Veritex Holdings Inc (VBTX) 2021 Q3 法說會逐字稿

Good day, and welcome to the Veritex Holdings Third Quarter 2021 Earnings Conference Call and Webcast. (Operator Instructions) Please note this event is being recorded. I will now turn the conference over to Ms. Susan Caudle, Investor Relations Officer and Secretary to the Board of Veritex Holdings.

Thank you. Before we get started, I would 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 statement.

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 website, veritexbank.com. All comments made during today's call are subject to that safe harbor statement.

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. Please see the reconciliation of all discussed non-GAAP measures in our filed 8-K earnings release.

Joining me today are Malcolm Holland, our Chairman and CEO; Terry Earley, our Chief Financial Officer; and Clay Riebe, our Chief Credit Officer. I will now turn the call over to Malcolm.

Good morning, everyone. It's been a very busy quarter for our team, which produced some very favorable results. For the quarter, we produced operating earnings of $0.70 a share, up from $0.60 the previous quarter, a 17% increase, while producing a pretax pre-provision return of 1.85%.

The third quarter was transformational for our company. We closed our 49% investment into Thrive Mortgage and realized a full quarter of our investment. We also announced our acquisition of North Avenue Capital, the nation's largest producer of USDA loans. We're scheduled to close this transaction next week on November 1. Both of these opportunities will add meaningfully to our noninterest income moving forward.

Our loan growth continues to perform at a brisk pace. For the quarter, loans net of PPP and mortgage warehouse grew $344 million or 22% annualized. This is the second straight quarter we have exceeded 20% loan growth. For the first 9 months of the year, we are growing at 17%.

If you peel back the onion a bit and really analyze our pipeline, it is clear that our investments in loan talent over the past 18 months are starting to produce the results that we had hoped for. But our timing on funding, closings and payoffs have worked in our favor in the last 2 quarters.

As we look forward, we don't see loan growth continuing at these last 2 quarter levels, but still feel confident that our annual loan growth should hover in the low double digits for the remainder of '21 and also for '22.

I'd like to speak a bit on the focused hiring we have done for the last 18 months. These new additions are a big part of our current growth and why we are so bullish on the future. Just this quarter, we added an additional 11 FTEs to our production teams and 25% year-over-year. These totals do not include the non-client-facing hires we've made in our operations, data analytics, credit and risk areas, which candidly are best-in-class. The market disruption in several M&A deals in our state and the fact that prospective employees in our markets are taking note of our culture and growth profile are prompting these hiring opportunities.

Our deposit growth continued during Q3, growing at just over 11% annualized or $200 million. We continue to drive down our cost of total deposits, now at 20 bps, down from 23% in Q2. We are probably at the bottom right here.

Credit quality continues its positive trend as we move further and further away from pandemic crisis in our markets. NPAs decreased for the fourth quarter in a row and now sit at 0.77% of total assets, down 8 bps from the previous quarter and over 30% year-over-year. We feel this ratio will continue to move down considering the resolutions we are currently working towards. Charge-offs were 9 bps, all of which were fully accounted for in our reserves.

I'll now turn the call over to Terry to discuss our detailed financial results.

Thank you, Malcolm. On Page 5, you've seen multiple graphs, and I want to comment on a couple of these. First, tangible book value per share increased to $17.53 in the third quarter. This translates into growth of 20.1% on a year-over-year basis after adding back the impact of our quarterly dividends. Growing tangible book value per share remains an important priority for our management team.

Second is our operating return on average tangible common equity, which remained very strong in the third quarter at 16.9% and has averaged 16.5% over the last 4 quarters as Veritex worked through the pandemic. The impact of the Thrive investment can be seen in our efficiency ratio, which improved over 3% down to 48.5%.

One thing that's not graphed but that I would like to call your attention to is the positive operating leverage in Q3. Operating revenue grew 7% on a linked-quarter basis, while operating expenses only grew at 0.6%, resulting in positive operating leverage over 6%, which is pretty strong.

On Slide 6. Malcolm has already mentioned our loan growth for the quarter. We saw growth in all loan segments, except multifamily. The rate of growth in the construction portfolio slowed in Q3, and the level of unfunded commitments remained steady. Improving C&I utilization rates also contributed to the outstanding loan growth for the quarter.

Average mortgage warehouse balances increased 2.3% in the third quarter, reflecting additional customer acquisition. This portfolio sits at 6.8% of average total loans, excluding PPP. It remains our intent to keep the average mortgage warehouse portfolio at 10% or less of average total loans.

