Veritex Holdings, Inc.

Good morning and welcome to the Veritex holding fourth quarter and full year 2024 earnings conference call and 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 Alford with Veritex.

Thank you. Before we get started, I'd 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're logged into our webcast, please refer to our slide presentation, including our safe harbor statement, beginning on slide two. For those on the phone, please enter the safe harbor statement, and all presentations are available on our website, VeritexBank.com. All comments made today are subject to that 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 now filed 8K earnings release. Joining me on the call today are Malcolm Holland, our Chairman and CEO, Terry Early, our Chief Financial Officer, and Curtis Anderson, our Chief Credit Officer. I'll now turn the call over to Malcolm.

Thank you, Will. Good morning, everyone. Today we'll review our fourth quarter and full year 2024 results. For the fourth quarter, we reported net operating profit of $29.8 million, or 54 cents per share. Pre-tax, pre-provision earnings were 41 million, or 1.28%. Then decreased during the quarter, but we anticipate to increase it from here, which Terry will cover in detail later in the call. For the full year 2024, we made operating earnings of $119.4 million, or $2.17 per share, which was flat over 2023. As I've stated many times during 2024, we communicated our earnings would take a hit to transform our balance sheet. We feel very good about where our balance sheet currently stands and earnings will begin to increase from their current levels. We are laser-focused and committed to return on average asset levels in excess of 1% in 2025 and beyond. Although the vast majority of the balance sheet work is completed, there are still opportunities for us to be more efficient with our liabilities through repricing and positioning of our funding. You saw some of this in the fourth quarter as our balance sheet decreased approximately $300 million, running off some high-priced funding. We also saw a small decrease in our funded loans for the fourth quarter and year over year. We expect 2025 to be a positive loan growth year between low to mid single digits due to very high forecasted payoffs. The discipline loan focus and new client acquisition has my undivided attention as well as our bankers. When I say discipline, I'm speaking about our ability to continue to be deposit first focused with well-priced relationships that produce available funding and spreads that are creative and profitable. I'm now going to turn the call over to Curtis Anderson, our Chief Credit Officer, to give you an update on our credit picture. I want to add that Curtis and all his dedicated teams have done an incredible job in 2024 transforming our credit process, our credit priorities, and our credit surveillance. As a result of their work, criticized loans have declined 20% over the last 12 months, and including two large payoffs in the first two weeks of January, that percentage decline goes to 28%. The numbers speak for themselves, but the team's focus and execution has been, quite frankly, remarkable. More to do, but I'm super proud of the progress.

I'll now turn the call over to Curtis. Thank you, Malcolm, and good morning all. We continue to realize positive momentum in credit through our focus on early identification of risk and balancing expediency with productive outcomes on problem loans. During the quarter, we foreclosed on an office property, which increased our NPAs from $67.3 million at third quarter end to $79.2 million at year end. The property has significant interest from various potential buyers, and it is currently under an LOI. Closing is expected in early second quarter with no loss. Charge-offs for the year are below previously provided guidance. Fourth quarter charge-offs are predominantly driven by a C&I relationship and a special purpose CRE property. In general, our 2024 full-year charge-offs reflect the impact of final resolutions on a number of loans in our drive to address velocity and throughput in managing credit risk. Past dues were generally in line with prior quarters. The increase in 30 to 59 days past due category largely reflects relationships for which payments were slightly delayed and are now current and without underlying credit concerns. Moving to slide six. We are pleased with the continued progress in managing and reducing our criticized loans with strong end-to-end focus by our frontline, special assets, credit officer, and loan servicing teammates. Criticized loans are down $100 million or nearly 20% year-over-year and down $78.5 million from the third quarter due to improved borrower performance, refinancings, and payoffs. Total CRE-criticized loans are $228.5 million, down 35% from year-end 2023. Please note that the breakdown of CRE-criticized by property type as now presented is accurate. This information is posted on our website. Finally, with respect to criticized loans, as Malcolm mentioned, certain closings and payoffs that we expected at year-end shifted to early January. These payoffs have further reduced criticized loans by approximately $15 million to $365.6 million. The related charge-offs for these resolutions are $1 million. There is significant risk management activity under the surface of these numbers. The portfolio is dynamic, and the routines in place to properly identify, grade, and manage risk are robust. We continue to execute our credit improvement initiatives with much more work to be done, but our focus is there. I'll now turn the call over to Cherry Early, our Chief Financial Officer, to discuss our financial highlights. Thank you, Curtis.

