Veritex Holdings Inc (VBTX) 2018 Q1 法說會逐字稿

Welcome to the Veritex Holdings First Quarter 2018 Earnings Conference Call and Webcast.

(Operator Instructions)

I would now like to turn the call over to Miss Susan Caudle.

Before we get started, I'd like to remind you that this presentation may include forward-looking statements and those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to publicly revise any forward-looking statements.

At this time, if you're logged into our webcast, please refer to our slide presentation including our safe harbor statement beginning on slide 2. For those of you joining us by phone, please note that the safe harbor statement and presentation are available on our Web Site, veritexbank.com. All comments made during today's call are subject to that safe harbor statement.

In addition, some of the financial metrics discussed will be on a non-GAAP basis, which our management believes better reflects the underlying core operating performance of the business.

I'm joined today by our Chairman and CEO, Malcolm Holland, Chief Financial Officer, Noreen Skelly and Chief Credit Officer, Clay Riebe. After the presentation, we'll be happy to address questions you may have. Now, here's Mr. Holland.

Thank you, Susan. Good morning, everyone. We're pleased to report we had a record quarter with earnings in excess of $10 million. And for the first time, our company exceeded $3 billion in total assets.

We have firmly embedded ourselves into the DSW banking market and now, are finding ourselves with relationship opportunities and conversations with clients we could have never had previously. The hard work our team has put in over the last two quarters with two acquisitions and subsequent integrations is now beginning to show in our results.

While our progress has been exceptional, the quarterly number still have some non-reoccurring revenues and expenses relating our acquisitions that we would like to highlight. Our first quarter had a few non-reoccurring items. We finalized and recorded the sale of our Austin branches. We finalized and recorded the assignment and sublease of duplicate Sovereign branch. We recorded additional accretion income on two purchase credit impaired loans and we collected more than originally estimated.

Looking at our growth for the quarter and as presented on the upcoming slide, our new loan commitments exceeded $350 million, our highest product quarter to date. This strong level of new loans led to an annualized growth of 15% for the quarter. These new commitments were centered in the commercial real estate discipline. We did experience a greater than average paydown payoff quarter with $260 million paying down, a sign of a healthy loan portfolio.

Although our pipelines remain very full and active, we have reduced our loan growth projections for the year from high-teens to mid-teens. We continue to focus on the liability side of the balance sheet. Our attention to deposits resulted in a 38% annualized growth rate, although recognizing that this growth came in the interest-bearing category.

Our noninterest-bearing deposits did decline over the previous period, primarily due to non-interest deposit sold with the Austin branches and the seasonal nature of these deposits. We instituted a deposit marketing plan in February for our relationship managers and we're starting to see those efforts pay off.

Our credit quality remains top of class. Nonperforming assets, past dues, nonaccruals and/or or at or near record loans. Our North Texas market remains fundamentally and economically very sound with new companies and people constantly relocating here. The market remains competitive but we continue to remain true to our core underwriting standards and pricing targets.

Now, here's Noreen to summarize our first quarter numbers for you.

Thank you, Malcolm, and good morning, everyone. I would like to focus your attention on our first quarter highlights, which you will find on slide 4 of the presentation. We earned record level net income of $10 million or $0.42 per deluded share, an increase of $7 million or $0.28 over prior quarter and $7 million of $0.22 over the same period last year.

As you will note, under selected ratios, our core efficiency ratio was 57%, an increase of 1% over prior quarter. And core return on assets was 1.22%, an increase of 42 basis points over prior quarter. Our loan balances, as detailed on slide 5, increased $56 million or 2.5% over the prior quarter. However, organic loan growth adjusting for the loan sold in connection with our Austin branches was just under $83 million, representing a 50% annualized growth rate.

Core loan yields increased to 5.03% versus 4.93% for the prior quarter. I expect around 5 to 7 basis point expansion over the next quarter, resulting from prior rate increases. We continue to see a very active loan book, new commitments continue to grow and while payoff paydown as a percentage of total loan balances trended between 5% to 8% over the past prior three quarters, we hit 11% this quarter with several unexpected payoffs.

Credit metrics remain very strong with nonperforming loans to total loans at 0.16% and minimal charge offs for the quarter. Just an update on the 13 million nonperforming oil and gas credit we discussed in last quarters call, you may recall it was part of a 94 million credit facility. Information we received from the lead bank post earnings call dictated that this loan was impaired when we acquired Sovereign, and the purchase accounting adjustments were reflected accordingly in our 10-K.

