Values-Driven Banking: A Roadmap for Growth

[0:00] Jeff Kesler: Well, when you had a zero rate interest environment with so low cost of funds, a lot of companies were built during that time in that growth. And so when rates go one way or another, you get to find out who has a sound business plan and vision and what is truly scalable.

[00:22] Narrator: Welcome to 22 Minutes in Lending, your go-to podcast for insights on all things lending, from lending practices, regulatory updates, how to enhance lending efforts and more. In each episode, Vince Passione connects with industry leaders to discuss the latest trends and happenings around the lending industry. Let’s dive into the latest in lending.

[00:45] Vince Passione: So welcome everyone, the 22 Minutes in Lending. I’m your host, Vince Passione. I’m excited to introduce our guest, Jeff Kesler, president Dallas Fort Worth at Veritex Community Bank. Since joining Veritex in 2010 as its second employee, Jeff’s been instrumental in driving the bank’s success story, he oversees the bank’s loan operations as well as helps to develop new lines of loan businesses, including SBA lending, equipment loans and asset lending. Jeff’s impact extends far beyond the boardroom from launching the Thursday Thought series on LinkedIn to establishing scholarship funds for aspiring banking professionals. Thank you, Jeff, for being here today and welcome to 22 Minutes in Lending.

[01:22] Jeff Kesler: Yeah, well thank you Vince. Glad to be here with you.

[01:24] Vince Passione: Awesome. So excited about the segment. So a little research on my part. So Veritex Bank, Community Bank, headquartered in Dallas, Texas. I think I got that right. Founded in 2010 by your CEO and Chair of Malcolm Holland. And you guys actually completed an IPO in 2014. Bank currently is approximately 13 billion in assets. You’ve grown both organically and through acquisition. And from what I can tell reading through the press releases, it looks like it’s about seven acquisitions since your funding.

[01:52] Jeff Kesler: That’s correct.

[01:53] Vince Passione: Awesome. So you were there at the start. You were right there. Second employee, you had a seat at the table, you helped structure this, you helped really drive it. So was this intentionally built as a bank to do acquisitions and that was the growth strategy? Tell us the backstory.

[02:07] Jeff Kesler: Yeah, well, thank you. Fascinating story. Our CEO and chairman Malcolm Holland coming out of the Great Recession in ’08 and ’09 in the United States, there was a handful of banks failing a month in the country. And it was his idea and vision to build an organization that’s very simply based on relationships, truth, integrity, and transparency. So it was values based. It was about serving others and building an impact. And so we sought out, raised capital, started with four people in an office, probably smaller than the one you’re in today, in sharing desks and resources. So what was a vision and a dream?

[02:46] Jeff Kesler: We were fortunate enough to raise capital from people within the community across Dallas-Fort Worth that supported us. We shared that vision. People thought that we were a little bit of a salmon swimming upstream given what was going on in the industry, but we felt it was a great time to do so when banks were so internally focused on challenges they were having. We were going to take healthy banks both through M&A but also growing organically. Again, going back to relationships where we believe is the beginning of how banking services start, it’s me knowing you, listening, learning about what your challenges are and seeing how I can find a way to serve you in the way you want to be served. So very basic premise.

[03:29] Vince Passione: Now, Jeff, not to interrupt you, but this is 2010. This is the shadow of the great recession. And this is-

[03:34] Jeff Kesler: Yes, it is.

[03:35] Vince Passione: This is the Healthcare Reform Act, the creation of the CFPB. This is all happening around the same time, right? So this was a good time to start a bank?

[03:44] Jeff Kesler: Yes, it was. The results kind of-

[03:49] Vince Passione: Yeah. Oh, absolutely, speak for themselves.

[03:51] Jeff Kesler: Yeah. That it was, and here what also happened in the banking landscape. So banks a lot of times are started by entrepreneurs that are built to be sold at a certain asset size. And so a lot of banks in Texas had been started in the early two thousands. And so that leadership team and capital and equity base had become a little fatigued in growing through the great recession. And so what their business model was to build something to sell, ours was to build a bank about impact and building it a brick at a time. And so we were able to take good new capital inject it into banks that might’ve been fatigued from a leadership or an equity standpoint. They had clean balance sheets, assimilate them together with a great culture. We wanted to be an acquirer of choice. So that gets into the people and culture we go about it, but then also be able to have capital to take business from other organizations that were so internally focused, they weren’t even serving their best clients. So we actually turned out to be a great time in history to start a bank.