Starting on page 7, when I look at the results for 2024, I'm encouraged. The balance sheet is in a good place. Liquidity is strong. Reliance on wholesale funding is down 20% in the last year. Capital and reserves are up. and creek concentration levels are within the regulatory guidelines. Moving to page 8, the CET1 ratio expanded by 23 basis points during the quarter and by 80 basis points year over year, and now stands at 11.09%. Over the last two years, a significant contributor to the expansion in the capital ratios is attributed to approximately $750 million decline in risk-weighted assets. Tangible book value per share is at $21.61, down slightly from the third quarter of 2024, as the increase in AOCI and our quarterly dividend were offset by earnings. That's a 10.9% increase on a year-over-year basis, including the shareholder dividends. It's worth noting that since Veritex went public in 2014, its compounded tangible book value per share had a rate of 11.1%, including the dividends that have been paid to shareholders. Finally, Veritex did not purchase any shares during the quarter. We have 93% of the authorized stock buyback program remaining and intend to be opportunistic in its use. On to page nine. The allowance now sits at 118 basis points, up significantly in the last eight quarters as we've increased the reserve by almost 25% or $22 million. Additionally, when you exclude the mortgage warehouse, The ACL coverage rises to 125 basis points. Our general reserves comprise 97% of the total allowance. We continue to use conservative economic assumptions in our credit loss modeling, with 65% of the weighting on downside scenarios. In prior quarters, it was 75% on the downside. This change seems appropriate given the change in administration, business optimism, strength in GDP, etc. The quarter-over-quarter decline in the absolute dollar amount of reserves, Makes sense when you look at the decline in loan outstandings, the improvement in our credit risk profile, and the level of business optimism. Moving to page 10, total loans declined 1.2% during Q4 and 0.7% on a year-over-year basis. We made significant progress in reducing our CRE and ADC concentrations and ended the quarter at 299 and 87, respectively. The significant decline in ADC can be seen in the top right graph, and it's been largely offset with growth in multifamily and mortgage warehouse. The credit maturity profile is shown in the bottom right graphs. We have just under $400 million in fixed rate maturities at an average rate of 5.48% over the next four quarters. As shown on the bottom left, loan production increased 44% from 2023 to 2024, but loan payoffs remain elevated at almost $1.4 billion. We're projecting payoffs to be even higher in 2025. This payoff activity reflects the vibrant economic activity in the Texas market, but it does make organic loan growth challenging. Slide 11 provides the detail of the term CRE and ADC portfolios by asset class, including what is out of state. It also shows 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 11%. This is predominantly where we have followed Texas real estate clients to other geographies. On page 12, our strong deposit growth and loan-loan growth has allowed Veritex to reduce its loan-to-deposit ratio from 104% to 89% over the past two years. We intend to remain below 90% going forward. Please note, the loan to deposit ratio would be just under 83% if you excluded mortgage warehouse. This seems to be the more relevant metric when you consider the short amount of time mortgages stay on the warehouse lines. The deposit growth also allowed us to reduce our wholesale funding reliance to 16.6%, 24% over the same two-year period. As you can see in the bottom left graph, we've kept the time deposit portfolio short. It has 2.3 billion in CD maturities over the next two quarters with an average rate of 4.95%. Glad to have this maturity profile given the Fed cuts that have occurred and the potential for more in 2025. On the bottom right, we show the monthly cost of total deposits. Note the 39 basis point decline since the month of June. Veritex has done a good job in preparing for and executing on deposit pricing in a falling rate environment. The Fed cut rates by 100 basis points in the last two quarters of the year, and our interest-bearing transaction accounts declined by 80 basis points from June 30th to December 31st, an 80% beta. Similarly, total interest-bearing deposit accounts declined by 66 basis points from the end of Q2 to the end of Q4. 