Q4 2023 Veritex Holdings Inc Earnings Call

Will Holford: Good morning and welcome to the Veritex Holdings 4th quarter, 2023 earnings conference call and webcast. All participants will be in a listen only mode. Please note, this event will be recorded.

Will Holford: I will now turn the conference over to Will Holford with Veritex Morning. Thank you for joining Veritex's 4th quarter, 2023 earnings call.

Will Holford: Before we begin, please be aware this call will include board looking statements that are based on our current expectations of future results. 4th looking statements are subject to both known and unknown risk and uncertainties that could cause actual results to differ material from these statements. Our 4th looking statements are as of the date of this call and we do not assume any obligation to update or revise them. The statements made on this call should be considered together with cautionary statements and other information contained in today's earnings release and our most recent annual report or forms in Jane and subsequent filings with the SEC. We will refer to investor slides during today's presentation, which can be found along with the press release and the investor information section of our website at VeritexPaint.com.

Will Holford: Our speakers for the call today are chairman of CEO Malcolm Holland, our CFO, Terry Early, and our chief credit officer, Clay Ruby. At the conclusion of our prepared remarks, we will open the lines up for a Q&A session.

Malcolm Holland: I will now turn the call over to Malcolm. Thank you Will. Good morning everyone.

Malcolm Holland: Today we'll recap both our 4th quarter results as well as our 2023 annual results. As you will see, we continue strengthen our balance sheet and add the tangible book value with a clear commitment to the things that will add long term value to our Cheryl. For the quarter, we reported operating earnings of 31.6 million or 58 cents per share, then pre-tax, pre-provision operating return on average assets of 1.4%.

Malcolm Holland: For the year 2023, we reported operating earnings of 142.1 billion or $2.60 per share with a pre-tax, pre-provision operating return on average assets of 1.81%. Although not the year we had hoped for from an earnings perspective, we were able to use our earnings power to reposition our balance sheet to a much stronger place and still make a nice return for our shareholders. Our continued profitability also allowed us to meet our goal of CET1 being greater than 10%, and in the year at 10.29% up over 120 pips over year end 2022.

Malcolm Holland: We're able to slow down our loan growth for the year to 1.7% or just 160 million, a far cry from our 2022 loan growth of 30 plus percent. This was accomplished by a focus strategy to move out of non-relational borrowers, continued loan payoffs and general market decline.

Malcolm Holland: Currently, we were able to grow deposits during the year by 13.3% or 1.2 billion. Again, this was a focus strategy that went into place against the third quarter of 2022, which we're now seeing some of the expected outcomes coming to fruition. Certainly, a heavy lift and a testament to the resolve of our people during some challenging and volatile times.

Malcolm Holland: Looking forward to 2024, our priorities will remain the same. Improving funding and its related costs and adding new clients that represent full relationships for 2024. We believe we can grow deposits at a high single digit pace while loans will grow in the mid single digits. As we mentioned, every quarter on credit remains a top priority.

Malcolm Holland: Our NPA to total assets increased from $8 million to $96 million or $77.77%. The net increase of $16 million were comprised of one data center loan of $10.5 million, a CNI credit and a plastics industry of $3.8 million, and several government guaranteed loans totaling $16 million. It should be noted on those specific loans that $5.2 million has a firm government guarantee, and as a reminder, we have a $5 million holdback that will be used for future losses in that loan category.

Malcolm Holland: We also have one large CNI upgrade out of the NPA category. Our ACL was 114, flat over 3Q, but up 21% over 1231-22, while criticized loans remained stable quarter over quarter as well as year over year. We did have a net charge of $9.5 million to the quarter of 23.7 for the year, or 25 bips, but it will provide some greater color on this shortly.

Terry Earley: I will now turn the call to Terry. Thank you, Malcolm.

Terry Earley: We make good progress, and Malcolm covered it in strengthening our balance sheet. I'm thankful for the progress that the job is not done. I want to spend time primarily drilling into the results for the year ended 1231-23, not a little for the fourth quarter. I think this is important because some of our businesses are seasonal, and we think about them on an annual basis and not just quarterly. Starting on page three, our strong deposit growth and low loan growth allowed Veritex to reduce its loan to deposit ratio from 104.4% at 1231-22 to 93.6% at 1231-23.

Terry Earley: The deposit growth also allowed us to reduce our whole self-funding reliance to almost 20% of year end. Capital is significantly stronger, and we made progress on reducing our commercial real estate concentrations. On page four, we knew the strengthening our balance sheet was going to come at a cost. Thankfully, we have the earnings power to absorb it. Create tax, pre-provision operating earnings were $222 million for the year, up slightly from 2022.

Terry Earley: Tangible book value per share increased to $20.21. A dollar 57 for the year or 12.7% when you add back the dividends. This is the first time that Veritex has gone over $20 per share in tangible book value.

