Veritex may look to sell after termination of StoneCastle deal

Veritex Holdings Inc. may be in the market to sell following the termination of its agreement to acquire StoneCastle Partners LLC's interLINK platform, analysts said.

Veritex was set to purchase StoneCastle Cash Insured Sweep, a proprietary software platform purpose-built as a bank treasury function and operates by the name interLINK. The transaction would have helped the Dallas-based company to improve its funding base, but StoneCastle pulled the plug on the deal.

Now, Veritex is facing a future of muted loan growth as it has to look for other funding sources, according to equity analysts. Multiple analysts suggested the bank may opt to sell now in the face of the challenges ahead.

"When they announced the interLINK deal, it signaled to the market that they were going to be on their own independent path," Raymond James analyst Michael Rose said in an interview with S&P Global Market Intelligence. "Now that this deal has been pulled and canceled by StoneCastle, I think there's the perception out there that, in theory, they could be back in play."

With a dearth of M&A options in Texas and Veritex's pure-play concentration in Dallas and Houston, the company will be attractive to a wide variety of potential suitors, Rose said.

Hovde analyst Brett Rabatin echoed the sentiment that "regular bank M&A may be back on the table" and that Veritex "will likely be higher valued without the noise of indexed deposits over time," he wrote in a Sept. 8 note.

Piper Sandler analyst Brad Milsaps in his Sept. 6 note on the termination wrote that "a [Veritex] without interLINK might make it more attractive to a potential acquiror."

Analysts gave mixed opinions on whether the termination is ultimately a negative for the company or if it will eventually prove positive.

On one hand, the transaction was meant to improve the bank's funding base, which would in turn help ramp up loan growth, analysts said.

"The cancellation of the interLINK deal further raises the specific investor question about funding this growth story," Rabatin wrote.

Milsaps said growth will now need to slow at Veritex as the bank figures out how to replace the interLINK deposits with new funding to compensate for the transaction's termination.

"[T]he company will need to refocus its efforts on growing its own deposit base to keep pace with loan growth, which will likely be more difficult than just tapping the interLINK network," Milsaps said.

D.A. Davidson analyst Gary Tenner also acknowledged that the company's future funding is now more uncertain, but he expects that Veritex can fund its growth at a similar cost to the high-beta deposits it anticipated acquiring from the interLINK deal, he wrote in a Sept. 7 note.

"Although, we think overall balance sheet growth is likely to moderate versus our prior expectations," he added.

Tenner also noted that the termination will hold Veritex's loan-to-deposit ratio around the mid-to-high 90% range and lower net interest income, both of which are "modestly negative" financial impacts.

Veritex reported a loan-to-deposit ratio of 100.4% as of June 30. The interLINK transaction was expected to reduce Veritex's loan-to-deposit ratio to a mid-80% target range, according to Tenner.

Despite the expectations for muted loan growth going forward given the loss of deposits from the terminated transaction, analysts found some silver linings.

Analysts agreed that shareholders were not keen on the transaction, so they may see this as a positive for the company.

"We never got the sense that investors were overly excited about [Veritex's] purchase of interLINK given the price paid and reliance on wholesale deposits," Milsaps wrote.

The analyst noted that Veritex's share price was down 27% since the deal was announced, compared with a 15% decline for the SPDR S&P Regional Banking ETF.

Following the termination news, Veritex's stock price closed at $28.10 on Sept. 7, down 3.1% from the Sept. 6 close price of $29 and compared to a 2.18% gain in the KBW Nasdaq Bank Index during the same period.