Veritex Holdings, Inc.
Q1 2018 Earnings Call Transcript

Published: 24 Apr 2018

[Operator:]

Good day, and welcome to the Veritex Holdings, First Quarter 2018 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Ms. Susan Caudle, Veritex Holdings, Investor Relations Officer and Secretary to the Board.

[Susan Caudle:]

Thank you, Bridgette. Before we get started, I’d 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. At this time, if you are logged into our webcast, please refer to our slide presentation including our Safe-Harbor statement beginning on slide two. For those of you joining us by phone, please note that the Safe-Harbor statement and presentation are available on our website, veritexbank.com. All comments made during today’s call are subject to that Safe Harbor statement. In addition, 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. I’m joined today by our Chairman and CEO, Malcolm Holland; Chief Financial Officer, Noreen Skelly; and Chief Credit Officer, Clay Riebe. After the presentation, we’ll be happy to address questions that you may have. Now here’s Mr. Holland.

[Malcolm Holland:]

Thank you, Susan. Good morning, everyone. We are pleased to report we had a record quarter with earnings in access of $10 million and for the first time our company exceeded $3 billion in total assets. We have firmly embedded ourselves into the DFW Banking market and now are finding ourselves with relationship opportunities and conversations with clients we could have never had previously. The hard work our team has put in over the last two quarters with two acquisitions and subsequent integrations is now beginning to show in our results. While our progress has been exceptional, the quarterly numbers still have some non-reoccurring revenues and expenses relating to our acquisitions that we would like to highlight. Our first quarter had a few non-reoccurring items. We finalized and recorded the sale of our Austin branches. We finalized and recorded the assignment and sublease of a duplicate sovereign branch. We recorded additional accretion income on two purchase credit impaired loans that we collected more than originally estimated. Looking at our growth for the quarter, and as presented on the upcoming slide, our new loan commitments exceeded $350 million, our highest production quarter todate. This strong level of new loans led to an annualized growth of 15% for the quarter. These new commitments were centered in the commercial real estate discipline. We did experience a greater than average paydown, payoff quarter with $260 million paying down a sign of a healthy loan portfolio. Although our pipelines remain very full and active, we are reduced our loan growth projections for the year from high teams to mid-teens. We continue to focus on the liability side of the balance sheet. Our attention to deposits resulted in a 38% annualized growth rate, although recognizing that this growth came in the interest-bearing category. Our non-interest-bearing deposits did decline over the previous period, primarily due to non-interest deposits sold with the Austin branches and the seasonal nature of these deposits. We instituted a deposit marketing plan in February for our relationship managers and we’re starting to see those efforts pay-off. Our credit quality remains top of class. Non-performing assets, past dues, non-accruals and/or are at or near record lows. Our North Texas market remains fundamentally and economically very sound with new companies and people constantly relocating here. The market remains competitive but we continue to remain true to our core underwriting standards and pricing targets. Now here’s Noreen to summarize our first quarter numbers for you.

[Noreen Skelly:]

