Veritex Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 23, 2024

There are 8 speakers on the call.

Operator

Good morning, and welcome to the Vertex Holdings Third Quarter 20 24 Earnings Conference Call and Webcast. All participants will be in listen only mode. Please note this event will be recorded. I'll now turn the conference over to Will Horford with Vertex.

Speaker 1

Thank you. Before we get started, I'd like to

Speaker 2

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. If you're logged into our webcast, please refer to slide presentation and our Safe Harbor statement beginning on Slide 2. For those on the phone, please note that the Safe Harbor statement and presentation are available on our website veritexbank.com. All comments made today are subject to that Safe Harbor statement.

Speaker 2

Some financial metrics discussed will be on a non GAAP basis, which management believes better reflects the underlying core operating performance of the business. Please see the reconciliation of all discussed non GAAP measures in our filed 8 ks earnings release. Joining me today are Malcolm Holland, our Chairman and CEO Terry Early, our Chief Financial Officer and Curtis Anderson, our Chief Credit Officer. I'll now turn the call over to Malcolm.

Speaker 1

Thank you, Will. Good morning, everyone, and welcome to our Q3 earnings call. We'll review our Q3 highlights as well as discuss the balance sheet transformation that's taken place over the past 2 years. To accomplish these needed changes on the balance sheet, it's taken a conviction and focus of our executive team and candidly our entire company. For the quarter, we reported operating earnings of $32,200,000 or $0.59 per share.

Speaker 1

Pretax, pre provision earnings were $44,600,000 or 1.38 percent. NIM continues to increase slightly while capital is growing with CET1 now at $10.86 Increased profitability and efficiency is our primary priority and goal as we are dedicated to move our 1% ROAA higher. Our balance sheet continues to get stronger through our focused efforts on deposit gathering and client reselection that are full relationships and not just transactions. For the quarter, deposits grew $311,000,000 or 11.6 percent annualized, proving out our strategy to grow and attractively priced deposit funding sources. Terry is going to detail for you what we can what we call desirable and non desirable deposits shortly that will give you some insight on the source of these deposits.

Speaker 1

On the loan side, we are still experiencing some large payoffs, which has kept our loan growth down resulting in a decrease quarter over quarter of $126,000,000 I would also like to mention our CRE concentration ratios are virtually back in line on our 300, 100 buckets and we will continue to manage these below 301100 going forward. Moving to credit, a couple of highlights. Curtis and his team remain committed to a top tier credit bank. We are not where we want to be yet, but we continue to make huge strides towards that goal. 3rd quarter results reflect our ongoing drive to address credit issues as quickly as possible and to achieve final resolutions.

Speaker 1

Criticized totals were lower for the quarter, primarily reflecting the impact of payoffs, while the bank had a number of restructurings that improved risk profiles during the quarter, the bank relied $80,000,000 in criticized payoffs and paydowns. OREO decreased from $24,000,000 to $9,000,000 primarily from the successful sale and close of a student housing property without loss to the bank. This sale was also the driver to a reduction in our NPAs from $83,000,000 $67,000,000 now down to 0.52 percent of assets. Charge offs were nominal at $269,000 and $1,600,000 charge offs of a long standing credit problem was offset by $2,000,000 in recoveries. Past dues including non accruals were flat to 2nd quarter as a percentage of total loans at 0.8% and down meaningfully from 1.5% at year end.

Speaker 1

We continue to build our credit loss reserve now at 1.21% of total loans or 1.3% excluding Mortgage Warehouse. Our credit team's efforts and early surveillance and priority to move undesirable loans out is producing some nice results, more work to do, but encouraged by positive trends. I'll now turn it over to Terry for some comments. Thank you, Malcolm. When I look at the results for the Q3, I'm encouraged, especially about the position of the balance sheet, the credit trends and 7.2% revenue growth quarter over quarter, including NIM expansion.

