Q2 2019 Earnings Call
Ladies and gentlemen to stand by your peers next conference will begin momentarily.
Good day and welcome to the Virtex holding second quarter 2019 earnings conference call and webcast I'll just.
Listen only mode. Please note. This notice this event is being recorded.
I would now like to turn the conference over to Miss Susan <unk>.
Invest relations officer, and Secretary of the Board and then.
<unk>.
Go ahead.
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 unanticipated results to differ.
The company undertake no obligation to publicly rebuy any forward looking statement.
At this time, if you're locked into our web cast. Please refer to our slide presentation, including are safe Harbor statement, beginning on slide too for those of you joining us by phone. Please note that the safe Harbor statement and presentation are available on our website Veritex Bank Dot com.
All comments made during today called are subject to that Safe Harbor statement.
In addition, some of the financial metrics discussed will be on a non gas basis, which power management believe better reflects the underlying core operating performance of the business.
Please do the reconciliation of all disgust non-GAAP measures in our filed eight K. earnings release.
Joining me today or Malcolm Holland, our chairman and C.E.O.
Kerry early or Chief financial Officer, and Clay Ribi, our chief credit Auster Malcolm.
Thank you Susan good morning, everyone.
Obviously, it was a a incredibly busy and productive quarter for our company.
Our operating income for the quarter was 32.7 million or 59 cents per sure.
Expenses were lower than expected credit costs were low and in line with expectations. However revenue was lighter than expected.
Year to date return on average assets, 1.66%.
Year to date return on average tangible common equity 18.5%.
And year to date efficiency ratio.
43.6%.
I do feel it's worth noting that these outstanding results were during consolidation.
Integration and merger to multibillion dollar bags and our respective cultures.
I couldn't be prouder of our team.
Let me address our growth for the first quarter found on slide 12.
Growth in loans for investment.
Was one 154 million or 10.7% annualized growth less mortgage warehouse was 68 million or 4.8% annualized.
We continue to see a little slow down arrow markets, but are also beginning to see some looser loan structures by some of our competitors.
Mainly and equity and covenant softening.
We will continue our credit disciplines, even if it means a lower growth profile.
Additionally.
We're perhaps overly optimistic on keeping our long drives around 10% in the midst of our merger on conversion.
Lone Grove.
Last mortgage warehouse for the second half of the year should exceed the first task and be in the 7% to 9% range.
Turning to slide 14 credit quality continues to remain very steady, although N.P.A.'s increase from 0.29 per cent of assets into one 2.54% in t. two.
The majority of the increase was two loans totaling 19 million that we're not renewed timely.
Both are secured by commercial real estate with appropriate collateral margins and will be renewed in Q3.
Total net charge offs for the quarter were virtually nonexistent.
Loanloss reserve plus our remaining purchase discount.
Mark gives us an effective reserve a 1.77% the total loans.
Keeping in mind over 50% of our loan portfolio was credit marked over the last seven quarters.
Deposit growth costs of deposits and then pressures continue to be a challenge for our company.
I'll turn the call over to Terry who died further on the subject and other financial results [noise]. Thank you Malcolm can good morning, everybody black to take a few minutes to provide you with more details.
Veritex, it's financial results for the second quarter.
I think we have had an excellent start to 2019 following the closing of the Green merger on January 1st of this year.
Malcolm mentioned are you today profitability profitability metrics, which are very encouraging.
As in the last couple of quarters, we do have some noise in the numbers. So please note that for the most part my commentary will focus on very attacked his second quarter financial results on a non gap operating basis.
Which excludes 5.4 million and merger expenses $642000 in Los on social security and 359000 dollar loss and disposal of the Austin branch assets before turning to the deck I want to also note that much of this was accomplished before.
I want to know that much was accomplished this quarter, even before focusing on the financial results.
Some of these accomplishments, including the core conversion rebranding of the green locations. Several significant hires as we continue to upgrade the team it very attacks and the <unk> Austin divestiture just to name a few now on the slide six fully diluted operating earnings per share were 59 cents per share in Q2.
