Q3 2023 Veritex Holdings Inc Earnings Call

Yeah.

Good morning, and welcome to the vertex holdings third quarter 2023 earnings conference call and webcast. All participants are in listen only mode. Please note. This event will be recorded.

Now I'll turn the conference over to MS. Susan Caudle, Investor Relations Officer, and Secretary of the board of vertex holding.

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 statement.

At this time, if you're logged into our webcast. Please refer to our slide presentation, including our Safe Harbor statement beginning on slide two for those of you joining us by phone. Please note that the safe Harbor statement and presentation are available on our website vertex bank dotcom all comments made during today's call are subject.

To that Safe Harbor statement some.

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 really our Chief Credit Officer, I'll now turn the call over to Malcolm.

Good morning, and welcome to our third quarter earnings call.

Certainly find ourselves in a challenging challenging days in our industries and markets, but we are very attached to continue to focus on building long term value for our shareholders.

He was a transformational quarter for Barrett Jackson, many areas first I'd like to formally welcome Dominic Carrabba's as our new President and Chief Banking Officer.

The 28 year banking better and the majority of his experience in leading and developing teams and our commercial banking space.

Even though he's only been here for six weeks he is already making a difference in our company I look forward to you all meeting or soon.

Second I want to talk about our continued commitment and efforts to reposition and strengthen deferred tax balance sheet.

Over one year ago, our teams back cats to build a stronger balance sheet that can withstand all economic environments.

You've always been a very profitable back shown by our historical P. P. N R. R O a a and efficiency ratios, but our balance sheet did not project the strength there is higher value.

Let me discuss for balance sheet ratios, we've been keenly focused on.

All of the deposit.

Wholesale funding.

Do you want in a real estate loan bucket concentrations.

Like to remind you. These efforts we're not as a result of March eight FCB crisis. These efforts have been a major focus and strategy for the last four quarters.

Happy to say, we're making progress candidly much quicker than we planned.

Our loan to deposit ratio has come down from Ohio, one away at 331 to 95 at 930.

Our dependence of wholesale funding has come down from 32% at $3 31 to 21 at 930, our CET one now exceeds 10%.

Our CRE portfolio continues to decline despite continued ADC fundings.

Approximately 400 million a quarter.

Total CRE to risk based capital declined from $3 35.

Mm $3 31 to $3 17 at quarter at ADC has declined from $1 29 to $1 16 during those same dates.

All of this positive momentum towards a stronger balance sheet takes the work and effort of our entire bank.

It requires a mindset change to add full client relationships not just borrowers.

It requires discipline efforts on the deposit gathering space that comes in many forms.

Better client selection digital banking direct marketing Msr's, H O H family and friends promotions.

Commercial and community banks brokers etcetera etcetera it.

It takes everyone working together with a common goal.

That's how we've increased our deposit balances over $1 billion.

Since 12 31 22.

I couldnt be prouder of our company and teams to embrace the changes we all felt had to happen.

There is still much to do and much to accomplish.

With all the great progress on the balance sheet, we understand that and the site is these cycles earnings will be under pressure.

In the third quarter, we reported net operating income of $32 6 million or <unk> 60 per share a pretax provision income for the quarter was $50 million or 1.62%.

Terry will provide some details shortly but the main three drivers of our slight earnings decline, where NIM pressure continued lack of government loan fees and increase in operating expenses.

And these cycles loan growth and credit are always at the top of everyone's mind and concerns for the quarter.

Loans decreased and are only up about $137 million or one 4% for the first nine months of the year.

We've been able to do this with a focused effort on pruning away load only clients and payoffs mainly from the CRE sales mainly from CRE sales transactions.

<unk> for the quarter did increase $11 5 million to 80 million or 65% of assets. This increase was solely from the C&I shared national credit that clay will discuss shortly net charge offs were minimal at eight bps. We also increased our ACL from 105 at $6 30 to $1 14.

Looking forward our growth profile for 2024 will continue being below the middle single digits, our pipelines are off over 80% and candidly the demand from our clients has been muted in our opinion. This will continue until some economic and rate certainty is established.

Now I'll turn the call over to Terry.

Malcolm has covered the progress we've made in strengthening our balance sheet I think it's fair to say, we've made more progress and in a quicker timeframe than I ever expected.

And some time drilling into the results for the third quarter and year to date numbers. I think this is important because some of our businesses are seasonal and we think about them on an annual basis not just quarterly starting on page. Four now you mentioned the operating earnings were <unk> 60 cents a share this is down slightly to $32 6 million tangible.

Book value per share was also up slightly to $19.44, even with rising rates impacting.

Accumulated other comprehensive income OCI by approximately <unk> 45 per share.

Focusing on the year to date results pre tax pre provision operating earnings increased 14% from 2022.

$175 million pretax pre provision return on average assets is flat over the year.

Flat year over year at 190 basis points vertex continues to be one of the more profitable banks amongst peer growth consistent with our intent to strengthen our balance sheet, we've only grown loans $615 million in the last year, while growing deposits $1 4 billion on a year over year basis.

Year to date annualized charge offs had been 20 basis points finally, we've grown CET one.

102 basis points over the last four quarters to $10 one 1%.

We achieved this target.

Being over 10% one quarter earlier than forecasted.

Moving to slide five <unk> made meaningful progress improving its liquidity and funding profile over the third quarter.

As of June 30th vertex has grown deposits by $963 million and only a $192 million of that was in the broker category.

The deposit growth coupled with some reduction in earning assets allowed us to reduce federal home loan bank borrowings over $1 1 billion.

As we've said before vertex shifted its focus to the right side of the balance sheet late in Q3 of 'twenty to 'twenty.

2022, we started slowing loan growth, we shifted our loan production focus away from commercial real estate and ADC to C&I and small business, we changed our banker incentive program at the beginning of 2023 to give deposits a higher weighting.

We really 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 second quarter is having a meaningful impact on our deposit growth.

Success on the deposit proper bear, Texas, three components growing deposits, increasing our client acquisition rate and increasing net client growth I'm pleased to note that our net client acquisition rate in the third quarter was a little more than double what we saw in the first half of the year. Similarly, our net client growth in the third quarter was up.

More than four times over the levels, we experienced in the first half of the year.

The effect of the fed's interest rate hikes on deposit mix stabilized in the second quarter and our noninterest bearing deposits to total deposits remained at 23% to 24% range deposit pricing competition continues to be intense resulting in a total deposit beta of approximately 57%.

Uninsured non collateralized deposits are 31, 5% of the total and our liquidity capacity is to ask of the uninsured.

And thinking about the loan portfolio the shift away from the ADC is showing progress our concentration level and cream moved down during the quarter and the goal is to continue to move these levels down below the regulatory guidelines payoffs in the creep portfolio remains strong and should range between 800 $900 million for 2000.

23, a sure sign of strength in the Texas economy.

Unfunded ADC commitments continue to drop at the range of $3 million to $400 million per quarter.

And are now well below our total capital.

Looking forward into 2024, we forecast ADC fundings to declined by 75% as compared to 2023.

On slide seven we're frequently asked about our out of state bond portfolio as you can see our national businesses and mortgages comprised 13% of our total loan book are true out of state portfolio is about $1 $2 billion and makes up about 12, 5% of the total book two thirds the outer state portfolio.

Loans, where we have followed Texas developers the rest of your snacks syndicated loans and C&I a breakdown of the upstate commercial real estate portfolio as shown on the bottom right of the slide.

