Veritex - Q2 2022
July 26, 2022
Transcript
Operator (participant)
Good day, and welcome to the Veritex Holdings second 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. Please go ahead.
Susan Caudle (Investor Relations Officer and Secretary to the Board)
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 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. 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.
C Malcolm Holland (Chairman and CEO)
Good morning, everyone, and welcome to our second quarter earnings call. Before we get started, I'd like to congratulate and thank my dedicated team on producing yet another exceptional quarter for Veritex. We're proud to serve Texas as a whole, and specifically the DFW and Houston markets, which are two of the strongest and most resilient markets in the U.S. Texas' focus on promoting growth, a pro-business environment, and increased job opportunities aligns to our core culture and mission. Slide four of our deck provides a small glimpse into the incredible statistics of our market we serve, which continue to provide ongoing opportunities to further our profile and scalability. Now let's jump into the earnings for the second quarter.
For the quarter, we had net operating income of $30 million or $0.55 per share, and a pre-tax, pre-provision operating income of $46.7 million or $0.85 per share. This pre-tax, pre-provision is an increase of $5.1 million over the previous quarter, despite lower non-interest income of $4.7 million. The increase was fueled by a surge in net interest income of over $11 million. Obviously, this increase in net interest income was a result of some outstanding loan growth. As I mentioned last quarter, the loan growth came late in Q1, which started this quarter with a great deal of momentum. This momentum only got stronger during 2Q.
For the quarter, loans net of mortgage warehouse grew $791 million or 44% annualized, and $1.16 billion for the first half of the year or 35% annualized. This quarter was a perfect storm of many of our lending teams surpassing our expectations, payoffs reducing, and candidly, good old-fashioned relationship building. The quality of our growth was exceptional. It should be noted that between 25% and 30% of our growth in 2022 was from newly hired talent since the start of the pandemic. We look at this growth as an increase in market share versus economic growth as these lenders move their books of business. I've been saying for two years now how we are committed to new hires and looking to increase our talent, our experience levels, and investment in quality relationships.
As you can see, these efforts are paying off. You can see on slide seven the breakdown of the loan categories that stratifies the growth for the second quarter. I do wish to address the notion that this level of growth is headed into what many describe as a weakening market. Our credit underwriting over the past several quarters has only become more stringent, with increased stress analysis and continued large equity contributions. The Texas economy continues to produce outstanding results and outperform national numbers. The best metric I've found is that Texas sales tax was up 16% over the prior June. For the first 10 months of the state's fiscal year, sales tax revenue topped $35 billion, a year-over-year gain of 20%, which is more than double the rise in inflation.
Understand that these are backward-looking metrics, but we have not seen the distress with our clients at this point in time. We have seen a few projects paused due to rising rates or supply chain costs. With that said, we expect our loan growth to slow in the back half of the year to 16%-18% range. Our deposit growth for the year has also been exceptional, with 2Q growth of $630 million or 32% annualized, and for the first half of the year, $1.2 billion or 32% annualized. Our non-interest-bearing deposits have consistently stayed in the 35% of total deposit range, even in this rising rate environment. I couldn't be prouder of the job our relationship managers and our support functions have done to continue to build our bank.
Like growth, our credit metrics continue to trend in a positive direction. NPAs fell for the seventh consecutive quarter and now stand at 40 basis points. Down from a high of 111 basis points at 3Q 2020. Charge-offs for the quarter were virtually nil at $909 thousand for the quarter. Our ACL remained at 1.02% after a loan reserve expense of $9 million, primarily driven by our strong growth quarter. We have and will continue to be diligent and conservative in our underwriting standards and the selection of new credit opportunities. I'll now turn the call over to Terry.
Terry Earley (CFO)
Thank you, Malcolm Holland. Before I get started into specific pages and results, it's important to remember that Q2 was the first full quarter since our capital raise in March. This capital raise was critical given our anticipated loan growth for Q2. However, the capital raise inherently makes earnings per share and return on tangible common equity metrics more challenging. Starting on page 6, Q2 was a very strong quarter for Veritex, with one exception. Net interest income grew almost 16% on a linked quarter basis, and expenses were in line with previously provided guidance, which include the talent investments we've been making since the beginning of the pandemic. Additionally, credit metrics continued to improve. Our weak spot, which is largely out of our control, was fee income. I will discuss this more later in my commentary.
We don't have a presentation table on operating leverage, but let's start our discussion there. Revenue growth since Q2 2021 has been 19.2%, even with weaker fees in Q2. Expense growth over the same period has been just under 15%. This results in about 4.5% of positive operating leverage. If you back out the impact of $1.6 million in PPP fees during Q2 2021, then operating leverage improves to 7%. Those are strong results that indicate our investments in talent, which are a significant factor in our growth profile, are generating strong returns. Our operating return on average tangible common equity was down to 12.8% in Q2 due to the capital raise and lower fee income. Return on tangible common equity has averaged 16.6% over the last four quarters.
