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Edited Transcript of VBTX earnings conference call or presentation 22-Oct-19 1:30pm GMT

Q3 2019 Veritex Holdings Inc Earnings Call

DALLAS Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Veritex Holdings Inc earnings conference call or presentation Tuesday, October 22, 2019 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

* 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

* Brett D. Rabatin

Piper Jaffray Companies, Research Division - Senior Research Analyst

* 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

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Presentation

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Operator [1]

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Good day and welcome to the Veritex Holdings Third Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to 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'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, President & CEO [3]

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Thank you, Susan. Good morning, everyone. Overall, third quarter was another nice quarter for Veritex. For the quarter, we produced operating income of $28.6 million or $0.53 per share. This is after accounting for a previously announced charge-off of a $6.1 million oil and gas loan we acquired with Sovereign Bank. Like everyone else, we continue to be challenged with the declining rate environment in addition to slower growth than anticipated. Terry and his team have done an incredible job of managing our balance sheet over the last 6 months to soften the blow of these declining rates. We remain focused on expense management and on increasing our noninterest income.

I'd like to make mention of a few of our year-to-date or 9-month metrics. Keeping in mind, this is how long Veritex and Green have been one company. Diluted operating EPS is up $0.36 or 26.3%. Pretax preprovision operating return on average assets is 2.3%. Operating return on average assets is 1.58%. Operating efficiency ratio is 43.2%, and operating return on tangible common equity is 17.6%. These strong metrics were all achieved in a declining rate environment and while we were involved in integrating, consolidating and transforming into the new Veritex.

From a growth perspective, our mortgage warehouse book increased $33 million while our nonmortgage warehouse loans decreased $78 million. The $45 million decrease in quarter-over-quarter loans can be attributed to 3 primary drivers. First, our paydowns and payoffs continued to accelerate. We had a few relationships relocate to smaller banks where a majority of these payoffs were commerce-driven in the sale of a company or moving loans to a long-term fixed rate provider. The silver lining in the payoff number is that we resolved our payoff over $25 million of previously identified problem assets from the legacy Green portfolio.

Second, new loan production is down 32% from the same period in 2018. Even though our markets remain vibrant and strong with historical lows in statewide unemployment, continued corporate and family relocations, like Uber and its 3,000 new employee campus here in Dallas, and an overall state economy that's booming, opportunities appear fewer as clients are becoming more conservative as we move later in the cycle. We continue to have an active pipeline; however, we do anticipate that the fourth quarter will produce mid-single-digit growth.

And third, we're probably a bit optimistic that there wouldn't be a transition period in the credit delivery side, especially in Houston, we're bringing our 2 lending cultures together. Under the leadership of Jeff Kesler in Dallas and Jon Heine in Houston, we see momentum beginning to build as we place our production staff in the right seats and add some key new hires.

On the credit front, aside from the previously mentioned $6.1 million charge-off, we had a good quarter credit-wise. We resolved $25 million in problem assets during the quarter, and it looks like we have another strong problem asset loan reduction number in the fourth quarter. Total NPAs decreased $26 million during the quarter, from 0.54% to 0.21% in total assets. We continue to see progress in shrinking the pool of problem assets we acquired from Green, and we still have confidence in our original credit marks. Our energy book is now less than $25 million net of any marks.

I'll now turn the call over to Terry.

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

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Thank you, Malcolm. Good morning, everybody. I'd like to take a few minutes to provide you with more details on Veritex' financial results for the third quarter and 2019 on a year-to-date basis.

The year -- the 2019 year-to-date financial results are the best I've seen in my career. These results have been accomplished while integrating and converting Green, working through problem assets from the acquired loan portfolios, significant headwinds from declining rates and a more difficult growth environment.

Skipping over to Slide 5. Note the table at the bottom half of the page which shows 2019 year-to-date operating results. Malcolm mentioned these in his remarks, but I don't want to pass by this page without mentioning a few of them again. These results clearly show the importance of scale and the impact of the merger between Veritex and Green.