Moving on to slide eight net interest income decreased by $1 5 million to just under $100 million in Q3 the.

The biggest drivers of the decrease were higher earning loans yields day, count and lower volume, primarily <unk> volume offset by increases in rates on deposits. The net interest margin decreased five basis points from Q2 to 346%.

NIM was helped by the increase in average noninterest bearing and the drop in volume and yield on our <unk> borrowings.

Given the deposit growth through the end of August we were able to pull back on deposit pricing in September. This resulted in monthly deposit production rates falling for the first time in 2023.

Just to say based on our current internal forecast the net interest margin is during the bottom assuming our deposit mix remains stable.

On slide nine please note that loan yields were up seven bps to 692% while deposit rates increased 42 basis points.

Q3, new loan production that production.

Production rate of eight point of sale and a spread of 330 basis points.

Slide 10 shows certain metrics on our investment portfolio are the key takeaways are it's only eight 6% of assets. The duration is four three years and 83% of the portfolio sale and available for sale.

We are all mark to market on the portfolio has minimal impact on tangible equity.

And.

Doesn't have any impact on our capital ratios.

Noninterest income decreased by 4 million to $9 7 million. These declines were generally across the board <unk> production volume increased 1% to $564 million, while less gain on sale margin declined by 43 basis points to 257 basis points to maintain volume drive at the sacrifice.

This rate and therefore gain wholesale margin.

Moving to slide 12 on the USDA front, we've always said and maybe think about this business on an annual basis. It's been a record 12 months for this business say produced over $21 6 million in revenue over the last four quarters I was happy to get any revenue in Q3 of 'twenty three given the funding situation to be in that vertical in the U S.

But we could only get one one closed in Q3, our pipeline is at record levels, which bodes well for future revenue and Q4 revenues should be meaningfully higher than Q3.

Given the potential government shutdown and funding the government with continuing resolutions makes it highly unlikely that Q4 will be as strong as Q4 2002.

Noninterest expenses increased $2 $2 million, driven by higher personnel cost and regulatory base.

The increase in personnel cost as a function of hiring bonuses variable compensation for deposit growth and lower loan production cost deferrals.

<unk> are up slightly but this was not the driver of the increase.

On Slide 13, total capital grew approximately $35 million during the quarter to almost one $5 billion. Our CET one ratio expanded 35 bps for the quarter and 101 basis points year over year. It now stands at 10, 1% a significant contributor to the expansion of the capital ratios.

Has been the decline in risk weighted assets.

It's worth noting that since <unk> went public in 2014 is compounding tangible book value per share at <unk> at <unk>.

Eight of 10, 8%, including the dividends that have been paid to our shareholders.

Finally on slide 14, noting that we continue to build the ACO since the beginning of 2023, we've grown at about $19 million or 21%. These additions to the allowance have increased by 18 basis points to 114% given all the uncertainty facing the U S and Texas economy.

We decided to allocate more weighting to the downside scenarios in the model two factors continue to make up a sizeable part of.

<unk> ACO.

I would like to turn the call over to <unk> for some comments.

Thank you Terry and good morning, everyone as Malcolm mentioned, our NPA as her up for the quarter driven by downgrades of a shared national credit in the most recent snake exam, but formed by the regulators in August.

Our portion of the loan is $18 million of $157 million total facility. The company is in the defense space and government sector and the company suffered from supply chain issues and inflation impact that significantly lowered the companys financial performance.

The credit was restructured in the third quarter with additional capital contributed by the equity sponsor and is currently performing under the restructured terms.

Past dues for the quarter increased $2 million, mainly due to three commercial credits. There were also a group of single family mortgage loans in the amount of $4 4 million that were transferred to a third party servicer, which created some administrative past dues and we expect those issues to clear this quarter.

<unk>.

Moving to criticized assets.

<unk> assets were relatively flat for the quarter, while total criticized assets increased by 3%.

Our surveillance of the portfolio continues to be strong and we're moving risk grades as we see issues arise.

I've been encouraged by the level of payoffs that have occurred this year in the amount of $932 million with $645 million of that in the book.

$62 million up year to date payoffs have come from the criticized asset books.

We experienced full payoffs of $10 $4 million of classified credits just in the last quarter.

With that I'll turn it back over to Matt.

As you can see <unk> has made significant improvement in our strategy to build a sturdy your balance sheet are focused on granular stable funding will not cease.

Terry mentioned, but I would like to mention again, just the new client acquisition.

Is on the front of our minds everyday.

For the third quarter client acquisition growth was almost 2700, new clients, which is more than the first two quarters combined.

It's working and we recognize we still have more work to do.

Finally, I'd like to thank the many phone calls and comforting text messages received for many of you concerning last quarter's earnings call everyone involved is doing quite well.

Thank you and operator, we will take any questions.

Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone to ask a question. Please press star 111 moment for our first question.

Our first question comes from the line of Stephen Scouten of Piper Sandler Your line is open.

Hey, good morning, everyone.

I can say.

I guess one of my questions.

Is maybe around capital and what you could do with your capital today.

Strong profitability.

Good capital, but the stocks, obviously, not trading where you'd want an intangible book value basis, Doug just wondering if you guys would think about share repurchase here today or kind of what your capital priorities would be at this point.

Yes.

Listen you keep making money and the cap where youre going to have options.

Our thinking right now with the environment that we're in.

It's just to continue to add capital.

And.

We know there's potential options down there, but we don't see a buyback in our immediate future.

I think it's just wise to build the capital base a little bit more.

And again the options are always there.

Okay fair enough.

And then just thinking about the NIM monetary you said, you think it's kind of nearing the bottom.

How should we think about.

Loan yields moving forward and just any portfolio churn and just kind of remind me the fixed versus floating. So we can think about where kind of the loan side of the balance sheet.

Okay.

While loan yields since we have so much floating.

70, 576% of the portfolio, 76% of the portfolio is tied to Super Prime loan yields are going to be contingent theyre going to move in correlation with what.

The fed does something rates are they down are they going one more time.

I don't know its a coin flip in my mind, I don't think Theyre going.

Our next meeting, but we'll see what happens on out there.

Yes.

We certainly have some fixed rate loans that are working.

Working with a banker on one earlier this week.

It's in the mid threes.

For renewal and so.

So we're going to have some of that Stephen but given that that so much of the portfolio is floating I think I think it's going to be helpful. When it occurs but I don't think its going to be a big enough number and change to really change the dynamic of what the NIM is going to do.

Look we're I'm really.

I was really happy with how the NIM performed in the quarter, especially as I look across the industry.

But as I've said pricing competition on the deposit side.

Pretty intense, but we were able to pull back meaningfully on.

Hours in September we can see it in the data and so I'm hopeful that Theres I think theres going to be some especially as Cds roll theres going to be some some NIM pressure, but.

It looks like in their own internal modeling that.

We're getting near the bottom anyway.

Got it Okay and then just maybe last thing for me I know you've talked about that USDA business.

Think about it more annualized.

But I'm just kind of curious what what youre seeing from a funding perspective, if that's kind of that vertical is kind of back open for business. Obviously, the pipeline looks really strong and so that was the I don't know.

2014, and $19 million line item last year is that thing.

Susan Caudle: Good morning and welcome to the Veritex Holdings third quarter 2023 earnings conference call in webcast. All participants are listening only mode. Please note this event will be recorded.