Speaker 1

Starting on Page 7, the allowance now sits to 121 basis points, up significantly in the last 6 quarters as we've increased the reserve by almost 19% or $19,000,000 Additionally, when you exclude the mortgage warehouse, the ACL coverage rises to 130 basis points. Our general reserves comprised 97% of the total allowance. We continue to use conservative economic assumptions in the CECL modeling with 75% of the weighting on downside scenarios. This seems appropriate given the level of economic uncertainty, election uncertainty and global geopolitical risk. Moving to Page 8, over the last 6 quarters, total capital has grown approximately $132,000,000 while the loan portfolio excluding Warwick Mortgage Warehouse has declined by just over $200,000,000 a clear indication that the balance sheet is better positioned and more resilient.

Speaker 1

The CET1 ratio expanded by 37 basis points during the quarter and by 75 basis points year over year and now stands at 10.86%. A significant contributor to the expansion in the capital ratios has been a $450,000,000 decline in risk weighted assets over the 6 quarter period. Tangible book value per share increased to 21.72%. That's a 15.8% increase on a year over year basis, including the shareholder dividends. It's worth noting that since Veritex went public in 2014, its compounded tangible book value per share at a rate of 11.1% including the dividends that's been paid to shareholders.

Speaker 1

Finally, Veritex only repurchased 2,000 shares during the quarter as the trading valuation improved from 102% of tangible book at the beginning of the quarter to 128% of tangible book at the end of the quarter. We have 93% of the authorization remaining and intend to be opportunistic in its use if the valuation shows significant weakness. On to Page 9, our strong deposit growth and disciplined loan growth allow Veritex to reduce its loan to deposit ratio from almost 95% a year ago to 88% at ninethirtytwenty 4. We intend to remain below 90% going forward. Please note the loan to deposit ratio would have been just under 82% if you exclude mortgage warehouse.

Speaker 1

This seems to be the more relevant metric when you consider the short amount of time mortgages stay on the warehouse lines. As you can see in the bottom left graph, we've kept the time deposit portfolio short and have $2,600,000,000 in ceding maturities over the next two quarters with an average rate of 5.14%. We're certainly glad to have this maturity profile given the potential for 3 to 4 bed cuts over the next 6 months. On the bottom right, we show the monthly cost of deposits, up to 11 basis point decline since the month of June. Veritex did a good job this quarter in preparing for and executing on deposit pricing.

Speaker 1

The Fed cut rates by 50 basis points in September and our interest bearing transaction accounts declined by 40 basis points from June 30 to September 30, an 80% beta. Similarly, total interest bearing deposit accounts declined by 30 basis points from the end of Q2 to the end of Q3. On Slide 10, it's been a great quarter in attracting in producing attractively priced deposits with $397,000,000 raised at an average rate of 2.84%. This allowed us to reduce brokered CDs by $294,000,000 and public funds by 117,000,000 dollars and our reliance on wholesale funding sits at 15.7 percent, down from 21% a year ago. Moving to Page 11.

Speaker 1

Total loans declined 1.3% during the quarter and are virtually flat year to date. Given the excess liquidity we've been carrying, it was good to see the increase in mortgage warehouse outstandings. We made significant progress in reducing our Korean ADC concentrations and ended the quarter at 302% 97% respectively. The CRE maturity profile is shown in the bottom right graphs. We have just over $400,000,000 in fixed rate maturities at an average rate of 5.93% over the next 4 quarters.

Speaker 1

As shown on the bottom left, loan production increased almost 75% from Q3 2023 to Q3 20 24, but loan payoffs remain high. This payoff activity reflects the vibrant economic activity in the Texas market, but it does make organic loan growth challenging. The office portfolio is down $112,000,000 in the last year or 18% and now comprises 5.3% of total loans. Slide 12 provides the detail in the term CRE and ADC portfolios by asset class including what is out of state. Slide 13 illustrates a breakdown of our out of state loan portfolio including the significant impact of our national businesses and mortgage.

