Veritex Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 24, 2024

There are 9 speakers on the call.

Operator

Good morning, and welcome to the Vertex Holdings Second Quarter 2024 Earnings Conference Call and Webcast. All participants will be in a listen only mode. Please note this event will be recorded. I will now turn the conference over to Will Holford with Vertex.

Speaker 1

Thank you. Before we get started, I would like to remind you that this presentation may include forward looking statements and those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to publicly revise any forward looking statement. If you are logged into our webcast, please refer to our slide presentation included on 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.

Speaker 1

All comments made today are subject to our Safe Harbor statement. 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 will now turn the call over to Malcolm.

Speaker 1

Good morning, everyone, and welcome to our Q2 earnings call. Our clear focus on repositioning our balance sheet continues with positive trends in virtually all categories. For the Q2, we reported operating earnings of $28,300,000 or $0.52 per share. All components of the P and L are showing positive trends with the exception of our government guaranteed fee business. We've made some enhancements in this area and that should start producing results in the back half of the year and beyond.

Speaker 1

NIM is stabilizing and expenses today are better than initially budgeted. Our balance sheet continues to transform. As seen on Slide 3, our loan deposit ratio excluding mortgage warehouse continues to decline and it sits below 86% and the dependence on wholesale funding has declined to 19%. Both of these metrics are down measurably over the last 12 months. Tangible book value continues to grow currently at 20.6 $2 up $1.21 since June 2023.

Speaker 1

Growth for the quarter was virtually nil on both sides of the balance sheet as we continue to bolster our balance sheet and shift the mix of our liabilities with lower cost funding. Although loan growth absent mortgage warehouse has been flat for the year, our pipelines are building in our small business and C and I areas. Although these areas are slower to move the growth needle, there are clients that provide full relationships, both deposits and fees. We anticipate loan growth for the back half of the year in the mid single digits and anticipate deposit growth will be in the high single digits. Moving to credit.

Speaker 1

Curtis Anderson, our Chief Credit Officer and his entire team had a very productive quarter with all trends moving in a positive direction. In general, criticized and classified totals were stable, but trending down compared to the previous quarters. However, the underlying portfolio is dynamic and reflects the ongoing work to prudently manage risk. Our NPAs reduced 20 percent or $21,000,000 for the quarter to 65 basis points of total assets. Multiple factors played into the reduction with the biggest drivers being a restructured Houston data center property to a new owner who substantially paid down the loan while we took a $1,500,000 charge that was previously reserved against.

Speaker 1

This restructured loan is now a pass rating credit. And additionally, we had a sale of a foreclosed property that was sold at a gain. Net charge offs were $6,900,000 a slight increase from the Q1, but in line on a year to date basis with full year expectations. 60% of the net charge off total was a problem C and I credit that is near its final resolution. As you know, we foreclosed on a student housing project in Q1.

Speaker 1

This property is now under contract and is scheduled to close this quarter a price that has no material P and L effect. Past dues to total loans continue to improve to 0.16, down from 0.29 in the Q1 of 2024. Credit loss reserves now sit at 1.16 of total, up 11 basis points over the last 12 months. All in all, we continue to make great strides in improving our credit metrics. More to do, we were encouraged by the positive trends.

Speaker 1

Now I'll turn the call over to Terry.

Speaker 2

Thank you, Malcolm. When I look at the results for the Q2, I'm pretty encouraged, especially about the credit trends, NIM expansion and expense levels. As I say every quarter, I'm thankful for the progress, but there's more work ahead of us. Starting on Page 7, the allowance for credit loss coverage now sits at 1.16%, up significantly from 6 quarters ago as we've increased the reserve by almost 25 percent or over $22,000,000 Excluding our mortgage warehouse portfolio, which we have not recognized a loss on since inception, the allowance for credit loss coverage is 1.23%. It's important to note that the total allowance for credit losses is 96% comprised of general reserves.