Think about still that range or because of some of the government issues is that going to be lower year over year or so.

No I don't think its going to be lower year over year.

Susan Caudle: I will now turn the conference over to Susan Caudle, investor relations officer and secretary of the board of Veritex 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 the page results to differ. The company undertakes no obligation to publicly revise any forward-looking statements. At this time, if you are logged into our webcast, please refer to our slide presentation, including our Safe Harbor statement beginning on slide two.

But I think the timing is I thought Q4, 90 days ago I would have thought Q4 was going to be a really strong quarter with the new fiscal year for the federal government now now that they are doing it on continuing resolutions or just.

The level of funding funding and the certainty of funding is.

Lowered my view of Q4, I mean, we have okay.

Specific loans, we believe we're going to get closed but.

Getting a little bit allocation out of continuing resolutions, it's hard to manage your business that way and some say differently and they are managing their medicines just fine. It's hard for me to give you clarity in terms of what I think revenue is going to do so that's why I tried to say I think it is going to be meaningfully better than Q3, but not nearly as good as last year's Q4.

Susan Caudle: For those of you joining us by phone, please note that the Safe Harbor statement and presentation are available on our website VeritexBanks.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-gap basis, which our management believes better reflects the underlying core operating performance of the business. Please see the reconciliation of all discussed non-gap measures in our filed 8K earnings release.

Unless something really pops and negative budget passed.

But I feel really good about 'twenty four I think it's going to be in line with what we're seeing I would love to see a little bit best pipelines are better today versus where they were going into 'twenty four.

Susan Caudle: Joining me today are Malcolm Holland, our chairman and CEO, Terry Early, our Chief Financial Officer and Clay Revy, our Chief Credit Officer.

<unk>, we can do better, but there is that macro circumstance, there thats really outside our control.

Malcolm Holland: I'll now turn the call over to Malcolm.

Sure that makes a lot of sense alright, guys. Thanks for all the color congrats on all the progress.

Malcolm Holland: Good morning and welcome to our third quarter earnings call. We certainly find ourselves in a challenging day in our industries and markets, but we hear Veritex continue to focus on building long-term value for our shareholders.

Thanks, Dave.

Thank you one moment please.

Our next question comes from the line of Brady Gailey of <unk>. Your line is open.

Malcolm Holland: Q3 was a transformational quarter for Veritex in many areas.

Okay. Thank you good morning, guys.

Malcolm Holland: First, I'd like to formally welcome Dominic Corado as our new president and Chief Banking Officer. Now, the 28-year banking veteran, the majority of his experience in leading and developing teams in a commercial bank space. Even though he's only been here for six weeks, he's already making a difference at our company.

Alright, great.

So I mean, you talk about all the progress that's been made over the last years I think you've called out kind of four or five different areas that are seeing some pretty nice improvement.

Are we done at this point with kind of the things that you are focused on improving internally or is there more work to be done on like the loan to deposit ratio at capital. One I think I think you mentioned you still wanted to get below the 300 100 creep AMB thresholds Im just wondering what.

Malcolm Holland: I look forward to you all meeting him soon.

Malcolm Holland: Second, I want to talk about our continued commitment and efforts to reposition and strengthen the Veritex balance sheet. Over one year ago, our team stacked hands to build a stronger balance sheet that could withstand all economic environments. We've always been a very profitable bank, shown by our historical PP&R, ROAA, and efficiency ratios, but our balance sheet did not project the strength that is highly valued. Let me discuss four balance sheet ratios we've been keenly focused on.

Are we at and is there a lot of work left to be done to get the company, where you guys would like to see it.

So.

The answer is no we're not we're not done at all.

Internally, we call what we accomplished in the third quarter phase one.

Phase II is a.

Malcolm Holland: Lone deposit, dependence of wholesale funding, CET1, and our real estate loan bucket concentrations. I'd like to remind you, these efforts were not as a result of March 8th SBB crisis. These efforts have been in our major focus and strategy for the last four quarters. I'm happy to say we're making progress, candidly much quicker than we planned. Our loan deposit ratios come down from Ohio 108 at 331 to 95 at 930. Our dependence of wholesale funding has come down from 32% at 331 to 21 at 930.

Our continued effort to strengthen the balance sheet and a whole bunch of areas.

The ones I've mentioned and a few others and so we don't believe.

The definition of a fortress balance sheet, rather than 95% loan to deposit ratio.

So we will continue.

One of the things in the.

Higher and Don.

His focus is to help us to continue to do that.

And really I think I said, it but it's the granular side of the business, which I told my folks at our strategic planning session Phase II, we will never be out of that.

That's our work to really.

Malcolm Holland: Our CET1 now exceeds 10%. Our CRD portfolio continues to decline despite continued ADC funding of approximately 400 million a quarter. Total CRE to risk-based capital is declined from 335 on 331 to 317 in quarter amp ADC has declined from 129 to 116 during those same dates. All of this positive momentum towards a stronger balance she takes the work and effort of our entire bank. It requires a mindset change to add full client relationships not just borrowers.

Support our funding levels and smaller more sticky business.

Funding areas and so we still have more work to do to Brady.

And we're not we're not going to stop and so I want to be real clear that.

We are we do feel like we accomplished phase one about a year or more ahead of time, but now we're into phase III and thats, the real heavy lift and the hard work, but that's what we intend to do the progress of change will probably slow yet.

Not expect to see Q4, yes. It looked like Q3, absolutely, yes, I don't think I'm at 85% loan to deposit ratio by the end of the year.

We can do that because it's Terry always says you Miss Pricier deposit you can get all you want.

Malcolm Holland: It requires discipline efforts on the deposit gathering space that comes in many forms. Better client selection, digital banking, direct marketing, MSRs, HOAs, family and friends, promotions, commercial and community bank focus, etc. It takes everyone working together with a common goal. That's how we've increased our deposit balances over $1 billion since 1231-22.

And we're not doing that shown by us lowering rates in September.

Feel like we're in a comfortable place right now from a balance sheet strength standpoint, but we still have more to do.

Alright, and then on the expense side, you saw some expense growth quarter on quarter I think a lot of it was in comps.

Compensation our comp.

Compensation that is kind of back at the level that you saw in <unk>.

Malcolm Holland: I couldn't be proud of our company and teams to embrace the changes we all felt had to happen. There's still much to do and much to accomplish.

Q1 of this year.

So I was just wondering as we look forward I think the expenses were a little under $60 million in the third quarter, how should we think about that expense run rate in the fourth quarter and maybe more importantly into 2024.

Malcolm Holland: With all the great progress on the balance sheet we understand that in these cycles earnings will be under pressure. So the third quarter reported in that operating income of 32.6 million or 60 cents per share. Our pre-catch per vision income for the quarter was 50 million dollars or 1.62 percent. Terry will provide some details shortly but the main three drivers of our slight earnings declined where them pressure continued lack of government loan fees and increased operating expenses.

And in Q4.

I wouldn't be I think it's going to be 60, it might be a tad over just.

So up a little bit but not tremendously.

Bob.

1% to 2% upset.

I think as we look into 'twenty four.

I think it's.

Malcolm Holland: In these cycles, loan growth and credit are always at the top of everyone's mind and concerns. So the quarter loans decrease and are only up 137 million or 1.4 percent for the first nine months of the year. We've been able to do this with a focus effort on pruning away loan-only clients and payoffs mainly from the CRD sales mainly from CRD sales transactions. NPAs for the quarter did increase $11.5 million to 80 million or 0.65 percent of assets.

