Veritex Q1 2023 Earnings Call Transcript

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April 26, 2023

Key Takeaways

  • Veritex reported $43.3 million net operating income in Q1 ($0.79 per share), with a 2.2% pretax pre-provision ROAA, 17.7% ROTCE and a 45.6% efficiency ratio.
  • Loan growth slowed to 9% annualized in Q1 as pipelines dropped over 60% and payoffs reached $235 million, with Q2 payoff expectations 15% higher than Q1.
  • Deposits were down just 1% in Q1 despite losing 51% of correspondent money market balances, as the bank replaced non-core funding, grew core deposits by $100 million post-quarter and boosted liquidity to exceed uninsured deposits by $1.6 billion.
  • Net interest margin fell 18 bps to 3.69% in Q1 due to higher funding costs, elevated Fed balances and 46% deposit beta, and management expects further margin pressure in Q2.
  • Credit metrics remain strong with net charge-offs under $1 million, criticized assets down 9% linked-quarter, NPAs stable, reserves increased to 1.07%, and a detailed CRE review indicating limited loss expectations.
AI Generated. May Contain Errors.
Earnings Conference Call
Veritex Q1 2023
00:00 / 00:00

There are 11 speakers on the call.

Operator

Good morning, and welcome to the Veritex Holdings First Quarter 2023 Earnings Conference Call and Webcast. All participants will be in a listen only mode. Please note this event will be recorded. I will now turn the conference over to Ms. Susan Caudill, Investor Relations Officer and Secretary to the Board of Veritex Holdings.

Speaker 1

Thank you. Before we get started, I would like to remind you that this presentation may include forward looking statements, and those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to publicly revise any forward looking statements. At this time, if you'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.

Speaker 1

All comments made during today's call are subject to that Safe Harbor statement. 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 ks earnings release. Joining me today are Malcolm Holland, our Chairman and CEO Terry Early, our Chief Financial Officer and Clay Riebe, our Chief Credit Officer. I'll now turn the call over to Malcolm.

Speaker 2

Good morning, everyone, and welcome to our Q1 earnings call. Despite the challenges in the marketplace, Veritex continues to For the Q1, we reported net operating income of 43,300,000 or $0.79 per share. Our pre tax pre provision for the quarter was $66,400,000 or 2.2 percent Return on average assets. From an operating standpoint, our return on average tangible common equity was in excess of 17 0.7%. Our return on average assets was 1.44% and efficiency remained in the mid-40s at 45.6%.

Speaker 2

As our market and industry face new challenges, we also reevaluate priorities and give extra attention to the challenges we have been presented. Liquidity management is part of every discussion. We have included some detailed slides addressing this topic that Terry will discuss momentarily. Overall, we have seen little deposit outflow since twelve 3122. Our bankers have done an amazing job at communication, answering questions and offering deposit solutions to all of our clients and prospects.

Speaker 2

As expected, growth at Veritex has been reducing. For the quarter, we reported 9% annualized loan growth with the majority of that coming from our funding in our already on the books Construction portfolio. Our pipelines across the bank are down over 60%. We expect growth to continue to decline going forward to the mid single digits. A great deal of our forecasting loan growth depends on the level of payoffs, which are a bit unpredictable in this market during these times.

Speaker 2

Payoffs for the quarter were $235,000,000 and as of now, our 2nd quarter payoff pipeline looks to exceed Q1 by 15%. Credit continues to be a major focus for me, our credit team and our bankers. The surveillance of our portfolio has never been higher. We recognize that as interest rates stay higher for longer, Additional credit stress will continue to appear. We have taken an extra deep dive on our entire real estate portfolio and each product type.

Speaker 2

You can find that detail on Page 19 of the slide deck. For the quarter, Net charge offs were nominal at less than $1,000,000 NPAs to assets was slightly down and we increased our reserve to 1.07 You will also see that criticized assets decreased 9% versus the previous quarter. Clay will give you some additional color in a moment. I'll now turn the call over to Terry.

