Q2 2022 Veritex Holdings Inc Earnings Call
slide 14 increased $2 million from Q1. The biggest driver of the increase is marketing costs associated with the Veritex Bank Corn Fairy Golf Championship, which is a tournament held in Arlington, Texas during the month of April . So far in 2022, we have incurred just under $94 million in operating expenses. We remain confident in our expense guidance of $185 to $195 million for the full year.
Moving forward to slide 15, a strong quarter on the deposit front with growth of $628 million, with growth of $8.7 million,
being driven by our community bank at 13.7% Link Quarter annualized, where we run a sub-53% loan-to-deposit ratio.
The rest of the growth is from our mortgage warehouse business, Interlink, and broker time deposits, offsetting outflows in our correspondent making division.
Total deposit costs increased 11 basis points to 28 basis points in response to the Fed increasing rates by 125 basis points during the quarter.
On slide 16, tow capital group 36 million during the quarter to $1.3 billion.
CET-1 ratios have expanded by 22 basis points year over year. As a quarter-end, we had significant access capital above the regulatory minimums, plus the capital conservation buffer.
Looking forward on capital, we believe that moderating loan growth coupled with higher earnings from rising interest rates will strengthen the capital ratios. Additionally, we are evaluating a credit risk transfer on our mortgage warehouse portfolio to lower risk weighted assets. This transaction should add approximately 30 basis points to our CET1 level when it's complete. With that, I would like to turn the call back over to Malcolm.
Thank you, Terry. We had an exciting quarter and very focused on the positive momentum we have created by our upgrade and talent and focus on scale. As I've mentioned many times, our focus has always been on hiring top quality talent. For the quarter, we hired 65 new employees, 16 of which are on the production side. Our hiring of producers will slow a bit now that we have many of our teams at full capacity, but our overall investment and talent for Veritex will continue.
We've added a new pipeline of potential bankers with our first class undergoing the Veritex banker development program. We have 16 participants, five internal and 11 external, that are part of a one-year development program that focuses on building future talent. We also have 13 college students in our Veritex summer intern program, which is now in its fourth year. We are committed to developing the banking leaders of the future and know this pipeline of talent will benefit us.
for years to come. A quick update on the Interlink transaction. We continue to have detailed dialogue and work with our regulators with full expectation of a three-q closing that's previously communicated. Interlink continues to grow and perform very well. Interlink continues to grow and perform very well.
The future continues to be bright for our company. We have the right team in the right markets and we continue to feel strongly that we have a firm hand on building continued value.
With that, I'd like to open the line up with any questions.
As a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that is star 1 on your telephone. Please standby while we compile the Q&A roster.
And our first question is from Brett Rabotein from Poppy Group. Your line is now open.
Thanks, this is actually Taylor stepping in for Brett. Up question on the government get guaranteed, just a reminder, you know, maybe that's slowing off and balance sheeting that. Is there any sort of read through on the expense side that we should think about going forward?
No, I mean, this is a temporary temporary thing. We strongly are committed to the business. If anything, we're investing in talent and building that business more. And we're just right now with rates going up and with this temporary blip and funding. From DC and our government, it's business as usual for us. We can pipelines are full and we continue to hire in that business.
So, you know, look, if the gain will still margin is going to stay weak, these are great balance sheet assets given that you got a 20% risk-widing for capital purposes.
And that's, you know, so if the economic, long term economic decision is the best for us to hold, we're going to hold and we're going to keep building the business because it didn't use much capital.
Great, thanks. Also, on the marketing expense, maybe I missed that. What would you attribute that the benefit from that? Would it be both sides of the balance sheet or anything else specific from? I am here with you this morning with some other people. traveling in
Rapping that up.
You know, we have a nice marking budget. We'll continue to market the way we market. We have spent heavily in the golf industry.
continue to do that despite some of the changes in the tours right now.
Very good. And the hires anything specific, obviously that's been...
You mentioned earlier, but any sort of specialty focus are just general producers.
that you've been offering. I mean, we've kind of got somewhat of a full team across the board with the exception of a few areas. You know, our commercial areas we continue to invest in, but we feel really good with the folks we have. You know, the recent hires in Houston have been very, very positive and the momentum down there is just starting to build. So, and again, I just reiterate that a lot of the new business that we have is...
is market share grab, and for us that's a real positive. But I think we're in a good place on the hiring, but we still have 40 something open positions.