28.3% from the same quarter in 2018.
And above the expectations from the green merger.
The operating net income of 32.2 million translated into a return on average tangible common equity that 18.9% and that's the second consecutive quarter with utterance return over 18%.
On slide seven these graphs demonstrated the significant earnings power Veritex with an operating return on average assets for the quarter of 1.63% and a pre tax preprovision return on average assets of 2.22%.
Its level of pre tax Preprovision operating earnings bodes well as we moved later and later in the credit cycle.
Veritex was already efficient on an operating basis before the green merger.
But this key metric is only gotten better with the scale and cost savings opportunities from the transaction.
We finished Q2 with an operating efficiency ratio of 43.7%.
Basically flat from two one and down 5% from the Q2 2018 level of 48.7%.
Tangible book value per share has declined by just over 3% since December 31st 2018 and ended Q2 at $14.27.
Please note that the $14.27 TBV per share is net of approximately 55 cents per share dilution from the dividend is not my back.
We're committed to managing our capital resources prudently as the deployment of capital for the enhancement of long term shareholder value remains one of our highest priorities. We continue to believe that return on tangible common equity is a critical financial metric that deserves significant focus.
On flooding the <unk> the gap net interest margin decrease 17 basis points.
To 4% in Q2, while the adjusted Nam, which excludes all purchase accounting impacts decline nine basis points to 3.69.
The table in the bottom right of this slide shows the items that impacted but the gap Nam Andy adjusted Nam.
The most significant driver the lower gap wasn't eight patients basis point impact from purchase accounting accretion and amortization.
The next most significant item will just six basis point increase on both the cat named Andy adjusted them from lagging deposit Vegas.
Also there was a one basis point impacting the call to the interest rate floors that were purchased in Q2.
Finally loan production rates for 5% to 5.51% for the quarter.
And in line with the contractual raid on the portfolio.
Turning to slide nine.
Given the volatility in them.
And we have taken multiple steps to.
It's so far in Q2, and Q3 to indicate the downside impact of falling right.
During the quarter Veritex purchased 275 million of one month lie more interest rate floor struck at 2.43%.
And restructure 255 million any investment portfolio to extend duration pick appeal and reduce your exposure to floating right.
These actions removed 20% of the impact from a down 100 right move.
As shown in the graph on the bottom left.
Subsequent quarter in we restructured $400 million in our funding profile through floating and structured products with a blended interest rate of approximately 1.5%. This new funding is being used to replace higher costs funding, including part of our correspondent money market.
Most importantly, we have developed a customer specific plan that decreases money market rates, while working to retain important relationships and preserve franchise value.
The table to the right at the bottom is a snapshot of the force in our portfolio.
31% of the floating rate loans have floors.
It's management's intent to continue to transition to balance sheet do more neutral position to reduce the risk further falling interest rates.
As we look out for the remainder of 2019.
The company expects the adjusted net interest margin, excluding all purchase accounting impacts to be in the range of 3.55% to 3.65%.
The gap Nam should be 20 to 30 basis points higher due to the impact to purchase accounting.
We are assuming too fed fund rating decreases in Q3.
If there's a third caught in December it shouldn't have a very material impact on the quarter.
On slide 10, Veritex reported operating fee income of 6.7 million.
The results of the quarter were negatively impacted by lower sales volume of S.B.A. loans.
I should add that we feel good about are you today results and acknowledge the gain on sale revenue for the S.B.A. business can be quite lumpy.
We expect S.B.A. revenue to rebounding two three to more normal levels.
Also our country's interest act customer interest rate swap business had a weak second quarter, we've already been encouraged by the activity so far in Q3.
Finally included in the two two results is a 434000 dollar right down in the value of an acquired investments.
In A.C.R.A. related fun.
This loss was not excluded from operating earnings.
On slide 11.
Company continues to realize on the cost savings from the Green Bank merger as total operating expenses declined 4.7% over Q1.
In General say these savings are coming in earlier than planned.
As previously stated we continue to believe the core conversion and branch closures that were completed towards the end up you two will will yield additional savings, but it remains or intent.