Speaker 3

Thank you, Malcolm. Starting on Page 5. Q1 was a quarter of strong financial metrics Despite the financial market turmoil in March, tangible book value per share ended the quarter at $19.43 up 5.1% in the quarter and 9.3% on a year over year basis after adding back the effect of the dividends. A new metric that we added to our earnings release is pretax pre provisioned operating return on average loans. I believe it's a good barometer of loss absorption capacity from the loan portfolio without impacting TBV or regulatory capital.

Speaker 3

Our result for Q1 is 284 basis points and is up over 21% on a year over year basis.

Speaker 4

On Slide

Speaker 3

6. For the 1st 67 days of the quarter, we were growing core deposits in an annualized rate of over 11.5%. Everything changed on March 8. Fear took over the deposit environment and there was a flight to scale and scale was perceived as safe. For Veritex, this was most evident with our correspondent money market clients.

Speaker 3

During Q1, we lost 51% of these index deposits as clients moved excess liquidity to the safest venue, the Fed. Overall, our deposits were down $88,000,000 or 1% for the quarter as we replace correspondent funding with broker deposits. Since the end of Q1, deposit activity continues to return to normal as evidenced by our increase in core deposits of almost $100,000,000 Veritec started the journey to transform the balance sheet starting in Q3 of 2022. We did this by slowing loan growth, shifting our loan production focus away from CRE and ADC to C and I and small business and building capital, especially the CET1 ratio. After Labor Day, we heightened our focus on the deposit portion of the balance sheet.

Speaker 3

We changed our banking banker incentive program at the beginning of January to give deposit value and volume a much higher weight in our balanced scorecard. We reallocated marketing spend to deposit products and launched a direct marketing campaign in February with encouraging results. All of these efforts and many more will continue through 2023 beyond. Finally, since March 28, We've reduced our non core funding by $258,000,000 and materially improved our liquidity capacity. Currently, our liquidity Exceeds uninsured deposits by $1,600,000,000 or almost 50%.

Speaker 3

Moving forward to Slide 7, Continuing the discussion on deposits, the effect of the Fed's interest rate hikes can be clearly seen in the shift of deposits out of non interest bearing To other interest bearing categories, these deposits have declined from 35% of total deposits in Q1 'twenty two to 24% in Q1 'twenty three. Deposit pricing competition has morphed into hand to hand combat. Our cycle to date total deposit beta is approximately 46%. I expect deposit betas to continue to increase given funding requirements and the competitive landscape. On Slide 8, uninsured and uncollateralized deposits are at 38.4%, down from 44.1 percent at Twelvethirty Onetwenty 2.

Speaker 3

Veritex's average account balance is $132,000 On Slide 9, loan production declined 73% from Q4 to Q1 as interest rates continued to increase, Economic uncertainty increased and liquidity became much more of a concern. Unfunded ADC commitments continue to drop at the rate of $300,000,000 to $400,000,000 per quarter. On Slide 10, you see the evidence of this greater emphasis on C and I. During the Q1, C and I and owner occupied real estate accounted for 48% of our production, up from 41% in Q4. On Page 11, net interest income decreased by $2,700,000 or 2.6 percent $103,400,000 in Q1, the 3 biggest drivers of the decrease were higher rates on interest bearing deposits and liabilities, day count and this was significantly offset by higher loan yields.

Speaker 3

The net interest margin decreased 18 basis points from Q4 to 3.69 percent in Q1. The Q1 NIM was negatively impacted by carrying higher cash balance at the Fed. This is approximately 5 basis points of contraction on the NIM. Interest reversals on problem credits was about 3 bps and the rest is due to deposit flows and pricing. All this is to say NIMs are likely to remain under pressure given the amount of liquidity that has left the banking system and the ongoing war for deposits.

Speaker 3

Veritex's interest rate sensitivity is largely unchanged since Q4 and we remain slightly asset sensitive. On Slide 12, during Q1, our loan yield was up 53 basis points to 6.51 percent, while deposit rates increased 78 basis points. Q1 loan production carries an interest rate of 7.56%. So thankful to have a predominantly floating rate loan book to offset the deposit beta impact and to be able to deliver acceptable new production spreads. On Slide 13, it shows certain key metrics on our investment portfolio.

