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Edited Transcript of VBTX earnings conference call or presentation 23-Apr-19 1:30pm GMT

Q1 2019 Veritex Holdings Inc Earnings Call

DALLAS Apr 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Veritex Holdings Inc earnings conference call or presentation Tuesday, April 23, 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

* 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

* 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 First 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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Good morning, everyone. Thank you, Susan. It goes without saying that this has been the biggest and most transformational quarter for Veritex in our short history. Going from a start-up company to the 10th largest domiciled bank in Texas in 8.5 years is a testament to our teammates and family we call Veritex. Q1 represents the first full quarter of merged -- of the merge Veritex and Green Bank's. We have much to report, so let's get started.

On a GAAP basis, we produced first quarter earnings of $7.4 million or $0.13 per share. This included nonrecurring merger and acquisition expenses of $31.2 million and nonrecurring losses from repositioning our investment portfolio of $772,000. On an operating basis, we recorded earnings of $32.7 million or $0.59 per diluted share. Terry will provide some additional color on these numbers momentarily.

From a balance sheet perspective, we finished the quarter just under $8 billion in total assets. We did see loan growth, excluding mortgage warehouse, slow a bit growing $74 million or 5.3% annually. Loan growth was offset by $25 million in government guaranteed loan sales and the payoff of 3 acquired troubled loans exceeding $26 million. We remain confident that we will always grow at or above our Houston and DFW markets, but we have seen a small pullback in these markets. So we're bringing our loan growth forecast for 2019 to high single digits. Our pipelines continue to be active and full, and we have over $400 million in yet-to-be funded construction loans over the next 15 months.

In March, Texas marked its 107th consecutive month of job gains. The unemployment rate in Dallas and Houston remains very low at 3.3% and 3.7%, respectively. Additionally, both DFW and Houston reported that each have added over 1 million new residents over the last 8 years, confirming the economic viability of our state.

Specific to mortgage warehouse division, we have hired a very strong leader who starts in mid-May. We currently have very small loan balances in mortgage warehouse of $114 million, which represents only 2% of our loans outstanding. However, with our new leadership, we expect to see a nice increase in outstanding balances over the coming quarters. Our credit remains very strong, but we did have a few things that occurred during the quarter that required a higher-than-anticipated provision expense.

Our total provision for the quarter was $5 million. That was made up of 3 primary components: a general reserve for loan growth of $2.3 million; specific reserves for 5 smaller credits, 4 acquired and 1 legacy Veritex of $1.2 million; and an additional reserve of $1.6 million to fully exit our largest problem, oil and gas credit acquired in the Sovereign acquisition. Our NPA to total assets remained very strong at 0.29%, and our allowance plus remaining purchase discount on acquired loans to total loans is a healthy 1.82%.

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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Good morning, everybody. Malcolm certainly did a good job in covering the major highlights for the quarter and in spite of the noise, there is certainly some exciting news and encouraging results. I want to now drill down into the numbers and try to give you some additional color on our Q1 results, including the earnings power of the new Veritex. I should note that Veritex filed its preliminary proformas on Friday, April 19, reflecting the impact of the Green Bank merger. We thought this information would be helpful in gaining a better understanding of the growth and financial results for Q1 2019. Finally, while GAAP reporting is certainly important and required, I'm going to focus a lot of my comments on operating results, which excludes merger expenses and loss on sale of securities.

Turning to Slide 5 in the deck. Fully diluted operating earnings per share increased just over 25% in Q1 to $0.59 per share. The operating net income of $32.7 million translated into a return on average tangible common equity of 18.81%, an improvement of over 40%.

On Slide 6, these graphs demonstrate the earnings power of the new Veritex with an operating return on average assets of 1.69% and a pretax preprovision return on average assets of 2.4%. This level of pretax preprovision operating earnings bodes well as we move later and later in the credit cycle. Veritex was already very efficient on an operating basis before the Green merger, but this key metric has only gotten better with the scale and cost savings opportunities from the transaction. We finished Q1 with an operating efficiency ratio of 43.5%, down over 7% from Q4. This level of efficiency was in line with management expectations.

