Improved Credit And Deposit Strategies Will Secure Future Prosperity

Key Takeaways

• Strong loan production and strategic deposit cost reductions may enhance revenue growth and net interest margins.
  
• Emphasis on credit risk management, fee income growth, and capital return strategies could boost profitability and EPS.
  
• Decreasing loan growth and rising nonaccrual loans indicate stress in Veritex's portfolio, posing revenue and net margin risks amid pessimistic economic assumptions.

Catalysts

Operates as the bank holding company for Veritex Community Bank that provides various commercial banking products and services to small and medium-sized businesses and professionals in the United States.

• Veritex is experiencing strong loan production, with $750 million in gross production for Q1 and a 130% year-over-year increase in production over the last four quarters. This indicates potential for future loan growth, which could positively impact revenue growth.
  
• The bank is actively working on reducing deposit costs by replacing higher-priced non-relationship dollars with lower-priced relationship deposits, which should improve net interest margins in the future.
  
• Credit risk management is showing positive trends, with reduced criticized loans and a net decrease in past-due loans, supporting lower future credit costs and beneficially impacting net margins.
  
• The bank has increased its quarterly dividend by 10% and has remaining authorization for share repurchases, indicating potential EPS growth through capital return strategies.
  
• The bank's focus on fee income growth aims to drive fees above 15% of total revenue, potentially increasing overall revenue and improving profitability.

Veritex Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Veritex Holdings's revenue will grow by 9.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.4% today to 28.0% in 3 years time.
• Analysts expect earnings to reach $147.0 million (and earnings per share of $2.71) by about April 2028, up from $107.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.9x on those 2028 earnings, up from 11.2x today. This future PE is greater than the current PE for the US Banks industry at 10.7x.
• Analysts expect the number of shares outstanding to decline by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Veritex Holdings Future Earnings Per Share Growth

Risks

• The decrease in loan growth, highlighted by a $125 million or 5% annualized drop in loans for the quarter and high payoff rates, could impact Veritex’s future revenue generation.
  
• The rise in nonaccrual loans from $79 million at year-end to $97 million poses a risk to net margins and indicates potential stress within Veritex’s loan portfolio.
  
• The reliance on economic assumptions that weight heavily on pessimistic scenarios for CECL modeling (65%) suggests that Veritex is preparing for potential downturns, which could impact earnings if credit conditions worsen.
  
• The anticipated muted loan growth for 2025, due to higher-than-normal payoffs, suggests a subdued revenue outlook in the near term.
  
• Potential vulnerability exists in the CRE and ADC portfolios, as higher payoffs and reduced concentrations could affect Veritex’s net interest income if loan replacements are not efficiently managed.

Valuation

• The analysts have a consensus price target of $31.583 for Veritex Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $34.0, and the most bearish reporting a price target of just $28.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $524.5 million, earnings will come to $147.0 million, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $22.12, the analyst price target of $31.58 is 30.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.