Veritex's pre-tax, pre-provision operating return on average assets was 1.76% for Q2 and has averaged 1.82% for the last year, reflecting a growing but efficient company. Tangible book value per share has grown by 10.7% over the last four quarters after adding back the impact of the dividend. On slide seven, Malcolm has already mentioned our loan growth for the quarter. This loan growth includes the purchase of $137 million in owner-occupied mortgages. On slide eight, advances on the ADC portfolio are approximately $400 million per quarter. Average mortgage warehouse balances increased 13.6% in the second quarter, and we're certainly pleased with these results, given what is going on in the mortgage industry. This portfolio represents 6% of average total loans in Q2. Skipping to page ten.
Net interest income increased by $11.5 million, or almost 16%, from Q1 to $84.5 million in Q2. The two biggest items in the increase are growth, which accounted for $7.4 million of the increase, and the Fed raising short-term interest rates, which represents about $2.4 million. The net interest margin increased 20 basis points from Q1 to 3.42%. The NIM got stronger as the quarter progressed, given the timing of the Fed rate hikes and the lag in the reset of one-month SOFR and LIBOR-based loans. The NIM for the month of June was 3.55%% and has strengthened further in July as contractual loan yields on the portfolio have increased another 31 basis points through mid-month.
Our internal modeling indicates that we should achieve 5 basis points of NIM expansion for every 25 basis points in Fed move. As you look to model net interest income in future periods, keep the following in mind. First, the ending balance in earning assets is $582 million above the average earning assets for Q2, creating a significant positive jump-off. Given market expectations of 175 basis points in additional Fed rate hikes in 2022, this will add significantly to net interest income. Veritex's asset sensitivity has decreased slightly since Q1, but so has our down rate risk. We have intentionally put fixed rate assets on the balance sheet to mitigate falling short rates in 2023. Skipping to slide 12. As I said earlier, fee income was the one weak point for Veritex during Q2.
Non-interest income declined by $4.7 million to $10.4 million for the quarter. Revenue related to our government-related businesses drove the decline. Gain on sale income declined $4.1 million. Additionally, there was a $1.3 million write-down on our SBA and USDA servicing assets. Partially offsetting these declines were increases in deposit fees, equity investment income via the investment in Thrive Mortgage, and interest rate swap fees. In fact, Q2 swap income was the highest in Veritex's history. Turning to slide 13. Q2 was a bumpy quarter for North Avenue Capital as the USDA centralized all funding decisions into Washington after loan demand outstripped federal government budget allocations. This significantly impacted our ability to get loans closed.
This was compounded by rising interest rates and economic uncertainty, which resulted in gain on sale premiums going down approximately 40%-50%. Additionally, the rising interest rate resulted in the valuation impairment of those assets, the servicing assets I noted previously. As it relates to Q3 2022, it's our understanding that the USDA has found $hundreds of millions of additional funding for their B&I program, which improves our chances of getting a few USDA loans closed. The new fiscal year for the government starts in Q4, so funding should not be a problem from that point forward. Our SBA business was also impacted by lower gain on sale premiums in the same range as they were in the USDA business, and also a servicing impairment.
It is likely that if gain on sale premiums in the USDA and SBA market remain under pressure, that Veritex will choose not to sell a portion of our production. Rather, we will portfolio the loans given their strong pricing and favorable capital treatment. Know this, we're gonna make the right long-term economic decision for Veritex, even if it means foregoing short-term revenue. Moving to Thrive. Funded volume increased approximately 19% in Q2, while the MBA is forecasting a 2% decline for the same period. Thrive has been able to maintain their gain on sale margins due to the high percentage of volume coming from Sun Belt states and a great reliance on purchase business versus refi. They are aggressively managing costs and staffing levels while successfully hiring strong origination teams in different parts of the country that could add meaningfully to forecasted closed loan volumes going forward.
It's been one year since we made this investment in Thrive. Over that period of time, we've generated a pretax return on our investment of between 13% and 14% in what has been a very turbulent mortgage market. Operating expenses on slide 14 increased $2 million from Q1. The biggest driver of the increase is marketing costs associated with the Veritex Bank Korn Ferry Golf Championship, which is a tournament held in Arlington, Texas, during the month of April. So far in 2022, we have incurred just under $94 million in operating expenses. We remain confident in our expense guidance of $185 million-$195 million for the full year. Moving forward to slide 15.
A strong quarter on the deposit front, with growth of $628 million, with growth being driven by our community bank at 13.7% linked-quarter annualized, where we run a sub-53% loan-to-deposit ratio. The rest of the growth is from our mortgage warehouse business, interLINK, and brokered time deposits, offsetting outflows in our correspondent banking division. Total deposit cost increased 11 basis points to 28 basis points in response to the Fed increasing rates by 125 basis points during the quarter. On slide 16, total capital grew $36 million during the quarter to $1.3 billion. CET1 ratios have expanded by 22 basis points year-over-year. As of quarter end, we had significant excess capital above the regulatory minimums, plus the capital conservation buffer.
Looking forward on capital, we believe that moderating loan growth, coupled with higher earnings from rising interest rates, will strengthen the capital ratios. Additionally, we are evaluating a credit risk transfer on our mortgage warehouse portfolio to lower risk-weighted assets. This transaction should add approximately 30 basis points to our CET1 level when it's complete. With that, I would like to turn the call back over to Malcolm.
