KBRA Affirms Ratings for Veritex Holdings, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Dallas, Texas based Veritex Holdings, Inc. (NASDAQ: VBTX) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for the subsidiary, Veritex Community Bank (“the bank”). The Outlook for all long-term ratings is revised to Stable from Negative.

Key Credit Considerations

The revision of the Outlook to Stable from Negative is largely driven by the company’s commitment to maintaining more peer-like capital levels, as reflected by the recent material increase in regulatory capital ratios, including a CET1 ratio that has increased ~130 bps since YE22. While still tracking below peer averages, KBRA expects capital to continue to trend higher throughout 2024, with a CET1 ratio managed near the peer average long term. The shift in capital management is part of the company's greater change in operating strategy that includes a slower pace of growth with a focus on strengthening the balance sheet with the aforementioned higher capital levels as well as an improved funding profile. Loan growth was rather stagnant in 2023 (+1%), with growth expected to be modest in 2024 (low-single digit) following years of outsized growth, including 28% in 2022. Recent trends in loans have allowed the company to materially reduce its wholesale funding. After peaking at 33% at 1Q23, VBTX decreased its reliance on wholesale funding to 21% at 1Q24, including a $1.6 billion decrease in FHLB borrowings during this time. Nonetheless, VBTX’s cost of deposits tracked well above peer averages at 3.42% for 1Q24.

Despite the elevated funding costs, VBTX has maintained an above average NIM, in part, due to a loan portfolio that is concentrated in variable or hybrid rate loans (roughly 75%), enabling the company to more effectively reprice its loan book and minimize NIM compression. As such, earnings have trended above rated peers, including on a risk-adjusted basis (RoRWA of 0.9% for 2023) despite a revenue base more reliant on spread income (~85% - 90% of total revenues). VBTX’s somewhat riskier loan portfolio, as reflected by its elevated concentrations in CRE and C&D lending and higher NPAs, has performed adequately, albeit in a relatively benign credit environment with credit losses well contained and rather consistent, with a reported NCO ratio between 0.2% - 0.3% over a multi-year period.

Rating Sensitivities

The Stable Outlook reflects KBRA's view that a change in ratings is unlikely over the medium term. However, should VBTX experience material deterioration in asset quality with credit losses significantly above rated peers, or should the company be unable to continue to execute on its strategic initiatives, including additional capital build and reduced wholesale funding usage, negative rating action could result.

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