Veritex Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 24, 2024

There are 8 speakers on the call.

Operator

Good morning, and welcome to the Veritex Holdings 4th 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 Will Holford with Veritex.

Speaker 1

Good morning. Thank you for joining Verintix's 4th Quarter 2023 Earnings Call. Before we begin, please be aware this call will forward looking statements that are based on our current expectations of future results or events. Forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward looking statements are as of the date of this call, We do not assume any obligation to update or revise them.

Speaker 1

Statements made on this call should be considered together with cautionary statements and other information date in today's earnings release and our most recent annual report on Form 10 ks and subsequent filings with the SEC. We will refer to investor slides during today's presentation, which can be found along with the press release in the Investor Relations section of our website at veritexbank.com. Our speakers for the call today are Chairman and CEO, Malcolm Holland our CFO, Terry Earley and our Chief Credit Officer, Clay Riebe. At the conclusion of our prepared remarks, we will open the lines up for a Q and A session. I will now turn the call over to Malcolm.

Speaker 1

Thank you, Will. Good morning, everyone. Today, we'll recap both our Q4 results as well as our 2023 annual results. As you will see, we continue to strengthen our balance sheet and add to tangible book value with a clear commitment to the things that will add long term value to our shareholders. For the quarter, we reported operating earnings of $31,600,000 or $0.58 per share, The pre tax pre provision operating return on average assets of 1.54%.

Speaker 1

For the year 2023, we reported operating earnings of $142,100,000,000 or $2.60 per share with a pre tax pre provision operating return on average assets of 1.81%. Although not the year we had hoped for from an earnings We were able to use our earnings power to reposition our balance sheet to a much stronger place and still make a nice return for our shareholders. Our continued profitability also allowed us to meet our goal of CET1 being greater than 10%, ending the year at 10.29 percent, up over 120 bps over year end 2022.

Speaker 2

We are

Speaker 1

able to slow down our loan growth for the year to 1.7 percent or just $160,000,000 a Far cry from our 2022 loan growth of 30 plus percent. This was accomplished by our focused strategy to move out non relational borrowers, continued loan payoffs and general market decline. Concurrently, we were able to grow deposits during the year by 13.3 percent or $1,200,000,000 Again, this was a focused strategy that went into place in The Q3 of 2022, which we are now seeing some of the expected outcomes coming to fruition. Certainly a heavy lift and a testament to the resolve of our people during some challenging and volatile times. Looking forward to 2024, our priorities will remain the same, improving funding and its related costs and adding new clients that represent full relationships for 2024.

Speaker 1

We believe we can grow deposits at a high single digit space while loans will grow in the mid single digits. As we mentioned every quarter, our credit remains a top priority. Our NPAs to total assets increased from $80,000,000 to $96,000,000 or 77.77 percent. The net increase of $16,000,000 were comprised of 1, a data center loan of 10,500,000 A C and I credit in the plastics industry of $3,800,000 and several government guaranteed loans totaling 15,000,000 It should be noted on those specific loans that $5,200,000 has a firm government guarantee. And as a reminder, we have a $5,000,000 holdback that will be used for future losses in that loan category.

Speaker 1

We also had one large C and I upgrade out of the NPA category. Our ACL was 114, Flat over 3Q, but up 21% over Twelvethirty Onetwenty 2, while criticized loans remained stable quarter over quarter as well as year over year. We did have net charge offs of $9,500,000 for the quarter, dollars 23,700,000 for the year or 25 bps. I'll provide some greater color on this shortly. I'll now turn the call to Terry.

Speaker 1

Thank you, Malcolm.

Speaker 2

We've made good progress and Malcolm covered it in strengthening our balance sheet. I'm thankful for the progress, but the job is not done. I want to spend time primarily drilling into the results for the year ended Twelvethirty Onetwenty 3, not little for the 4th quarter. Think this is important because some of our businesses are seasonal and we think about them on an annual basis and not just quarterly. Starting on Page 3, our strong deposit growth and low loan growth allowed Veritex to reduce its loan to deposit ratio from 104.4 percent at Twelvethirty onetwenty 2 to 93.6 percent at Twelvethirty onetwenty 3.

