雅虎香港財經 Veritex Holdings, Inc. (NASDAQ:VBTX) Q4 2022 Earnings Call Transcript
Veritex Holdings, Inc. (NASDAQ:VBTX) Q4 2022 Earnings Call Transcript January 25, 2023
Operator: Good day, and welcome to the Veritex Holdings Fourth Quarter 2022 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 Ms. Susan Caudle, Investor Relations Officer and Secretary to the Board of Veritex Holdings.
Susan Caudle: 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. 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. 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 discussed non-GAAP measures in our filed 8-K earnings release. Joining me today are Malcolm Holland, our Chairman and CEO; Terry Earley, our Chief Financial Officer; and Clay Riebe, our Chief Credit Officer. I will now turn the call over to Malcolm.
Malcolm Holland: Thank you, Susan. Good morning, everyone, and welcome to our fourth quarter earnings call. Today, we want to focus on our fourth quarter results, as well as our 2022 year-end results. For the quarter, we reported operating earnings of $0.74 per share or $40 million and for the year, $2.74 per share or $147.9 million. Pretax pre-provision returns were 2.15% for 4Q and 1.97% for the year. Year-over-year metrics continue to perform at levels with ROAA at 1.35%, TBV increase over the year of 6.6%, ROATCE of 16% and efficiency ratio at 48%. The quarter did have a few items of note, which Terry will give you additional detail on momentarily. Loan growth less mortgage warehouse continues to temper, trending down since 2Q to 25% for the quarter end and 34% for the year.
It is clear that loan growth in 2023 will be much lower than in 2022 with our current pipelines down over 76%. We continue to think 2023 loan growth will be in the low double digits, primarily consisting of the to-be- funded construction book. The market is certainly slowing down as the borrowers are uncertain of a looming recession and the interest rate forecast. They have done a good job of self-policing their credit requirements. Payoffs for the quarter remained fairly consistent with previous quarters at $400 million, but we do feel this level of payoffs will continue to decline in the coming quarters. Overall credit trends are moving negatively as we are seeing signs of a slower economy with the rising rates, creating some level of stress.
We did record a $5 million C&I charge-off of an acquired credit that we've been monitoring for several months. This loan is now fully extinguished. Our total provision of $11.8 million for the quarter accounts for the charge-off, growth and keeps our ACL at 1.01% of loans. NPAs to assets did increase 10 bps, but still remain at an acceptable level of 0.36%. Deposit growth continues to be our greatest focus and with most banks, our greatest challenge. Our deposits did grow during the fourth quarter, 17% annualized and shows our commitment and dedicated strategy to growing deposits at the same rate as our loans grow. We are investing in process, people and technology while making core deposit gathering our top strategic initiatives. I'll now turn the call over to Terry.
Terry Earley: Thank you, Malcolm. Starting on Page 5. Q4 was a challenging quarter on several fronts and would have been a lot better without the loss from Thrive and the charge-off on the acquired credit that Malcolm referenced earlier. The financial metrics around ROAA efficiency and ROATCE are still very acceptable. Tangible book value per share ended the year up 18.64%, 5.2% for the quarter and 11% for the year after adding back the effect of our dividend. As you look at the financial results on a year-over-year basis, remember to factor in the capital raise in the first quarter where we issued approximately 4.3 million common shares and raised $154 million in common equity. Given the current economic outlook, we are pleased to have achieved such a favorable result for the bank.
The capital raise certainly weighed on the year-over-year performance and EPS and return on tangible common equity. Additionally, 2021 was a very favorable credit year as we didn't need to provide for growth given the reserves established during the pandemic. Finally, in 2021, we also had over $9 million in PPP fees that did not reoccur in 2022. On Slide 9, loan production declined 35% from Q3 to Q4 as interest rates continue to increase, economic uncertainty rose and liquidity became more of a concern. With the termination of the interLINK deal late in Q3, our focus shifted to growing our deposit portfolio through greater emphasis on C&I and a lower appetite for ADC and CRE. Unfunded ADC construction continues to drop at the rate of $300 million to $400 million per quarter.
Photo by Ibrahim Rifath on Unsplash
On Slide 10, you see the evidence of the greater emphasis on C&I. During the fourth quarter, the C&I accounted for 41% of our production, up from 30% in Q3. On to Page 11. Net interest income increased by $5.1 million or just over 5% to $106.1 million in Q4. The two biggest items in the increase are the Fed raising short-term interest rates, which represents $4.2 million of the increase in growth, which also accounted for about 700 -- $0.7 million The net interest margin increased 10 basis points from Q3 to 3.87%. The margin for the month of December was 3.93%. The Q4 NIM was negatively impacted by interest reversals on problem credits and intense deposit rate competition in our primary markets of DFW and Houston. This competition for deposit volume at a reasonable price is not just limited to other financial institutions.