2024 was a successful year in deposits, with all our growth coming from our core lines of business. These deposits carrying an interest cost is approximately 170 basis points below our other more expensive funding options. In Q4, this allowed us to reduce brokerage CDs by 254 million, public funds by 233, and to exit a client with over 100 million in deposits, which carry the highest rate in the entire bank. The remixing of deposits is a key strategic priority as we go through 2025 and beyond. On slide 13, Net interest income decreased by $4 million in Q4, positively impacting the results with lower deposit yields, improved deposit mix, and higher debt securities volumes and yields. These were offset by lower floating rate asset yields, lower average loan volume, and interest reversals on problem loans. The net interest margin decreased 10 basis points in Q3 to 3.20%. As you look at our interest rate sensitivity, note that our down 100% 100 basis point rate shock is at 2.55% down from 4.16% over the last year, a 39% improvement as we work to make the Veritex balance sheet more rate neutral. We believe the NEM has profit in Q4 and should be in the range of 325 to 330 in Q1, assuming no Fed cuts during the quarter. Keep in mind the following three things. One, the repayment of the $75 million in sub-debt in February of 2025, which is accruing as SOFR plus 347 basis points. We filed an 8K, but should have also called it out in the earnings release. Restructuring of the investment portfolio in Q4 and the time lag on the repricing of the time deposits. Slide 14 shows certain metrics on our investment portfolio. The key takeaways, it's only 11.6% of assets. The duration is 3.6 years. and 88% of the portfolio was held in AFS. Finally, on this slide, you see a snapshot of our securities loss trade completed in the fourth quarter. The yield pickup on $189 million of traded volume is 178 basis points, and the earn back of the loss will be just under 1.4 years. Slide 15, operating non-interest income increased $1.3 million to $14.5 million. The increase was driven by the best quarter of the year in our government guaranteed loan business. partially offset by lower loan fees and lower OREO rental income. The $1 million increase in operating expenses for the quarter was a function of higher professional and regulatory fees and data processing software. Recognizing the need to improve our operating leverage and efficiency, Veritex in the second quarter engaged with a national consulting firm with extensive banking expertise to look at all aspects of the company. This review has consisted of staffing, operational processes, and technology. We've already realized a 19% reduction in certain technology vendor contracts. Other key contracts are in scope for renewal in 2025 and beyond. Two other areas where we benchmark poorly include treasury management and commercial banking. We've engaged the firm to help us review our treasury management product line and pricing structure and to help us complete the total commercial lending business model review. To wrap up my comments, I see a lot of positives. The balance sheet is in a much stronger position with excess liquidity, lower CRE and ADC concentrations, higher capital, and improved credit metrics. We have reduced reliance on unattractively priced deposits. Our teams are stronger in almost every area of the bank, and we're in great markets. DFW and Houston's hard to do better than that. Also, there's still things we need to work on, though. Continuing the trend and improving the credit risk profile, remixing the deposit portfolio and disciplined loan growth, and continuing to build out our fee businesses with growth expected in deposit fees, card revenue, customer swaps, and government-guaranteed income. It's our expectation that 2025 will produce positive operating leverage. This will be driven by an improved NIM, positive loan growth, and stronger fee revenues, partially offset by moderate expense growth. Operator will now take questions.

