Q3 2021 Veritex Holdings Inc Earnings Call
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Once again your conference is scheduled to begin.
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Yeah.
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Okay.
Good day and welcome to the vertex Holdings third quarter 2021 earnings conference call and webcast.
All participants will be in a listen only mode.
Please note this event is being.
Being recorded.
I will now turn the conference over to MS. Susan Caudle.
Investor Relations Officer, and Secretary to the board of Aveva takes hold.
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.
This time, if you're logged into our webcast. Please refer to our slide presentation, including our Safe Harbor statement beginning on slide two for those of you joining us by phone. Please note that the safe Harbor statement and presentation are available on our website that protects bank dot 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 70 cents a share up from 60 cents to the previous quarter, a 17% increase while producing a pretax pre provision return of 1.85%.
Third quarter was transformational for our company, we closed our 49% investment in disk drive mortgage and realize a full quarter of our investment. We also announced our acquisition of North Avenue capital the nation's largest producer of USDA loans were scheduled to close this transaction next week on Nov.
Remember first.
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've exceeded 20% loan growth for the first nine months of the year, we're growing at 17%.
If you Peel back the onion, a bit and really analyze our pipelines. 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 fundings closings and payoffs have worked in our favor in the last two quarters as we look forward, we don't see loan growth continuing at these last two quarter levels, but still feel confident that our annual loan growth should hover in the low double digits for the remainder of 'twenty, one and also for 'twenty two.
I'd like to speak a bit on the focused hiring we have done for the last 18 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 11 ftes to our production teams and 25 year over year. These.
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 and several M&A deals and our state and the fact that prospective employees and our markets are taking note of our culture and growth profile are prompting these hiring opportunities.
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 the pandemic crisis in our markets.
N P. A decrease for the fourth quarter in a row and now sit at seven 7% of total assets down eight bps from the previous quarter and over 30% year over year. We feel this ratio will continue to move down considering the resolutions. We're currently working towards charge offs were nine bps, all of which are 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 five you can see 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, which translates into growth of 21% 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.
As 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 four quarters as <unk> worked through the pandemic the impact of the thrive investments can be seen in our efficiency ratio, which improved over 3% down to $48.
5%, one thing Thats not graph 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 6%, resulting in positive operating leverage over 6%, which is pretty strong on slide six.
Malcolm has already mentioned our loan growth for the quarter, we saw growth in all loan segments, except multifamily.
<unk> growth in the construction portfolio slowed in Q3 and the level of unfunded commitments remained steady improving C&I utilization rates also contribute to the outstanding loan growth for the quarter.
Average mortgage warehouse balances increased two 3% in the third quarter, reflecting additional customer acquisition. This portfolio sits at six 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 eight 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 three point, 700% 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 two 6% for Q3, the PPP portfolio represented a five 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 seven basis points. So when 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 to keep the following in mind first average loans, excluding mortgage warehouse and PPP for the third quarter, our $255 million below the ending balance on September 30th.
There's 35 million in subordinated debt with a rate of approximately five 5% that is callable in December of 2021.
Third the earnings impact of the hedge terminated in February of 2020, 'twenty, one 2021 we 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 margins should continue to expand.
On this slide not.
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 PPE PPP forgiveness and thrive in a $188000 in security losses operating net noninterest revenue represented 16, 3% of total <unk>.
Revenue for the quarter and should continue to improve in Q4 with the closing of the North Avenue capital acquisition as.
As a result of vertex is 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 $400000 from Q2 salaries and employee benefits increased slightly as higher salary cross from the hiring Mount Malcolm referenced was partially offset by lower benefit cost. 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 328000 shares at an average price of $34 85.
All the capital ratios, except the labor ratio declined slightly during the quarter due to balance sheet growth and the shift out of lower risk weighted assets into the loan portfolio and 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 drive 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%.
<unk> purchased driven origination model has delivered 66% purchase volume for the year to date and over 70% for two consecutive quarters.
Since the end of the third quarter, we signed a correspondent contract with thrive where they will provide fulfillment on all vertex bank originated mortgages and a loan purchase agreement, allowing vertex Dubai drive 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 remained strong at approximately $400 million vertex. Its Q4 forecasted net income from the North Avenue.
Acquisitions should be in the range of one $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 and 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 vertex continues to improve as Malcolm mentioned, our NPA has dropped over the quarter. Our NPA to total assets has dropped 30% from the high watermark experienced in the third quarter of 2020, we continue to see encouraging signs of resolution and.
Our problem loan portfolio page.
Page 15 of the deck contains a credit metrics for the bank for Q3 the chart in the bottom right hand of the page reflects the movement in criticized assets over the past four 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, 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 centered in three 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 that the second was a contractor that went out of business and the collateral did not sufficiently cover the debt.
And finally, we are SBA loans secured by a restaurant property that was foreclosed and sold at a loss.
The referenced 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 electrical power generating industry that matured and it's in negotiation for renewal.
I want to touch briefly on the third quarter loan production details given on page seven of the deck, our largest area of committed production for the past year. It's 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 ltc's DSC ours.