So we'll always be hiring.
Thank you for the commentary. Appreciate it.
And your next question comes from the line of ready gaily with KBW your line is open.
Hey, thanks. Good morning, guys.
Hey, Brady. Morning, Brady. Good morning, Brady.
So the gain on sale premium coming in in the second quarter, is that something?
Is that more just a sign of the time? Is that related to rising interest rates? You expect that to bounce back? And what's the forecast on how you think about getting on sale premiums for that business? Or is it just kind of up to the market when it's hard to forecast? I don't know. I don't know. I don't know. I don't know. I don't know. I don't know. I don't know. I don't know. I don't know. I don't know. I don't know. I don't know. I don't know.
Well, I mean, I think a lot of it is driven by rising rates and economic uncertainty and that's even with strong pre-pay protection in the USDA space. I think it's making the buyers and investors in that paper less aggressive in their bidding. And so I think that's what's contributing to it. Now, I think once there's the...
The terminal rate for Fed funds and the timing of the rate curve moving or short term rates moving down is what I think is going to be key and just greater economic certainty on the, you know, are we going to have a recession, how deep I'll short, etc. Is it going to be I think that's when premium start to strengthen. So my general view is that premium will probably remain weak through the balance of the year. I expect them to start strengthening as we get into 2023.
We got really good implications for net interest margin, growth, etc. And if that's the way it happens, so be it. We have a way looking at the present value, the cash flow of cell versus hold, just counting at our cost of capital. And when that link the time for it to sell in your break even period, it gets too short. We just hold it. And we just hold it.
because it's the right long-term economic decision for GreerTex.
Yeah, that makes sense.
But just for expectations, I mean, one Q was such a great quarter, I mean, $5 million of fees there. You know, two Q was closer to 1 million, or a little under 1 million. Do you think the two Q rate is kind of what we should expect for the back half of the year, or do you think it could be better? ROOM 6
I think I would expect...
that it will be a little better, but not, you know, I don't think it's back to, I think Q3 will be the weakest. I think Q4 will get better, but will it get back to Q1 levels hard to know, Brady. But I think this is true for the SBA business as well. I don't think it's gonna be great. I mean, roughly right now only half our production meets our hurdles fell when we look at the game on cell premiums, so.
I would be pretty conservative on that, but that, you know, the thing I feel the best of, you know, in terms of what's going to offset that, we made a big strategic eye at the beginning of the quarter and interest rate swaps and we had the best quarter ever in Q2. Trust me, it's going to be even better than that in Q3, because we can see what's in the pipeline there. So there's some offsets, but I wouldn't go crazy, especially in Q3 getting overly optimistic.
That I mean, I think we're gonna have better than Q2 overall and fee income because it's interest rate swaps. I think the government guaranteed business is gonna stay weak on the gain on sales side through the quarter. I think the government guaranteed business is gonna stay weak on the gain on sales side through the quarter.
and then improve more in Q4.
All right, that makes sense. Then finally for me… leave the full video in the description session.
you know, growth is slowing here. It's still gonna be great growth. You know, growth is slowing. Your profitability is enjoying the benefit from higher rates.
It sounds like you're about to get a little boost to capital from the CRT Mortgage Warehouse deal. So, you know, the stocks at 8 times earnings.
So, do you start thinking about re-engaging in the Vivec at this point given all those dynamics?
No, no, it's just not the right time. And, you know, Candlely investors rather have us invest in the future growth and earnings of the company. And that's where we're focused. But I wouldn't, I would not model in any buybacks. But I wouldn't, I would not model in any buybacks.
It's definitely an attractive valuation and historically before we had such a strong growth profile.
The answer would have been different. Would have been saying yes, but that's not where we find ourselves now. And so we'll deploy all our capital generation, even, you know, you saw that CET1 went down to 925. I need that moving back up. And so with the growth profile, that we're talking about, it's pretty neutral to capital, but it doesn't build and I need it to be able to hire. CET1 is up, you're over here. It is up, you're up, you're 22 bits.
Okay, all right, great. Thanks for the car, guys.
That ain't great.
And your next question comes from the line of Matt Olney with Stevens Inc. Your line is open.