Thank you. To ask a question, please press star 11 on your telephone. You will then hear an automated message advising your hand is raised. We also ask that you please wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q&A roster. The first question for today will be coming from the line of Steven Scouten of Piper Sandler. Your line is open.

Hey, thank you. Good morning, everyone. Malcolm, I think you said in the release, obviously, that 2025 will be more about back to growing profitability. I think you said earlier here, the target being 1% ROA. I think I heard you say in 2025 and beyond. So just kind of wanted to confirm how you're thinking about reaching that 1% ROA and kind of the potential timing there. And then what do you think the biggest driver of that profitability improvement will be in the year ahead or biggest drivers if there's multiple?

Yeah, so, yeah, you heard me correct. We do believe it's 2025. You know, Q3 is probably a good quarter to hit that number. You know, the drivers of that's going to be, you know, loan growth and repricing on the deposit side. We continue to see some good movement there. You know, the headwind that Terry and I both mentioned was just the payoff number. Now those are coming matured and they, you know, those payoffs are coming. We're not going to go back to the, you know, the 320 range on CRE. And so there's going to be more reliance on the CNI side, but with the staff we have and what Dom's doing on that side of the business, we feel, we feel really, really good about where we're headed. It is, your opening comment was right. I mean, Veritex has been a growth story for most of its career. Obviously, we spent two years remixing this, redoing the balance sheet. We feel like that work's done, and we can really focus on what we do best. And so I'm very encouraged and think that we can get there. But Q3 is probably the first quarter you're going to see it and hope to be high enough to where your average will be around one. Yeah, Stephen and Terry, let me jump in.

Fees are going to be more important to us this year than they've ever been. That's why you heard me say as I was wrapping up my comments is we're going to continue to build out our fee businesses, whether it's deposit fees, trade or management fees, card revenue, customer swaps, government guaranteed. It's going to be a significant contributor for us. And so I agree with everything Malcolm said. I just didn't want you to lose sight of how important the fee businesses are for us in 2025.

Which have actually gotten off to a pretty good start with two really nice relationships on the fee side that we've already flowed. Hope that helps answer the question.

It does, for sure. Yeah, appreciate that. And then kind of on the loan growth front, I mean, obviously, as you said, you're facing a pretty big headwind still from some payoffs, and that's understandable and probably beneficial to the balance sheet. But what are you seeing so far in terms of any inflections from your customers in terms of, you know, pipeline growth, X, the CRE book, or kind of what gives you confidence, whether it's mortgage, warehouse, or other, that you can see that inflection kind of towards the back half of the year?

I mean, actually, the production side of our business has been really strong. The pipelines are as strong as they've ever been. I had a director ask me about, well, how much real estate activity is really going on? Well, I can tell you in the state of Texas, it's pretty strong. And the underwriting has continued to be pretty stringent on the bank side. I mean, we're seeing deals with 45% equity in them. Pretty regular. Now, you know, as most things go, as competitive juices get flowing, you're going to see that 45 go to 40 and, you know, probably get to 35. Now, you know, we're not going to dumb down our credit underwriting, but the activity is still very, very stout. I mean, we have to do, you know, call it a billion four in new loans on the real estate side this year just to stay even. And we feel pretty confident we'll be able to do that.

Yeah, I'm sorry. No, go ahead. I'm going to listen to this again. There's a lot of strength, Stephen, in the fourth quarter on the production side. If you annualize Q4 loan production, it's 50% bigger than the full year. But some of that's been in the ADC side, which does start to fund up for six months, nine months. So we can see that it's coming. But we are still going to have that. So I just want you to know we're seeing it because the Q4 production was way stronger than the first three quarters of the year. And pipelines continue to build. So anyway.

Yeah, that's great color. And then just last thing for me, on the $1.5 billion in maturing CDs in the first quarter, I think they were a little over 5.02% on the average. What do you think you'll be able to put those – back on the books at and what would you think is like a viable retention rate of those customers as you lower those rates?

