Veritex Holdings, Inc. (NASDAQ:VBTX) Q4 2023 Earnings Call Transcript

Veritex Holdings, Inc. (NASDAQ:VBTX) Q4 2023 Earnings Call Transcript January 24, 2024

Veritex Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Veritex Holdings Fourth Quarter 2023 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 Veritex.

Will Holford: Good morning. Thank you for joining Veritex’s fourth quarter 2023 earnings call. Before we begin, please be aware this call will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risk and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them. Statements made on this call should be consider with cautionary statements and other information contained in today’s earnings release and our most recent annual report or Form 10-K, and subsequent filings with the SEC.

We will refer to investor slides during today’s presentations, which can be found along with the press release in the Investor Relations section of our Web site at veritexbank.com. Our speakers for the call today are Chairman and CEO, Malcolm Holland; our CFO, Terry Earley; and our Chief Credit Officer, Clay Riebe. At the conclusion of our prepared remarks, we will open the lines up for a Q&A session. I will now turn the call over to Malcolm.

Malcolm Holland: Thank you, Will. Good morning, everyone. Today, we’ll recap both our fourth quarter results as well as our 2023 annual results. As you will see, we continue to strengthen our balance sheet and add to tangible book value with a clear commitment to the things that will add long-term value to our shareholders. For the quarter, we reported operating earnings of $31.6 million or $0.58 per share, with a pre-tax pre-provision operating return on average assets of 1.54%. For the year 2023, we reported operating earnings of $142.1 million or $2.60 per share, with a pre-tax pre-provision operating return on average assets of 1.81%. Although not the year we had hoped for from an earnings perspective, we were able to use our earnings power to reposition our balance sheet to a much stronger place and still make a nice return for our shareholders.

Our continued profitability also allowed us to meet our goal of CET1 being greater than 10%, ending the year at 10.29%, up over 120 bps over year-end 2022. We were able to slow down our loan growth for the year to 1.7% or just $160 million, a far cry from our 2022 loan growth of 30%-plus. This was accomplished by a focused strategy to move out non-relational borrowers, continued loan payoffs, and general market decline. Concurrently, we were able to grow deposits during the year by 13.3% or $1.2 billion. Again, this was a focused strategy that went into place in the third quarter of 2022, which we’re now seeing some of the expected outcomes coming to fruition, certainly a heavy lift and a testament to the resolve of our people during some challenging and volatile times.

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Q&A Session

Looking forward to 2024, our priorities will remain the same; improving funding and its related costs, and adding new clients that represent full relationships for 2024. We believe we can grow deposits at a high single-digit pace, while loans will grow in the mid-single digits. As we mention every quarter, credit remains a top priority. Our NPAs to total assets increased from $80 million to $96 million or 0.77%. The net increase of $16 million were comprised of one, a datacenter loan with $10.5 million, a C&I credit in the plastics industry of $3.8 million, and several government guaranteed loans totaling $15 million. It should be noted, on those specific loans, that $5.2 million has a firm government guarantee. And as a reminder, we have a $5 million holdback that will be used for future losses in that loan category.

We also had one large C&I upgrade out of the NPA category. Our ACL was 1.14%, flat over 3Q but up 21% over 12-31-2022, while criticized loans remained stable quarter-over-quarter as well as year-over-year. We did have net charge-offs of $9.5 million to the quarter, $23.7 million for the year or 25 bps. Clay will provide some greater color on this shortly. I’ll now turn the call to Terry.

Terry Earley: Thank you, Malcolm. We’ve made good progress, and Malcolm covered in strengthening our balance sheet. I’m thankful for the progress, but the job is not done. I want to spend time primarily drilling into the results for the year-ended 12-31-2023, and a little for the fourth quarter. 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. Starting on page three, our strong deposit growth and low loan growth allowed Veritex to reduce its loan-to-deposit ratio from 104.4% at 12-31-2022 to 93.6% at 12-31-2023. The deposit growth also allowed us to reduce our wholesale funding reliance to almost 20% at year-end. Capital is significantly stronger, and we made progress on reducing our commercial real estate concentrations.

On page four, we knew that strengthening our balance sheet was going to come at a cost. Thankfully, we have the earnings power to absorb it. Pre-tax pre-provision operating earnings were $222 million for the year, up slightly from 2022. Tangible book value per share increased to $20.21, up $1.57 for the year or 12.7% when you add back the dividends. This is the first time that Veritex has gone over $20 per share in tangible book value. Finally, we’ve grown CET1, as Malcolm mentioned, by 120 basis points to 10.29%. We had a goal of 10%, we got there a quarter early, and we continue to strengthen capital. Moving to slide five, Veritex continued its progress in improving its liquidity and funding profile over the fourth quarter. During the quarter, we grew deposits by $142 million or 5.6% with little change in broker deposits.

The deposit growth combined with no loan growth allowed us to pay down expensive FHLB advances and invest $200 million into the investment portfolio. As we have said before, Veritex shifted its focus to the right side of the balance sheet late in the third quarter of 2022. We started slowing loan growth. We shifted our loan production focus away from CRE and ADC to C&I Small Business, we changed our banker incentive program at the beginning of 2023 to give deposits a higher weighting. We have reallocated marketing spend to deposit products and launched a multi-wave direct marketing campaign in February. Additionally, our digital bank, which we started in the second quarter, is making a meaningful impact on deposit growth. All these efforts are showing promise as evidenced by the fact that our net new account growth in 2023 was 172% higher than in 2022.

Non-interest bearing deposits declined during the quarter by $145 million due to seasonal outflows in our mortgage escrow deposits. This is reversed early in Q1. Deposit pricing competition continues to be strong, but not quite as intense as it was a few quarters ago. That being said, with our desire to move our loan-to-deposit ratio below 90% before the end of 2024, we’re going to continue to feel pressure on the deposit beta and the NIM. On slide six, in thinking about the loan portfolio, you noticed that loan production declined 80% in 2022 to 2023. The shift away from CRE and ADC is showing progress. As stated earlier, our concentration level in CRE moved down during the year from 325% to 320% and the level of ADC declined from 132% to 119%.

The goal is to continue to move these levels down below the regulatory guidelines. Payoffs in the CRE and ADC portfolios remain strong and were slightly over $900 million for the year. Unfunded ADC commitments declined $1.2 billion in 2023 and now set at $900 million heading into 2024. Looking forward into 2024, we forecast ADC fundings to decline by 75% as compared to 2023. Slide seven provides the detail on the Commercial Real Estate and ADC portfolios by asset class including what is Out of State. Moving to slide eight, we’re frequently asked about our Out of State loan portfolio and as you can see, our national businesses in mortgage loans comprise 14% of our total loan portfolio. Our true Out of State portfolio is $1.1 billion and makes up just under 12% of the total book.