In a recent earnings conference call, Veritex Holdings, Inc. (NASDAQ: VBTX) announced a successful third quarter for 2024, with operating earnings of $32.2 million or $0.59 per share, and pretax pre-provision earnings of $44.6 million. The bank highlighted significant balance sheet improvements and a strategic focus on credit quality and operational efficiency. Despite a decrease in total loans due to substantial payoffs, Veritex reported growth in revenue and tangible book value per share, as well as an improved loan-to-deposit ratio and net interest margin.
Key Takeaways:
– Veritex Holdings reported operating earnings of $32.2 million ($0.59 per share).
– Pretax pre-provision earnings stood at $44.6 million.
– The Common Equity Tier 1 (CET1) ratio improved to 10.86%.
– Deposits increased by $311 million, while total loans decreased by $126 million.
– Non-performing assets (NPAs) decreased to $67 million.
– Net interest margin (NIM) slightly increased to 3.30%.
– Revenue grew by 7.2% quarter-over-quarter and tangible book value per share by 15.8% year-over-year.
– The bank raised $397 million in attractively priced deposits and reduced reliance on wholesale funding to 15.7%.
Company Outlook:
– Loan growth expectations are moderated due to significant payoffs and market uncertainties.
– Net interest margin is projected to remain stable at around 3.20% into 2025.
– The bank is focusing on operational efficiency and credit risk management.
Bearish Highlights:
– Total loans saw a decrease due to large payoffs.
– The USDA revenue performance remains inconsistent, with efforts to improve the integration of USDA and SBA loan production.
Bullish Highlights:
– Veritex reported its best quarter ever with improved balance sheet metrics.
– The bank has successfully reduced commercial real estate concentrations and increased liquidity.
– Operating noninterest income rose by $2.5 million to $13.1 million.
Misses:
– A $6 million rise in operating and noninterest expenses was noted, primarily due to higher incentive accruals and OREO expenses.
Q&A Highlights:
– Strategies to manage deposit costs and maintain net interest margin were discussed.
– The bank plans to build capital further and re-enter the construction lending market within the next 4 to 6 quarters.
– A focus on improving profitability and fee income through services such as swaps, syndication fees, and new commercial card products was emphasized.
Veritex Holdings, Inc. (NASDAQ: VBTX) has reported a strong third quarter in 2024, with CEO Malcolm Holland and CFO Terry Earley outlining the bank’s performance and strategies. The bank’s focus on maintaining a robust capital position and improving its balance sheet has resulted in a Common Equity Tier 1 ratio of 10.86%. Deposits saw a healthy increase, and the bank’s credit metrics improved, with non-performing assets decreasing and the allowance for credit losses rising. The net interest margin experienced a slight uptick, contributing to the bank’s revenue growth.
The bank is actively managing its balance sheet, with a focus on balance sheet transformation and credit quality. Despite the challenges in loan growth, particularly in the commercial real estate sector, Veritex remains committed to managing its loan cycle times and maintaining stability in its asset class. The bank is also looking to enhance fee income and overall profitability through various services and products.
Veritex’s capital management strategy includes building capital to support future growth, particularly as it plans to re-enter the construction lending market. The bank is content with its current capital ratios and dividend position, choosing to focus on profitability rather than engaging in share buybacks.
Overall, Veritex Holdings has demonstrated resilience and strategic planning in its third-quarter performance, with a focus on maintaining margins, managing expenses, and positioning for future growth. The bank’s leadership expressed confidence in their ability to navigate the current financial landscape and continue to deliver value to shareholders. Our CRE concentration ratios are back in line on our 300, 100 buckets, and we will continue to manage these below 300 and 100 going forward. In terms of credit, we have seen improvements in the third quarter. Criticized totals were lower due to payoffs and restructurings that improved risk profiles. We also saw a decrease in OREO and NPAs, with charge-offs being nominal. Past dues, including nonaccruals, have decreased significantly. Our credit loss reserve now stands at 1.21% of total loans, showing positive trends.
