Q1 2023 Veritex Holdings Inc. Earnings Call
Okay.
Good morning, and welcome to the vertex 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 Caudle, Investor Relations Officer, and Secretary to the.
The vertex holdings.
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 locked into our webcast. Please refer to our slide presentation, including our Safe Harbor statement beginning on slide two for those of you joining us by phone. Please note that the safe Harbor statement and presentation are available on our website very jacks bank Dot com.
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-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, I'll now turn the call over to Malcolm.
Good morning, everyone and welcome to our first quarter earnings call. Despite the challenges in the marketplace Veritas continues to produce results that accrue to our shareholders' benefit.
The first quarter, we reported net operating income of $43 3 million or 79 cents per share our pretax pre provision for the quarter was $66 4 million or two 2% return on average assets from an operating standpoint, our return on average tangible common equity.
He was in excess of 17, 7%.
Our return on average assets was 144% and efficiency remained enough in the mid Forty's at 45, 6%.
As our market and industry face new challenges, we also reevaluate priorities and get extra attention to the challenges we have been presented liquidity management as part of every discussion.
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As expected growth at vertex has been reduced for the quarter, we reported 9% annualized loan growth with a majority of that coming from a funding and are 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.
Payoffs for the quarter were $235 million and is now our second quarter payoff pipeline lets to exceed first quarter by 15%.
Credit continues to be a major focus for me our credit team and our bankers.
Very little 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 you can find that detail on page 19 of the slide deck.
For the quarter net charge offs were nominal at less than 1 million Npa's to assets was slightly down and we increased our reserve to 1.17%.
You'll 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.
Thank you Malcolm.
Starting on page five 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 five 1% in the quarter and nine 3% on a year over year basis after adding back.
The effect of the dividends and.
The new metrics that we added to our earnings release, just pre tax pre provision operating return on average loans I believe it's a good barometer of loss absorption capacity from the loan portfolio without impacting TBD or regulatory capital.
So for Q1 was 284 basis points and is up over 21% on a year over year basis.
On slide six.
For the first 67 days of the quarter, we were growing core deposits and an annualized rate of over 11, 5%.
Everything changed on March th fear to cover the deposit environment and there was a flight to scale and scale was perceived as safe.
Rivera attacks. This was most evident with our correspondent money market clients. During Q1, we lost 51% of these index deposits as clients moved excess liquidity to the safest venue the fad.
Overall, our deposits were down $88 million or 1% for the quarter as we replaced 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 million.
Vertex started the journey to transform the balance sheet starting in Q3 of 2022. We did this by slowing grew up loan growth shifting our loan production focus away from Cree in ADC to C&I and small business and building capital, especially the CET one ratio after labor day, we heightened our focus on the <unk>.
<unk> portion of the balance sheet, 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 them.
These efforts and many more will continue through 2023 and beyond.
Finally since March 28, we have reduced our noncore funding by $258 million and materially improved our liquidity capacity.
Currently our liquidity capacity exceeds uninsured deposits by $1 $6 billion or almost 50%.
Moving forward to slide seven 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 noninterest bearing.
Two other interest bearing categories. These deposits have declined from 35% of total deposits in Q1, 22% to 24% in Q1 'twenty three.
Deposit pricing competition has morphed into end to end combat our cycle to date total deposit beta is approximately 46%.
I expect deposit betas to continue to increase given funding requirements in the competitive landscape.
On slide eight uninsured and uncollateralized deposits are at 38, 4% down from 44, 1% at 12 31 22.
Texas average account balance is $132000.
On slide nine 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.
ADC commitments continue to drop at the rate of $300 million to $400 million per quarter.
On Slide 10, you see the evidence of this greater emphasis on C&I during the first quarter C&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 7 million or two 6%.
$103 4 million in Q1.
The three 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. The net interest margin decreased 18 basis points from Q4 to $3 six 9% in Q1 the.
Q1, NIM was negatively impacted by carrying higher cash balance at the pad. This is approximately five basis points of contraction on the NIM interest reversals on problem credits was about three bps and the rest is due to deposit flows and pricing.
This is to say nims are likely to remain under pressure given the amount of liquidity that slipped the banking system and the ongoing war for deposits.
Vertex is interest rate sensitivity is largely unchanged since Q to Q4, and we remain slightly asset sensitive.
On slide 12 during Q1, our loan yield was up 53 basis points to 651% 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.
On slide 13.
Sure certain key metrics on our investment portfolio.
First it's only 9% of assets the duration is four years, 83% of the portfolio.