Hey, thanks. Good morning, everybody.
Hey guys.
It sounds like the loan growth pipeline remains strong the back half of the year. We would love to hear more about the plan for funding the growth. Good core deposit growth in 2Q. You took on a little FHLB. I guess you also had the Interlink deal closing at some point in the third quarter. You wrote all together. We would love to hear the thoughts on funding the growth of the back half of the year. Thank you.
Yeah, that's a great question. You know, we have started to participate at the downstream bank in Interlink even before we had it closed. And we started doing that in the second quarter. The optics with the broker dealers to have us as the acquirer going ahead and participating is just just pretty compelling from their perspective. So that's that's what we did. So I would expect, you know, we've been saying all along that we, you know, we thought we'd probably fund up to one and a half billion dollars with Interlink.
In 2022, and so I expect that to be a big contributor. I also think that our mortgage warehouse business continues to see good opportunities in the deposit space there, the escrow deposits, those type things where we're seeing we're able to achieve good spreads over our ECR rate. And then, you know, our community bank continues.
to really produce great results for us on the deposit side. It got a strong emphasis on treasury. So I think it's going to be a combination of all those things, Matt, that are going to fund the growth in the back half. All I can say is with the growth of the industry, and I'm glad that we have interlinked pretty close to closing, because without it, it would be much more different in challenging. We re-readed our incentive plans for our bankers.
on the deposit side and we're starting to see some payoff from that. And so we'll continue to focus on, you know, incentives on the deposit side, but the community bank had unbelievable growth.
quarter and expect that that will move into the corporate side here also since we've changed that plan up some. And we changed that at the beginning of the year. Yeah, just to get you ever new, that funding was going to get. Right. So that's greater emphasis on the value deposits.
Yeah, agree on the timing of this. This should be good. Any color on how much of the deposit growth in 2Q were from some of those participations that you mentioned, Terry?
I mean, it's spread across, I mean, I mentioned four intentionally, and they're all pretty significant drivers with the one downside being our correspondent banking division. And you can see the correspondent banking division because of what's happening with growth across, loan growth across the industry. And the Fed pulling liquidity out of the system, so we've seen a pretty steady decline in that. And, you know, and earlier in the first quarter, it was, it was public funds. So, you know, Matt, Matt, they're all all significant contributors to this quarter.
in a leg.
I would say, you know, a third to a half, probably something in that range.
If we're growing loans in the mid teens, I think we through our banking initiatives and treasury initiatives, community bank, et cetera, we can fund high single, low double digits, something like that, and then the rest to come through. Interlinked, interlinked has never the sole answer. It's just a funding gap to make up the difference because in these two markets we operate in of DFW and Houston, the loan growth opportunities with strong credit but far outstrip.
line with the market right now. I think y'all have heard me say for the past few years, going back a few years pre-pandemic, I called it hand-to-hand combat.
And that I felt like DFW was the most irrational deposit pricing market I've seen in my career, which covers a long time and a lot of geography. And it's just incredibly competitive. My personal view is that that level of competition will return. Will it be Q4? Will it be early next year? I'm not exactly sure. But I think you have too many competitors. So I think it's going to be pretty intense, but right now that hasn't manifested itself yet.
pretty rational at the current time.
Okay, thanks guys.
Thanks, Matt.
And your next question comes from the line of Brad Mills' from Piper's Handler. Please receive either question.
I'm sorry, Brad, she's too out disconnected.
We'll go to the next question.
Your next question is for Michael Rose from Raymond James.
Your line is now open.
Hey, good morning guys, thanks for taking my questions.
Just to follow up on the good morning, just to follow up on the funding question with Interlink and understand there's a lot of moving pieces. Obviously, good core deposit growth is quarters. You talked about, I think you guys have talked about, you know, getting a loan or deposit ratio somewhere down to kind of the mid, low to mid 80s, if I remember correctly, is that still the outlook? And then I think in response to the math question, you said, and then I think in response to the math question, you said,
you know, amid teens growth rate might be acceptable. It sounded like for next year. Is that kind of still what we're thinking at this point? Thanks.
Yeah, so mid-tains is what we're looking at for next year. You know, call it 14 to 16, something along those lines. A lot of that is already embedded. If you look at our unfunded commitments, but no, we feel very confident that we can meet those numbers.