Speaker 3

First, it's only 9% of assets. The duration is 4 years. 83 percent of the portfolio is in AFS and the mark to market on the entire portfolio is less than $90,000,000 On Slide 14, non interest income increased by $4,500,000 to $18,900,000 This excludes the loss on the investment portfolio deleveraging trade executed before March 8. Revenue diversification is becoming a more important part of the Veritec's revenue stream. For the 2nd consecutive quarter, we got outstanding performance in our USDA business, and it was also helped by a much smaller loss at Thrive and partially offset with lower customer interest rate swap revenue.

Speaker 3

We'll come back with additional comments on USDA and Thrive in just a minute. Non interest expense decreased by $949,000 to just under $56,000,000 reflecting lower variable compensation, partially offset by higher data processing and software expense. Turning to Slide 15. As I noted earlier, Q1 was another great quarter for North Avenue Capital With $114,000,000 in USDA loans closed during the quarter, we sold the guaranteed portion on approximately $80,000,000 of those loans. Gain on sale premiums remain very strong and we have a strong pipeline of loans in the closing stage as we look forward to Q2.

Speaker 3

It's worth noting that the USDA B and I program could once again run out of funding before the end of the government's 2023 fiscal year. This is consistent with what happened in 2022 and could impact revenue later in the year. Our SBA pipelines to build as new leadership and recent hires gain traction. Gain on sale margins are slightly stronger than at the end of Q4. Moving to Thrive.

Speaker 3

Veritex recorded an equity method loss of just over $1,500,000 as funded volume increased 3% to 426,000,000 Gain on sale margins improved from Q4 levels, but are still below historical results. Thankfully, the negative margin impact of the long dated locks Thrive's efforts to right size the expense structure of the company, given expected 2023 production volume is bearing fruit. We continue to believe breakeven performance in 2023 from Thrive is possible. On Slide 16, Total capital grew approximately $42,000,000 during the quarter to $1,438,000,000 CET1 ratios have Please note the impact on the capital ratios From the mark to market on the AFS and HTM portfolios, these ratios remain meaningfully above the well capitalized threshold plus the capital buffer. Looking forward on capital, we believe that moderating loan growth and lower unfunded commitments should allow us to achieve our CET1 target of 10% by the end of 2023.

Speaker 3

Finally, on Slide 17, Note that we increased the weighting on the downside economic scenarios in the CECL model to reflect the uncertainty in the economic outlook and the greater recessionary risk that's out there. These changes increased the allowance by 5 basis With that, I'd like to turn the call over to Clay for some comments on credit.

Speaker 4

Thank you, Terry, and good morning, everyone. Please turn your attention to Page 18 of the deck. Q1 was a quiet quarter overall from a numbers perspective, but a very active quarter from a Surveillance perspective, we saw a meaningful reduction in criticized assets due primarily to a large pay down in the lender finance facility discussed on last quarter's call, resulting in a 9% reduction in criticized assets during the quarter. NPAs remain essentially flat for the quarter and reducing to 35 basis points of total assets. Past dues remain manageable.

Speaker 4

Annualized net charge offs were down to 4 basis points and were primarily due to The cleanup of several SBA credits that went through liquidation. Moving on to Page 19, We've provided a snapshot of the primary loan types held in the CRE portfolio. This information came from an individual review of Every credit in excess of $1,000,000 in each sub segment highlighted. The office portfolio is the primary focus of many during this season. Our office portfolio was 6.7% of the total loan book and contains a significant amount of our classified assets and all of the NPAs in the CRE subsegments evaluated.

Speaker 4

There are some troubled loans in the portfolio that will require reworking. However, overall, Losses are not expected to be outsized. We currently have 11% of the office portfolio classified Quarterly surveillance is ongoing on the portfolio. There's very limited construction activity in the office portfolio and all future funding Will be for good news money for newly added tenants. 84% of our office exposure is located in our primary markets and We are able to put our eyes on the properties frequently.