Skipping to Slide 8. Net interest income increased $4.2 million from Q2 level all the way up to $71.3 million in Q3. The most significant drivers of the increase were loan growth, day count and deposit rates. Also note that Q3 loan production was at 3.70% and Q3 interest-bearing deposit production was at 21 basis points.

Next, the net interest margin increased 15 basis points from Q2, up to 3.26%. For Q3, the PPP portfolio represented a 5 basis point drag on the NIM. Average liquidity was approximately $136 million, higher than our normal target level, but down significantly from $350 million in excess liquidity in Q2. This excess liquidity had the impact of depressing the NIM in Q3 by 7 basis points.

So in the aggregate PPP and excess liquidity represent about a 12 basis point drag on the NIM. As you model net interest income for future periods keep the following in mind. First, average loans, excluding mortgage warehouse and PPP, for the third quarter are $255 million below the ending balance on September 30.

Second, there's $35 million in subordinated debt, with a rate of approximately 5.5% that is callable in December of 2021. Third, the earnings impact of the hedge terminated in February of 2021 will start to flow through earnings in Q1 2022 with an annual net interest income impact of $4.3 million. These factors give us optimism that the growth in net interest income from Q3 to Q4 and beyond will be meaningful and that the margin should continue to expand.

On to Slide 9. Another strong noninterest income quarter with $15.6 million in revenue or $13.9 million on an operating basis, excluding the benefit of $1.9 million in PPP forgiveness at Thrive and $188,000 in security losses. Operating noninterest revenue represented 16.3% of total revenue for the quarter and should continue to improve in Q4 with the closing of the North Avenue Capital acquisition.

As a result of Vertex's strategic intent to diversify revenue sources, we've achieved 32% year-over-year growth in operating noninterest income, excluding the impact of PPP. Operating expenses on Slide 10 decreased $400,000 from Q2. Salaries and employee benefits increased slightly as higher salary costs from the hiring Malcolm referenced was partially offset by lower benefit costs. The number of employees increased by 10% during the quarter and by 31% year-over-year as we continue to invest for growth.

Skipping to Slide 12. Capital levels grew approximately $20 million for the quarter. This is net of the $21.3 million we returned to shareholders in the form of dividends or share buyback. For the quarter, we repurchased 328,000 shares at an average price of $34.85.

All the capital ratios, except the leverage ratio, declined slightly during the quarter due to balance sheet growth and the shift out of lower risk-weighted assets into the loan portfolio. Our capital deployment priorities, given the current valuation of our stock, are organic growth, dividends, strategic growth and, lastly, share repurchases.

On Slide 13, I want to provide an update on the Thrive Mortgage investment. Thrive continues to perform well as their Q3 origination volume increased slightly to almost $800 million. Year-to-date 2021 origination volume is up just over 60% as compared to the same period in 2020. This compares to the most recent MBA forecast, which is calling for a decrease of 6%.

Thrive's purchase-driven origination model has delivered 66% purchase volume for the year-to-date and over 70% for 2 consecutive quarters. Since the end of the third quarter, we've signed a corresponding contract with Thrive, where they will provide fulfillment on all Veritex Bank-originated mortgages and a loan purchase agreement allowing Veritex to buy Thrive adjustable rate originations for our own loan portfolio.

On Slide 14, I would like to end with an update on North Avenue Capital. Their loan pipeline remains strong at approximately $400 million. Vertex's Q4 forecasted net income from the North Avenue acquisition should be in the range of $1.5 million to $2 million. The 2022 estimated net income remains unchanged from the announcement date at approximately $12 million.

We've been working closely with the team from North Avenue since the announcement and are even more encouraged about their earnings potential. They've built a strong market position in USDA lending, and we're committed to helping them build on that leading position.

With that, I'd like to turn the call over to Clay for some comments on credit.

Thank you, Terry, and good morning, everyone. The credit picture for Veritex continues to improve. As Malcolm mentioned, our NPAs dropped over the quarter. Our NPAs to total assets have dropped 30% from the high watermark experienced in the third quarter of 2020. We continue to see encouraging signs of resolution in our problem loan portfolio.

Page 15 of the deck contains the credit metrics for the bank for Q3. The chart at the bottom right hand of the page reflects the movement in criticized assets over the past 4 quarters. After a run-up due to the pandemic, we've experienced a 25% improvement in our levels of criticized assets from the high watermark that occurred in the third quarter of 2020. Our special assets team is doing a great job of reducing our levels of criticized assets, and we expect that to continue through the balance of the year. The migration of credits from the line to our special assets team due to deteriorating trends has reduced significantly also, which is encouraging.