To reinvest most of these savings an additional quality personnel to drive future growth.
From slide 13, the loan to deposit ratio stood at 96.2% at the end of the quarter, our preferences to operate the ratio between 95% and 100%. So we're very comfortable with this funding profile being our funding profile being in this position also non interest bearing D.D.A. now stands at 24% of total deposits.
The average cost of total deposits increase during q. too not 13 basis points to 1.38%.
Five basis points of this increase was driven by lower C.D. amortization of the purchase accounting.
Finally on slide 15 or capital ratios at the holding company into bank remain very strong and increased slightly even with our capital actions importantly, <unk>, we return 28.9 million to common shareholders during the quarter, including the share buy back of 22.1 million and a 6.8 million in common dividends on a year to date basis, we returned 43.4 million to shareholders through the buyback of almost 1.2 million shares and the dividend, which we initiated in 2019.
Given our activity in the buyback, we clearly believe that the stock is trading blows franchise value and will continue to use the buy back when we received the tears weakness in the stock.
And it represents a good value with that I'd like to turn to call back over them album.
Thank you Terry well done.
As I stated earlier, our second quarter was incredibly busy and eventful the core conversion of our systems that was completed in late June and went remarkably well.
All operating financial branch phones, and network systems were integrated and are up and running as expected.
The last remaining piece, our Internet banking product conversion is scheduled for September .
I'd like to publicly thank or conversion team for a job very well done.
Well also completed the sale of our Austin branch during the quarter, which allows for us to focus all of our efforts in are going to be the two best markets in the country, Dallas Fort worth and Houston.
My management team that couldn't be more excited about the future prospects here in Texas, we're engaged in several discussions currently.
Receiving lenders and business leaders that will only make us a better and more valuable company.
Our vision to create and one of the best institutions Interstates well on its way.
Operator at this time, we would like to open line for any questions.
Thank you.
He's in gentleman if you have a question at this time. Please press Star then the number one on your touch tone telephone.
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Our first question comes on the line.
<unk>.
Airline is open.
Hey, good morning, guys.
More than very <unk>.
So I mean, you've repurchased over 2% of the company year to date, so a nice a nice amount you still have.
T C.E. over 10% you know the stock is still cheap.
Is there any reason to think that the buybacks would slow at all versus the pace that we've seen in the first half of the year.
No.
I know it short and sweet but no.
Alright, that's great that's great.
Then I know, there's there's some expense noise.
And the numbers this quarter you also had the conversion.
In June you got rid of the Austin location, when we put all that together.
And look towards expenses and the back half of the year.
What do you think would be inappropriate kind of core really expense runrate.
Hmm.
<unk> you know.
I believe that our expenses are going to kind of stay where they are.
I'm pretty comfortable with a 34 million dollar expense run right in on an operating basis were 34 one.
<unk> you know I believe we need to invest in people and brand and things like that and I believe we're going to drive the efficiency ratio down by driving the name writer and so for US as we look out for the rest of this year and next year investing for drugs to me is more important than harvesting.
Expense saves a when our efficiency ratio is already this good.
Alright.
And then finally for me I mean, you mention the two commercial real estate loans that were.
I think around $20 million talking about how they were renewed on a timely basis, what it any more color as far as you know what why that happened.
Sure I'm like like give you some details on those.
Yeah. Thanks Brady Yeah. The the first asset is a is a Houston C.R.A. loan there was a performing until 331.
We've got an as is value that more than covers our our loan balance today.
Borrower began negotiating with a a large sizable 10, it to add to the property and.
That that the addition of that 10, it was going to require some additional capital and so we had been negotiating with them, bringing new equity to the table as well as potentially increasing our loan amount to accommodate that new tenet.
That that 10, it's really a game changer for the Prob project and so.
That's that's kind of the background on that we expect that to be finalized and on in August and this loan for a return to performing status. This quarter. The second asset is another Houston C.R.A. property, we've got to 37% loan to value on that property. The bar were made some changes to the organization that had to be unwound.
And because of that.
That unwound unwinding took some time and that has now been done we expect that loan to be renewed this month and.
