Veritex Holdings, Inc.

Q3 2021 Earnings Conference Call


spk_0: good day and welcome to the vertex holdings third quarter twenty twenty one earnings conference call and webcast all participants will be in a listen only mode please note this event is the may have been record i will not only a conference over to miss this and cuddle investor relations officer and secretary to the board of vertex harper
spk_1: thank you before we get started i would like to remind you that if the presentation may include forward looking statements and those statements are subject to risks and uncertainties that could cause acts well and then hit the bed without to defer the company undertake no obligation to publicly revive any forward looking statements as the time if you're locked into our webcast please refer to our slide presentation including our safe harbor statement beginning on flight to for those of you joining up by phone please note that the safe harbor statement and presentation are available on our website varitek bank dot com l comments made during today's call are subject to that safe harbor statement some of the financial metric discuss will be on a non gap faith in which our management believe better reflect the underlying core operating performance at the business please see the reconciliation of all the gets non get measures and are filed eight k earnings really joining me today or malcolm holland our chairman and ceo jerry early our chief financial officer and clay really are cheap credit officer i will now to end the call every mountain
spk_2: good morning everyone it's been a very busy quarter for a team which produce some very favorable results for the quarter reproduced operating earnings of seventy cents a share up from sixty cents the previous quarter a seventeen percent increase while producing a pre tax free provision return of one point eight five percent third quarter was transformational for our company we closed or forty nine percent investment into thrive mortgage and realized a full quarter of our investment we also announced their acquisition of north avenue capital the nation's largest producer of us the a loans were scheduled to close this transaction next week on november first both of these opportunities when meaningfully to are non interest income moving forward or long growth continues to perform at a brisk pace for the quarter mounds net of dpp and mortgage whereas group three hundred forty four million or twenty two percent annualized this the second string quarter we have exceeded twenty percent long growth for the first nine months at a year we're growing at seventeen percent if you peel back the onion a bit and really analyze our pipelines it is clear that our investments and long talent over the past eighteen months are starting to produce the result that we hope for but our tiny non funding closings and payoffs have worked in our favor the last two quarters as we looked bored we don't see long growth continuing it the last two quarter levels but still feel confident that our annual longer oh shit over and the double digits for the remainder of twenty one and also for twenty do i like to speak a bit on the focus time we have done in the last eighteen months these new additions are big part of our current growth and why we're so bullish on the future just this quarter we added an additional eleven ft used to our production games and twenty five year over year these total do not include the non point dating hired made in our operations data analytics credit and risk areas which candidly your best in class the market disruption in several emanate deals and our state and the fact that prospective employees and our markets are taking note of our culture and growth profile or prompting these hiring opportunities our deposit growth continued during cute three groin and just over eleven percent annualized or two hundred me and we continue to drive down our past and total deposits now at twenty dips down from twenty three in q do we are probably at the bottom right here credit quality continues it's positive trend as we move further and further away from pandemic crisis and our markets and p a decrease for the fourth quarter in a row and now said a point seven seven percent of total at that down a bit from the previous quarter and over thirty percent year over years we feel this race show continue to move down considering the resolutions were currently working towards charges were nine vips all of which were fully accounted for in our reserves are now turn the call with charities gusher detailed financial results thank you malcolm on pace bad give see multiple graphs no one carmel couple of these first tangible good value per share increased to seventy dollars and fifty three cents in the third quarter was translates into growth of twenty point one percent on a year over year basis after adding back the impact of our quarterly dividends go and intangible good value for shared most important priority for a management team second is are operating return on average tangible common equity which remain very strong in the third quarter at sixteen point nine percent and his average sixteen point five percent over the last four quarters is weird sex work visa the pandemic the impact of the thrived investment can be
spk_3: seen in our efficiency rick ratio which improved over three percent now the forty eight point five percent would think it's not graph of that i would like to call your attention to is the part positive operating leveraging que three operating revenue grew seven percent on a link order basis while operating expenses only grew at point six percent resulting in part of our writing leverage over six percent which is pretty strong on slide six malcolm is already mentioned are long road for the quarter we saw growth and all one segments except multifamily the rate of growth in the construction portfolio floating two three and a level of on funny commitments remained steady improving sienna utilization rate also country to the outstanding one growth for the quarter average mortgage warehouse balances to increase two point three percent in the third quarter reflecting additional customer acquisition this portfolio sits at six point eight percent of average total loans excluding ppp he remains or intent to keep the average mortgage warehouse portfolio at ten percent or less of average total lumps skipping to slide eight net interesting com increased four point two million from qt levels are are all the way up to seventy one point three million in two three the most significant drivers of the increase were lung growth they count and deposit rates often know the key free loan production was at three point seven hope