Our reliance on commercial construction loan for production has dropped meaningfully over the last year from 70% to 40, 42%.
Finally, our commercial construction lending is focused in the industrial space, which has been the most active Kris space.
For some time.
Tremendous investor interest in this space and many of our <unk>.
Payout before fully funding due to buyer demand.
That I will turn it back over to mountain for final remarks.
Thanks Clay.
Our continued focus and commitment to operating a rich focus growing in key 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 us back 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 vertex 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 him well done operator, we will now.
I'll open for any questions.
Okay.
Thank you.
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Yes.
One moment please for the first question.
Our first question is from the line of Matt Olney.
Stefan.
Your line is now open hey, thanks, good morning, guys.
Hey, Matt Hey, somebody doing great.
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.
You mentioned, a few things one of which was our expectations of more pay downs.
Any more commentary you can provide or are you seeing some of the construction loans.
Completion.
Yes, I mean, the pay downs are going to get pretty.
Pretty aggressive here a movie no. We just look forward through the pipeline the next.
During the quarter after.
We've been really really active and obviously when you 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 where we're at in 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 or are in the real estate side, they're all in that community banker commercial side.
And Malcolm on the production side, you gave us a great slide there on slide seven looking at the.
Production improvements of last few quarters.
What's your expectation for that over the next few quarters in terms of incremental.
Incremental improvement from there.
You mean in each each individual area.
Well I was looking at the top right hand graph on that slide seven quarterly commitment productions in aggregate what we've got.
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 were hiring and the new efforts that we're putting forth in a couple of different areas, but.
Yeah, I think we're going to be able to hold that line.
Over a 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 $3 70, just remind me does that include any fees or any other miscellaneous things.
Is that just the coupon rate.
But just the coupon rate Baptist here.
Okay.
So when you compare so when you're comparing that to our quarterly yield.
Yes.
Once coupon yield, including deferred fees fees collected et cetera.
Got it.
Hey.
Okay.
Back in the queue nice quarter. Thanks.
Thank you, Matt I think Matt.
Our next question is from Gary Tenner.
A D. A Davidson your line is now open.
Thanks, Good morning.
Good morning.
Wanted to just ask a little bit I think Terry you've talked about this in the past in terms of kind of vertex is comfort level at various loan deposit ratios.
94% at.
At the end of the quarter ex mortgage warehouse.
Even even with a slowdown in the pace of loan growth from here.
Stan but that loan deposit ratio probably continues to cruise hires. So just could you remind us where your comfort level is in terms of.
That loan deposit ratio.
Loan to deposit excluding PPP in mortgage warehouse, we're comfortable up close to 100% I mean, just right under that if you will.
Because we.
We know we have a lot of off balance sheet resources.
We know that the mortgage warehouse business, that's short term so.
So if we need liquidity, we can get it from there.
So.
Certainly slightly slower loan production.
Loan growth will help but but.
Liquidity.
As I said look look forecast out I don't I don't see liquidity as any type of significant constraint as we go as we get the finished 21 and get through 'twenty, two obviously, a key focus on raising deposits.
In our community Bank has done a great job of that.
And our commercial C&I lenders are doing a good job too. So we've got to stay focused there just every day the way we do on the loan side and then.
It will be okay, and were comfortable again up close to a 100% excluding mortgage warehouse in PPP.
Alright, Thank you and then on the construction portfolio and you kind of addressed this in a sense.
Given expectations of some increased pay downs in that book, but 14% of loans ex mortgage warehouse in PPP.
Where would you like that portfolio.
Sure enough optimally to be relative to the total book.
You know it.
Probably right where it is.
We don't if it shrank a little bit that would be okay to lead.
We just have a really really talented team in that area. They are really good.
The credit quality of some of our best.
Because we have an execution team.
Really really top notch, though.
We're going to keep dealing with borrowers and.
I see it staying about the same.
Yeah.
Okay, and then finally for me.
You mentioned the agreement to purchase a variable rate loans.
Through through thrive and having the option there.
As you think about expectations for that channel and where you would want the kind of resi mortgage portfolio to be.
Where does that what does that look like over time.
Yeah, I'll take that one Gary I mean were 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.
B B.
D at about 2015% to 20%.
One of the side benefits of that is certainly carries a lower risk weighting.
On the capital ratio front, but.
We'd like to continue to grow that obviously don't want to go too aggressively there given where we are in the rate cycle and the expectation for future rate hikes in 'twenty two 'twenty three 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 feel good about it drop has been a good partner in that regard and.
We want to grow.
At reasonable rates, but.
And just to get it to 10 and then we will go to towards the 15 number if you will.
Thank you very much.
Thanks Derek.
Next question is from Brad Milsap.
Piper Sandler your line is now open.
Hey, good morning, guys.
Good morning, Brad.
Thanks for taking my questions Terry I, just wanted to follow up on the on the on the loan yield question.
My math right I think your core loan yields were maybe down 10 basis points linked quarter to 10 or 11, if I exclude sort of.
All the PPP noise P C D reversal things like that.
You talked about that 370, new and renewed yield.
That's without the wood do you feel like the new and renewed is kind of firming up or do you think there is more pressure there to come just trying to get a sense of how.
