Veritex Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2023

There are 9 speakers on the call.

Operator

Good morning, and welcome to the Veritex Holdings Third Quarter 2023 Earnings Conference Call and Webcast. All participants are in a listen only mode. Please 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 Veritex Holding.

Operator

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 statements. At this time, if you are logged into our webcast, Please refer to our slide presentation, including our Safe Harbor statement beginning on Slide 2. For those of you joining us by phone, please note that the Safe 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.

Operator

Please see the reconciliation of all discussed non GAAP measures in our filed 8 ks earnings release. Joining me today are Malcolm Holland, Our Chairman and CEO Terry Early, our Chief Financial Officer and Clay Riebe, our Chief Credit Officer. I'll now turn the call over to Malcolm.

Speaker 1

Good morning, and welcome to our Q3 earnings call. We certainly find ourselves in challenging days in our industries and markets, but we here at Veritex Continue to focus on building long term value for our shareholders. Q3 was a transformational quarter for Veritex in many areas. First, I'd like to formally welcome Dominic Corolla as our new President and Chief Banking Officer. Tom is a 28 year banking veteran with majority of his experience in leading and developing teams in the commercial bank space.

Speaker 1

Even though he's only been here for 6 weeks, he's already making a difference at our company. I look forward To you all meeting here soon. 2nd, I want to talk about our continued commitment and efforts to reposition and strengthen the Veritex balance sheet. Over 1 year ago, our team stacked hands to build a stronger balance sheet that could withstand all economic environments. We've always been a very profitable bank shown by our historical PPNR, ROAA and efficiency ratios, But our balance sheet did not project the strength that is highly valued.

Speaker 1

Let me discuss 4 balance sheet ratios we've been keenly focused on: Loan and deposit, dependence of wholesale funding, CET1 and our real estate loan bucket concentrations. I'd like to remind you these efforts were not as a result of March 8 SVB crisis. These efforts have been our major focus strategy for the last four quarters. I'm happy to say we're making progress, candidly much quicker than we planned. Our loan deposit ratio has come down from a high of 108 at 3.31 to 95 at 9.30.

Speaker 1

Our dependence of wholesale funding has come down from 32% at threethirty 1 to 21@9:30. Our CET1 now exceeds 10%. Our CRE portfolio continues to decline despite continued ADC fundings of approximately $400,000,000 a quarter. Total CRE to risk based capital has declined from 3.35 on threethirty 1 twothree17@quarterend. ADC has declined from 129 to 116 during those same dates.

Speaker 1

All of this positive momentum towards a stronger balance sheet takes the work and effort of our entire bank. It requires a mindset change to add full client relationships, not just borrowers. It requires disciplined efforts on the deposit gathering space that comes in many forms, better client selection, Digital Banking, Direct Marketing, MSRs, HOAs, Family and Friends Promotions, Commercial and community banks focus, etcetera, etcetera. It takes everyone working together with a common goal. That's how we've increased our deposit balances over $1,000,000,000 since Twelvethirty Onetwenty 2.

Speaker 1

I couldn't be prouder of our company and teams to embrace the changes we all felt had to happen. There is still much to do and much to accomplish. With all the great progress on the balance sheet, we understand that in these cycles, earnings will be under pressure. For the Q3, we reported net operating income of $32,600,000 or $0.60 per share. Our pre tax provision income for the quarter was $50,000,000 or 1.62%.

Speaker 1

Terry will provide some details Certainly, but the main three drivers of our slight earnings decline were NIM pressure, continued lack of government loan fees and increase in operating expenses. In these cycles, loan growth and credit are always at the top of everyone's mind and concerns. For the quarter, Loans decreased and are only up $137,000,000 or 1.4 percent for the 1st 9 months of the year. We've been able to do this with a focused effort on pruning away loan only clients and payoffs, Mainly from the CRE sales transactions. NPAs for the quarter did increase $11,500,000 to $80,000,000 or 0.65 percent of assets.