On Slide 7, tangible book value per share ended Q1 at $13.76. The bottom half of this slide shows the roll forward of tangible book value for Q1. Clearly, there were several significant items impacting TBV during the quarter. The total TBV dilution from the merger and the Q1 merger charges totaled $1.61 or 10.9% of tangible book value prior to the merger. This graph then shows the positive impact of Q1 from operating earnings, market value changes in investment portfolio and the CDI amortization included in operating earnings. These positives were offset by a $0.12 reduction in TBV from the Q1 dividend and $0.07 per share dilution from the share buyback of 317,000 shares, which occurred late in the quarter.

On Slide 8, the net interest margin increased to 4.17% in Q1, including the impact of the merger and the purchase accounting accretion. This NIM includes 10 basis points of the impact from accelerated accretion in the purchased nonimpaired portfolio and cash recoveries and excess of estimates in the PCI portfolio. Most encouraging from my point of view is the 5 basis points of NIM expansion from 3.73% to 3.78% in the adjusted net interest margin, which excludes the impact of all purchase accounting. As we look out for the remainder of 2019, the company continues to expect a net interest margin in the 4.05% to 4.2% range. This range assumes no fed funds rate increases or decreases. Where we will fall in the range is largely a function of the level of prepayments in the purchased nonimpaired portfolio.

On Slide 9, Veritex had a strong quarter on the fee income side with operating net interest income over $9 million for the quarter including very strong results in deposit and treasury management fees and from government guaranteed loan sales.

On Slide 10, the company is very focused on achieving the cost savings that were expected from the merger. In general, these savings are coming in earlier than planned. We do believe the core conversion and branch consolidations at the end of Q2 will yield additional savings in several expense categories, but it is our intent to reinvest some of these savings in additional quality personnel to drive future growth.

On Slide 11, it's important to note that post merger approximately 57% of the loan portfolio now carries a credit mark in the part that doesn't -- has been underwritten to Veritex's credit standards, which continues to show exceptional loans performance. Also the loan composition is shown in the pie chart at the bottom right with commercial real estate at 44% of total loans.

On Slide 12, the loan-to-deposit ratio stood at 91.8% at the end of the quarter. Our preference is to operate this ratio between 95% and 100% so we have room for loan growth given the current funding profile. Also the average cost of total deposits declined during Q1, reflecting the Green deposit base and the impact of purchase accounting. If you eliminate the purchase accounting impact, the cost of interest-bearing deposits would have increased 10 basis points from the Q4 level to 1.85%.

On Slide 13, this shows our asset quality metrics, including NPAs at 29 basis points of total assets. Also note that we have $165 million in purchase impaired loans, but these loans have a credit mark in ALLL which covers approximately 33% of the loan balance, thereby significantly reducing the downside risk from this part of the portfolio.

Finally, on Slide 14, this reflects our capital ratios as a holding company, which remain very strong post merger. Importantly, we returned $14.5 million to common shareholders during the quarter, including the share buyback of $7.7 million and the $6.8 million in common dividends. Needless to say, the share buyback is more than an insurance policy. We will continue to use the buyback given our excess capital if the share price reflects weakness and we believe it represents good value.

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. The integration of our 2 banks is going exceptionally well. We spent the quarter upgrading our technology platform, which should be complete by June 1, so we'll be ready for the core conversion in late June. Our teams continue to be focused on bringing these 2 companies together with the least amount of disruption as possible. All key personnel remain in place and are working towards our common goal of being the bank of choice in our markets.

We've also had a very busy quarter from the new hire standpoint. First and foremost, Geoff Greenwade has decided to retire May 31. Geoff has been a very loyal, supported member of Green Bank for 11 years and a major part of its success and growth. I want to thank Geoff for his continued support of this merger and of me personally. With Geoff's retirement, we have hired a new Houston City President, [Jon Heiny] who starts May 1. [Jon] is a native of Houston and is an 18-year veteran from a large superregional institution. His experience in commercial lending and leading private banking teams will only add to our outstanding Houston franchise.

In addition to the hiring of the new mortgage warehouse leader I mentioned earlier, we've also hired a new president for our mortgage company with 25 years of experience, a new chief technology officer who will support Michael Bryan, our CIO, and a new key hire in the middle market lending group in DFW. We feel investing in future leadership and personnel will continue our efforts towards efficiency and further profitability. As you can tell, we've been busy on all fronts. Our focus is on creating a top tier institution, which means we'll continue to add top tier talent.