Charge-offs for the quarter are centered in 3 acquired credits. First was a borrower in the saltwater disposal industry that lost its primary customer, which put the borrower in distress and resulted in a charge down of the subject debt. The second was a contractor that went out of business and the collateral did not sufficiently cover the debt. And finally, we had an SBA loan secured by a restaurant property that was foreclosed and sold at a loss.

The reference charge-offs were fully reserved in prior periods and had no impact on our required loan loss provision. Past dues were up slightly due to one credit in the electric coal power generating industry that matured and is in negotiation for a renewal.

I want to touch briefly on the third quarter loan production details given on Page 7 of the deck. Our largest area of committed production for the past year has been in commercial construction loans. The chart in the bottom left of the page demonstrates a couple of points worthy of note.

Our underwriting standards have not changed over the last year, as can be seen in the weighted average LTVs, LTCs and DSCRs. Our reliance on commercial construction loan for production has dropped meaningfully over the last year from 70% to 42%.

Finally, our commercial construction lending is focused in the industrial space, which has been the most active CRE space [intensities] for some time. There's tremendous investor interest in this space, and many of our projects pay off before fully funding due to buyer demand.

With that, I'll turn it back over to Malcolm for final remarks.

Thanks, Clay. Our continued focus and commitment to operating a risk-focused growing and fee-producing efficient business is starting to show the earnings power and efficiency of this company. We continue to be focused on consistent core earnings while executing our conservative risk profile through all parts of the enterprise. We have made a targeted effort to enhance our noninterest income category as well as continue to hire talented staff to take this bank to the next level.

We do continue to see numerous opportunities in the M&A side of our business. We remain confident that we will be involved in any meaningful M&A conversations in Texas, but we will remain very disciplined when it comes to bringing on a new institution into our Veritex family.

In closing, let me say how proud I am of the entire staff. Delivering these types of results in an extremely competitive market is not easy. Our team should be congratulated and I'm awfully proud of them, well done. Operator, we'll now open for any questions.

(Operator Instructions) Our first question is from the line of Matt Olney from Stephens.

Congrats on the loan growth this quarter. It sounds like you're still guiding towards that low double-digit loan growth for the fourth quarter and into next year, which would obviously be a slowdown from what we've seen over the last few quarters. I think you mentioned a few things, one of which was expectations to more paydowns. Any more commentary you can provide? Or are you just seeing some of the construction loans nearing completion?

Yes. I mean the paydowns are going to get pretty aggressive here. I mean, we know we just look forward through the pipeline in the next quarter and quarter after. We've been really, really active. And obviously, when you're really active, they pay off. And so we see some of that. I mean, candidly, we're still encouraged by the loan growth, but we're not going to keep up at 20%. That's -- we're running them pretty hard at that. And the good news is that we're actually doing less and less of that as we move forward. And the folks that we're hiring, none of the are in the real estate side, they're all in the community bank or commercial side.

And Malcolm, on the production side, you gave us a great slide there on Slide 7, looking at the commitment production improvements of the last few quarters. What's the expectation for that over the next few quarters in terms of incremental improvement from there?

You mean in each individual area?

Well, I was looking at the top right-hand graph on that Slide 7, the quarterly commitment production in aggregate was...

I've got it. I'm sorry, I got it. Okay. I'm on it now. There's a lot going on. My guess is we're going to be continuing to be above that $1 billion mark going forward, just with the new folks that we're hiring and the new efforts that we're putting forth in a couple of different areas. But I think we're going to be able to hold that line over $1 billion.

Okay. And then just lastly, and I'll hop back in the queue. I think you disclosed the weighted average rate on new production was around 370. Just remind me, does that include any fees or any other miscellaneous things? Or is that just a coupon rate?

That's just the coupon rate, Matt. This is Terry. So when you're comparing that to our quarterly yield that one's coupon, one's yield, including deferred fees, fees collected, et cetera.

Our next question is from Gary Tenner of D.A. Davidson.

I wanted to just ask a little bit. I think, Terry, you've talked about this in the past in terms of kind of Veritex's comfort level at various loan deposit ratios. 94% at the end of the quarter, ex mortgage warehouse, even with a slowdown in the pace of loan growth from here, would stand that, that loan deposit ratio probably continues to increase hire. So just can you remind us where your current level is in terms of that loan deposit ratio?