Speaker 1

This increase was solely from a C and I shared national credit that Clay will discuss shortly. Net charge offs were minimal at 8 bps. We also increased our ACL from 105 at 6:30 to 114. Looking forward, our growth profile for 2024 will continue to be in the low to middle single digits. Our pipelines are off over 80%, and candidly, the demand from our clients has been muted.

Speaker 1

In our opinion, This will continue until some economic and rate certainty is established. I'll now turn the call over to Terry.

Speaker 2

Thank you. Malcolm has covered the progress we've made in strengthening our balance sheet. I think it is fair to say that we've made more progress and in a quicker timeframe than I ever expected. I want to spend some time drilling into the results for the Q3 and the year to date numbers. I think this is important because some of our businesses are seasonal and we think about them on an annual basis and not just quarterly.

Speaker 2

Starting on Page 4, Malcolm mentioned that operating earnings were $0.60 a share. This is down slightly to $32,600,000 Tangible book value per share was also up slightly to $19.44 Even with rising rates impacting accumulated other comprehensive income, AOCI, by approximately $0.45 per share. Focusing on year to date results, pre tax pre provision operating earnings increased 14% in 2022 to almost $175,000,000 Pre tax pre provision return on average assets is flat year over year at 190 basis points. Veritex continues to be one of the more profitable banks among its peer group. Consistent with our intent to strengthen our balance sheet, we've only grown loans $615,000,000 in the last year, while growing deposits of $1,400,000,000 on a year over year basis.

Speaker 2

Year to date annualized charge offs have been 20 basis points. Finally, we've grown CET1, 502 basis points over the last 4 quarters At 10.11 percent, we achieved this target of being over 10% 1 quarter earlier than forecast. Moving to Slide 5, Veritex made meaningful progress improving its liquidity and funding profile over the 3rd quarter. Since June 30, Veritex has grown deposits by $963,000,000 and only $192,000,000 of that was in the growth category. The deposit growth coupled with some reduction in earning assets allowed us to reduce Federal Home Loan Bank borrowings by over $1,100,000,000 As we've said before, Veritex shifted its focus to the right side of the balance sheet late in Q3 of 2022.

Speaker 2

We started slowing loan growth. We shifted our loan production focus away from commercial real estate and ADC to C and I and small business. We changed our banker incentive program at the beginning of 2023 to give deposits a higher weighting. We reallocated marketing expense to deposit products And launched a multi wave direct marketing campaign in February. Additionally, our digital bank, which we started in the second quarter, This is having a meaningful impact on our deposit growth.

Speaker 2

Success on the deposit front for Veritex has 3 components: Growing deposits, increasing our client acquisition rate and increasing net client growth. I'm pleased to note that our net client acquisition rate in the 3rd quarter Was a little more than double what we saw in the first half of the year. Similarly, our net client growth in the Q3 was up more than 4 times over The levels we've experienced in the first half of the year. The effect of the Fed's interest rate hikes on deposit mix stabilized in the second quarter And our non interest bearing deposits to total deposits remain in the 23% to 24% range. Deposit pricing competition continues to be intense, resulting in a total deposit paid of approximately 57%.

Speaker 2

Finally, uninsured and uncollateralized deposits are 31.5% of total and our liquidity capacity is 2x of the uninsured The shift away from ADC is showing progress. Our concentration level in CRE moved down during the quarter and the goal is We continue to move these levels down below the regulatory guidelines. The payoffs in the CRE portfolio remain strong and should range between $800,000,000 $900,000,000 For 2023, a sure sign of strength in the Texas economy. Unfunded ADC commitments continue to drop at the rate of $300,000,000 to $400,000,000 per quarter and are now well below total capital. Looking forward into 2024, we forecast ADC fundings to decline by 75% This compared to 2023.