Operator, at this time, we would like 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 Brady Gailey with KBW.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [2]

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So the NIM guidance of the 4.05% to 4.20%. I mean one quarter in, you're clearly at the top end of that range. I know with yield accretion, it can bounce around a little bit. But, I mean, do you think it's likely that you'll come towards the top end of that range this year?

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

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Brady, it's Terry. If I had a crystal ball and could predict the level of prepayments in the Green Bank purchased nonimpaired portfolio, I could give you a definitive answer, but I don't. Look, I think, my experience has said usually prepays peak early and start to tail off. And so if you look at the NIM slide on Page 8, and you look at the 10 basis points between GAAP NIM and what we kind of call an adjusted NIM that excludes the accelerated prepayment stuff, I think, that will narrow. Okay? It always has in my experience. How much it will narrow? Hard to say. I wouldn't be surprised to see it narrow like 5 bps over the course of the year, something like that. That being said, I do think that we have on the -- so that would tell me it's going to move more towards kind of the middle part of the range. The only offsetting thing, I believe, to that is, I think, our loan-to-deposit ratio and our earning asset mix were a little unfavorable to us this quarter. So I think that could counterbalance to it a little bit. And that's the best way I know to think about it. It's probably going to migrate down a little, but there will be some things I think that will support it, as I've said.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [4]

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All right. Then on the loan growth side this quarter, I know total loans grew a little over $3.1 billion. How much of that was organic growth? Like, if you take out the Green loans that were acquired, how much did loans grow just organically?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [5]

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Yes. So just on the growth side, it was pretty much a flat quarter just total loans. We strip out the mortgage warehouse component, and so just commercial loans, nonmortgage warehouse grew $74 million or about 5.3% annually. Mortgage warehouse was down period end to period end about $97 million. So we had a little bit of overall decrease in the portfolio.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [6]

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All right. And then just lastly, it's great to see a little bit of buyback activity in the quarter. How should we think about the buyback for the rest of the year?

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

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I mean, we're going to use the buyback when pricing opportunities show. I think they showed their sales are a little bit late in the quarter, and we reacted, and we'll continue to do that when appropriate. At certain pricing levels, it doesn't make sense. And at certain pricing levels, it does. So if we have to be active, we will.

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Operator [8]

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Our next question comes from Matt Olney with Stephens Inc.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [9]

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I want to start on the operating expenses, and I believe that came in below consensus forecast in the first quarter. Just want to try and get a better idea of how much of this was a pull forward of some future cost savings that was recognized earlier. I think the full year forecast from me, it looks like was about $147 million. I think you previously talked around that number, but with your recent commentary about reinvesting some of this in some new people, I'm curious kind of what your view of that full year number is currently.

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

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Well, Matt, it's Terry. As you know, we said that the efficiency ratio was in line with management expectations for the quarter. So it did come earlier, it didn't surprise us. There's more to come, namely in the form of conversion, branch consolidations and other things. And it's our intent to reinvest some of that. So the $147 million consensus is, it's in the ballpark. But I'm -- we're at 43.5% efficiency ratio, and it's going to be in that range. We did our -- if growth picks up, et cetera, then I think there could be a little downside from here. I'm not trying to convey that we're going to dollar for dollar reinvest every -- all our future savings in new people, but I'm trying to -- I did want to signal that some of what we've got we're going to put back in there. So I would expect it to trend slightly lower, but not -- we're not looking for this thing to start with a 3 or anything like that. I mean, we like where we are from an efficiency standpoint. We've got to continue to invest to drive growth, and we've got markets that will take advantage of that given the demographics. And growth's important to us, especially when you think about the accretion runoff and how that's going to play out. So good growth, always good growth, coming from me, makes sense.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [11]

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Okay. That's helpful, Terry. And then thinking more about capital and capital planning for 2019. If you're going to be growing loans in that high single-digit range, you now pay a nice cash dividend and assuming you continue to remain active on your share repurchase plan, it still seems like the capital levels could build throughout 2019. Am I thinking about that the right way? Is that within your expectation that capital could still build this year even if all those things come to fruition?