Speaker 2

The deposit growth also allowed us to reduce our wholesale funding reliance to almost 20% at year end. Capital is significantly stronger We made progress on reducing our commercial real estate concentrations. On Page 4, we knew that strengthening our balance sheet was going to come at a cost. Thankfully, we have the earnings power to absorb it. Pre tax pre provision operating earnings were $222,000,000 for the year, up slightly from 2022.

Speaker 2

Tangible book value per share increased to $20.21 up $1.57 for the year or 12.7 percent when you add back the dividends. This is the first time that Veritex has gone over $20 per share in tangible book value. Finally, we've grown CET1, as Malcolm mentioned, 120 basis points to 10.29. We had a goal of 10%. We got there a quarter early and we continue to strengthen capital.

Speaker 2

Moving to Slide 5. Veritex continues its progress in improving its liquidity and funding profile over the 4th quarter. During the quarter, we grew deposits by $142,000,000 or 5.6 percent with little change in broker deposits. The deposit growth combined with no loan growth allowed us to pay down expensive FHLB advances and invest $200,000,000 into the investment portfolio. As we have said before, Veritex shifted its focus to the right side of the balance sheet Late in Q3 of 2022, we started slowing loan growth.

Speaker 2

We shifted our loan production focus Away from CRE and ADC to C and I Small Business, we changed our banker incentive program at the beginning of 2023 to give deposits a higher weighting. We have reallocated marketing spend to deposit products and launched a multi wave direct marketing campaign in February. Additionally, our digital bank, which we started in the Q2, is making a meaningful impact on deposit growth. All these efforts are showing promise as evidenced by the fact that our net new account growth in 2023 was 172% higher than in 2022. Non interest bearing deposits declined during the quarter by $145,000,000 due to seasonal outflows in our mortgage escrow deposits.

Speaker 2

This is reversed early in Q1. Deposit pricing competition continues to be strong, but not quite as intense as it was a few quarters ago. That being said, with our desire to move our loan to deposit ratio below 90% Before the end of 2024, we're going to continue to feel pressure on the deposit beta and the NIM. On Slide 6, In thinking about the loan portfolio, you noticed that loan production declined 80% from 2022 to 2023. The shift away from Korean Agency is showing progress.

Speaker 2

As stated earlier, our concentration level in Korea moved down during the year from 3 25% to 3 20 percent and the level of ADC declined from 132% to 119%. The goal is to continue to move these levels down below the regulatory guidelines. Payoffs in the Korean ADC portfolios remain strong and we're slightly over $900,000,000 for the year. Unfunded ADC commitments declined $1,200,000,000 in 2023 and now set at $900,000,000 heading into 2024. Looking forward into 2024, we forecast ADC fundings to decline by 75% as compared to 2023.

Speaker 2

Slide 7 provides the detail on the commercial real estate and ADC portfolios by asset class including what is out of stake. Moving to Slide 8. We're frequently asked about our out of state loan portfolio. And as you can see, our national businesses in mortgage loans comprise 14% of our total loan portfolio. Our true out of state portfolio was 1,100,000,000 It makes up just under 12% of the total book.

Speaker 2

Almost 70% of the out of state portfolio are loans where we have followed Texas developers. The rest are SNCs, syndicated loans and C and I. On Slide 9, net interest income decreased by $3,900,000 to over $95,000,000 in Q4. The biggest drivers of the decrease were higher deposit costs and lower loan yields offset by higher yields on the investment portfolio. The net interest margin decreased 15 basis points from Q3 to 3.31%.