Thank you Malcolm, and good morning everyone. I would like to focus your attention on our first-quarter highlights which you will find on slide four of the presentation. We earned record level net income of $10 million or $0.42 per diluted share, an increase of $7 million or $0.28 over the prior quarter and $7 million or $0.22 over the same period last year. As you will note under selected ratios, our core efficiency ratio was 57% an increase of 1% over prior quarter and core return on assets was 1.22%, an increase of 42 basis point over prior quarter. Our loan balances as detailed on slide five increased $56 million or 2.5% over the prior quarter, however, organic loan growth adjusting for the loans sold in connection with our Austin branches was just under $83 million representing a 15% annualized growth rate. Core loan yields increased to 5.03% versus 4.93% for the prior quarter. I expect around five to seven basis point expansion over the next quarter resulting from prior rate increases. We continue to see a very loan book, new commitments continue to grow and while pay-off, pay-downs as a percentage of total loan balances trended between 5% to 8% over the past prior three quarters, we hit 11% this quarter with several unexpected pay-off. Credit metrics remain very strong with non-performing loans to total loans at 0.16% and minimal charge offs for the quarter. Just an update on the 13 million non-performing oil and gas credit we discussed on last quarter’s call. You may recall it was part of a $94 million credit facility. Information we received from the lead bank host earnings call dictated that this loan was impaired, when we acquired sovereign and the purchase accounting adjustments reflected accordingly in our 10-K. Turning to slide eight, as Malcolm stated earlier, deposit balance increased $151 million. If we exclude the $64 million of deposit sold with the Austin branches, deposits grew 9% or 38% annualized. $164 million of the deposit increase came from our correspondent money market product, which is highly rate sensitive. As a result, interest-bearing deposits increased to 1% compared to 0.93% in the prior quarter. I expect to see continued increases and deposit cost somewhere between 15 to 20 basis points in the next quarter as we incur the full impact of rate sensitive deposits. On the next slide you see the NIM expansion. Our reported net interest income was $29 million and it included $4 million or purchase accounting loan accretion. $1.9 million of this accretion is primarily related to loans that performed better than expected. Excluding purchase accounting accretion, the core margin expanded nine basis points to 384 this quarter from 375 in the prior quarter. I anticipate margins may compress a bit, settling back around the 370 to 380 range over the next quarter. As shown on the lower half of slide nine, we continue to deploy access capital into loans as loans now represent 86% of our earning asset mix. Turning to slide 10, as in the prior quarter, we have several non-recurring items that result from merger, acquisition, branch disposition and the tax act remeasurement that comes along with purchase accounting adjustments. Our reported expense was $17 million and adjusting for these non-recurring items, core non-interest quarter expense was just under $16 million. Our expectation is that core expenses will stabilize for the remainder of the year. With that, let me turn the call back over to Malcolm for a few closing comments.

[Malcolm Holland:]

Thanks, Noreen. With all conversions and integrations behind us, our team and I are focusing on continuing our organic growth to achieve efficiencies relative to our scale. We remain committed to the Houston market. We have a very strong team and they are focused intently on growing, although we have made several attempts at finding accused [ph] to the merger partner, we’ve been unable to come to terms with an institution, while keeping our pricing disciplined and our long-term strategy intact. We will continue to have conversations and pursue appropriate acquisition opportunities while at the same time, we plan on doubling our efforts organically, with additional lenders and their respective teams and possibly adding strategic locations. With continued growth, healthy margins, focus on credit quality and excess capital to grow, we are poised for a very good 2018. The accomplishments of the past six months would not been possible without our incredible team and strong support from our board. They have proven once again that we have the best team in the state. Our excitement about our future has never been brighter. Thank you for your time and interest in Veritex. We are now happy to answer any questions that you may have.

[Operator:]

[Operator Instructions] Our first question comes from Brady Gailey with KBW. Your line is open

[Brady Gailey:]

Hey good morning guys.

[Malcolm Holland:]

Good morning, Brady.

[Brady Gailey:]

So you know I appreciate the guidance for the code NIM of the 370 to 380, but when we look at the reported net interest margin, I know you’ll had a big number of yield accretion in this quarter, but how should we think about the level of accretable yield you know going forward through the remainder of this year?

[Noreen Skelly:]

Hey Brady, its Noreen. I would guide you to the lower end of the range that I spoke of the 370 to 380 range and that’s all really resulting from the timing on deposits in the correspondent money market product and – most of these deposits came in at the end of the quarter and so I think the full impact of that will take the margin down deposit a bit.

[Brady Gailey:]

Okay, so the reported margin of 446, I mean that had 62 basis points of benefit from the order accretion. I mean that 62 basis points feels abnormally high, so do you have any color for forward levels of accretive yield, you know like I think you said it was in dollar terms it was about $4 million this quarter. Any idea what a good run rate for that would be over the next two or three quarters?