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

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Yes. I mean, our capital ratios apparently are going to increase, but -- yes, you're thinking about it right. I have no other -- any other way to say it. We're producing a fair amount of new capital, and if we can't buy enough shares back, we'll pay a big enough dividend. So it definitely is going to grow.

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman, President & CEO [13]

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It's a high class problem.

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [14]

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High class problem.

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Operator [15]

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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 [16]

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I joined a couple of minutes late. But just curious how big you guys might consider taking the mortgage warehouse side of the business. It sounds like you hired a new person also someone new in the regular mortgage division. But just want to get a sense how big you might consider taking that.

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman, President & CEO [17]

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Yes. And that's a good question. The person we got coming in is a seasoned, seasoned veteran. She's been in the business. She has some deep, deep relationships. Listen, mortgage warehouse is never going to be a major component of our loan mix. But the 2%, it certainly got a bunch of room that it could grow. And so do I see it in the 5% range, 5%, 6% range? Sure. This person has the ability to do that just through their years of experience. So again, it won't ever be a major component, but it is a nice add and so...

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

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And let me tag on that to Malcolm. Look, this is a profitable part of our business right now based on where pricing is, as we look at our operational cost to fulfill. And I like the risk-adjusted returns and return on allocated capital. And so I just -- we've done a lot of analysis on this. The growth is going to -- you got to come in and take a hard look at our business, and as Malcolm talked about the upside, I mean that's going to play out over several years. This is not something we think is -- do I think it will contribute in '19? I do. Do I think it's going to be a major part of our growth? I don't. I think the upside in this business largely depends on the macroeconomic things and what's going on in the mortgage business and just letting her get in and do what she needs to do which I think will take a couple of years to play out.

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman, President & CEO [19]

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Yes. And on your mortgage company question. We hired a guy that's been in this market for 25-plus years. He's very well known. Again, this is not going to be a major part of our business. It's a great add-on and another arrow in the quiver for our folks to sell. Green Bank did not have any mortgage business because they got out of that business, and so we're going to grow a little bit in Houston. We'll hire some folks down there. But again, it won't be a major piece. It'll be a nice add-on.

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

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That's great. And Malcolm, I know you've got -- you and Terry both got plenty on your plate with digesting Green. But just curious what the appetite would be for future M&A. Do you need to get to the end of the year or just kind of what are your thoughts at this point given where you are?

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

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Candidly, we are just solely focused on this integration, conversion and just making this company as efficient as we can. You never take M&A off the table, but I can tell you right now, we haven't spoken the word this last quarter. We believe that if we do what we say we're going to do, and we are successful the way that we think we can be successful, at the appropriate time we are going to get to make the decision whether that is going to be an opportunity or the 4, 5 other options that we have are going to be the path that we take. So none of that happens if we don't do this job well and so sitting in my seat that's what they hear from me every day, my folks that let's do this and let's get this right, and then we're going to get to decide down the road. But this bank is a conglomeration of 7 other institutions and a bunch of organic growth. And so I don't think you can ever take the M&A pieces completely off the table.

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Operator [22]

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Our next question comes from Brett Rabatin with Piper Jaffray.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [23]

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I wanted to talk about the funding, and you had a slide on -- talking about trying to focus on funding and treasury. Could you first just -- you, obviously, had noise related to the deal on the funding side in terms of the cost of funds. Can you may be just give us an idea of what you think your cost of funds will be on kind of a core run rate from here? And then just the top of mind deposit growth strategies besides treasury management and HOA, are there other things that you're trying to do on the funding side of the equation?

