Veritex Holdings, Inc.
Q3 2018 Earnings Call Transcript

Published: 23 Oct 2018

[Operator:]

Good day, and welcome to the Veritex Holdings, Third 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, Investor Relations Officer and Secretary to the Board of Veritex Holdings.

[Susan Caudle:]

Thank you. 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 2. 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. Please see the reconciliation of all discussion on GAAP measures in our filed 8K earnings release. Now here's our Chairman and CEO, Malcolm Holland.

[Malcolm Holland:]

Thank you, Susan. Good morning to everyone. Today with me we have Noreen Skelly, our CFO and Clay Riebe, our Chief Credit Officer. In addition and keeping our original plans and joined call with the Green Bank announcement driven by Terry Earley, CFO and Donald Perschbacher, Chief Credit Officer of Green Bank to join us on our call today as well. This morning I'll give a brief summary of the very best quarter, Noreen will give a high level summary of our numbers and then we'll turn the call over to Terry to present the Green numbers. I'll provide a short update on the integration and consolidation progress and open up the call for questions. Obviously, the third quarter was the most transformational quarter in the history of our bank with the announcement of the Green Bank merger. We have completed and filed our S4 and field all necessary applications with the state banking department and Federal Reserve. We received our approval from the state last night and anticipate hearing from the fed very shortly. We're still targeting an early first quarter 2019 close. Our quarter growth looked a bit different than previous quarters with deposit growth outpacing loan growth. Our loan growth for Q3 was a modest $22 million or 4% annualized. We continue to see large number of pent offs with $60 million coming from the last two weeks of the quarter. During the first nine months of 2018, with growth of 1.25 billion in new commitments and had pay downs of over $710 million. So the volume of new credits still remains exceptionally strong. On the deposit side, growth for Q3 was the best quarter we've seen since the company's inception with an annualized growth of 26% plus, with $116 million in third quarter growth represents $50 million in non-anticipated growth and $150 million in interest rate growth with a total marginal cost of 1.53%. Our reported quarterly earnings of $8.9 million or $0.36 per share did have $0.09 of merger-related cost totaling probably $2.7 million, making our quarterly earnings $0.45 per share, adding back the merger cost net of tax. Noreen will provide some additional cover on the numbers here in a moment. From a credit perspective, we continue to maintain exceptional credit quality except for three acquired credit. Two of the three [indiscernible] are expected to be resolved to refinance or restructure in the fourth quarter and all are properly reserved for current and up to date [indiscernible].. Now I'll turn the call over to Noreen for financial results.

[Noreen Skelly:]

Thanks Malcolm. I'd like to focus your attention on our third quarter highlights that you'll find on Slide 6 of the presentation. Turning to the balance sheet, our loans ended at $2.44 billion, deposit ended at $2.66 billion and assets just under $3.3 billion. We continue to quickly earn back the tangible book value dilution from our 2017 acquisition. Our tangible equity grew to $340 million with tangible book value per share at $14.02 compared to $13.23 a year ago. Net income available to common for the quarter was $8.9 million, or $0.36 per diluted share, a decrease of $1.3 million or $0.06 over the prior quarter. Net income increased $3.8 million or 48% compared with the same period a year ago. Net interest income grew $1.5 million, excluding purchase accounting accretion. Core net income grew $625,000, primarily as a result of average loan balances that were up just shy of $100 million from prior quarter. Our non-interest income is down slightly from prior quarter, given the reduction in premiums offered on SBA loan sales. We decided better to hold it right now. Non-interest expense increased to $18.2 million or $2.1 million over prior quarter. This was primarily due to Green acquisition related legal and professional expenses of $2.7 million. Excluding these expenses, core expenses were up $849,000. We saw increases in occupancy and equipment related to property taxes, build outs in our headquarter building and other property, some of which are one-time expenses. However, at a $15.5 million core non-interest expense during the Veritex came along run rate. Moving to Slide 7, we had loan growth of $25.6 million for the year core in and average balances as I said were up close to $100 million in the quarter. We had a 9% annualized growth rate sorry, a 9-month annualized growth rate of 12.6%. [indiscernible] and payoffs stated on transit over the past five quarters in on Slide 8. We had record level of new commitments in the quarter and given the average life of our loan portfolio, we continue to see payoffs and pay-downs between 8% to 10% of our loan loss total loan balances. Turning to Slide 9, our non-performing loans total loans increased to 1.07% due to three acquired credits I mentioned earlier. This resulted in a $21.3 million in non-performing loans. One of these loans had a non-revolving specific entailment recorded during the quarter. Our provision for loan loss was $3.1 million, an increase of $1.6 million over prior quarter. We had no charge-offs in the quarter. Turning to Slide 10, as discussed previously, we had fixed deposit growth and non-interest deposits grew $51 million. Our mix compared to prior quarter remained consistent. That moves us to margin on Slide 11, while our reported net interest margin was 4%, our core margin excluding [indiscernible] moved down 14 basis points for 3.69%. As we can see on the bottom half of the slide, we typically hold 86% of earning assets and loans. This moved to 84% in Q3 with the increase in interest-bearing deposits in other banks. The mark deposits this quarter was around 1.53 and average yield on new loan production was approximately 5.50%. We should earn 4% spread as we deploy this funding into loans over the next quarter. Turning to Slide 12, as in the prior quarter, we had several non-recurring items that result primarily from our acquisition activity. I'll point to Column D, we had discrete tax benefit of 680,000, primarily related to completing a hot segregation setting on our building and the revision of our deferred tax estimate upon funding our 2017 tax return. With that, let me turn the call over to Terry.