Speaker 2

We continue to use conservative economic assumptions in our credit loss model with 75% of the weighting on downside scenarios. We deem this reasonable given the level of economic uncertainty coupled with significant geopolitical risk. Moving to Page 8. Over the last 6 quarters, total capital grew approximately $145,000,000 CET1 ratio expanded by 12 basis points during the quarter and by 73 basis points year over year and stands at 10.49%. A significant contributor to the expansion in the capital ratios has been a $550,000,000 decline in risk weighted assets since the end of 2022.

Speaker 2

Tangible book value per share increased to 20 point $6.2 which is a 12.7% increase on a year over year basis, including the shareholder dividends. It's worth noting that since Veritex went public in 2014, it has compounded tangible book value per share at a rate of 11.1%, including the dividends that have been paid to shareholders. Finally, Vertex was opportunistic in its use of the buyback during the quarter. We spent 7% of the authorized amount and bought back approximately 178,000 shares at an average price of $19.91 or 96.6 percent of current tangible book value. On to Page 9, Our strong deposit growth and low loan growth allowed Veritex to reduce its loan to deposit ratio from 105.4% at June 30, 2023 to 91.8% at June 30, 2024.

Speaker 2

Our target remains to have this ratio below 90% by the end of 2024. Please note that the loan to deposit ratio was 85.9% if you exclude Mortgage Warehouse. This seems to be a more relevant metric when you consider the short duration of time mortgages stay on these warehouse lines. Deposit growth also allowed us to reduce our bank's wholesale funding reliance to 18.9 percent, 29.2% at June 30, 2023. As you can see in the bottom left graph, we've kept the time deposit portfolio short and have $2,300,000,000 in CD maturities over the remainder of 2024 with an average rate of 5.18%.

Speaker 2

I'm glad to have this maturity profile given the potential for 2 Fed rate cuts before year end. Bottom right, the monthly cost of total deposits showed pretty steep rise up through September of 2023. However, since then, it has largely leveled out. On Slide 10, loan growth was approximately 2.9% and was driven by multifamily CRE and mortgage warehouse. We continue to make progress on reducing our CRE concentrations and remain committed to getting our CRE concentrations under 300% and ADC concentrations under 100% by the end of the year.

Speaker 2

The CRE maturity profile is shown in the bottom right graphs. We have approximately $350,000,000 in fixed rate maturities at an average rate of 5.50 percent over the next four quarters. The average loan size of these maturities is $3,100,000 As shown on the bottom left, loan production picked up considerably in the 2nd quarter, so did the loan payoffs. This payoff activity reflects the vibrant economic activity in the Texas market, but it does make organic loan growth challenging. The office portfolio continued to decline, down $140,000,000 in the last year or 22%.

Speaker 2

This portfolio now comprises 5.2% of total loans. Slide 11 provides the detail in the CRE and ADC portfolios by asset class, including what is out of state. Slide 12 illustrates a breakdown of our out of state loan portfolio, including the significant impact of our national businesses and mortgage. The true percentage of the out of state portfolio is only 10%, down from 11.3% last quarter. This is predominantly where we have followed Texas real estate clients to other geographies.

Speaker 2

On to Slide 13, net interest income increased by $3,400,000 to just over $96,000,000 in Q2. The biggest drivers of the increase were lower non accrual interest reversals, the impact of higher loan rates and the impact of higher security yields. This was partially offset by slightly higher deposit yields. The net interest margin increased 5 basis points from Q1 to 3.29 percent in Q2. We believe the NIM will remain in the range of 3.25% to 3.30% over the remainder of 2024, obviously, depending on what the Fed does with rates.

Speaker 2

Slide 14 shows certain metrics on our investment portfolio. Key takeaways are, it's only 10.6 percent of assets, the duration is 3.8 years and 87% of the portfolio is held in AFS. Finally, on this slide, you see a snapshot of our cash and borrowing capacity at June 30, 2024 and the trend since Q1 of 2023. The current available liquidity represents 2.0 times the level of uninsured or uncollateralized deposits. Slide 15.

Speaker 2

Operating non interest income declined to $10,600,000 This decrease is driven by the lack of gain on sale revenue in our USDA business. Other parts of our fee revenues are performing in line with expectations. Operating non interest expenses were flat quarter over quarter and we're very satisfied with our expense management efforts in 2024. To wrap up my comments, I see a lot of positives in the quarter. 1st, credit.