[04:55] Vince Passione: So now talk about the structure. So you have a bank, you have to operate a bank, and then you’re going out almost acting like a P firm where you’re acquiring banks, so you have to do due diligence, then you need to turn around and close those deals. You’ve got to integrate this. How do you structure to make sure you’re optimal in both operating the bank as well as being an acquirer of other banks? And it looks like you’ve acquired banks as well as some other companies that are processors or FinTechs.

[05:20] Jeff Kesler: Yeah. Yeah, we’ve acquired two non-bank companies in the last couple of years. One part we always thought if we had built something right that was able to operate organically with a good culture, just serving clients and bringing in new business that that actually enables and makes M&A more likely. Because the talent and people can see that there’s a future ahead there, but it’s simply not just an acquisition of assets, it’s not just an income play. It was really about continuing to grow the value of both organizations and that both together we’re better than one independent of the other.

[06:04] Vince Passione: Now, have they grown in size? I mean, I went through some of the press releases, but has that been part of the methodology is to keep increasing asset size or is it geographic? How does the strategy work when you think about your acquisitions?

[06:18] Jeff Kesler: Yeah, multipronged there. Originally it was, one, to create a foundation with a strong bank. So that was really the focus of the first one that had a good mix and concentration of both on the asset and liability side. And we found that in our very first acquisition and so thankful for that. From there, it was finding like-minded community banks, which typically have a similar mix and composition. You mentioned going public in 2014. That was not originally part of what we thought we were going to do, but many of the organizations that started as private had wanted to not take another private stock but rather have a public currency. So if they wanted to sell, they could.

[07:30] Jeff Kesler: And so by doing so with our investment bank, that enabled us to acquire some larger organizations, which the largest two were in late ’17 and then into ’19, 2020, which were larger banks. And so yes, they have grown in size of what we’ve acquired, that is part of it for scale and spreading cost over a larger asset base. But also it was focused on geography, as you mentioned, when we entered another area of the Dallas-Fort Worth metroplex as well as talent and or specific disciplines like SBA, that was a discipline we picked up when we made an acquisition back in 2015. And then most recently an acquisition that we had of North Avenue Capital was also about that, right? A business that was complimentary that we brought their expertise into our balance sheet and it was very, again, complimentary and a great marriage.

[08:00] Vince Passione: And you talk a little about your values, you talk about truth, you talk about integrity, you talked about transparency, and I think your name, right? It’s sort of Veritex, but I guess its Veritas in Texas, that’s how you… Veritas meaning truth, I think. So how do you maintain the culture when you’re acquiring all these banks and non-banks? They have their own culture. So what’s the recipe to integrate not just the people, but also getting the culture to be the same?

[08:30] Jeff Kesler:  Yeah, that would probably be part of the secret sauce as they say, to use that term. It’s really about intentionality. It’s about listening and learning and being open to understand that while those are our values, they’re not negotiable how we do things or how we might go about something is if there’s a way we can refine a process from a company that we acquired or new employees. That’s really what’s built this company to be so great from a foundation to continue to refine and learn from one another. And when you do that, you can sit across the table from one another and you have a common interest that’s based on values and serving others. And when you’re aligned, you can walk through that and I think it gives you a much greater chance or opportunity of that culture surviving and also people just on adapting, but adopting it and owning it themselves.

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[09:59] Vince Passione: So we saw mergers and acquisitions slow down. For the past four years we saw about 400 banks a year in the last year, 2023, it slowed down to about a hundred. So how did that affect your strategy when it comes to looking at prospects to acquire?

[10:14] Jeff Kesler: Yeah, well the event that occurred, it was March of 2023 with Silicon Valley Bank. We all know that. I’ve heard someone mentioned the other day, it was truly probably the first digital bank run that we’ve seen where people could quickly invest and move money like they’ve never seen before. We’ve seen days of old where there’s lines out banks and people looking to deposit. Well, this happened in minutes on phones and digitally and apps. So some of the things we’ve used to serve have done that. So that event singularly changed it along with the culmination, the rise in interest rates put the focus back on granular funding base, which means deposits, core deposits that are very sustainable, that aren’t real volatile. So again, goes back to granularity. So that became the focus combined with the fact that when interest rates went up, the banks had either held a higher loan or deposit ratio or a lower one, right? Meaning what percentage deposits were of loans.