Speaker 2

On Slide 7, we're frequently asked about our out of state loan portfolio. As you can see, our national businesses and mortgages comprise 13% of our total loan book. Our true out of state portfolio is about $1,200,000,000 It makes up about 12.5 percent of the total book. 2 thirds of the out of state portfolio are loans where we have followed Texas developers. The rest are SNC syndicated loans and C and I.

Speaker 2

A breakdown of the out of state commercial real estate portfolio is shown on the bottom right of the slide. Moving on to Slide 8. Net interest income decreased by $1,500,000 to just under $100,000,000 in Q3. The biggest drivers of the decrease were higher earning loan yields, day count and lower volume, I. E.

Speaker 2

Primarily FHLB volume, offset by increases in rates on deposits. The net interest margin decreased 5 basis points from Q2 to 3.46%. The NIM was helped by the increase in average non interest bearing and the drop in volume and yield on our FHLB borrowings. Given the deposit growth through the end of August, we were able to pull back on deposit pricing in September. This resulted in monthly deposit Production rates falling for the first time in 2023.

Speaker 2

All this to say based on our current internal forecast, the net interest margin is nearing the bottom, assuming our deposit mix remains stable here. On Slide 9, please note that loan yields were up 7 bps to 6.92%, All deposit rates increased by 42 basis points. Q3's new loan production had production rate of 8.06 And a spread of 3 30 basis points. Slide 10 shows certain metrics on our investment portfolio. The key takeaways are It's only 8.6% of assets.

Speaker 2

The duration is 4.3 years and 83% of the portfolio sales and available for sale. Overall, the mark to market on the portfolio has a minimal impact on tangible equity and doesn't have any impact on our capital issues. Non interest income decreased by $4,000,000 to $9,700,000 These declines were generally across the board. Drive's production volume increased 1% to $564,000,000 while its gain on sale margin declined by 43 basis points It's 257 basis points. To maintain volume, Thrive had to sacrifice rate and therefore, gain on sale margin.

Speaker 2

Moving to Slide 12 on the USDA front, we've always said we need to think about this business on an annual basis. It's been a record 12 months for this business. SAVE produced over $21,600,000 revenue over the last four quarters. I was happy to get any revenue in Q3 of 2023 given the funding situation in the B and I vertical at the USDA, But we could only get one loan closed in Q3. Our pipeline is at record levels, which bodes well for future revenue And Q4 revenue should be meaningfully higher than Q3.

Speaker 2

But given the potential government shutdown and funding the government with continuing resolutions Makes it highly unlikely that Q4 will be as strong as Q4 2022. Non interest expenses increased $2,200,000 driven by higher personnel costs and regulatory fees. The increase in personnel costs is a function of hiring bonuses, Variable compensation for deposit growth and lower loan production cost deferrals, salaries are up slightly, but this was not the driver of the increase. On Slide 13, total capital grew approximately $35,000,000 during the quarter to almost $1,500,000,000 Our CET1 ratio expanded 35 bps for the quarter and 101 basis points year over year and now stands at 10.11%, A significant contributor to the expansion of the capital ratios has been the decline in risk weighted assets. It's worth noting that since Veritex went public in 2014, this compounded tangible book value per share at a rate of 10.8%, including the dividends that have been paid to our shareholders.

Speaker 2

Finally, on Slide 14, note that we continue

Speaker 1

to build the ACL. Since the

Speaker 2

beginning of 2023, we've grown in by $19,000,000 or 21%. These additions to the allowance have increased it by 18 basis points to 1.14%. Given all the uncertainty facing the U. S. And Texas economy, we decided to allocate more weighting to the downside scenarios in the model.

