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Edited Transcript of VBTX earnings conference call or presentation 29-Apr-20 1:30pm GMT

Q1 2020 Veritex Holdings Inc Earnings Call

DALLAS May 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Veritex Holdings Inc earnings conference call or presentation Wednesday, April 29, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles Malcolm Holland

Veritex Holdings, Inc. - Chairman, President & CEO

* Michael Clayton Riebe

Veritex Holdings, Inc. - Senior EVP

* Susan Caudle

Veritex Holdings, Inc. - Executive Assistant & Shareholder Relations

* Terry S. Earley

Veritex Holdings, Inc. - Senior Executive VP & CFO

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Conference Call Participants

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* Bradley Jason Milsaps

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* Gary Peter Tenner

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Michael Edward Rose

Raymond James & Associates, Inc., Research Division - MD of Equity Research

* Wood Neblett Lay

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good day, and welcome to the Veritex Holdings First Quarter 2020 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I will now turn the conference over to Ms. Susan Caudle, Investor Relations Officer and Secretary to the Board of Veritex Holdings.

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Susan Caudle, Veritex Holdings, Inc. - Executive Assistant & Shareholder Relations [2]

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Thank you. Before we get started, I would 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 statements.

At this time, if you are logged into our webcast, please refer to our slide presentation, including our safe harbor statement beginning on Slide 2. For those of you joining us by phone, please note that the safe harbor statement and presentation are available on our website, veritexbank.com. All comments made during today's call are subject to that safe harbor statement.

On Slide 3, we have provided an update to our risk factors, specifically regarding the impact that COVID-19 could have on our business. In addition, some of the financial metrics discussed will be on a non-GAAP basis, which our 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; Clay Riebe, our Chief Credit Officer; and Angela Harper, our Chief Risk Officer. Malcolm?

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman, President & CEO [3]

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Good morning, everybody. Stating the obvious, this quarter's call will be considerably different than our previous calls and may last a few minutes longer. Our desire today is to give you a clear and transparent view of the bank and at the same time, provide a more in-depth and granular look at our business. What we can only tell you what we know right now, understanding that things are evolving and changing very quickly in the world we live today. We want to communicate and discuss with you 5 main topics: number one, pandemic update and what are we doing as a bank; number two, our credit status as we see it right now; three, a CECL discussion; four, balance sheet liquidity and capital metrics; and then five, quarterly earnings and related items.

Before we dive into these 5 areas, I want to start with what I believe is the most relevant financial metric for us during these days, pretax preprovision. For the first quarter, we produced pretax preprovision income of $39.1 million or 1.94% return on average assets. The continued strength of this number gives us confidence in the earnings power of this institution in the uncertain times that we find ourselves in. Terry will provide more detail on the financial performance in a few minutes.

First and foremost, our entire staff is doing well and is healthy with no confirmed cases of COVID-19 for any of our 660-plus employees. We made the decision to go into pandemic mode in mid-March and at that time, prepared for a minimum of a 6-week business as unusual plan. We currently are fully functioning in all areas of the bank with approximately 45% of our staff working exclusively off-site. Most of the remaining staff are rotating days between being in and out of our physical offices. We have weekly crisis management, tactical and strategic team meetings, and I have a weekly telephonic update with our Board of Directors. Our branches offer walk-in access by appointment-only, while our drive-through facilities have remained open for business.

Additionally, we are supporting our local communities with approximately 500,000 donations to assist those in need during this pandemic. These donations have targeted the food needs and the women's and children's shelters in the communities in which we serve. Our initial response to this pandemic on the credit side has been our involvement in loan payment deferments and participating in the SBA PPP loan program.

Slide 8 shows our process and a breakdown of the number of payment deferments booked and the principal loan balance associated with those requests. As of April 24, we have booked 517 deferrals with principal balances of $894 million or 10.5% of total commitments or 15% of total loans outstanding. The majority of those deferments are in retail, CRE, hospitality, office CRE and general C&I.