Yes, and the mark to market on the entire portfolio is less than $90 million.
On slide 14, noninterest income increased by $4 5 million to $18 9 million. This excludes the loss on the investment portfolio deleveraging trade executed before March eight.
Revenue diversification is becoming a more important part of the vertex revenue stream for.
For the second consecutive quarter, we got outstanding performance in our USDA business and it was also helped by a much smaller loss it thrive and partially offset with lower customer interest rate swap revenue will come back with additional comments on USDA and thrive in just a minute noninterest expense decreased by 949.
To just under $56 million, 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 million and USDA loans closed during the quarter.
We sold the guaranteed portion on approximately $80 million of those loans gain on sale premiums remained very strong and we have a strong pipeline of loans in the closing stage.
As we look forward to Q2.
It's worth noting that the USDA P&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 continue to build as new leadership and recent hires gained traction gain on sale margins are slightly stronger than at the end of Q4.
Moving to thrive vertex recorded in equity method loss of just over $1 5 million as funded volume increased 3% to $426 million gain on sale margins improved from Q4 levels, but are still below historical results thankfully the negative margin impact of the long dated locks has now been plus.
The P&L. These losses represented 50, 150% of our Q1 loss we recognized from thrive.
Drives efforts to rightsize the expense structure of the company given expected 23 production volume is bearing fruit. We continue to believe breakeven performance in 2023 from thrive as possible.
On Slide 16, total capital grew approximately $42 million during the quarter to $1 billion and $438 million CET, one ratios have expanded by 23 basis points. During this period.
Please note the impact.
It's more.
Please note the impact on the capital ratios from the Mark to market on the <unk> and HTM portfolios. These ratios remained 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 CET one target of 10% by the end of 2023.
Finally on slide 17 note that we increased the weighting on the downside economic scenarios and the seasonal model to reflect the uncertainty.
And the economic outlook and the greater risk recessionary risk that's out there. These changes increased the allowance by five basis points to 107 with that I'd like to turn the call over to clay for some comments on credit. Thank.
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.
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.
NPA has remained essentially flat for the quarter and reducing the 35 basis points of total assets.
Past dues remain manageable.
Annualized net charge offs were down to four basis points and were primarily due to the cleanup of several SBA credits that went through liquidation move.
Moving on to page 19.
We've provided a snapshot of the primary long tops tops held in the creep portfolio.
This information came from an individual review of every credit in excess of $1 million in each sub sub segment highlighting.
The office portfolio is the primary focus of many during the season.
Our office portfolio was six 7% of the total loan book and contains a significant amount of our classified assets and all of the NPA increase sub segments evaluated.
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 in quarterly surveillance is ongoing on the portfolio. There's very limited construction activity in your office portfolio in all future.
Funding will be for good news money for newly added tenants.
84% of our office exposure is located in our primary markets.
We are able to put our eyes on the properties Freak line.
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 or 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 three years since COVID-19 came on the scene <unk>.
<unk> to hold up well.
We do not seeing meaningful losses coming from the hospitality book.
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 Michael Thank.
Thank you Clay these times are a challenge for our industry and our country.
Look back over the last seven weeks I'm grateful for my team and the bank. We have built business life is always going to throw you. Some challenges. It is how you have prepared for those unexpected days that will set you apart.
These times also create opportunities that may not have existed prior our goal in my charge is to continue to produce results that accrue to the value of our franchise focused on focusing on continuing to build a fortress balance sheet deliver sound credit and build tangible book value. Your team is engaged and can.
<unk>.
Operator, we will now take any questions.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one again.
Our first question comes from Brady Gailey with <unk> you May proceed.
Florida very morning Brady.
The thrive.
Not right now.
North Avenue had another great quarter in <unk>, but Terry I heard your comments about how the USDA could be running out of funding again.
If we look at last year, so 2022.
North Avenue had a great <unk> and a great <unk>.
But.
Fees, there, we're pretty limited in <unk> 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.
Great. It's a great question I do think 'twenty three is going to be a little bit different in 'twenty two.
One there is 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 pointed out.
Secondly, the pipelines the loans, we've got closed the commitments we've gotten from the USD.
USDA gives me more optimism that Q2 will be better than last year I'd say, 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 and that comment because the new physical starts on 10, one okay and the other.
Sure thing is remember, we can actually do it 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 there just brokers their stock and so we do have an advantage and closing loans that others may not.
And the Brady just to tag on that the beauty of these interim loans as it gives me incredible insight into future future resident neighborhood.