Turning to slide 8. As Malcolm stated earlier, deposit balance increased 151 million. If exclude the 64 million of deposit sold with the Austin branches, deposit through 9% or 38% annualized. 163 million of the deposit increase came from our core responded money market product, which is highly rate sensitive. As a result, interest-bearing deposits increased to 1% compared to 0.93% in the prior quarter. I expect to see continued increased in deposit costs, somewhere between 15 to 20 basis points in the next quarter as we incur the full impact of rate sensitive deposits.

On the next slide, you see the NIM expansion. Our reported net interest income was 29 million and it included 4 million of purchase accounting accretion. 1.9 million of this accretion is primarily related to loans that performed better than expected. Excluding purchase accounting accretion, the core margin expanded 9 basis points to 384 this quarter, from 375 in the period quarter. I anticipate margins may compress a bit, settling back around the 370 to 380 range over the next quarter.

As shown on the lower half of slide 9, we continue to deploy excess capital into loans as loans now represent 86% of our earning asset mix.

Turning to slide 10. As in the prior quarter, we have several nonrecurring items that result from merger, acquisition, branch disposition and the tax accurate measurement that comes along with purchase accounting adjustments. Our reported expense was 17 million and adjusting for these nonrecurring items, core noninterest expense was just under 16 million. Our expectation is that core expenses will stabilize for the reminder of the year.

With that, let me turn the call back over to Malcolm for a few closing comments.

Thanks, Noreen. With all conversions and the integrations behind us, my team and I are focusing on continuing our organic growth to achieve efficiencies relative to our scale. We remain committed to the eastern market. We have a very strong team and they are focused intently on growing. Although we have made several attempts at finding a Houston merger partner, we have been unable to come to terms with an institution while keeping our pricing discipline and our long-term strategy intact.

We will continue to have conversations and pursue appropriate acquisition opportunities, while at the same time, we plan on doubling our efforts organically with additional lenders and their respective teams and possibly adding strategic locations.

With continued growth, healthy margins, focused on credit quality and excess capital to grow, we are poised for a very good 2018. The accomplishments of the past six months would not have been possible without our incredible team and strong support from our board. They have proven once again that we have the best team in the state. Our excitement about our future has never been brighter. Thank you for your time and interest in Veritex. We're now happy to answer any questions that you may have.

(Operator Instructions)

Your first call is from Brady Gailey with KBW.

Hey. Good morning, guys.

Good morning.

Good morning, Brady.

So, you know, I appreciate the guidance for the coordinating of the 370 to 380. But when we look at the reported Net Interest Margin, I know you all had, you know, a big number of the yield accretion in this quarter. But how should we think about, you know, the level of accrued when you're, you know, going forward through the remainder of this year?

Hey, Brady. It's Noreen. I would guide to the lower end of the range that I spoke of, the 370 to 380 range, and that's all really resulting for the timing on deposits and the correspond money market product. And we - most of these deposits came in at the end of the quarter. And so, I think the full impact of that will take the margin down rested a bit.

Okay. So, the reposted margin of 446, I mean, that, you know, had 62 basis points of benefit from the yield accretion.

Correct.

I mean, that 62 basis points, you know, feels abnormally high. So, do you have any color for, you know, forward levels of accretive yield? Like I think you said it was - dollar terms, it was about 4 million this quarter. Any idea what a good run rate for that would be over the next two or three quarters?

Yes. So, I think if you strip out the 1.9 million of the - you know, the onetime PCI related loans, we really are closer to a $2 million run rate on accretable yield.

Okay. And that feels like a good run rate going forward?

It's like a good run rate, at least for the next--

Okay.

--at least for the next quarter. I mean, we're really running through that purchase discount pretty quickly here with the weighted-average life of those loans. It's really coming in pretty fast.

Yes, Brady. Sovereign, had a really short portfolio. And so, it's running through pretty quick. But we feel like about the $2 million range for the next several quarters and hoops are bleeding down. But wanted you to focus on the million 9 that was a non-reoccurring accretable income item.

Yes. Okay. And then, you know, it sounds like you guys are more positive on the loan growth, you know, moving the guidance to high-teens from the mid-teen level. I know in the past, we've talked about deposit growth being in that kind of low to mid-teens range. I mean, do you think that that is still an appropriate amount or with the higher loan growth, are you anticipating, you know, trying to bump up that deposit growth range as well?

Yes. So, I think - and I could have misspoken during the call. The - what I was saying is that we're moving - we were in the high-teens is what we've looked at in the beginning of the year. We move that back to the mid-teens for the remainder of the year.

The deposit side, you know, we've had some success in this first quarter, all be it, a lot of it was from the interest-bearing side. But this deposit contents that we've had is bearing out some really nice growth, even on the noninterest-bearing side, you know. Through April, we see some good movement there. So, I think the deposit growth is going to be near that mid-teens number on the loan side.

Okay. Great. Thanks for the color.

Thanks, Brady.