Additionally, we fully embraced the PPP program that have been active participants. On Slide 9, you can see that a team that was pulled together participate in the PPP process. We quickly implemented a team of over 90 people from all areas of the bank to execute a plan to deliver as many PPP loans as possible. I'm proud to say that we have approved 1,142 E-Tran number applications and funded 1,047 loans totaling $308 million as of April 24. We are currently in the process of working through the second funding of PPP. As of yesterday, we have an additional 880 trend numbers, which equates to 99% of all applications we've received to date and expected additional funding nearing $100 million.

In line of these times we're living in and the relative uncertainty, we want to provide you some additional granularity of our loan portfolio in several industry-specific breakdowns. Slide 11 stratifies our loan portfolio by loan type, including some additional category details. As you can see, we remain very balanced in our portfolio distribution. I would direct your attention to the weighted average loan-to-values for each of the commercial real estate categories. As I've said many times, when you deal with 8 borrowers and get substantial equity in their transactions, these components will serve you well when times are difficult, as they did at the banks I was working at in 1988 to 1990 and 2008 to 2009. You can see on this slide, our healthy equity positions in these portfolios.

The next several slides give you some details are most asked about sectors and ones that could be stressed due to COVID-19. The specific industries are hospitality, restaurant, energy and health care, and they account for 9.3% of our total loan portfolio.

Starting with Slide 12. Let's look at our hospitality and restaurant exposure. Our hospitality portfolio is comprised of 127 different loans with a total outstanding balance of $344 million or 5.9% of our loan book. The average loan is less than $4 million with over 75% of the portfolio being national flag hotels. The portfolio's loan-to-value is approximately 61%. It should be noted that 7 -- the 7 largest loans totaled $150 million or 44% of this portfolio and have a collective loan-to-value of 53%. These represent our strongest borrowers, and fortunately, none of these properties depend on the convention business. As of March 31, 2020, none of this portfolio was nonperforming, but I expect that may change in the back half of this year. Our operators, owners, developers in this sector have been in the industry for many, many years. Although none of us know how this is going to play out exactly, these borrowers are seasoned and best-in-class.

The restaurant portfolio is made up of 155 loans with an outstanding balance of $116 million, which represents 2% of our loan portfolio. The average loan size is $700,000. Our 6 largest borrowers account for 11 loans totaling $42 million or 36% of the portfolio. All but one of these credits, which is a highly recognized restaurant in the DFW area, are secured by well-margined, real estate collateral. 80% of the loans in our restaurant portfolio, less SBA loans, are secured by real estate.

On Slide 13, we've included some additional color on our very small energy book and our health care exposure. The energy book continues to decline, and it's almost de minimis at this point. This small portfolio consists of 21 different borrowers with an average loan amount of less than $1 million. 3 oilfield service borrowers account for over half of the energy portfolio and are secured by the company's real estate facilities. We've also included some additional detail on our health care portfolio, which remains healthy and only represents 1.1% of our total loan portfolio.

Slide 14 provides a detailed look at our retail CRE book and leverage lending portfolios. Our retail CRE portfolio has 154 loans with an outstanding balance of $436 million or 7.5% of our total loans outstanding. Weighted average loan-to-value for this portfolio is less than 60%. Again, substantial equity in our portfolios.

On Slide 15, you'll see detail on our advances, on lines of credit and/or SNCs. We did not see huge advances on our commercial lines, although the ones we did have come late in the quarter. Our SNC portfolio is very diversified and continues to perform very well. Overall, asset quality remains at acceptable levels through March 31 with NPAs at 0.6% of total assets and our second straight quarter in a net recovery position. I did want to quickly touch on growth for the quarter. You will see that we had annualized nonmortgage warehouse loan growth of over 8%, while mortgage warehouse grew $190 million. Our pipelines were solid with many opportunities in the works. Obviously, we're now in a very different situation and -- than we originally kind of thought, and we expect that that growth will certainly take a back seat until we see some positive economic movement.

