Veritex Holdings, Inc. (VBTX) Q2 2024 Earnings Call Transcript

Veritex Holdings, Inc. (NASDAQ:VBTX) Q2 2024 Results Conference Call July 24, 2024 9:30 AM ET

Company Participants

Will Holford – Director of Strategic Corporate Development
Malcolm Holland – Chairman and Chief Executive Officer
Terry Earley – Chief Financial Officer
Curtis Anderson – Executive Credit Officer

Conference Call Participants

Stephen Scouten – Piper Sandler
Michael Rose – Raymond James
Brett Rabatin – Hovde Group
Ahmad Hasan – D.A. Davidson

Operator

Good morning, and welcome to the Veritex Holdings Second Quarter 2024 Earnings Conference Call and Webcast. [Operator Instructions]. Please note, this event will be recorded.

I will now turn the conference over to Will Holford with Veritex.

Will Holford

Thank you. Before we get started, I’d 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.

If you’re logged into our webcast, please refer to our slide presentation, including our safe harbor statement beginning on Slide 2. For those on the phone, please note that the safe harbor statement and presentation are available on our website, veritexbank.com.

All comments made today are subject to our safe harbor statement. Some financial metrics discussed will be on a non-GAAP basis, which 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 Curtis Anderson our Chief Credit Officer.

I will now turn the call over to Malcolm.

Malcolm Holland

Morning, everyone and welcome to our second quarter earnings call. Our clear focus on repositioning our balance sheet continues with positive trends in virtually all categories. The second quarter we reported operating earnings of $28.3 million or $0.52 per share. All components of the P&L are showing positive trends with the exception of our government-guaranteed key business. We made some enhancements in this area to start and venture start producing results in the back half of the year and beyond. NIM is stabilizing and expenses today are better than initially budgeted.

Our balance sheet continues to transform as seen on slide 3, our loan deposit ratio, excluding mortgage warehouse, continues to decline and it sits below 86% and the dependences on wholesale funding has declined in 19%. Both of these metrics are down measurably over the last 12 months. Tangible book value continues to grow currently at $20.62 up $1.21 since June, 2023. Growth for the quarter was virtually Neil on both sides of the balance sheet as we continue to bolster our balance sheet and shift the mix of our liabilities with lower-cost funding. Although loan growth absent mortgage warehouse has been flat for the year, our pipelines are building in our small business and C&I areas. Although these areas are slower to move the growth needle, there are clients that provide full relationships with both deposits and fees. We anticipate loan growth for the back half of the year in the mid-single digits and anticipate deposit growth will be in the high single digits.

Moving to credit, Curtis Anderson, our Chief Credit Officer and his entire team have had a very productive quarter with all trends moving in a positive direction. In general, criticized and classified totals were stable, but trending down compared to the previous quarter. However, the underlying portfolio is dynamic and reflects the ongoing work to prudently manage risk. Our NPAs reduced 20% or $21 million for the quarter to 65 basis points of total assets. Multiple factors played into the reduction with the biggest drivers being a restructured, Houston data center property to a new owner who substantially paid down the loan, while we took a $1.5 million charge that was previously reserved against. This restructured loan is now a pass-rated credit and additionally, we had a sale before closed property that was sold at a gain.

Net charge-offs were $6.9 million, a slight increase from the first quarter, but in line on a year-to-date basis with full year expectations, 60% of the net charge-off total was a problem C&I credit that is near its final resolution. As you know, we foreclosed on a student housing project in Q1. This property is now under contract and is scheduled to close this quarter at a price that has no material P&L effect. Past dues to total loans continue to improve to 0.16% down from 0.29% in the first quarter of 2024. Credit loss reserves now sit at 1.16% of total up 11 basis points over the last 12 months.

All in all, we continue to make great strides in improving our credit metrics. More to do, we were encouraged by the positive trends.

Now I’ll turn the call over to Terry.