C Malcolm Holland (Chairman and CEO)
Thank you, Terry. We had an exciting quarter and very focused on the positive momentum we have created by our upgrade in talent and focus on scale. As I've mentioned many times, our focus has always been on hiring top quality talent. For the quarter, we hired 65 new employees, 16 of which are on the production side. Our hiring of producers will slow a bit now that we have many of our teams at full capacity, but our overall investment in talent for Veritex will continue. We've added a new pipeline of potential bankers with our first class undergoing the Veritex Banking Development Program. We have 16 participants, five internal and 11 external, that are part of a one-year development program that focuses on building future talent. We also have 13 college students in our Veritex Summer Intern Program, which is now in its fourth year.
We are committed to developing the banking leaders of the future and know this pipeline of talent will benefit us for years to come. A quick update on the interLINK transaction. We continue to have detailed dialogue and work with our regulators with full expectation of a 3Q closing as previously communicated. interLINK continues to grow and perform very well. The future continues to be bright for our company. We have the right team and the right markets, and we continue to feel strongly that we have a firm hand on building continued value. With that, I'd like to open the line up with any questions.
Operator (participant)
As a reminder, to ask a question, you will need to press star one on your telephone. Again, that is star one on your telephone. Please stand by while we compile the Q&A roster. Our first question is from Brett Rabatin from Hovde Group. Your line is now open.
Taylor Brodarick (Equity Research Analyst)
Thanks. This is actually Taylor stepping in for Brett. A question on the government guaranteed. Just a reminder, you know, maybe that's slowing off-balance-sheet that. Is there any sort of read-through on the expense side that we should think about going forward? No. I mean, this is a temporary thing. We strongly are committed to the business. If anything, we're investing in talent and building that business more. We're just right now with rates going up and with this temporary blip in funding from D.C. and our government. It's business as usual for us. You know, pipelines are full, and we continue to hire, you know, in that business.
Terry Earley (CFO)
You know, look, if the gain on sale margin's gonna stay weak, these are great balance sheet assets, given that you got a 20% risk weighting for capital purposes. That's, you know, if the economic, long-term economic decision is the best for us to hold, we're gonna hold, and we're gonna keep building the business 'cause it doesn't use much capital.
Taylor Brodarick (Equity Research Analyst)
Great. Thanks. Also on the marketing expense, maybe I missed that. What would you attribute that, the benefit from that? Would that be both sides of the balance sheet or anything else specific from ramping that up?
Terry Earley (CFO)
You know, we have a nice marketing budget. We'll continue to market the way we market. We have spent heavily in the golf industry and continue to do that despite some of the changes in the tours right now.
Taylor Brodarick (Equity Research Analyst)
Okay, very good. On the hires, anything specific? I know, and obviously that's been easing, as you mentioned earlier, but any sort of specialty focus or just general producers that you've been offering?
Terry Earley (CFO)
No, I mean, yeah, I mean, we've kind of got somewhat of a full team across the board with the exception of a few areas. You know, our commercial areas we continue to invest in, but we feel really good with the folks we have. You know, the recent hires in Houston have been very, very positive, and the momentum down there is just starting to build. Again, I just reiterate that a lot of the new business that we have is market share grab, and for us, that's a real positive. You know, I think we're in a good place on the hiring, but we still have 40-something open positions, so we'll always be hiring.
Taylor Brodarick (Equity Research Analyst)
Okay. Well, thank you for the commentary. Appreciate it.
Operator (participant)
Your next question comes from the line of Brady Gailey with KBW. Your line is open.
Brady Gailey (Managing Director of Equity Research)
Hey, thanks. Good morning, guys.
C Malcolm Holland (Chairman and CEO)
Hey, Brady.
Terry Earley (CFO)
Morning, Brady.
Brady Gailey (Managing Director of Equity Research)
The gain on sale premium, you know, coming in in the second quarter, is that something, or is that more just a sign of the times? Is that related to the rising interest rates? You know, do you expect that to bounce back? You know, what's the forecast on how you think about gain on sale premiums for that business? Or is it just kinda up to the market and it's hard to forecast?
Terry Earley (CFO)
Well, I mean, I think a lot of it is driven by rising rates and economic uncertainty, and even with strong prepayment protection in the USDA space, I think it's making the buyers and investors in that paper less aggressive in their bidding. I think that's what's contributing to it. Now, I think once there's the terminal rate for Fed funds and the timing of the rate curve moving or short-term rates moving down is what I think is gonna be key and just greater economic certainty on the, you know, are we gonna have a recession? How deep, how short, et cetera, is it gonna be? I think that's when premiums start to strengthen. My general view is that premiums will probably remain weak through the balance of the year.
I expect them to start strengthening as we get into 2023. That's on the premium side. On the funding and I think we'll be closing loans. The question is, are we just gonna hold or are we gonna sell? And so I expect closed volume now that the USDA is getting its funding lined up and we're heading into a new fiscal year starting October 1. I expect a really strong back half of the year on the funding side, but may just all end up in portfolio, which has got really good implications for net interest margin, growth, et cetera. If that's the way it happens, so be it, you know?