I'll now turn the call over to Terry.

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Terry S. Earley, Veritex Holdings, Inc. - Senior Executive VP & CFO [4]

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Thank you, Malcolm, and good morning, everybody. I'd like to take a few minutes to provide you with more details on Veritex' financial results for the first quarter, including CECL and the allowance for loan losses, capital, deposits, liquidity and earnings.

Let's jump back to Slide 5. This page gives you a good overview of the first quarter results. Earnings per fully diluted share were $0.08 as we built the allowance for credit losses to approximately $101 million or 1.73% in anticipation of future losses due to the economic impact of COVID-19. Coming down the page, note the metrics in the red box. In my opinion, in this economic environment of uncertainty and increasing credit costs due to the pandemic, the single most important metric is our pretax preprovision earnings and return on average assets. The 194 basis points of pretax, preprovision return on average assets indicates that we have the ability to absorb approximately 250 basis points of credit loss per year before it impacts our capital base.

Now on to Slide 18, which focuses on our allowance for credit losses. Like most banks, we adopted CECL on January 1. This slide lays out the impact of CECL on each loan pool from December 31 through the day of adoption and ending on March 31. Texas unemployment and GDP forecast we are using in the CECL model comes from Moody's, specifically their baseline forecast that were updated on April 2. Please see the table on the bottom left part of the page. As you can see in this table, the impact of COVID-19 is reflected in the deteriorating forecast for Texas unemployment and GDP. Namely, unemployment was expected to peak in Q2 at 8% and improve over the next 3 quarters. GDP is expected to bottom out in Q2 at negative 5% and improve from there. Again, this is as of the April 2 forecast.

On the top table labeled January 1 adoption impact, this reflects the change from an incurred loss model to a forward-looking life of loan loss model, coupled with the economic forecast on the day of adoption. This change in approach, including economic forecast, drove an increase in our ACL to total loans from 52 basis points on December 31 to 123 basis points on January 1, primarily driven by reserves on our acquired portfolio that were not previously required to have a reserve under the incurred loss model. Please also note the increase in the PCD reserves of $19.1 million or 34 basis points of the total ACL primarily reflects the unaccretable credit mark moving into the allowance.

Focusing on the column labeled Q1 reserve bill. The declining economic outlook from COVID-19 negatively impacted our pooled loans and PCD reserves to the tune of $27.7 million. Additionally, we established $4.3 million in specific reserves, primarily due to impairments of $3.4 million that came from 2 loans totaling $6 million in the green portfolio that were not credit deteriorated on the date of acquisition. Finally, we had $236,000 in net recoveries for the quarter. The result was a quarterly loan loss provision of $31.8 million and an increase in the credit loss reserve to total loans at March 31 to 173 basis points. Please note, we're trying to build the reserve to prepare for the upcoming expected adverse credit environment. To that end, in addition to the loss history and the economic forecast, we have qualitative factors that represent approximately 30 basis points of the total ACL. Also worthy to note is that 85% of the provision was due to the deteriorating economy. In our opinion, as we look forward, there is a high degree of uncertainty and little to be gained by being overly optimistic at this stage of the pandemic.

On to Slide 20. Let's transition to discussion from CECL and the allowance for loan losses to capital. Capital ratio that the holding company in the bank remained very strong. Those ratios, along with tangible common equity to tangible assets, decreased this quarter, reflecting weaker earnings, share repurchases, the CECL transition adjustment and dividends. Back in December, Veritex announced an increase in the stock buyback to $175 million. During the quarter, we returned $58.3 million to common shareholders, including $49.6 million from the repurchase of slightly over 2 million shares and $8.7 million in common dividends. We suspended the stock buyback program on March 16 and expect to remain on the sideline for the foreseeable future given the uncertainty of this pandemic. The current authorization has $31 million remaining and is open until December 31, 2020.