[Noreen Skelly:]

Yes, so I think if you stripped out the 1.9 million of the onetime PCI related loan, we really are closer to the $2 million run rate on accretible yield.

[Brady Gailey:]

Okay and that feels like a good run rate going forward?

[Noreen Skelly:]

It’s like a good run rate, atleast for the next quarter I mean, we are really running through that purchase discount pretty quickly here with the weighted average life of those loans, it’s really coming in pretty fast.

[Malcolm Holland:]

Hey Brady, Sovereign had a really sure [ph] portfolio and so it’s running through pretty quick, but we feel like about $2 million range for the next several quarters and it will start leading down, but wanted you to focus on the $1.9 million that was a non-recurring accretable income item.

[Brady Gailey:]

Yes, okay. And then it sounds like you guys are more positive on the loan growth you know moving the guidance to high teens from the mid-teen level. I know in the past we’ve talked about deposit growth being in that kind of low to mid teens range. I mean do you think that that is still an appropriate amount or with the higher loan growth are you anticipating trying to pop up that deposit growth range as well?

[Malcolm Holland:]

Yes, so I think I could have missed both during the call. What I was saying is that we are moving. We were in the high teens is what we have looked at, at the beginning of the year. We’ve moved that back to the mid-teens for the remainder of the year. The deposit side, we had some success in this first quarter, albeit a lot of it was on the interest-bearing side. This deposit contents that we’ve had is very -- nice, really nice group even on the non-interest bearing side. You know through April, we’ve seen some good movement there. So I think the deposit growth is going to be married [ph] at mid-teens number on the loan side.

[Brady Gailey:]

Okay, great. Thanks for the color.

[Malcolm Holland:]

Thanks, Brady.

[Operator:]

Our next question is from Brad Milsaps with Sandler O'Neill. Your line is open.

[Brad Milsaps:]

Hey good morning.

[Malcolm Holland:]

Good morning.

[Brad Milsaps:]

Really just a follow up on the discount accretion. How much in total do you have left and down. I know maybe last quarter you used some of the access to build the reserve back a bit, it didn’t look like you did that this quarter, but I just want to see if there -- there is a new dynamic acquired as well?

[Noreen Skelly:]

Well what’s the second half of your question?

[Brad Milsaps:]

You used part of the outsize accretion last quarter to add the reserves, it didn’t look like that happened this quarter, just wanted to make sure that was correct?

[Noreen Skelly:]

That’s correct. So we have left about 13 million of non -- 12 million in non accretable yield and then about 6 million of accretable yield left.

[Brad Milsaps:]

Okay, great. Thank you. And then Malcolm, can you talk about kind of some of your longer term kind of profitability goes, you had outlined in the past, you know kind of an ROA target. As you sit here today, it sounds like expenses are going to kind of stabilize, you are hoping the loan growth is going to pick back up, can you talk about achieving those targets, kind of which your commentary around the NIM was cooler?

[Malcolm Holland:]

No, I mean we are still looking Brad to you know the 130 to 140 maybe pressing it up higher over 140 depending on our loan growth. But for the year, probably in the low 140s, we are still get decent loan pricing, we’ve seen a little bit of pressure on that. So really the thing that’s moving, the demand is really on the cost side. The pricing side seems to be hanging in there pretty well. I mean that’s obviously the good competitive deals are getting a little bit, a little cheap. But I am still looking for a 140 for the year.

[Brad Milsaps:]

Okay, that’s helpful. And then just a final question, I know you mentioned in the past that you wanted to kind of get these deals digested to make sure everything was good to go on that front. What’s your appetite for M&A as you look out for the rest of the year, is it something that would be more backend loaded or even into 2019 at this point?

[Malcolm Holland:]

As you know bank, they are sold, they are not bought and so it's got to be two ruling parties. I'm certainly open to something if it arises and I continue to have conversations, but I don't have anything that's cook in right now, that's really hot. I am having a couple of conversations. We have finished our core conversion with Liberty that was last weekend and went very well. So all integrations are done, all the conversions are done, and our people taking a little bit of a deep breath just that we don't have anything on our plate right now, but I would love to have something on the back half of the year, but my sense its going to be 2019.