We have a way, looking at the present value of the cash flow of sell versus hold, you're discounting at our cost of capital. When that length of time for it to sell and your break-even period, if it gets too short, we just hold, and we're gonna stay to that methodology, because it's the right long-term economic decision for Veritex.
Brady Gailey (Managing Director of Equity Research)
Yeah, that makes sense. Just for expectations, I mean, 1Q was such a great quarter. I mean, $5 million of fees there. You know, 2Q was closer to $1 million or a little under $1 million. I mean, do you think the 2Q rate is kinda what we should expect for the back half of the year, or do you think it could be better?
Terry Earley (CFO)
I think I would expect that it will be a little better, but not, you know, I don't think it's back to. I think Q3 will be the weakest. I think Q4 will get better. Will it get back to Q1 levels? Hard to know, Brady. But I think this is true for the SBA business as well. I don't think it's gonna be great. I mean, roughly right now, only half our production meets our hurdles to sell when we look at the gain on sale premiums. So, I would be pretty conservative on that. But that's, you know, the thing I feel the best about.
You know, in terms of what's gonna offset that, we made a big strategic hire at the beginning of the quarter in interest rate swaps, and we had the best quarter ever in Q2. Trust me, it's gonna be even better than that in Q3, 'cause we can see what's in the pipeline there. There's some offsets, but I wouldn't go crazy, especially in Q3, getting overly optimistic. I mean, I think we're gonna have better than Q2 overall in fee income because of interest rate swaps. I think the government guaranteed business is gonna stay weak on the gain on sale side through the quarter and then improve more in Q4.
Brady Gailey (Managing Director of Equity Research)
Okay. All right. That makes sense. Finally, for me, you know, growth is slowing here. It's still gonna be great growth, but, you know, growth is slowing. Your profitability is enjoying the benefit from higher rates. You know, it sounds like you're about to get a little boost to capital from the CRT Mortgage Warehouse deal. You know, the stock's at 8 times earnings. Do you start thinking about reengaging in the buyback at this point, given all those dynamics?
C Malcolm Holland (Chairman and CEO)
No, it's just not the right time. You know, candidly, investors rather have us invest in the future growth and earnings of the company, and that's where we're focused. I would not model in any buybacks.
Terry Earley (CFO)
It's definitely an attractive valuation. Historically, before we had such a strong growth profile, the answer would've been different. We'd have been saying yes, but that's not where we find ourselves now. We'll deploy all our capital generation to even, you know, even you know, you saw that CET1 went down to 9.25%. You know, I need that moving back up. I, you know, with the growth profile that we're talking about, it's pretty neutral to capital, but it doesn't build, and I need it to be a little bit higher.
C Malcolm Holland (Chairman and CEO)
CET1 is up year-over-year.
Terry Earley (CFO)
It is up year-over-year 22 basis points.
C Malcolm Holland (Chairman and CEO)
Right.
Brady Gailey (Managing Director of Equity Research)
Okay. All right. Great. Thanks for the color, guys.
Terry Earley (CFO)
Thank you, Brady.
Operator (participant)
Your next question comes from the line of Matt Olney with Stephens Inc. Your line is open.
Matt Olney (Managing Director)
Hey, thanks. Good morning, everybody.
Terry Earley (CFO)
Hey, guys.
C Malcolm Holland (Chairman and CEO)
Hey, Matt.
Matt Olney (Managing Director)
It sounds like the loan growth pipeline remains strong in the back half of the year. Would love to hear more about the plans for funding the growth. Good core deposit growth in 2Q. You took on a little FHLB. I guess you also have the interLINK deal closing at some point in the third quarter. Just you roll it all together. Would love to hear kind of the thoughts on funding the growth in the back half of the year. Thanks.
Terry Earley (CFO)
Yeah, that's a great question. You know, we have started to participate at the downstream bank in interLINK even before we had it closed, and we started doing that in the second quarter. The optics with the broker-dealers to have us as the acquirer going ahead and participating is just pretty compelling from their perspective. That's what we did. I would expect, you know, we've been saying all along that you know, we thought we'd probably fund up to $1.5 billion with interLINK in 2022, and that's. I expect that to be a big contributor.
I also think that our Mortgage Warehouse business continues to see good opportunities in the deposit space there, the escrow deposits, those type things where we're able to achieve good spreads over our ECR rate. Like, you know, our community bank continues to really produce great results for us on the deposit side. Got a strong emphasis on Treasury. I think it's gonna be a combination of all those things, Matt, that are going to fund the growth in the back half.
All I can say is with the growth that the industry's seeing, I'm glad that we have interLINK, you know, pretty close to closing because without it would be a much more different and challenging quarter.
C Malcolm Holland (Chairman and CEO)
We redid our incentive plans for our bankers on the deposit side, and we're starting to see some payoff from that. We'll continue to focus on you know incentives on the deposit side. The community bank had an unbelievable growth quarter and expect that that will move into the corporate side here also since we've changed that plan up some.
Terry Earley (CFO)
We changed that at the beginning of the year.
C Malcolm Holland (Chairman and CEO)
Yeah.