Speaker 1

The true percentage of the out of state loan portfolio is only 10.7% and this is predominantly where we have followed Texas real estate clients to other geographies. On Slide 14, net interest income increased by $3,900,000 to just over $100,000,000 in Q3. Positively impacting the results were higher loan rates on the mortgage warehouse and higher fixed rate yields of 24 basis points, which offset the decline in sulfur and prime. Also positively impacting results were higher earning asset volumes and day count. The net interest margin increased 1 basis point from Q2 to 3.30 percent.

Speaker 1

The NIM was negatively impacted by the average level of cash being approximately $425,000,000 higher than our target. This lowered the NIM by approximately 12 basis points. We believe the NIM will remain in the range of 3.25 to 3.30 over the remainder of 24, assuming we get 50 basis points of FIT cuts during the Q4. While we're discussing the impact of the excess cash levels, this also reduced Q3 ROA return on average assets by 3 basis points and lowered the TCE to TA ratio by 40 basis points. Before leaving this topic, I want to remind analysts and investors that we have a $250,000,000 42 basis point fixed pay hedge that was put on in March of 2020 and matures in March of 2025.

Speaker 1

On Slide 15, we shared certain metrics on our investment portfolio. The key takeaway is it's only 10.9% of assets, duration is 3.6 years and 87% of the portfolio is held and available for sale. Finally, on this slide, you see a snapshot of our cash and borrowing capacity at ninethirtytwenty 4 and the trend since Q1 of last year. The current available liquidity represents 2 times the level of uninsured and uncalaborized deposits. On Slide 16, operating non interest income increased $2,500,000 to 13 $100,000 The increase was driven by $428,000 increase in treasury management fees, a $1,000,000 increase in loan fees from syndications and loan prepayment fees and $1,200,000 in revenue from operating the piece of OREO that was sold during the Q3.

Speaker 1

Our SBA business continues to build momentum and we remain disappointed by the lack of USDA fee revenue and are evaluating every aspect of the business as we work to improve performance. The $6,000,000 increase in operating non interest expense for the quarter was a function of a higher interest incentive accrual, OREO expenses and marketing. The $2,000,000 incentive increase reflects us moving our accrual target, our accrual up to 80% of target. This increase was warranted given the improvement in earnings, credit and deposits. The OREO expense included about $1,000,000 in cost associated with the piece of Oreo that was sold during the quarter as well as 2 office buildings in Houston that were foreclosed earlier in the year.

Speaker 1

Recognizing the need to improve our operating leverage and efficiency, Veritex in the Q2 engaged a national consulting firm with extensive banking expertise to look at all aspects of the company. This review is consisted of staffing, operational processes and technology. We've identified meaningful opportunities to improve and we'll be working to execute on those through the remainder of 2024 2025. To wrap up my comments, I see a lot of positives in the quarter. The balance sheet is in a much stronger position with excess liquidity, lower CRE and ADC concentrations, higher capital and improved credit metrics.

Speaker 1

We successfully executed and had the best quarter in the history of Veritex and attractively priced deposit production. And our NAM expanded led by good execution when the Fed reduced rates. But there's still things we need to work on, continuing the past 2 quarter trend and improving our credit risk profile, continuing to remix our deposit portfolio towards attractively priced and improving our USDA revenue performance. With that, I'd like to turn the call over to Malcolm for his concluding comments. Thank you, Terry.

Speaker 1

2 years ago, we embarked on a journey to remake and change our balance sheet. We knew at the time we had to build a company that could withstand all market swings and changes. In the middle of this journey, we all had to deal with liquidity challenges in the Q1 of 2023 that further validated our need to change. Let me be honest, it has not been an easy couple of years and our work is not done, but it's nice to see the amazing progress our team has made 2 years. Every metric has moved positively and made our company stronger.

Speaker 1

Thank you to our nearly 900 team members who embraced our challenge to better position Veritex. But like I said, our work is not done. We have more to accomplish. Operator, we'll now take any questions.

Operator

Thank you. Our first question comes from the line of Michael Rose from Raymond James. Your line is now open.

Speaker 3

Hey, good morning, everyone. Thanks for taking my questions. I just wanted to dig into loan growth this quarter. Obviously, some pay downs continue to impact the net balances. I think previously you kind of talked about a mid single digit growth expectation for the back half of the year.