Operating net income has grown almost $60 million from 2018, translating into an increase in fully diluted earnings per share of over 26%. Operating return on tangible common equity has improved almost 350 basis points and now stands at about 17.6%. Finally, the operating efficiency ratio is at 43.2%, an improvement of over 6% from 2018.

Skipping to Slide 7. Focusing on the bottom right-hand graph, tangible book value per share is $14.61 as of the end of the third quarter. This is down less than 1% since the end of 2018. Starting in 2019, we had the merger with Green Bank and $1.38 in tangible book value dilution from the merger. This was disclosed in the Q1 results. We've also absorbed approximately $0.88 per share dilution from the stock buyback and the dividends we initiated this year. From our perspective, the earnback of the tangible book value dilution from the merger is occurring meaningfully faster than originally modeled.

On Slide 8. The GAAP net interest margin decreased 10 basis points to 3.9% in Q3. While the adjusted NIM, which excludes all purchase accounting impacts, declined 9 basis points to 3.60%. The table in the bottom right of the slide shows the items that impacted both the GAAP NIM and the adjusted NIM.

Focusing on the adjusted NIM, falling short-term interest rates have impacted the yield on earning assets and reduced the adjusted NIM by 12 basis points. This was largely outside of our control given that 69% of the loan portfolio is floating. This was partially offset by a 6 basis point NIM expansion from lower rates on interest-bearing liabilities, where we executed a funding shift moving away from higher cost deposit sources to much less expensive wholesale funding sources. So part of what we planned to do this quarter, we were able to do.

Lower loan volumes and a negative shift in the earning asset mix accounts for the other 3 basis points in the adjusted NIM compression. It's management's intent to continue to transition the balance sheet to more neutral position to reduce the risk of further falling interest rates.

On Slide 9, Veritex reported operating fee income of $8.4 million, up from $6.7 million in Q2. The results for the quarter were positively impacted by stronger deposit fees and loan fees. Our SBA revenue was basically flat with Q2, but our pipeline remains strong and we're looking for improvement in Q4. Also, our customer interest rate swap business had the best quarter of the year, with $671,000 fee revenue on 10 customer transactions. This follows a weak second quarter where we only had $12,000 in revenue. Also remember that Q2 fee income levels were negatively impacted by the $434,000 write-down of a CRA investment.

On Slide 10, the company continues to operate efficiency -- efficiently, realizing the benefits of scale from the Green merger and a branch-light business model. Overall expenses were below our target due to the credit on the FDIC insurance assessment and lower variable compensation expenses. Looking forward, I expect that operating expenses will stay in the $34 million to $35 million range.

On Slide 11, total loans declined 3% on a linked quarter annualized basis. Please note that production from the Dallas-Fort Worth market increased significantly from the second to the third quarter. In addition to the improvement in our nonperforming assets that Malcolm mentioned, the bank is also able to achieve a $25 million reduction in the acquired PCI portfolio. Please see the table at the top right quadrant of the page. The detail on the floor is embedded in our loan portfolio, shown bottom left, and should provide additional relief if short-term rates continue to lower.

On Slide 12. Loan-to-deposit ratio stood at 100.2% at the end of the quarter. If you back out the mortgage warehouse balances from the loan total, then the ratio moves down to 96.2%. We think this is the more important metric because of the liquidity characteristics of our mortgage warehouse loans. Loans on our warehouse lines turn quickly and can be converted to cash if liquidity is needed. As we discussed from last quarter's call, we've been aggressively reducing money market deposit rates and shifting out of our higher cost market index deposits and into Federal Home Loan Banks' structured borrowings. The graph in the bottom left of the page shows that on a quarterly basis, deposit rates, excluding purchase accounting, declined about 5 basis points from Q2 to Q3. But we feel the progress is even greater than the quarterly analysis can show. Therefore, we added a monthly graph in the bottom right showing the cost of interest-bearing deposits in Federal Home Loan Bank borrowings. As you can see, from June till September, we were able to lower interest-bearing deposit costs by 15 basis points. Additionally, we were able to lower the cost of FHLB borrowings from May to September by 99 basis points.