Speaker 2

Two factors continue to make up a sizable part of our ACL. With that, I'd like to turn the call over to Clay for some comments on

Speaker 3

Thank you, Terry, and good morning, everyone. As Malcolm mentioned, our NPAs are up for the quarter, driven by a downgrade of a shared national Credit in the most recent SNC exam performed by the regulators in August. Our portion of the loan is $18,000,000 of $157,000,000 total facility. The company is in the defense, space and government sector, And the company suffered from supply chain issues and inflation impact that significantly lowered the company's financial performance. The credit was restructured in the 3rd quarter with additional capital contributed by the equity sponsor and is currently performing under the restructured terms.

Speaker 3

Past dues for the quarter increased $2,000,000 Mainly due to 3 commercial credits. There were also a group of single family mortgage loans in the amount of $4,400,000 that were Transferred to a 3rd party servicer, which created some administrative past dues, and we expect those issues to clear this quarter. Moving to criticized assets. Classified assets were relatively flat for the quarter, while total criticized assets increased by 3%. Our surveillance of the portfolio continues to be strong and we're removing risk grades as we see issues arise.

Speaker 3

I've been encouraged by the level of payoffs that have occurred this year in the amount of $932,000,000 with $645,000,000 of that in the CRE book. $62,000,000 of year to date payoffs have come from the criticized asset books. We experienced full payoffs of $10,400,000 Classified credits just in the last quarter. With that, I'll turn it back over to Mel.

Speaker 1

As you can see, Veritex has made significant Improvement in our strategy to build a sturdier balance sheet. Our focus on granular, stable funding will not cease. Terry mentioned, but I would like to mention again just the new client acquisition is on the front of our minds every day.

Speaker 4

For the Q3 client

Speaker 1

acquisition growth was almost 2,700 new clients, which is more than the 1st 2 quarters combined. It's working, and we recognize we still have more work to do. Finally, I'd like to thank the many phone calls and comforting text messages received from many of you concerning last

Operator

Thank you. Our first question comes from the line of Stephen Scouten of Piper Sandler. Your line is open.

Speaker 5

Hey, good morning everyone.

Speaker 1

Hi, Steve.

Speaker 5

I guess, one of my questions It's maybe around capital and what you could do with your capital today. Strong profitability, Good capital, but the stock is obviously not trading where you'd want on a tangible book value basis. So I'm just wondering if you guys would think about A share repurchase here today or kind of what your capital priorities would be at this point?

Speaker 1

It's Listen, if you keep making money and adding the capital, you're going to have options. Our thinking right now with the environment that we're in It's just to continue to add capital, and we know there's potential options down there, but We don't see a buyback in our immediate future. I think it's just wise to build the capital base a little bit more. And again, the options are always there.

Speaker 5

Okay, fair enough. And then just thinking about the NIM, I know Terry, you said you think it's And nearing the bottom, how should we think about loan yields moving forward and just any Portfolio churn and just kind of remind me that fixed versus floating, so we can think about where kind of the loan side of the balance sheet can go?

Speaker 2

Well, loan yields since we have so much floating, 75%, 76% of the portfolio, 76% of the portfolio's time is so for prime. Loan yields are going to be contingent. They're going to move in correlation with what The Fed does on rates. Are they done? Are they going one more time?

Speaker 2

I don't know. It's a coin flip in my mind. I don't think they're going At the next meeting, but we'll see what happens on out there. We certainly have some fixed rate loans that are I was working with a banker on one earlier this week that's in the mid for each that's up for renewal. And So we're going to have some of that, Stephen.

Speaker 2

But given that so much of the portfolio is floating, I think it's going to be helpful when it occurs, but I don't think it's going to be a big enough number and change to really change the dynamic of what the NIM is going to And look, we're not really was really happy with how the NIM performed in the quarter, especially as I look across the industry. But as I said, pricing competition on the deposit side is pretty intense, but we were able to pull back meaningfully On ours in September, we can see it in the data. And so I'm hopeful that there's I think there's going to be some Especially at CD's role, there's going to be some NIM pressure, but it looks like in their own internal modeling that We're getting near the bottom anyway.