Speaker 2

NPAs are down, criticized assets are stable and net charge offs are in line with expectations.

Speaker 1

2nd,

Speaker 2

NIM expanded 5 basis points and funding costs are relatively stable. 3, capital ratios moved higher. 4, the allowance for credit losses to total loan coverage increased. 5, loan production is up and pipelines are increasing. There's still a lot of things we need to work on.

Speaker 2

1st, continuing to reduce the credit risk profile 2nd, continuing to reduce funding costs and 3, improving USDA revenue performance. With that, I'd like to turn the call over to Michael for his concluding commentary.

Speaker 1

Thank you, Terry. As you can see much progress made yet much to do. I want to mention the progress we're also making on the way we're pursuing our new client acquisition. Under Dom's leadership, new client identification and follow-up has seen some very positive results. Our commitment to the small business and community bank areas remain a focus in building and retaining long term clients.

Speaker 1

Those markets provide us a granularity and full relationships that will make us much more balanced and less susceptible to market swings. While these areas build our assets at a slower rate due to their size, they are foundational they are a foundation of a diverse sound and regional bank. Finally, I'd like to acknowledge our 800 plus Veritex team members on being named one of the best companies to work for by U. S. News and World Report.

Speaker 1

Congratulations, team. Operator, we'll now take any questions.

Operator

And our first question is going to come from the line of Stephen Scouten with Piper Sandler Companies. Your line is open. Please go ahead.

Speaker 3

Hey, thanks guys. Good morning.

Speaker 2

Good morning.

Speaker 1

I guess, can you talk a

Speaker 3

little bit about what you're seeing on the government lending side? I know you said there were some enhancements that you've kind of put into place that should reflect in the second half. How is the funding dynamic in that business today? And kind of what do you think we could expect to see from a prospect perspective in that back half?

Speaker 1

Yes. So we kind of first quarter or first half of the year, we kind of reset that business a little bit. It's been put the Evan Dew person that we kind of put over that business at Jonathan Snyder, who's done a really good job to go down there and really get into the business, figure out the ways that we could be most successful in it. And one of the key things that we did is we found that although USD and SBA are different government loan businesses. There are quite a bit of similarities in there.

Speaker 1

The similarities really come up in the broker markets because they control most of that business. And so over the last 4 months, Jonathan's along with Joseph have figured out how to put that business, that SBA business into the USDA business. Not that we put them together, it's just that we're enhancing what our USDA folks can chase. And so we've seen in a very short period of time, I think it's been online for 30 days, a bunch of activity there. So what you're going to see is you're going to see some enhanced SBA business in addition to our USDA space.

Speaker 1

Listen, USDA is down for this year over last year. We still anticipate it having a a fairly decent back half of the year, but I know you guys are probably tired of us saying that and I understand that, but we do have a good pipeline. We have 2 or 3 deals that we are feel very certain they're going to close, they're going to move the needle on the expense side. So it's just it's a little bit more attention, it's a little bit more focused and it's a bigger market for the USDA business development team to be able to capture.

Speaker 3

Okay, great. That's helpful, Malcolm. And then maybe thinking about the CRE concentration, it feels like that's an increasing focus from regulators, rating agencies and the like. And I know you said you want to get below 300, 100 by year end. Is that just going to be letting payoffs occur and growing other lines of business?

Speaker 3

Or is there some there's there need to be something more wholesale, loan sales, things of that nature to get those numbers there by year?

Speaker 1

So it's strictly organic, Stephen. Our payoffs outside of 1 quarter in the past 6 quarters have been pretty stable and they were pretty heavy actually in the 2nd quarter. We anticipate that happening in the 3rd and 4th as well. And these are sales. These aren't refinances.

Speaker 1

Things are actually happening. And so just through our real estate council that we have at our forecast, we will be under those numbers by year end. Unless something crazy happens. I actually think, candidly, if you get a rate cut or 2, it could actually accelerate. So we're going to manage the company to $2.99 $99 That's where we're going to manage it.