Speaker 2

The NIM change was primarily related to these same drivers. As stated earlier, the NIM is going to continue to feel pressure As we work to achieve a loan to deposit ratio below 90%. This will require us to invest between $500,000,000 $600,000,000 In excess funding into the investment portfolio during 2024, this additional investment in debt securities will drive 8 to 10 basis points of NIM contraction. Additionally, the NIM will contract approximately 4 basis points for every 25 basis point reduction in the fed funds rate. On Slide 10, loan yields are relatively flat, slight decline, Investment yields are up and deposit costs increased 22 basis points.

Speaker 2

Slide 11. This shows certain metrics on our investment portfolio. Key takeaways are, it's currently only 10% of assets. The duration has remained steady at around 4 years, it's 4.1 and 86% of the portfolio is held and available for sale. Overall, the mark to market on the portfolio has a minimal impact on tangible equity and our capital ratios since it's excluded.

Speaker 2

We did purchase $205,000,000 in securities in the first half of Q4. These securities were capital efficient and delivered a hedge spread of 133 basis points over the next 3 years. On Slide 12, Operating non interest income increased slightly in 2023 to almost $54,000,000 The biggest drivers were government guaranteed loan businesses, which increased our gain on sale revenue by 42% over 2022. Operating non interest expenses were black quarter over quarter, but increased almost $30,000,000 year over year. Significant drivers of the increase are FDIC insurance, lower cost deferral from limited loan production, higher legal and professional fees, largely associated with being over $10,000,000,000 and marketing cost.

Speaker 2

This was offset by lower variable compensation. On Slide 13, during 2023, total capital grew approximately $105,000,000 CET1 ratios expanded by 18 points during the quarter and 120 basis points for the year. A significant contributor to the expansion in the capital ratios has been a $612,000,000 decline in risk weighted assets. It's worth noting that since Veritex went public in 2014, it is compounded tangible book value per share at a rate of 11.4% when you include the dividends that have been paid to shareholders. Finally, on Slide 14, 2023 was a year of building the ACL.

Speaker 2

Since the beginning of 2023, we've grown it by $19,000,000 or 21%. These additions to the allowance increased about 18 basis points to 1.14%. Given all the uncertainty faced in the U. S. And Texas economy, we decided to allocate more weighting the downside scenarios in the model.

Speaker 2

Two factors continue to make up a sizable part of the ACL. With that, I'd like to turn the call over to Clay for comments on credit. Thank you, Terry, and good morning, everyone. This quarter has been a mixed bag of credit improvements and challenges. On the improvement side was a reduction in the bank's office exposure by $65,000,000 or 10% over the last 90 days.

Speaker 2

That does not include an $8,500,000 substandard office loan that paid off post quarter end. Secondly, our classified assets were reduced by $17,000,000 or 7% due to the diligent efforts of our Team to resolve problem credits. Classified assets were at their lowest amount for 2023 in the 4th quarter. On the challenge side was an increase in NPAs as previously discussed by Malcolm, dollars 9,500,000 in charge offs and elevated past dues. Past dues are elevated in the 30 to 60 day past due category primarily due to a $15,000,000 multi Family loan that's mature and renewal discussions were in process and ongoing at year end.

Speaker 2

2 other loans totaling $21,000,000 were past due 30 days at year end and are now current. Commercial real estate relationship in the amount of $8,800,000 was past due at year end and is awaiting payoff. Charge offs for the quarter were spread out across 8 borrowers, the largest of which was a 2,900,000 dollar charge off on the data center office property that was moved to MPA during the quarter. The 2nd largest charge off in the amount of $2,500,000 was taken to exit the Atlanta office property that was moved to MPA in Q2. A $2,600,000 charge off was taken on a medical practice that was filed for bankruptcy in 2023.

Speaker 2

And there are a few other smaller charge offs that amounted to $1,200,000 spread across various C and S alone types. The year over year increase in net charge offs is driven by the Atlanta office building charge off. A 5 year look back on charge offs is provided as context for the year. Charge offs of acquired credit makes up 72% of all charge offs for the previous 5 years. And with that, I'll turn it back over to Malcolm to finalize.