Speaker 5

Got it. Okay. And then just maybe last thing for me. I know you've talked about that USDA DA business, think about it more annualized. But I'm just kind of curious what you're seeing from a funding perspective if that's kind of That vertical is kind of back open for business.

Speaker 5

Obviously, the pipeline looks really strong. And so if that was a, I don't know, $14,000,000 $19,000,000 line item last year, is that Think about still that range or because of some of the government issues, is that going to be lower year over year still?

Speaker 2

No, I don't think it's going to be lower year over year, but I think the timing is that I thought Q4 90 days ago, I would have thought Q4 was going to be a really strong quarter with a new fiscal year for the federal government. Now that they're doing it on continuing resolutions, there's just The level of funding and the certainty of funding is what's lowered my view of Q4. I mean we have Specific loans, we believe we're going to get closed. But

Speaker 1

this is

Speaker 2

getting a little bit allocation out of continuing resolutions. It's hard to manage your business that way and it's what's them say differently. They're managing their business just fine. It's hard for me to give you clarity In terms of what I think revenue is going to do, so that's why I tried to say, I think it's going to be meaningfully better than Q3, but not nearly as good as last year's Q4 Unless something really pops and they get a buzzy past. But I feel really good about 2024.

Speaker 2

I think it's going to be in line With what we're seeing and we'd love to see it be a little bit better. Pipelines are better today versus where they were going into 2024. So if the funding is there, we could do better, But there's that macro circumstance there that's really outside our control.

Speaker 1

Sure. That makes a lot of sense.

Speaker 5

All right, guys. Thanks for all the color.

Operator

Our next question comes from the line of Brady Gailey of KBW. Your line is open.

Speaker 4

Hey, thank you. Good morning, guys. Good morning, Greg. I mean, you talk about all the progress that's been made Over the last years, I think you've called out kind of 4 or 5 different areas that have seen some pretty nice improvement. Are we done at this point with kind of the things that You are focused on improving internally or is there more work to be done on like the loaner deposit ratio and capital?

Speaker 4

And I think you mentioned you still wanted to get below the 3 100, 100 CRE A and D thresholds. I'm just wondering, In what inning are we in? And is there a lot of work left to be done to get the company where you guys would like to see it?

Speaker 1

So the easy answer is no. We're not done at all. Internally, we called What we accomplished in the Q3 Phase 1. Phase 2 is A continued effort to strengthen the balance sheet in a whole bunch of areas, the ones I mentioned and a few others. And so we don't believe The definition of Fortress balance sheet runs at 95% loan to deposit ratio.

Speaker 1

So we will continue. One of the things in hiring Dom is that that's his focus itself is to continue to do that. And really, I think I said it, but it's the granular side of the business, which I told my folks that our strategic planning session Phase 2 will never be out of. That's our work to really support our funding levels in smaller, more sticky business Funding areas. And so we still have more work to do, Brady, and we're not going to stop.

Speaker 1

And so I want to be Real clear that we are we do feel like we accomplished Phase 1 about a year or more ahead of time, But now we're into Phase 2 and that's the real heavy lift and the hard work, but that's what we intend to do.

Speaker 2

The progress The change will probably slow. Yes. You would not expect to see Q4. Yes. Look like Q3.

Speaker 2

Absolutely.

Speaker 1

Yes. Don't think I'm at 85 percent loan deposit ratio by the end of the year. We could do that because as Terry always says, You misprice your deposits, you can get all you want. And we're not doing that shown by a slower rate since September. So we feel like we're in a comfortable place right now from a balance sheet standpoint, but we still have more to do.

Speaker 4

All right. And then on the expense side, you saw some expense growth quarter on quarter. I think a lot of it was in Compensation, compensation is kind of back at the level that you saw in Q1 of this year. So I was just wondering, as we look forward, I think the expenses were a little under $60,000,000 in the 3rd quarter. How should we think about that Expense run rate in the Q4 and maybe more importantly end of 2024?