Looking at the balance sheet, we have seen a 7.2% revenue growth quarter-over-quarter and NIM expansion. The allowance now sits at 121 basis points, and the ACL coverage rises to 130 basis points excluding mortgage warehouse. Our total capital has grown, while the loan portfolio has declined, making the balance sheet more resilient. The CET1 ratio has expanded, and tangible book value per share has increased. We have also reduced our loan-to-deposit ratio and have strong deposit growth.
Overall, we have made significant progress in improving our credit quality, balance sheet position, and deposit pricing. We remain focused on managing risk and driving growth in a challenging economic environment. Slide 12 provides a detailed overview of CRE and ADC portfolios by asset class, highlighting what is at stake. Slide 13 breaks down our out-of-state loan portfolio, emphasizing the significant impact of our national businesses and mortgages. Only 10.7% of the out-of-state loan portfolio is represented, primarily following Texas real estate clients to other geographies. Moving on to Slide 14, net interest income increased by $3.9 million to just over $100 million in Q3. Factors contributing to this increase include higher loan rates on the mortgage warehouse, higher fixed rate yields, higher earning asset volumes, and day count. The net interest margin increased by 1 basis point to 3.30%, although it was negatively impacted by excess cash levels. It is expected that the NIM will remain in the range of $3.25 to $3.30 for the remainder of 2024, assuming a 50 basis point Fed cut in the fourth quarter. Additionally, a $250 million fixed pay hedge is in place until March 2025. Slide 15 provides metrics on our investment portfolio, highlighting that it accounts for only 10.9% of assets, with a duration of 3.6 years and 87% held in available for sale. The slide also showcases our cash and borrowing capacity at September 30, 2024. On Slide 16, operating noninterest income increased by $2.5 million to $13.1 million, driven by various factors including treasury management fees, loan fees, and revenue from OREO. Operating noninterest expense also increased by $6 million, mainly due to higher interest incentive accrual, OREO expenses, and marketing. Efforts to improve operating leverage and efficiency are underway, with a focus on staffing, operational processes, and technology. Despite the progress made, there are areas that still require attention, such as credit risk profile improvement and increasing USDA revenue performance. Overall, the company has made significant strides in strengthening the balance sheet and enhancing performance metrics. The call concluded with remarks from Malcolm Holland, acknowledging the progress made and highlighting the ongoing efforts to further improve the company’s position. In the last few quarters, we’ve had around $1 billion in payoffs, which is a positive sign for our healthy loan portfolio. The loan growth we experienced in 2022 is starting to level off, leading to heavier payoffs in the fourth quarter and early ’25. Although I previously mentioned mid-single-digit loan growth, I now anticipate it to be slightly lower than that due to the impact of payoffs. Our pipelines are growing, and we’re seeing success in our commercial, middle market, community banks, and business banking sectors, although it’s challenging to significantly increase growth in those areas.
The uncertainty surrounding the election is affecting companies’ decisions, but there are silver linings to the payoffs we’re experiencing. Our commercial real estate concentration has decreased, thanks to significant payoffs. The mortgage warehouse has been strong, and we expect this strength to continue. However, factors like the 10-year Treasury yield and mortgage rates may impact its performance in the back half of the year. We are focused on revenue growth, disciplined loan growth, and efficiency as we continue to evolve as a company.
Regarding the hedge that was put in place on March 9, 2020, we do not plan to renew it at current rates. The market conditions have changed, and we have other hedges in place that can help mitigate the impact on our net interest margin. The consulting firm we engaged with is targeting improvements in processes, technology utilization, commercial lending processes, and revenue opportunities. This transformation will take time but is essential for making our company more efficient and process-driven. Your line is now open for questions.
Catherine Mealor: I wanted to inquire about the margin for this quarter and how it may evolve as we move into the next year. Do you think there is potential to keep the margin stable or even increase it given the opportunities to lower deposit costs?