Speaker 1

Thank you, Clay. As we think about 2024, we believe it will be somewhat challenging from a growth and rate standpoint. Despite that, our team is fully engaged on building a stronger balance sheet that will perform at the highest level regardless of the time we find ourselves in. We're committed to our purpose with unwavering persistence while being patient to make the right moves at the appropriate times. Operator, we can now take questions.

Operator

Thank you. We will go into the Q and A now. And our first call will be coming from Matt Oling. Lee?

Speaker 3

I just want to start off on Capital, you guys met your 2023 capital goals and I was wondering if you had any set goals for 2024?

Speaker 2

Great. Good questions. We'll probably continue to build capital a little bit. We don't have any explicit targets. We will certainly I think as much as anything, we'd like to see growth get back to the mid single digits and be able to leverage that capital in an efficient way, continue to pay our dividends and you'll probably see capital build, but slower in 2024 than it has in 2023.

Speaker 3

Okay. Thank you. I appreciate the color there. And then One more for me. You guys laid out the impacts of the 25 bit cuts throughout 2024.

Speaker 3

You give us an idea of what you're internally modeling for cuts?

Speaker 1

Yes. So if I had

Speaker 2

a crystal ball, I mean, look, the Fed says 6, the market says 3, who does? I'm not that's the reason I Structured the comment the way I did is you guys I think are modeling 3. So, but With as volatile as rates have proven to be, making a statement is just not prudent on our part as to what we think. Our job is to try to insulate our balance sheet as best we can from rate movements and hedge the risk as best we can And that's all we can do.

Speaker 3

All right. I appreciate the color. Thank you.

Speaker 1

You.

Operator

And our next question will be coming from Bradley Garelli of KBW. Your line is open.

Speaker 3

Hey, it's Brady. Good morning, guys.

Speaker 1

Hey, Brady.

Speaker 3

So I understand the commentary about the NIM seeing some additional pressure. I mean, you're growing deposits faster than loans and putting in the bond book. So I understand that dynamic. When you look at NII dollars, Do you expect to see downside in NII dollars relative to 4Q? Or do you think that could be stable to increasing?

Speaker 2

I think it should relative to 4Q, I think it should be relatively stable in the front half of the year and maybe we start to build some positive Got momentum and growth in the back half because I think our loan growth is going to help that. And obviously with a lot of focus on deposit costs as well.

Speaker 3

Okay. And then how are you thinking about Expenses have been growing at a double digit pace for the last few years, but it seems like it could be less than that this year. How are you thinking about expense growth in 2024?

Speaker 1

Yes, that's certainly the goal, Brady. We've had a lot of discussion around expenses at the company and continue to do. The issue is we run a pretty efficient company today and obviously the biggest driver of any expense for a bank is people And we continue to see opportunities in certain areas. Dom's made a pretty good Focus on our small business, our business banking group, and that's going to require some folks to continue to grow that area. So, our goal is to hold it somewhat flat.

Speaker 1

Some of this stuff is out of our control. I mean, we look back at last year And FDIC insurance, you had benefits costs. You had some The marketing dollars that were driving some of

Speaker 2

these deposits? Lower cost deferrals because our loan production was down 80%.

Speaker 1

The old FAS 91 rule was definitely lower. So we still feel pretty good about expenses. But looking forward, our goal is to hold them pretty flat if we can, but there's going to be some there's certainly going to be some growth.

Speaker 2

I think it's probably fair to say we're paying more attention to Going into 2024 and at least my 5 year history with the company and my 13.

Speaker 1

Okay. That's for sure.

Speaker 3

Got it. Got it. That's good color. Then lastly for me, just back to the capital question. I mean, your profitability is pretty good.

