Veritex Holdings, Inc.

Good morning, and welcome to the Veritex Holdings Second Quarter 2024 Earnings Conference Call-In Webcast. All participants will be in a listen-only mode. Please note, this event will be recorded. I will now turn the conference over to Will Holford with Veritex.

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 risk and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to publicly revise any forward-looking statement. If you are logged into our webcast, please refer to our slide presentation included on our safe harbor statement beginning on slide two. For those on the phone, please note that the safe harbor statement and presentation are available on our website, VeritexBank.com. All comments made today are subject to our safe harbor statement. Some financial metrics discussed will be on a non-GAAP basis, which 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 8K earnings release. Joining me today are Malcolm Holland, our Chairman and CEO, Terry Early, our Chief Financial Officer, and Curtis Anderson, our Chief Credit Officer. I will now turn the call over to Malcolm. Good morning, everyone, and welcome to our second quarter earnings call. Our clear focus on repositioning our balance sheet continues with positive trends in virtually all categories. For the second quarter, we reported operating earnings of $28.3 million or $0.52 per share. All components of the P&L are showing positive trends with the exception of our government guaranteed fee business. We made some enhancements in this area and that should start producing results in the back half of the year and beyond. NIM is stabilizing and expenses today are better than initially budgeted. Our balance sheet continues to transform. As seen on slide three, our loan deposit ratio excluding mortgage warehouse continues to decline, and it sits below 86%. And the dependence on wholesale funding has declined to 19%. Both of these metrics are down measurably over the last 12 months. Tangible book value continues to grow, currently at $20.62, up $1.21 since June 2023. Growth for the quarter was virtually nil on both sides of the balance sheet as we continue to bolster our balance sheet and shift the mix of our liabilities with lower-cost funding. Although loan growth absent mortgage warehouse has been flat for the year, our pipelines are building in our small business and C&I areas. Although these areas are slower to move the growth needle, there are clients that provide full relationships with both deposits and fees. We anticipate loan growth for the back half of the year in the mid-single digits and anticipate deposit growth will be in the high single digits. Moving to credit, Curtis Anderson, our Chief Credit Officer, and his entire team have had a very productive quarter with all trends moving in a positive direction. In general, criticized and classified totals were stable but trending down compared to the previous quarter. the underlying portfolio is dynamic and reflects the ongoing work to prudently manage risk. Our NPAs reduced 20% or 21 million for the quarter to 65 basis points of total assets. Multiple factors played into the reduction with the biggest drivers being a restructured Houston data center property to a new owner who substantially paid down the loan while we took a 1.5 million charge that was previously reserved against. This restructured loan is now a pass-rated credit. And additionally, we had a sale of a foreclosed property that was sold at a gain. Net charge-offs were $6.9 million, a slight increase from the first quarter, but in line on a year-to-date basis with full-year expectations. 60% of the net charge-off total was a problem C&I credit that is near its final resolution. As you know, we foreclosed on a student housing project in Q1. This property is now under contract and is scheduled to close this quarter at a price that has no material P&L effect. Past dues to total loans continue to improve to .16 down from .29 in the first quarter of 2024. Credit loss reserves now sit at 1.16 of total, up 11 basis points over the last 12 months. All in all, we continue to make great strides in improving our credit metrics. More to do, but we're encouraged by the positive trends. Now I'll turn the call over to Terry. Thank you, Malcolm. When I look at the results for the second quarter, I'm pretty encouraged, especially about the credit trends, NIM expansion, and expense levels. As I say every quarter, I'm thankful for the progress, but there's more work ahead of us. Starting on page 7, the allowance for credit loss coverage now sits at 1.16%. up significantly from six quarters ago as we've increased the reserve by almost 25% or over $22 million, excluding our mortgage warehouse portfolio, which we have not recognized a loss on since inception. The allowance for credit loss coverage is 1.23%. It's important to note that the total allowance for credit losses is 96% comprised of general reserves. We continue to use conservative economic assumptions in our credit loss model, with 75% of the weighting on downside scenarios. We deem this reasonable given the level of economic uncertainty coupled with significant geopolitical risk. Moving to page 8, over the last six quarters, total capital grew approximately 145 million dollars. CET1 ratio expanded by 12 basis points during the quarter and by 73 basis points year over year and stands at 10.49%. A significant contributor to the expansion in the capital ratios has been a $550 million decline in risk-weighted assets since the end of 2022. Tangible book value per share increased to $20.62, which is a 12.7% increase on a year-over-year basis including the shareholder dividends. It's worth noting that since Veritex went public in 