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Edited Transcript of VBTX earnings conference call or presentation 29-Jan-19 2:30pm GMT

Q4 2018 Veritex Holdings Inc Earnings Call

DALLAS Jan 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Veritex Holdings Inc earnings conference call or presentation Tuesday, January 29, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles Malcolm Holland

Veritex Holdings, Inc. - Chairman & CEO

* Michael Clayton Riebe

Veritex Holdings, Inc. - Executive VP & Chief Credit Officer

* Susan Caudle

Veritex Holdings, Inc. - Executive Assistant & Shareholder Relations

* Terry S. Earley

Veritex Holdings, Inc. - Executive VP & CFO

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Conference Call Participants

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* Bradley Jason Milsaps

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Brady Matthew Gailey

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

* Daniel Raymond Mannix

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Gary Peter Tenner

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

* Matthew Covington Olney

Stephens Inc., Research Division - MD

* William J. Dezellem

Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer

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Presentation

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Operator [1]

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Good day, and welcome to the Veritex Holdings Fourth Quarter 2018 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the call over to Ms. Susan Caudle, Investor Relations Officer and Secretary to the Board of Veritex Holdings. You may begin.

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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'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. At this time, if you're 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.

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; and Clay Riebe, our Chief Credit Officer. Malcolm?

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

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Good morning, everybody, and thank you, Susan. First and foremost, I want to officially welcome Terry Earley and the entire Green Bank team to the Veritex family. Last 7 months, working towards the January 1 Green Bank closings, has been an incredibly positive experience with all parties pulling together to build something very special. I personally like to thank Manny Mehos for his constant support and trust over the past few months as we work towards uniting these 2 great companies. I'll start with a couple of exciting announcements.

Our board has adopted our first quarter dividend of $0.125 per share payable on February 21 for shareholders of record on February 7. And we have finalized and received approval of a buyback agreement for up to $50 million of our common stock during 2019.

Now on to the results. Fourth quarter was an encouraging quarter for Veritex. We recorded fourth quarter EPS of $0.40 and fully diluted operating EPS of $0.47. We continue to see a very strong Texas lending market with Veritex net loans during the quarter increasing $110 million or 18% annualized. 2018 marked the eighth consecutive year of record loan growth for Veritex. Veritex originated new loan commitments in excess of $1.675 billion, while Green originated just short of $1.2 billion. That's almost $3 billion in combined new loan commitments. Our pipelines remain active and full, and we're extremely confident that our 2019 net loan growth will be in the low double digits. Our Texas economy is strong. Our unemployment rate continued at historic rates of 3.7% with new jobs of 391,000 and 127,000 state-wide and DFW, respectively. Texas remains a robust economy.

As mentioned last quarter, we felt our core NIM had some upward movement. The quarter produced a 9 basis point increase to 3.82% from 3.73% last quarter. Terry will provide some additional color on the NIM in a few moments. Credit quality has remained very strong. Net charge-offs for the year were virtually nonexistent. Nonperforming assets decreased from 0.80% to 0.77% during the quarter, and concentrations remained at acceptable levels. Additionally, we completed the December review of the outstanding Green Bank loan portfolio to obtain the most current data available and are making the appropriate up-to-date marks to the acquired portfolio. The deposit side of our business continued to be extremely competitive in all of our markets. Veritex grew deposits $343 million or 15.1% for the calendar year 2018. Recognizing that a majority of this growth was in the interest-bearing categories, we continue to be keenly focused on this side of the business. We have multiple levers available to continue to grow our core deposits, such as treasury management focused sales efforts, relationship manager deposit incentive plans and the creation of a new HLA division. We're also looking forward to new customer opportunities provided by the scale achieved with the merger of Green. Now I'll turn the call over to Terry for some additional color on our numbers.

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

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Good morning, everybody. Malcolm definitely did a good job in covering the major highlights for the quarter, and there are certainly some good news and results. I want to now drill down into numbers and try to give you a sense of the earnings power of the new combined company. I should start by acknowledging that by including the discussion of Green results in the press release, it does make it very long. But the importance of the Green acquisition to the Veritex financials, along with the desire to be totally transparent led us to conclude this presentation approach was best. Finally, while GAAP reporting is certainly important and required, I'm going to focus most of my comments on combined operating results, even though the slides reflect the companies on a stand-alone basis.