Regarding the dividend, we declared a regular quarterly dividend of $0.17 per share after conducting multiple capital burn down scenarios. Again, Veritex' strong pretax preprovision earnings gives us the ability to absorb substantial credit losses without weakening our capital base. We anticipate being able to maintain the dividend, but that depends on COVID-19 and its impact on the Texas economy.

Turning to Slide 21 in deposits. The mix of the deposit portfolio has improved significantly since the beginning of 2019 with noninterest-bearing deposits at 26.7% of total deposits and the reliance on time deposits dropping from 36% to 30%. The loan-to-deposit ratio, excluding the mortgage warehouse at quarter end, stood at 100.9% and is slightly above the range we've targeted. As we have discussed on every earnings call since the Fed posted on interest rates in May of 2019, we've been aggressively reducing money market and time deposit rates and shifting out of higher cost market index deposits.

The graph on the bottom left of the page shows, on a monthly basis, deposit rates, excluding purchase accounting, declined by 39 basis points from December '19 to March 2020. Over that same period, Federal Home Loan Bank borrowings declined by 37 basis points from 1.47% to 1.1%.

Looking past the first quarter, the table in the middle part of the page shows time deposit repricing opportunity for the remainder of 2020 and beyond. Additionally, the graph on the bottom right shows the significant deposit inflows that have occurred so far in April. Deposits have increased over $300 million with almost 2/3 being in noninterest-bearing deposits. Obviously, the balance sheet is flushed with liquidity, and the loan-to-deposit ratio is down since quarter end and comfortably within our target range.

Moving on to Slide 22 and liquidity. The purpose of this slide is to highlight 3 things. First, is our primary and secondary liquidity sources. The table on the bottom right shows that we have over $2.5 billion in total liquidity sources plus another $325 million available from the Fed under the PPPLF. Also note that beginning on March 6, we've doubled the amount of normal liquidity that we're carrying on the balance sheet. We believe that liquidity is of the highest importance. And given the uncertainty coming from the pandemic, we concluded it was prudent to double our liquidity cushion.

Second is our investment portfolio of approximately $1.1 billion. As you will note, 97% of the portfolio is available for sale. The portfolio yield is just over 3% and the projected cash flow coming off the portfolio in the next year is projected to be $175 million or 16%. Finally, we're maintaining our excess liquidity into the second quarter. Note that in the red box at the bottom, that liquidity on the balance sheet has gone up even with the funding of the PPP loans, reflecting very strong deposit inflows.

On Page 23, you will note 4 graphs. First, is our return-on-average assets and our pretax preprovision return-on-average asset trend in the top left graph. Second, the operating efficiency ratio, which shows that we've been below 48% over the last 5 quarters. The graphs on the right side of the page show the trend in tangible book value per share on the top, and the graph at the bottom is a build of TBV per share from December 31 through March 31.

On Slide 24. The GAAP net interest margin decreased 14 basis points to 3.67% in Q1 with 8 basis points of the decline due to lower purchase accounting adjustment, while the adjusted NIM, which excludes all purchase accounting impacts, ended the quarter at 3.39%. The table on the bottom right of the slide shows the items that impacted both the GAAP NIM and the adjusted NIM. Focusing on the adjusted NIM, which excludes the impact of purchase accounting, following short-term interest rates, coupled with a loan portfolio that is 70% floated, have impacted the yield on loans and reduced the adjusted NIM by 19 basis points. This was largely offset by 14 basis points of NIM expansion from lower rates on interest-bearing deposits and another 3 basis points expansion from the lower rates paid on the FHLB advances. As we've discussed for several quarters, we continue to be aggressive on the funding side, including rate reductions on our deposit portfolio.

As we announced during the fourth quarter, Veritex completed the issuance of $75 million in sub-debt. This funding caused 2 basis points of decline in the first quarter NIM. Additionally, we've been able to negotiate a 1% LIBOR floor and over 50% of the loan to permit request where the interest rate was tied to 1-month LIBOR.