[Brad Milsaps:]

Okay, great. Thank you.

[Malcolm Holland:]

Thanks, Brett.

[Noreen Skelly:]

Thanks, Brett.

[Operator:]

Our next question is from the line of Matt Olney with Stephens Incorporated. Your line is open.

[Matt Olney:]

Hi. Thanks. Good morning guys.

[Malcolm Holland:]

Good morning.

[Noreen Skelly:]

Good morning.

[Matt Olney:]

I want to go back to operating expenses. I believe you said the operating expenses were flattened out over the next few quarters. Can you just talk more about this? And does this imply that the reinvestments in the core business are going to be offset by cost says from Liberty or any other stance you give us on that?

[Noreen Skelly:]

Sure. There's kind of two tracks going on our expenses. One is as you said Liberty, so on this quarter we'll have some continued integration cost. I mean not significant, but there will be some cost related to integration. We'll also have non-core cost related to that 50 shares I think we mentioned last earnings call that we were offering – we were distributing 50 shares to each employee that was not currently part of an equity plan, so that's one on $50,000 non-core expense that you'll see next quarter. But then moving forward, we'll have – as you suggested we'll have savings from the Liberty integrate conversion and integration going into the third and fourth quarter. And at the same time we're working on efficiency plan. We started with AC [ph] loan ups and human resources and we're moving to other back office functions. And our plan there is to have efficiencies in those operations to offset the volume growth and other growth increases so that we can stabilize our cost base, that's the plan.

[Matt Olney:]

Okay, great. That's helpful, Noreen. Thank you. And then going back to loan growth, Malcolm can you talk more about what you're seeing on the loan growth side, moderating the loan growth guidance down. Is just more from elevated payoffs and paydowns, production maybe little bit slower, any kind of entail you give us on that?

[Malcolm Holland:]

Yes. It's really kind of on the payoff, paydown side. We're seeing a lot of activity and they're not moving business necessarily, it just economic activity. Our pipelines are just full as they've ever been doing $350 million in commitments in the first quarter was huge. Now can we do that $4 billion on new commitments? Now that would be running the hands that's pretty hard. I don't think we'll quite do that. So that's one reason for pulling it down. But what we're seeing. We're seeing a bunch of really good opportunities on the C&I side. I think I'm mentioned them in my opening comments that we're in conversations now we've never been in. We're going toe-to-toe with Texas capital and some stuff and I think we're fairing very well, some folks that we've hired that come from the larger banks. I see that being a huge driver business and then our commercial real estate area has gotten some serious moment. And the first quarter was very strong. And they've done a couple of construction deals. These high equity construction deals recently that we'll see some benefit in the fourth and third – we start the third and some fourth quarter to got to either follow equity to put into it, but it's still very active.

[Matt Olney:]

Okay. Very good.

[Malcolm Holland:]

Thanks, Matt.

[Operator:]

[Operator Instructions] Our next question comes from Brett Rabatin with Piper Jaffray. Your line is open.

[Brett Rabatin:]

Hi. Good morning, everyone. Malcolm, just to back to M&A for a second and you talked about on your prepared comments and that maybe there will 2019 before something kind of comes up given the environment and what's transpired this year. Does your thesis on Houston evolved any or do you want -- you're not a little bit to think about some other opportunities or can you give us maybe an update on if your strategy might have changed a little bit kind of post what we've seen transpired in 1Q?