[Terry Earley:]

Thanks Noreen and Malcolm, I'd like to thank you for letting Green join the Veritex call to discuss Q3 results. Turning to Slide 4 on the green deck continuing from there, it was a strong financial quarter, especially considering the merger announcement and the integration planning that's well underway. Green reported a diluted earnings per share of $0.41 and operating earnings per share of $0.49 after adding back the $3 million in merger expenses. These operating results translate into a 1.69% return on average assets and 19% return on average tangible common equity at an efficiency ratio of approximately 47%, that's on an operating basis. Benefit on the efficiency front, expenses were down over $1 million from Q2. It was a strong quarter for loan growth as period in loans grew $144 million or 17.8% annualized. Green continued its quarterly dividend of $0.10 per share payable on November 21. Turning to the next slide, note that the tangible book value per share increased to $10.63. The next slide shows our five quarter trend and I'll offer our key financial metrics. It is worth of note that operating pretax, pre-provision return on assets have been above 2.10% for three consecutive quarters, as really demonstrated in the earnings power of the bank and our operating efficiency ratio has been below 50% for five straight quarters. On Slide 7, Q3 loans -- Q3 loan growth of $144 million was strong with 50% of that growth coming from seated in our C&I business and 45% from commercial real estate. Loan growth since the end of Q1 2018 has averaged 14.5% on an annualized basis. Loan growth at our -- loan production remained strong at $348 million for the quarter and our annualized year-to-date production in 2018 is up 45% over 2017. Loan pipelines remained strong supported by an experienced team of bankers and a strong economy in Houston and Dallas-Fort Worth. Turning to the next slide, deposits were relative flat for the quarter with our DTA [ph] balances having grown to $150 million or almost 22% over the last four quarters. Our loan-to-deposit ratio trended higher with a strong loan growth and finished the quarter at 98.5%. Over the last four quarters, [indiscernible] of funds rate four times were 100 basis points over that same period, our average cost of total deposits had increased 28 basis points to 1.05%. On the next slide, if we look at our net interest margin, which declined 16 basis points. This is due to three factors; 10 basis points of the decline was due to lower accretion on purchase impaired loans from the Patriot acquisition 2015. Three basis points were due to the prepayment of an agency CMBI security and three basis points were due to the interest reversals on non-accrual loans. For the quarter, loan yields excluding fees increased 20 basis points to 5.32% and the new production contractual rates for the quarter were 5.5%. On the next slide, fee income rose slightly to $5.5 million on strong customer service fees, offset by declines in SBA gain or sell revenue. During the quarter, Green elected not to sell $9.5 million in SBA guarantee loans for their premium was too low to just prior to sale. Had we sold these loans, non-interest income would have exceeded $6 million for the quarter. Turning to the next slide, NPAs increased over Q2, primarily due to two real estate secured loans that moved into non-accrual status. No loss is expected on either loan. Provision expense was $320,000 as we provided for new loan growth, but this was offset by a decrease in specific reserves on the healthcare credit that we impaired in Q1. Finally on Slide 12, capital levels remained strong and growing, given the profitability levels of the company. The Green Banc team remains excited about the merger with Veritex and is very focused to maintaining our business momentum as we successfully execute on the merger and integration. With that I'd like to turn the call back over to Malcolm Holland.