Finally, as can be seen on Page 9 in the earnings release, we continue to carry considerable excess liquidity as a result of the pandemic. This excess liquidity has only increased so far in Q2. Much of it should be deployed through the PPP program, but it will put downward pressure on the NIM in Q2.

Slide 25. Veritex reported operating fee income of $7.2 million. Loan fees were down, but significantly offset by other fee income, which includes customer interest rate swap fees. Q1 was the best quarter we have ever had in this important fee business. Staying on Slide 25. Operating noninterest expense was flat from Q4 to Q1 and in line with management expectations.

With that, I'd like to turn the call back over to Malcolm.

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman, President & CEO [5]

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Thank you, Terry. Our intent today was to communicate clearly with a little more granularity on our current operating position and credit picture. Our balance sheet remains very strong. Our efficiency ratio continues at levels we are very pleased with and our ability to create pretax preprovision income looks very sustainable.

I'd like to add a quick word about my team. Like all my colleagues, we've been in the trenches for 6 weeks now and have been fighting every day to figure out the new normal and what lever we need to pull next. I'd not want to be in the situation with any other team. They're, in one word, incredible. I'm grateful for their efforts and loyalty. We remain focused and dedicated to managing these challenging and ever-changing times and are committed to remaining one of the best banks in Texas.

Thanks for your patience today. Operator, we'll now open the line for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Michael Rose of Raymond James.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [2]

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So just wanted to get some color, and I'm sorry if I missed this, much earnings calls this morning. Just a little bit greater color on your at-risk categories. Thanks for outlining them. Where do you see kind of the more immediate stress and then depending on how long this lasts, I mean, we do get a temporary boost from some of the government programs like PPP and EIDL. But that is temporary. So if this lasts longer, are there other categories that may broaden out that at-risk exposure? And maybe if you can just comment on what that would look like.

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman, President & CEO [3]

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Yes, you asked a really hard question, and that's looking into the future, Michael. And so my initial response is, I don't know. If you can tell me what the future looks like, I might be able to help. And that's not being flipping, I promise you. It's just really hard to deck out. But as we look at our hospitality portfolio, I mean, that's the one that comes to mind first. We've had quite a few conversations with our guys already. You're reading the numbers, occupancy. If they're even open, and several of them would just shut doors because it's cheaper to do that, the occupancies are in the single digits. So if we can get people back traveling and moving around in the country again, I think we can weather the storm. Our folks -- a couple of things we have going for us in that portfolio specifically is the folks that we loan money to in that space are very, very experienced and have been around a long, long time, number one. And then number two, we got a whole bunch of equity. But then what does a whole bunch of equity mean if nobody is walking in the door every day? Maybe not much. So right now, we're having lots of conversations. Like everyone, we're waiting to see if people start moving around the country. But that's certainly one that is top of mind for us. The next one would probably be on the retail real estate side. And we actually feel pretty good about that one. A very small piece of that is big box stuff. Majority of it is more neighborhood or out in front of grocery-type stuff. We don't -- we feel pretty good. Again, a lot of equity in those. The other categories, we look at transportation, we have less than 1% in transportation. What other categories? I'm sure there's going to be some C&I struggles and some stress, but industry-specific, at this point, I would be guessing if I told you where I think that would happen.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [4]

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Anything on the construction front? Construction and land is about 10% of the book. Any thoughts there?

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman, President & CEO [5]

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Yes. I mean our construction book is -- again, that's a high equity, high -- low leverage deal. Obviously, construction hasn't stopped. It's gone on very strong. We did have -- so we had 2 large, large construction deals. [Play] 1 was industrial and the other one, both industrial with big equities that have not even funded $1 and our borrowers said they're going to stop building for 6 months. And so a lot of our construction deals are still into the equity phase. So I actually feel if this thing lasts 6 months, 9 months, a year, I think our construction book is going to hold up real nice because that's when these things are going to be delivered. So I'm actually less concerned about our construction book than a lot of our books.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [6]

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Very helpful. Maybe just one more for me for Terry. Can you talk about maybe some near-term expectations for the margin, just with the puts and takes? And then how the PPP program will flow through for you guys? And then maybe what the estimated fee would be? And what the revenue you'd expect from that?