For the first time in my career, banks are competing directly with the U.S. Treasury. At the close yesterday, 3-month T-bills were paying 4.7%, creating significant rate and volume pressure on the banking system. All this to say, NIMs are likely at or very near their peak as the Fed deposit betas are going to catch up, making growth in net interest income harder to achieve. Veritex asset sensitivity is largely unchanged from Q3. We've been intentionally hedging floating rate loans to mitigate falling short rates out through 2026. On Slide 12, please note that during our - during Q4 our loan yield was up 97 basis points to 5.98%, while deposits increased 70 basis points. Q4 loan originations were 93% floating and these floating rate loans carrying an interest rate at quarter end of 7.19%.
So thankful to have a predominantly floating rate loan book to offset the deposit beta impact. Slide 13, a productive quarter on the deposit front with growth of $375 million and a 16% CAGR since the beginning of 2020. Our cycle-to-date to total deposit beta is approximately 30% as total deposit rates have increased 119 basis points and the average Fed funds effective rate has moved 353 basis points. We've seen the deposit mix start to change during Q4 with DDA declining 6% and time deposits growing 25%. On Slide 14. Non-interest income increased by $1.2 million to $14.3 million. Great performance in the USDA business was largely offset by an increased loss at Thrive and lower swap revenue. We'll come back with additional comments on USDA and Thrive in just a month.
Non-interest expense, including severance costs, increased $6.1 million to $56.7 million, reflecting the investments in talent we have discussed for many quarters. Salaries were up $1.7 million and variable comp was up the same. A meaningful part of the variable comp increase is due to the exceptional fee performance at North Avenue Capital during the fourth quarter. The rest of the expense increases reflect inflationary pressure and is spread across the other categories. Even though operating expenses are up, the efficiency ratio remains strong in the 47% range. Looking forward, the pace of hiring is slowing. This seems prudent as loan production and growth slow in 2023. Slower loan growth will translate into stronger capital ratios and less funding pressure.
Turning to Slide 15. As I noted earlier, Q4 was a great quarter for NAC, with $75 million in USDA loans closed, and additionally, for the full year in '22, we closed $117 million. We entered 2023 with positive momentum, premiums looking pretty well and our pipeline is full. Our SBA business continues to strengthen as new leadership and recent hires gained traction. We closed almost $40 million in SBA volume in 2022, including $16 million in Q4. The pipeline is up 46% since the end of the third quarter. Gain on sale premiums in the SBA business are stronger than a quarter ago, but much weaker than the USDA side. Moving to Thrive. Veritex recorded an equity method loss of over $5 million as funded volume decreased to almost $415 million, but gain on sale margins collapsed to 1.89% due to rising rates, significant rate volatility and the impact of long-dated rate locks.
Given these results in Q4, they stopped issuing mortgage rate locks longer than 90 days and initiated an effort to rightsize the expense structure of the company, given forecasted 2023 volume. We expect both actions to meaningfully improve Thrive's financial performance. On Slide 16, total capital grew approximately $41 million during the quarter and $296 million during 2022 during the year at $1.4 billion. CET1 ratios have expanded by 51 basis points year-over-year. Looking forward on capital, we believe that moderating loan growth and lower unfunded commitments, coupled with higher earnings from rising rates should allow us to achieve our CET1 target of 10% by the end of 2023. With that, I'd like to turn the call over to Clay for some comments on credit.
Clay Riebe: Thank you, Terry, and good morning, everyone. Moving to Page 17, you can see an increase in criticized assets during the quarter that's driven by our quarterly review process for credit. The largest change during the quarter was driven by a move to special mention of a customer in our note finance business that has experienced negative earnings, but continues to maintain good liquidity and capitalization. We downgraded three office properties during the quarter that have demonstrated underperformance. Surveillance is the word of the year for Credit team. As Malcolm mentioned, we had an uptick in NPAs during the quarter. That was driven by a downgrade in a PCD pool of loans to nonaccrual status. A single credit that made up 95% of the outstanding balance of one of our PCD pools was posted for - foreclosure because the pool is a unit of accounting for these acquired loans, they almost be great at the same.
Our ACL for the quarter grew by $6 million, mostly due to the change in Moody's projections for Texas unemployment and GDP, which accounted for $5.2 million of the increase. Growth in loans accounted for an additional $6.3 million of the build offset by charge-offs. During the quarter, we had a bulge of past dues in the 30 to 60-day range. Most of the increase was created primarily by administrative past dues caused by the end of year season delays. $10.2 million of the bulge was cleared in early January. Turning to charge-offs. During the quarter, we experienced an unexpected deterioration in an acquired $5.2 million commercial credit in the power generation space. During the quarter, the borrower became unresponsive and missed several established milestones that led us to question the viability of the borrower.
Given the facts that we acted quickly to remove the credit from the books and we'll treat any collection proceeds as a recovery in future quarters. With that, I'll turn it back over to Malcolm.
See also 12 Best S&P 500 Dividend Stocks To Buy and 12 Cheap Biotech Stocks To Buy.
To continue reading the Q&A session, please click here.