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

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Sure. Brett, it's Terry. First part of your question around funding cost. I mean, the reason I made the comments around -- it looks like we're down, but we're really not down as a function of purchase accounting and the 10 basis points. We'd be at 1.85%, if you will, in average cost of interest-bearing deposits. And 10 basis point increase given the fed increase in December doesn't feel bad to me. I think that coupled with what was going on in the loan side that's why we got the NIM expansion of 5 bps absent all purchase accounting from 3.73% to 3.78%. I think, where deposit costs go from here, I mean, I know there's a tail as you reprice your CDs that are coming due. And so there will be a little bit of upward pressure on CD pricing. I just don't think it's going to be overly significant. In fact, we've been able to lower some of our CD sheet rates at Veritex so far this year. So -- and we've been able to attract and grow some deposit growth. That being said, I mean, I think the mix of deposits is important and there is some seasonality in the deposits that we tend to start out with an unfavorable mix shift at the beginning of the year and it strengthens as the year goes along. So I think that works in our favor a little bit. Also, I think as we think about deposit initiatives other than treasury, obviously, Green had a lot of customized treasury management code and the plan is try to continue to leverage that. And you've heard us talk about the HOA business, which is we're trying to build momentum in, and I think we are. I think the other thing is just we're a commercially funded company by and large. And so this to me comes back to the focus on C&I and operating business and asking for the deposits. And so I think a couple of things there. One is some changes in the incentive system that I think for our bankers that really, really promotes the importance every quarter of doing a good job on the deposit side. And if you don't do a good job there that really -- from an incentive perspective, it certainly negatively impacts them in terms of what they've done on the loan side. So that's important. We put in pricing models that help them really see the value of deposits, DDA versus money market versus CD. So that's an important piece too. And then it's just a focus for us every day on both the retail and commercial -- every side, every part of the company has deposit goals, and they get measured and tracked, and I think it's a mindset, it's incentives, and it's really focusing on leveraging the treasury management side of the C&I world, I think, are going to be the keys for us.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [25]

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Okay. That great color there. And then I guess, the other thing I want to make sure I understood was, thinking about post the conversion and may be spending some of the money on hires, and you've maybe got some technology to spend as well, compliance, CRA teams. How much -- can you may be just break out for us how much of the spending is going to be on technology-type stuff versus adding new talent to the bank?

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman, President & CEO [26]

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Yes, I mean, the majority of our technology spend is going to be in the first half of the year, just upgrading our platform so ready for the core conversion. I mean, we're -- that's ongoing. I mean, there was a pretty good spend in the first quarter on the technology side. And in terms of the new hire piece, we just -- we're trying to raise the bar in a whole bunch of different areas, and so you've seen just this quarter some substantial new hires. I think, you're going to see more in the C&I space. We feel really good about our commercial real estate lenders and their ability to produce the amount of loans that we want. But from the C&I side, we can always grab 1 or 2 or 3 people both here and in Houston. So from a management standpoint, we feel really strong. We just need to get some good strong relationship managers. We're talking to them. So we just want to be ready to acquire them when they're ready. This is the season to do it because of bonuses and what have you. But if they're not there and they're not going to be additive to our company, we're not going to hire just to hire. So I think in terms of our compliance, CRA, BSA folks, we're in really good shape. Angela has done a really good job of putting together a team. Green had a great team. All of the teams have stayed pretty much intact on both sides. So we don't see a big spend going forward on that side.

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Operator [27]

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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 [28]

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So first one from me, I just wanted to start by going back to the NIM guide. Just what you're assuming in terms of earning asset mix. It looks to me like you guys got a lot of upside here as far as increasing your loan-to-earning asset mix back to what it was premerger, which sounds to be pretty accretive. What exactly are you assuming in that NIM guide? And can you talk about just your target, maybe size of the securities portfolio as a percentage of earning assets and what the duration of that portfolio is?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [29]

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Daniel, it's Terry. I mean, I'm assume that the investment portfolio is going to be low double digits in terms of as a percentage of assets. And in terms of -- and so I think it's not going to grow a lot from here as I see the balance sheet growing, you're going to see the investment portfolio. It may -- we'll be reinvesting cash flows, it may step up incredibly slowly, but the big thing is to keep the cash flows reinvested. And I would much rather use our capital and our funding on the loan side than the wholesale side, if you will. But we do need leverage on this capital base. So we're going to grow at pretty small, and we're going to reinvest cash flows. The duration is pretty short at about 3.4 years, I believe. And as you saw in the rate volume table in the -- it's got a great yield at, like, 3.17% I believe. Yes, 3.17%. The beauty of purchase accounting, you got to acquire the Green investment portfolio on January 1 at market rates. And so it's really working in our favor. And the cash flow on it is strong. There's a lot of cash flow coming off of it. So if loan demand is stronger than expected, then we could let it run down a little bit. But we do have -- the earning asset mix definitely was a bit of the drag this quarter.