Terry Earley

Thank you, Malcolm. When I look at the results for the second quarter, I’m pretty encouraged especially about the credit trim, trends, NIM expansion and expense levels. As I say, every quarter I’m thankful for the progress, but there’s more work ahead of us. Starting on Page 7. The allowance for credit loss coverage now sits at 1.16% up significantly from six quarters ago as we’ve increased the reserve by almost 25% or over $22 million, excluding our mortgage warehouse portfolio, which we have not recognized a loss on since inception. The allowance for credit loss coverage is 1.23%. It’s important to note that the total allowance for credit losses is 96% comprised of general reserves.

We continue to use conservative economic assumptions in our credit loss model with 75% of the waiting on downside scenarios. We deemed this reasonable given the level of economic uncertainty coupled with significant geopolitical risk. Moving to Page 8, over the last six quarters, total capital grew approximately $145 million. The CET1 ratio expanded by 12 basis points during the quarter and by 73 basis points year over year and stands at 10.49%. The significant contributor to the expansion in the capital ratios has been a $550 million decline in risk-weighted assets since the end of 2022. Tangible book value per share increased to $20.62, which is a 12.7% increase on a year over year basis, including the shareholder dividends.

It’s worth noting that since Veritex went public in 2014, it has compounded tangible book value per share at a rate of 11.1%, including the dividends that have been paid to shareholders. Finally, Veritex was opportunistic in its use of the buyback during the quarter. We spent 7% of the authorized amount and bought back approximately 178,000 shares at an average price of $19.91, or 96.6% of current tangible book value. Onto Page 9, our strong deposit growth and low loan growth allowed Veritex to reduce its loan-to-deposit ratio from 105.4% at June 30th, 2023 to 91.8% at June 30th, 2024. Our target remains to have this ratio below 90% by the end of 2024.

Please note that the loan-to-deposit ratio is 85.9% if you exclude mortgage warehouse. This seems to be a more relevant metric when you consider the short duration of time mortgages stay on these warehouse loans. Deposit growth also allowed us to reduce our bank’s wholesale funding reliance to 18.9%, 29.2% at June 30th, 2023. As you can see in the bottom left graph, we’ve kept the time deposit portfolio short and have $2.3 billion in CD maturities over the remainder of 2024 with an average rate of 5.18%. I’m glad to have this maturity profile given the potential for two Fed rate cuts before year end. Bottom right, the monthly cost total deposits show a pretty steep rise up through September of 2023.

However, since then it has largely leveled out. On Slide 10, loan growth was approximately 2.9%. It was driven by multifamily CRE and mortgage warehouse. We continue to make progress on reducing our CRE concentrations and remain committed to getting our CRE concentrations under 300% and ADC concentrations under 100% by the end of the year. CRE maturity profile is shown in the bottom right graphs. We have approximately $350 million in fixed-rate maturities and average rate of 5.5% over the next four quarters. The average loan size of these maturities is $3.1 million. As shown on the bottom left loan production picked up considerably in the second quarter, so did the loan payoffs.

This payoff activity reflects the vibrant economic activity in the Texas market, but it does make organic loan growth challenging. The office portfolio continued to decline down $140 million in the last year or 22%. This portfolio now comprises 5.2% of total loans. Slide 11 provides the detail in the CRE and ADC portfolios by asset class, including what is out of state. Slide 12 illustrates a breakdown of our out-of-state loan portfolio, including the significant impact of our national businesses and mortgage. The true percentage of the out-of-state portfolio is only 10% down from 11.3% last quarter. This is predominantly where we have followed Texas real estate clients to other geographies.

On the Slide 13, that interest income increased by $3.4 million to just over $96 million in Q2. The biggest drivers of the increase were lower non-accrual, interest reversals the impact of higher loan rates and the impact of higher security yields. This was partially offset by slightly higher deposit yields. The net interest margin increased 5 basis points from Q1 to 3.29% in Q2. We believe the NIM will remain in the range of 3.25% to 3.3% over the remainder of 2024. Obviously, depending on what the Fed does with rates. Slide 14, this shows certain metrics on our investment portfolio. Key takeaways are it’s only 10.6% of assets the duration is 3.8 years and 87% of the portfolio is held in a FS.