Terry Earley: Finally, we've grown CET1's Malcolm mentioned by 120 basis points to 10.29. We had a goal of 10%, we got their quarter early, and we continue to strengthen capital. Moving to slide five, Veritex continues its progress in improving its liquidity and funding profile over the fourth quarter. During the quarter, we grew deposit $542 million for 5.6% with little change in broker deposits. The deposit growth combined with no loan growth allowed us to pay down expensive FHLB advances and invest $200 million into the investment portfolio.

Terry Earley: As we've said before, Veritex shifted its focus to the right side of the balance sheet late in the third quarter of 2022. We started slowing loan growth. We shifted our loan production focus away from Korean ADC to CNI Small Business.

Terry Earley: We changed our banker incentive program at the beginning of 2023 to give deposits of higher weight. We have reallocated marketing spend to deposit products and launched a multi-wave direct marketing campaign in February. Additionally, our digital bank, which we started in the second quarter, is making a meaningful impact on deposit growth. All these efforts are showing promise.

Terry Earley: This evidence, by the fact that our new account growth in 2023 was 100 is 72% higher than in 2022. Non-interesting deposits declined during the quarter of $545 million due to seasonal outflows in our mortgage escrow deposits. This is reversed early in Q1.

Terry Earley: Deposit pricing competition continued to be strong, but not quite as intense as it was a few quarters ago. That being said, with our desire to move our loan deposit ratio below 90% before the end of 2024, we're going to continue to fill pressure on the deposit beta and the name on slide 6. In thinking about the loan portfolio, he noticed that loan production declined to 80% from 2022 to 2023. This shift away from Korean ADC is showing progress.

Terry Earley: As stated earlier, our concentration level increased and moved down during the year from 325% to 320%, and the level of ADC declined from 132% to 119%. The goal was to continue to move these levels down below the regulatory guidelines.

Terry Earley: Payoffs in the Korean ADC portfolio remain strong, and we're slightly over $900 million for the year. Unfunded ADC commitments declined $1.2 billion in 2023, and now spent at 900 million heading into 2024. Looking forward to 2024, we forecast ADC funding to decline by 75% as compared to 2023. Slide 7.

Terry Earley: Provide us a detail on the commercial real estate and ADC portfolios by asset class, including what is our state. Moving to slide 8, we're frequently asked about our out-of-state loan portfolio, and as you can see, our national businesses and mortgage loans comprise 14% of our total loan portfolio. Our true out-of-state portfolio is 1.1 billion, and makes up to 12% of the total bulk. Almost 70% of the out-of-state portfolio are loans where we have followed Texas developers.

Terry Earley: The rest are SNCCs, syndicated loans, and CNI. On slide 9, that interest income decreased by 3.9 million to just over 95 million in Q4. The biggest drivers of the decrease were higher deposit costs, and lower loan yields offset by higher yields on the investment portfolio. The net interest margin decreased 15 basis points from Q3 to 3.31%, the NIM change was primarily related to these same drivers. As stated earlier, the NIM is going to continue to feel pressure to work to achieve a loan to deposit ratio below 90%.

Terry Earley: This will require us to invest between $500-$600 million in excess funding into the investment portfolio during 2024. This additional investment in debt securities will drive 8-10 basis points of NIM contraction. Additionally, the NIM will contract approximately 4 basis points for every 25 basis point reduction in the fifth month, on Slide 10, Lundjilter Relatively Felt Flat, Slide Decline, Investment Yilter Up, and Deposit Cost Increased 23 Basis Points.

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

Terry Earley: We did purchase 205 million securities in the first half of Q4. These securities were capital efficient and delivered ahead spread of 133 basis points over the next three years. On Slide 12, operating non-interest income increased slightly in 2023 to almost 54 million dollars. The biggest drivers were government guaranteed loan businesses which increased their gain on sale revenue by 42% over 2022. Operating non-interest expenses were a black quarter over a quarter, but increased almost 30 million dollars year over year. Significant drivers as he increased our FDIC insurance, lower cost deferral from limited loan production, higher legal and professional fees largely associated with being over $10 billion and marketing cost. This was offset by lower variable compensation.

Terry Earley: On Slide 13, during 2023 total capital grew approximately $105 million. CET-1 ratios expanded by 18 points during the quarter and 120 basis points for the year. The significant contributor to the expansion in the capital ratios has been a $612 million decline in risk-weighted assets. It's worth noting that since Veritex went public in 2014, it is compounded tangible book value for share at a rate of 11.4% when you include the dividends that have been paid to shareholders.

Terry Earley: Finally on Slide 14, 2023 was a year building the ACL. Since the beginning of 2023, we've grown it by 19 million dollars or 21%. These additions to the allowance 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. Chief factors continue to make a sizable part of the ACL.