Turning to Slide 5 in the deck. Malcolm has already commented on the key financial results for the quarter. So I just want to spend a minute focusing on a couple of other points. The combined and annualized fourth quarter operating net income for Green and Veritex totals $111 million, again combined and annualized. This translates into $2.04 in fully diluted earnings per share, and you get there by adding the fully diluted shares for both companies and applying the exchange rate for the merger. This earnings level should give everyone a stand so that run rate earnings power before 2019 growth, the impact of the cost saves and the balance sheet marks.

On Slide 6, please note the growth in tangible book value per share in Q4 with Veritex ending the year at $14.57 and Green at $11.18. Obviously, the tangible book value will change materially on January 1 with the closing of the merger. The work on the fair value marks for the balance sheet is still underway, but Veritex remains confident that its earlier estimates of upfront TBV dilution from balance sheet marks and merger cost remain materially correct in the aggregate.

Turning to the next slide. These graphs demonstrate this earnings power I've been talking about of the 2 companies and show the pretax preprovision operating earnings contribution as well. This level of pretax preprovision operating earnings bodes well as we move later and later in the credit cycle. Both companies are producing strong operating results. Clearly, the level of excess capital being carried by the 2 companies will be significantly lower from the merger, coupled with the initiation of the dividend and the announcement of the buyback. The merger and these capital management actions should result in significantly higher returns on tangible common equity going forward.

On Slide 8, both companies were already very efficient on an operating basis before we see the benefits of the cost saves related to the merger. With the conversion and branch consolidations planned for the end of the second quarter, the bulk of the cost saves will be back-end loaded. There's been a small portion of the overall savings that were realized late in 2018 and that level will increase in Q1 and Q2 with scheduled employee departures and other cost-saving integration activities. On a combined basis, loan production increased approximately 77% from 2017 to 2018 to the almost $3 billion number that Malcolm mentioned earlier. The planned divestiture of Green's Austin branch was announced late in Q4 and is expected to close in late Q1. Loan growth on a combined basis, excluding the impact of the Austin loans, which are classified as held-for-sale, was approximately $530 million or almost 10% in 2018. This growth was achieved in spite of the distraction from the merger and the work on the integration. Management remains confident in our ability to achieve low double-digit loan growth in 2019. Commercial real estate concentrations remained steady in Q4 and should not be a constraint on loan growth as we go through 2019.

On Slide 10, the combined non-interest-bearing DDA portfolio is almost $1.5 billion and represents approximately 24% of total deposits. Total deposit cost continued to increase. But remember, please consider the loan beta, where we have almost 70% floating rates. Additionally, the branch-light business model provides other expense synergies given the $6.1 billion in deposits with only 43 banking offices.

Turning to Slide 11. Now the increase in contractual loan rates from Q3 to Q4 for both Veritex and Green highlights the floating-rate nature of our loan portfolio, and the combined interest -- net interest margin in Q4 was 3.84%. As we look out into 2019, the company is expecting a net interest margin in the range of 4.05% to 4.2%. This range assumes no Fed fund rate increases and is a result of: First, the purchase accounting marks on loans and investments; second, the rate marks on the time deposits and borrowings; and third, a favorable mix shift in both earning assets and interest-bearing liabilities.

Finally, on Slide 12, as Malcolm stated earlier, Q4 reflected continued credit stability at Veritex with a slight decline in NPAs, and Green has shown considerable improvement in NPAs since the end of Q1. Also recall that the credit mark was refreshed to Green right before year-end and should provide considerable downside protection as it relates to net charge-offs and loan loss provisions. It's important to note that post merger, approximately 63% of the loan portfolio now carries a credit mark and the part that isn't marked has been underwritten to Veritex credit standards and continues to show exceptional loss performance. With that, I'd like to turn the call back to Malcolm.

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

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Thank you, Terry. As you might imagine, we have a lot of moving parts right now consolidating our 2 institutions. The integration of our systems and teams is going extremely well. Personnel and management determinations have been made and communicated company-wide. Over the last months, we offered 18 retention agreements to key Green producers with 100% acceptance rate. Other highlights include us hiring our first ever full-time training Director from the Green side and engaging a brand agency to better connect with our customers. Additionally, our CIO just hired a new Chief Technology Officer to lead us in our growing technology area. Candidly, I've never seen this much communication and collaboration between similar-size institutions while coming together. We have a great deal of work to accomplish, and our goal is to have a majority of it completed by June 30. We'll continue the monitor of -- we will take the best of each institution to produce a better company and stronger than either one of us was independently. Increased scale and countless new opportunities enhance our new Veritex and our excitement about what we can build together in 2019 and beyond. Operator, at this time, we'd be happy to answer any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Matt Olney from Stephens.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [2]

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Want to start on capital. You had some interesting announcements last night as far as the stock repurchase program, the dividend. I think they all make sense. Curious on the buyback. How active do you expect to be? Is this more of an insurance policy in case the stock gets down to below $22 again? And then, on the pro forma TC ratio, I guess, with Green Bank, want to make sure I'm thinking about this right. I'm about a 9.5% TC ratio in the first quarter. Am I in the right ballpark there?