The executed rate reduction and funding shift has put upward pressure on our loan-to-deposit ratio that's been instrumental in mitigating the downward NIM pressure from the floating rate loan portfolio. Finally, noninterest-bearing deposits now stand at 25% of total deposits.

Moving to Slide 13. As Malcolm mentioned, we made good progress introducing our NPAs to 21 basis points of total assets. The Q3 loan provision was elevated because of resolution of the acquired energy loan from Sovereign Bancshares along with migration of acquired loans to originated loans during normal and scheduled renewals.

Now concerning CECL. How much will our allowance increase? We're in the final implementation stages and are currently getting the CECL model we will use to determine the allowance amount each quarter independently validated. Preliminarily, we believe that the allowance for loan loss as a percentage of total loans could be in the range of 1.15% to 1.35%, up from 45 basis points currently. This amount includes a meaningful amount of purchase credit impaired reserves, which upon adoption will transfer into the allowance without an impact to capital. As of September 30, this amount is approximately $36 million.

Finally, on Slide 14, capital ratios at the holding company and bank remain very strong. Our tangible common equity to tangible assets increased slightly to 10.17%, even with our capital actions. Back in September, Veritex announced an increase and a stock buyback to $100 million. During the quarter, we returned $35.7 million to common shareholders through $29 million from the repurchase of almost 1.2 million shares and $6.7 million in common dividends.

On a year-to-date basis, we returned $79 million to shareholders through the buyback of over 2.3 million shares and the dividend, which we initiated this year. Additionally, Veritex did declare its regular quarterly dividend of $0.125, which will be paid in November. Finally, Veritex has been working through the ratings process with Kroll and expect to have the rating announced shortly. Given the attractiveness of the sub-debt marking -- market, we are considering an issuance in the future.

In closing, it's my opinion that Veritex is a significantly better company today than it was a year ago. Our potential is significant and is supported by earnings power, growth markets, culture, market positioning and scarcity value. It's our job to execute on our strategy to deliver strong financial results on a consistent basis and to keep telling this story to analysts and investors.

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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Thanks, Terry. All in all, we're very pleased with our third quarter results despite the acquired Sovereign Bank charge-offs and a little slower-than-expected loan growth. We've completed all conversions. We are fully integrated with Green Bank. I'm extremely proud of my team's hard work and the progress we've made in 9 months. With 7 acquisitions since our inception 9 years ago, M&A will always be a part of our company. We have accomplished a great deal and have achieved a meaningful asset scale where we can maximize profitability and efficiency. My team's focus is on 3 main items: to continue to manage our credit risk, to increase our deposit market share percentage and efficiently manage our capital. We are not currently focusing on M&A. But if we are successful in accomplishing these goals, we would be open to consider new opportunities that may present themselves down the road.

The markets we reside in are arguably the best in the nation. We have a top-class executive team, and our earnings power institution continues to be validated quarter-after-quarter. Our balance sheet and capital position exhibit a strong and sturdy company, and we're looking forward to closing out this transformational year with a strong fourth quarter.

At this time, operator, we'd be happy to 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 Brett Rabatin with Piper Jaffray.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [2]

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Wanted to first ask, Terry, can you just give us -- I appreciate the additional color on the monthly cost of funds. Can you just give us some color? It would seem like you'd be able to mitigate margin pressure from here to some degree. Can you just talk about your outlook now kind of post 3Q, and then kind of what other changes you're going to make on the balance sheet to insulate the margin from pressure?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [3]

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Well, I think with -- and Brett, it's a good question, and I think with each move that the Fed makes, the beta from how you're able to reduce your deposit rates, especially on money market, goes up. Ours certainly did in the July increase to the September increase, and we'll continue to see that as we go through the rest of the year. In general, I think that even if you do everything you can on the money market book, though, you're still -- depending on what the Fed does, you're still going to feel some NIM compression. The floors, they're going to continue to help and the deposit side, I think we're doing everything we can there. I think we've been pretty aggressive. But I still think you're going to feel some compression. So my general view is that with each move you're going to get, plus or minus, about 5 bps of compression to the core NIM. So I guess, that's the best way I can say to answer it.

