Veritex Holdings, Inc.

Good morning and welcome to the Veritex Holdings first quarter 2025 earnings conference call and webcast. All participants will be in the listen-only mode. Please note this event will be recorded. I will now turn the conference over to Will Halford 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 risks and uncertainties. It 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 note that the safe harbor statement and presentation 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 in our final 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'll now turn the call over to Malcolm. Thank you, Will. Good morning and welcome to our first quarter earnings call. For the quarter, we reported net operating profit of $29 million, or $0.54 per share. Pre-tax, pre-provision earnings were $43.4 million, or 1.41%. Overall, Veritech's had a very good quarter. Our balance sheet remains in a very strong position, with capital continuing to grow. Our continued pursuit to achieve a ROAA exceeding 1% the back half of the year is very much in focus and realistic. Our challenge, much like the rest of the industry, remains disciplined loan growth. For the quarter, we saw a decrease in loans of 125 million or 5% annualized, while our average balances were down 135 million over Q4. Payoffs over the last four quarters were 1.5 billion, while payoffs for the four quarters previous were 1.3 billion, a 17% increase year over year. Although these payoffs continue to put pressure on our loan totals and validates the credit worthiness of our loan book. Despite loan totals lagging, we're very encouraged by our bank-wide loan production. For Q1, we had $750 million in gross production, although only 31% or $237 million of that production was funded. The last four quarters, our production exceeded $2.8 billion, while the four-quarter previous production equaled $1.2 billion. a 130% increase year over year. That bodes well for our future loan growth over the next several years. From a deposit growth standpoint, we had another solid quarter bringing in lower price relationship dollars and moving out higher price non-relationship dollars. For the quarter, we moved out over $440 million in wholesale funding. Continued great work by the team to move our deposit costs down. More from Terry and Will in a moment on that topic. Credit continues to remain stable with positive trends in almost all categories, with lots of work being accomplished by the team below the surface. I'll now turn the call over to Curtis for his credit comment. Thank you, Malcolm. We continue to make progress in managing credit risk as reflected in our first quarter results. Our relationship teams are focused on risk identification and managing cycle times to resolution. In the quarter, we realized a net decrease in past dues and criticized loans, Our charge-offs are below forecast, and MPAs reflect our focus on moving names to final resolution. Moving to page 5, non-accruals increased $17 million from year-end as we took targeted action on select names to bring them to final resolution. Accordingly, non-performing assets increased from $79 million at year-end to $97 million at the end of the first quarter. The increase was primarily from two loans representing retail and office exposures. We expect resolution on a majority of our current non-accrual exposure by early third quarter. Property and sales agreements are in place with buyers on a number of these assets. Past due loans reflect strong oversight and management by the team and declined from $31 million at year end to $11 million at the end of the first quarter. Net charge-offs totaled $4 million for the quarter, primarily reflecting loss exposure on commercial office and retail real estate loans with final resolution. Our 2025 full-year charge-off forecast of 20 basis points has not changed. Moving to page 6. Criticized assets were down 4.3%, or $18 million, from year-end and down 26%, or $135 million, from the first quarter in 2024. CRE criticized totals continue to show meaningful reduction. In summary, we're pleased with the risk management discipline of our relationship teams. As Malcolm noted, their focus in partnership with special assets delivers results that are not fully evident in the top-line numbers. These results include criticized payoffs and paydowns, restructurings resulting in positive grade changes, and early risk identification that ultimately mitigates further downgrade and loss. We are committed to this continued focus. I'll now turn the call over to Terry. Thank you, Curtis. Starting on page seven, when I look at the results since the end of 22, I'm encouraged. The balance sheet is in a good place. Liquidity is strong. Reliance on wholesale funding is down under 14%. Capital and reserves are up. and Cree concentration levels are right where we want them, just below the regulatory guidelines. Moving to page eight. Capital ratios held relatively steady quarter over quarter, except for the total capital ratio. The decline in total capital is a function of a $75 million tranche of sub-debt that was repaid in the middle of the quarter after the rate converted to SOPR plus 347 basis points. Over the last two years, A significant contributor to the expansion in the capital ratios has been a $700 million decline in risk-weighted assets. Tangible book value per share is $22.33, up from $21.61 at year-end, and a 13.8% increase on a year-over-year basis, including the dividends we've paid. It's worth noting, since Veritex went public in 2014, it's compounded tangible book value per share at a rate of 11.5%, including the dividends that have been paid to shareholders. Considering our growth outlook, organic capital generation, and risk profile, the bank has increased its quarterly dividend by 10% to 22 cents per share per quarter. Finally, Veritex repurchased 377,000 shares during the quarter. The tangible book value dilution was minimal, and the earned back is just over two years. We have $37 million remaining on the authorization, which at the current stock price is sufficient to repurchase just over 3% of the company. We intend to be opportunistic in its use. Moving to page 9, the allowance now sits at 119 basis points, up significantly in the last eight quarters. Additionally, when you exclude the mortgage warehouse, the ACL coverage rises to 127 basis points. Our general reserves comprise 95% of the total allowance. We continue to use conservative economic assumptions in the CECL modeling with 65% of the weighting on downside scenarios. In Q1, we shifted the weighting toward the most pessimistic scenario. Part of the weighting we shifted towards the most pessimistic scenario. This seems reasonable considering all the economic uncertainty from tariffs, interest rates, reduction in government spending, I could go on and on. Bottom line, the combination of the Q factors and the economic