[Malcolm Holland:]

Thank you, Terry. Our integration with Green is progressing better than we've planned. We firmed up and scheduled our data conversions. We’re currently reviewing and formulating and effective team members to be aligned and will continue to see opportunities for appropriate cost base and efficiencies. This is our seventh year at Veritex and I'm very proud of our organization and everyone's willingness who work together for the past 90 days, which has been -- it has been quite incredible. Before closing, I’d like to take a moment to recognize on our brand and long time business partner, Will Murphy. After 45 years of banking in Dallas, Will has decided to retire from Veritex and our two boards. We’re fortunate to have him as part of our team and we wish him all the best. This morning we stood off that each of our two banks showed some real and different strength during the quarter. Once we take these strengths and put them together, we anticipate a very balanced sound acquisition and we’re all very proud of be a combined company. With that operator, we can now open up the line for questions.

[Operator:]

[Operator instructions] And our first question comes from the line of Brady Gailey of KBW. Your line is now open.

[Brad Gailey:]

So I know that you talked a little bit about the loan pay-downs impacting the period-end growth in the third quarter. I think now that in past, you've about this low double-digit range of loan growth. I was just wondering do you still think that's appropriate even as Green comes in the fold and you look at what the loan growth could be next year?

[Malcolm Holland:]

Yeah Green, really they top the chart, there is drive here in '18. They got the 14.6% of loan growth this year, 12.6%. Our commitments together have been over $2 billion this year. We have a bunch of unfunded deals that will get funded over the next six to 15 months or so. We still feel pretty confident that we're going to be in the low double-digit, even in the low teens for '19. Now that still we assume really, really strong and our pipelines remain strong. So I don’t think Brady, I think we’re still comfortable in the 10%, to 11% to 13% growth rate for the foreseeable future.

[Brad Gailey:]

All right. And then I know in the release you all talked a little bit about the robust deposit growth. Some of that came from broker and in the corresponding money market. I just wonder where did broker deposits stand as of now and then by correspondent money market, is that like deposits to other financial institutions?

[Malcolm Holland:]

Yeah so broker deposits here are about 7%, about $200 million of our total and what was the second half of your question Brady?

[Brad Gailey:]

Yeah just the corresponding money markets. I was just wondering what the balances were there and I'm guessing those accounts are from other financial institutions is that correct?

[Malcolm Holland:]

Yeah 100% other financial institutions about $400 million are just right around 15%. So that's probably our most sensitive product out there. It's highly rate sensitive. So we can move the rate up and bring in all in one and move the rate down and then move that up.

[Brad Gailey:]

All right and then lastly for me just an update on how you guys are thinking about the margin into 4Q?

[Noreen Skelly:]

Sure, it's Noreen. We're thinking that we did have a bounce back on the margin. As I said we had an early asset position with deposits coming in, deployment of loans in this quarter of five to 10 basis points back in the margins. So we are looking at 3.70 to 3.75 range from the fourth quarter

[Terry Earley:]

And Brady, this is Terry. On the Green side, I see the net interest margin moving up two basis points as well. Don't anticipate the security prepayment of that size as well as new non-accruals and I think we'll continue to benefit from an earning assets mix shift as we shift cash flows from the investment portfolio into the loan book.

[Brad Gailey:]

Got it. Thanks for the color guys.

[Malcolm Holland:]

Thanks Brady.

[Operator:]

And our next question comes from the line of Daniel Mannix of Raymond James. Your line is now open.

[Daniel Mannix:]

Yeah, hey guys good morning.

[Malcolm Holland:]

Good morning, Daniel.

[Daniel Mannix:]

All right. Just wanted to start with the PCI loans. So the ones moved to non-accrual on the two energy loans. Can you tell me what part of energy those loans are related to and then more broadly as you look at the remaining energy portfolios both at Green and Veritex, do you feel like you're adequately reserved for the rest of those and kind of your plans on potentially exiting that? Thanks.

[Clay Riebe:]

Sure, this is Clay Riebe. Both of those loans we feel like are adequately reserved based on current valuations. The total portfolio at Veritex the remaining oil and gas portfolios at $19 million and all of those loans are in the non-performing category today and we're working to exit those credits and continue to do that. On a combined basis, the two portfolios Green and Veritex, will have an acquisition of about $57 million in total combined balances, which is less than 1% of our loan book. And all of those loans are hedge to credit and the two that are problem assets here, they are both E&P credits correct.

[Daniel Mannix:]

Got it. Thank you. Terry I wanted to ask you about the mortgage warehouse business. We've been hearing a lot about some stiff competition there. What do you think about the prospects of that business and kind of where you guys are thinking about taking that going forward here?