I think we're going to have to continue to be aggressive. We're going to have to look to -- in terms of the funding mix, we're going to have to continue to be opportunistic. And I know that deposits were down on a quarter-over-quarter basis, but believe -- we talked about this in the call at the beginning of Q3. A lot of this was intentional. We were -- we purposely tried to move out some of our high-priced market index deposits where the spread was negative and use other sources. Can we replicate what we've done on the wholesale borrowing side this quarter? I think it's going to be tough. But I mean our wholesale borrowing rates are lower than what you see here on this graph as we head off into Q3. But can you move it down another 100 basis points in 4 months? No, you probably can't. So net-net on the NIM with every move, I think you're going to get somewhere in the 4, 5, 6 basis points of NIM compression with each move. My personal view is that the Fed -- I think one more move all they need to do, if they need to do that, but they don't listen to what I think anyway. So...

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [4]

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Yes. I know that's helpful. And then the other thing I wanted to just ask about was the payoffs were obviously a little more than I expected anyway. Do you have any visibility into kind of what's left that might be susceptible to prepayment or getting taken away? And then can you talk maybe about origination rates versus existing portfolio?

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

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Yes. We have vision into payoffs. I mean it goes down to officers being in front of their borrowers and managing their books a little bit better. I will say, a lot of that stuff you can plan for and some of it, you can't. The last day of the quarter, on the 30th, we got $66 million in payoffs. So if we were to close the quarter a day before, you would be seeing positive loan balances. So we didn't know about some of those. So some of them were payoffs, some of -- a couple of them are refinances, some of them were the problem asset resolution that I spoke about. In fact, I think a majority of the problem assets were resolved on that day. So the answer is yes. We do have visibility. We have an active pipeline. We get better at it every month, and we get better at it every quarter. We like what we see in the fourth quarter. We have some stuff rollover. So yes, we do have visibility but every once in a while as you look up and you get some payoffs. We didn't expect $66 million. And then on the offering rate side, we've seen our lenders are doing a pretty damn good job of holding the line. So I think it's...

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

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New origination rates are about 10 bps or so less than contractual portfolio rates, okay? So it's not tariff.

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

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It's not -- yes, it's not tariff. Our guys are doing a pretty good job. And we're getting back to that lower rate environment where people quit moving money around because there's not much benefit to move it across the street. And borrowers, if they can't make deals work in mid-4s, they probably aren't going to work at any lower rate. So I think we're going to get back to some level of keeping these things the same, but we'll see.

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Operator [8]

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And our next question comes from Brad Milsaps with Sandler O'Neill.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [9]

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Terry, I joined just a couple of minutes late, but I did catch the part regarding CECL. You saw the purchase accounting impact would be around $36 million moving from, I guess, the discount bucket over to the reserve. If my numbers are right, you had about $60 million of discount on the books at June 30. Is that about correct? So you'd have maybe $25 million or so less what you recognize this quarter that could come back in through net interest income?

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

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That's correct.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [11]

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Okay. And then on the CD -- on the deposit side of things, did those marks kind of run out at the end of the year or do some of those carry through into 2020?

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

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No, no. There's not enough that carry -- I mean I'm sure there's some fraction level that carries forward, but in my own internal, internal forecasting, I don't even think about that in 2020.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [13]

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Got it. Okay. And Malcolm, my -- I apologize if you addressed this, but I know you guys have been doing a great job lately of taking advantage of some new hires. Can you talk about kind of maybe what you did in the quarter and then just sort of your outlook for what you're thinking might be able to do over the next 6, 12 months given some disruption in kind of all your markets?

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

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Yes. Well, I mean we continue to look for some new hires, both Dallas-Fort Worth and in Houston. We will announce a pretty large hire here in the next week that we're super, super excited about. We're taking a pretty good hire in Fort Worth. That hasn't been done yet. Has it, [Jeff]?