Don't see the efficiency ratio for the year getting much better than where it is today because I'll tell you one thing to let me say two things.

Benefit cost are going through the roof.

Two FDIC insurance premiums.

As they rebuild the fund and those things.

They are largely outside of our control and so that's.

In terms of <unk>.

Where I expect to see the most expense pressure generally speaking going into next year.

Okay, alright, great. Thanks for the color guys.

Malcolm Holland: This increase was solely from the CNI shared national credit that Clay will discuss shortly. Net charge us were minimal at 8 bits. We also increased our ACL from 105 at 630 to 114. Looking forward, our growth profile for 2024 will continue being the low of the middle single digits. Our pipelines are off over 80 percent and can't believe that a man from our clients have been muted. In our opinion, this will continue until some economic and rate certainly is established.

Thanks Prady.

Thank you one moment please.

Our next question comes from the line of Gary Tenner of D. A Davidson your line is open.

Thanks, Good morning.

It could.

I was curious if you can talk a little about kind of the success on the deposit side.

And.

Any plans to expand what you've already done in terms of the digital bank.

Direct marketing channels or otherwise are you slowing the spend on the direct marketing at this point and kind of rely more on the.

Terry Early: I'll now turn the call over to Terry. Thank you. Malcolm has covered the progress we've made in strengthening our balance sheet. I thank you to spare us today that we've made more progress and in a quicker timeframe than I ever expected. I won't spend some time drilling into the results for the third quarter and the year-to-day numbers. I think this is important because some of our businesses are seasonal and we think about them on an annual basis and not just quarter.

Standing up digital banks and kind of local areas. The way you did.

To the degree of digital bank can be local of course, so just curious for any color on that.

Yeah, I think we're always going to have the digital bank direct marketing lever will always play in that arena.

We had to get digital banking government. So that took a lift just to get into the areas and what we could always go into new areas. Most of all of our digital banking went outside of our current markets.

Terry Early: Starting on page four, not from mentions, I've written it's earnings worth 60 cents a share. This is down slightly to 32.6 million. Tangible foot value for share results fell slightly to $19.44. To almost $175 million. Pre-tax reprivation, return on average assets is flat over here. It's flat year over here at 190 basis points. Veritex continues to be one of the more profitable banks among his peer growth. Consistent with our intent to strengthen our balance sheet, we've only grown loans $615 million in the last year while growing deposits $1.4 billion on a year over your basis.

Identified certain spots in Texas only that we wanted to be there are many more markets that we could tap into that area.

Direct marketing that's going to be something that we do but we probably won't do as hard as we did in the third quarter, but it's always going to be there again I think this is not.

It's not a one one.

The event is going to cure. This thing it continues to be a lever.

Seven or eight different places where people have to pull from now are the reason I think it gets a little slower and a little bit harder going forward.

Now, we're moving into more of the commercial bank space The community Bank space the business banking space, the private banking space, where those become much more granular things that have some lead times in order to get them closed and getting them moved over.

Terry Early: Here today annualized charge also have been 20 basis points. Finally, we've grown CET1 by 102 basis points over the last four quarters to 10.11%. We achieved this target of being over 10% one quarter earlier than forecast.

But those are the ones that are harder, but are much more valuable from a treasury management standpoint from a granularity standpoint so.

I think we continue all efforts, we may put more emphasis on different areas, depending on what the balance sheet needs. Yes, let me add two things one.

Terry Early: Moving to slide five, Veritex made meaningful progress improving its liquidity and funding profile over the third quarter. Since June 30th, Veritex has grown deposits by 963 million and only 192 million of that was in the growth category. The deposit growth coupled with some reduction in earning assets allowed us to reduce federal home loan bank borrowings by over $1.1 billion. As we've said before, Veritex shifted its focus to the right side of the balance sheet late in Q3 of 2022-2022.

On direct marketing Gerry I think youll see us move from more product specific to <unk>.

Direct marketing to more small business focused direct marketing to help drive more new client acquisition, specifically in that space.

I had another one.

So what happens when we get all of you for your clients.

Yes.

Okay.

I appreciate that and maybe this is a question for predominantly to a degree but is there.

Terry Early: We started slowing loan growth. We shifted our loan production focus away from commercial real estate and ADC to see an eye on small business. We changed our banker incentive program at the beginning of 2023 to give deposits a higher wage. We reallocated market expense deposit products and launched a multi-wave direct market campaign in February. Additionally, our digital bank which we started in the second quarter is having a meaningful impact on our deposit growth.

The customers that you're acquiring through the digital bank are these their in state are they customers that you think you would have you.

You would have an opportunity to do.

More business with other than just the depository side.

Absolutely I mean, that's the whole goal if it was just a one CD client or one money market clients.

Isn't really do much for us and I think the metric that Terry mentioned and I gave you at the very end with our new client acquisition.

Terry Early: Success from the deposit front for Veritex has three components. Growing deposits, increasing our client acquisition rate and increasing next client growth. I'm pleased to note that our next client acquisition rate in the third quarter was a little more than double what we saw in the first half of the year. Similarly, our next client growth in the third quarter was up more than four times over the levels we've experienced in the first half of the year.

Just shy of 2700 in the third quarter, that's double the first quarter and second quarter and July combined.

Combined and so what that does is I know I might folks in the branches and my folks have the opportunity to cross sell and today I believe we have 68% retention ratio.

Terry Early: The effect of the Fed's interest rate hikes on deposit mix stabilized in the second quarter and our non-interesting deposits to total deposits remain in the 23 to 24 percent range. The deposit price of competition continues to be intense resulting in the total deposit paid up approximately 57 percent. Finally, uninsured and uncollateralized deposits are 31.5 percent total and our liquidity capacity is two acts of the uninsured deposits. In thinking about the loan portfolio, the shift away from ADC is showing progress.

Of those clients and so if.

All you got to do is get them in our company and they leave it.

Our service levels at the branches are incredibly high as you look at our our ratings and all of that they are just incredibly hard. So we can get them in and they're not going to leave and we can sell them other stuff.

I appreciate that and then just.

Really quickly in terms of that.

Credit.

Mr. Initial credit that was downgraded and restructured or was there any.

Terry Early: Our concentration level and cream moved down during the quarter and the goal is to continue to move these levels down below the regulatory guidelines. Payoffs and the Cree portfolio remains strong. It should range between $800 and $900 million for 2023. It should sign a string in the Texas economy. Unfunded ADC commitments continue to drop at the rate of three to four hundred million per quarter, and are now well below the capital. Looking forward to 2024, we forecast ADC funding to decline by 75% compared to 2023.

Any furniture reversed related to that credit.

There was $1 2 million.

Great. Thank you.

Thanks, Gary Thank you one moment please.

Our next question comes from the line of Michael Rose of Raymond James Your line is open.

Hey, good morning, guys.

A couple of follow ups here.

So obviously a lot of progress on the deposit front a lot of that's been discussed.

The mix of noninterest bearing down to about 23%.

Terry Early: On slides 7, we're frequently asked about our out-of-state loan portfolio. As you can see, our national businesses and our mortgages comprise 13% of our total loan book. Our true out-of-state portfolio is about 1.2 billion, and makes up about 12.5% of the total book. Two-thirds of the out-of-state portfolio are loans where we have followed Texas developers, the rest are SNICs, syndicated loans and CNI. A breakdown of the out-of-state commercial real-state portfolio is shown on the bottom right of the slide.