[Malcolm Holland:]

Yes. No, I think our strategy, we're going to have to do a little of a pivot here, identified four really strong targets down there in Houston, three of those were gone. And so in Houston it’s a little bit of a different market. If you don't get those, one of those four you start moving to the suburbs mainly south of town and I'm not saying those won't work, but the pivots probably going to be a little bit more focus on some organic growth in hiring some teams. We've had a really good success with hiring people down there. So I think we're going to double our efforts and see if we can do it in the old-fashioned way in the short term continue to have these conversations. I think we'll probably double our efforts down there. My team and I actually working on a plan right now to present to the board sometime in the second quarter about how we can do that a little bit more organically than doing acquisition, but we're certainly committed. Houston is a very good market. It's a different market. We need Houston people to grow it. And we are committed to figuring it out.

[Brett Rabatin:]

Okay. And then I was hoping maybe for additional color around the commitment increase linked quarter, maybe how much of that was commercial real estate versus C&I construction?

[Malcolm Holland:]

Yes. Most of it was around the commercial real estate area. We did do a couple construction deals. We could not obviously see our re-bucket obviously and these are super solid. We're getting 35 to 40 plus percent equity in most of these construction deals and these are for clients who been dealing with. Sovereign had a very nice bucket of those just making through those couple of them are, but it was centered on commercial real estate area which we plan for year ago when we hired Bob and got that group started.

[Brett Rabatin:]

Okay. And then, Noreen, if I heard you correctly, you were looking for a 15 to 20 basis points deposit increase in 2Q, assuming rates are little higher this quarter and another fed hike maybe coming. What is your thought on the rise from there and then the increase this quarter is that mostly a function of from some of your existing deposits or is that just a function of what it cost to bring on new deposits relative to the existing base?

[Noreen Skelly:]

Really at this point it’s the cost of the new deposits to support the growth.

[Brett Rabatin:]

Okay. And then, are you mouthing [ph] out deposit betas is rising from the second quarter. Any color on them what you're thinking from 2Q?

[Noreen Skelly:]

Yes. We do see a slight increase in deposit betas from past, you know and it really depends on – we feel like we're in a good position to fund growth right now with the deposits that we have with the balance sheet. So we're really looking at towards the end of the quarter. What will the growth be and we do think we're going to have to pay off so thus the betas will increase. Is that answers your question?

[Brett Rabatin:]

Okay. Yes. That's helpful. Thank you so much.

[Operator:]

Thank you. I'm not showing – I'm sorry, we do have a question from Gary Tenner with D.A. Davidson. Your line is open.

[Gary Tenner:]

Thanks. Good morning, guys. I apologize if you gone over this, I had to hop off for a second, but in terms of the paydowns in the quarter is your sense and I think you said that you are not losing business for the banks. Is the sense that this is a function of maybe some business transactions that were delayed until post 2017, because of tax reasons maybe the level of paydowns from that perspective was higher than what you might see over the reminder of the year? Or just any trends that maybe give you a sense what things may shake out the next couple of quarters?

[Malcolm Holland:]

You know, a couple of them were just real estate deals that sold. Sovereign had a nice book of -- I'm just thinking there were couple of industrial deals that they have and just in the normal course of business, so we had a couple of big industrial deals passed, is that correct? And then we replace those. So that part of that 350 commitments is a replacement for some of that stuff we've sold. You get the paydown which is fully funded loan and then you make a commitment and you don't fund anything because they've got –beat up their equity first. So I did call that economic commerce. They are just trading. I mean they build them to sell them and that's what they're doing. So I don't see any specific trends. On the C&I side, there could have been some delay because of the tax deal, but we've certainly haven't lost any customers on that side. If separate one we did lose to one and two and also been left we did lose one relationship to be totally candid with you. Now it's about 10 million – 11 million. We lose that one relationship to another small community bank here, but no trends Gary that I think we could hang our head on.

[Gary Tenner:]

Thanks. Appreciate it.

[Malcolm Holland:]

Thank you, Gary.

[Operator:]

I'm not showing any further questions. I'll now turn the call back over to Mr. Holland for closing remarks.

[Malcolm Holland:]

Thank you all for joining us today. And we're around all day for any specific calls if anybody wants to make. Have a good day.

[Operator:]

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone have a great day.