Speaker 3

It feels like you'll be able to still accumulate a decent amount of capital this year. I mean the stocks at 9 times earnings, 1.1 Is this the year that you more seriously consider share buybacks?

Speaker 1

Listen, it's certainly something we have to look at. And we had a board meeting yesterday and it was a topic of discussion. Capital is King and I love to have some dry powder, but there may be a situation at some point in time in 2024 where we try to put something in place and protect ourselves if the stock were to see some dips. So the answer to your question is Like expensive, we've had conversations about it. We don't have any in place today, but I wouldn't be surprised that we didn't have something in place very shortly.

Speaker 1

Okay,

Speaker 3

got it. Thanks guys.

Speaker 2

Thanks Brady.

Operator

Thank you. One moment for our next question. Our next question will be coming from Brett I

Speaker 4

wanted to Start back on the margin and just thinking about the outlook. The decision to increase the securities portfolio, is that purely from a balance sheet liquidity perspective or can you guys talk about the decision to grow the securities book at this point?

Speaker 1

It's really it's just a

Speaker 2

remixing of earning assets. It's building liquidity on the balance sheet. I think what we've done through the Q4 has been to lock in good spreads by using the Relative funding rates in the swap curve versus the investment to lock in good spreads for 3 years. I think going forward So we're going to there's going to be an additional important factor, which is we're not going to hedge it as much And we want to have it for down rate protection to help mitigate the NIM pressure on the way down. So that's it is going to kind of shift as rates have moved, as the Fed's gotten clear What it's going to do with rates, we're tweaking a little bit as we look forward for the rest of 2024 and the investing we've got to do to help provide that protection.

Speaker 1

And Brett, I would just say, go back about 18 months when we decided that we were going to change our balance sheet. And this is an overall balance sheet strategy. And in order to get it down below 90% on loan deposit ratio, you got to put your liquidity somewhere and so there's got to be a bigger securities book. So it's a remix, as Terry said, but it's all part of the strategy that we started 18 months ago to remake this balance sheet. And we just don't think that it makes sense to leave it sitting at

Speaker 2

short rates overnight at the Fed because that's only going to exacerbate our down rate risk.

Speaker 3

Okay.

Speaker 4

And then given the commentary around the betas, I know Malcolm, you've got quite a few deposit initiatives in place. Can you give us maybe an update on the deposit initiatives relative to the guidance for betas to continue to increase?

Speaker 1

I mean, the initiatives continue. I mean, there's no different this quarter than it was the prior quarter in what we're doing. Again, we've got 7 or 8 different levers that we're pulling. Some are more expensive than others. We're trying to stay away and reduce our wholesale funding dependence, if you will.

Speaker 1

But we're seeing some good movement. I could pick out a couple right now that have actually done quite well. And this is the time of year where we See every bank, I think, sees a little bit of deposit shrinkage because of taxes, bonuses or what have you. We've actually had a pretty decent start to the year. In terms of betas, Terry, do you mind Well, I mean,

Speaker 2

I mean, I just think in general, it's been so competitive and that's driven the deposit side is up. I would say this, we talked on the last call of Q3 call about bringing more balance to pricing and volumes. We saw that during the quarter and we've seen it already in Q1. Our total deposit cost as of 2 days ago had declined, not a lot, but a few bps and I'm encouraged by that. On the margin, our production rates right now are around 4.60 for new deposits.

Speaker 2

So All that to say, it's moving, it's starting to move. And as you can tell from the new client acquisition of 172% in new accounts, I mean, we're getting traction. It just takes time to rebuild, remake our deposit base and bring pricing balance to it. And that's what we're all about every day.

Speaker 4

Okay, that's helpful. If I could sneak in one last one. Balcom, how do you feel about North Avenue this year and this maybe fee income generally speaking?