Speaker 1

But that's going to be somewhat difficult if rates go down quickly. And to keep up with that volume could be difficult. So we're less concerned about getting under 301100 and probably more concerned about it going down a little bit farther long term.

Speaker 2

Let me add too. Stephen, when you look at the payoffs on Slide 10, it's at $550,000,000 or so. Between 40% 50% of the activity of that activity was in the Cree space. So I mean it's meaningful. The pipeline for payoffs, the forecast for payoffs is very consistent.

Speaker 2

I mean, we're looking at 100 of 1,000,000 of dollars in the Q3 in forecasted payoffs by our bankers. So Malcolm is right, it's going to be organic and barring a surprise, we'll be there.

Speaker 3

Okay. That's great. And then just last for me, kind of on the deposit mix shift, saw nice growth in non interest bearing and really it's moved kind of nicely year over year. Is that something you think you could expect to continue? And is that a function of kind of some of these customer acquisition efforts that you referenced as well?

Speaker 3

Or what's kind of driving that expansion there?

Speaker 1

Hey, Chris, it's Terry.

Speaker 2

Yes. It's absolutely a function of it's being certainly being held materially by the work Dom and the business bankers and our community bankers etcetera are doing. Our business bankers for an initiative that really just got kicked off late last year, I would say, have had just a stellar first half of the year. They're growing deposits. They're very granular and their cost of deposits is in the low 2% range.

Speaker 2

We need more of that.

Speaker 1

What's their loan to deposit? Is it 10 to 1? So they're bringing in 10 to 1 deposits to loan in that category. Now as I said in my comments, those are small numbers. And so it takes a lot of those accounts to get to where you want to get to.

Speaker 1

But from a percentage basis, it's super, super encouraging. So we're going to actually I think we have 10 business bankers or something around there. Candidly, we'd like to have 20 to 30. And so that's an area where we're investing in and think that that is a real place to for the future to get this granularity and lower cost funding.

Speaker 2

That's the way we increase the value of this deposit franchise, Stephen. The lifetime value, when you think about the spread of those business deposits over the expected life of those deposits, that's value enhancing.

Speaker 3

Absolutely. Couldn't agree more. Great.

Speaker 4

Thanks for

Speaker 2

all the color, guys. Appreciate it.

Speaker 1

Thanks, Steven.

Operator

Thank you. And one moment for our next question. And our next question is going to come from the line of Michael Rose with Raymond James. Your line is open. Please go ahead.

Speaker 4

Hey, good morning guys. Thanks for taking my questions. Just following up on Stephen's questions on deposits. Do you guys now that the loaner deposit ratio is kind of in line with where you wanted it to be, I think, at around 85% ex warehouse, where do you think that NIB mix can get to over time? And are there other opportunities to kind of shed some higher cost deposits outside of CDs that are scheduled to mature as we kind of move forward if that DVA growth keeps up?

Speaker 4

Just trying to get a sense for if deposit costs have maybe reached a peak here and then what we could expect on the downside? Thanks.

Speaker 2

Michael, we certainly think deposit costs are at or very close to the peak. And because when we look at where we're pricing new business in the production that they're doing, it's just it's good that we're focused. What we're bearing is what we did last year to move this loan to deposit ratio so quickly down to mainly the work in Q2 and Q3 of 2023. But since then and we told you at the end of Q3 that we're going to slow the change and we have. To me now where we are is the focus is kind of shifting from all the deposit production and growth funding loan growth to a big part of this focused on changing the deposit mix and shifting out of some of those higher cost deposits, while still maintaining decent loan growth, nothing is going to affect the revenue of this company and the earnings more than deposit funding cost.

Speaker 2

It's way more impactful than loan growth right now. So we have multiple clients with significant balances not in the CD space where we're looking to price down or move out. And that's execution is going to be the key, but we're working on it hard every day. We know who they are. We know why we brought them in, but now is the time where we really don't need these high priced deposits.

Speaker 2

So stay tuned, but we do believe with that work, that's assuming rates stay flat. Obviously, if rates go down, deposit costs are going to go down. But yes, this is a big focus for us over the balance of 2024 going into really probably through the end of 2025 is remixing this deposit base.