Finally, on this slide you see a snapshot of our cash and borrowing capacity at June 30th, 2024, and the trend since Q1 of 2023. The current available liquidity represents 2.0 times the level of uninsured or uncollateralized deposits. Slide 15, operating non-interest income declined to $10.6 million. This decrease is driven by the lack of gain on sale revenue in our USDA business. Other parts of our fee revenues are performing in line with expectations. Operating non-interest expenses were flat quarter-over-quarter and we’re very satisfied with our expense management efforts 2024.

To wrap up my comments, I see a lot of positives in the quarter. First credit, NPAs are down, criticized assets are stable, and net charge offs are in aligned with expectations. Second, and then expanded 5 basis points and funding costs are relatively stable. Three, capital ratios moved higher. Four, the allowance for credit losses to total loan coverage increased. Five, loan production is up and pipelines are increasing, but there’s still a lot of things we need to work on first continuing to reduce the credit risk profile to do second, continuing to reduce funding costs. And three, improving USDA revenue performance.

With that, I’d like to turn the call over to Malcolm for concluding comment.

Malcolm Holland

Thank you, Terry. As you can see, much progress made yet much to do. I want to mention the progress we’re also making on the way we’re pursuing our new client acquisition. Under Dom’s leadership, new client identification and follow-up is seeing some very positive results. Our commitment to the small business and community bank areas, remain a focus in building and retaining long-term clients. Those markets provide us a granularity and full relationships. They will make us much more balanced and less susceptible to market swings. While these areas build our assets at a slower rate due to their size, they are foundational, they are foundation of a diverse sound and regional bank.

Finally, I’d like to acknowledge our 800 plus Veritex team members on being named one of the best companies to work for by US News and World Report, congratulations, team.

Operator, we will now take any questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question is going to come from the line of Stephen Scouten with Piper Sandler Companies. Your line is open. Please go ahead.

Stephen Scouten

Hey, thanks, guys. Good morning. I guess can you talk a little bit about what you’re seeing on the government lending side? I know you said there were some enhancements that you’ve kind of put into place that should reflect in the second half. How’s the funding dynamic in that business today? And kind of what do you think we could expect to see from a prospect perspective in that back half?

Malcolm Holland

Yeah, so guided, first quarter for first half of the year, we kind of reset that business a little bit and put the new person that we kind of put over that business in Jonathan Snyder, who’s done a really good job to go down there and really get into the business, figure out the ways that we could be most successful in it. And one of the key things that we did is we found that, although USDA and SBA are different government loan businesses, there are quite a bit of similarities in there. Similarities really come up in the broker markets because they control most of that business. And so, over the last four months, Jonathan’s, along with Joseph have figured out how to put that business that SBA business into the USDA business. Not that we put them together, it’s just that we’re enhancing what our USDA folks can chase.

And so, we’ve seen in a very short period of time, I think it’s been online for 30 days, a bunch of activity there. And so, what you’re going to see is you’re going to see some enhanced SBA business, in addition to our USDA space. Now listen, USDA is down for this year over last year. We still anticipate having a fairly decent back half of the year, but I know you guys are probably tired of us saying that, and I understand that. But we do have a good pipeline. We have two or three deals that we are feel very certain they’re going to close, they’re going to move the needle on the expense side. So, it’s just, it’s a little bit more attention, it’s a little bit more focused and it’s a bigger market for the USDA business development team to be able to capture.

Stephen Scouten

Okay, great. That’s helpful, Malcolm. And then maybe thinking about the CRE concentration, it feels like that’s an increasing focus from regulators, rating agencies and the like, and I know you said you want to get below 300%, 100% by year end. Is that just going to be letting payoffs occur and growing other lines of business? Or is there some, there need to be something more wholesale loan sales, things of that nature to get those numbers there by you?