Speaker 1

North Avenue had a really candidly from a revenue standpoint, They did revenue from a reduction standpoint. They're about $180,000,000 in 2023. Candidly, I would expect that or maybe a little bit more in 24, they've got some good momentum. We've talked about it time and time again about the government constraints that we have from time to time whether They're funding stuff or not. But as a bank, we're helpful because we can do some of these interim fund fundings that is actually a huge advantage in the space.

Speaker 1

But Listen, I think they're engaged. Their pipelines are huge. And I expect them I think was it production, I mean the revenue was $20,000,000 in fees last year approximately. And the one thing about that business that I think people do miss is they still have some there's loans on the books and there's spread income. And so spread income is Covering the expenses of the company that the fee income is kind of the upside to it.

Speaker 1

So I expect at least what they did last year into 2024. And just as on that fee business, the SBA business, we kind of It would be unfair to say we've remade it in 2023, but we hired some a new guy to run it and he has done a phenomenal job And we expect a lot more out of SBA with what he's been able to do and we've hit the ground running already. So,

Speaker 2

I would say the fee businesses will outperform 2023. And their SBA Q4 production is indicative of the momentum you're seeing. I mean, they did 40% to 45% of their production in Q4 And really encouraged. I agree with everything Malcolm said on the USDA, but I think the SBA has not been as big a but it's our outlook on that is really bright.

Speaker 1

Okay. That's really helpful. Thanks guys. Thank you.

Operator

Thank you. And one moment for the next question. And our next question will be coming from Stephen Scouten of Piper Sandler. Your line is open.

Speaker 5

Yes, thanks. Good morning. Hey guys, I wanted to start with the loan and deposit new production spread that you've listed in Slide 10, it looks like a pretty big jump quarter over quarter, which is nice to see. So I'm kind of wondering that 4.93 basis points, What is that like what is that actually from a new loan perspective and a new deposit perspective? And could that lead to some core NIM expansion apart from kind of the potential for rate cuts and the debt securities that you noted?

Speaker 2

Well, the new loan production, the problem with The question is, is that new deposit production dwarfs new loan production. The spread is good, but there ain't enough of it. New loan production is about 9%. And New deposit production has been in the 4s. So

Speaker 5

Yes, but just a much higher pace of deposit growth, if that makes sense.

Speaker 2

Yes. If we can get

Speaker 1

the volume on the loan side, Stephen, you're going to see something possibly, But we're not

Speaker 2

budgeting for that production. But if

Speaker 1

we are able to find it even mid single digits

Speaker 2

is going to be helpful. Exactly. Yes. I mean, if we're going to grow gloves mid single digits, let's just use 5% since that's mid single digits, That's about $480,000,000 If we grow deposits, that means we need to grow deposits $1,000,000,000 So that $480,000,000 is going to have a really good spread, But the other $520,000,000 not so much. The cost of funding and where you can invest for 2024 is going to be about flat, But and it's going to be NIM diluted, but it's going to help going into 2025, 'twenty six.

Speaker 2

Yes.

Speaker 1

That's the point I was going to make is that once you make up that delta of that 500 or so, Now you're kind of on solid footing where if you want to do a dollar in loans, you only need $1.10 in deposits. Today, you need double that. To get our balance sheet. So $25,000,000 you should hit the ground running, assuming We do the $1,000,000,000 in deposits and $500,000,000 in loans.

Speaker 2

And I think $25,000,000 is also going to be once we get the balance sheet where we want it, 25% is going to be a year about optimizing deposit pricing because we're not going to need the excess growth to get the balance sheet where we want it.

Speaker 3

Yes, that all makes sense.

Speaker 5

Okay. And what I know you mentioned maybe not hedging to kind of bring down your overall rate In the future, I mean, do you think you can move that 4 basis points for every 25 basis point cut? I mean, is that a number You're trying to cut in half? I mean, do you think you can work that number down or is it more just around the edges?