Terry Earley: It’s a great question, and predicting the future is always uncertain. I see the NIM potentially staying in the 320’s range, but I don’t foresee it reaching the 3.30’s. We are focused on pricing down and improving efficiency to maintain a healthy margin.
Catherine Mealor: Can you provide any insights on modeling the USDA outlook and what a good run rate to target might be?
Malcolm Holland: Modeling USDA can be challenging due to its lumpy nature, especially with larger loans. We are working on leveraging USDA and SBA business together to minimize lumpiness and create a more stable outlook.
Terry Earley: Looking at the bigger picture, ’24 may be a down year, but our goal is to get back to 2023 government guaranteed earnings levels, with a shift towards more SBA and less USDA loans.
Operator: Our next question is from Ahmad Hasan regarding expenses ticking up this quarter. How should we expect expenses to trend in the near term?
Terry Earley: We are focused on reducing expenses, with some increases being incentive-driven and related to specific circumstances that will normalize in the coming quarters. We are working on efficiency initiatives to manage expenses effectively. I don’t anticipate a significant decrease in expenses in the near future. While there may be some reduction due to the OREO issue, other factors like incentive accruals will keep expenses at a slightly higher level. As we implement efficiency initiatives in 2025, we may see some improvement, but it will take time to see significant changes.
In terms of deposit pricing, we have been successful in attracting deposits across all lines of business at attractive rates. We are focused on remixing deposits by reducing high-cost deposits and increasing attractively priced ones. Our goal is to continue executing our strategy and targeting the right customer segments to maintain our deposit growth.
Regarding our liquidity position, we plan to reduce excess liquidity by paying down wholesale broker deposits and possibly investing in securities. We also aim to achieve better loan growth and move out expensive deposits to enhance our net interest margin. This strategic approach will help us optimize our balance sheet and improve our financial performance.
As for our classified and criticized assets, we are actively managing them with various strategies including payoffs and note sales. We aim to stabilize this asset class by carefully addressing each loan and mitigating risks. While there may be some fluctuations, we are confident in our team’s ability to anticipate and manage risks effectively. I am not sure if Malcolm or Terry have anything to add, but I am extremely pleased with the work done by the entire bank, especially our special assets team.
Terry Earley: I believe the key to our success has been the effort put in by Curtis and the team, starting from the past watch stage. When a loan is in the past watch stage, there are various options available. However, as it progresses, the options diminish. The anticipation and forward-thinking done by the team 6 to 9 months ahead have truly paid off for us. Even though things may seem relatively stable, there is a lot happening behind the scenes.
Brett Rabatin: Terry, do you have any thoughts on capital moving forward? You have been reducing commercial real estate and construction and improving capital ratios. Are you satisfied with the current ratios, or do you plan to further increase capital levels?
Malcolm Holland: We are content with our capital ratios and grateful for the growth we have achieved. The changes made to the balance sheet, reducing risk-weighted assets, and improving profitability have all contributed to this. While we plan to continue building capital, it is wise to have some reserves for future opportunities. We are not considering buybacks at the moment and aim to maintain a healthy dividend. Our focus is on strategic growth and profitability.
Terry Earley: As we reach our desired growth profile, capital ratios will stabilize. We are also looking at re-entering the production business, which will impact risk-weighted assets. More capital provides us with flexibility and options strategically. The market is currently focused on profitability, and we aim to improve our earnings profile while letting capital levels adjust accordingly.
Brett Rabatin: Lastly, regarding fee income excluding certain items, how should we approach this going forward?
Terry Earley: Fee income is a crucial driver of profitability, and we need to continue growing it through various avenues such as swap fees, syndication fees, loan prepayment fees, and more. Our focus is on enhancing fee income across the board to improve profitability and return on assets.
Operator: Thank you for participating in today’s conference. You may now disconnect.