Harry.

You had kind of.

Quite flip in your eyes between kind of what happens with rates here, but.

Where do you think that could could fall through and if you could give us any sort of updated expectations there would be appreciated. Thanks.

Yes.

I think I mean look we grew DDA.

So even though the mix went down is a function of the overall growth in total deposits.

Terry Early: We've gone on to slide 8. An interesting income decreased by 1.5 million to just under 100 million in Q3. The biggest drivers of the decrease were higher earning loan yields, day count and lower volume, e-primarily FHLB volume, offset by increases in rates on deposits. The net interest margin decreased by basis points from Q2 to 3.46%. The demand was helped by the increase in average non-interest bearing and the drop in volume and yield on our FHLB borrowings.

So.

I think it's.

I think the mix it was for two quarters. We've held in my belief is DDA is going to continue.

Internally I would say, we view it as more likely than not to continue to hold in this range.

It may be depending on how successful we are overtime I would expect it to grow as we with all the work we're doing in the small business and low to middle market et cetera, but in the short run and I expect it to stay stable.

Through Q4, and as far as I can see into <unk> into.

Terry Early: Given the deposit growth through the end of August, we were able to pull back on deposit pricing in September. This resulted in monthly deposit production rates falling for the first time in 2023. All this to say based on our current terminal forecast, the net interest margin is nearing the bottom, assuming our deposit rates remain stable here. On slide 9, please note that our loan yields were up 7 bibs to 6.92% by the deposit rates increased by 42 basis points.

And the 24, one thing I would note.

The rate of migration and then as we as we analyzed pretty granularly, our deposit base the level of migration for the last 250 basis points of move has really really slow downs, meaning take out new customers just looking at existing customers that we started that we started.

<unk> Q Q2, with the rate of migration for the last two moves has been way less we've been able to offset it and grow this quarter, but still it seems like customers. Obviously, there is just not having as much of an impact those people who are customers who are aggressively managing liquidity seems to be not as high a priority I would say.

Terry Early: Q3's new loan production rate of 8.06 and a spread of 330 basis points. Slide 10 shifts certain metrics on our investment portfolio. The key table is our, it's only 8.6% of assets. The duration is 4.3 years and 83% of the portfolio is held in the middle of the sale. So overall the market market on the portfolio has a minimal impact on tangible equity and that have any impact on our capital issues.

Oh, yes, certainly didn't mean to discount the fact that Youre one of the few banks is actually growing DDA. This quarter. So certainly appreciate that.

I guess in a lot of stuff that you can't but may not be apparent.

Under the Hood, so a lot of good stuff there so.

Terry Early: Non-interest income decreased by 4 million to 9.7 million. These declines were generally crossed the board. Throws production volume increased 1% to 564 million. Files to gain those film margin declined by 43 basis points to 257 basis points. To maintain volume, the drive has a sacrifice rate and therefore the gain will sell margin.

The deposit cost continue to increase obviously you guys added some higher cost deposits this quarter.

Are we getting closer.

To a peak in deposit costs in your eyes.

No not with the way I think Cds are going to roll I don't think I don't think we've hit a peak in deposit costs that we've lowered production rates, but just as we've got fixed rate loans I talked about a three 5% being renewed we've got some earlier dated Cds at lower rates that are going to roll too. So I think it's going to.

Terry Early: Moving to slide 12 on the USDA run. We've always said and need to think about this business on an annual basis. It's been a record 12 months for this business to say produced over 21.6 million revenue over the last four quarters. I was happy to get any revenue in Q3 to 23 given the funding situation to be in our article at the USDA. But we could only get one loan closed in Q3.

It's why I think we're near the bottom at the bottom on them.

Okay helpful. And then maybe just last for me.

Through the pandemic, obviously, you guys hired a lot of producers got a lot of growth there in that period.

Terry Early: Our pipeline is at record levels which both well for future revenue and Q4 revenue should be minimally higher than Q3. To give the potential government shutdown and funding the government with continuing resolutions make it highly unlikely that Q4 will be as strong as Q422.

Now the fundings increased it seems like.

Growth is kind of poised to kind of pick up.

Just wanted to get some kind of initial nearer term thoughts on what the drivers would be and then obviously.

You're trying to bring the CRE and <unk>.

Terry Early: Non-interest expenses increased $2.2 million, driven by higher personnel costs and regulatory fees. An increasing personnel cost is a function of hiring bonuses, variable compensation for deposit growth, and lower loan production costs to pearls. So I'll reason up slightly, but this was not the driver of the increase.

In A&D concentration down.

Or would you expect kind of that growth to be just trying to get the puts and takes as we think about next year. Thanks.

Yes, so the growth is going to be largely dependent on payoffs.

And then the.

Funding look outlook, which we have some really good vision into.

Terry Early: On slide 13, total capital grew approximately $35 million during the quarter to almost $1.5 billion. Our CET-1 ratio expanded 35 bips for the quarter, and 101 basis points zero over year now stands at 10.11%. A significant contributor to the expansion of the capital ratio has been to decline in risk-weighted assets. This worth noting that since Veritex 1 public in 2014 is compounded tangible book value for share at a rate of 10.8%, including the dividends that have been paid to our shareholders.

By the second quarter of next year, It basically falls off a cliff.

Because we've been funding.

Three to 400 closer to $400 million a quarter by the time, we get to Q2 next year that falls off and so you are funding some of the funding.

Already in the book is going to stop if payoffs continue that growth is going to be a pretty good challenge.

But some of the things that we're doing here and we are focused on growth, but we're focused on growth on what the market's going to give us.

Not outsized growth is what we're looking for and we're still trying to determine what that looks like I mean candidly our clients.

Terry Early: Finally on slide 14, note that we continue to build the ACL since the beginning of 2023, we've grown in by 19 million dollars for 21%. These additions to the allowance have increased by 18 basis points to 1.14%. Given all the uncertainty facing the US and Texas economy, we decided to allocate more weighting to the downside scenarios in the model. Two factors continue to make up a sizable part of the ACL.

If not ask for a lot lately, but I do see some things.

Getting a little better. So overall I think I would tell you it's low to St single low to middle digits on growth for next year, but depending on payoffs that could be a challenge.

Totally understand thanks for the color I appreciate it guys.

Yes, let me remember.

Clay Revy: With that, I'd like to turn to Paul Erdogan for some comments on this. Thank you, Terry. Good morning, everyone. As Malcolm mentioned, our NPAs are up for the quarter driven by a downgrade of a shared national credit in the most recent SNIC exam before and by the regulators in August. Our portion of the loan is $18 million of $157 million total facility. The company is in the defense space and government sector and the company suffered from supply chain issues and inflation impact that significantly lowered the company's financial performance.

Missouri came back and I remember by other items and Gary I was just kind of make a comment then.

If you look at our deposit pipelines to our loan pipelines, it's forex today, yes deposits so deposits to loans.

<unk>.

Five months four times greater than our loan pipeline today so.

Operator next question.

Okay.

Thank you my Momma please.

Our next question comes from the line of Matt Olney of Stephens. Your line is open.

Okay.

Hi, Thanks, guys I appreciate all the good commentary this morning.