Terry Earley (CFO)
Just so you never knew that funding was gonna get.
C Malcolm Holland (Chairman and CEO)
Right. Just a much greater emphasis on this, the value of deposits.
Matt Olney (Managing Director)
Yeah. Yeah, agree on the timing of this. Should be good. Any color on how much of the deposit growth in 2Q were from some of those participations that you mentioned, Terry?
Terry Earley (CFO)
I mean, I mentioned four intentionally, and they're all pretty significant drivers, with the one downside being our correspondent banking division. You can see the correspondent banking division because of what's happening with loan growth across the industry and the Fed pulling liquidity out of the system. We've seen a pretty steady decline in that. You know, earlier in the first quarter, it was public funds. You know, Matt, they're all significant contributors to this quarter's $628 million. Probably the largest was interLINK, but the rest are awfully significant and big time contributors.
Matt Olney (Managing Director)
Okay. That's helpful. I guess just taking a step back, but kind of the same discussion with interLINK. How should we think about how much of the future growth, not just in 3Q, but next year and the year after, how much of the loan growth do you expect to be funded by the interLINK?
Terry Earley (CFO)
I would say, you know, a third to a half, probably something in that range. You know, if we're growing loans in the mid-teens, you know, I think we through our banking initiatives and treasury initiatives, community bank, et cetera, we can fund, you know, high single, low double digits, something like that, and then the rest to come through interLINK. InterLINK is never the sole answer. It's just a funding gap to make up the difference because in these two markets we operate in, DFW and Houston, the loan growth opportunities with strong credit have far outstrip the deposit funding opportunities.
Matt Olney (Managing Director)
Okay. Just lastly, you mentioned the community bank also had some really good deposit growth this quarter. How would you characterize the bank's deposit pricing within the metro market? In other words, how does it compare to some of the other peers within the Houston and DFW markets?
Terry Earley (CFO)
I would say it's pretty well. It's in line with the market right now. I think y'all have heard me say for the past few years, going back a few years pre-pandemic, I called it hand-to-hand combat. That I felt like DFW was the most irrational deposit pricing market I've seen in my career, which covers a long time and a lot of geography. It's just incredibly competitive. My personal view is that that level of competition will return. Will it be Q4? Will it be early next year? I'm not exactly sure. I think you have too many competitors, so I think it's gonna be pretty intense. Right now, that hasn't manifested itself yet. Pretty rational at the current time.
Matt Olney (Managing Director)
Okay. Thanks, guys.
Terry Earley (CFO)
Thanks, Matt.
Operator (participant)
Your next question comes from the line of Brad Milsaps from Piper Sandler. Please proceed with your question.
Terry Earley (CFO)
Brad.
Operator (participant)
I'm sorry, Brad seems to have disconnected. We will go to the next question. Your next question is from Michael Rose from Raymond James. Your line is now open.
Michael Rose (Managing Director, Equity Research)
Hey, good morning, guys. Thanks for taking my questions.
Terry Earley (CFO)
Good morning.
Michael Rose (Managing Director, Equity Research)
Good morning. Just to follow up on the funding question with interLINK, and I understand there's a lot of moving pieces, obviously good core deposit growth this quarter, as you talked about. I think you guys have talked about, you know, getting the loan-to-deposit ratio somewhere down to kind of the mid, low- to mid-80s, if I remember correctly. Is that still the outlook? Then I think in response to Matt's question, you had said, you know, a mid-teens growth rate might be acceptable, it sounded like, for next year. Is that kind of still what you're thinking at this point? Thanks.
Terry Earley (CFO)
Yeah. Mid-teens is what we're looking at for next year. You know, call it 14%-16%, something along those lines. A lot of that is already embedded if you look at our unfunded commitments. But no, we feel very confident that we can meet those numbers. You know, like I said earlier, the economy here has not slowed down much. There are a few projects they've pulled off the table or a few things maybe have been put off, but for the most part, it's still kinda crazy. The first question on interLINK, I forgot exactly what you were asking, Michael. I apologize.
Michael Rose (Managing Director, Equity Research)
It was just around the targeted kind of loan-to-deposit ratio.
Terry Earley (CFO)
Oh, yeah.
Michael Rose (Managing Director, Equity Research)
I think you talked about low- to mid-80s as kind of being the
Terry Earley (CFO)
You're right.
Michael Rose (Managing Director, Equity Research)
A guideline.
Terry Earley (CFO)
Yeah. Our goal is to totally get it in the mid-80s. You know
Michael Rose (Managing Director, Equity Research)
Absent warehouse.
Terry Earley (CFO)
Yeah, absent warehouse. We think that, you know, is just a really stout balance sheet. Yes, the answer is absolutely, you remember correctly. One tag on to Malcolm's comment. You know, with our earnings profile going into 2023, coupled with growth range he just gave you, that will allow us to accrete capital, CET1, et cetera. That's a good place for Veritex, is that type of loan growth, that type of earnings profile, that type of capital CET1 growth.