forecast weighting gives Veritex a very conservative allowance result. Moving to page 10, as Malcolm said, total loans declined 1.3% during Q1 and 3% on the year-over-year basis. We made significant progress in reducing our CRE and ATC concentrations and ended the quarter at 297 and 85, respectively. The significant decline during Q1 in CRE and ADC can be seen in the top right graph. As shown in the bottom right, loan production has increased by $1.6 billion from the four quarters ending Q1-24 to the four quarters ending Q1-25. A meaningful part of the increased production is in the ADC area. Funding on these two loans lags for several quarters as the borrower's equity goes into the projects first. Loan growth will remain muted in 2025 due to higher-than-normal payoffs, but this production over the last several quarters will translate into loan growth as we move into 2026 and beyond. Slide 11 provides the details in the term CRE and ADC portfolios by asset class, including what is out-of-state. Also shown is the 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 was only 10.7%, and this is predominantly where we have followed Texas real estate clients to other geographies. On to page 12. Our strong deposit growth and low loan growth has allowed Veritex to reduce its loan-to-deposit ratio from 104% to 89% over the last two-plus years. We intend to remain below 90% going forward. Please note the loan-to-deposit ratio would be 82.8 if you exclude mortgage warehouse. Deposit growth has also allowed us to reduce our wholesale funding reliance to 13.7%, and it was over 24% the same period of the last couple of years. As you can see from the bottom left graph, we've kept the time deposit portfolio short and have $1.9 billion in CD maturities over the next two quarters with an average rate of 4.57%. A short maturity profile helps us to manage the interest rate risk given the floating rate nature of the loan portfolio. On the bottom right, we show the monthly cost of total deposits. Note the 63 basis point decline since the month of June 2024, including 24 basis points since year end. If you look at interest-bearing deposits, they declined 37 basis points in Q4, and we follow that up with another 33 basis points of decline in Q1 of 25. Veritex is very focused on reducing deposit pricing where possible on existing accounts. Q125 was another successful quarter of deposit remixing. Growth from our core lines of business allowed us to reduce our reliance on unattractively priced deposits like brokered or public. These unattractive deposits carry a cost that's approximately 185 basis points above our core business deposits. I'll now turn it over to Will for commentary net interest income, investments, and liquidity. Thanks, Terry. Slide 13 reflects a NIM increase of 11 basis points to 331 in Q1, which is slightly higher than the previously guided range of 325 to 330. The primary driver of the NIM increase is the result of continued repricing and remixing efforts within the deposit portfolio Terry mentioned on the previous slide. The cost of interest-paying liabilities declined 33 basis points in Q1, while the yield on earning assets only declined 12 basis points. On a dollar basis, net interest income was down $700,000 for the quarter, driven by two fewer days in the quarter, lower earning asset volume, and the full quarter impact of rate cuts late in 2024 on loan yields, which were mostly offset by interest expense savings from deposit repricing efforts and lower interest-bearing average deposits. On a go-forward basis, we expect NIM to return to the $325 to $330 range for the remainder of the year, absent outsized or accelerated rate cuts. As we mentioned in previous quarters, a $250 million pay-fixed balance sheet swap matured in late Q1, which will be partially offset by the interest savings from paying back the $75 million tranche of sub-debt that Terry mentioned. We expect continued deposit remixing and repricing efforts against muted loan growth to result in a relatively stable NEM throughout 2025. Slide 14 shows certain key metrics of our investment portfolio. Key takeaways. It's only 11.6% of total assets. The effective duration is 3.6 years, and 88% of the portfolio is held in AFS. Total available liquidity sits at $7.2 billion as of 3-31. The decline in available liquidity since Q3 2024 is a result of the decision to tighten wholesale liquidity policy limits in the fourth quarter, reflecting a lower liquidity risk appetite. Finally, please note the economics of the BOLI exchange trade completed in the first quarter in which we exchanged an $18.1 million portion of our existing BOLI policy at a 276 yield for a new investment yielding 4.73. We took a $517,000 one-time loss on the transaction, which equates to an annual pickup of $356,000, equating to a 1.4-year earn-back. I'll now turn the call back over to Terry. On slide 15, operating non-interest income increased 2.4% to $14.8 million on a linked quarter basis. Fee income as a percentage of total revenue has increased to 13.4% in Q125 from 12.3% in Q124. The goal is to drive fee income above 15% of total revenue. Operating non-interest expense declined $2.8 million for the quarter with a good execution across all the categories. The operating efficiency ratio declined 2.5% to 60.4%. To wrap up my comments, I see a lot of positives. The balance sheet continues to strengthen with more available liquidity, lower CRE and ADC concentrations, less reliance on unattractively priced deposits, and higher capital levels. Q1 earnings were in line with internal expectations. The NIM expanded by 11 basis points to 331, driven by deposit costs. Fee income continues to build momentum across every category. Increased attention to expenses is showing encouraging results, and loan production has increased meaningfully. The negatives I see are the lack of loan growth driven by elevated payoffs and elevated deposit costs from over-reliance on expensive funding sources in earlier, higher growth periods. We're working hard to address these negatives. With that, I'd like to turn the call back over to Michael. As you've heard, the Veritex team continues to manage our balance sheet, capital, deposit costs, and earnings to add additional value to our company. We obviously have no control over the national economy and the various decisions made in Washington. Uncertainty has once again entered the system, but we remain focused and committed to our shareholders, team members, and community to bring the best Veritex we can. Operator will be happy to answer a few questions.

Thank you. To ask a question, you will need to press star 101 on your telephone and wait for a name to be announced. To withdraw your question, please press star 101 again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from the line of Brett Rabaton from Hobd. You are now connected. You are now open. Hey, good morning, guys.