Clay Revy: The credit was restructured in the third quarter with additional capital contributed by the equity sponsor and is currently performing under the restructured terms. Past dues for the quarter increased to me and mainly due to three commercial credits. There were also a group of single family mortgage loans in the amount of $4.4 million that were transferred to a third party servicer which creates some administrative past dues and we expect those issues to clear this quarter.

And I apologize if I missed this but wanted to ask about the overnight liquidity levels cash balances I think.

With the third quarter liquidity build I think cash balances are now 6% of earning assets.

Where are you looking to maintain these levels in the fourth quarter and into 2024.

I would like for cash levels to be a little lower.

Actually we started investing excess liquidity this quarter.

Clay Revy: Moving to criticized assets classified assets were relatively flat for the quarter while total criticized assets increased by 3%. Our surveillance of the portfolio continues to be strong and we're removing risk grades as we see issues arise. I've been encouraged by the level of payoffs that have occurred this year in the amount of $932 million was $645 million of that in the Cree book. 62 million of year-to-date payoffs have come from the criticized asset books. We experienced full payoffs of 10.4 million of classified credits just in the last quarter.

And.

Sure.

Cash balances I would like for them to be.

Yes.

5% to 10% lower.

But the important thing is just when.

This whole thing went off the rails with Silicon Valley on March eight the available liquidity to the bank right now is double what it was we've got six in a quarter billion dollars cash and available cash. So we think <unk> done a good job in getting everything pledged in the right place.

Sandra so, but I do want to see us manage cash a little tighter and so depending on what loan growth to us start to invest in excess liquidity in a very capital efficient way.

Malcolm Holland: With that, I'll turn it back over to them up. As you can see, very active made significant improvement in our strategy to build a 30-year balance sheet. Our focus on granular stable funding will not cease. Terry mentioned, but I would like to mention, again, just the new client acquisition is on the front of our minds every day. For the third quarter acquisition growth was almost 2700 new clients, which is more than the first two quarters combined.

And Terry just following up to that.

You say invest that are you talking about maintaining investment securities portfolio or you're talking about building up from here slightly.

I'm talking about growing the portfolio over the course.

If we're going to continue to make progress as Malcolm talked about on the overall strength of the balance sheet, we've got to put more liquidity into the investment portfolio. The other good thing. It does is it can help protect for down rates given our floating rate loan book, So and so I'm not going to leverage to do it now I'm not looking immediately to do a loss.

Malcolm Holland: It's working, and we recognize we still have more work to do. Finally, I'd like to thank the many phone calls and company text messages received from many of you concerning last quarter's earnings call. Everyone involved is doing quite well.

Trading to do it but as we have excess liquidity we.

Operator: Thank you and operator will take any questions. Thank you. Again, ladies and gentlemen, if you like, that's a question, please press star 11 on your telephone to ask a question, please press star 111 one moment for our first question.

We are investing locking in spreads.

And we will build that portfolio over over Q4 into 'twenty four.

Yes, okay that makes sense.

And then I guess shifting over different topic on the out of state loan portfolio I appreciate that disclosure in the deck. There as we think about next year is there a strategy to change the amount and the shift that at all.

Stephen Scouten: Our first question comes from a lot of Steven Scouten, a Piper family, your line is open. Hey, good morning, everyone. I guess one of my questions is maybe around capital and what you could do with your capital today, you know, strong profitability. Good capital, but you know, stocks, obviously, not trading where you'd want on a tangible book value basis. So I'm just wondering if you guys would think about a share of purchase here today or kind of what your capital priorities would be at the point. You know, listen, if you keep making money and capital, you're going to have options are thinking right now with the environment that we're in.

8% or are you just trying to update.

The community here.

A lot of some of the questions you've gotten on that topic.

I would say the latter to start.

There's been some confusion and frustration and I understand and that's why we've just got really really clear a granular.

Would see so just just as a function of the property types youre going to see that out of state number come down.

Fairly drastically with almost half a billion dollars in that 800.

Malcolm Holland: It's just to continue to add capital and you know, we know there's potential options down there, but we don't see a buy back in our immediate future. You know, I think it's just wise to build the capital base a little bit more. And again, the options are always there. Okay, fair enough.

Warehouse and retail multi to actually explore that much closer to 600, a lot of those are construction deals and they're going to be paying off the payoffs are going to come out of those books, so you're going to see that number come down.

Okay perfect.

And then I guess for clay on the on.

Malcolm Holland: And then just thinking about the, the neminitaries that you think it's kind of nearing the bottom, how should we think about loan yields moving forward and just any portfolio chair and just kind of remind me that fixed first floating so we can think about where. Kind of the loan side of the balance sheet. Well, loan yields, since we have so much floating, you know, 75, 76 to the portfolio 76% of the portfolios time is so per prime.

The office portfolio that disclosure this quarter on the deck with a little bit different than last quarter. So I can't tell if there is any migration in office any just commentary on the office portfolio.

We had we had one loan in the portfolio that moved to criticized assets during the quarter and the office portfolio, but since.

But since June 30th.

Our portfolio is down $30 million.

Malcolm Holland: Loan yields are going to be contingent of that, you know, they're going to move in correlation with what, you know, the Fed does on right. So are they done are they going one more time. I don't know. It's a coin flip in my mind. I don't think they're going into next meeting, but we'll see what happens on out there. You know, you know, we certainly have some two straight loans that are a young working with a background one earlier this week that's in mid reach that stuff to renewal.

Okay.

Got it.

Okay. That's helpful and then just lastly.

As we take a step back and think about just general profitability I think you disclosed in the deck. The PNR ROA. This quarter was around 160 I think.

If we focus.

I was going to ask if we if we if we think about just profitability.

In terms of the next year.

Malcolm Holland: And so it's a, you know, so we're going to have some of that Steven, but given that that so much of the portfolio is floating, I think I think it's going to be helpful when it occurs, but I don't think it's going to be a big enough number and change to really change the dynamic of what the name is going to do.

Far as balance sheet management, and all of the things you're focused on how should we think about that keeping our ROA level.

Yeah.

Probably pretty similar.

I would say.

We're in that give or take 10 bps, yes.

Malcolm Holland: I, you know, and look where I'm really was really happy with how the name performing the quarter, especially as I look across the industry. But, you know, that's a pricing competition on the deposit side is pretty intense, but we were able to pull back meaningfully on hours in September. We can see it in the data. And so I'm hopeful that there's, I think there's going to be some, especially at speedies role, there's going to be some, some nimprosher, but, you know, it looks like in their own internal modeling that, you know, You know, we're getting here on the bottom anyway. Got it. Okay.

<unk>, yes, that's what I would say.

There's a lot of it has to do some of this U.

USDA and counting.

What levels they perform but I think it's fair to say between 115 170 <unk>.

Going to see it.

Sure.

Okay. That's helpful guys. Thanks for taking my questions.

Thanks Pat.

Thank you.

Ladies and gentlemen, this does conclude today's conference. Thank you all participating you may now disconnect have a great day.

Malcolm Holland: And then just maybe lasting for me. I know you've talked about that USDA business, you know, think about it more annualized, but I'm just kind of curious what, what you're seeing from a funding perspective. If that's kind of that vertical is kind of back open for business. Obviously the pipeline looks really strong. And so that was a, I don't know, 14 in $19 million line item last year. Is that, you know, think about still that range?

Okay.

[music].