Speaker 2

Thank you. In Q4, I would be I think it's going to be 60, maybe a tad over, Just but that's so up a little bit, but not tremendously, up 1% to 2%, I would say. I think as we look into 2024, I think it's I don't see the efficiency ratio For the year getting much better than where it is today, because I'll tell you one thing. 2, let me say 2 things. Benefit costs are going through the roof.

Speaker 2

2, FDIC insurance premiums as they rebuild the fund. And those things, They're largely outside our control. And so that's

Speaker 1

in terms of that's where I expect to see the

Speaker 2

most expense pressure, Generally speaking, going into next year.

Speaker 4

Okay. All right, great. Thanks for

Speaker 3

the color, guys. Thanks, Brady.

Operator

Thank you. One moment please. Our next question comes from the line of Gary Tenner of D. A. Davidson.

Operator

Your line is open.

Speaker 6

Thanks. Good morning. Hi, Eric. I was curious if you could talk a little about kind of the success on the deposit side and Any plans to expand what you've already done in terms of the digital bank, direct marketing channels or otherwise? Are you slowing the spend on the direct marketing At this point and kind of relying more on standing up digital banks in kind of local areas the way you did to a degree of digital bank can be local, Of course.

Speaker 6

So just curious for any color on that.

Speaker 1

Yes. I think we're always going to have the digital bank direct marketing lever. We'll always play in that arena. We had to get digital banking going. So I mean that took a lift just to get into the areas that

Speaker 2

we want.

Speaker 1

We could always Go into new areas, most of all of our digital banking went outside of our current markets and we identified certain spots in Texas only That we wanted to be. There are many more markets that we could tap into that area. Direct marketing, that's going to be Something that we do, but we probably won't do as hard as we did in the Q3, but it's always going to be there. Again, I think this is not It's not a one event is going to cure this thing. It continues to be a lever of 6, 7 or 8 different places where people have to pull from.

Speaker 1

Now the reason I think it gets a little slower and a little bit harder going forward As now we're moving into more of the commercial bank space, the community bank space, the business banking space, The private banking space where those become much more granular things that have some lead times in order to get them closed and getting them moved over. But those are the ones that are harder, but are much more valuable from a Treasury management standpoint, from a granularity standpoint. And so, I think we continue all efforts. We may put more emphasis on Different areas depending on what the balance sheet needs. Yes.

Speaker 1

Let me add 2 things. 1, on direct marketing,

Speaker 2

Gary, I think you'll see us move from More product specific to direct marketing to more small business focused direct marketing to help drive more new client acquisition Specifically in that space. And I had another. That's what happens when you get all you forget things.

Speaker 6

Yes, I appreciate that. And maybe this is a question for Dominic to a degree, but is there The customers that you're acquiring through the digital bank, are these they're in state. Are they customers that you think You would have an opportunity to do more business with other than just the Depositary side?

Speaker 1

Absolutely. I mean, that's the whole goal. If it was just a 1 CD client or a 1 money market client, that doesn't really do much for us. And I think the metric that Terry mentioned and I gave you at the very end was our new client acquisition Just shy of 2,700 in the 3rd quarter. That's double the 1st quarter and second quarter Combined.

Speaker 1

And so what that does is, I now I my folks in the branches and my folks have the opportunity to cross sell. And today, I believe we have 68% retention ratio of those clients. And so If you can all you got to do is get them in our company and they ain't leaving. Our service levels at the branches are incredibly high. If you look at Our ratings and all that, they're just incredibly high.

Speaker 1

So we can get them in. They're not going to leave and we can sell them other stuff.

Speaker 6

Appreciate that. And then just really quickly, in terms of that credit, the National Credit that was downgraded and Was there any crude interest reversed related to that credit?

Speaker 2

There was 1,200,000 Great. Thank you. Thanks, Gary.