That's that's some background on those two larger crap, that's that's 19 million of the 26.
Increase and loans over 90 days still a curly.
Got it.
Alright, thanks for the color.
Got it.
Thank you very.
Thank you in our next question comes from the line of Rad Millsaps the Sandler O'neill.
Please go ahead.
Hey, good morning, guys.
Morning.
Ah Terry appreciate all the color on and then I know lots of things have changed since the last call I think.
The previous guidance was you know four or five to 420 on a gap basis.
Certainly lower than that now if if you had to sort of.
You know look at you know the reasons for lower is is it principally because of your expectations. I think you said you guys are using to rate cuts in the third quarter and then potentially a third later in the year you know how much is it sort of related to that versus you know sort of under other things you're seeing on the fundamental basis, but you know blown a deposit pricing.
[noise]. So there's a lot in that question you know.
Yeah, we certainly are adjusting the guys down and and feel you know it feel like that that that I must say this I I, probably never in my career, saying the the direction of change.
Their direction of rates changed so much from you know things are moving up you think you're going to have a period of flat rate and all of a sudden I mean, it pivots. So quickly, but that you know coming back to your question I think.
I think rates.
You know to rate moves down when two to three when we were expecting flat rates is the by far the single biggest driver.
Next I would say I I, you know I would say that the the the the <unk> continuing increase in especially C.D. right.
You know I I probably.
Miss that one a little bit into in terms of I think I if rates in states. It stayed flat I think I've been at the low end of the range for the year.
With the with the with the way C.D. rates had behaved I mean, there is just <unk>.
I mean, the level of irrational competition.
Astounds me.
In terms of how.
Some people are pricing deposit. It's just you know, but that that's the choice and that they make and so the the the the challenge for US is to figure out how to balance relationship.
And pricing pressure and and I think we're doing okay feels like pricing pressure.
Is easing, but there's still people out there doing things we won't do on the [noise].
On the deposit pricing side, so I I would say rates, one deposit pricing too and accretion not being as strong as I would've thought and then lastly, a little bit a little bit.
The growth is coming in a little lighter than we would have thought and so you know all of these things are playing in it and so.
Let me stop there and see if I yeah, no. That's that's grand color I mean, yeah, but based on your comments. It sounds like you don't feel like deposit costs for sort of.
You know kind of at an inflection point of a stabilizing maybe you've got to because the competition. They maybe have a little bit of room to inch higher than before you can start bringing them down.
Well, we're bringing them down and you know, we're we're acutely focused on what the roll off rate is in the C.D. book this quarter and and I I think we're either at or close to the inflection point, our our new production rates are at or below the role operate but the question is can you put them on at our our new desire <unk>, our new new desired sheet, right or or they're going to be customer pressures because of the overall look and feel of that deposit relationship. It causes you to make exceptions. So I mean, we're we're really really close.
I tell full and it just a follow up to Malcolm I. Appreciate the color on you know the opportunity to the market to.
Hire folks you've been talking about that you know for a couple of quarters now just kind of curious do you have any goals on how many you know people you know you'd like to bring in you know between you know maybe say now and then you're and or you know maybe the next 12 months.
You know, we don't we don't really.
Figure it that way you know there there are a couple of groups where was a very large group in town ended up going somewhere else.
I I will tell you were in conversations with several right now both here.
And really Houston has some real opportunity with John Heinz is getting some traction now with people and what have you, but the answer. The question is I don't have numbers I'm kind of an old Tom Landry Guy you know you hire the best athlete and find a place for them and so we need to be available for windows athletes are coming out.
Obviously, there are some pretty good disruption in our taxes market, you know, which banks are being disrupted and so there's going to be opportunities candidly Brad.
We've had people, calling us which isn't always a good thing, but we've had some real quality people that we're working through now so we just want to make the right hires but I don't have any specific numbers, but we do want to add we are adding.
Great great. Thanks, Doc appreciate the color Oh, you bet. Thanks.
Thank you on our next question comes from the line them now.
Stevens Carolina's often please go ahead.