Speaker 2

No, I think we could work that number down with a combination of things. One is how aggressively we priced on the way down. And we Exceeded expectations during the pandemic. And so we just got to replicate what we did before, coupled with the way We're making more fixed rate loans today, and there's a lot more discussion on that. Veritex has never been a big fixed rate lender.

Speaker 2

I certainly have a much greater appetite for that, and there's a lot more discussions going on there. For that and there's a lot more discussions going on there. And then hedging as well. The problem with hedging right down rate risk right now with the shape of the forward curve, look, it's just so expensive to hedge it. And I would rather I think I would rather not do it in the derivative space, but do it in the cash space with fixed rate loans and securities.

Speaker 5

Yes, makes sense. Okay. And then just the last thing for me is kind of moving back to credit from the earlier conversations. I mean, it sounds like the past dues maybe resolved itself to a large degree since quarter end. But I mean, if you think about charge offs for next year, what's kind of a reasonable pace off this off the elevation we saw in in 2023, largely related to that one office credit item?

Speaker 2

Sure. Thanks for the question. Yes, I think If I'm sitting here today looking forward into 2023, I couldn't identify more than $15,000,000 in potential charge offs today. But we're not budgeting for that. We're budgeting for higher downside than that.

Speaker 2

Yes.

Speaker 1

I mean, I think you had a slide in there, Clay, that said we did Average of 27 bps over the last 5 years. I'm sitting in y'all shoes. Sounds like a great place to start. We think we'll do better, But 27 bps has been our historical number. And your answer to a question on past dues is, yes, we got $20 something plus million is already current on 2 deals.

Speaker 2

Okay.

Speaker 1

Steve, I was just

Speaker 2

going to say, I would rather you guys I think the consensus charge off number for the year is 29, 30 bps. I'd rather outperform on that. Wouldn't want to see anybody drop the estimate to be honest with you. Yes.

Speaker 5

No, understood. And I guess, I mean, from a provision standpoint, Even with some of the migrations, there wasn't a need for provision build. So it's not as if you see any large scale degradation that makes you see the

Speaker 6

need to build that, correct?

Speaker 1

Correct. Correct.

Speaker 2

I would not expect to grow anywhere close to what the amount of growth this year. No.

Speaker 1

Perfect. Thanks for all the color guys. Appreciate the time.

Speaker 2

Thanks, David.

Operator

Thank you. And one moment for our next question. And our next question will come from Ahmad Hassan

Speaker 7

This is Ahmed Hassan on for Gary Tanner. Good morning.

Speaker 1

How are

Speaker 2

you doing?

Speaker 7

Pretty good. So firstly, I might have missed this, but any color on the credit that went non accrual and generated $1,900,000 in interest reversal?

Speaker 2

We didn't have $1,900,000 interest reversals, I don't think. I think it was $600,000 $700,000 and that's 6 bps or 7 bps, I think, somewhere in that range. So I agree with that part. The rest was that was the move in the non accruals that affected the NAV.

Speaker 7

All right. Thanks. And Looking through 2024 and the wholesale funding, Reliance is a takeover 20% at the year end. Where would you like this target ratio to be?

Speaker 2

Yes. It's already down meaningfully in the Q1. It's been as low as 17% so far this year, probably lack for it to end somewhere between 15% 17%, 18%, somewhere in that range. If it's lower, I'm going to be happy because we've done it. We've outperformed on the deposit growth core deposit growth side, but I would expect somewhere in the 15 to 18.

Speaker 7

All right. And lastly, I know you talked a bit about this, but Thinking about the loan growth outlook for 2024, particularly given the CET1 is over 10%. How are we thinking about growing risk weighted assets for the next year?

Speaker 1

I mean, we're going to be more measured in that growth on the risk weighted asset side. As we've mentioned many calls ago that we Got that a little bit over our skis on our unfunded and what have you. But I think the goal now is to always keep that number inside our capital number, and that's what you should expect. So I don't see that growing.