Malcolm Holland

So, it’s strictly organic. Stephen. You know, the, our payoffs outside of one quarter, in the past six quarters have been pretty stable. And they were pretty heavy actually in the second quarter. We anticipate that happening in the third and fourth as well. And these are sales, these aren’t refinances things are actually happening. And so just through our real estate council that we have at our forecast, we will be under those numbers by year end. Unless something crazy happens, I actually think handedly if you get a rate cut or two, it could actually accelerate it. So, we’re going to manage the company to 299% and 99%. That’s where we’re going to manage it. But that’s going to be somewhat difficult if rates go down quickly and to keep up with that volume could be difficult. So, we’re less concerned about getting under 300% and 100% and probably more concerned about it going down a little bit farther long term.

Terry Earley

Let me add too, Stephen, when you look at the payoffs on slide 10, in that $550 million or so, between 40% and 50% of the activity of that activity was in increased space. I mean, it’s meaningful, the pipeline for payoffs, the forecast for payoffs is very consistent. I mean, we’re looking at hundreds of millions of dollars in the third quarter in forecasted payoffs by our — so Malcolm’s is right, it’s going to be organic and barring a surprise will be there.

Stephen Scouten

Okay. That’s great. And then just last for me kind of on the deposit mix shift saw nice growth and non-interest bearing and really, it’s moved kind of nicely year-over-year. Is that something you think you could expect to continue? And is that a function of kind of some of these customer acquisition efforts that you referenced as well? Or what’s kind of driving that expansion there?

Malcolm Holland

Go ahead Terry here.

Terry Earley

Yes, it’s absolutely a, a function of it’s being certainly being held materially by the work Dom and the business bankers and their community bankers, et cetera are doing. Our business bankers for an initiative that really just got kicked off late last year, I would say have had a, just a stellar first half of the year. They’re growing deposits. They’re very granular and their cost of deposits is in the low 2% range. We need more of that. What’s their loan that deposit? Is it 10 to one? So, they’re bringing in 10 to one deposits to loan in that category.

Now, as I said in my comments, those are small numbers, and so it takes a lot of those accounts to get to where you want to get to. But from a percentage basis, it’s super, super encouraging. So, we’re going to actually, I think we have 10 business bankers or something around there, candidly, we’d like to have 20 to 30. And so that’s an area where we’re investing in and think that that is a real place for the future to get this granularity and lower cost funding. That’s the way we increase the value of this deposit franchise, Stephen. The lifetime value, when you think about the spread of those business deposits over the expected life of those deposits, that’s value enhancing. Yeah,

Operator

Our next question is going to come from a line of Michael Rose with Raymond James. Your line is open. Please go ahead.

Michael Rose

Good morning guys. Thanks for taking my questions. Just following up on, Stephen’s questions on deposits. Do you guys, now that the loaner deposit ratio is kind of in line with where you wanted it to be, I think at around 85% X warehouse, and where do you think that NIB mix can get to over time? And are there other opportunities to kind of shed some higher cost deposits, outside of CDs that are scheduled to mature. As we kind of move forward, if that DDA growth kind of keeps up, just trying to get a sense for if deposit cost of maybe reach a peak here and then what we could expect on the downside. Thanks.

Terry Earley

Michael. We certainly think deposit costs are at or very close to the peak. Because when we look at where we’re pricing new business and in the production that they’re doing it just, it’s good that we’re focused. What we’re bearing is what we did last year to move this loan-to-deposit ratio so quickly down to mainly the work in Q2 and Q3 of ‘23, that and so that since then, and we told you at the end of Q3 that we’re going to slow the change. And we have, to me now where we are is the focus is kind of shifting from all the deposit production and growth funding loan growth to a big part of this focused on changing the deposit mix and shifting out of some of those higher cost deposits, while still maintaining decent loan growth.

Nothing’s going to affect the revenue of this company and the earnings more than deposit funding cost. It’s way more impactful than loan growth right now. So, we have multiple clients with significant balances, not in the CD space where we’re looking to price down or move out.