We'll take that question. Hey, Steven. Hey, Terry. Yeah, so far in Q1 2025, we've been putting on new CDs at 424 rate. And we've seen, we've experienced really good retention. Some of that, we're seeing some migration out of CDs into money marketing other products, but in terms of overall retention, it remains

Great, extremely helpful. I will jump back in the queue. Thanks so much. Thanks, Elizabeth.

Thank you. One moment for the next question. And the next question will be coming from the line of Matt Olney of Steven. Your line is open.

Hey, thanks. Good morning. On the comment about positive operating leverage for 2025, I think you mentioned to expect moderate expense growth. Just any more color about expenses for 2025?

Low to mid single digits. Okay. And then going back to the loan growth comment.

I'm just going to say, if you get some disciplined loan growth, some NIM expansion and good fee execution, feel good about the opportunity to really get the positive operating leverage with that type of expense growth.

Got it. Okay. And then on the, going back to the loan growth discussion, I think you mentioned the paydowns, obviously severe in 2024. It sounds like that will continue for at least for a portion of 2025. Just any more color on when you think that could inflect or at least slow down to allow the net loan balance to start to grow throughout the year?

You know, Our projections or our forecast right now look like the heaviest piece of those payoffs come in the back half of the year. But again, those payoffs are a little bit harder to predict. But actually, we've done a pretty good job at that. I see the first quarter, it's going to be pretty stable at best. And then with these pipelines that Terry just discussed, I do see some of that to start to fund up. I see our commercial businesses starting to get stronger on the pipeline side. So I expect that we're going to start seeing some growth in the second quarter. But overall, Matt, I think it's probably going to be a low to single middle digits probably for the year.

But again, hard to predict where all those payoffs are coming, but they're coming.

And that's assuming nothing really, if anything were to really happen significant with the Fed, and rates that, you know, especially long-term rates fail, it could accelerate that.

It could. But we don't expect that. I'm just saying that's the wild card, really. Yeah. You don't know. Yeah. Okay. All right, guys. Thanks for your help. Thanks, Matt.

Thanks, Matt. Thank you. One moment for the next question. And our next question will be coming from the line of Mark Shetley of KBW. Your line is open. Hey, good morning.

Good morning. So on the deposit side, like you said, there was some good funding remit kind of out of cities, but there was also a noninterest bearing decline in the quarter, and I was wondering if you could kind of talk about the dynamics at play there and where you think that noninterest bearing kind of settles out for the quarter.

Sure. Yeah, this is Will. Thanks for the question. Look, this quarter we had some seasonal fluctuations of tax and insurance payments for mortgage escrow accounts. We also exited an expensive ECR deposit relationship that was paying around Fed funds. That was intentional. So when you look at our non-interest bearing on some of those escrow accounts, we do pay an ECR that just doesn't flow through the deposit cost line item. And so this was planned. This was anticipated. And in in several facets, it actually improves our earnings. And so seasonally, where do I expect it? It'll build back up and range between 21% and 23% the rest of the year.

Okay, thanks. That's helpful. And then maybe switching over to the government guaranteed side, obviously that was really strong this quarter. I know that business is kind of lumpy and can be difficult to project, but is there any additional color you can give to sort of help us model that in 2025?

I would just make two comments. Well, three. We're off to a good start in 2025. Two, premiums are holding in very, very well. And three, our pipelines and business production is strongest they've ever been, especially in the SBA space. He talked about how we're trying to rebalance and almost reinvent the USDA business, but uh overall we're really encouraged by what we're seeing the team's doing a great job and uh so we're we're pretty bullish great uh well that's it for me um thanks for taking my question thank you thank you one moment for the next question and the next question will be coming from the line of tim mitchell of raymond james your line is open

Hey, good morning, guys. I want to start on credit. It's nice to see the continued improvement in credit size and special mention, but it looks like there was some migration into MPAs. How are you thinking about credit moving forward, and what should we kind of expect for a net charge-off ratio in 2025?