Speaker 3

I think what we're seeing kind of across the industry though is that being ratcheted back in the hope for some reacceleration once you get past the election and kind of know what the rules are, so to speak. Can you just talk about trends in your pipeline, things like that? And then just separately outside of core loans, just any expectations for the warehouse? Thanks.

Speaker 1

Yes. I think we'd be in line with everybody else has reported. Our pipeline, just to speak to that, is actually pretty good. We enjoy pipelines that are building, specifically in the C and I side. But you've nailed it.

Speaker 1

I mean, the payoffs have been really strong. I think over the last couple of quarters, it's been $1,000,000,000 is ever, well, something in that line. So we had $1,000,000,000 in payoffs. If you remember back in 2022, we had this massive loan growth and we're starting to see the cliff on that loan growth payoff. And so we actually expect the Q4 to be a pretty heavy payoff quarter and into early 2025.

Speaker 1

So yes, I've mentioned probably on the last two calls, Michael, kind of mid single digit loan growth. I just I don't see it. The payoffs are and listen, that's a sign of a positive healthy loan portfolio. So the other side of the coin is that we did the right deals. But I do see the pipelines building and we've invested as I've told you and so the people on the commercial side, the middle market side, our community banks and business banking are doing well.

Speaker 1

It's just hard to move the needle in those spaces. But I would probably say it's going to be a little bit less than single mid digits. Yes. Michael, let me jump in a couple of things. 1, when we hear this from our bankers, is that I think this whole election uncertainty is weighing on companies and what they're doing and we hear that pretty consistently.

Speaker 1

I'd also add that there's a silver lining to these payoffs. Look at the fall off in our commercial real estate concentration from $320,000,000 to $302,000,000 I mean you could have done that without significant payoffs. So there's definitely a silver lining there. 3, the mortgage warehouse was strong for us this quarter. We expect it in Q3.

Speaker 1

We're looking forward to be strong again in Q4. Having said that, what's going on with the 10 year and mortgage rates, it may not be as strong as we would like or had hoped or even as it was at the end of Q3 because you've got seasonality and you've got what's going on in rates. So, being flat in the back half of the year, I would be pretty happy with that. I don't think that's going to be easy. But we've got I think Malcolm said it well that Veritex has shifted from getting liquidity to repositioning the balance sheet to now the focus is on revenue growth, disciplined growth, disciplined loan growth and efficiency.

Speaker 1

So that's just where we are in our evolution as a company and it's good to be at this stage.

Speaker 3

Okay, perfect. And then just a question on the hedge that you mentioned as it relates to kind of the margin. I mean, is the expectation that you would look to maybe renew that closer to expiration or not? And then what is the impact if it were just to roll off in context of the margin? Thanks.

Speaker 1

Well, if I could renew that hedge at 42 basis points, believe me, I've been on the phone and not talking to you right now. But the market wouldn't give me that hedge again. I put it on March 9. If you remember what was going on March 9, 2020 when COVID kicked off and we just had to work the presence of mind to see the opportunity and grab it. Good fortune.

Speaker 1

Yes. Sometimes it's better to be lucky than good. But so we can't nor would we want to if you believe what the forward curve and what the Fed dot plot says. I won't be I mean, if I wouldn't re hedge it at current rates because I just don't think we need to do that. I would rather have these things.

Speaker 1

They have a beta of 100% because they're hedging brokered CDs. So they're going to price down as the market moves down and we keep these things pretty short as you know. The effect of this is $1,000,000 a month in NIM.

Speaker 3

Okay, very helpful. And then maybe just finally for me,

Speaker 1

I hear you. Let me add one other Michael, let me add one other thing. Will reminded me of this. We have some collars and fixed pay hedges though that are going to get more and more in the money. So they're going to help mitigate some of this.

Speaker 1

It's not just dollar for dollar what's going to happen to NIM. We've got 100 of 1,000,000 of dollars of fixed receive hedges that are going to help mitigate this, probably $375,000,000 if my memory is serving me right.

