Q2 2023 Veritex Holdings Inc Earnings Call
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Good morning, and welcome to the vertex Holdings second quarter 2023 earnings conference call and webcast.
All participants will be in a listen only mode.
Note this event will be recorded.
I will now turn the conference over to MS. Susan Caudle Investor Relations Officer, and Secretary of the board of vertex Holdings Ma'am you may begin.
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 at 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 vertex bank Dot com all comments made during today's call are subject to that safe Harbor state.
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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 I'll discuss non-GAAP measures in our filed 8-K earnings release joining.
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 and welcome to our second quarter earnings call. Despite the challenges in the marketplace vertex continues to make progress in many areas delivering positive results for the <unk>.
Second quarter, we reported net operating income of $34 7 million or 64 cents per share.
Our pretax pre provision for the quarter was $58 5 million or one 9% since our merger with Green we have never produced a pretax pre provision of less than one point to 7%.
Our two main drivers of our income decline over the previous period, we had to charge offs totaling $11 4 million. The majority charge was for an out of state office building for a 25 year Dallas client.
And the second one was a C&I credit for a five plus year client in the lender finance space Clay will provide some additional color here in a moment.
The second factor was the lack of U S D. A Z in Canada, the government due to the government hitting their funding limits.
Despite these two issues, we returned a 1.13% return on average assets and a <unk>.
13.7.
Our return on total common equity and we kept our efficiency ratio below 50%.
As I've stated previously for almost a year our main strategic focus has been on the deposit funding side of our balance sheet well.
Well. This season has been challenging we began to see some of our funding initiatives begin to pay off.
For the quarter, our deposits grew 200 million or eight 8% annualized.
Our reliance on wholesale funding dropped from 32% to 29%.
Terry to give you some more insights shortly but I wanted you to know our strategies are working.
For the quarter, our loan growth was flat for the first time in many years. This occurred due to several items first loan demand has remained slow, especially in the commercial real estate area second is our payoffs for the quarter. They were right at 400 million up 58% over quarter first quarter.
Of that 54% was commercial real estate.
Not sure we can expect this payoff levels to hold up for the back half of the year.
Third we continue to evaluate each credit from a relationship standpoint, if you don't have a deposit relationship or other fee generating business. We're looking hard at whether they are good long term client for vertex.
We do expect loan growth to be in the mid single digits.
For Q3.
Credit continues to be a major focus for me and our credit team N. P. H increased to $68 3 million or 55 basis points of assets up 20 bps over Q1, almost 100% of the increase is from the two loans discussed having partial charge offs.
Criticized loans.
Slightly more classified loans decreased slightly and clay will provide more detail in a moment I'll now turn the call over to Terry.
Thank you Malcolm.
Malcolm has covered the key financial metrics for Q2, I want to spend a little time comparing to the first two quarters of 2023 to the same period in 2022 I think this is important because some of our businesses are very seasonal and we think about them on an annual basis and not just quarterly starting on page four.
Operating earnings were up 22% to 78 million from 2022 to 2023 operating EPS is up 19% pretax pre provision operating earnings increased 41%.
The 2022 level to $125 million pre tax pre provision return on average assets increased 31 basis points to 2.5% and the efficiency ratio declined 400 basis points to 47, 2%, we've grown loans $1 1 billion in the last four.
Quarters, or 12, 8% and we've grown deposits $700 million over the same period.
Finally, we've grown to CET one about <unk>.
51 basis points to 976% over the last year, while growing loans $1 $1 billion.
Skipping to slide six.
Vertex made meaningful progress improving its liquidity and funding profile over the second quarter.
Momentum has continued into July since the end of Q2 since the end of Q1 vertex has grown deposits about $350 million through July 19th.
It has reduced its loan to deposit ratio of about 5% to 102.5 and reduced its reliance on wholesale funding by over 14% more work to do but the vertex team is proving it can grow deposits in a challenging market <unk>.
Vertex shifted its focus to the right side of the balance sheet late in Q3 of 2022, we started slowing loan growth we shifted our loan production focus away from Cree and ADC to C&I and small business, we changed our banker incentive program at the beginning of January to give deposit value and volume.
Higher weight in our balanced scorecard, we have reallocated marketing spend to deposit products and launched a multi wave direct marketing campaign, starting in February with impressive results.
All of these efforts and many more will be continue through 2024 and beyond.
Finally, our liquidity capacity exceeds uninsured deposits about $2 $2 billion or just over 70% of uninsured.
Moving forward to slide seven.
The discussion on deposit growth for the second quarter was $200 million with only 1% of that growth in brokerage.
The effect of the fed's interest rate hikes on deposit mix has stabilized as the percentage of deposits and noninterest bearing remained at 24%.
Deposit pricing competition continues to be intense our cycle to date total deposit beta is approximately 52%.
Spec deposit betas to continue to increase given funding requirements in the competitive landscape.
Finally, uninsured in our collateralized deposits are at about 33% down over the quarter.
Vertex is average deposit account balances around $124000.
Slide eight.
And thinking about the loan portfolio the shift away from ADC is showing progress is that portfolio declined $172 million or.
Were nine 4% during Q2 our.
Our concentration level in commercial real estate moved down during the quarter from 335% to 327% and the level of acquisition development construction ADC improved from 129% to 115% of total capital. The goal is to continue to move these levels down below the regulatory guidelines.
Unfunded ADC commitments have declined by over $1 billion in the last year.
On slide nine net interest income decreased by $2 6 million to just over $100 million in Q2.
<unk> three biggest drivers of the decrease were higher earning asset yields and day count offset by increasing rates on interest bearing liabilities and interest reversals on nonaccrual loans.
Net interest margin decreased by 18 basis points from Q1 to $3 five 1%.
Q2, NIM was negatively impacted by higher by carrying higher cash balances at the fed. This was about three basis points interest reversals on problem credits, which was also three basis points and deposit flows and pricing.
All of this is to say based on our current internal forecast. The net interest market margin is nearing the bottom assuming better deposit mix remained stable from here on.
On Slide 10. Please note that during Q2, our loan yield was up 34 basis points to 685% while deposit rates increased 49 basis points Q.
Q2s, new loan production as it relates to seven.
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Alright.
Understood.
Colin I would like to call 911, we need to pause.
Okay.
Ladies and gentlemen, please standby your conference will resume momentarily. Thank you for your patience, ladies and gentlemen, please standby your conference will resume shortly.
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Once again, ladies and gentlemen, thank you for your patience.
Vince will resume momentarily. Please remain on the line your conference will resume momentarily.
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Pardon me. This is your operator again, I apologize, but there would be a slight delay in today's conference. Please hold and the conference will resume shortly again, thank you for your patience.
Ma'am I think it would be best if we.
Concluded the conference.
We have an issue here, we need to deal with I apologize for those on the line and we'll be back in touch at a later date. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Again, ladies and gentlemen, the conference with now concur.
<unk>. Thank you for your patience.
May now disconnect.
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