spk_2: percent and que three interesting deposit production was at twenty one basis points next the net interest margin increase fifteen basis points from que to up to three point two six percent for two three the ppp portfolio rep bob bases point drag on the nam average liquidity was approximately one hundred and thirty six me
spk_3: dollars higher than are normal target level but down significantly from three hundred and fifty million in excess liquidity and you do the sector liquidy heavy impact depressing the nam and que three bus seven basis points so in the aggregate ppp in excess liquidity represent about it well based on drag on the now as you model men interesting income for future period keep the following in mine
spk_2: first average loans excluding mortgage warehouse and ppp for the third quarter or two hundred and fifty five million dollars below the inning balance on september thirty thirty
spk_3: second there thirty five million in subordinated debt with a rate of approximately five and a half percent that is callable in december of twenty twenty one
spk_2: third the earnings impact of the hedge terminated in february and twenty twenty twenty one the twenty twenty one will start to flow through earnings and que one twenty twenty two with an annual net interesting can impact of four point three million these factors give us optimism that the growth the net interesting come from que three to four and beyond will be meaningful
spk_3: and that the margin should continue to expand
spk_4: on the slide not
spk_3: another strong on interesting camcorder with fifteen point six million in revenue or thirteen point nine me and on an operating bases excluding the benefit of one point nine million people ppp forgiveness at thrive and a hundred eighty eight thousand dollars and security losses
spk_2: operating at it non interest revenue represented sixteen point three percent of total revenue for the quarter and should continue to improve queue for with the closing of the north avenue capital acquisition as a result of vertex a strategic content to diversify revenue sources we've achieved thirty two percent year over year growth in operating non interest income excluding the impact of ppp operating expenses on slide can decrease one thousand dollars from q two salaried employee benefits increased slightly it's higher salary cross from the hiring melt now been referenced was partially offset by lower benefit cost the number of employees increased by ten during the quarter and but thirty one year over year as we continue to and best for growth skipping disliked well capital levels were approximately twenty million dollars for the quarter this is never the twain one point three million we return to shareholders in the form of dividends or share buyback for the quarter we repurchase preparing twenty eight thousand shares at an average price of thirty four dollars and eighty five cents all the capital ratios except the leverage ratio declined slightly during the quarter due to balance sheet growth and the shipped out of lower risk weighted assets into the and portfolio a capital deployment priorities given the current valuation overstock organic growth dividends strategic growth and lastly share repurchases on slide through don't run update on the rob mortgage investment dried continues to perform well as they're cute three origination volume increases likely to almost a hundred million year to date twenty twenty one origination guys himself just over sixty percent as compared to the same period and twenty twenty this comparison most recent in be a forecast which going for a decrease of six percent thrives purchase driven origination modeled has delivered sixty six percent purchase volume for the your today and over seventy percent for two consecutive quarters
spk_3: since the end of the third quarter we saw the correspondent contract with right where they will provide fulfillment on all vertex bank originated mortgages and alone purchase agreement allowing protect about thrive adjustable rate originations for online portfolio on slide fourteen of like and with an update on north avenue capital their long pipeline remain strong and approximately four hundred million dollars vertex it's cute for four cats net income from the north avenue
spk_5: acquisition should be in the range of one point five to two million dollars the twenty twenty two estimated net income remains unchanged from the announcement day at approximately twelve me dollars we've been working closely with the team from north avenue since the announcement and are even more encourage about their earnings potential they build a strong market position and us
spk_3: the a landing and we're committed to helping them build on that leading position with that the like turn the goal of the some comments on credit
spk_6: like a terry good morning everyone the credit picture for british continues to improve as mouth mentioned are mph dropped over the quarter or mph to total assets of dropped thirty percent from a high watermark experienced in the third quarter twenty twenty we continue to see encouraging signs resolution in our problem loan portfolio page fifteen of the deck contains a credit metric for the bank for two three the chart in the bottom right hand of the paid reflects the movement and criticized it's over the past four quarters after a run up data the pandemic we've experienced the twenty five percent improvement in our levels of criticize assets from the high watermark that occurred in the third quarter of twenty twenty are specialized it's team is doing a great job or reducing our levels of criticized as that we expect that the continued to the balance of the year the migration of credits from the line to are specialized it's team due to deteriorating trances reduced significantly also which is encouraging