It's sitting on our balance sheet, while the USDA lines up its funding and so we know that's coming through.
Yes, those are great points, and then Terry I heard your comment about the margin continuing to be under pressure.
Down about 18 basis points linked quarter in Q1, how are you thinking about how much pressure it could be out there throughout the rest of the year.
Okay.
I think most of the pressure is going to come in Q2 to be honest.
But.
A lot of this depends on things totally outside our control what is what does the fed do about rates and secondly, when deposits start to return to the banking system again.
But.
I think I think the pressures going to be there.
Uh huh.
But I would expect that if the fed quits quits raising in Q3 and causes that that level of pressure is going to start to ease off.
So look it's.
It's hard to Youre, asking me to read it look into the future and read a crystal ball.
Yes.
I think last quarter I said I said, it peaked and I think I didn't have any idea they would have done what they've done but but.
It just it just feels like there as well.
I would say it this way Brady I can we can see how people are pricing on the margin.
Our markets.
And I'm shocked at some of the ways deposits Salt Lake.
We've lost some deposits over the last 45 days at prices that would have never dreamed off that competitors are paying all right. So that's what leads me to that conclusion.
And then finally.
Yeah.
Sorry go ahead.
No I was just going to say, we just we've let we've let some lag.
Crazy stupid brides irrational pricing.
<unk> is just.
Fair competitive one thing irrationalities another.
Alright, and then final question for me, where the stock is under tangible book value.
You guys haven't been active in the buyback and I know these are very interesting times, but do you think about buying the stock back below tangible book value here.
We think about it but we're not going to do it right now because we wouldn't think it would be prudent.
Okay, great. Thanks, guys.
Yeah.
Thank you.
Our next question comes from Brett Robinson with poverty Group you May proceed.
Hey, guys good morning.
Hey, Brett Nebraska.
Oh excuse me my allergies are pretty high just wondering.
Wanted to I guess first start off R&D decrease in the.
Criticized assets the linked quarter of $41 million or adoption I heard the comment about the lender finance credit was there anything else that changed linked quarter in that in the criticized asset bucket.
There is.
A lot of movement because of the surveillance that were doing that that is the standout.
Event that.
The reduced reduction in criticized.
Criticized assets.
Okay.
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 of that.
The the confidence on the multifamily construction.
Is that a line of sight into occupancy that youre expecting or.
Maybe just any color around your confidence on the multifamily construction book.
Primarily driven by the.
The fact that it's all very high quality product. There is typically always an open market.
Sure.
Multifamily product and finally, our our metrics associated with the portfolio are very strong and I would just add.
Brett if you take a look at locations there are 87% are in Texas.
67% in the big multi.
Markets of DSW in Houston So.
With that said then you go back and look at the migration numbers and that people move into Texas and you got 87% of your product of which 78% is class a and they've got a whole bunch of equity in there and so candidly are portfolios that we look at.
That's probably the one we have the least concerned about.
Okay.
That's great color and then just lastly on deposits from here.
Are there any categories that you.
You're focused on in terms of growing or are you looking to do money market promotional Cds use FH lb or brokered or whats your strategy in terms of the <unk>.
Growth of our funding base from here.
Well.
From my perspective, there's just so much going on in this space.
Our digital and direct marketing is focused around money market and shorter term Cds.
I want to be less reliant on brokered.
And the FH L b.
Have a insurance vertical that we've staffed up and which is a good source of debt. When we've hired people with a lot of deep expertise in this space. That's another important source.
Our mortgage.
Mortgage warehouse.
<unk> is showing good growth.
Our community Bank.
Yes, so it's around commercial community.
Digital and direct marketing.
And.
<unk>.
Another insurer it let me just say that we've had a plan I know you guys have heard from us before but we put this plan into place in the third quarter.
Last year and so it's just 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 that our company, but it was before March eight and we are changing the way we look at client selection changing the way yet.
We're lending to and why.
We've hired somebody full time as of January one that that's all they do they get up every day and you think about deposits and really think about more than that just how to acquire the right type of client.
We are changing that and so we've got seven or eight nine different verticals. If you will our places are levers that we can pull deposits from not one or two of them is going to solve our issue. We got all of them have to be successful and so Terri just went through a list.
Are those.
And there are some other things that we're looking at and so it's a.
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.
Okay, that's great color I appreciate it.
Thanks, Brett.
Thank you.
Our next question comes from Brad Millsaps with Piper Sandler you May proceed.
Yes.
Hey, good morning.
Hey, Brad.