And that’s execution’s going to be the key, but we’re working on it hard every day. We know who they are, we know why we brought them in, but now is the time where we really don’t need these high price deposits. So, stay tuned. But we do believe with that work, that’s assuming rates stay flat, obviously rates go down deposit costs are going to go down. But yeah, this is a big focus for us over the balance of ‘24 going into really probably through the end of ’25 is remixing this deposit base.

Michael Rose

Yeah, totally get it. And that’s great color, Terry. And then really nice to see some of the accelerated disposition of some of the non-performers this quarter. I expect that would continue kind of as we move forward. I know the reductions that you had were tied up in a few credits. Can you just give us a flavor of kind of what’s in kind of the non-accrual bucket at this point? And if we should expect to continue to see criticized classifieds come down. Thanks

Malcolm Holland

Curtis. You want to take that?

Curtis Anderson

Sure. Yeah. Thank you. We have a, there’s a pretty good mix in our non-accrual bucket. We have got strategies of course on each of those names. We have pretty good outlook for the third quarter. Malcolm mentioned the student housing deal. We’ve got strategies emerging on other names. So, the outlook at this point in time is stable to positive, I would say is how I’m looking at it.

Malcolm Holland

Yeah, I think it’s favorable. I mean, the work they’re doing, they, and Curtis and his team, Donald [indiscernible] or Michael Carpet, have done just a really, really yeoman’s effort getting their arms around this stuff. And so, listen, something can always jump up and grab you that, that we don’t know about. But the visibility that we have into our criticized classified and even our past watch categories, which we’ve done a whole detailed deep dive into the visibility is unbelievable.

And so, something can grab you, but Michael, I’d be surprised if NPAs didn’t take a pretty good dip in the third quarter. Criticizing classified debt, what you see is the top line, and yes, it is trending down. What you don’t see is the massive work that goes on with things coming in and going out and relooking at and retesting. And so, there’s a lot of effort going on there. The positive thing for me is it is trending down and we anticipate trending down, but there’s a lot of effort there. And I think this back half of the year, you’re going to see us continue moving the right direction.

Michael Rose

Very helpful, maybe just finally for me, any thought given to any additional securities restructuring at this point? Or are you guys kind of at where you want to be? Because obviously in the down 100, the NII is down about 4.5%. So just wanted to get any thoughts there. Thanks.

Malcolm Holland

I mean, it’s something, Michael, that we look at on a pretty regular basis. We did, certainly did one late to late in Q1. You look at where our yield is on the portfolio, I think it was 4.68% at so the yield is really good. The duration is relatively short at 3.8%. That’s just one thing we’ve never done is gone long for yield. It doesn’t help you go long given the inverted curve. But I don’t think there’s much more to really be done in the investment portfolio. One thing we are looking at, especially given the strength in our capital ratios and ongoing profitability with pretty mild to moderate growth if you will, is we’re looking at a broadly restructure, but that’s something we’ve been thinking about. But that’s not going to affect the NIM, but it’s going to affect profitability and that’s just something that’s the only other restructure thing we’re really looking at right now.

Operator

Our next question is going to come from the line of Brett Rabatin with Hovde Group. Your line is open. Please go ahead.

Brett Rabatin

I got disconnected for a minute. You may have talked about this a little bit, but if I heard correctly, the margin guidance from here, or at least for the back half of the year is 3.25% to 3.30%. Just want to make sure I heard that correctly. And then within that, I’m looking at slide 9 on the maturity schedule for deposits. I assume that includes CDs and other things. I’m just looking at this and thinking, hey, what’s for pricing in the next three quarters is over 5%. And just wanted to get an idea of one if you think you can reprice that any lower than current levels. Then secondly, how does that fit in with your guidance on the margin? Thanks.

Terry Earley

You were right on the margin guidance 3.25% to 3.30%. The mature term maturity schedule is $2.4 billion, give or take $2.3 billion, $2.4 billion for the back half of the year at a 5.18% average rate. We absolutely think we can reprice that down. That’s factored in to that the NIM guidance. It’s also assuming we’re using the Fed dot plot with one fed cut in the back half of the year. So that’s also factored in. If you look at our new production spreads and on loans and deposits, it’s over 400 basis points, 440 I believe, something in that range. And so that it’s going well, and so but the other big thing is interest reversals.