Speaker 4

Yes, totally got it. That's great color, Terry. And then really nice to see some of the accelerated disposition of some of the non performers this quarter. I expect that would continue kind of as we move forward. I know the reductions that you had were tied up in a few credit.

Speaker 4

Can you just give us a flavor of kind of what's in kind of the non accrual bucket at this point? And if we should expect to continue to see criticizedclassifieds come down? Thanks.

Speaker 1

Curtis, you want to take that? Sure. Yes. Thank you. We have a there's a

Speaker 5

pretty good mix in our non accrual bucket. We have got strategies of course on each of those names. We have a pretty good outlook for the Q3. Malcolm mentioned the student housing deal. We've got strategies emerging on other names.

Speaker 5

So the outlook, at this point in time is stable to positive, I would say, is how I'm looking at it.

Speaker 1

Yes. I think it's favorable.

Speaker 2

I mean the work they're doing,

Speaker 1

Curtis and his team, Alan Furshbacher, Michael Carpet done just a really, really yeoman's effort getting their arms around this stuff. And so listen, something can always jump up and grab me that we don't know about, The visibility that we have into our criticized classifieds and even our past watch categories, which we've done a whole detailed deep dive into, the visibility is unbelievable. And so, yes, something can grab you. But Michael, I'd be surprised if NPAs didn't take a pretty good dip in the 3rd quarter, criticizing classified debt. What you see is the top line.

Speaker 1

And yes, it is trending down. What you don't see is the massive work that goes on with things coming in and going out and relooking at and retesting. And so there's a lot of effort going on there. The positive thing for me is, it is trending down and we anticipate it trending down. But there's a lot of effort there.

Speaker 1

And I think this back half of the year, you're going to see us continue moving in the right direction.

Speaker 4

Very helpful. And maybe just finally for me, any thought given to any additional securities restructuring at this point? Or are you guys kind of at where you want to be? Because obviously in the down 100, the NII is down down about 4.5%. So just wanted to get any thoughts there.

Speaker 4

Thanks.

Speaker 2

I mean, it's something, Michael, that we look at on a pretty regular basis. We did certainly did one late in Q1. And then you look at where our yield is on the portfolio, I think it was 4 68. So the yield is really good. The duration is relatively short at 3.8.

Speaker 2

That's just one thing we've never done is gone long for yield. It doesn't help you go long given the inverted curve. But I don't think there's much more to really be done in the investment portfolio. One thing we are looking at, especially given the strength in our capital ratios and ongoing profitability with pretty mild to moderate growth, if you will, as we're looking at a BOLI restructure. But that's something we've been thinking about.

Speaker 2

But that's not going to affect the NIM, but it's going to affect profitability. But that's just something that's the only other restructured thing we're really looking at right now.

Speaker 4

Very helpful. Appreciate you guys taking my questions.

Speaker 1

Thanks, Mark. Thanks, Mark.

Operator

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Brett Robatin with Hode Group. Your line is open. Please go ahead.

Speaker 6

Hey guys, good morning.

Speaker 1

Hey Brett. Hey Brett.

Speaker 6

I got disconnected for a minute. So you may have talked about this a little bit, but if I heard correctly, the margin guidance from here or at least for the back half of the year is $3.25 to $3.30 just want to make sure I heard that correctly. And then within that, I'm looking at Slide 9 on the maturity schedule for deposits. I assume that includes CDs and other things. I'm just looking at this and thinking, hey, what's repricing in the next three quarters is over 5%.

Speaker 6

And just wanted to get an idea, one, if you think you can reprice that any lower than current levels? And then secondly, how does that fit in with your guidance on the margin? Thanks.

Speaker 2

You're right on the margin guidance, dollars 325,000,000 to $330,000,000 The term maturity schedule is $2,400,000,000 give or take, dollars 2,300,000,000 to the back half of the year at a 5.18 average rate. We absolutely think we can reprice that down. That's factored in to that guidance is also assuming we're using the Fed dot plot with 1 Fed cut in the back half of the year. So that's also factored in. So if you look at our new production spreads on loans and deposits, it's over 400 basis points, 440, I believe, something in that range.