Yeah, I mean, listen, I think we did a decent job in managing a bunch of stuff out and took a charge here or there to help assist in that. We did, I think, 21 basis points in charge-offs for 24. You know, we expect to probably be in that range for 25. It could be a little better. It could be a little bit worse. But that's a pretty good range, about 20 bits going forward. But overall, I mean, you brought up the credit piece and just what Curtis and his teams have done. And moving this stuff out has been incredible. And there's still some more movement to do. Recall, he only got this job back in March of last year. So in fairly short order, we've moved into a good place. So the good news is, you know, we've kind of gotten rid of the surprises, and we know what's coming down the pipe, and we're managing it much earlier than we've ever had before.

So, again, we're very confident that credit continues to get better going forward.

Awesome. And then back to the margin, I think you said 325 to 330 here in the first quarter. I understand the bulk of that CD maturity is in the first quarter, but there's still some opportunity past it. I mean, assuming rates are relatively stable, is it fair to assume the margin can continue to grind a little higher, you know, kind of through the rest of the year?

Yeah, I think given no more rate changes, I think we will continue to expand. We do have a hedge that matures at the end of Q1. That's on $250 million of our money market accounts at 42 basis points. So there will be a little bit of a headwind from that, but we expect the things that Terry mentioned, sub-debt rolling off with what we've done on the securities portfolio and continued improvement on the deposit side, too.

to drive positive NIM for the whole year. Awesome. All right. Well, thanks for taking my questions. Thank you.

Thank you. One moment for the next question, please. And the next question will be coming from the line of Umar Hassan of D.A. Davidson. Your line is open.

Hey, good morning, guys. Umar Hassan on for D.A. Tanner. Appreciate the December deposit cost detail. Can you provide a spot rate as of 12-31?

Yes.

Spot rate for deposits as of 12-31 is interest rate 399 and for total 319.

Appreciate that. And on the slide 11, How much of the 820 million out-of-state balance is ADC versus CRE, and any geographic concentration there?

The out-of-states up there, you know, it's the 820 million of the billion 61, so it's 80% of it, give or take. Most particular state concentration that I'm aware of and

We've not been made, we're not aware of any issues with respect to California or it's correct. Okay. That's correct. All right.

That sounds good. And, uh, great to see the SBA and USDA loan pickup, uh, the gain on sale pickup. There, uh, any thoughts around, uh, uh, that business line heading into 2025?

Nothing other than what I've already said.

Yeah. Very positive. Lots of momentum going forward. We've combined the two businesses, so they're feeding off of each other. Again, premiums are holding in there. Pipelines are super strong. So we're pretty bullish on 2025 on the government guaranteed business.

But to the extent it's USDA, it'll be lumpy. But for the year, and that's the way we tend to think about this business is the full year. don't get frustrated with the lumpiness when it's a USDA trade.

All right. That makes sense. Thank you for taking my questions.

Thank you. And that does conclude today's Q&A session. I would like to go ahead and turn the call over to Malcolm. Sorry, Lisa. No problem. You can go ahead with your closing remarks.

Yes, ma'am. Thank you. So I wanted to close today with a management update. Six years ago, we closed the Green Bank transaction, and at the time, we're blessed to have Terry Early become our chief financial officer. Terry's been the ultimate team player and partner to me and the entire Veritex family. His knowledge, expertise, counsel, and wisdom to our company cannot be measured. Best said, he just made us a better bank. Terry will be retiring this summer on June 30th. but he will not be leaving us entirely. He will become a part of our bank board, as well as entering in a consulting agreement, assisting in the finance area, and assisting in the transition. Our new CFO will be Will Hofford, who many of you already know. Will has been with Veritex for 13 years, serving in all areas of finance. We are very excited for both Terry and Will and their new roles.

Thanks for your time today. We look forward to speaking to you soon. Thank you all for joining today's conference call. This does conclude today's meeting. You all may disconnect.