[Malcolm Holland:]

That's a difficult question and during Q3, our balances were down just slightly in the mortgage warehouse business as we look at that going forward, we see it as a business at current pricing levels that we’re willing to continue at relatively the same level of customers now standing. I don't see it as a business we're looking to grow just because of the funding it would require and should pricing come under increasing pressure, our decision, our long-term decision that business may change, but right now, I think it’s a business that with the fee and spread income that provides us and the capital that it requires, generates some good ROEs for Green and I think for the combined company. And again as long as pricing stays relatively close to where it is now, that would be my position to stay in it about the same as well.

[Daniel Mannix:]

Okay. Great thanks and then just one last one for me. Can you guys just talk about the relative strength of the Dallas and Houston markets from what you're seeing right now? How are the demographics trending. Are you seeing anything from tax reform? Of course again the migration impact from the salt states, but more directly are your customers increasing their demand CapEx and then to piggyback off of that, have you given more thought into your physical footprint in those markets and once the Green Bank deal is done kind of what branches you might look to exit?

[Malcolm Holland:]

So I'll take the last one first. There is certainly to report over last year geography wise it just kind of fit real close to each other. So those are pretty easy and we’ll consolidate those that. Other than that, we love our footprint on the map look really, really good, where we add one or two strategic ones over the next couple of years possibly, but I would tell you we're probably going to stay pretty close to what we have in place with the few consolidations. The Dallas-Fort Worth and the Houston markets are really, really robust and really continues to be driven more than anything by job growth. We had 15,000 new jobs that just in Dallas last month. We're over 130,000 new jobs in the state back this year. It's just -- its really, really strong and most of that happening in Dallas-Fort Worth and so we still -- we haven't seen any deterioration in any of our portfolio outside of the three acquired credits, which we recognize knowing about that those were problems. And so I would say right now we're still pretty bullish on our two markets driven mainly by the job growth, which is driven by people moving into this state, which is in Dallas. I don't know the Huston number. Dallas it's 425 people today still moving in.

[Daniel Mannix:]

That's great color. Thanks for taking my questions, guys.

[Malcolm Holland:]

Thank you, Daniel.

[Operator:]

And our next question comes from the line of Brad Milsaps with Sandler O'Neill. Your line is now open.

[Brad Milsaps:]

Hey good morning.

[Malcolm Holland:]

Good morning, Brad.

[Brad Milsaps:]

Hey I joined just a few minutes late. So I apologize if you addressed this, but core loan yields at standalone Veritex, I think were up maybe four or five basis points linked quarter. Malcolm, could you give a little bit more color there and kind of what your outlook kind of says from a competitive standpoint from maybe seeing some improvement there and kind of relative to what you've seen in previous quarters?

[Malcolm Holland:]

I think Brad, we're making some headway there. It's definitely moving up. Our third quarter average yield for new loans was about 5.60. So I do see it moving up a little bit Brad, maybe 7 bps or so, but I think we're still again -- we're pretty bullish on that moving up.

[Brad Milsaps:]

Okay. And just to follow up on that, when you guys announced the deal, I think Veritex on a standalone basis was somewhere closer to a kind of a 3.75% to 3.80% kind of NIM. I think last when Green Bank gave guidance, they were looking for 3.90% to 4%. Obviously, we've come back off those numbers a little bit. As you think about for the combined NIM of the bank as you put the two together just kind of accretion income notwithstanding, is it somewhere in that 3.70% to 3.75% type range as the two companies come together?

[Malcolm Holland:]

Go ahead, Terry.

[Terry Earley:]

Yeah. Brad I think so, I think 3.70% it's 3.75% plus or minus 5 bps or so I'd say probably a fair range, again excluding the accretion on the Green portfolio from a market going forward.

[Brad Milsaps:]

Okay. And Terry the offset will be that the Green balance sheet is maybe a little bit bigger than you were fine would being kind of going in?

[Terry Earley:]

Correct. I think that the growth has been a little stronger than we had thought. We expected the quarter like this 90 days ago where we had this type of loan growth, but we were sort of we demonstrated as Malcolm said earlier that the business development efforts at Green are the best they've been in the long, long time after the exit of energy and the rundown. So it feels good and again, don't ever mean -- it's good to have the 60% of Veritex portfolio floating and 80% of the Green portfolio floating. So whatever the fed does, it certainly going to help us there. Help us as we try to manage what's happening on the industry and deposit side.

[Malcolm Holland:]

And Brad I would say during the many acquisitions that we've done, majority of what happens is we'll put the deal together and that bank will have state 3D prep [ph] and slow down. I got to give a lot of credit to Jeff Greenway and his team because they are completed focused on still acquiring new business and to see this kind of growth over 90 days and during the announcement we have seen that and so it just speaks volumes and what they are doing at Green.