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Terry S. Earley, Veritex Holdings, Inc. - Senior Executive VP & CFO [7]

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Yes. Thanks, Michael. First of all, on the NIM, I think we've got things moving different ways here. I highlighted in my prepared comments, what's going on in the CD book and the opportunity there. But equally -- and this is not -- and the timing doesn't match up here, but we also add what's really working the other way is what's been going on with 1-month LIBOR. And where it ended the quarter versus where it sits today is around 40 bps, give or take, I believe, and probably has a little bit further to drop not tremendously from there, but a little bit further. So as we've said, we've got a pretty significant part of the portfolio tied to 1-month LIBOR. And so we're going to feel that in Q2. The benefit from -- and the benefit from CDs are going to be spread over Q2, Q3 and Q4. So I expect the NIM to feel pressure in Q2, pretty neutral in Q3 and should show some expansion in Q4.

In terms of the PPP, obviously, we're looking at total fees right now, $12 million to $13 million. We know that's -- obviously, as we've thought about and Malcolm mentioned, is the contributions we're making, and that's in light of some of the revenue benefit we're getting from being the distributors for the SBA and this PPP program. But about -- so I think it's between $12 million and $13 million gross. And the hope is when we're 7 weeks from the day of funding, we're going to be asking the government to pay us off. And our credit team and our bankers have done a really good job in qualifying what's forgivable under this program. So we're not expecting a huge tail and so we think that if we get paid off, that stuff will come in as fee income or yield in the second quarter. Obviously, for the things that funded in Phase 1, that's got a higher probability than what's funding in Phase 2. But so anyway, hopefully, that helps. And it's been good to be a part of that. And I think just -- this was in Malcolm's comments, but really note how much of our lending, it's like it is under $350,000 to loan size.

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman, President & CEO [8]

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Average loan is $210,000, I believe, of the total book.

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Terry S. Earley, Veritex Holdings, Inc. - Senior Executive VP & CFO [9]

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Yes. And so it's been really good to help the small businesses.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [10]

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Okay. So just to be clear, you're expecting that to go through fee income, not NII of the margin because you're going to hold it for held for sale, the PPP loans?

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman, President & CEO [11]

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Yes.

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Operator [12]

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Our next question comes from Brad Milsaps of Piper Sandler.

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Bradley Jason Milsaps, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [13]

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Really great details that you guys provided in the slide deck. Really appreciate that. I apologize if I missed this. There was an uptick in nonperforming loans. Just curious, any color there on -- I think there's about a $10 million or so increase. I apologize if I missed it earlier.

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Michael Clayton Riebe, Veritex Holdings, Inc. - Senior EVP [14]

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Yes, Brad, this is Clay Riebe. I'll take that one, yes. The uptick is due to primarily 3 credits that total about $7.6 million. Two of those borrowers are contractors that demonstrated some stress from the COVID downturn. And one's the oilfield services company that's in liquidation, that oilfield service company -- we've got that loan fully reserved. And the balance is really [10] smaller credits that are having to paying issues that we're seeing. So primarily related to 3 credits.

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Bradley Jason Milsaps, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [15]

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Great. And Malcolm, I know, obviously, the world turned upside down, and you guys were expecting some good loan growth momentum this year. Obviously, with how things are changed, I'd assume a lot of that gets put to the back burner and you focused on your existing customer base and PPP. But just kind of curious your thoughts around opportunities that might avail themselves in this kind of market for guys like yourself that do have good pre-provision earning power and capital to take advantage.