[11:21] Jeff Kesler: And so organizations that may have had excess liquidity invested that into securities in a bond portfolio. Some of those bond portfolios and CFOs went out rather long in duration, and when rates went up, the value of those bonds came down. And so you actually have, while you don’t mark to market today in the case of M&A, you would. You’d have to realize those, and that reduces equity. So therefore that prevents really, while conversations I believe in the industry are going on and we will see it return, until that is resolved or rates not only stabilize but maybe come down. The only way for that adjustment in the bond portfolio to return is either rates coming down or the bonds are valued more or to solve it with equity. And so that is naturally preventing a lot of the M&A at the historical levels that we’ve seen.

[12:17] Vince Passione: No, it’s obvious, right? I missed that. The mark to market and the music stops, right? And you’ve got to realize that. Interesting. Very interesting. So let’s talk about deposits. You touched on a little bit, and we all know the deposit story. We saw what happened with Silicon Valley Bank. Almost $50 billion disappeared in probably less than six hours. I was looking at some research, I was putting together a presentation on deposits and S&P Global had this interesting chart, and basically what it showed was industry cost of funds were about 59 basis points back in Q3 of 2022. And then they jumped to about 218 basis points by the third quarter of 2023.

[12:57] Vince Passione: And deposit betas are still really, really high right now, and people are concerned about cost of funds and impact on them. Now from what I read and heard on the earnings call, Veritex started initiative back in Q3 2022 to focus on deposits and you kind of slowed loan growth, which made sense. The result’s pretty impressive, right? Your deposit growth was like $1.2 billion in 2023, which is I think was almost 13%. And you brought down your loan to the deposit ratio to like 93%, and I heard your CEO say, “Hey, our future by the end of the year is we want to be at like 90%.” So what strategies did you deploy to get those deposits? I saw a white paper on MMANTL. Was this part of your strategy?

[13:43] Jeff Kesler: Yes, it was. Vince, you’ve done a great job in research, in Veritex, in our company and understanding the things that we’ve been doing. And so MANTL for us, which we started in late ’22 and even years before that, and some other things that we’re doing in process refinement and continually improving MANTL was part of that. And so come March and here we were with a place that we could go out digitally and acquire clients and deposits, and we acquired more clients in that environment, in the most challenging environment we’ve probably seen right in the 14 years perhaps in part of the history of the bank. And we’re able to do that because that technology enabled it.

[14:28] Jeff Kesler: We had to work to tell our story digitally, what that was like in sourcing those clients in markets where we’ve established a brand in Texas where primarily our footprint is in Texas. We had to be able to tell that story so that it resonated no matter how well we’ve done that in the markets where we have physical footprint. And so both a digital campaign of awareness through brand and through some of the things we do in investment in communities, and then actually apply the technology to where someone could open accounts with us. And so again, thankful that we’ve invested ahead of time, a need and anticipation that it may come and it just happened to be that both the economic events that occurred and that technology overlapped at just the right time for us.

[15:17] Vince Passione: Yeah. Now, I won’t ask you to forecast what you think rates are going to be, but talk to us a little bit about your view on cost of funds. I mean, you talked about SVB and the world’s really changed, right? Consumers can move money very, very quickly. It’s questionable what betas will look like in the future. Where do you see this settling out for the industry as far as deposit betas and cost of funds? Do you think they ever go back to where they were three, four years ago? Or do you think this is the new normal and we’re settling into it now?

[15:50] Jeff Kesler: Yeah. Well, when you had a zero rate interest environment with so low cost of funds, a lot of companies were built during that time in that growth. And so when rates go one way or another, you get to find out who has a sound business plan and vision and what is truly scalable. For banks clearly outside of employee cost and benefit interest cost is it. Very simply, we’re in trust with the deposits of our clients. We in fact take and invest those back into the community from mortgages and projects and new credit facilities for manufacturing companies, so on and so forth, that creates the jobs. So while rates have gone up on the loan side, on the asset side, so has the betas, right? The deposit beta on the other side gone up and it’s gone up significantly. So a headwind is not only the deposit mix and concentration of your funding mix, but also the cost of it. And so that’s putting pressure on banks as far as the net interest margin goes. We continue to think that we’ll see that for some time, for some time.

[17:20] Vince Passione: Agreed, agreed. So we talked about funding costs, but you also have other expenses and reducing those expenses, especially now you have to be really focused on it. So let’s talk about FinTechs, right? People throw that around all the time and say, “Hey, this is potentially a solution for creating more operating efficiency.” So how does Veritex, how do you view FinTechs and how do you view them either helping or potentially hurting your community banking business?

