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 Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by an improved funding and capital position related to a multi-year strategic initiative to strengthen the balance sheet and fortify long-term earnings performance. More specifically, VBTX has reported close to a 250 bp increase in its risk-based capital ratios since YE21, with its CET1 ratio more closely aligned with the rated peer average at 11.0% at 1Q25. In conjunction with the improved capital position, VBTX has also materially reduced its investor CRE and C&D concentration, which has been reduced to below regulatory guidance and is likely to track near its current levels long-term. In addition, VBTX has materially improved its funding profile, significantly reducing its wholesale funding usage (~17% at 4Q24 as compared to 33% at 1Q23). This was primarily driven by the company’s lack of loan growth during this period, while still managing to meaningfully grow core deposits.

Despite this improvement, VBTX’s funding costs remained comparatively elevated, with its reported total cost of funds at 3.33% for 2024, in part, related to a continued higher usage of brokered deposits, which comprised 17% of total deposits at 4Q24. However, VBTX continued to produce a moderately higher than peer NIM, in part, due to a higher-yielding, higher-risk loan portfolio, as well as a higher yielding securities portfolio (4.24% for 2024), which has benefitted from repositioning efforts completed in 2024 (VBTX sold $189 million of lower yielding AFS securities, reinvesting the proceeds to higher-yielding securities, incurring an $11 million loss in 2024). In terms of credit performance, the company has historically reported an above average NCO ratio, though credit losses have largely been well contained and rather stable, with an NCO ratio typically ranging from 0.2% - 0.3% over a multi-year period. Additionally, more recently, VBTX has reported positive trends within the portfolio, including a reduction in criticized loans in four consecutive quarters dating to 1Q24. Finally, VBTX’s revenues remain primarily spread based (~85% - 90% of total revenues), though the company expects meaningful growth from its SBA/USDA business line, with close to $250 million to $300 million in total originations expected in 2025.

Rating Sensitivities

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

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Methodologies