Speaker 3

All right. So like a net impact of like $600,000 a month in that ballpark is fair to consider?

Speaker 1

Maybe a little less than that.

Speaker 3

A little less. Okay. Okay, perfect. And then maybe just finally for me, I know you kind of mentioned last quarter that you had engaged a consulting firm. You mentioned it again today.

Speaker 3

Any early read on things that they're targeting or that you plan to kind of implement? And just would love any sort of color there? Thanks.

Speaker 1

I mean, look, we're excited about the opportunity. I've actually worked with them in 2 previous lives, if you will. And so I have a lot of confidence and they're working with a fair number of our peers. It tells you a lot about the need for scale in our industry, doesn't it, and efficiency. Look, it's pretty broad based.

Speaker 1

I touched on the big parts are around process and technology and fully leveraging the technology we have, negotiating down the prices in some of our technology contracts, improving our commercial lending processes. Just so it's but these are going to these some of these are easier, some are pretty hard and complex, but and they're not just expenses, they're revenue opportunities as well. We can do a better job on certain things around we had a good quarter in treasury management fees, we can do better. We're underpenetrated there. There's no silver bullet here, Michael.

Speaker 1

It's about making our company more process driven and focused on efficiency. And it won't happen in a quarter or 2, it'll take some time, but it's all really good stuff. Yes.

Speaker 3

That's great color. I'll step back. Thanks for taking my questions.

Speaker 1

Thank you. Thanks, Martin.

Operator

Thank you. One moment for our

Speaker 1

next question. Next question comes from the line

Operator

of Catherine Mealor of KBW. Your line is now open.

Speaker 4

Thanks. Good morning.

Speaker 1

Good morning, Catherine.

Speaker 4

I wanted to follow-up on the margin. You mentioned a 3.25% to 3.30% margin this quarter, which makes sense. How should we think about the margin as we move into 2025? I mean, you're asset sensitive clearly, but you've got a lot of opportunity on the deposit cost to lower deposit cost probably more than most asset sensitive banks. So just kind of trying to think about, do you think there's enough on those funding side where you can still keep that margin stable to maybe even higher as we move into next year?

Speaker 4

Or is there still kind of an asset sensitive downside? Thanks.

Speaker 1

It's a great question. And if I had a crystal ball on what the I've given up on the forward curve. I'm kind of moved to the Fed dot plot, which I think is probably the most reliable. But who knows, I mean, especially when you look at the recent employment inflation data, what's going to happen. We've gone from a lot of cuts to now, it's less than 100% guarantee of a cut in November.

Speaker 1

We'll see. I think the NIM is going I don't see the NIM expanding in 2025. I think the best we can hope for is to just do a good job on pricing down. We did the first cut. I talked about the 80% beta on the interest bearing transactional accounts.

Speaker 1

But the deeper it goes, I don't think it's going to go that deep. I mean, once the dot plot say 3.5% Fed funds the end of next year. So if that if it's gradual and whatnot and we can execute well and if we can get the balance sheet, the excess cash, I think we can stay somewhere in that 3 in the 3.20s, but I just don't see it getting right now, I don't see it getting into the 3.30s. Now one of the things weighing on it, it's interesting for me to have that point of view because when you look at our new loan production rates, we're just over 8%. And you look at our new deposit production rates excluding brokered and all and I talked about attractively priced.

Speaker 1

We have some production that's not attractively priced. But the new production rates there in the mid-360s were spread of almost 3.90 basis points. So I feel good about what we're doing on the margin. And in terms of just how we're pricing on the margin, we do need more loan production as we've talked about, we need growth. But I don't I see it staying in that 3.20 plus somewhere in the 3.20s.

Speaker 1

So.

Speaker 4

Okay. Yes, that makes a lot of sense. And that's about where we are. On the USDA outlook, any additional commentary you can give us on what's a good way to model that? I know it's been lumpy and has come under your expectations for the past couple of quarters, but just curious kind of what you're doing there and maybe what a good run rate is to target?

