VBTX - Veritex Holdings Warrants Significant Consideration

2023-10-30 10:26:47 ET

Summary

• Veritex Holdings is a strong buy candidate in the banking sector due to its overall financial performance and cheap stock price.
• The bank has grown through acquisitions and currently has 28 branches, prioritizing small and medium-sized businesses.
• Despite some weaknesses in the bottom line, the bank has seen growth in deposits, loans, and assets, making it an attractive investment option.

Since the banking crisis began in March of this year, I have been looking for some very attractive stocks in that sector. I've come across some that frankly did not make sense to buy into. And I have found others that were generally appealing. But I have found very few that are in the same league as Veritex Holdings (VBTX). Overall financial performance of the bank has been astounding. Yes, there has been some weakness this year, particularly in the most recent quarter that was just announced. But when you consider overall financial performance and how cheap the stock is, it becomes clear to me that this is a clear 'strong buy' candidate.

A stellar prospect to bank on

Veritex Holdings is not exactly a large bank, but it's far from being the smallest that I have covered. With a market capitalization of $942.2 million, it's probably a little below average in terms of size compared to many of the other banks that I have looked at. Using acquisitions, the institution has grown quite a bit in recent years. In all, at the end of 2022 , the firm boasted 18 full-service branches located in the Dallas Fort Worth Metroplex. It also had 10 full-service branches in Houston. It has other assets as well, including the office in which its top executives work. 28 branches might seem a bit small when you consider that, over the years, the company has purchased banks with a combined branch count of 44. However, management has done well to close down locations that underperformed and to concentrate assets and activities in just a small batch of properties.

From these locations, the company provides customers with a wide array of banking services. For the most part, it prioritizes servicing small and medium-sized businesses, which it defines as those with revenue under $30 million. It also caters to customers in the 'professional' class. Particular activities that it engages in include accepting deposits and using those deposits to give out loans. It offers loans for the purpose of buying or fixing up commercial real estate, as well as for the purchase of residential real estate. It provides farmland loans, consumer loans, and other similar instruments. Like many banks, it has its own network of ATMs, and it also empowers its depositors to use its mobile banking services. It offers debit cards, direct deposit, cashier's checks, letters of credit, and more. On top of this, it also provides commercial treasury management services, an interest rate swap program, and other similar offerings.

Over the years, management has done a fantastic job growing the bank. The value of deposits, for instance, shot up from $6.51 billion in 2020 to $9.12 billion in 2022. Despite the banking crisis that began earlier this year, deposits continued to grow after experiencing just a bit of downside in the first quarter. In the third quarter that management just reported, deposits came in at an all-time high of $10.20 billion. One thing that I am quite wary about when it comes to deposits is the exposure that banks have to uninsured deposits. I typically draw that line at 30%. Anything higher than that I consider to be too risky for my taste. But in this case, I believe an exception is warranted. Uninsured deposit exposure is awfully close at 31.5%. And management went from having $1.91 billion worth of debt at the end of the first quarter to having only $429.5 million in debt by the end of the third quarter. So the company does have a good amount of wiggle room from a financial perspective in the event that times get tough.

As deposits increased, the value of loans grew as well. These increased from $6.68 billion in 2020 to $9.39 billion in 2022. By the end of the third quarter, they had risen further to $9.67 billion. Many investors are, justifiably so, worried about exposure to office assets. And the good thing for investors on this front is that if we exclude the small amount of exposure that the bank has to medical office properties, only 4% of its commercial real estate loan portfolio falls under this description. That's less than 1% of total loans for the bank. There are some other metrics that we should be paying attention to as well. For instance, the value of securities gradually grew from 2020 to 2022, rising from $1.07 billion to $1.30 billion. We have seen that number drop slightly over the last couple of quarters, with reading as of the end of the most recent quarter of $1.14 billion. Over the same window of time, cash has been rather volatile. With the exception of the $808.4 million that the company had in the form of cash and cash equivalents at the end of the first quarter of this year, the $713.4 million reported in the third quarter is the highest that I have on record for it.

The overall growth of the assets in the bank was responsible for revenue and profits climbing over the past few years. Net interest income, for instance, expanded from $200.1 million in 2020 to $336.9 million in 2022. Non-interest income inched up slightly from $47.3 million to $52.8 million. These two things combined allowed net income to grow from $73.9 million to $146.3 million. Growth for the bank has continued into the current fiscal year. Net interest income in the first half of the year came in strong at $271.1 million. That's an increase of 12% over the $242.1 million generated one year earlier. We did see a bit of a decline in non-interest income from $38.5 million to $36.9 million. And that, combined with other cost increases, resulted in net profits dipping from $106.4 million to $104.8 million. It is worth noting that substantially all of this pain on the bottom line came in the third quarter of the year, with a net income of only $32.6 million compared to the $43.3 million reported at the same time of the 2022 fiscal year.

Since financial results in the first three quarters of the year are almost identical, I don't believe that projecting financial results for the rest of the year will be all that helpful. Using the data from 2022 then, I calculated that the bank is trading at a price-to-earnings multiple of 6.4. This is not the lowest that I have seen, but it is definitely on the low end of the spectrum. The price-to-book ratio, meanwhile, is 0.63, while the price to tangible book value ratio is only slightly higher at a hair under 0.90. It's pretty typical to see a price to book ratio that is 1.0 or lower. But not very many banks that I have looked at have a price to tangible book value ratio that is at or below where Veritex Holdings' is.

Takeaway

The way I see things, the financial picture for Veritex Holdings is not perfect. We have seen some weakness in the bottom line this year. The value of loans and securities has dropped slightly. And uninsured deposit exposure is a bit higher than I would like it to be. But we do have a very strong prospect even with these deficiencies. Shares are very cheap and deposits continue to grow at a nice clip. Management has a high amount of cash on hand and managed to reduce debt considerably. Add all of these factors together, and I do believe that Veritex Holdings makes for a 'strong buy' right now.

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