[17:30] Jeff Kesler: Yeah, it’d be fascinating. Various conversations that we’ve had amongst the executive teams going back a couple of years now, ranged from, what is it? What is banking as a service? You’re seeing a lot of articles now, is it good or bad? How does it impact the industry? Are FinTech companies going to be future of banking? Are they going to take all the clients away? Do you need brick and mortar? All the things. The fact is they have to be embraced and it needs to be complimentary to one another. So the FinTech space, which does a great job of serving people how they want to be served and acquiring clients is not akin to the regulation and the governance and the risk management practices that banks are. That has really been a roadblock for more things working between FinTechs and banks. On the other side of that is banks, it’s been the mindset because mindset for most banks is more traditional and is willing to be innovative.

[18:32] Jeff Kesler: And you have to be innovative within the guardrails of risk and government, right? So putting those together, there’s been some banks that have figured it out that are doing some fantastic things. Most of that honestly has been banks less than $10 billion in the US that have been a little bit more innovative in approach. You must be wise here in that and ensure while they can help you acquire clients, that the appropriate risk and governance procedures and controls, data security, cyber security, that that is also there. So it’s putting both of those worlds together, but when they complement and the management teams can align there, while there’s both a little bit of adjustment, you’ll see some win and victory, but we’re embracing it. We’re trying to work to find more solutions every day. And you look at many of them to find a few.

[19:26] Vince Passione: So which of the areas you’re focused on? Because you hear everybody lines up when they hear AI these days, it doesn’t matter whether it’s machine learning, generative AI, people just seem to say, “Oh, my board said I should have a solution here, so I’m going to look for one.” But are there verticals that you have interest in when you think on the technology side, like using robotic process automation or machine learning? We talked about account opening, which it sounds like you’re well underway, you’ve been at it for a while.

[19:53] Jeff Kesler: Yeah, so we’ve done that on the account side there. Internally, what we’ve looked at is many processes are manual when you start a company and you put them together. So as you look to invest and continue to grow and scale specifically, I think as you ask most CEOs in America, when you speak to them, they always want to be twice as big as they are today, always seems to be the answer. And so what processes are scalable? The old manual process and by putting more talented people in place, it’ll get it done. But we have to find solutions. So machine learning, that has been fantastic to use it or data capture, so that data is only input one time and it comes through, or loan documents is an example. There’s a lot of companies out there doing it today where it’s learned and it can be appropriately document filed in the respective places within the bank or departments. And so you’re removing that people need there, which allows you, this is interesting, to take and realign those people where people are needed in the process.

[20:57] Vince Passione: No, no, we resonate with that statement. We often describe our business as a tech-enabled services company.

[21:03] Jeff Kesler: Yeah, awesome.

[21:05] Vince Passione: And yeah, it’s interesting, right? Because without the people, you lose connection with the customer. And I agree with you wholeheartedly about that. So Jeff, last takeaway. So three things you’re excited about coming down the pike. What are they?

[21:22] Jeff Kesler: Yeah, great One, it’s the future of this industry for the talent that we’re developing. Very excited about that. To see what those bankers will do years beyond my tenure, in my era and stewardship of leadership within banking. I think that is great. Next, the uncertainty of the industry, the uncertainty of the industry, that excites me. It allows me to build, to create, to find solutions, and to work with people that are as curious to be innovative within the confines of working in a highly regulated business.

[21:59] Jeff Kelser: I believe that is a major key to success of the banks from today and those that go forward or whether or not are acquired that’s there. And finally, it will be the continued building of the brand of our organization as we’ve built it today across Texas and we expanded into new markets, is being able to tell our story, tell why we started this bank, why we want to serve others and serve them how they want to be served. It is an honor, it’s a blessing to be able to do that and to be entrusted with the resources of others. And that and along with my team, we’re very excited about the future.

[22:42] Vince Passione: Now look, we’ll leave it there. It’s a great story. So congrats on your success.

[22:47] Jeff Kesler: Thank you.

[22:48] Vince Passione: I appreciate the time today. Appreciate the insights and hearing the backstory behind the research, but it is a great story. So thank you. Thanks to our listeners a lot for tuning in. Don’t forget to subscribe so you can enjoy future episodes and I’ll meet you back here for our next 22 Minutes in Lending. Thanks so much, Jeff.

[23:05] Jeff Kesler: All right, thank you Vince.

[23:07] Narrator: Thank you for listening to the 22 Minutes in Lending podcast. We hope you enjoy today’s episode. You’ll find links to any resources mentioned in the show notes. If you’re enjoying our show, be sure to subscribe and leave us a five star review.