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

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Go ahead, Terry.

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

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Yes, Matt, it's Terry. Let me take your last question first. I think you are in the right ballpark with respect to TCE at the end of Q1. And on the buyback, I would -- I don't -- I do view it more as an insurance policy, although I would probably put a little bit higher number on it than you did. You used $22. So let's just -- let's leave that there. I think the last point I would make is that, this company is going to generate a lot of excess capital even -- with the earnings power, and so it's a great problem to have. But certainly the dividend and if we need to buy back, we're going to stay -- given our risk profile, we'll have plenty of capital to support the growth we need in our 2 markets.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [5]

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Okay. That's perfect. And then on the cost savings, I think you said in the prepared remarks, there was a small portion of the cost saves that were recognized at the end of 2018. So just taking a step back, any change in the overall cost-saving expectations and can you kind of form up for us the timing of those cost savings? I think you said they would be back-half loaded. Any other color you can provide on the timing of the cost saves?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [6]

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Well, I chose those remarks carefully, and you'll note that we gave guidance on NIM. And we felt like we needed to give guidance on the NIM because the range of everybody out there who writes on us was so wide, especially in Q1, and felt like there was a need to clarify and tighten that up a little bit. We didn't say anything on the efficiency because I felt like you -- and the cost saves because my general view is you guys have done pretty good job there. And it will have -- we will realize additional saves in the first half of the year, whether it be personnel or nonpersonnel related things, but when you've got your consolidation and your conversion in June, that's when you're really going to start to see the operational saves and things like that. So I don't know, I'll probably just leave it there.

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman & CEO [7]

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Yes, I think you're on the cost save number, we --- it moves within the number, but the total that we had originally when we've originally looked at the deal is virtually the same.

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Operator [8]

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And our next question comes from the line of Brady Gailey from KBW.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [9]

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So the 2019 NIM guidance of the 4.05% to 4.20%, I got that. How are you all thinking about the core NIM for 2019? I'm just trying to figure out how much yield accretion will be flowing through the margin this year?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [10]

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My estimates of yield accretion on the loan side are probably in the 9 to 10 basis points range. Well, let me say, 8 to 9, sorry, maybe to look back at my notes, 8 to 9.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [11]

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So core margin somewhere in kind of the high 3%, low 4% range? Does that...

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [12]

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No, no. Not yet. Let's be careful. When I say 8 to 9 bps on the loan portfolio, there's another 4 to 5 on the investment portfolio and there's some on the liability side. So I don't see the core NIM doing a lot. It might be up a handful of basis points, both from earning assets as well as the December Fed increase, but that's the way I think about this.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [13]

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Okay. Right. That's helpful. And then just on the M&A front, I know it feels a little early to ask about M&A. This deal is a big deal. I know you're going to be focused on it for at least the first half of the year if not the full year. But I mean, both Green and Veritex have been pretty acquisitive in the past. How are you all -- and you'll be around $8 billion, so you've got not a ton of room until you get $10 billion. But how are you all thinking about M&A for the back half of this year and into 2020?

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman & CEO [14]

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We are thinking about it the back half of -- really, we're thinking about it 2020. I mean, you hit the nail on the head. This is a big deal for both of us. We are zero focused on making sure this integration goes well, and it is going exceedingly well. But there's a bunch of stuff to do between now and 6/30 that the M&A discussion has really been off the table until we can get through 6/30. And we even have a small little piece of our data converging in September. It's a smaller piece, it's treasury piece. But we've got a lot to get done here. And so if we do what we think we can do and we can deliver what we think we can deliver, then we're going to have some optionality in the back half of the year and going in 2020 to make some of those decisions. But those are decisions that we'll make down the road.