(Operator Instructions)

[Brad Millstaff] with [Liro Neil].

Hey, good morning.

Good morning.

Good morning.

Really, just to follow up on the discount accretion. How much in total do you have left? And I know maybe last quarter, you used some of the excess, you, you know, build the reserve back a bit. It didn't look like you did not this quarter. But I just wanted to see if there's any of that dynamic in play as well.

What was the second half of your question?

Part of the outside of accretion last quarter to add the reserve.

Yes.

But it didn't look like that happened this quarter, just more than extra that was, correct?

That's correct. So, we have about 13 million or non - or 12 million or non-accretable yield and then about 6 million of accretable yields left.

Okay. Great. Thank you.

You're welcome.

And then, Malcolm, can you talk about, you know, kind of some of your, you know, longer-term kind of profitability goals? You got one in the past, you know, kind of an RLA target. As you sit here today, it sounds like expenses are going to kind of stabilize, you're hoping the loan growth is going to pick back up. Can you talk about, you know, achieving those targets, you know, kind of put your commentary around the NIM this quarter?

Yes. I mean, we're still - you know, we're still looking, Brad, to, you know, the 1 - you know, the 130 to 140, maybe pressing it up higher over 140 depending on our loan growth. But for the year, probably in the low 140s.

You know, we're still getting decent loan pricing. We've seen a little bit of pressure on that. So really, the thing that's moving the NIM is really on the cost side. The pricing side seems to be hanging in there pretty well. I mean, obviously, the good competitive deals are getting a little bit - are a little cheap. But I'm still looking for a 140 for the year.

Okay. That's helpful. And then just final question, I know you mentioned in the past that you wanted to kind of get these yields digested and make sure everything was, you know, good to go on that front. What's your appetite for M&A as you look at for the rest of the year and, you know, is it something that would be more back and loaded or even in the 19 at this point?

You know, as you know, banks are sold they're not bought. And so, it's going to be ruling parties. I'm certainly open to something if it arises and I continue to have conversations but I don't have anything that's - you know, that's cooking right now, that's really hot. I am having a couple of conversations.

We have finished our core conversation with Liberty, that was last weekend, it went very well. So, all integrations are done, all the conversations are done. And, you know, our people can take a little bit of a deep breath just that we don't have anything on our plate right now. But I would love to have something, you know, in the back half of the year. But my sense that it's going to be 19.

Okay. Great. Thank you.

Thanks, Brad.

Thanks, Brad.

(Operator Instructions)

Matt Olney with Stevens Incorporated.

Hey. Thanks. Good morning, guys.

Good morning.

Good morning.

I want to go back to operating expenses. I believe you said the operating expenses would flatten out over the next few quarters. Can you just talk more about this? And did this imply that the reinvestments in the core business are going to be offset by cost saves from Liberty or any other things you can give us on that?

Sure. There's kind of two tracks going on on our expenses. One is, as you said, Liberty. So, on this quarter we'll have some continued integration costs. I mean, not significant but there will be some cost related integration. We also have noncore costs related to that, 50-share, I think we mentioned last earnings call that we were offering - we were distributing 50 shared to each employee that was not currently part of an equity plan. So, that's the $450,000 noncore expense that you'll see next quarter.

But then, moving forward, we'll have - as you have suggested, we'll have savings from the Liberty conversation and integration going into the third and fourth quarter. And at the same time, we're working on efficiency plans. We started with AC loan ops and human resources and we'll move into other back office functions. And our plan there is to have efficiencies into those operations to offset the volume growth and other growth increases so that we can stabilize our cost basis, that's the plan.

Okay. Great. That's helpful, Noreen. Thank you. And then, going back to loan growth, Malcolm, can you talk more about what you're seeing in the loan growth side, moderating the loan growth guidance down? Is this more from elevated payoff paydowns, do production mean a little bit slower, any kind of intel you can give us on that?

Yes. It's really kind of on the payoff paydown side. We're seeing a lot of activity and they're not moving business necessarily, it's just, you know, economic activity. Our pipelines are as just full as it's ever been. I mean, doing $350 million in commitments in the first quarter was huge. Now, can do, what's that, a billion 4 in commitments? Man, that would be - we'd be running the hamsters pretty hard.

I don't think we'll quite do that. So, that's one reason for pulling it down. But what we're seeing, we're seeing a bunch of really good opportunities on the CNI side. I think I mentioned in my opening comment that we're in some conversations now we've never been in. I mean, we're going toe-to-toe with Texas Capital on some stuff. And, you know, I think we're fairing very well. Supposed to be hired, we've come from the larger banks. I see that being a huge driver of business.