Speaker 2

So it's going well. So

Speaker 1

we but the

Speaker 2

other big thing is interest reversals. If credit stays good given the current outlook and we don't have significant interest reversals, that's going to with loans moving into non accrual status that will help too. So we feel like we don't want to overpromise none to deliver. And so we feel like $325,000,000 to $330,000,000 is the right place to give you that range. But we do see opportunity on the funding side to help with that.

Speaker 6

Okay. That's helpful, Terry. And then just wanted to talk about the criticized assets for a second. And was curious, Juan, I can't remember if you guys have disclosed it, but how much of that amount might have been previously acquired credit? I guess start with that one.

Speaker 1

We don't have that broken down. The only place we have that broken down is on the charge off page.

Speaker 6

Okay.

Speaker 1

We don't have that broken down within the criticized. I mean, we have it. I just don't have it in our fingertips. Okay. Okay.

Speaker 6

And then just related to that bucket, if I'm hearing you correctly, it sounds like you're saying you can work that down some from here. As that bucket kind of filled, were you guys I assume you guys were kind of working on the hardest things or the things that were most pressing first. And so it seemed like over the past few quarters, what could have been loss exposure in that bucket may have declined. Would you guys have any thoughts on that? And just it seemed like you'd have an easier time relative to maybe a few quarters ago with some of those credits that might still be in there?

Speaker 1

I wouldn't categorize it that way, Brett. I think we still have a lot of work to do there. But I will agree with you go to the harder stuff first. And the harder stuff first is MBAs, right? So you go attack that piece first because you're not accruing anything in there, the biggest problems.

Speaker 1

That's where you see the biggest move. We're still working within our criticizing classifieds. There's a lot of turbulence that's underneath the top line. Like I said, the trend is down and I do believe the trend is going to be down. I just don't know how steep the curve is.

Speaker 1

So Curtis, you may want to add.

Speaker 5

Yes. I'll reiterate what was said earlier that each loan has a defined strategy. And yes, priority of course on NPAs, but everything in that category, every name by name has a defined strategy and workflow around it. You look at a quarter and you look underneath the total, you've got payoffs, you've got increases, you've got downgrades, you've got upgrades. It's a very dynamic name by name approach every single quarter.

Speaker 5

That's going to continue. And we're not going to take our eye off the ball. So you we will probably see more payoffs and we'll probably see more migration and we work those name by name. It's very strategic and granular.

Speaker 6

Okay. That's helpful. And then I don't know if you covered this, so apologies if you did, but just on capital and the buyback, I know you used some of the authorization this quarter. Just wanted to see if you might continue to do some of that or if the stock moving higher might lead you to hold on to this capital?

Speaker 2

Yes. Brent, when we announced the buyback and talked about it last quarter, we said we would be opportunistic and I think we have done that. We have we've been a buyer when the stock is below tangible book and we'll continue to be that. Given where it is today, I wouldn't expect us to be in the market, so to speak, to buy back shares. So we have capital allocated for it, but I'm not expecting us to use much of it given what's been going on in the market with respect to bank stock.

Speaker 2

So I'm not sure I've modeled a lot of share buyback in the fully diluted share count into my bond.

Speaker 6

Okay. All right. Great. Appreciate all the color guys.

Speaker 1

Okay. Thanks, Brad.

Operator

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Mark Shetley with KBW. Your line is open. Please go ahead.

Speaker 7

Hey, thanks for taking my questions. Appreciate the margin guidance. Just to follow-up there, it sounds like deposit costs have mostly peaked. Where do you think loan yields can go near year end prior to rate cuts?

Speaker 2

Well, 75% of the loan portfolio tied to prime and sulfur, if we get Fed rate cuts, it's going to move down pretty meaningfully. Obviously, sulfur resets the next month after. So that lags, it's a little bit on the way down, just like it lagged on the way up. But you're going to see prime certainly is going to move fast, but we have 70% of the floating rates versus prime. The key for us is going to be our ability to adjust deposit pricing down as loan yields decline from Fed rate cuts.