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Unidentified Company Representative, [15]

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[Not yet].

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

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Okay. So we haven't finalized that one. And then there's a couple in Houston, but there's more than a couple that we're working on Houston. So I look -- I think it's going to be fairly active, but the issues always come up with the season on when you can hire these folks since as we get closer to year-end, and they get their bonuses and all that types of things. I'm not exactly sure when we're going to land them. I will tell you it's very active. We actually have inbound calls to us inquiring about opportunities. Sometimes those aren't always the ones you want, but we have a couple ones that are really strong. So to answer your question, I think it's going to be an active 6 months for us in adding through our relationship manager team.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [17]

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If you had to guess the bench strength that you've added this year, what do you think sort of their capacity would be in terms of being able to bring on loans over the next, you name it, 6 to 12 months?

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman, President & CEO [18]

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Yes. I mean the way I read that question, Brad, is what do you think you can do in loan growth next year net-net. There is certainly end of the cycle, you've got to be careful, and so we're not going to run out there. I'm not looking for us to do big double-digit growth here in 2020. I do think that we're going to have some strong opportunities to deliver a high single-digit number next year. I feel really confident about that. So that's probably how I would answer that one.

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Operator [19]

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And our next question comes from Matt Olney with Stephens.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [20]

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I want to dig a little bit deeper on your loan growth commentary. Your expectation sounds like mid-single digit net growth in the fourth quarter and will be higher than that next year. That be a nice swing from what we saw in the third quarter. Help us understand, is this assuming the paydown is slow from what we saw in the third quarter? Or is it more about originations really improving from what we saw in the third quarter?

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman, President & CEO [21]

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I mean it's both and -- but the heavier side is the paydown side. We had a heavy third quarter paydown, especially in our Houston market. I still see a little bit of paydown coming, but originations -- our pipelines are really strong. I mean within 45 minutes ago, I was working through our pipelines for the fourth quarter to try give you some good color, knowing that this question might come up. And I really like what I see. So -- and it's diverse. It's not all in one area. It's not concentrated in one specific area. The new hires that we are going to announce is in the C&I space. And so there's some really nice discipline that we're bringing on.

So I look at the third quarter as a little bit of an aberration. Listen, we've been a growth company for 9 years and we've been focused on growth. Yes, we've done M&A, but we've always had a growth profile. And I won't see that changing. But as I said in my comments, I think putting 2 companies like this together, we were probably too optimistic in putting together the credit piece of it to where we could continue those growth levels. I see those coming back, not double digits, not 15% like we used to do, but I do think we'll get back to, and we're already headed in that direction.

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [22]

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And I would -- this is Terry. I had to follow up, Malcolm, and say I bought a lot of banks and I've always seen prepay speeds accelerate on the acquired loan portfolio, especially through the first 3 quarters following the close of a deal. They do start to normalize. And if this one didn't -- I'm going to remark on this, if this one didn't revert to the NIM, if you will, then it would be the exception, not the norm. And I think we're going to see that starting this quarter in Houston.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [23]

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Okay. And then switching gears. I guess on the liability side, Terry, I appreciate allowing the loan deposit ratio drifting higher and lean more on the FHLB, but how much more room do you have on this? And would you be willing to let the loan deposit ratio drift above 100%?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [24]

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No. I don't want to see the loan-to-deposit ratio, excluding mortgage warehouse, go above 100%. I do think that with the mortgage warehouse going to 105%, 108%, I'm okay with that because we have a lot of off-balance-sheet liquidity. We've got a very liquid investment portfolio. We've got a lot of excess collateral. We can raise a lot of money quickly from a liquidity perspective. So we had this discussion with our Board last week. We are comfortable letting the FHLB thing continue to move up just because it's -- we're just trying to be opportunistic to help support the NIM. So that's -- we're encouraged by what we've been able to do this quarter. I don't think we can do it to the same magnitude that -- in Q4, but I do think we'll continue to play pretty heavily there because of just the opportunistic pricing that it affords us.