spk_2: charges for the quarter centered and three acquired credits first was a bar and the salt water disposal industry that lost it's primary customer which put the bar in distress and resulted in a charge down of the subject that the second was a contractor that went out of business in the cloud old enough of this cover the debt
spk_6: and finally we added as be a loan secured by restaurant pop property that was for close been sold at a loss
spk_2: the reference charges for fully reserved and prior periods and had no impact on are required long lost for this as those are up slightly did one credit than the electrical power generating industry that matured and as and negotiation for renewal
spk_6: i want to touch briefly on the third quarter loan production details given on page seven of the deck our largest area have committed production for the past year been and commercial construction law firms the chart in the bottom left to the pace demonstrates a couple of points where the and know our underwriting standards had not changed over the last year as can be seen in the weighted average l t v lt sees dsc ours our reliance on commercial construction loan for production has dropped meat way over the last year from seventy percent to forty per forty two percent
spk_2: follow our commercial construction lending as focused in the industrial space which has been the most active crease place for some time there's tremendous investor interest in the space and many of our as pay off before fully funding do to bar demand for that i'll turn it back over to my
spk_7: help him for five marks
spk_8: dice clay
spk_2: our continued focusing commitment operating a rich focus growing and the producing efficient business is starting to shows the earnings power to and see this company we continue to be focused on consistent core earnings while executing are conservative risk profile through all parts of the enterprise we have made a targeted effort to enhance our non interest income category as well as continued to counted shaft tape is back to the next level we do continued on numerous opportunities and and then a side of our business we remain confident that will be involved in any meaningful am in a conversation in taxes but we will remain very disciplined when it comes to brain on a new institution into our protect family and clothing let me tell proud i am tired that delivering these types of results and an extremely competitive market is not easy our team should be congratulated and i'm awfully proud of well done operator will now open for any questions
spk_9: thank you
spk_0: if you would like to register a question please press star followed by the number one on your cell phone keypad if your question has been answered and you would like to enjoy your to registration please press one moment please for the first question or first questions from the line of math only from stephen
spk_10: your line is now i think my gosh
spk_11: more name at a muddy doing great
spk_12: congrats on that along with a corner on it it sounds like you're still going toward that low double digit long growth after for the fourth quarter and into next year which ought to be a slow down from with laugh he quarters i think you mentioned a few think one of which was high expectations of to more pay down any more common sure you can provide are you theme from the construction loan nearing completion
spk_2: yeah i'm in the uk downs are gonna get pretty pretty aggressive year a movie now we just looked forward through the pipeline the next quarter and quarter after we've been really really active and bam obviously when you really active they pay off and so we see some of that i mean candidly were still encouraged by the long growth but in a we're not going to keep up with twenty percent that's that's will run and i'm pretty artifacts and the good news is that we're actually doing less and less of that as we move forward and the bugs and were hiring nutter him in the real estate side they're on that committee banker commercial side
spk_12: and malcolm on the production side you give us a great flight there on on slide seven looking at the cominit production improvement of laugh quarters with the expectation for that of the next few quarters in terms of incremental improvement from
spk_2: you in each each individual area
spk_13: wow one of the top right hand grab on that flight that and the corley cominit production in aggregate while got i'm sorry i got it again i'm on it now you know i
spk_14: there's a lot no on on
spk_2: my guess is we're going to be continuing to be above that day a dollar mark going forward just with the new folks that were iran and the new efforts that would put forth and a couple different areas but yeah i think we're going to be able hold that line
spk_15: a over a billion
spk_12: okay
spk_2: and in flashlight are back in the queue i think you disclose the weighted average rate on do productions around three seventy it just remind me does that include any fees or any other miscellaneous things was that just to keep on right thing that's just the keep andre baptist here and so that when you compare so when you're comparing that to our quarterly yield that you know
spk_16: once keep on one yield including deferred fee fees collected except
spk_12: got it okay
spk_11: okay
spk_0: we are back in a cave my score of thanks
spk_17: thank you magma
spk_18: or next questions from gary tenor
spk_2: of they a davidson your line is no that's more
spk_3: i'm more than one that just as little bit i think chair you talk about this in the past in terms of kind of vertex comfort level at at various month as a ratios of your ninety four percent at the end of the quarter x mortgage warehouse oh yeah even even with us so down and the pace of longer of from here yo with
spk_7: stand that that on others are probably continues to higher so just your mind is where your comfort level is in terms of the that that on other issue