Malcolm Holland: Or because of some of the government issues, is that going to be, you know, lower year-over-year still? No, I don't think it's going to be lower year-over-year, you know, and, you know, but I think the timing is, I thought Q4, 90 days ago, I would have thought Q4 was going to be a really strong order within you fiscal year for the federal government. Now, now that they're doing it on continuing resolutions, there's just the level of funding, funding, and the certainty of funding is what's lowered my view of Q4.

Malcolm Holland: I mean, we have specific loans, we believe we're going to get closed, but, but, you know, this is getting a little bit of allocation out of continuing resolutions. It's hard to manage your business that way, and it's what some say differently. They're managing their business. It's just fine. It's hard for me to give you clarity in terms of what I think revenue is going to do, but that's why I try to say, I think it's going to be mainly better than Q3, but not nearly as good this last year as Q4, unless something really positive.

Malcolm Holland: It's going to be an option to get a budget passed, but I feel really good about Q4. I think it's going to be in line with what we're saying, and, you know, we'd love to see it be a little bit better. Pipelines are better, the day versus where they were going into Q24. So, the funding is there, we could do better, but there's that macro circumstance there that's really outside our control.

Stephen Scouten: Sure, that makes a lot of sense. All right, guys, thanks for all the color. Congrats on all the progress. Thanks, too. Thank you.

Brady Gailey: One moment, please. Our next question comes on line of Brady Galey of KBW line is open. Hey, thank you. Good morning, guys. Good morning, great. Let me get you talk about all the progress that's been made over the last year. I think you pulled out kind of four or five different areas that have seen some pretty nice improvement. Are we done at this point with kind of the thing? Things that you're focused on on improving internally, or, you know, is there more work to be done on like the loan or deposit ratio and capital, and I think, I think you mentioned you still wanted to get below the 300, 100 creep A and D thresholds. I'm just wondering, you know, in what you mean, are we in, and is there a lot of work left to be done to get the company where you guys would like to see it?

Malcolm Holland: So the, the, the answer is no, we're not, we're not done at all. Internally, we, we call what we accomplished in the third quarter phase one. Phase two is a continued effort to strengthen the balance sheet in a whole bunch of areas. The one that mentioned in a few others. And so we don't believe the definition of fortress balance sheet runs at 95% loan deposit ratio. So we will continue one of the things in the hiring.

Malcolm Holland: Dom is that that his focus has felt was to continue to do that. And really, I think I said it, but it's the granular side of the business, which I told my folks at our planning session phase two will never be out of. That's that's our work to really, you know, support our funding levels and smaller, more sticky business funding areas. And so we said more work to do, Brady, and we're not, we're not going to stop.

Malcolm Holland: And so I want to be real clear that we are, we do feel like we accomplished phase one about a year or more ahead of time. But now we're into phase two. And that's the real heavy lift and the hard work. But that's what we intend to do. The progress of change will probably slow. Yeah, yeah. That was you would not expect to see cube or yeah, look like you were absolutely don't.

Malcolm Holland: Yeah, don't think I'm at 85% loan deposit ratio by the end of the year. You know, we can, we can do that because it's, as Terry always says, you, you miss price, your deposits, you can get all you want. And we're not doing that shown by a slower and rate in September. So we feel like we're in a comfortable place right now from a balance sheet strength standpoint, but we still have more to do.

Malcolm Holland: All right. And then on the expense side, you saw some expense growth quarter on quarter. I think a lot of it was in compensation. But you know, compensation is kind of back at the level that you saw in Q one of this year. So I was just wondering, you know, as we looked forward to think the expenses were a little under $60 million in the third quarter. How should we think about that expense run rate in the fourth quarter?

Malcolm Holland: And maybe more importantly in the 2024? Thank you. And in key four, you know, I would be, I think it's going to be 60 maybe a tad over just, you know, but so not a little bit but not tremendously, you know, one to two percent, I would say. I think as we look into 24. Or, you know, I think it's the I don't see the efficiency ratio for the year getting much better than where it is today, because I'll take one thing to let me say two things.

Malcolm Holland: Benefic costs are going through the roof to get to see insurance premiums as they rebuilt the fund. And those things, you know, they're largely outside our control. And so that's, you know, in terms of if that's where I expect to see the most expense pressure, generally speaking, going into next year. Okay. All right. Great. Thanks for the color guys. Thanks for me. Thank you. One moment, please.

Gary Tenner: Our next question comes on the line of Gary tenor at B.A. Davison. Your line is open. Thanks. Good morning. I was curious to talk a little about kind of the success on the deposit side.

Malcolm Holland: You know, and, you know, many plans to expand what you've already done in terms of the digital bank, you know, direct marketing channels or otherwise have are you slowing the spend on the direct marketing at this point and kind of relying more on the on standing up digital banks and kind of local areas the way you did. To the degree of digital bank can be local, of course, so just curious when you call her on that.

Malcolm Holland: Yeah, I think we're always going to have the digital bank direct marketing lever will always play in that arena. We have to get digital banking going. So I mean, that took a lift just to get into the areas that want we could always go into new areas, you know, most of all of our digital banking went outside of our current markets and we identified certain spots in Texas only that we wanted to be.

Malcolm Holland: There are many more markets that we could pass into that area. You know, direct marketing, that's going to be coming something that we do, but we probably won't do as hard as we did in the third quarter, but it's always going to be there. Again, I think this is not it's not a one one event is going to cure this thing. It continues to be a lever of six seven or eight different places where people have to pull from.

Malcolm Holland: Now, the reason I think you get the little slower and a little bit harder going forward is now we're moving into, you know, more of the commercial bank space, the community bank space, the business banking space, the private banking space, where those become much more granular things that have some lead times in order to get them closed and getting them moved over. But those are the ones that are harder but are much more valuable from a treasury management standpoint from a granularity standpoint. So I think we continue all efforts. We may put more emphasis on different areas, depending on what the balance.

Terry Early: Yeah, let me add two things. One, on direct marketing. Gary, I think you'll see us move from more product specific to direct marketing to more small business focused direct marketing to help drive more new client acquisition specifically in that space.

Malcolm Holland: And I have another one. Yeah, I appreciate that. I mean, this is a question for for Dominic to a degree, but is there, you know, the customers that you're acquiring through the digital bank, are these, you know, they're in state? Are they customers that you think you would have an, you would have an opportunity to do, you know, more business with other than just the depositors at? Absolutely. I mean, that's the whole goal.

Malcolm Holland: If it was just a one CD client or a one money market client, that doesn't really do much for us. And I think the metric that Terry mentioned and I gave you at the very end was our new client acquisition was just shot 2700 in the third quarter. That's double the first quarter and second quarter. And so I'm combined. And so what that does is I now are my folks in the branches and my folks have the opportunity to cross fell.

Malcolm Holland: And today, I believe, we have 68% retention ratio of those clients. And so if you can, all you got to do is get them in our company and they leave. Our service levels at the branches are incredibly high as you look at our ratings and all that. They're just incredibly high. So we did, we can get them in. They're not going to leave and we can sell them other stuff.

Malcolm Holland: Appreciate that. And then just really quickly, in terms of that credit, the additional credit that was donated and restored to us, was there any any creditious reverse related to that credit? There was 1.2 million. Great. Thank you.

Operator: One moment, please.

Michael Rose: Our next question comes from the line of Michael Rose of Raymond James. Your line is open. Hey, good morning, guys. Just a couple follow-ups here. So obviously a lot of progress on the deposit front. A lot of that's been discussed. The the mix of of non-intersparing down to about 23%. Terry, you kind of, you know, it's a coin flip in your eyes between, you know, kind of what happens with with rates here.