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Operator [25]

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And our next question comes from Daniel Mannix with Raymond James.

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Daniel Raymond Mannix, Raymond James & Associates, Inc., Research Division - Senior Research Associate [26]

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Just wanted to start with buybacks. So you're about 60% utilized under the current plan. If I look at what's left, you don't really have to be too active to get through this pretty soon. Just looking at that juxtaposed with your commentary on the sub-debt offering, can you give us a potential size of that and how you're thinking about a replacement authorization on the buyback?

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

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Terry, do you want to answer that one?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [28]

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Yes. Let me just comment a little bit more on the sub-debt deal. Look, I mean everyone on this call knows where those rates are today. And when you look at those rates and those spreads and you think about the impact of increasing your Tier 2 capital level, optimizing your capital stack and lowering your overall cost of capital, that's the right corporate financial thing to do. And so that's playing into our thinking.

Secondly, once you get through the ratings process, your ability to access the market is pretty fast. And we've never been a company. We have not been there as Veritex. We certainly have some acquired sub-debt that will be callable in a couple of years now. I look forward to that day. But if we were -- our first issuance is probably somewhere $50 million to $75 million, $80 million is more of what we're thinking. We want to be very conservative with the double leverage and we're trying to get optimized in capital stack, and the reality is it could find its way into round 3 of the buyback, who knows.

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Daniel Raymond Mannix, Raymond James & Associates, Inc., Research Division - Senior Research Associate [29]

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Got it. That's great color. I just want to switch over to fee income. You mentioned, Malcolm, that it's one of the focuses looking forward. So there were a couple line items that were good in the quarter such as swaps and it looks like loan fees. Thinking about loan fees specifically, how much of that is tied to the higher level of paydown work we see there going forward?

And then, if you guys could just touch on the SBA revenue. I think you're expecting a bit more of a bounce back this quarter. Is that kind of -- has that moved over into the fourth quarter? Should we expect it to be -- 3Q be a good run rate there?

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman, President & CEO [30]

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Yes. So I'll address SBA loan fees. We had a slower quarter than anticipated but, yes, there's quite a bit that rolls over into Q4. We have a couple of opportunities in the USDA side in the fourth quarter that could really have a nice quarter. We're not 100% certain those are going to happen, but SBA has been very active. Our fee business is one that we've really focused on. The swap business, it's extremely active which you can certainly expect as rates go down and borrowers want to lock in. What we've seen on the fee side is the Dallas-Fort Worth group. The old legacy Veritex folks have now kind of bought into that, and so they're starting to show a lot of product. That pipeline is, again, very, very active. The loan fee income, I don't -- it's not hugely material. And it's not driven by that prepayment fees.

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [31]

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It's more unused line fees. There's certainly a little bit of prepaid fees. There's some servicing revenue on the growing SBA portfolio that were -- we've sold off a guaranteed piece but where you're seeing the prepays help you as an additional accretion income, which was flat on a linked quarter basis. It wouldn't have declined as you would've expected. But that you're seeing it in the NIM, that the GAAP NIM is where you're seeing that come through.

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman, President & CEO [32]

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The other area that we've -- Green had a really nice specialty treasury business. We are spending some time right now in figuring out how we can grow some of that business in other lines. And so we are going to spend a little time there because it's a nice noninterest-bearing -- I mean noninterest income area, recognizing that, that is one of our shortcomings. So we are spending some time there. But I think the fee outlook for Q4 is actually quite good.

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Operator [33]

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And our next question comes from Brady Gailey with KBW.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [34]

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So maybe we can start with expenses. I mean you've harvested the cost saves, expenses on a quarterly run rate had been coming down, and with the $34 million to $35 million guidance, it's going to be flat to up a little bit in the fourth quarter. As you look at 2020, do you think that expense growth kind of normalizes and you could see a mid-single-digit growth rate in the expense base?