Speaker 1

I'll answer your good way to model it. No, there's no good

Speaker 2

way to model

Speaker 1

it. A good USDA year is going to close between 8, 12 loans. So and if they're bigger, that gets really, really lumpy and it's hard to model. Now we've tried to change some of the focus at USDA to move down market. Let's not chase the big elephants, easier to model it.

Speaker 1

And what we're really trying to do, Catherine, is we're trying to leverage the USDA and the SBA business together. There's a lot of similarities, specifically on the loan production side. And so we're trying to put match those people together. In fact, over this last quarter for the Q1, we have our USDA group originating some SBA loans. And hopefully they'll cross pollinate on that a little bit.

Speaker 1

But what we're trying to get to is where we don't have the lumpiness and this cross pollinization will help create some of that going forward. But I can't give you any huge insight on how to model USDA because if you get a big one, it kind of blows it out of the water. And so we're just trying to guide to a low number and if a big one pops it up, it pops up. I would say

Speaker 4

That's helpful, Richard. Thank you.

Speaker 1

Catherine, I would say if you look if you think about the way Malcolm said, think about it in total, I would say 24% is going to be a down year as we've all talked about that ad nauseam. 23% in not just don't look at USDA, look at government guaranteed, look at the 23% government guaranteed earnings. Our goal is to get back to that, but it's going to have a really different mix, much more heavily weighted in the SBA, less on the USDA. And so in terms of product mix, in terms of what drives that revenue, but just really trying to get back to 2023 type levels.

Speaker 4

That's helpful. Thank you very much.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Ahmad Hassan of D. A. Davidson.

Operator

Your line is now open.

Speaker 5

Ahmad Hassan on for Gary Tenner. I had a quick one regarding expenses. Expenses ticked up a little bit this quarter. So how should we be thinking about them in the near term?

Speaker 1

You need to be thinking we want them to go down. I mean, I said, I mean, some of this is incentive driven based on performance, where we took our accrual up. That accrual is not coming down in Q4. Some of it's OREO related and that property is gone. So that's going to that $700,000,000 $800,000,000 in expenses, it inflated both the fee side and the expense side.

Speaker 1

Largely, it was an offset. So that's going to come down. Marketing probably is not going to be as high.

Speaker 2

So

Speaker 1

and we're working on some of these efficiency initiatives. I don't see expenses coming. They're going to come down a little bit from this OREO thing, but the incentive accrual and some of the other things we need to do, I see expenses staying higher, not from not that much higher from here, but I don't see them coming back down a lot. Not yet. As we work through 2025 and some of these efficiency initiatives, I think that's a longer term question in Q4 and you just can't move the needle that quick.

Speaker 5

Right. That makes sense. And then maybe one on deposits. You guys have pretty good deposit success, specifically in NIBs. Can you talk about changes you have made on deposit pricing?

Speaker 5

I know you touched it on a little bit on the prepared remarks. But how are you thinking about deposit pricing given the expected rate cuts ahead? We

Speaker 1

want to execute as well as we did at the September rate cut. We got in front of that. We were talking to our bankers. We certainly made some exceptions where relationship profitability warranted it. But and we just got to continue to do that and remix deposits by continuing to attract continuing to produce attractively priced deposits and reducing wholesale, reducing public funds, reducing some other that have very high things like high effective rates.

Speaker 1

So that's just what we've got to continue to do. The key thing to our good quarter in deposits is every line of business is contributing. They're contributing production, growth and good rates from retail to small business to middle market to specialty. I mean, it's just been across it's been across our community group. It's the first time in my tenure at Veritex where I've seen good quality deposit productions at attractive rates across all lines of business.

Speaker 1

And that's the key. And it's about the changes that Dom and his leaders are making in terms of prospecting outbound calls, targeting the right customer segments, etcetera, that fits in with our strategy. And it's just about continuing to execute there.

Speaker 5

That's good to hear. And maybe a follow-up, do you have a quarter end spot rate for total or interest bearing deposit cost?