You know, like I said earlier, the economy here has not slowed down much. There are few projects they've pulled off the table or a few things maybe have been put
The most part it still.
Kind of crazy. The first question on Interlink. I forgot exactly what you were asking Michael. I apologize. Just around the targeted kind of loan to deposit ratio. Oh, yeah, yeah. I think you talked about low to mid 80s is kind of being that right. Yeah, our goal is.
Our goal is to totally get it in the mid 80s. In absent warehouse. Yeah, absent warehouse. We think that, you know, it's just a really stout balance sheet. And so, yes, the answer is absolutely, or do you remember correctly? Well, one tag on the mouth comes comment. You know, with earnings profile going into 23, coupled with growth range, he just gave you, that will allow us to create capital, CET1, et cetera.
And so that's a pretty good, that's, that's a, that's a good place for veritex is, is that type of lung growth, that type of earnings profile, that type of capital CET-1 growth. So
Got it. And then maybe just to follow up, I appreciate the updated rate sensitivity in the deck, but it's the interlinked deposit scroll. And you found out that the beta is obviously gonna increase. Can you just give us an update on what your beta assumptions would be over the next couple quarters? Thanks.
for the whole company or for interlink.
Yeah, for the whole company.
For the, you know, cumulative, we believe, as we get through the end of this year and in the next, starting the first few quarters of next year, we see a cumulative deposit beta in the low to mid 40s.
That's what we believe right now and that's factoring in Interlink.
So that's why, you know, if we've got a beta cumulative in that range, we're off our floors on the loan side, given what the Feds have already done. That's what gives us confidence in the NIM expansion. We think we can see, and our, you know, if I said the NIM in June was 355, and we've already seen a 31-bit increase in our contractual accrual rates on our loan book and through the first half of the month. So we're feeling pretty good. And you see that in the table on the interest rate, which is still there is so much space and stability. and its cavity.
just the absolute growth in dollars.
and dollars. Pretty encouraged and a good
with positive operating leverage going forward.
Very, very helpful. And then maybe just finally one for me, just, you know, sounds like maybe the expense. Just, you know, sounds like maybe the expense.
trends are gonna slow because you're gonna hire a little bit less. I don't think Malcolm, you said the teams are pretty staffed up at this point. I guess moving into 2023, I'm not trying to pin you down here, because I know you're gonna continue to be opportunistic, but your hiring costs have gone off. You mentioned that the teams are relatively full at this point. They would seem like expense growth, you know, could really decelerate you guys who get some really strong kind of positive operating leverages. We think about next year just given, you know, the NII trend to look.
You know, the movement in earning assets you talked about, Terry, is it plausible to think we could see a pretty big, you know, step down in the efficiency ratios. You get that leverage. Thanks.
Yeah, you can expect to see meaningful improvement in the efficiency ratio over the next four to six quarters with what's going on. And I mean, I could ask a fair amount, well, what do you think about your expense growth? I mean, it's sitting here at 14.7% year over year. Well, when you're generating close to 22%, backing out the effect of PPP fees in 2021,
Yeah, you can expect to see meaningful improvement in the efficiency ratio over the next four to six quarters with what's going on. And I mean, you know, I could ask a fair amount, well, what do you think about your expense growth? I mean, you know, it's sitting here at 14.7% year over year, but when you're generating close to 22%, backing out the effect of PPP fees, you know, in 2021, you know,
I don't really, I don't think I'll say a whole lot about expense growth as long as we can generate that revenue growth. You know, and the other thing is even if you back out the effect of rising rates.
Our operating leverage is still close to five.
So expenses are going up, but we're driving the revenue. And then I'll talk about operating leverage in an incredibly weak income quarter for us. So.
I think the model is working. And but I do think you can see significant improvements in efficiency as we move through the balance of this year heading into 23. We like our expense guidance. We've given it 185 to 195. You asked about 2023. I mean, we don't have any huge things on tap candidly. Our teams are.
quite full. I will be opportunistic, especially in a couple of different areas. But I think there's a chance that, you know, we're going to be fairly flat. There's going to be some wage inflation, obviously. I think at the first of the year, all of us are going to have to deal with that. When I say all the industry, you're going to have to deal with some wage inflation. I thought yesterday, I think it was Google, or somebody said, we're going to go ahead and give raises right now. No one are going to give them just to keep everybody around. Hello.