Speaker 2

I think it's definitely going to stay inside. I think as we as our Commercial Real Estate and ADC ratios get below 301100. I do think you will see production of ADC in 2024 higher than it's Then in 2023, that will add some to the unfunded, some to the risk weighted assets. But net net, I still and so Instead of unfunded shrinking, they're probably going to grow a little, but not a lot. And so I think that's going to be one of the things that's going to keep the CET1 ratio from growing as much as it did in 2023.

Speaker 2

But we're going to stay very we're going to look for capital efficient Investments in the investment portfolio and if we have more loan growth that's going to help utilize or deploy the CET1 and some unfunded increase, but nothing like we've seen in the past.

Speaker 7

Thank you for the great color. And a quick follow-up on that. Within the loan book And unfunded construction commitments under $1,000,000,000 should we expect a larger year over year decline in the balances In that segment versus the $53,000,000 decline in 2023?

Speaker 1

No. You expect it to be flat, Maybe a little growth, but nothing meaningful.

Speaker 7

Sounds good. That's it.

Speaker 2

Thank you. Thank you.

Operator

Thank you. And one moment please And our final question for the day will be coming from Michael Rose of Raymond James. Your line is open.

Speaker 6

Hey, everyone. Thanks for taking my questions. Two quick follow ups. I'm sorry if I missed this, Terry, but certainly understand the desire to bring the loan to deposit ratio down. What should we expect for or what are your expectations for non interest bearing mix?

Speaker 6

I assume some of the growth is going to be in some higher cost categories, but do you have a sense for, and I'm sorry if I missed this, where that could drop out and what terminal beta expectations could be? Thanks.

Speaker 2

Yes, I would expect it to be pretty flat from here. Now If we execute well, I would expect it to be pretty flat. And that means our small business, our community bankers, our commercial C and I guys are hitting their targets, I would expect it to be flat. There's always seasonality like I said, in the 4th quarter, There's some outflows in that that have come back in the Q1 already. But general, we're going to see those outflows again in the Q4 of 2024.

Speaker 2

So, Michael, that's our best guess right now.

Speaker 6

Okay. That's helpful. And then just going Back to credit quality. I know there's the 2 office CRE loans that comprise, I think, 60% of your NPAs at this point. Any sort of update there and what's the outlook for potentially moving those credits outside the bank?

Speaker 6

Thanks.

Speaker 1

It's just one of them, right? It's just that one. And we actually had that one, a note sale working on It fell out late. So we wrote it down to where the note sale was going to be. We do have a participant in that Partner in that.

Speaker 1

So we obviously have to work with them. But our anticipation is that that asset will be gone this quarter either through a probably through a note sale of some sort, but we were really close and just fell out at the end. Okay,

Speaker 6

great. And then maybe just finally for me, I know this was kind of touched on earlier in the call, but Terry, do you have a sense for How, if we do, what the delta would be from kind of what you talked about in terms of rate cuts, kind of us being at 3%, forward curve being at 6%. What that delta could look like, A, if we don't get any cuts and then B, if we get the full forward curve at this point? Just trying to look for the sensitivity since I assume it's not linear. Thanks.

Speaker 2

Well, I mean, if a it's about $1,250,000 for every basis point of dent. And so if it's 6 cuts, if you get 20 to 24 basis points in NIM reduction, there's your math there. And if it stays flat,

Speaker 1

it's There's your math there.

Speaker 2

Yes, it's And so it's kind of pretty if rates were to stay flat, it's pretty meaningful to NII and to EPS. But I don't think anybody is thinking we're going to end the year flat. So That's the best way I know to answer it, Mike.

Speaker 6

No, that's very helpful, Terry. I appreciate you guys taking my questions. Thanks.

Speaker 2

Thanks, Michael.

Operator

Thank you all for your time today. This concludes today's conference call. You may all disconnect.

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Earnings Conference Call
Veritex Q4 2023
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