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Daniel Raymond Mannix, Raymond James & Associates, Inc., Research Division - Senior Research Associate [30]

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Great. Really helpful. Thanks, Terry. Maybe one for Clay here. So on the credit side, the $1.5 million recorded provision on the PCI loan that you pointed out. I'm assuming that's the one that originally was expected to be resolved in 4Q that was expected to kind of leak over into 1Q and then there was another credit that you guys have pointed out previously that was in bankruptcy that was expected to be resolved this quarter and 2Q. Maybe just give us an update on that.

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Michael Clayton Riebe, Veritex Holdings, Inc. - Executive VP & Chief Credit Officer [31]

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Sure. Yes, you're right. The asset that we talked about in Q3 of '18, we anticipated that it could potentially resolve in Q4. It rolled over to Q1, and that $1.5 million is an additional provision that's associated with that asset. It paid off March 31. So we're completely out of that asset. The other asset that you're talking about is an oil and gas credit from the Sovereign portfolio. That is in bankruptcy. And the current look on that is that it's potentially going to resolve in Q2. There is some potential that it might roll over just based upon the process that they're running in BK today.

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

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And just the valuation on that, our most current valuation shows that our loan is lower than the ultimate valuation, and we're the only creditor in that bankruptcy.

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Michael Clayton Riebe, Veritex Holdings, Inc. - Executive VP & Chief Credit Officer [33]

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That's right.

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Charles Malcolm Holland, Veritex Holdings, Inc. - Chairman, President & CEO [34]

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Only secured creditor, I guess.

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

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Right.

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Operator [36]

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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 [37]

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I just wanted to ask a question first on fee income, came in higher than I anticipated at least this quarter. I'm just wondering certainly piece of that was the gain on sale on the loan front. What are your thoughts on kind of the level of gain on sale the rest of the year? And were there any other fees that with the banks coming together will sort of be adjusted in terms of your fee rates or anything like that that would impact forward quarters?

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

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Gary, it's Terry. It was a strong quarter on the fee income line. I think the -- one, you mentioned that the gain on sale from the government guaranteed, strong quarter, premiums improved a lot over where they were in Q4. It's a lumpy business but we had a lot of product that we could sell. Premiums were better than we had seen, and we decided we ought to take advantage of that. It'll continue to be lumpy. Is $2.4 million repeatable? I don't know. But I feel good about the business for the year. In terms of -- I think, their pipelines look good, and so we're doing some good things in that business. So I feel good about it for the year. I would never say you ought to look at this quarter's results and say that, that's a sustainable level. Over 4 quarters, there will be some quarters I think that are lower and we'll see if there's some that are higher, but that's just the reality. I think the treasury management and the other fees, I think, are pretty sustainable. I think one new thing to Veritex was our interest rate swap business that Green brought that we trained our -- the Veritex lenders on about halfway through the quarter towards the end of February. We had a decent interest rate swap fee quarter, but I expect that to accelerate as we go through the year. So some things -- definitely some different things going on there, but overall a great quarter. And that's kind of a little bit of context there.

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

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Okay. And the interest rate swap income, is that in the loan fee line item or is that elsewhere?

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Terry S. Earley, Veritex Holdings, Inc. - Executive VP & CFO [40]

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It's actually not. It's down in other...

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [41]

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Oh, it is in other...

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

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Because it's -- yes.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [43]

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Okay. Great. And then Malcolm, you mentioned a slowdown, I think, specifically in Houston. I wonder if you could just elaborate a bit on what you're seeing there.

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

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Yes. I think, what I was trying to communicate is, we're just seeing a little bit of a pullback in both markets. I described it, we've been running at the speed limit 60, we've been running over the speed limit for the last 3 to 4 years. We just pulled back a little bit to probably speed limit. It's still very good. There is still a crazy amount of people moving to these 2 markets. There are real jobs. I mean, 107 straight months of job gains is just remarkable. What's going on in certain segments of both Houston and Dallas, the growth areas, it's remarkable. So we just -- we do see it pulling back a little bit, but our pullback is from over the speed limit into speed limit. So I still think we're going to have some very nice growth, and I do believe that we'll always outperform the market, but we're going to only take what the market's going to give us.

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Operator [45]

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Thank you. Ladies and gentlemen, thank you for participating in today's question-and-answer session as well as today's conference call. This concludes the program. You may all disconnect, and have a wonderful day.