Thanks for taking my question maybe.
Maybe Terry I wanted to ask on expenses.
You had some nice expense control in the quarter, you mentioned lower variable compensation I, maybe I would've thought given the strong quarter that.
North Avenue NAC had that that may be variable comp would've 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 that kind of 50 $56 million number on.
On a core basis in the first quarter.
Variable comp at North Avenue capital would have been up but when you when you cut your loan production 75%.
It has a pretty significant impact on variable comp and other parts of the business. So I think that that's the reason I say variable variable comps down and.
And how we are moderating growth as you know from last years.
Pretty pretty high number two as Malcolm said in his comments, we did 9% in Q1 mid single digits for the rest of the year all of those things give me reason to believe that that expense.
The expenses are going to be well controlled we've made all the investments.
That we need to make we made.
I can't think of anything significant we we staffed up last year to prepare for going over 10.
So.
I think from here from here I think expenses should be.
Pretty stable.
I, just can't see anything thats going to call Sam to move up dramatically Theres, certainly inflationary pressures, but.
That.
I don't think thats going to be.
A big driver of expense is up for us for the rest of this year now we will 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.
And keep them pretty pretty tight in this range.
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 youre still earning probably.
Somewhere there.
Mid teen ROE TCE, 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 CET, one or another ratio that you look at or focus on that you feel like youre trying to target.
It's kind of an area of hey, we feel okay.
Kind of what where we want to be in terms of our capital ratios.
I mean look Brad.
Great buy at these levels 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.
And right now.
Yeah. It's just the ratio that you guys are maybe targeting by the end of the year to try to build to you or is it just hey, we're going to we're sort of going to let it go.
No no I mean look we've been saying for multiple quarters now we want to get CET one over 10%.
And we and we definitely think we're going to get there in the back half of the year once we get there.
Then look at the economic outlook and the recession and how credits behaving et cetera, then I think it's a more relevant discussion.
Yes makes sense.
We don't we're going to have an approved buyback right now so we still have some work to do if we were even to get to that point, but we're just focused on CET one and.
Future outlook.
Got it great. Thank you guys.
Thanks, Brett.
Thank you.
Our next question comes from Gary Tenner with D. A Davidson you May proceed.
Thanks, Good morning.
So I'll take your questions.
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.
Kerry that as things have calmed a little bit.
With regard to you know.
Liquidity fears.
Well.
At the end of the quarter, we had $808 million.
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 the ninth.
I think we're going to get cash levels down materially from 800, probably if I had to put it.
The old World pre March eight I would've said 300 million to $3 50 was probably our target I would say, our new target is closer to $500 million.
Okay great.
And.
In terms of office.
<unk> and the additional information has depreciated in the deck.
Can you remind us kind of the dynamics that are existing office NPA, how long has it been a nonaccrual resolution progress progress et cetera.
Other maybe commonality is just in terms of those.
Criticized office lunch.
Yes, I think thanks for the question Gary.
That loan that you are referring in NPA has been an NPA since the fourth quarter of 'twenty two.
The former <unk> loan that was acquired and as we move forward with trying to execute our strategy to resolve that asset borrower filed bankruptcy on us and so we're stuck in that one for a little bit until we work through that process.
And any commonality in the other ones.
In the classified assets no that was a very specific property that is really it.
It's long term use is not as an office, but as a.
That's another site for a different type of crew and were carrying it at.
Yes, we're carrying ethylene yes, yes, that's correct that's correct.
I'm, sorry, so does that <unk>.
69 million classified as their one sizable credit within that number you were just discussing.
And there are about.
About three different credits that make up that the most the majority of that $69 million and we are at.
I have our eyes on those.
Very very closely so we're working those hard.
Those.
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. It goes back to our a borrower's lots of equity.
Philosophy. So we don't we're not we're not concerned about those assets.
As they reposition them.
Sure.
Okay, Great and then last question.
Thrive.
In the prepared remarks.
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.
So to be breakeven in any given quarter based on their kind of.
The expense reduction exercise they went through et cetera.
Yes, one second I've got to do a quick calculation Corey.
They need about 400 ASC.
At $4 38 last $4 38, we need about $4 60.
They did 426, they need about $4 $54 five yes, you've told me $4 50.
Okay, Alright, thanks, guys.
Thank you Gary.
Thank you.
Our next question comes from Michael Rose with Raymond James You May proceed.
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%.
Some of the tailwind that you are.
Experienced inc. From construction pond apps 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 apps versus.
Our core portfolio growth ex that impact thanks.