Yes. Loan to deposit, excluding PPP and mortgage warehouse, we're comfortable up close to 100%. I mean just right under that, if you will, because we know we have a lot of off-balance sheet resources. We know that the mortgage warehouse business has short turn times so that if we need liquidity, we can get it from there. So certainly, slightly slower loan production, loan growth will help. But liquidity, as offset and we've forecast out, I don't see liquidity as any type of significant constraint as we go -- as we get to finish '21 and get through '22.

Obviously, a key focus on raising deposits and our community bank has done a great job of that. And our commercial C&I lenders are doing a good job, too. So we got to stay focused there, just every day, the way we do on the loan side. And then we'll be okay, and we're comfortable, again, up close to 100%, excluding mortgage warehouse and PPP.

All right. And then on the construction portfolio, and you kind of addressed this in a sense, given the expectations of some increased paydowns in that book. But 14% of loans, ex mortgage or ex some PPP, where would you like that portfolio sort of optimally to be relative to the total book?

Probably right where it is. We don't -- if it shrank a little bit, that would be okay, too. We just have a really, really talented team in that area. They are really good. And the credit quality is some of our best because we have an execution team that's really, really top notch. So we're going to keep dealing with [8] borrowers and I see it staying about the same.

Okay. And then finally for me, you mentioned the agreement to purchase variable rate loans through Thrive and having the option there. As you think about expectations for that channel and where you'd want the kind of resi mortgage portfolio to be, where does that -- what does that look like over time?

Yes. I'll take that one, Gary. I mean we're just over 8% today. I mean I would certainly like to see it get to 10% in the intermediate term, if you will, and then go from there. I mean we would love to have the mortgage consumer part of the book be at about 15% to 20%. One of the side benefits to that is it certainly carries a lower risk weighting, which was helpful on the capital ratio front. But we'd like to continue to grow that.

Obviously, I don't want to go too aggressively there given where we are in the rate cycle and the expectation for future rate hikes in '22, '23. But it's a nice tool that we now have, and we've done a fair amount of work over the last 90 days or so to get there. And so we feel good about it. Thrive's been a good partner in that regard. And we want to grow at reasonable rates, but not -- and just get it to 10%, and then we'll go towards the 15% number, if you will.

Next question is from Brad Milsaps, Piper Sandler.

Terry, I just wanted to follow up on the loan yield question. But Matt's right, I think your core loan yields were maybe down 10 basis points linked quarter, 10 or 11 if I exclude sort of all the PPP noise, PPP reversals, things like that. You talked about that 370 new and renewed yield. That's without fees. Would -- do you feel like the new and renewed is kind of firming up? Or do you think there's more pressure there to come? Just trying to get a sense of how much more core loan yield pressure we cud kind of see over the near term.

Well, I mean I think the pace of the decline in loan yields has lessened during the third quarter. But -- and I think it wouldn't have a lot more downward pressure. But there's an external variable here known as competition. And if things were to stay the way they are, I don't think that pressure would be great. But I'm not convinced that competitors who feel pressure to grow are not going to tighten spreads and get really more aggressive on yields.

And so it's hard to know, but I don't see that, that's going to get a whole lot better. We've been coaching our team all year long that pricing was going to get tougher as the year went on. And so that's another part in this a little bit slower growth is we've certainly had a good -- I mean for the 17% or so in the first 9 months. And I would I'm glad we put it on then when spreads were wider as opposed to having to be stepping into that gap now thinking, "I got to turn up the growth level when spreads are coming in."

So yes, it's one of the hardest things to forecast in our world is what's the competitive pressure on rates. But Brad, there's a lot of capital. As you know, there's a lot of liquidity in the system and we should include some pressure from both the buy and sell side to other -- to our competitors. And so I think it's going to be meaningful. And we're -- look, I don't mind competing on spread. I just don't want to compete on structure. And that's where I'm proud of Clay and the credit team and our bankers for holding the line well there, as you can see.

Great, Terry. That's helpful. And Malcolm, just a question on both organic and sort of inorganic growth. Can you help us think -- you've hired 25 new lenders year-to-date. As you think about the next 12 months, what would be a good number to maybe think about? I know it's hard. And then can you also just remind us or maybe how things have changed in terms of how you're thinking about size of a potential M&A target? I know you've talked about maybe potentially going to a more rural franchise that might have more funding versus a more metro franchise? Just kind of wanted to get a sense of kind of how you're thinking about size of deals, et cetera.