Speaker 4

We have virtually no office exposure near Central Business Districts where the portfolio is located. Industrial and multifamily make up 46% Of total Cree outstandings, the majority of multifamily and industrial exposure are for construction of Class A properties in the Texas market. Limited issues are expected from industrial and multifamily given the equity and value considerations. Hospitality has held up very well, overall the last 3 years since COVID came on the scene and continues to hold up well. We do not see meaningful losses coming from the hospitality book.

Speaker 4

Retail is performing very well at this Point in the cycle and sales activity in this portfolio is actually picking up. So with that, I'll turn it back over to Malcolm.

Speaker 2

Thank you, Clay. These times are a challenge for our industry and our country. I look back at the last 7 weeks and I'm grateful for my team and the bank we have built. Business life is always going to throw you some challenges. It's how you have prepared for those unexpected days that will set you apart.

Speaker 2

These times also create opportunities that may not have existed prior. Our goal and my charge is to continue to produce results that accrue to the value of our franchise, focusing on continuing to build a fortress balance sheet, deliver sound credit and build tangible book value. Your team is engaged and committed. Operator, we'll now take any questions. Thank you.

Operator

Our first question comes from Brady Gailey with KBW. You may proceed.

Speaker 5

Hey, thank you. Good morning, guys.

Speaker 2

Good morning, Brady. Good morning, Brady.

Speaker 5

So Thrive had or not Thrive, North Avenue had another great quarter in 1Q. But Terry, I heard your comments about how Yes. The USDA could be running out of funding again. I know if we look at last year, so 2022, North Avenue had a great 1Q and a great 4Q, but Fees there were pretty limited in 2Q and 3Q. Should we think about that same timing potentially for this year, If this program runs out of funding similar to how it did last year?

Speaker 3

Brady, it's a great question. I do think 2023 is going to be a little bit different than 20 22. 1, there's already a concerted lobbying effort going on in D. C. To make sure it doesn't happen, But I just felt it was appropriate to point it out.

Speaker 3

Secondly, the pipelines, the loans we've got closed, the commitments we've gotten from the USDA gives me more optimism that Q2 will be better than last year. I think that's why I said in my comments, I think the revenue implications are probably more in the back half of the year. And I really I'm really more focused on Q3 in that comment because the new fiscal starts on 10.1.

Speaker 2

And the other thing is that, Ray, remember, we can actually do and get an approval and do an interim loan. So we have an approval and we fund it where the folks out there that don't have a bank or don't have a line, they're just brokers, They're stuck. And so we do have an advantage in closing loans that others may not.

Speaker 3

And then Brady, just Tag on that. The beauty of these interim loans is it gives me incredible insight into future revenue, because it's sitting on our balance sheet while the USDA lines up its funding and so we know that's coming through.

Speaker 5

Yes. Those are great points. And then Terry, I heard your comment about the margin continuing to be under pressure. It was down about 18 basis points 1 quarter and Q1. How are you thinking about how much Pressure it could be under throughout the rest of the year?

Speaker 3

I think most of the pressure is going to come in Q2, To be honest, it's but a lot of this depends on the things totally outside our control. What does the Fed do about rates? And secondly, When the deposits start to return to the banking system again, but I think the pressure is going to be there. But I would expect that if the Fed quits raising in Q3 and pauses that level of pressure is going to start to ease off. So look, It's hard.

Speaker 3

You're asking me to read it, look into the future and read a crystal ball. I think last quarter, I said NIMs have peaked And I think I didn't have any idea they would have done what they've done, but it just feels like there's I would say it this way, Brady, I can see we can see how people are pricing on the margin in our markets And I'm shocked at some of the ways deposits it's all like we've lost some deposits over the last 45 days at prices I would have never dreamed of that competitors are paying on rates. So that's what leads me to that conclusion.

Speaker 5

Sorry, go ahead.

Speaker 3

No, I'm just going to say, we just We've let some leave at crazy stupid pricing. Irrational pricing is It's just fair I mean competitive one thing, irrationality is another.

Speaker 5

All right. And then final question for me. The stock is under tangible book value. I know you guys haven't been active And the buyback, and I know these are very interesting times, but do you think about buying the stock back below tangible book value here?