spk_2: the i love the deposit excluding pp pay a mortgage warehouse where we're at we're comfortable up close to one hundred percent among the i just right under that if you will ah because it you know we we know we have a lot of balance sheet resources thought we know that the mortgage warehouse business as short term times ah so the if we need with what it
spk_3: the weekend you can get it from there though that you know certainly slightly slower have ah lung production
spk_2: learn growth war or or help but but op or qualities a it you know that that and look look for kept out i know and i'll see what would it be as any type of significant constraint as as as we go is we mean a get to finish twenty one and get three twenty two obviously keep focus on raising deposits ah and in our community bank that has done a great job of that ah and had a end the our our commercial see and islanders are don't have a good job to so we gotta stay focused they're just everyday the way we do in the one side and then armed that you know we'll we'll be okay and era where comfortable again a closed up one hundred per se and excluding mortgage warehouse ppp
spk_19: are they here and then on their construction portfolio and and and you cannot addresses and a sense of you're giving expectations of some increase a downs in that book that forty percent alone loans explores whereas ppp
spk_2: yeah where where would you like that portfolio shorn of optimal a to be process of it's all about yeah would drop probably right where it is in a widow if it's regular with that be okay to we just have a really really talented team in that area they're really good and that the credit quality get some of our that because we have an execution date really really top notch than a we're going to keep dealing with a borrower's and i see it stain about the same
spk_20: and then finally for me i've even you mention the agreement to purchase a verbal rounds through through thrive and having option there on you know i'd as you think about expectations for that channel and where you'd want the kind of
spk_3: receive mortgage for failure to be
spk_2: your word is that was that like overtime yeah i'll take them get me we're we're just over eight percent today i mean i would certainly it year like to see it get to ten ah in the in the intermediate term if you will ah and then go from there i mean we we would love to have the mortgage consumer barter the boat ah be at that as the at about twenty fifteen to twenty percent ah with one of them at benefits that it is certainly carries the lower risk waiting i would with up on the on and capital ratio lot but would would would like to continue to grow that obviously don't want to go to aggressively they're given were
spk_21: we are in the in the race cycle and the expectation for peter rate hikes and twenty two twenty three but it's it's a nice tool that we now have and we've done a fair amount of work over the night last ninety days or so to get there and ah ah
spk_22: so we're don't feel good about it drops been a good partner in that regard and on you know what we wanna grow up at at reasonable rates but but that you know not and is get it t and and then we'll go to towards the fifteen number of you will
spk_0: and very much thanks eric eric
spk_23: next question is from brad millsap
spk_2: piper sandler your line is now up
spk_7: hegemonic got it
spk_2: good morning rack they stay my questions i'd carried it on the follow up on the up on the on the loan your question
spk_24: a match right i think you're cool loan yields for maybe down and basis points link or ten or eleven if facts screwed sort of all the ppp noise pvt reversal things like that
spk_3: he talked about that be seventy knew him in new york that without fees with is the deep deep the like that that the new and renewed his kind of serving up really teachers more pressure there to come to try to get a sense of how much more core mon pressure you know we can we can tennessee of that over the near term
spk_2: well i mean up and i think the pace of the decline in lung yields has has lessened during the third quarter ah i'm but at you know and and i think is you know it wouldn't have a lot more downward pressure but there's of that and there's an extra variable here known as competition and and a you know all i think we're to stay the way they are i don't think that price 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 i you know it's a hard to know ah you know but but it an adult
spk_3: and i don't see that the debt gonna get a whole lot better thought yeah we've been coaching our team are all year long that pricing was gonna get tougher as the you're well on and so that's another part in this a little bit slower growth is we've we've certainly had a good a mean for the seventeen percent or so in the first nine months and i would have am glad we put it on the end when spreads were wider as opposed to having to be stepping into that gap now thinking i gotta turn up the growth level when when spreads are coming in so i'm
spk_2: at yeah yeah i thought it was the hardest things tempted that to forecast in our world is what's the competitive pressure on right
spk_25: but but brad there's a lot of capital as you know there's a lot of liquidity and system and he can put the pressure from both the bond felt bad the other to to to our to our competitors and so i think it's it's gonna be meaningful and and were look at what i don't mind competing on on spread i just don't compete on
spk_2: structure an hour and that's where i'm proud of clay and the credit same and are bankers for holding the line well there's you can greater thank you that's helpful and and now can disturb question on both organic in through an organic growth can can you help the think you've you've hired you know twenty five new under here to date as you think about the next two months what what would be a good number maybe think about know it's hard and then he also just on reminded or them or maybe how things have changed terms how you're feeling about you know size of a potential on you know him and a target and are you talk about maybe potentially you know going to more or franchise and might have a a more funding your versus a more metro franchise he's kind of want to get a sense of of can how you're thinking about he has died deal that cetera yeah and again in terms of the organic and are a lot of these folks we have hired recently are and what we would call community backers could the committee bank is them kill lounge can main and last companies played badly and and revenue and last is that most profitable area it provides funding it over it binds the majority the back and and and that the are foundations or lot of those people come out of there so those numbers are smaller but maggot said they're very profitable and they provide funding so they'll be organic it's move they're moving there too big mergers and town that have that have created a whole bunch you opportunity our say one of that mergers and down we've gotten over ten people from