Michael Rose: But where do you think that could could fall through? And if you can give us any sort of updated data expectations, it would be appreciated. Thanks. Yeah. I mean, I think, I mean, we grew DDA. You know, so even though the mix went down, it's a function of the overall growth and then the total deposits. You know, so I think it's, you know, I think the mix, it was for two quarters, we've held in.

Michael Rose: My belief is DDA is going to continue. You know, internally, I say we do it is more likely than not to continue to hold in this range. It may be depending on how successful we are. Over time, I would expect it to grow as we as with all the work we're doing in the small business and low to middle market, etc. But in the short run, I expect it to space stable through Q4 as far as I can see into into into into 24.

Michael Rose: One thing I would note, the, you know, the rate of migration. And then as we as we analyze, pre-granularly our deposit base, the level of migration for the last 250 basis points of mood has really, really slowed down. Meaning, and take out new customers, just looking at existing customers that we started that we started to fake Q2 with. The rate of migration for the last two moves has been way less. We've been able to all spend and grow this quarter.

Michael Rose: But still, it seems like customers, obviously, it's just not having as much of an impact. Those people who are in customers who are aggressively managing with the poverty, it seems to be not as high a priority as it should be. Oh, yeah, and certainly didn't mean to discount the fact that you're one of the few banks that's actually grown, GTA is quarter so certainly appreciate the progress and a lot of stuff that you can, you know, that may not be apparent kind of under the hood, so a lot of good stuff there.

Michael Rose: So, but the deposit cost continued to increase, obviously, you guys are at some higher cost deposits this quarter, you know, are we getting closer to a peak and deposit costs in your eyes? Not not with the way I think CDs are going to roll, I don't think I don't think we've hit a peak in deposit costs, we've lower production rates, but just as we've got fixed rate loans, I talked about it, 3.5% being reduced, we've got some earlier dated CDs at lower rates that are going to roll too, so I think it's kind of that's why I think we're near the bottom, not at the bottom on them.

Michael Rose: Okay, helpful, and then maybe just last for me, you know, through the pandemic, obviously, you guys hired a lot of producers, got a lot of growth there in that period, now the funding's increased, it seems like, you know, growth is kind of poised to kind of pick up and, you know, just wanted to get some kind of initial near return thoughts on what the drivers would be and then, obviously, you're trying to bring the theory. And an AMD concentration, you know, down, where would you expect kind of a growth to be just trying to get the puts and takes as we think about next year, thanks.

Michael Rose: Yeah, so the girls going to be largely dependent on payoffs, and then, you know, the whole funding look outlook, which we have some really good vision into is by the second quarter of next year, it basically falls off the cliff. And because we've been funding three 400 closer to 400 million a quarter by the time we get to queue to next year, that falls off, and so you're funding some of the funding it's already in the in the book, it's going to stop.

Michael Rose: If payoffs continue, then growth's going to be a pretty good challenge. But some of the things that we're doing here and we are focused on growth, but we're focused on growth on what the market is going to give us. We're not outsized growth is what we're looking for, and we're still trying to determine what that looks like. I mean, candidly our clients have not asked for a lot lately, but I do see some things getting a little better.

Michael Rose: So overall, I think I would tell you to load a single load of middle digits on growth for next year, but depending on payoffs, that could be a challenge. I totally understand. Thanks for the color. Appreciate it guys. Yeah, I mean, I remember my mystery came back and I remember my other item and carries. I just going to make a comment. If you look at our deposit pipelines to our loan pipelines, it's four items today. Deposit to loans. Yeah, it's four.

Terry Early: It's the deposit pipelines four times greater than our loan pipelines today. So that's just, you know what? I'm right in the next question. Thank you. One moment, please.

Malcolm Holland: Our next question comes from the line of Matt Allney of Stevens, your line is open. Hey, thanks guys. Appreciate all the good commentary this morning. And I apologize if I missed this, but want to ask about the overnight liquidity levels, cash balances, I think, with the third quarter liquidity bill, I think cash balances are now 6% of earning assets. Where are you looking to maintain these levels in the fourth quarter and in 2024?

Malcolm Holland: I would like certain cash levels to be a little lower. Actually, we started investing except liquidity this quarter. And I, you know, cash balances, you know, I would like for that to be, you know, 5 to 10% lower. But the important thing is, you know, when this whole thing went off the rails with Silicon Valley on March 8th, the available liquidity to the bank right now is double what it was. We've got six and a quarter of a billion dollars cash and a bit of cash.

Malcolm Holland: So we, we've been doing a good job and getting everything pledged in the right place, et cetera. So, but I do want to see us manage cash a little tighter. And depending on what number it does, start to invest in excess liquidity in a very capital-efficient way. And Terry, just following up to that, you say, invest that. Are you talking about maintaining investment securities portfolio? Or are you talking about building that from here slightly?

Malcolm Holland: I'm talking about growing the portfolio over the course. You know, if we're going to continue to make progress, as Malcolm talked about, on the overall strength of the balance sheet, we've got to put more liquidity into the investment portfolio. The other good thing it does, it can help protect or downrights, given our floating rate loan book. So, and so it to the, I'm not going to leverage to do it. No, I'm not looking immediately to do a loss trade to do it.

Malcolm Holland: But as we have access to liquidity, we are investing, blocking interest, and we'll build that portfolio over Q4 into Q24. Yep, okay, that makes sense. And then I guess, shifting over a different topic on the out-of-state loan portfolio. I appreciate that disclosure in the deck there. As we think about next year, is there a strategy to change the amount and to shift that at all of the out-of-state percent, or are you just trying to update us the community here in a lot of some of the questions you've got on that topic?

Malcolm Holland: I would say the latter to start, there's been some confusion and frustration and I understand, and that's why we just got really, really clear and granular. I would see, so just as a function of the property type, you're going to see that out-of-state number come down fairly drastically, with almost half a billion dollars in that 800 in warehouse and retail, mostly to ashes, more than that in what's closer to 600. A lot of those are construction deals, and they're going to be paying off. The payoffs are going to come out of those books, so you're going to see that number come down.

Terry Early: Okay, perfect. And then, I guess, for Clay on the the office portfolio, that disclosure of this core in the deck was a little bit different than the last quarter, so I can't tell if there's any migration in office, any just commentary on the office portfolio. We had one loan in the portfolio that moved to criticize assets during the quarter in the office portfolio, but since June 30th, the portfolio is down 30 million.

Terry Early: Got it, okay that's helpful and then just lastly, as we take a step back and think about general profitability, I think you disclosed in the deck that PPR ROA this quarter was around 160 I think. If we if we think about just profitability in terms of the next year, as far as balance sheet management and all the things you're focused on, how should we think about that PPR ROA level? Probably pretty similar.

Terry Early: That's what I would say, somewhere in that you know give or take 10 bits. Yeah, one thing to one step. Yeah, that's what I would say. In a lot of it have to do Matt some of this USDA income and you know whether what levels they perform, but I think it's fair to say between 150 and 170. You're going to see it. Okay. Okay, that's helpful guys. Thanks for taking my questions. Thanks. Thank you.

Operator: Ladies and gentlemen, this is us conclude today's conference. Thank you all participating. We now disconnect. Have a great day.