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Operator [15]

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And our next question comes from the line of Brad Milsaps from Sandler O'Neill.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [16]

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Terry, just wanted to follow up on the whole core NIM discussion. It looks like maybe you changed the way you presented to some degree in that the core NIM, as you define it, includes some level of expected purchase accounting and then anything above that is sort of the accelerated piece. Is that correct?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [17]

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Yes, that is correct. In my view, the scheduled accretion is no different than buying -- the loan portfolio is like buying a bond at a discount. And it’s got a life. And when you look at Veritex's stand-alone accretion in the fourth quarter, one, it was down materially, which drove the decline in the NIM. But there's -- if you take the remaining marks, the accretable yield, and look at it and look at Q4, we got 17 quarters if the level stays exactly the same. And so a life left in those marks, if you will, 17 quarters. And I just think that bodes well, and it's an ongoing revenue stream that needs to be considered as core because it really has got a pretty long life on it. So yes, we've changed -- that's why -- we've changed, I guess, reflecting my view of that scheduled accretion as part of the yield that you priced into the deal when you mark the balance sheet and announced a deal. And that's the way we ought to treat it. And if there's anything above that, then we ought to call that out because that is lumpy and unusual.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [18]

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Got it. So the 4.05% to 4.20% would include everything, the accelerated and the expected or that's just the expected?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [19]

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That's the expected.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [20]

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Okay. So then it could -- there could be upside, if you get something accelerated?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [21]

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Correct.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [22]

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Okay. And then, you said, you expressed comfort with kind of the efficiency expenses that were out? So does that include like any new update on CDI because you have new marks here?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [23]

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Yes, we have -- it does include CDI, both the -- the positive impact of wiping out the Green and the estimated CDI from the merger. Now our work on the CDI is not yet complete, but I just really don't think it's going to change materially from what was filed in the S-4.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [24]

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Okay. Great. And then just a final question on fees, specifically SBA. I think if I read correctly, it would sound like Veritex had a pretty good SBA quarter. Maybe you guys did -- may have that flip-flop, but just kind of curious with what's all going on with that product, kind of how do you think about that, kind of, on a combined basis?

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman & CEO [25]

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Yes, I mean, we're -- it's still a major focus for us, both companies. We're very active and had folks in it. The Green guy is going to be leading us there. We think it has understandably slowed down a little bit, but we still think that we'll be fairly active. I think what we're -- we're kind of looking at about $1.5 million or so a quarter in USDA and SBA. But that's -- those are lumpy, as you know. So those USDA deals show up and you can have a great quarter and the next quarter would be a little bit down. But that's still very much a focus for us. The 10-year product is pretty difficult to sell right now just because of the pricing. The 25-year product, you still get some really good pricing. So we'll make those decisions depending on what the markets are. But it's still a major piece of what we're going to have for next year.

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [26]

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But tagging on, the great thing about the USDA product is you don't have to split the premium over 10%. So the economics were even better. It's lumpy, but it's going to have even more great focus for us going forward and the rest of what Malcolm said, I totally agree with.

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Operator [27]

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And our next question comes from the line of Gary Tenner from D.A. Davidson.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [28]

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Some of my questions have been answered. Couple of questions, though. I guess, in terms of fees for the combined company, are there any fee categories where maybe the structure or types of fees differed materially, whether there would be any sort of meaningful difference than just the combination of the 2 companies' fee items?

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

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No. I mean, I think the combination is accurate. Green definitely had a really nice noninterest income treasury fee product -- products, which we're going to be adopting. But combining them together, I think, is very accurate.

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

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I do think it's the place where they -- we see revenue synergies, trying to leverage that customized Green treasury management code across the Veritex footprint and the Green within the customer interest rates swap business. And that's something we'd like to see expand across the Veritex footprint. So -- but Malcolm's right. It's combining it and thus just focusing on it and growing it.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [31]

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And actually, as you mentioned, the swap book and the swap business, with prospects of a Fed pause and not knowing where they'll go after this and you noted the larger amount of your loans that are floating rate in nature, any thoughts in terms of sort of moderating or adjusting the rate sensitivity at this point in the cycle?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [32]

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Well, we now run -- we've got three quarters. We've already run on the pro forma combined basis for the institution. And I'm pretty comfortable with where the asset sensitivity is. I'd say it's modestly or moderately asset sensitive. It's come down with some fixed rate lending that we've done in the back half of the quarter. We're certainly not neutral, we're not liability sensitive, but I'm pretty comfortable with where we are. And I don't see the need -- I think the asset duration we have, I want to use in the owner-occupied commercial real estate book to help us drive deposits from operating businesses. So we've got the ability to do that. We'll continue to do it. I think it will keep us neutral. And I like what it can help us do on the deposit side. So feeling pretty good there.