Speaker 2

We think about it, but we're not going to do it right now because we wouldn't think it would be prudent.

Speaker 5

Okay, great. Thanks guys.

Operator

Thank you. Our next question comes from Brett Rabatin with Hovde Group. You may proceed.

Speaker 6

Hey guys, good morning.

Speaker 5

Hey, Brett. Hey, Brett.

Speaker 6

Excuse me, my allergies are pretty bad this morning. Wanted to, I guess, first start off on the Decrease in the criticized assets, the linked quarter $41,000,000 reduction, I heard the comment about the lender finance credit. Was there anything else that changed linked quarter in the criticized asset bucket?

Speaker 4

There is Well, a lot of movement because of the surveillance that we're doing. That is the standout

Speaker 5

Okay.

Speaker 6

And then you mentioned the multifamily construction, you feel pretty good About that not being a credit issue, just wanted to obviously appreciate all the color in the slide deck on LTVs and all that. The confidence on the multifamily construction, Do you is that line of sight just into occupancy that you're expecting or Maybe just any color around your confidence on the multifamily construction book? Thanks.

Speaker 4

Primarily driven by The fact that it's all very high quality product, there is typically always an open market for Multifamily product and finally our metrics associated with the portfolio are very strong. Yes. And I would just add, Brett, if you take a look at locations, there 87% are in Texas, 67%

Speaker 2

in the big multi markets of DFW and Houston. So, with that said, then you go back to you go and look at the migration numbers and the people moving to Texas and you got 87% of your product of which 78% is Class A and they got a whole bunch of equity in there. And so candidly, our portfolios that we look at, That's probably the one we have the least concern about.

Speaker 6

Okay. That's great color. And then just lastly on deposits from here, are there any categories that You're focused on in terms of growing, are you looking to do money market promotions, CDs, use FHLB or broker or what's your strategy in terms of the growth of the funding base from here?

Speaker 3

Well, from my perspective, there's just so much going on in this space. Our digital and direct marketing It's focused around money market and shorter term CDs. I want to be less reliant on brokered And the FHLB, we have an insurance vertical that we've staffed up in, which is a good source that when we've hired people with a lot of deep expertise in this space, that's another important source. Our mortgage warehouse business is showing good growth. Our community bank, so it's around commercial, community, digital and direct marketing And not insurance.

Speaker 2

Let me just say, we've got a plan. I know you guys have heard from us before, but we put this plan into place in the Q3 of last year. And so this has been something we've been focused on. And like I said, I think in my comments I mentioned, this is part of a daily conversation at our company, but it was before March 8. And we're changing the way we look at client selection, changing the way at who we're lending to and why.

Speaker 2

And so We've hired somebody full time as of January 1, that's all they do. They get up every day and they think about deposits and really think about More than that, just how to acquire the right type of client. We're changing that. And so we've got 7 or 8, 9 different verticals, if you will, are places or levers that we can pull deposits from. Not 1 or 2 of them is going to solve our issue.

Speaker 2

We got to all of them have to be successful. And so Terry just went through a list, most of those. And there's some other things that we're looking at. And so it's not a one size fits all, I promise you. This is an effort to change our company on who we acquire and what they provide to the bank and then how we can provide that service back on the loan side.

Speaker 6

Okay. That's great color. Appreciate it.

Speaker 3

Thanks, Brad.

Operator

Thank you. Our next question comes from Brad Milsaps with Piper Sandler. You may proceed.

Speaker 7

Hey, good morning.

Speaker 8

Hey, Brad.

Speaker 7

Thanks for taking my question. Maybe Terry,

Speaker 4

I wanted to ask on

Speaker 7

expenses. You had some nice expense control in the quarter. You mentioned lower variable compensation. I may be able to have thought given the strong quarter that North Avenue, NAC had that maybe variable comp would have been up. Can you just kind of give us some puts and takes on expenses and sort of how you're thinking about the trajectory of growth off this kind of $56,000,000 number on a core basis in the Q1?