Speaker 1

I'm sure, Rusty. That's interest bearing. Interest bearing is 4.38, total is 3.33, sorry. That doesn't include hedges by the way. So that doesn't include hedges.

Speaker 1

That's just that's our contractual rates on our deposit franchise, our deposit accounts.

Speaker 5

Right. Thank you for taking my questions.

Speaker 1

Thanks.

Operator

Thank you. Our next question comes from the line of Matt Olney of Stephens. Your line is now open.

Speaker 6

Yes, thanks for taking the question guys. With that deposit growth that we just talked about, it looks like that allowed you to build the overnight liquidity position to pretty strong levels just over $1,000,000,000 Just curious about the plans for that. Should we just assume that this maintains this level next few quarters? Or do you expect to deploy any of this into securities? Just any thoughts on that build?

Speaker 6

Thanks.

Speaker 1

No. Success is not carrying that much excess liquidity. I think it will be a combination of 3 things. We have wholesale broker deposit pay down opportunities with rates over the 5% that starting here next week. So that's so you will see us continue to reduce that.

Speaker 1

2, we will probably put some money in securities. 3, we want to have a better loan growth quarter. And 4, we want to move out some very expensive deposits other than brokered that we're currently working on and expect to move out. So that's it's going to look a little bit different, but it's everything I just said is NIM enhancing. And so that I said about $450,000,000 above our target.

Speaker 1

A good quarter is if we can get down from and I'm looking at averages more, if we can get down from that and do those things, then that will be good. That's the plan.

Speaker 6

Okay, great. Thanks for that, Terry. And then going back to the balance sheet repricing, just remind us of the dollar amount of the floating rate loans and the index liabilities. And just remind us how quickly these will reprice reset? Thanks.

Speaker 1

Index liability, the floating rate loans are about 75%. Veritex had never moved around very, very much. Our index deposits, I don't know, I thought I had a sheet break on that. It's $2,500,000,000 about $2,500,000,000 that is either contractually or functionally indexed.

Speaker 6

And then, Terry, just how quickly those reset following the Fed?

Speaker 1

Nationally.

Operator

Okay.

Speaker 6

All right. Thank you, guys.

Speaker 1

Functionally, you're in or contractually indexed to the Fed funds rate. So that's what I'll say immediately.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Brett Rabatin of LAD Group. Your line is now open.

Speaker 7

Hey guys, good morning. Hey guys, wanted to talk a little bit about the classified, criticized and Terry, I think you said that you had reduced the criticized $80,000,000 this quarter with payoffs. So I guess there was some in and out migration. Can you just maybe talk about, how you see the classified, criticized bucket from here? And then specifically, I know about a third of the criticized is office and maybe just an outlook on the office book that's criticized and kind of how you see that playing out?

Speaker 2

Good morning, Brett. This is Curtis Anderson. I'll address that. We're working through our criticized classified carefully. We've got multiple strategies in flight with our special assets team.

Speaker 2

We're working to manage the cycle time on that group of loans quickly and carefully. We're using all of the strategies that are at hand to address them. Payoffs, of course, is a key one. If we can have a property owner, for example, sell a property and we get alignment on that, we will do that. We actively use our team actively uses note sales.

Speaker 2

So all the strategies are in place.

Speaker 1

My view is

Speaker 2

that that category should be relatively stable given the focus that we've got on it for the near term, always can have something pop up. But again, the team has done such a good job anticipating risk and looking out and getting ahead of risk at all the risk categories. And I'm fairly confident, based on what we know today that we should see relative stability in that asset class. I don't know if there's anything Malcolm, Terry, you'd add to it, but really pleased with the work by the entire bank, but in particular,

Speaker 1

our special assets team. Great. I think the key has just been to the effort, Brett, that Curtis and team have done and really starting in the pass watch stage and thinking about because when the loans in PassWatch, there's options. And as that thing migrates, the number of options available to you shrinks as everyone knows. So I just think the work they've done in getting looking out, anticipating 6 months, 9 months ahead is what's paying dividends for us.