Hey, Thanks from one guys.
Born in math.
Want to start with fees, a little soft into q. on the fee side, I think you mentioned S.B.A. and slop fees and the prepared remarks were lower than expected. It sounds like you expected could rebound the back half the year are there any numbers you can put behind this is the is the 9 million dollar fee income in one q.
A reasonable goal or will be something less than that.
That's a that's a good question and and <unk>, Yeah look I I said I think if you go back and look at the script for Q1, you know not nine and a quarter million dollars operating fee income Q1 exceeded our expectations.
And we thought we could get there, but we thought it would be later in the year.
You know I I think.
You know when you win.
Has to be a quarter at 1.1 million those no meaningful swap income.
I I think you're going to see.
Yeah, I hate to give numbers, but but.
I I I I believe that this will increase in a significant way from Q2 to the rest of the year. They are going to be between Q2 and Q1.
[laughter].
And the other thing is you know, we we hired a new mortgage guy He's got four new mortgage lenders.
That we're putting on until you know and and down yeah interest rate environment. We're gonna I think we're going to see some more mortgage activity you know, it's never going to be a big part of what we do but so far the first half a year, it's been virtually nonexistent and now I think we're going to see some of that so.
It's it's hard to exactly predict because it's a lumpy, but it's going to be somewhere between q. wanting to do yeah. I mean, there was some S.B.A. stuff that just got push it's not just got pushed into Q3.
That was targeted for a cue to close got in sale and it just got pushed into two three and so I I believe you know when you when you add back to write off of you know, we don't expect to ride off on the C.R.A. found again, yeah. So you're you're really looking like more like $7.1 million.
So it's 1719293.
You know, it's kind of in the middle Yeah.
Okay, and I I really <unk> I I believe that with what I see going on an S.B.A.N. swap world that that's a number I'm comfortable with.
Well I understand those can be some lumpy item so tough to predict.
And I guess <unk>, Terry going back to the the guy in surround the adjusted margin the 355 battery 65.
Thank you gave some good parameters to help us out as far as what you're assuming what was that range just to clarify was that for the back half a year on average was that for the full year 2019.
Back half of the year.
The full year would be you know.
If I gave you the full year you know we were at four O. five the for 24 years is going to be way above any of those numbers because we did <unk> in the first half. If you will say I just wanted to rather than make you do the math I thought it was best to say here's the guidance for the back half of the year.
Yeah very helpful. And then I guess kind of related you you took on some borrowings hit they ended the quarter, maybe the candidates quarter for a million dollars I think the ray on what's around 1.5%, replacing some higher cost a positive can you give us an idea kind of what that would be replacing what what what the pots of coffee.
About 100 bibs higher.
Got it.
Okay. Thank you guys.
Thanks, Matt Thanks, Matt.
Thank you and our next question comes from the line of Daniel Mannix with Raymond James.
Okay. Please go ahead.
Yeah, Hey, guys good morning.
Hey, Daniel Daniel Yeah. Thanks for taking the question. It's just one of the start by going back to Brady's question on the buybacks. So it's kind of like you're gonna still be pretty aggressive there by my math, you've got about 20 million left under the current authorization, which is less than what you did in the second quarter. How do we think about a replacement authorization as far as size and timing is concerned.
So we've got a little less than 20 last but.
Well, then I will just say that that would be a topic and.
Soon to be had board meeting.
About you know what next steps are I mean, I've I've I've current by that runs through December I think <unk>. So we're we're going to start talking about add to that we just haven't had that discussion at the board meeting, but we will in August .
Okay got it.
Want to move over to loans Saint if I could get some more information here as far as maybe like a breakdown between Dallas and Houston as far as the man is concerned competition.
What do you see it on pay downs. According to date and how do you expect that training over the rest of the year here.
[noise] so competition just between Dallas and Fort worth So Dallas is certainly led the charge in new loan generation and there's there's two reasons for that one is we're bigger we're about two thirds in Dallas in about a third and he said maybe 60 40, something like that and then the other thing is just you know we hired John hiding in.