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman, President & CEO [16]

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Yes. I mean I've been preaching to my team for 6 weeks about the opportunity that this is going to provide us in a whole bunch of different areas. Obviously, right now, it's kind of batting down the hatches and getting the foxhole and fight it out a little bit. But I do believe the disassociation that's going on in the state of Texas on the banking side, is going to create some opportunities. We're seeing them -- I wish we could have -- I wish -- all of us wish we wouldn't have had this, but we were on record for one of our best quarters ever. On the growth side, I mean, our pipelines were stout. That new commercial team that we've been assembling has been super active. And so there's some opportunities there. So I don't think those opportunities are gone. They're still there, but there's certainly been pushed off and growth has just taken a little bit of a backseat. But I do think there will be opportunities with people, and I think there's going to be opportunities with clients. We were able to serve some folks during this PPP process that maybe had just an account here, too, but banked with us, and we're using this as their primary and the primary bank couldn't handle it or didn't handle it or wasn't communicating. So I do think there's going to be some opportunities, Brad. I think they'll -- we'll be guarded. I mean it's hard to put a new commercial credit in front of the credit guys right now and say, "Hey, let's loan them $10 million." And we don't know the future. But I think there will be later in the year.

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Bradley Jason Milsaps, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [17]

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Okay. Great. And then on expenses, Terry, you guys did a great job. They were flat linked quarter, essentially. I assume you'll maybe have some additional expenses related to PPP, but any other thoughts around kind of run rate, operating expense costs as you kind of think about the balance of the year?

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Terry S. Earley, Veritex Holdings, Inc. - Senior Executive VP & CFO [18]

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Well, first thing I would say is we're not spending a lot of money right now. I may -- in terms of -- when you think about expenses, such a high percentage of it is pretty well locked. But they're somewhere between 5% and 10% that's really discretionary on the margin, and that's what I'm really saying is, you're just not spending a lot of money right now. So even if we -- my belief is expenses should stay fairly flat even if we take advantage of the opportunity to hire some new people is because I think we're not spending a lot of other dollars. And so that would be, as I look out for the rest of the year, I'm expecting expenses to stay relatively flat.

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Bradley Jason Milsaps, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [19]

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Okay, great. And then maybe just kind of 1 final housekeeping. The accretion on the loan book was $4.4 million this quarter. I know it's hard to predict, but kind of how should we think about that over the next several quarters, maybe fewer prepayments? Just kind of curious how you expect that to trend.

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Terry S. Earley, Veritex Holdings, Inc. - Senior Executive VP & CFO [20]

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Well, certainly, prepayments are going to slow. And that's just a given in this environment, which will certainly slow it down some. Brad, I think it's hard to predict. I think the most meaningful way to answer the question is that we've got $25 million worth of accretable interest rate mark on the balance sheet right now that's going to come in over the next 2 to 3 years, depending on the pace of prepays, and do I think it's going to stay at $4-plus million a quarter? Likely not. But we've still got a ways to go. And that's why I'm just so much -- what happens on the accretion side is so out of our control and so driven by macro factors. Actually, I like to stay focused on the adjusted NIM where I'll show you the other side, but let's focus on what we can control, which is backing out that purchase accounting.

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Operator [21]

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(Operator Instructions) Our next question comes from the line of Gary Tenner of D.A. Davidson.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [22]

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I wanted to ask about the deferment process. You kind of laid out the flow chart of how you go through it. But I'm curious, just from an underwriting perspective, any kind of concessions you're getting from the borrowers to extend loans or deferred loans and how you're thinking of that?

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Michael Clayton Riebe, Veritex Holdings, Inc. - Senior EVP [23]

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Thank you, Gary. This is Clay Riebe. I'll take that one. Yes, the process that we have from an underwriting standpoint is just going through and -- [the timing needs] and so this is not just a program that is a giveaway due to customer base, [it's built on] time and effort focusing on, is there a real need here? And if so, how can we document that. And that's where we spend the majority of our time in underwriting of each transaction. So -- and the second part of your question, I'm forgetting it here.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [24]

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Well, it was really wrapped around that. It was about, do you have any concessions from the borrowers that you are -- deferred.