Operator

Thank you. One moment, please. Our next question comes from the line of Michael Rose of Raymond James. Your line is open.

Speaker 7

Hey, good morning guys. Just a couple of follow ups here. So obviously a lot of progress on the deposit front, a lot of that's It's been discussed. The mix of non interest bearing down to about 23%. Terry, you'd kind of Yes, it's a coin flip in your eyes between kind of what happens with rates here.

Speaker 7

But where do you think that could fall through? And if you can give us any sort of updated Beta expectations, it would be appreciated. Thanks.

Speaker 2

Yes. I mean, look, we grew DDA. So even though the mix went down, it's a function of the overall growth and total deposits. So I think it's I think the mix look for Two quarters we've held in. My belief is DDA is going to continue internally, I'd say we view it as more likely than not to continue to hold in this range.

Speaker 2

It may be depending on how successful we are. Over time,

Speaker 1

I would expect it to grow

Speaker 2

as we as with all the work we're doing in the small business And low to middle market, etcetera. But in the short run, I expect it to stay stable through Q4 and as far as I can see And to 24, one thing I would note, the rate of migration And then as we analyze pretty granularly our deposit base, the level of migration for the last 2 50 basis points of move Has really, really slowed down, meaning and take out new customers, just look at the existing customers that we started that we started say Q2 with, The rate of migration for the last two moves has been way less. We've been able to offset it and grow this quarter, but still it seems like customers Obviously, it's just not having as much of an impact. Those people who are and customers who are aggressively managing liquidity seems to be not as high a priority, I would say.

Speaker 7

Yes, certainly didn't mean to discount the fact that you're one of the few banks that's actually grown DDA this quarter. So certainly appreciate The progress and a lot of stuff that you can't that may not be apparent kind of that's under the hood. So a lot of good stuff there. So, But the deposit costs continue to increase. Obviously, you guys added some higher cost deposits this quarter.

Speaker 7

Are we getting closer to a peak in deposit costs in your eyes?

Speaker 2

Not with the way I think CDs are going to roll. I don't think we should have peak in deposit costs. We've lowered production rates, but just as we've got Fixed rate loans, I talked about it, 3.5% being renewed. We've got some earlier dated CDs at lower rates that are going to roll too. So I think it's going to That's why I think we're near the bottom, not at the bottom on them.

Speaker 7

Okay, helpful. And then maybe just last for me. Through the pandemic, obviously, you guys hired a lot of producers, got a lot of growth there in that period. Now the funding's increased. It seems like Growth is kind of poised to kind of pick up and just wanted to get some kind of initial near term thoughts on what the Drivers would be and then obviously you're trying to bring the CRE and And A and D concentration down, where would you expect kind of that growth to be just trying to get the puts and takes as we think about next year?

Speaker 7

Thanks.

Speaker 1

Yes. So the growth is going to be largely dependent on payoffs. And The full funding outlook, which we have some really good vision into, is by the Q2 of next year, it basically falls off a cliff Because we've been funding $300,000,000 to $400,000,000 closer to $400,000,000 a quarter, by the time we get to Q2 next year that falls off. So you're funding some of the funding that's already in the book is going to stop. If payoffs continue, then growth is going to be a pretty good challenge.

Speaker 1

But some of the things that we're doing here and we are focused on growth, but we're focused on growth On what the market is going to give us, we're not outsized growth is what we're looking for. And we're still trying to determine what that looks like. I mean, candidly, our clients Have not asked for a lot lately, but I do see some things getting a little better. So overall, I think I would tell you it's low to Single low to middle digits on growth for next year, but depending on payoffs that could be a challenge.

Speaker 7

Totally understand. Thanks for the color. I appreciate it guys.

Speaker 2

Yes. Let me remember that My memory came back and I

Speaker 1

remember my other items and carries. I just got to make a comment that

Speaker 2

if you look at our deposit pipeline to our loan pipelines, It's 4x today. Yes. Deposits to loans. Yes. It's 4 deposit pipelines 4 times greater than our loan pipeline today.