I'd say a majority of the fund depth is going to be in.
Construction loans that we already have.
But we're hoping to offset a big portion of that is through pay offs and so that's the number that's really hard to predict in this market, although were still getting them and we feel good about the second quarter, but most of the fund up is coming out of the construction book.
But I would say the net growth is really going to come from somewhere other than right payoffs versus construction, if theyre going to hopefully alts to offset right correct and the.
The growth from here is going to be in the other parts, which should help on the funding side, because they're more really I wouldn't expect we're going to be putting on any construction deals Michael.
Perfect.
Great and then.
Just on our loans as well just on the on the warehouse.
Any sort of.
Colors, we look forward there obviously the rates have remained.
Mortgage rates remain 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're down a little bit on average.
Yeah, 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 theres going to be some opportunities we've done it.
The group's done a really nice job of moving out a few but there are going to be some opportunities, 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 Michael there will be seasonality, obviously, Q2, and Q3 urea will be up but I agree with everything else is just wanted to tack battle.
Okay helpful. And then maybe just finally for me I appreciate the the.
The spot deposit rate data in.
In the slide deck, and obviously with slower growth.
On the loan side.
Maybe just going back to Brady's question, just putting everything together full quarter impact of everything post the failures the higher funding costs, but obviously some tail winds on.
Loan repricing as well.
Can you just kind of help us from a.
A magnitude perspective as it relates to the second quarter in terms of the damage. It seems to me just back of the envelope.
Margin could be down.
Roughly just as much as it was in the first quarter I understand the comments that you.
<unk> expect the most of it most of the pressure.
As it relates to the rest of the year to be incurred in the second quarter, but just trying to put a little finer point on the second quarter in particular, what youre expecting.
I wouldn't.
Wouldn't expect I wouldn't disagree with anything you said somewhere in that range.
<unk> is what I think is possible and we've been saying for months now that the opportunity for vertex on the outperformance side thats going to come through the fee line and our fee businesses and I think.
That's still true today, even after two good quarters in DAC.
We've got the best pipelines in that business, we've ever had so yes, I think the NIM is going to peak I think the NIM is going to feel pressure, especially in Q2.
But I think the whole thing about revenue diversification.
Thrive improving in Q2, not having another good quarter, maybe not as good as Q4 and Q1, but another good quarter.
What I think is the key to.
To continue to perform well.
Okay, great. Thanks for taking my questions.
Thanks Pat.
Thank you.
Hey, Thanks, good morning, everybody.
Wanted to go back.
Discussion around credit quality and.
Clearly 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 million.
Right and if so I guess that would imply.
There were some inflows are in migration into that criticized loan bucket anything any color you want to provide on the migration into the criticized loan bucket.
Sure.
It was.
One that you're referencing was the commitment was $100 million balance was about $100 million.
But yes, there have been.
Migrations into 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 core office book.
That'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 are just a lot of activity this month and that based upon the surveillance that were done.
Okay. That's helpful. I appreciate that and then I guess sticking on credit.
What are the updated thoughts around potential loss content.
And the overall classified bucket I know Thats, a tough question and impacted by lots of external factors, but just love to I. Appreciate any kind of thoughts you have as far as whats the real loss content within within those buckets. Thanks.
Yeah.
<unk>.
I don't see anything today, if we saw it today, we would have it reserved for and we would have our charges.
But.
I mean losses are pending.
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.
Yes, I mean, we're resting in.
Our loan to values are debt coverages are are great markets with big in migration.
But for us to get.
<unk> slipped that loss content would be.
If any.
It's really really hard.
<unk>.
Yeah 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 declined each quarter that Terry mentioned have we now seen a peak in the dollar amount of the construction book or is there still another quarter or two where we could see that increase.
I think our peak was actually two quarters ago.
Or at least the fourth quarter, its fourth quarter and fourth quarter, yes, it's on the way down pretty rapidly I think we fund.
$3 million to $400 million COO.
Quarter on the construction side and payoffs comments, so that books declining we expect that book to be less than a $1 billion by the end of the year the unfunded unfunded piece.
Unfunded piece and we started it but two four.
I watermark somewhat yes, yes, so the balance is still going up but if you look at it on a commitment perspective right. So you guys don't see that coming down Thats, what he starts what I'm looking at yes, okay based upon them.
Based upon the actual numbers from the fourth quarter to the first quarter, our Cree, 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.
Got it.
Okay. That's helpful guys. Thanks for taking my questions.
Thanks, Matt Thank you.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
Okay.
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