If credit stays good given the current outlook, and we don’t have significant interest reversals that’s going to, with loans moving into non-accrual status, that will help too. We feel like we don’t want to over promise none to deliver. We feel like 3.25% to 3.30% is the right place to give you that range. But we do see opportunity on the funding side to help with that.

Brett Rabatin

Okay. That’s helpful, Terry. And then just wanted to talk about the criticized assets for a second and was curious one, I can’t remember if you guys have disclosed it, but how much of that amount might have been previously acquired credit? I can start with that one.

Malcolm Holland

We don’t have that broken down. The only place we have that broken down is on the charge off page. We don’t have it broken down within the criticize. I mean, we have it, I just don’t have it in our fingertips.

Brett Rabatin

Okay. And then just related to that bucket if I’m hearing you correctly, it sounds like you’re saying you can work that down some from here. As that bucket kind of filled, were you guys, I assume you guys were kind of working on the hardest things or the things that were most pressing first. And so, it seemed like over the past few quarters, what could have been loss exposure in that bucket may have declined. Would you guys have any thoughts on that and just it seemed like you’d have an easier time relative to maybe a few quarters ago with some of those credits that might still be in there.

Malcolm Holland

I wouldn’t categorize it that way, Brett. I think we still have a lot of work to do there we’re, but I, I will agree with you. Go to the harder stuff first. The harder stuff first is MPAs, right? So, you go attack that piece first because you’re not incriminating anything and they’re their biggest problems. That’s where you see the biggest move. We’re still working within our criticized and classifieds. There’s a lot of turbulence that’s underneath the top line. Like I said, the trend is down. And I do believe the trend’s going to be down. I just don’t know how steep the curve is. So, Curtis, you may want to add.

Terry Earley

Yeah, and I’ll reiterate what was said earlier. Each loan has a defined strategy. And yes, priority of course on NPAs, but everything in that category, every name by name has a defined strategy and workflow around it. You look at a quarter and you look underneath the total, you’ve got payoffs, you’ve got increases, you’ve got downgrades, you’ve got upgrades. It’s a very dynamic, name-by-name approach every single quarter, that’s going to continue. And we’re not going to take our eye off the ball. So, you, we will probably see more payoffs and we’ll probably see more migration. And we work those name by name. It’s very strategic and granular.

Brett Rabatin

Okay. That’s helpful. And then, I don’t know if you covered this, so apologies if you did, but just on the capital and the buyback I know you used some of the authorization this quarter. Just wanted to see if he might continue to do some of that, or if the stock moving higher might hold, lead you to hold onto this capital.

Terry Earley

Yeah, Brett, when we announced the buyback and talked about its last quarter, we said we would be opportunistic. And I think we have done that. We have when — we’ve been a buyer when the stock is below tangible book and we’ll continue to be that, given where it is today, I wouldn’t expect us to be wouldn’t expect us to be, in the market, so to speak to buy back shares. So, we have capital allocated for it, but I’m not expecting us to use much of it given what’s been going on in the market with respect to bank stocks. So, I’m not sure I’ve modeled a lot of share buyback in the fully diluted share account into my model.

Operator

Our next question is going to come from the line of Mark [Indiscernible] with KBW. Your line is open. Please go ahead.

Unidentified Analyst

Thanks for taking my question. Appreciate the margin guidance. Just to follow up there, it sounds like positive costs have mostly peaked. Where do you think loan yields can go near year end prior to rate cuts?