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

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Yes. Brady, this is Terry. I do from the standpoint of not year-over-year but using Q4 run rate as we jump off into '20, I think you're going to see a more normal expense growth rate. Now we got to be very focused on operating leverage and be sure to drive positive operating leverage from the growth on the revenue side. But I do -- we've done -- we've been talking a lot about new hires, especially in the production credit special asset space over the last 6 months. And I think we've been able to offset that, but I don't think -- there's not much juice left in the orange to squeeze out. So we are going to start to see expenses start to grow. You got the whole benefit cost thing of health care, et cetera, that you're going to have to deal with. And -- so yes, as I look out to 2020, I think you're going to see us start to have some expense growth. And that's what we've been talking about, not trying to drive this efficiency ratio on down to harvest these cost saves and get them invested back into risk management and growth. Because I think that's what -- we need growth, but we need it with really good risk management, especially at this stage of the cycle.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [36]

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Got it. All right. And then finally for me is just back to the deposit growth. I guess that some of it was strategic and you did it on purpose. Do you think that we see deposits continue to fall from here? Or do you think they'll be more stable looking forward?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [37]

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I'm more on the stable camp. I mean when you guys are looking at it from the outside, I mean I think the key thing is DDA was stable. Our core money market customers, where there's a good relationship and good spread in those, we didn't give a lot of pushback from these rate cuts at all, surprisingly. But those that were overpriced with negative spread or CDs that were overpriced were the same negative. We've been okay in letting those go because we don't think those -- those are just price-sensitive customers without these relationships. And so I think you should be stable because I think a lot of what we've -- a lot of what we've wanted to work out, we've worked out -- kind of worked out through rational pricing as the Fed lowered the rates.

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Operator [38]

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(Operator Instructions) Our next question comes from Gary Tenner with D.A. Davidson.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [39]

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Just on the commentary on the kind of last day of the quarter payoffs of the $66 million. But if you adjust the kind of growth for the quarter for that number, you're looking at about 2% linked quarter annualized growth. Even with that said, so if you do get a slowdown in the payout, that should be in the fourth quarter. I just wonder about kind of the outlook for mid-single-digit growth. What needs to happen to get there?

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman, President & CEO [40]

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Yes. I mean these loans, if you do a -- since mid -- around 5%, 6%, we're talking about $100 million growth rate net of mortgage warehouse. So when I do say, and I probably need to make that clear, it's just net of mortgage warehouse. So -- I mean we have that identified. These are loans that aren't in term sheet. These aren't loans that are being underwritten. These are loans that we know about. We've got some payoffs in there. That number is net of that. So all I can tell you is that from our vantage point and our view today, that's a number we think as extremely achievable.

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [41]

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Gary, we're very granular in our tracking. We track every loan over $2.5 million in every stage as it moves through here. And as Malcolm is saying, our confidence in that tracking is improving, and we keep -- we've got our eyes on what they are and they garner an enormous amount of attention to make sure they're moving through the pipeline.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [42]

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Okay. That's great. I appreciate the color there. And then just on the buyback, obviously very active in the third quarter at a price that's just a little bit lower than the stock is right now. And you did as much in the third quarter as I think you had in the first 2 quarters of the year combined. So how do we think about the pace of buyback fourth quarter into early '20?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [43]

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I think it's a function of the strength of the stock price. We have our buyback set up that the weaker the price gets, the higher we're willing to move up into our maximum buying limit for every day. So if the price stays weak and similar to current, what the price has kind of averaged over the third quarter, you'll see us be buying just as much. We're not going to slow that down. If the price strengthens up, then you'll see it slowed a little bit. So we've got the authorization and the ability to be just as active, but it will be price-driven.

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman, President & CEO [44]

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But -- and I will say, at these levels, we're pretty active, and there's still some room to be active. We still think this is the best way for us to reinvest our capital at these levels and even a hair higher. So I mean it's a positive for us. We have to do something with this capital, and there's no better investment we can make than in ourselves.

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Operator [45]

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Thank you. And there are no further questions in the queue at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.