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Operator [33]

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And our next question comes from the line of Daniel Mannix from Raymond James.

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Daniel Raymond Mannix, Raymond James & Associates, Inc., Research Division - Senior Research Associate [34]

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Appreciate the updated outlook here. I wanted to start with credits. So maybe Clay, want to ask, look like the credit metrics regained their footing this quarter. Can you give us an update on those 3 PCI loans that were moved to nonperforming last quarter, in 3Q?

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Michael Clayton Riebe, Veritex Holdings, Inc. - Executive VP & Chief Credit Officer [35]

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Sure, we can. The first credit that was in the auto industry, that loan resolved and is on a performing basis today. The other 2 credits that are in the oil and gas space, we expected one to resolve in the fourth quarter through a refinance. That has not taken place. We continue to work that credit. And the final credit was another oil and gas credit that's in the bankruptcy today, and we expect that to resolve in Q2 of this year.

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [36]

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No additional marks or anything on any of those credits. Valuations have stayed pretty stable.

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Daniel Raymond Mannix, Raymond James & Associates, Inc., Research Division - Senior Research Associate [37]

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Got it. So adequately reserved?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [38]

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Yes.

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Michael Clayton Riebe, Veritex Holdings, Inc. - Executive VP & Chief Credit Officer [39]

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Yes, sir.

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Daniel Raymond Mannix, Raymond James & Associates, Inc., Research Division - Senior Research Associate [40]

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Great. Okay. And then just wanted to switch over to deposits. Look like there were sequential declines in the core deposits after what was really a great third quarter. How much of that fourth quarter decline is seasonal or, I guess, transitory in nature. I mean, I -- and I totally understand the higher loan growth and tilt toward commercial, how that impacts deposit costs and betas, but how do you see those trending this year in 2019?

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman & CEO [41]

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Seasonal probably isn't the right word, but they are opportunistic in that there were a couple of large company sales that happened in the third quarter that were substantial, and so those monies sat around for 60 to 120 days, while they reinvested and did whatever they did with those dollars. We still know that deposits are probably one of our largest challenges. We do have a bunch of levers to pull. This market is still growing. It's quite robust. But it is very competitive. The good news is, is that, at least on the loan side, we continue to move our loan yields up as we move up our deposit side. But we have seen some flattening, I guess, locally in terms of cost. And so is the competition the same, yes, but I think, it's at a lesser price, which is encouraging to us. But it's just -- it's something that's got to be top of mind for all of our relationship managers and my management team, it is the most frequently talked about subject. But we still feel good about getting our growth next year.

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [42]

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I think we've also increased the weight we give it in our lender incentive plan to support that importance in view of the challenge it represents for us. So hopefully that will contribute as well.

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Daniel Raymond Mannix, Raymond James & Associates, Inc., Research Division - Senior Research Associate [43]

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Yes, that's really helpful. I appreciate the additional color on those deposit growth strategies. So just wanted to confirm they are -- are you still targeting that 95% loan-to-deposit ratio for the combined company?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [44]

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Yes, sir.

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Operator [45]

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And our next question comes from the line of Bill Dezellem from Tieton Capital Management.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [46]

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I had a couple of questions. First of all, your, I guess, I should say, Veritex's salaries and employee benefits was up by roughly $900,000 versus the third quarter. Would you please walk us through and what was behind that? And then secondarily, Terry, you'd mentioned that the combined entity had $2.04 of earnings when annualized. Is that the number that we should be taking that 25% accretion on that you originally noted when the combination was announced?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [47]

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Let me take -- let me start the first there on Veritex salaries. I think there's 2 things that are playing into the increase in the salary line. First is variable incentives driven by growth and production by the -- by our bankers. So it was strong. This strong growth translated into better incentives for them. Secondly though, even though we had a lot of growth, production was actually down. And Veritex has been talking for several quarters now about a lot of production that was going to fund up. And I think that was what was going on. So production was down a little. So our cost deferral under FAS 91 was less. And so the combination of higher variable incentives and lower cost deferral is what's contributing to the salary line. On the second question, I went blank...

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman & CEO [48]

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Is on the $2.04.