Michael Rose (Managing Director, Equity Research)
Got it. Then maybe just to follow up, if you know, I appreciate the updated rate sensitivity in the deck, but as the interLINK deposits grow and you fund up, the beta's obviously gonna increase. Can you just give us an update on what your beta assumptions would be over the next couple quarters? Thanks.
Terry Earley (CFO)
For the whole company or for interLINK?
Michael Rose (Managing Director, Equity Research)
Yeah, for the whole company.
Terry Earley (CFO)
You know, cumulative, we believe, as we get through the end of this year and into next year starting the first few quarters of next year, we see a cumulative deposit beta in the low-to-mid 40s. That's what we believe right now, and that's factoring in interLINK. So that's why, you know, if we've got a beta cumulative in that range, we're off our floors on the loan side, given what the Fed's already done. That's what gives us confidence in the NIM expansion we think we can see. You know, as I said, the NIM in June was 3.55%, and we've already seen a 31 BP increase in our contractual accrual rates on our loan booking through the first half of the month. So we're feeling pretty good.
You see that in the table on the interest rate sensitivity, just the absolute growth in dollars. Pretty encouraging.
Michael Rose (Managing Director, Equity Research)
Right.
Terry Earley (CFO)
a good positive operating leverage going forward.
Michael Rose (Managing Director, Equity Research)
Very, very helpful. Maybe just finally one for me, just, you know, it sounds like maybe the expense trends are gonna slow because you're gonna hire a little bit less. I think, Malcolm, you said the teams are pretty staffed up at this point. I guess moving into 2023, I'm not trying to pin you down here because I know you're gonna continue to be opportunistic, but, you know, hiring costs have gone up. You mentioned that the teams are relatively full at this point.
It would seem like expense growth, you know, could really decelerate, and you guys could get some really strong kind of positive operating leverage as we think about next year, just given, you know, the NII trends and the, you know, the move in earning assets that you talked about, Terry. Is it plausible to think we could see a pretty big, you know, step down in the efficiency ratio as you get that leverage? Thanks.
Terry Earley (CFO)
Yeah.
Michael Rose (Managing Director, Equity Research)
Yeah.
Terry Earley (CFO)
You can expect to see meaningful improvement in the efficiency ratio over the next 4-6 quarters with what's going on. I mean, you know, I get asked a fair amount, "Well, what do you think about your expense growth?" I mean, you know, it's sitting here at 14.7% year-over-year. But when you're generating close to 22% backing out the effect of PPP fees, you know, in 2021, you know, I don't think I'll say a whole lot about expense growth as long as we can generate that revenue growth. You know, the other thing is even if you back out the effect of rising rates.
Michael Rose (Managing Director, Equity Research)
Right.
Terry Earley (CFO)
Our operating leverage is still close to five. Expenses are going up, but we're driving the revenue. I'm talking about operating leverage in an incredibly weak fee income quarter for us. I think the model is working. But I do think you can see significant improvements in efficiency as we move through the balance of this year heading into 2023.
C Malcolm Holland (Chairman and CEO)
We like our expense guidance. You know,
Terry Earley (CFO)
Yeah.
C Malcolm Holland (Chairman and CEO)
given it $185-$195. You asked about 2023. I mean, we don't have any huge things on tap, candidly. Our teams are quite full. I will be opportunistic, especially in a couple different areas. But I think there's a chance that, you know, we're gonna be fairly flat. There's gonna be some wage inflation, obviously. I think at the first of the year, all of us are gonna have to deal with that. When I say all, the industry, you're gonna have to deal with some wage inflation. I saw yesterday, I think it was Google or somebody said, "We're gonna go ahead and give raises right now knowing we're gonna give them just to keep everybody around." So, you know, all that stuff may start happening. But I feel pretty good about our expense.
You know, candidly, you start looking forward, and we look at our efficiency ratio and go, "Well, there's no way we could be that good," because there's gonna be some expenses and some costs. You know, you may see some technology things next year. You may see some treasury investments, those types of things that'll drive some deposit growth. But I feel pretty good. I mean, 2023 looks pretty good. Terry's right, I hate to, you know, beat a dead horse, but the increase in revenue is not just a rate thing by any stretch of the imagination. It's really kind of a 75/25 deal historically this last quarter. That's the gift that keeps giving when it's on the growth side.
Terry Earley (CFO)
I'll just tag on the expense side. Mike, we do have to keep in mind the interLINK costs will come in. That's not huge. Don't get me wrong. I'm just saying.
C Malcolm Holland (Chairman and CEO)
Revenue should outstrip that too.
Terry Earley (CFO)
Oh, it will.
C Malcolm Holland (Chairman and CEO)
On the interLINK side.
Terry Earley (CFO)
Yeah, for sure.
Michael Rose (Managing Director, Equity Research)
I appreciate all the color, guys. Thank you.
C Malcolm Holland (Chairman and CEO)
Thanks.
Terry Earley (CFO)
Thanks, Michael.
Operator (participant)
Your next question comes from the line of Brad Milsaps with Piper Sandler. Your line is now open, Brad.
Brad Milsaps (Managing Director and Senior Research Analyst)
Hey, good morning, guys.
Terry Earley (CFO)
Good morning.
C Malcolm Holland (Chairman and CEO)
We're glad to have you back.