Terry Earley

75% of the loan portfolio tied to prime and so forth. If we get fed rate cuts, it’s going to move down pretty meaningfully. Yes, it’s obviously SOFR resets the next month after, so that lags sit a little bit on the way down just like it lagged on the way up. You are going to see prime certainly is going to move fast, but we have 70% of the floating rates in SOFR versus prime. The key for us is going to be our ability to adjust deposit pricing down as loan yields decline from fed rate cuts. And we’re certainly talking about that, working on that in anticipation of that. That’s not your question, but that’s where my head goes when you talk about fed cuts, I know what’s going to happen on the loan side. It’s about what can we do on the deposit side.

I wouldn’t make one other comment on when rates go down, depending on the shape of the curve and people start wanting to refinance the importance of if we’ve got prepay protection in the loan documents, the importance of holding our borrowers to that. To help with the loan yields and net interest margin as rates go down.

Unidentified Analyst

And then maybe just switching gears expenses were pretty well contained again. I was just wondering if this total expenses in the quarter, if that’s a good run rate to think about for the remainder of 2024, and if there are any expense levers you see or an opportunity to gain efficiency anywhere?

Terry Earley

I think these are pretty good levels. I would say this, if we get the revenue execution, we’re hoping for in our government guarantee business, that will be some more incentives there. But I’m good with that expense given the revenue implications of it. I mean, it’s still a tight labor market. You have to — we’ve had that bring on a lot of very talented but not inexpensive people as we’ve gone over 10 billion and build out internal audit, enterprise risk management, financial stress testing, better information, data security, et cetera, et cetera. So, it’s not going down and we do want, as we’ve been talking about on the call, to find ways to invest more money into the business banking side. That’s such a driver for us.

So that’s probably the main reason why I wouldn’t expect it to be going down all. No, but we’re going to do our best at holding it flat. I think it’s a good run rate right now. I’m a believer that our earnings challenges are revenue-related and not expense-related. Veritex needs more scale, but you can’t get save your way to prosperity here. This is about revenue generation. But the primary driver being funding costs.

Operator

Our next question comes from the line of Ahmad Hasan with DA Davidson. Your line is open, please go ahead.

Ahmad Hasan

Good morning, guys. I’m Ahmad Hasan on for Gary Tanner. So, you might, guys might have covered this, but how are you thinking about the maturing term funding in the third quarter? I think it’s about %1.3 billion at 5.17%.

Terry Earley

I’m thinking about we ought to reprice these things lower. We’ve intentionally tried to keep the funding profiles short because we thought that the next move from the Fed was down, not up. And so, when you look at on the margin where we’re pricing deposits we, these should roll down the price curve a little bit? So, I would expect that that that’s going to continue to be the case. And I think that will extend into the fourth quarter as well because we’ve got a little over a billion at 5.20% in the fourth quarter and almost a billion at 5.02%. But when, anything above five should be our term funding profile and it’s all CDs. We, if you notice, we don’t have any FHLB advances, so it should be coming down.

Ahmad Hasan

Thanks. That’s helpful. And you touched on it a little bit, but the SBA and USDA production was nil for the quarter. What’s the story there? Is that seasonality and how can we think about it going forward?

Terry Earley

Yeah, we expect a better back half on both of those numbers. SBA’s got a lot of momentum and they’re doing a nice job. USDA we’ve done a little restructuring there, so we think we’ll do better on the fee income on the back half of the year. And let me clarify, there’s an error on the graph. The 18.8 million in Q1 production of USDA is actually Q2 production in SBA.

So, SBA production is down a little bit from Q1 to Q2, the pipeline for Q3 is way up. So, and I apologize for the error on the graph, but it’s the USDA with no production. The SBA had good production and the number of loans produced was good. They were just smaller. And the gain on sale premiums in the SBA on average for us are hanging in there right around 9%.

Malcolm Holland

And we did during the quarter hire a new team of five people this quarter. So, I mean we’re, we’re making some investments in that space. So, I do look for the back half of our fee income to be much better than from that.

Ahmad Hasan

Great. That’s really, helpful. Thank you for the clarification. Then that’s it for my questions.

Operator

Thank you. This does conclude today’s question and answer session as well as today’s conference call. Ladies and gentlemen, thank you for participating and you may now disconnect.