Yes. In terms of the organic, inorganic, a lot of these folks we have hired recently are what we would call community bankers. The Community Bank is loans, $10 million and less companies, $25 million in revenue and less. It's our most profitable area. It provides funding. It funds the majority of the bank. And that's our foundation. So a lot of those people have come out of there. So those numbers are smaller.

But like I said, they're very profitable and they provide funding. So they'll be organic. It's move -- they're good that moving there's 2 big mergers in town that have created a whole bunch of opportunity. I will say one of the mergers in town, we've gotten over 10 people from and several have reached out to us. And that's not just production people. It's actually probably more like 15.

But so I think there's going to be a fair amount of organic growth, albeit it might be on the smaller side because the majority of folks are community bankers. But we're still pushing on -- we have 2 big hires on the commercial side that I think is going to -- that are going to be really, really nice.

In terms of the M&A, here's our thinking. We've grown about $800 million this year. And so it seems to us that it would be hard for us to dip down that low if we can grow at that size. But we recognize that at the growth rates we are, albeit they'll be less in the last 2 quarters, we're going to need some funding at some point in time through '23, '24. And so fundings, we're looking out far enough. And so yes, the smaller banks with 60% loan-to-deposit ratios that reside in slower growth towns, but still in Texas are something that we're looking at and have looked at and we'll continue to. But there's got to be a reason to do a deal. We're not going to do it just to add $600 million in loans. We've got to have a reason behind doing it. And so we're going to be pretty disciplined there.

Your next question is from Woody Lay of KBW.

As you mentioned, you've done a really great job on the fee income side, the rise in the numbers in the numbers in North Avenue closing in November. I guess my question is, just longer term and in an ideal world, where would you like fees to revenue to ultimately represent, like the 25% range or maybe even above that?

Go ahead, Terry.

Yes. Woody, look, we're kind of focused on getting to 25%. We've made good progress. I mean as a management team, we sat here just over 12 months ago, and we were about 10%. And this quarter, we were at 16%, and we're going up from there. And so we've been very intentional about growing this. We've made 2 meaningful transactions between Thrive and North Avenue Capital.

And would we be happy over 25%? Yes? But 25% is a good place to get to. And the thing I would remind all investors and analysts on this call is that North Avenue Capital is a great business, but it's going to be a lumpy business. It's lumpier than any other business line we are in or about to be in starting next Monday.

So my urging is to think about that over an annual time period and don't get caught up. And what you said your fee revenue goal was 25% and you went down this quarter. Yes, but we could be up. It just depends on the timing of closings in that business.

And so I know I'm rambling, but I want to take this opportunity to remind everybody, it's a lumpy business. And 25%, I think, would be really, really happy. I think that the revenue diversification, including one very countercyclical investment in Thrive is really -- we have a much more diversified and stable earnings picture from that -- stable revenue picture from that. So there you go.

Yes, that's good color. And then related to asset sensitivity, at least based on the (inaudible) disclosures, it came down a touch quarter-over-quarter. Is there any color you could give just surrounding that decrease?

Yes. I mean when you move loans -- I mean when you move cash off the balance sheet, it's going to move you down. And while that cash moving out lessened our asset sensitivity, I certainly like to what it did the net interest income and the NIM. So we'll make that trade. I think the important thing is that the table to the left on Page 8. When you look at how many of our floating rate loans, they don't have a floor, or the floor has been reached. So almost 90% of our loans will reprice when the Fed starts to move. So I'm encouraged by that, given that we're 2/3 floating or thereabout. So anyway, I hope that helps.

Yes. And then last for me, it was just nice to see the level of buyback in the quarter. Was the buyback this quarter sort of a reflection that M&A might be coming along a little bit slower than you previously thought? Or just any comments you can give on the buybacks this quarter.

Well, we've always said that we want that to be one of the tools in our tool book and -- toolbox and that we're going to be opportunistic. And when there's weakness in the stock, we like -- we certainly like taking advantage of that. I don't expect us. At these valuation levels, don't expect much from us in the buyback. But if you go back to when we started this post Green acquisition, our average purchase price per share has been $25.27. And we bought back 6.6 million shares. So I know that's in different valuation environments than we have now, but it's been a good tool to have, and it was a good tool in the third quarter. How much we're going to use, it's going to depend on how the market is valuing the currency, and I wouldn't expect us to be exactly forward.

And there are no further questions at this time. This concludes today's conference call. Thank you all for your participation. You may now disconnect.

Thank you.

Thanks.