Brad Milsaps (Managing Director and Senior Research Analyst)
Yeah, I don't know what happened there. Call dropped or something.
C Malcolm Holland (Chairman and CEO)
It wasn't us. We didn't put you back.
Brad Milsaps (Managing Director and Senior Research Analyst)
Red-headed stepchild, I don't know. Let's see, I apologize if I missed this when I dropped, but the chart that you guys added on slide 10, I think it's really good. I just wanna make sure I understand kind of some of the assumptions there. The base case of $405 million of net interest income, which would imply over $100 million a quarter, is that if you do nothing? That's just if you just leave, you know, just let the balance sheet kind of run where it is, you know, no further rate increases, no further growth. Then as we move up the scale there, that would reflect rate increases, but not necessarily growth. Is that how I need to think about those numbers?
Terry Earley (CFO)
Absolutely. Assuming a shock, yes, but as opposed to a ramp. No, you're thinking about. Look, we did $95 million roughly. No, well, we did $85 million, I'm sorry, in net interest income. But when you think about what the margin's doing in June versus what it was, you know, that's 13-fifths higher, and every BP is about $1 million. So our run rate, just on a static balance sheet, is not $84 million, and 13-fifths is annualized. So don't misunderstand, but it's significantly. That's another $4.25 million just right on the jump off, if you will.
Brad Milsaps (Managing Director and Senior Research Analyst)
Yeah.
Terry Earley (CFO)
Yeah.
Brad Milsaps (Managing Director and Senior Research Analyst)
Yeah.
Terry Earley (CFO)
That's, you know, getting to $100 million, you know, getting over $100 million in quarterly net interest income.
Brad Milsaps (Managing Director and Senior Research Analyst)
Interesting.
Terry Earley (CFO)
I think is pretty doable pretty fast. If you will.
Brad Milsaps (Managing Director and Senior Research Analyst)
Yeah.
Terry Earley (CFO)
Yeah, that's, you know, getting to $100 million, you know, getting over $100 million in quarterly net interest income. I think is pretty doable pretty fast.
Brad Milsaps (Managing Director and Senior Research Analyst)
Right. You think about growth.
Terry Earley (CFO)
Yeah.
Brad Milsaps (Managing Director and Senior Research Analyst)
You got growth on top of that, right?
Terry Earley (CFO)
You got growth on top of that, which we've already seen some growth in three Qs.
Brad Milsaps (Managing Director and Senior Research Analyst)
Sure. That chart on page 10, would that include your 40%-45% kind of cumulative beta assumption as well?
Terry Earley (CFO)
Absolutely.
Brad Milsaps (Managing Director and Senior Research Analyst)
Yep. Yep.
Okay. Just as a follow-up, maybe on the provision, it looked like on new growth, you were provisioning it sort of a rate of around 90 basis points. Do you think that makes sense going forward? Sure. In that chart on page 10, would that include your 40%-45% kind of cumulative beta assumption as well?
Terry Earley (CFO)
Absolutely.
Brad Milsaps (Managing Director and Senior Research Analyst)
Yep. Yep.
Okay. Just as a follow-up, maybe on the provision, it looked like on new growth, you were provisioning it sort of a rate of around 90 basis points. Do you think that makes sense going forward? Obviously, over time, that will continue to kind of bring, you know, the reserve down, depending upon charge-offs. Obviously, you can make adjustments, you know, for other factors. But is that kind of the way you guys are thinking about it?
Terry Earley (CFO)
I'm thinking about the reserve staying pretty flat from where it is now. I think we're heading into a period.
Brad Milsaps (Managing Director and Senior Research Analyst)
Percentage-wise.
Terry Earley (CFO)
Percentage-wise.
Brad Milsaps (Managing Director and Senior Research Analyst)
Not dollar-wise.
Terry Earley (CFO)
Yeah, yeah. 102, somewhere in that range feels good to me. Knowing there's so much economic uncertainty, and even though I'm in the camp of, I believe the U.S. is either in or about to be in a recession, I don't think that recession is going to come to Texas because as you look forward at the GDP forecast from Moody's. But I do think we have to be cognizant of deteriorating forecasts, and so we're going to have to continue to provide for that to a degree. You know, that's the best advice I can give is, you know, our goal is to kind of keep the reserve level in that 102 range. If we need to provide a little bit more to do that, so be it.
Brad Milsaps (Managing Director and Senior Research Analyst)
Perfect. Thank you guys. I really appreciate it.
Terry Earley (CFO)
Thank you, Brad.
Operator (participant)
Your last question comes from the line of Gary Tenner from D.A. Davidson. Your line is now open.
Gary Tenner (Managing Director and Senior Research Analyst)
Thanks. Good morning.
Terry Earley (CFO)
Hey, Gary.
Gary Tenner (Managing Director and Senior Research Analyst)
Want to ask about the loan growth in the back half of the year. You talked about kind of what you think from a percentage basis, but just thinking of the main categories of growth, I assume construction continues to fund up at a fairly steady pace given the unfunded commitments. Between commercial real estate and single family, which were the big drivers of growth this quarter, any shift in kind of where the mix might come from, beyond construction?