[Brad Milsaps:]

Thanks guys. And just one final thought. Terry, the small uptick you saw in non-performers at Green. Would those identify kind of early on in the process where you kind of slated for marks or are those maybe newer problem loans that came out this quarter that will sort of warrant? I think you may have mentioned there were sub standard, but I can't recall for certain?

[Terry Earley:]

Hey Brad just on first, those are loans that originated many years, probably three-plus years ago and so they have been on the watch list and on our radar that weren't new issues that popped up. It was just a timing issue of where [indiscernible] talk anybody with the non-accrual, but not anything unusual wherever, no surprise.

[Brad Milsaps:]

Okay. Great. Thank you.

[Operator:]

And our next question comes from the line of Gary Tenner of D.A. Davidson. Your line is now open.

[Gary Tenner:]

Thanks. Good morning. I just had a follow-up question Noreen on your kind of comments on the bounce back of margin for the fourth quarter. Does that outlook suggest that you've sort of maybe pre-funded some of the loan growth in the fourth quarter with some of the brokered and correspondent deposit gathering in the third quarter. So the incremental cost of new deposits next quarter maybe won't pull up core deposits that you saw?

[Noreen Skelly:]

Yes. I think that's fair Gary.

[Gary Tenner:]

Okay. And then bounce back quarter here in the third quarter in terms of just kind of accretion benefit, any sort of visibility or expectation of where we should be sort of looking for that number in the fourth quarter?

[Noreen Skelly:]

What number, I'm sorry.

[Gary Tenner:]

Accretion.

[Noreen Skelly:]

In terms of the PCI and the cash recovery that we get out that it's anybody guess, we were fortunate to have $2 million cash recovery on an impaired loan that we never expected when we originally market that, that you can see that in our numbers this quarter. So for the purchase performing loans, we've really seen that come down far quicker than we originally expected. That number is 600,000 this quarter and we expect it to slow down this over $300,000 for the next quarter.

[Gary Tenner:]

Sorry Noreen to interrupt you, but the $2.6 million benefit this quarter, $2 million of that was single credit recovery?

[Noreen Skelly:]

You got it.

[Gary Tenner:]

Okay. Thanks very much.

[Noreen Skelly:]

That sort of the offset to the -- we had a 900,000 impairment on a purchase credit impaired loan and then we had $2 million pick up on something we never expected. So unfortunately there are different places on the balance sheet or on the income statement.

[Gary Tenner:]

Got it. Thank you.

[Operator:]

[Operator instructions] Our next question comes from the line of [indiscernible] Capital Management. Your line is now open.

[Unidentified Analyst:]

Great. Thank you. I was just curious, I just want a little bit more color on in particular Green, what is leading to the loan growth string? What's the underlying reasons, where are you seeing the demand and just help me understand the drivers there a little bit more if you could?

[Terry Earley:]

Hey Matt, this is Terry. Hope you're doing well. I mean, I think the biggest thing is when you at CRE, when it was out of the CRE business and running down, all run down the three and exiting oil and gas and was just depended on the C&I businesses, this company was a mid-single-digit type grower. And that's what's really happened is CRE back in the game and there's a lot of opportunity there in both markets Houston in DFW and I think that's the big difference in terms of our growth profile over the last couple of quarters as compared to 2017. Also of note that our payoffs, Veritex's payoffs were -- ours actually came down. We had higher payoffs in the first half of the year. So our production was in terms of new commitments relatively flat in production driven by both C&I and CRE and CRE coming on strong. But our payoffs were down and so it translated into better loan growth for us. So we went up like 10.6% last quarter to the 17% annualized this quarter. So and I have to think as Malcolm said, we've got a good experienced team and they are, credit to Jeff and his team. They stayed very, very focused on trying to be active with customers and prospects and we're trying to do everything we can to keep them out of the minutiae and work of the integration planning. They don't need to get caught up in that and there's been a lot of times spent between the credit teams and the sales teams to get uncomfortable with how we're going to deliver credit and our risk appetite and I think they see us as a good fit. They see how the process isn't going to be that different than what they were used to. So they're not called out and worrying about those things. They're very focused on being dealing with customers and capturing new business and I think that focus that work that's been done on the integration by the credit thing is really paying off for us.

[Unidentified Analyst:]

Great. Thank you. End of Q&A

[Operator:]

Thank you. And ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

[Malcolm Holland:]

Thank you.