All that stuff may start happening. But I feel pretty good about our expense. Candidly, you start looking out forward and we look at our efficiency ratio and go, well, there's no way we could be that good because there's going to be some expenses and some costs. So, basically, this is what we've done, we just made a lot of plans, and makes too much
You may see some technology things next year. You may see some treasury investments, those types of things that will drive some deposit growth. But I feel pretty good. I mean, 23 looks pretty good. And Terry's right, I hate to be the dead horse, but the increase in revenue is not just the right thing. By any stretch of the imagination, it's really kind of a 75, 25 deal.
Historically this last quarter and so that's the gift that keeps giving when it's when it's on the gross side And I'm just tagging on the expense that might be do have to keep in mind the interlink cost will come in
So, but that's not huge. Don't go give you wrong. I'm just saying that that's that revenue. I'm just saying that that's that revenue.
should out strip that too. On the internet. On the internet. Yeah. Yeah.
that we're really.... how they know the lengths of? Patienten Barafen deeply ans Sure.
I appreciate all the color guys. Thank you.
Thanks, Michael.
And your next question comes from the line of Brad Millships with Piper Sandler. Your line is now open Brad.
Hey, good morning, guys.
Good morning. Good morning.
Yeah, I don't know what happened there.
Call Drop or something. You don't know if we didn't put you back.
I apologize if I missed this when I dropped, but the chart that you guys added on slide 10, I think it's really good. I just want to make sure I understand some of the assumptions there. The base case of $405 million of net interest income, which would imply over $100 million a quarter, is that if you do nothing? That's just if you just let the balance sheet run where it is? No further rate increases, no further growth.
And then as we move up the scale there, that would reflect rate increases, but not necessarily growth. Is that is that how I need to think about those numbers?
Absolutely assuming a shock, yes, but as opposed to a ramp. So, but no, you're thinking about, look, we did $95 million roughly. Well, we did $85 million, I'm sorry, and that interest income. But when you think about what the margins doing in June versus what it was, you know, that's 13 vip's higher and every vip is about $1 million. So, our run rate, just on the static balance sheet, is not $84 and it's not.
$100 million, getting over $100 million in quarterly net income, it's pretty doable, pretty fast.
Right, and you're thinking about Guy Bruce.
You got proof on top of that, right?
You got growth on top of that, which we've already seen some growth in 3Q.
Sure. In that chart on page 10, would that include your 40-45 percent kind of cumulative beta assumption as well?
Absolutely.
Yep. Okay. And then just as a follow-up, maybe on the provision, it looked like on new growth you were provisioning it sort of a rate at around 90 basis points. Do you think that makes sense going forward? Obviously, over time that will continue to kind of bring sure. In that chart on page 10, would that include your 40 to 45% kind of cumulative beta assumption as well? Do we still...
Absolutely.
Yep. Okay. And then, just as a follow-up, maybe on the provision, it looked like on new growth you were provisioning it sort of a rate at around 90 basis points. Do you think that makes sense going forward? Obviously, over time, that would continue to kind of bring the reserve down, depending upon charge-offs and obviously other, obviously you can make adjustments for other factors. But is that kind of the way you guys are thinking about it?
I'm thinking about the reserves staying pretty flat from where it is now. I think we're heading into a percentage wise. Yeah. Yeah. 102 somewhere in that range. Feels good to me and knowing there's so much economic uncertainty and even though I'm in the camp of. I believe the US is either in or about to be in a recession. I don't think that recession is going to come to Texas. Because as you look forward at the GDP forecast from Moody's.
So I think, but I do think we have to be cognizant of deteriorating forecast. And so we're going to have to continue to provide for that to a degree. So that's the best advice I can give. Is our goal is to kind of keep the reserve level in that 102 range. And if we need to provide a little bit more to do that, so be it. We'll do that, so be it. We'll do that, so be it.
Perfect. Thank you guys. I really appreciate it.
So cranky breath.
And your last question comes to the line of Gary Tanner from DA David's tune. Your line is now open.
Thanks. Good morning.