Speaker 3

Variable comp at North Avenue Capital would have been up. But when you cut your loan production 75%, It has a pretty significant impact on variable comp in other parts of the business. So I think that's the reason I say variable comp is down. And how we're moderating growth, as you know, from last year's pretty high number to, as Malcolm said in his comments, We did 9% in Q1 mid single digits for the rest of the year. All those things give me reason to believe that Expenses are going to be well controlled.

Speaker 3

We've made all the investments that we need to make. We made I can't think of anything significant. We staffed up last year to prepare for going over 10. So I think From here, I think expenses should be pretty stable. I just can't see anything that's going to cause them To move up dramatically, there's certainly inflationary pressures, but that I don't think that's going to be A big driver of expense is up for us for the rest of this year.

Speaker 3

Now we'll see where it goes in 'twenty four and beyond. But so I feel pretty good about where the expense levels are And think that we can keep them pretty tied in this range.

Speaker 7

Great. That's helpful. And then just as my follow-up, Just to follow-up on Brady's question. I mean, you guys, even on the reduced outlook, you're still earning probably somewhere mid teen ROTCE, which will more than provide the capital you need. I understand that We're in a dynamic environment, but is there a certain level of CET1 or another ratio that you look at or focus on that You feel like you're trying to target as kind of an area, hey, we feel okay.

Speaker 7

This is kind of where we want to be in terms of our capital ratios.

Speaker 3

I mean, look, Brad, it's a cheap great buy at these levels. You cannot debate that. But given the economic uncertainty and the need to build capital, we just as much as we would love to be out there buying shares, It's just not the prudent, safe and sound thing to do right now.

Speaker 2

Yes, I understand that.

Speaker 7

Yes, is it just a ratio that you guys are Maybe targeting by the end of the year to try to build to you or to just, hey, we're going to we're sort of going to let it just go.

Speaker 3

No, no. I mean, look, we've been saying for multiple quarters now, we want to get CET1 over 10%. And we definitely

Speaker 9

think we're going to get there in the

Speaker 3

back half of the year. Once we get there, I think we're going to get there in the back half of the year. Once we get there and then look at the economic outlook and the recession and how credit is behaving, etcetera, then I think it's a more relevant discussion.

Speaker 5

Yes, makes sense.

Speaker 7

And we don't have

Speaker 2

an we don't even have an approved buyback right now. So we still have some work to do if we were even to get to that point. We're just focused on CET1 and future outlook.

Speaker 7

Got it. Great. Thank you, guys.

Speaker 3

Thanks, Brett.

Operator

Thank you. Our next question comes from Gary Tenner with D. A. Davidson. You may proceed.

Speaker 8

Thanks. Good morning. So a couple

Speaker 2

of questions.

Speaker 8

First, in terms of as you're thinking about the excess liquidity that you have on balance sheet, How long do you think, Terry, you may carry that as things have sort of calmed a little bit With regards to liquidity fears?

Speaker 3

Well, at the end of the quarter, we had $808,000,000 Of cash and cash equivalents, the average was certainly less than that for the quarter, but you can tell we really ramped up our cash holding Starting March 9, I think we're going to get cash levels down materially from 800 Probably if I had to put it in the old world pre March 8, I would have said $300,000,000 to 350,000,000 Was probably our target. I'd say our new target is closer to 500,000,000

Speaker 8

Okay, great. And in terms of Office 3 and the additional information is appreciated in the deck. Can you remind us kind of the dynamics of that existing office MPA? How long has it been a non accrual resolution Progress, etcetera. And any other maybe commonalities just

Speaker 2

in terms

Speaker 8

of those criticized office lines?

Speaker 4

Yes. Thanks for the question, Gary. That loan that you're referring in NPA has been an NPA since the Q4 of 2022. It was a former PCD loan that was acquired. And as we move forward with trying to Our strategy to resolve that asset, the borrower filed bankruptcy on us.

Speaker 4

And so we're stuck in that one for a little bit until we work through that process.

Speaker 2

Any commonality in the other ones? In the

Speaker 4

classified assets? No. That one is a very specific property that is really Its long term use is not as an office, but as another site for a different type of crop creek.