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [49]

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$2.04. Yes, I think that's -- look, we -- I gave you that number because I think it's indicative of what our run rate earnings are as we jump off into 2019 before those things. And so we certainly didn't know on July 24 exactly what our Q4 run rate earnings were going to be. But I think our comments and everything still generally -- we're not sitting here and giving guidance that -- or comments that would change that guidance. So it's in the range of -- when you get to a NIM of 4.05% to 4.20%, it puts you in a similar place with respect to that accretion -- EPS accretion we originally discussed when we announced the merger.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [50]

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And the $2.04, that's the combined annualized, is the correct base to be using that on as opposed to Veritex only? Or -- I just want to make sure that we don't start doing a 25% accretion on the wrong base.

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [51]

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Well, it gets you to the -- the comment was based on Veritex -- at the merger announcement was based on Veritex's EPS expectations for 2019. So I mean, you're layering in the Green earnings, but you're layering in the Green fully diluted shares as well. So the calculation was different, but I'm really saying that what you suggested gets you into the right range, if you will, of where we think about 2019 performance.

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Operator [52]

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And our next question comes from the line of Matt Olney from Stephens.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [53]

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I just wanted to understand the onetime expenses for 2019 as a result of the acquisition, kind of the timing and the amount we should be expecting.

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [54]

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Yes, Matt, it's Terry. We -- timing, we want them to be front-end loaded, first half of the year. And I would estimate that we have about 2/3 of them to go and there will be a lot in Q1 with the closing of the deal and the advisory cost and some of the severance, et cetera. So we certainly have got about -- again, about 2/3 to go with, I think -- and I would say that will be weighted a little bit towards Q1 over Q2.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [55]

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Okay. And then on the Green Bank side, I think there was a larger charge-off than we've seen for a few quarters now. Any color, was that clean-up or anything you can tell us about that charge-off or just credit in general at Green Bank?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [56]

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Yes, that charge-off related to the syndicated health care credit that Green identified in Q1 and provided for. And so that bankrupt -- that company went into bankruptcy, and that during Q4, that bankruptcy was resolved and Green was paid down on its unreserved portion, if you will, and so we were just cleaning it up. It'd gotten far enough along we had real clarity on what the charge-off needed to be and we felt right to get that done in 12/31.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [57]

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And outside of that, Terry, it looks like non-accrual levels fell at Green Bank. So I assume there's no other color there or any other details on the Green Bank credit piece?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [58]

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No, it's actually moving in the right direction.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [59]

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Perfect.

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman & CEO [60]

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And that's all before the marks that we're going to make on the portfolio. So we feel really good about their portfolio.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [61]

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Okay. And then circling back to the margin discussion, I looked at my notes and I believe the mark that we talked about last time on that sub-debt and maybe some trust preferreds was around $8 million. Is that still the right ballpark number? Or has that moved around with rates being volatile?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [62]

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It's -- I think it's -- rates have moved up and moved back down. I'm still using, as I think about things, that same general number. That work still -- that we've been more focused on the loan and investment side than on the liability side of the balance sheet on the mark so far in January. But I think you're probably still in the ballpark.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [63]

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And just how do I think about the duration of some of these moving pieces? So take that first one on the sub-debt part, what's the duration on something like that?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [64]

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Well, the bulk of the marks coming out of the Green's sub-debt, which was put on in December of '16, it's a 10-year, no-call 5. So you got 3 years to run. It was expensive when they issued, and we would expect to actively refinance it when the time comes. So that's the way I would think about that. The other liability marks are going to be relatively short. The Federal Home Loan Bank advances are all inside of 18 months, and the duration of the CD portfolio on average is probably about a year. I mean, it's -- as is most -- I don't think in my entire career, I've ever seen a CD book with a duration of more than (inaudible). It's that's what -- so they don't have long lives.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [65]

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And what about the duration on the loan side, Terry? What's your best guess of that?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [66]

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I would say that's got -- it's probably 4 to 5 years. And the same is true in the investment portfolio. I talked about the yield, the NIM pickup and the investment portfolio. It's got an effective duration at probably right about 4.1 years. So it's got a pretty good tail on it as well.

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Operator [67]

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(Operator Instructions) And I'm showing no questions at this time. I'd like to turn the call back to Malcolm for closing remarks.

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman & CEO [68]

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Appreciate everybody's attention today, and we're available for any calls afterwards if anyone needs one. Thank you very much.

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Operator [69]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.