Speaker 2

And we're certainly talking about that, working on that in anticipation of that. It's not your question, but that's where my head goes when you talk about Fed cuts. I know what's going to happen on the loan side. It's about but it's about what can we do on the deposit side. I would make one other comment on when rates go down.

Speaker 2

Depending on the shape of the curve and people start wanting to refinance, the importance of if we've got prepay protection in the loan documents, importance of holding our borrowers to that. So I think to help with the loan yields and net interest margin as rates go down.

Speaker 7

Got it. That's helpful. And then maybe just switching gears, expenses were pretty well contained again. I was just wondering if this total expenses in the quarter, if that's a good run rate to think about for the remainder of 2024? And if there are any expense levers you see or an opportunity to gain efficiency anywhere?

Speaker 2

I think these are pretty good levels. I would say this, if we get the revenue execution we're hoping for in our government guaranteed business, there will be some more incentives there. But I'm good with that expense given the real new implications on it. So I mean, look, it's still a tight labor market. You have to it's we've had that bring on a lot of very talented, but not inexpensive people as we've gone over $10,000,000,000 and build out internal audit, enterprise risk management, financial stress testing, better information data security, etcetera, etcetera.

Speaker 2

So it's not going down. And we do want, as we've been talking about on the call, to find ways to invest more money into the Business Banking side. That's such a driver for us.

Speaker 1

So that's probably the main reason why I wouldn't expect it to be going down, Paul. But we're going to do our best

Speaker 2

at holding it flat. I think it's

Speaker 1

a good run rate right now.

Speaker 2

I'm a believer that our earnings challenges are revenue related and not expense related. Aretex needs more scale, but you can't get save your way to prosperity here. This is about revenue generation, but the primary driver being funding costs. Yes,

Speaker 7

that makes sense. Well, thanks for taking my questions.

Speaker 1

Thank you.

Operator

Thank you. And one moment as we move on to our next question. And our next question comes from the line of Hammad Afan with D. A. Davidson.

Operator

Your line is open. Please go ahead.

Speaker 8

Good morning, guys. I'm Amitav on for Gary Tenner. So you guys might have covered this, but how are you thinking about the maturing term funding in the Q3? I think it's about $1,300,000,000 at 5.17.

Speaker 2

Dollars I'm thinking about we ought to reprice these things lower. We've intentionally tried to keep the funding profile short because we thought that the next move from the Fed was down, not up. And so when you look at on the margin where we're pricing deposits, we These should roll down the price curve a little bit. So I would expect that that's going to continue to be the case. And I think that will extend into the Q4 as well because we've got a little over $1,000,000,000 at $520,000,000 in the 4th quarter and almost $1,000,000,000 at $502,000,000 But when we're anything above $5,000,000 should be our term funding profile.

Speaker 2

And it's all CDs. If you notice, we don't have any FHLB advances. So it should be coming down.

Speaker 8

Thanks. That's helpful. And you touched on it a little bit, but the SBA and USDA production was nil for the quarter. What's the story there? Is that seasonality?

Speaker 8

And how should we think about it going forward?

Speaker 1

We expect a better back half on both of those numbers. SBA has got a lot of momentum and they're doing a nice job. USDA, we've done a little restructuring there. So we think we'll do better on the fee income on the back half of the year. And let

Speaker 2

me clarify, there's an arrow on the graph. The $18,800,000 in Q1 production of USDA is actually Q2 production in SBA. So the SBA production is down a little bit from Q1 to Q2. The pipeline for Q3 is way up. So I apologize for the error on the graph, but it's the USDA with no production.

Speaker 2

The SBA had good production. The number of loans produced was good. They were just smaller. And the gain on sale premiums in the SBA on average for us are hanging in there right around 9%. And we

Speaker 1

did during the quarter hire a new team of 5 people this quarter. So I mean, we're making some investments in that space. So I do look for the back half of our fee income to be much better from that.

Speaker 8

Great. That's really helpful. Thank you for the clarification. And that's it for my questions.

Operator

Thank you. This does conclude today's question and answer session as well as today's conference call. Ladies and gentlemen, thank you for participating and you may now disconnect.

Powered by Quartr
Earnings Conference Call
Veritex Q2 2024
00:00 / 00:00