I want to ask about the long growth in the back half of the year. You talked about what you think from a percentage basis, but just thinking of the main categories of growth, I assume construction continues to fund up at a fairly steady pace given the unfunded commitments. But between commercial real estate and single family, which were the big drivers of growth this quarter, any shift in where the mix might come from beyond construction?
Yeah, I mean, our commercial teams are ramping up. Their pipelines are really quite full, the industries that they're represented are quite diversified. The Houston team is just getting some sea legs under them. We've already looked at a couple of three deals for them. You know, there's a big deal in Dallas that we're gonna close or have closed in the insurance space. So, um, get to it.
solid, solid relationship. There's some more of that coming. So I really think I look for the commercial side to really be the driver of it. You're absolutely accurate. We are already embedded on the ADC space. And so those deals are booked in, but we also look for a pretty big payoff back half of the year forecast. I don't know how other banks forecast their pipelines, but I can.
And part of it is underwriting. I mean, we've moved to our underwriting rate up a couple of points. I mean, we were running, you know, certain stress analysis in the mid-4s and now we're running them in mid-thixes. And so some deals don't pencil out as nicely in those rates. So that's kind of a forced slowdown, if you will. But I can't really look for the commercial space to be pretty active, the back half. And again, this is it.
A market share move, in my opinion, from these new hires that we've made. I would tag on don't expect Rezy real estate, the 1 to 4 family to do as much. Yeah, we using that's been 1 of the key drivers and getting their down rate protection. Close to 5%, so expect that to slow. I agree with Malcolm on that. We've got funding, but slow their terminal estate though. There's some really good looking stabilized opportunities out there.
And I think we're starting to see pricing get a little bit better. Yep. So, but, you know, I just want to really make a point about the residential real estate. You won't see us be as active there buying stuff as we have been the first half.
Okay, I appreciate that. And just to be clear, Malik and me were talking about forecasting the payoffs. Is that really starting to see some of these construction projects? These construction projects?
kind of comes to fruition and convert. Okay, so that's an app in that line. Okay. Yeah. Yeah.
Yes.
On the deposit side, do you have offhand the June 30 spot rates on interest bearing or total deposits?
Oh!
You know, they were definitely just like I talked about. Somewhere in the, you know, is intersparing or total. You know, it's just intersparing or total.
about somewhere in the, you know, is intersparing or total. Other. Other.
10
Interest bearing is going to be in the 70s.
Adjunct 30.
At that date.
Yeah, okay, perfect. And then just one last question. And it may be, the SIRB and Elementary question, should I apologize, the valuation allowance on the servicing asset?
You know, I usually think a servicing headset is becoming more valuable as a human wire. I just think that an easier time or have five hundred per kilometer of distance between the entire wyposa and the light, and, and the man with the plane with the vertically independent quintessence of which dismantled the twelve parts both to the brink of cl verschof aid and notomerious servicing, and recovery on the rise of equipment, and pushing?? you
That's a good question, by the way. I had the same one. Well, in the mortgage base, you're absolutely right. Is rates go up, large to stand cash flow streams that you value and the servicing asset get longer and better? Unfortunately, in the USDA and SBA space, is rates go up, given itself virtually floating rate. You default risk goes up, meaning from an investor standpoint, you, the government's going to back your loan at par, not at the premium you pay.
So life shortened from that and refi risk goes up as well, because the banks who have or the borrowers whose businesses have continued to grow and mature in season will look to jump out of that space quicker and into typical bank lending space. And so I think both of those contribute to shorter lives and that's what drives the servicing valuation down.
Is that valuation allowance sort of embedded in the forward curve as well, or in the third quarter, more rate moves? Would you expect another allowance?
My understanding is it embeds the on the queue service concludes to this thing yet. So, but we'll see how what the given how forward the volatile curve has been of late. We'll have to see where it ends up on the end of the month of September . So, but I'm not expecting it, but we'll see.
My understanding is it embeds the......on the queue, so this concludes the......so, but we'll see how, what the... Given how forward the volatile curve has been of late, we'll have to see where it ends up at the end of the month, of September , so, but I'm not expecting it, but we'll see. All right, great. Thanks, guys.
All right, thanks here. And we know we don't have any other questions on the queue so this concludes today's conference call. Thank you for participating. You may now disconnect.
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