April April may time frame to Johns down on the ground 90 day.
So they're obviously, there's been some sort of movement, there and it just change and change in leadership and I can tell you I am Super Super excited about what he's doing down there and the prospects for the future, but you know that stuff doesn't happen overnight Houston, it's still a very very strong viable market. So we're super encouraged with that but.
John still in the honeymoon stage, although I guess, it's coming to an end here shortly.
But you know pay down there haven't been any any greater than any we haven't seen a spike unpaid has let me just say it that way.
Paydowns have been pretty consistent.
We actually as we forecast in the future Daniel the pay down number is a little bit smaller in Dallas than it is in Houston.
I don't really know why.
But that's what the future looks like for us. So I think I'm still really encouraged that 79% net long grow outside of mortgage warehouse I I think.
There's going to be.
Is it g., but what we're going to have to you know get on most cylinders, but we still feel confident we can get there.
That's great Kelli. Thanks, if I could just sneak in one more here you guys had mentioned previously that you might.
Has something for us as far as the Cecil impact is there anything that you guys can provide on that front.
Now comes looking at me I'm looking at here.
Yeah, Daniel we have done a ton of work and and.
But we're not comfortable enough really yet to say we're ready to go out there were just finalizing the models. We've got the model validation scheduled for later this year you know an external from audit for them to come in and do the model validation and we'll be ready to talk at the end of next quarter and you know we're in the last stages in my mind of of finalizing the models and getting that range firmed up but I I.
Given job to tell you. This if you got you left rates alone for the past 90 days, we might be there but.
I I it there's nothing taking more of my time than than than than managing for interest rate risk of light. So the team's working hard <unk> will be ready to talk about no. He dies, yeah and if we could if we are are <unk>, we have enough information to discuss it but it's just we've been focused on the on the Nam and interest rate risk.
But we're well well along in the process.
That's great. Thanks, gentlemen, I really appreciate the time.
Okay.
Hi.
And if you have a question at this time. Please press Star then the number one on your touch tone telephone.
Next question comes from the line.
18 89 is open. Please go ahead.
Thanks.
And again I got I got a call a couple of minutes late so it's all drugs, if I'm going over something you're covered but in terms of the loan growth this quarter and <unk> you provide of the originator loans versus acquired loans could you just talking about that originated.
Growth and how much of that actually represents loans transferring from me required to the.
Originated bucket.
Yes.
On slide.
Well.
Yeah, Gary there's probably about 100 million that transferred from the.
Acquired into the into the originated bucket.
His Malcolm said we had.
Overall total total loans held for investment grew by about 10.7% linked quarter annualized.
When you back mortgage warehouse, how that just about 4.8%.
Okay and that I, just hear a moment ago your.
Full year loan growth.
Look is 7% to 9%.
Yes, that's the back half Yeah. We think we can do the seven seven in <unk> in the back half excluding mortgage when excluding mortgage warehouse correct ex warehouse, Okay, alright, perfect. Thank you for that and then just Oh I don't know if you mentioned this in your remarks, but any kind of thoughts on.
M&A I think you've talked in the past about maybe towards the back half of this year are getting clear of the conversions and everything related to Green bank or a that you would maybe start thinking about that again just wonder what your thoughts are there.
You know candidly Gary the M&A question and thoughts have not been had occupied much of my time.
For a lot of reasons I mean, as I've said many times, we had to make sure. We got this deal right dubious conversion right make sure. This culture conversion goes well, that's where our focus is.
I haven't I haven't had any M&A discussions.
Secondarily.
You know I really I really do like our scale and $8 billion.
I feel like we have an opportunity to do some do some really good things. So and then the other thing is just currency value.
You know the dilution that you would potentially create right now doesn't make sense.
So you know M&A, it's not and it's never off the table for me, but it's certainly not something we're focusing on.
Perfect. Thank you.
Thank you.
[noise] [noise].
And I'm showing no further questions at this time and I would like to turn the conference.
Seekers for any further remarks.
Oh, thanks, everybody for the call today and they were available in the next couple of days for any specific questions you might have have a good day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a great day.