How much more core loan yield pressure, we could we can kind of CEO over the near term.
Well I mean.
I think the pace of the decline in loan yields has has lessened during the third quarter.
But.
And I think.
It wouldn't have a lot more downward pressure, but there is there is an external variable here known as competition.
And.
All I think were to stay the way. They are I don't think that pressure would be great, but I'm not convinced the competitors, who feel pressure to grow are not going to tightened spreads and get really more aggressive on yields and so it's hard to know.
But I don't.
I don't see that thats going to get a whole lot better.
Ben.
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 nine months and 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.
It's one of the hardest things to forecast in our world is whats the competitive pressure on rates.
But Brad there's a lot of capital as you know theres a lot of liquidity in the system and there is increasing pressure from both the buy and sell side to others.
To our competitors and so I think it's going to be meaningful and we look.
I don't mind competing on spread I, just don't want to compete on structure.
And that's where I am proud of play and the credit team and our bankers for holding the line well there as you can.
Great. Thank you that's helpful.
And nothing just a question on both organic and inorganic growth.
Can you help us think you've hired 25, new lenders year to date.
As we think about the next 12 months what would be a good number to maybe think about it and then can.
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 go into more rural franchise, they might have more funding versus a more metro franchise, just kind of wanted to get a sense of kind of how youre thinking about size of deals et cetera.
Yeah.
In terms of the organic inorganic a lot of these folks we've hired recently are what we would call community bankers.
The community Bank is.
Loans $10 million less.
Company's $25 million in revenue and less.
It's our most profitable area. It provides funding it funds the majority of the bank.
And Thats got foundation, so a lot of those people will come out of there. So those numbers are smaller.
But like I said, they're very profitable and they provide funding so.
There'll be organic move if theyre moving they are two big mergers in town that have that have created a whole bunch of them.
Opportunity I will say one of the mergers in town.
Gotten over 10 people from.
And several of them have reached out to us.
And Thats not just production people, it's actually probably more like 15, but.
Joe.
I think theres going to be a fair amount of organic growth, albeit it might be on the smaller side because the majority of Sculpsure community bankers, but we're still pushing on we have two 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.
<unk>.
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 the growth rates, we are albeit there'll be there'll be less in the last two quarters.
We're going to need some funding at some point in 'twenty three 'twenty four and so fundings were looking out far enough and so yeah, 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 will continue to but there's got to be a reason to do a deal.
Not going to do it just to add $600 million in loans, we've got to have a reason behind doing it.
So we're going to be pretty disciplined there.
Hello.
Great. Thank you guys.
Thanks, Brett.
And your next question is from would you lay off.
<unk> Your line is now open.
Hey, good morning, guys.
Right.
So.
You mentioned you know you've done a really great job on the fee income side derived in the numbers in North Avenue closing in November.
My question is just longer term.
Ideal world, where would you like.
Fees to revenue to ultimately represent like the 25% range or maybe even above that.
Go ahead Gerry.
Yeah.
We're kind of focused on getting the 25, we made good progress I mean as a management team. We sit here just over 12 months ago, and we were about 10 and this quarter, we were at <unk> and we're going up from there and so we've been very intentional about growing this we've made two meaningful transactions between thrive in North Avenue capital.
And would.
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 for about to be starting next Monday.
So.
My urging us to think about that over an annual time period and don't get caught up in what you said your fee revenue goal was 25 and you went down this quarter, yet, but we could be up.
I know I'm rambling, but I want to take this opportunity to remind everybody is a lumpy business and.
2025, I think we'd be really really happy I think that the revenue diversification, including one very counter cyclical investment and drive.
Is really we have a much more diversified and stable earnings picture from that stable revenue picture from that so.
Very good.
Yes, that's good color.
And then.
It related to asset sensitivity based on the Alco disclosure as it came down a touch quarter over quarter is there any color you could give just surrounding that decrease.
Yeah.
When you move when you move loans 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 liked to what it did to net interest income and the NIM. So we'll make that trade.
I think the.
<unk> thing is that.
The table to the left on page eight.
When you look at how many of our floating rate loans don't have a floor or the floor has been breached so almost 90% of our loans will reprice when the fed starts to move.
So I'm encouraged by that.
Given the given that we are.
Two thirds floating or thereabout, so I.
I hope that helps.
Yep.
And then last for me is just nice to see the level of buybacks in the quarter.
With 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 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 to box and that we're going to be opportunistic and when there is weakness in the stock.
We like we certainly like take taking advantage of that.
I don't expect us at these valuation levels don't don't expect much from us.
And the buyback, but if you go back to when we started this post screen acquisition.
Our average purchase price per share is from $25 27.
And we bought back six 6 million shares so.
I know thats different valuation environment 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 were going to use it is going to depend on how the market's valuing the currency and I wouldn't expect us to be as active going forward.
Yes that makes sense alright, thanks, guys.
Thanks.
Yeah.
And there are no further questions at this time.
Concludes today's conference call. Thank you all for your participation.
You may now disconnect. Thank.
Thank you.
Thank you.
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