Speaker 2

So, yes, that's just anyway, operator, next question.

Operator

Thank you. One moment, please. Our next question comes from the line of Matt Olney of Stephens. Your line is open.

Speaker 8

Hey, thanks guys. Appreciate all the good Commentary this morning. And I apologize if I missed this, but I want to ask about the overnight liquidity levels, cash balances. I think With the Q3 liquidity build, I think cash balances are now 6% of earning assets. Where are you looking to maintain these levels in the Q4 and into

Speaker 2

I would like for cash levels to be a little lower. Actually, we've started investing Excess liquidity this quarter and cash balances, I would like for this to be 5% to 10% lower. But the important thing is just when this whole thing Went off the rails with Silicon Valley on March 8. The available liquidity to the bank right now is double what it was. We've got $6,250,000,000 cash and available cash.

Speaker 2

So we team has done a good job in getting everything Placed in the right place, etcetera. So but I do want to see us manage cash a little tighter and depending on what loan growth does, Start to invest in excess liquidity in a very capital efficient way.

Speaker 8

And Terry, just following up to that, You say Invest That, are you talking about maintaining the investment securities portfolio or are you talking about building out from here slightly?

Speaker 2

I'm talking about growing the portfolio over the course. If we're going to continue to make progress, as Malcolm talked about, On the overall strength of the balance sheet, we've got to put more liquidity into the investment portfolio. The other good thing it does is it can help protect for down rates Given our floating rate loan book. So and so to the I'm not going to leverage to do it. I'm not looking immediately to do a loss trade to do it.

Speaker 2

But as we have excess liquidity, we are investing, locking in spreads and we'll build that portfolio Over Q4 into 2024.

Speaker 8

Yes. Okay. That makes sense. And then I guess shifting over a different topic on the Out of state loan portfolio, I appreciate that disclosure in the deck there. As we think about next year, Is there a strategy to change the amount and to shift that at all, of the out of state percent?

Speaker 8

Or you're just trying to update us, The community here in light of some of the questions you've gotten on that topic.

Speaker 1

I would say the latter to start. There's been some confusion and frustration and I understand and that's why we just got really, really clear and granular. I would see so just as a function of the property type, you're going to see that out of state number come down Fairly drastically with almost $500,000,000 in that $800,000,000 in warehouse and retail Well, it's actually more than that, much closer to 600. A lot of those are construction deals and they're going to be paying off the payoffs are

Speaker 4

going to come out of those books. So You're going

Speaker 2

to see that number come down.

Speaker 8

Okay, perfect. And then I guess For Clay, on the Office portfolio, that disclosure this quarter in the deck was a little bit different than last quarter. So Can't tell if there's any migration in Office. Any just commentary on the Office portfolio?

Speaker 3

We had one loan in the portfolio that moved to criticized assets during the quarter in the office portfolio. But since June 30, portfolio is down 30,000,000

Speaker 8

Got it. Okay, that's helpful. And then just lastly, as we take a step back and think about just general profitability, I think you disclosed in the deck that the PP and R ROA this quarter was around 1.60, I think. If we focus I was going to ask, if we think about just profitability in terms of the next year As far as balance sheet management and all the things you're focused on, how should we think about that PP and R ROA level?

Speaker 2

Probably pretty similar is what I would say. Somewhere in that give or take 10 bps, 150 to 170. Yes, that's what I would say.

Speaker 1

A lot of it has to do, Matt, some of this USDA income and What levels they perform, but I think it's fair to say between 150170 you're going to see a

Speaker 2

subset then.

Speaker 8

Okay. That's helpful, guys. Thanks for taking my questions.

Speaker 1

Thanks. Thanks, Matt.

Operator

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.

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Earnings Conference Call
Veritex Q3 2023
00:00 / 00:00