And then, our commercial real estate area has gotten some serious momentum. And in the first quarter, it was very strong. And we've done a couple of construction deals, these high equity construction deals recently that we'll see some benefit in the fourth and third, it will start on the third and some fourth quarter. So, we've got to eat up all the equity they put into it. But it's still very active.

Okay. Very good. Thank you.

Thanks, Matt.

(Operator Instructions)

Brett Rabatin with Piper Jaffray.

Hi. Good morning, everyone.

Good morning.

Good morning.

I wanted to, and Malcolm, just to go back to M&A for a second. And you talked about in you prepared comments and maybe it will be '19 before something kind of comes up given the environment and what's transpired this year. Does your thesis on Houston evolve any or do you widen your net a little bit to think about some other opportunities or can you give us maybe an update on if your strategy might have changed a little kind of post what we've seen transpire in 1Q?

Yes. No, I think our strategy, you know, we're going to have to do a little bit of pivot here identified for really strong targets down there in Houston, three of those are gone. And so, in Houston, it's a little bit of a different market. If you don't get those - one of those four, you start moving to the suburbs, mainly south of town.

And I'm not saying those won't work. But the pivot is probably going to be a little bit more focused on some organic growth and hiring it seems. We've had a really good success with hiring people down there. So, I think we're going to double our efforts and see if we can do it the old fashion way in the short-term, continue to have these conversations and I think we'll probably double our efforts down there.

My team and I are actually working on a plan right now to present to the board some time this second quarter about how we can do a little bit more organically than through an acquisition. But, we're certainly committed. Houston is a very good market. It's a different market. We need Houston deeply to grow it and we are committed to figuring it out.

Okay. And then, I was hoping maybe for any additional color around the commitment increase in quarter, maybe how much of that was commercial real estate versus CNI construction?

Yes. Most of it was around the commercial real estate area. We did do a couple of construction deals, we put in our CRB bucket obviously, and these are super solid. You know, we're getting 35 to 40% plus equity in most of these construction deals and these are for clients we've been dealing with. So I'm going to have a very nice bucket of those. Just thinking through a couple of them are. But it was centered on the commercial real estate area, which we planned for a year ago when we hired Bob and got that group started.

Okay. And then, Noreen, if I heard you correctly, you were looking for a 15 to 20 basis points deposit increase into 2Q. You know, assuming rates are a little higher this quarter, another Fed hike maybe coming. What is your thought on the rise from there and then the increase this quarter? You know, is that mostly a function of some of your existing deposits or is that just a function of what it cost to bring on new deposits relative to the existing base?

Really, at this point, it's the cost of the new deposits to support the growth.

Okay. And then, you know, are you mopping deposit basis rising from the second quarter? Any color on them? What's your thinking from 2Q?

Yes. We do see a slight increase in deposit basis from past, you know, it really depends on. We feel like we're in a good position to fund growth right now with the deposits that we have on the balance sheet. So, we're really looking at sort in the end of the quarter, what will the growth be and we do think we're going to have payout, that the basis will increase. Does that answer your question?

Okay. Yes. That's helpful. Thank you so much.

(Operator Instructions)

Gary Tenner with D.A. Davidson.

Thanks. Good morning, guys.

Good morning.

I apologize if you over this, I had to hop off for a second. But in terms of the paydowns in the quarter, is your sense and I think you said that you're not losing business to other banks.

Is the sense that this is a function of maybe some business transactions that were delayed until post 2017 because the facts, reasons, maybe, you know, the level of paydowns were not prospective as higher than what you might see over the remainder of the year or just any trends that maybe give you a sense of where things may shake out the next couple of quarters?

You know, a couple of them were just real estate deals, it's sold. You know, Sovereign had a nice book. I'm just thinking, there were a couple of industrial deals that they had and you know, just in the normal course of business. So, we had a couple of the big industrial deals payoff. Right, Clay?

Right.

And then, we have replaced those. So, part of that 315 commitment is a replacement for some of that stuff that's sold. But you get the paydown, which is the fully funded loan and then you make the commitment and you don't fund anything because they've got to eat up their equity first.

So, I just call that, you know, economic commerce, they are just trading. I mean, they build them to sell them and that's what they're doing. So, I don't see any specific trends. On the CNI side, there could have been some delay because of the tax deal. But we certainly haven't lost any customers on that side. Except for one, we did lose one to an officer that left. We did lose one relationship, to be totally candid with you. So that was a about $10 million or $11 million.

We did lose that one relationship to another small community bank here. But, no trends, Gary, that I think we could hang our hat on.

Okay. Thanks. Appreciate it.

Thank you, Gary.

And I'm not showing any further questions.

I'll now turn the call back over to Mr. Holland for closing remarks.

Thank you all for joining us today. And we're around all day for any specific calls everybody wants to make. Have a good day.

Ladies and gentlemen--

Thank you.

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day.