C Malcolm Holland (Chairman and CEO)
Yeah. I mean, our commercial teams are ramping up. Their pipelines are really quite full. The industries that they're represented are quite diversified. You know, the Houston team is just getting some sea legs under them. We've already looked at a couple of three deals for them. You know, there's a big deal in Dallas that we're going to close or have closed in the insurance space with a solid relationship. There's some more of that coming. I really think I look for the commercial side to really be the driver of it. You're absolutely accurate. We are already embedded on the ADC space, and those deals are booked.
But we also look for a pretty big payoff back half of the year forecast. You know, I don't know how other banks forecast their pipelines, but I've never seen one like what we're doing. The level of granularity in fundings and payoffs, I mean, we're serial forecasters as it relates to that. We meet every week, and we're looking at every deal granularity on whether you know, it's going to happen or not happen. You know, I think the commercial real estate space is going to slow and is slowing. Part of it is underwriting. I mean, we've moved our underwriting rates up a couple of points.
I mean, we were running, you know, some stress analysis in mid-fours, and now we're running them in mid-sixes. Some deals don't pencil out as nicely at those rates. That's kind of a forced slowdown, if you will. I candidly look for the commercial space to be pretty active the back half. Again, this is a market share move, in my opinion, from these new hires that we've made.
Terry Earley (CFO)
I would tag on. Don't expect resi real estate, 1-4 family to do as much.
C Malcolm Holland (Chairman and CEO)
Yeah.
Terry Earley (CFO)
Using that's been one of the key drivers in getting our down rate protection close to 5%. Expect that to slow. I agree with Malcolm on ADC. We've got fundings that slow there. Term real estate, though, there's some really good-looking, stabilized opportunities out there. I think you're starting to see pricing get a little bit better.
C Malcolm Holland (Chairman and CEO)
Yep.
Terry Earley (CFO)
Yeah, I just wanted to really make the point about the residential real estate you won't see us be as active there buying stuff as we have been the first half of the year.
Gary Tenner (Managing Director and Senior Research Analyst)
Okay. I appreciate that. Just to be clear, Malcolm, when you were talking about forecasting the payoffs, is that really starting to see some of these construction projects, kind of come to?
C Malcolm Holland (Chairman and CEO)
Yes.
Gary Tenner (Managing Director and Senior Research Analyst)
to fruition and convert? Okay. That's in that line. Okay. Appreciate it.
C Malcolm Holland (Chairman and CEO)
Yeah. Yeah, that's yes.
Gary Tenner (Managing Director and Senior Research Analyst)
On the deposit side, Terry, do you have offhand the kind of June 30 spot rates on interest bearing or total deposits?
Terry Earley (CFO)
Oh, you know, they were definitely just like I talked about, somewhere in the, you know. Is it interest bearing or total?
Gary Tenner (Managing Director and Senior Research Analyst)
Either. Interest bearing is probably better to guess.
Terry Earley (CFO)
Interest bearing is gonna be in the 70s.
Gary Tenner (Managing Director and Senior Research Analyst)
At June 30? Okay.
Terry Earley (CFO)
At that date. Yeah.
Gary Tenner (Managing Director and Senior Research Analyst)
Okay, perfect. Then just one last question, and it may be sort of an elementary question, so I apologize. The valuation allowance on the servicing asset, you know, I usually think of servicing assets becoming more valuable as rates are moving higher. Am I missing something there? What's the thought around that?
Terry Earley (CFO)
Well-
C Malcolm Holland (Chairman and CEO)
That's a good question, by the way. I had the same one.
Terry Earley (CFO)
Well, in the mortgage space, you're absolutely right. As rates go up, lives extend, cash flow streams that, you know, you value in the servicing assets get longer and better. Unfortunately in the USDA and SBA space, as rates go up, given it's all virtually floating rates, your default risk goes up, meaning the—from an investor standpoint, the government's gonna buy back your loan at par, not at the premium you paid. Lives shorten from that. Refi risk goes up as well because the banks who have or the borrowers whose businesses have continued to grow and mature in season, will look to jump out of that space quicker and into typical bank lending space. I think both of those contribute to shorter lives, and that's what drives the servicing valuation down.
Gary Tenner (Managing Director and Senior Research Analyst)
Great. Is that valuation allowance sort of embedding the forward curve as well? Or again, you know, in the third quarter-
Terry Earley (CFO)
Yes.
Gary Tenner (Managing Director and Senior Research Analyst)
More rate moves, would you expect another allowance?
Terry Earley (CFO)
My understanding is it embeds the.
Operator (participant)
Questions on the queue. This concludes today's.
Terry Earley (CFO)
Given how forward the volatility curve has been of late, we'll have to see where it ends up at the end of the month of September. I'm not expecting it, but we'll see.
Gary Tenner (Managing Director and Senior Research Analyst)
All right, great. Thanks guys.
Terry Earley (CFO)
All right. Thanks, Gary.
C Malcolm Holland (Chairman and CEO)
Thank you.
Operator (participant)
We now don't have any other questions on the queue, so this concludes today's conference call. Thank you for participating. You may now disconnect.