Speaker 2

And we're carrying it at land value? Yes, we're carrying it

Speaker 4

at the land value. Yes.

Speaker 3

Yes, that's correct.

Speaker 8

I'm sorry. So does that the $69,000,000 of classified, is that is there one sizable credit within that number you were just discussing?

Speaker 4

There are about 3 different credits that make up that The majority of that $69,000,000 and we're have I have our eyes on those Very, very closely. So we're working those hard.

Speaker 2

Great. Those I would just add Those, Gary, a couple of them have very, very strong sponsors that have lots of cash flow outside of the office space and they put in a big old chunk of equity in there. That goes back to our A borrowers, lots of equity philosophy. So we don't we're not concerned about those assets as they reposition them.

Speaker 8

Okay, great. And then last question, in terms of Thrive And I think in the prepared remarks, you noted that you think breakeven is possible for the year. Can you ballpark say on a quarterly basis what type of volume they need right now to be breakeven in a given quarter based on their kind of expense reduction exercise they went through, etcetera.

Speaker 3

Yes, one second. Got to do a quick calculation for you. They need about 400 ASC. Did 438 last? 438, they need about 460.

Speaker 3

They did 426, they need about 450.

Speaker 2

450. Yes, you told me 450. Yes.

Speaker 8

Okay. All right. Thanks guys. Thank you, Gary.

Operator

Thank you. Our Our next question comes from Michael Rose with Raymond James. You may proceed.

Speaker 10

Hey, good morning guys. Thanks for taking my questions. Just wanted to go back to the loan growth outlook. Certainly understand in light of the environment, I think you mentioned pipelines are down about 60% and Some of the tailwind that you're experiencing from construction fund ups. Can you just as it relates to the outlook for the year, how much of the kind of mid single digit growth is Related to construction fund ups versus core portfolio growth ex that impact.

Speaker 10

Thanks.

Speaker 2

I'd tell you, a majority of the fund up is going to be in construction loans that we already have, but we're hoping to Offset a big portion of that is through payoffs. And so that's the number that's really hard to predict in this market, although We're still getting them, and we feel good about the Q2, but most of the fund up is coming out of the construction book.

Speaker 3

But I'd say the net growth is really going to come from somewhere other

Speaker 4

than CRE.

Speaker 9

Yes,

Speaker 2

right. Payoff versus construction is going to hopefully offset. Right. Correct.

Speaker 3

And the growth from here is going to be in the other parts, which should help on the funding side because they're more related. Yes.

Speaker 2

I wouldn't expect we're going to be putting on any construction deals, Michael.

Speaker 10

Perfect. I appreciate it. And then just on loans as well, just on the warehouse, any sort of Caller, as we look forward there, obviously, the rates have remained the mortgage rates have remained relatively sticky. I know there's the inventory issue, but just wanted to get a sense for What you guys were kind of expecting as we move forward, they were down a little bit on average. Thanks.

Speaker 2

Yes. And I think they'll probably stay around where they are. I will say that A lot of folks are deciding to get out of that business. So there's going to be some opportunities. We've done The group has done a really nice job of moving out a few, but there are going to be some opportunities.

Speaker 2

But I don't see us growing that business substantially. But there is a deposit feature to that industry that we have tapped into. And so, we're not getting out of the business. We like the business, especially with some of the deposits that come with it.

Speaker 3

Michael, there will be seasonality, obviously. Q2 and Q3 will be up. But I agree. Everything else is just wanted to tag that off.

Speaker 10

Okay, helpful. And then maybe just finally for me, appreciate The spot deposit rate data in the slide deck and obviously with slower growth on the loan side. Maybe just going back to Brady's question, just putting kind of everything together, full quarter impact of everything post the failures, the higher Funding costs, but obviously some tailwinds on loan repricing as well. Can you just kind of help us from a magnitude perspective as relates to the Q2 in terms of the NIM, it seems to me just back of the envelope that margin could be down roughly just as much as It was in the Q1. I understand the comments that you expect the most of the pressure as it relates to the rest of the year to be incurred in the But just trying to put a little finer point on the Q2 in particular, what you're expecting.