spk_19: in several have have reached out to us
spk_2: and that's not just production people actually gotten more active thing that joke i think there's going to be a fair amount of organic growth of the it it might be on the smaller side because the majority subject committee bankers but we're still pushing on we have two big ayers on a commercial side that i think gonna that are going to be really really nice the term the emanate you know years ears are think in a work at we've grown about eight hundred million this year and damn so it seems to let it be hard for aphid get down that low if we can grow at that size but we recognize that at the growth rate vr albeit they'll be also be laughing the last two quarters
spk_25: we're going to need some funding at some point got twenty three twenty four and tell findings were looking out far enough and so yeah the smaller banks with know sixty percent longer deposit ratios that reside in
spk_3: slower growth pounds but still on taxes or something that we're get we're looking at an adamant that will continue to but there's gotta be a reason to do a deal we're not going to do it just to add six hundred main and loved we've gotta have a reason by do it
spk_0: and so we can be pretty disciplined there
spk_2: great thank god
spk_26: in thread next questions from the of would you lay of kbw your line is now up
spk_2: eg or god why would he worked on that as you add he mentioned you know you've done a really great job on the income fact there i've been the numbers north avenue close the in november i'm a get my question is longer term in an hour and a an ideal world where where would you like you have fees to revenue to alternately represent like the twenty five percent ranger
spk_5: maybe even about that
spk_2: to add gearing up yeah
spk_5: would you let we're kind of focused on getting the twenty five we made good progress i mean as a management team we sat here just over twelve months ago and and and we were run out here and in that quarter we were at sixteen and we're going up from there and so we've been very intentional about rowing this we make to meaningful transactions between thrive and north
spk_2: capital and you know it would would be happy over twenty five yes but but it it know twenty five the good place to get to and the thing i would remind all investors nam with on this call is that north avenue capital is a great business but it's gonna be a lumpy business it's luckier or than any other business plan we are in
spk_26: for about the the and starting next money so my mom my urging his to think about that over an annual time period and don't get caught up in and for you said your your your the revenue go with twenty five and you would down with quarter yeah but we could be up to be on the timing a closings and that business and and so
spk_5: i'm an i'm rambling but i want to take this opportunity to remind your body is a lobby business and twenty twenty five i think we'd be really really happy i think that the revenue diversification including one very counter cyclical investment in drive ah at it is is really are it it's we we have a much more do
spk_3: versa five and stable earnings picture from that stable revenue picture from that so there you go
spk_2: he added that get color on and then really the at that sensitivity and we'd based on the alka disclosure the came down it touch quarter of a quarter journey power you could give just surrounding that decrease
spk_3: the a yeah yeah i mean you know when you when you move when you move lungs when when you cash off the balance sheet it's gonna be down and and while that cash moving out than their assets sensitivity i certainly like to what it did the net interest income and the nam sell out will make that trade ah i think that
spk_20: a you know i think the important thing is is that be the tape to the laptop age eight when you look at how many of our floating rate loans don't have a floor or the floor as been breached so almost ninety percent of our loans will reprise when fed starts to move
spk_3: so yeah i'm encouraged by that ah given a given that were two thirds floating or thereabouts so he wanted their health
spk_5: yeah i'm in a while for me and it's nice to see the leveled by back in the quarter
spk_2: with the by that this quarter sort of a reflection that emanate might be coming along a little bit lower than he previously thought or just any any comedy and give on the back with quarter well we've we've always said that we want that to be one of the tools and are to book and a to box and that we're going to be opportunistic and when there's weakness in the stop on the it out we like we certainly like cake taking advantage of that on a don't expect us at the evaluation levels don't don't expect
spk_5: much from us to to be kept in the in the by that but if you go back to when we started this post green acquisition
spk_20: our average purchase price per shares been twenty five dollars and twenty seven cents and we bought back six point six million shares so at yeah i know that's and differ valuation environments and we have now but it's been a good tool the out and and a it was a good tool in the third quarter ah
spk_0: how much we're going to use it's gonna depend on them out markets valuing the currency and i wouldn't expect this to be that it going forward
spk_27: yeah that makes sense right thank god

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