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Michael Clayton Riebe, Veritex Holdings, Inc. - Senior EVP [25]

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I think from a concession standpoint, we got a lot lower on about 40% of all of the LIBOR base loans that we deferred. So we did get something in return for the [exclusion] of those loans that we did deferrals.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [26]

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Okay. And then a lot of focus, obviously, on the kind of COVID-specific portfolios or those that would be viewed as being at risk. You don't have a meaningful energy portfolio, but I'm just curious, as you kind of think maybe longer-term ramifications, assuming your recovery from the health crisis that could support somewhat higher energy prices than we have right now, but even prior to that, prices were a bit lower because of kind of global production. How are you thinking about the secondary impacts of energy, particularly in Houston, where you didn't have a real meaningful Houston franchise during the last downturn?

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman, President & CEO [27]

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Yes. I mean, listen, we don't have -- we have a de minimis level of direct energy exposure, which I've outlined. We live in the State of Texas, our 90% plus of our business sits in the State of Texas. And so we're going to be effective, period, in the conversation. It will be secondary, it will be tertiary. And so we have people that touch the energy business, either at a distance or fairly close, whether it's uniform-type people or guys that are selling screws to them. I mean it's just part of the business. So as energy hurts the state, we're going to hurt a little bit, too. I don't think it's as catastrophic as it's not a direct obligations. But I could -- we don't have any -- we can -- I guess, we have one multifamily deal out in Midland, Odessa, but I just think of Midland, Odessa is -- that was the hot bed in the United States for the Permian out there, and you couldn't find an apartment. Well, today, I bet you can probably find an apartment or maybe not, but those guys probably aren't paying their rent. So we're not heavy out in West Texas, but I think we do have one complex out there or we did or it's gone or I can't remember.

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Michael Clayton Riebe, Veritex Holdings, Inc. - Senior EVP [28]

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We have one hotel exposure in (inaudible) I don't think we have any exposure in Midland, Odessa directly.

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman, President & CEO [29]

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Okay. So we do look at it, Gary. It's just really hard to calculate.

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Terry S. Earley, Veritex Holdings, Inc. - Senior Executive VP & CFO [30]

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Gary, this is Terry. Let me tag on to that. I think the way we pick this up is by the fact we're using the Moody's Texas GDP and unemployment forecast. And so to the extent those are reflecting what's going on in the oil industry, it's coming through those forecasts pretty directly, and we're providing for it. And so even though we don't have direct exposures, I'm pretty confident, especially in a 1.73% and with qualitative factors included in that, that we're doing a pretty good job of anticipating the secondary and tertiary impact from oil on the Texas economy.

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Operator [31]

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Our next question comes from Woody Lay of KBW.

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Wood Neblett Lay, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [32]

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Just to touch on the secondary impacts of energy, which you just mentioned. I was curious that you had a geographical breakdown of just between Dallas and Houston and your loan portfolio.

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman, President & CEO [33]

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It's -- I mean, the bank is about 2/3, 1/3 division and the loan distribution is going to be close to that.

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Wood Neblett Lay, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [34]

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Got it. Okay. That's helpful. And then the color surrounding the weekly deposit growth on Slide 21 is really interesting. I was just curious if you think this deposit influx is more temporary in nature. Or if it can be a longer-lasting source of funding for the bank?

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Terry S. Earley, Veritex Holdings, Inc. - Senior Executive VP & CFO [35]

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I think it's a little bit of both, to be honest with you. I think some of these inflows is somewhat temporary given everything going on in the PPP program. But I think there's a significant piece of it, a meaningful piece, that is more sustainable as people move out of the equity in the fixed income markets in the banks. And so the flows have just been amazing. And so I think it's going to -- really, for the foreseeable future, how long? I don't know. I think the funding position of not just Veritex, but I would anticipate most banks are going to be in a significantly better funding place than they've been in years and years.

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Operator [36]

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And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.