Speaker 3

I wouldn't expect I wouldn't disagree with anything you said. Somewhere in that range is what I think is possible. And we've been saying for months now that The opportunity for Veritex on the outperformance side is going to come through the fee line and our fee businesses. And I think That's still true today. Even after 2 good quarters in NAC, we've got the best pipelines in that business we've ever had.

Speaker 3

So yes, I think the NIM is going to feel pressure, especially in Q2. And but I think the whole thing about revenue diversification, Thrive improving in Q2, Knack having another good quarter, maybe not as good as Q4 and Q1, but another good quarter is What I think is the key to from an out to continue to perform well.

Speaker 10

Okay, great. Thanks for taking my questions.

Speaker 8

Thanks, Ben. Great.

Operator

Thank you. Our next question comes from Matt Olney with Stephens. You may proceed.

Speaker 9

Hey, thanks. Good morning, everybody. I wanted to go back to the discussion around credit quality. And Clay, you talked about the larger lender finance loan that was paid down and came out of the criticized loan bucket. I think you said last time that loan was $100,000,000 Is that right?

Speaker 9

And if so, I guess that would imply There were some inflows or in migration into that criticized loan bucket. Anything any color you want to provide on the migrations into the criticized loan bucket?

Speaker 3

Sure. It was

Speaker 4

the loan that you're referencing was the commitment was $100,000,000 The balance was not 100,000,000 But yes, there have been migrations into the criticized asset portfolio and It's done primarily from the deep dive, the results of the deep dive that you see on Page 19 and just More surveillance on that. The majority of that has come in our CRE office book It's where most of the movement has been, but there's also been other good guys that came out of the portfolio that were upgraded during the quarter as well. So the comment on the movement being related to the one particular asset, There's just a lot of activity this month in that based upon the surveillance that we're done.

Speaker 9

Okay. That's helpful. Quite appreciate that. And then I guess sticking on credit, what are the updated thoughts around potential loss content In the overall classified buckets, I know that's a tough question and impacted by lots of external factors, but just love to appreciate any kind of Thought you have as far as what's the real loss content within those buckets? Thanks.

Speaker 4

Yes. I don't see anything today. If we saw it today, we would have it reserved for and we would have already charged it off. But I mean losses are coming, but it's very difficult to predict the magnitude of those at this point Given the fact we don't know what future financial conditions hold.

Speaker 2

Yes, I mean, we're resting in Our loan to values, our debt coverages are great markets with big in migration. But for us to guess what that lost content would be, if any, is really, really hard to predict.

Speaker 9

Yes, understood. Understood. And then just lastly, we've talked a lot about the construction portfolio And the unfunded balance on that, just to clarify, I think that construction book is now 19% of total loans. And obviously, the unfunded pieces decline each quarter that Terry mentioned. Have we now seen a peak in the dollar amount of the construction book?

Speaker 9

Or is there still another Quarter 2 where we could see that increase? Thanks.

Speaker 2

No. I think our peak was actually 2 quarters ago Or at least the Q4, it's Q4 and Q4, yes, it's on the way down pretty rapidly. I think we fund $300,000,000 to $400,000,000 a quarter on the construction side and payoffs coming. So that book's Declining. We expect that book to be less than $1,000,000,000 by the end of the year.

Speaker 3

The unfunded.

Speaker 2

Unfunded piece. Yes, yes. And then from the piece. And we started at, what, 2, 4, which is our high watermark? Somewhat that.

Speaker 2

Yes.

Speaker 3

So the balance is still going up. But if you look at it on a commitment perspective, which you guys don't see, it's coming down.

Speaker 2

That's what he's talking about. That's what I'm looking at. Yes. Okay.

Speaker 4

Based upon the actual numbers from Q4 to Q1, our ADC to risk based capital dropped From 135%, I believe, down to 129%. So it actually dropped for the quarter as a percentage of capital.

Speaker 9

Yes. Got it. Okay. That's helpful, guys. Thanks for taking my questions.

Speaker 2

Thanks, Matt. Thank you.

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

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