2014, it has compounded tangible book value per share at a rate of 11.1%, including the dividends that have been paid to shareholders. Finally, Veritex was opportunistic in its use of the buyback during the quarter. We spent 7% of the authorized amount at an average price of $19.91 or 96.6% of current tangible book value. On to page 9, our strong deposit growth and low loan growth allowed Veritex to reduce its loan-to-deposit ratio from 105.4% at June 30, 2023 to 91.8% at June 30, 2024. Our target remains to have this ratio below 90% by the end of 2024. Please note that the loan-to-deposit ratio is 85.9% if you exclude mortgage warehouse. This seems to be a more relevant metric when you consider the short duration of time mortgages stayed on these warehouse lines. Deposit growth also allowed us to reduce our bank's wholesale funding reliance to 18.9%, 29.2% at June 30, 2023. As you can see in the bottom left graph, we've kept the time deposit portfolio short have $2.3 billion in CD maturities over the remainder of 2024 with an average rate of 5.18%. I'm glad to have this maturity profile given the potential for two Fed rate cuts before year-end. Bottom right, the monthly cost of total deposits show a pretty steep rise up through September of 2023. However, since then, it has largely leveled out. On slide 10, loan growth was approximately 2.9%. It was driven by multifamily Cree and Mortgage Warehouse. We continue to make progress on reducing our Cree concentrations and remain committed to getting our Cree concentrations under 300% and ADC concentrations under 100% by the end of the year. The Cree maturity profile is shown in the bottom right graphs. We have approximately $350 million in fixed rate maturities at an average rate of 5.50% over the next four quarters. The average loan size for these maturities is $3.1 million. As shown on the bottom left, loan production picked up considerably in the second quarter, so did loan payoffs. This payoff activity reflects the vibrant economic activity in the Texas market, but it does make organic loan growth challenging. The office portfolio continued to decline, down $140 million in the last year, or 22%. This portfolio now comprises 5.2% of total loans. Slide 11 provides the detail in the CRE and ADC portfolios by asset class, including what is out-of-state. Slide 12 illustrates a breakdown of our out-of-state loan portfolio, including the significant impact of our national businesses and mortgage. The true percentage of the out-of-state portfolio is only 10%, down from 11.3% last quarter. predominantly where we have followed Texas real estate clients to other geographies. On slide 13, net interest income increased by $3.4 million to just over $96 million in Q2. The biggest drivers of the increase were lower non-accrual interest reversals, the impact of higher loan rates, and the impact of higher security yields. This was partially offset by slightly higher deposit yields. The net interest margin increased five basis points from Q1 to to 3.29% in Q2. We believe the NIM will remain in the range of 3.25% to 3.30% over the remainder of 2024, obviously depending on what the Fed does with rates. Slide 14. This shows certain metrics on our investment portfolio. The key takeaways are it's only 10.6% of assets, the duration is 3.8 years, and 87% of the portfolio is held in AFS. Finally, on this slide, you see a snapshot of our cash and borrowing capacity at June 30, 2024, and the trend since Q1 of 2023. The current available liquidity represents 2.0 times the level of uninsured or uncollateralized deposits. Slide 15, operating non-interest income declined to $10.6 million. This decrease is driven by the lack of gain-on-sell revenue in our USDA business. Other parts of our fee revenues are performing in line with expectations. Operating non-interest expenses were flat quarter over quarter, and we're very satisfied with our expense management efforts in 2024. To wrap up my comments, I see a lot of positives in the quarter. First, credit. NPAs are down, criticized assets are stable, and net charge offs are in line with expectations. Second, NIM expanded five basis points, and funding costs are relatively stable. Three, capital ratios moved higher. Four, the allowance for credit losses to total loan coverage increased. Five, loan production is up and pipelines are increasing. But there's still a lot of things we need to work on. First, continuing to reduce the credit risk profile. Second, continuing to reduce funding costs. And three, improving USDA revenue performance. With that, I'd like to turn the call over to Malcolm for his concluding comments. Thank you, Terry. As you can see, much progress made, yet much to do. I want to mention the progress we're also making on the way we're pursuing our new client acquisition. Under Dom's leadership, new client identification and follow-up is seeing some very positive results. Our commitment to the small business and community bank areas remain a focus in building and retaining long-term clients. Those markets provide us with granularity and full relationships. They'll make us much more balanced and less susceptible to market swings. While these areas build our assets at a slower rate due to their size, they are a foundation of a diverse, sound, and regional bank. Finally, I'd like to acknowledge our 800-plus Veritex team members on being named one of the best companies to work for by U.S. News and World Report. Congratulations, team. Operator, we'll now take any questions.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment while we compile our Q&A roster. And our first question is going to come from the line of Steven Skelton with Piper Sandler Companies. Your line is open. Please go ahead.