Speaker 1

And even though you may see it be relatively stable, trust me, there's a lot going on underneath. Yes, a lot of turbulence underneath.

Speaker 7

Okay. That's helpful. And then maybe Terry, any thoughts on capital from here? And you've obviously been in a reduction mode on commercial real estate and construction, and improving your capital ratios. Are we to the point that you're happy with the capital ratios and maybe you might use excess capital for something or do you still think you want to build capital levels further?

Speaker 1

Yes. Brent, this is Malcolm. Listen, we're happy with the capital ratios where they are. We're grateful we've been able to grow it. A lot of change on the balance sheet helped us with that and reduction of risk weighted assets and obviously profitability over the year.

Speaker 1

And we're going to continue to build Capa. But I think it's prudent today to have some dry powder. We've run a pretty we run our own peer group, which is a very, very high performing peer group. And candidly, we're below the median on CET1. So it's not just us.

Speaker 1

It's a lot of people that are holding on to this capital. And so I think that's what you're going to see us do over the next period. The buyback, we're not really interested in the buyback at these levels. It's more of a defensive play for us. Our dividend is in a good place.

Speaker 1

And so you're going to see us build a little capital. And we'll still give us the ability to potentially work on some opportunities in the future. I would tag on and add that if we get our growth profile to where we want it, capital ratios will stabilize. And you also also we are given where our ratios are on CRE, we're already looking at we haven't been in the CRE production business in any significant way in 2 years. And so that's ticking back in.

Speaker 1

So you're going to see some increases in the ADC unfunded as we look out over the next 4 to 6 quarters. And so that's going to have an effect on risk weighted assets too. I think for me, the reality is more capital gives you more options and that's what we want strategically right now. And the market doesn't the market is focused on profitability, not return on tangible common equity right now. And so let's don't worry about capital and equity, let's improve profitability and get this growth profile, earnings profile where we want it and the capital levels take care of themselves.

Speaker 7

Okay. That's helpful. And then just lastly on back on fee income and excluding kind of the North Avenue stuff, the other bucket obviously had some ORE income in it. How should we think about that other bucket from here?

Speaker 1

Look, I think about it more, I mean, we had a good quarter. Even if you back out the ORE income and you net out the ORE expense, net net, we still grew fees. We've got to continue to do that, whether it's swap fees, syndication fees, loan prepayment fees, government guaranteed fees, treasury management fees, mortgage get our mortgage business going more and selling more of that product. So it's an important focus for us. Card fees that we've introduced some new card products on the commercial side.

Speaker 1

So it's an ongoing effort. And other is just boldly buried in there and others and some real estate we own like our office building here, rental income, stuff like that. But I think, Brett, it's more about the totality of fee income and we've got a huge focus there because it's certainly a good driver of profitability in ROA.

Speaker 7

Okay. That's helpful guys. Appreciate all the color.

Speaker 2

Okay. Thanks, Brad.

Operator

Thank you. This concludes the question and answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Key Takeaways

  • Operating earnings of $32.2 million ($0.59 per share) and pretax, pre‐provision earnings of $44.6 million, with net interest margin at 3.30% and a CET1 capital ratio strengthened to 10.86%.
  • Deposits grew by $311 million (11.6% annualized), enabling a $294 million reduction in brokered CDs and lowering reliance on wholesale funding to 15.7% of total funding sources.
  • Credit metrics continued to improve as OREO fell from $24 million to $9 million, nonperforming assets declined to 0.52% of assets, and the allowance for credit losses rose to 1.21% of total loans (1.30% excluding mortgage warehouse).
  • Loan payoffs remained elevated (approximately $1 billion over recent quarters), driving a $126 million quarter‐over‐quarter decline in loans and making mid‐single‐digit growth challenging despite a solid commercial pipeline and strong mortgage warehouse activity.
  • The bank has engaged a national consulting firm to identify and execute on process, technology and staffing improvements, aiming to enhance operating leverage and efficiency through 2024–2025.
AI Generated. May Contain Errors.
Earnings Conference Call
Veritex Q3 2024
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