Clay Ruby: With that, I'd like to turn the caller into Clay for comments on credit. Thank you, Terry. Good morning, everyone. This quarter has been a mixed bag of credit improvements and challenges. On the improvement side was a reduction in the bank's office exposure by 65 million or 10% over the last 90 days. That does not include an $8.5 million substandard office loan that paid off post-corder end. Secondly, our classified assets were reduced by 17 million or 7%. Due to the team-to-resolved problem credits, classified assets were at their lowest amount for 2023 in the fourth quarter.

Clay Ruby: On the challenge side was an increase in MPAs as previously discussed by Malcolm, $9.5 million in charge of an elevated past due. Past dues are elevated in the 30 to 60-day past due category, primarily due to a $15 million multi-family loan that's matured and renewal discussions were in in process and ongoing at year-end. Two other loans totaling $21 million were past due 30 days at year-end and are now current. A commercial real estate relationship in the amount of $8.8 million was passed due at year-end and it's a waiting pay-off.

Clay Ruby: Charge-offs for the quarter were spread out across eight borrowers. The largest of which was a $2.9 million charge-off on the data center office property that was moved to MPA during the quarter. The second largest charge-off in the amount of $2.5 million was taken to exit the Atlanta office property that was moved to MPA in Q2. A $2.6 million charge-off was taken on a medical practice that was filed for bankruptcy in 2023 and there are a few other smaller charge-offs that amounted to $1.2 million spread across various in the loan tax. The year-over-year increase in that charge-offs is driven by the Atlanta office building charge-off. A five-year lookback on charge-offs is provided as context for the year.

Clay Ruby: Charge-offs of acquired credit makes up 72% of all charge-offs for the previous five years and with that I'll turn it back over to Malcolm to follow up on this. Thank you, Clay.

Malcolm Holland: As we think about 2024, we believe it will be somewhat falleting from a growth and rate standpoint. Despite that, our team has fully engaged on building a stronger balance sheet that will perform at the highest level regardless of the time we find ourselves in. We'll commit it to our purpose with unwavering persistence while being patient to make the right clues at the appropriate times. Operator, we can now take questions.

Operator: Thank you. If you would like to ask a question, please press star one on your telephone. You will then hear an automated message saying your hand is raised.

Matthew Olney: We will go into the Q&A now and our first call will be coming from Matt Olin, Clay. I just want to start off on capital. You guys met your 2023 capital goals and I was wondering if you had any set goals for 2024. Great, good question. We're going to probably continue to build capital a little bit. We don't have any explicit targets.

Matthew Olney: We will certainly, I think as much as anything, we'd like to see growth get back to the mid-single digits and be able to leverage that capital in an efficient way, continue to pay our dividends, and you'll probably see capital build, but slower in 24 than it has in 23. Okay, thank you. I appreciate the color there. And then one more for me.

Matthew Olney: You guys laid out the impacts of the 25-bit cuts throughout 2024. Can you give us an idea of what you're internally modeling for cuts? Yeah, if I had a crystal ball, I mean, look, the fence set six, the market set three, you know, who does, I'm not, that's a reason I structured the comments the way I did, is you guys, I think, are modeling three, so I, you know, but what is volatile is race improvement to be making a statement is just not prudent on our part as to what we think. Our job is to try to insulate our balance sheet as best we can from right movements and hedge the risk as best we can, and that's all we can do.

Operator: Alright, I appreciate the color. Thank you. Thank you, one moment for our next question.

Brady Gailey: And our next question will be coming from Bradley, dearly of KBW line of open. Hey, it's Brady, someone of us.

Brady Gailey: So I understand the commentary about the name, seeing some additional pressure ever you're growing deposits faster than loans and putting in the bond books, I understand that. But when you look at NII dollars, do you expect to see, you know, downside and NII dollars relative to 4Q, or do you think that could be stable to increasing. I think it's, I think it should relative to 4Q.

Brady Gailey: I think it should be relatively stable in the front half of the year and maybe we start to build some positive momentum and growth in the back half because I think our loan growth is going to help that. And, you know, obviously with a lot of focus on deposit costs as well. Okay, and then how are you thinking about expenses, expenses have been growing at a double digit pace for the last few years, but seems like it could be less than that this year. How are you thinking about expense growth in 24? Yeah, that's certainly the goal, Brady.

Brady Gailey: We've had a lot of discussion around expenses at the company and continue to do. You know, the issue is we run a pretty efficient company today and obviously the biggest driver of any expense for bank is people. And we continue to see opportunities in certain areas, you know, doms made a pretty good focus on our small business, our business banking group. That's going to require some folks to continue to grow that area.

Brady Gailey: So, you know, our goal is to hold it somewhat flat, some of this stuff is out of our control. I mean, we looked back at last year and FDIC insurance, you had benefits costs, you had some marketing dollars that were driving some of these deposits, lower cost deferrals because our loan production was down 80. Yeah, our deal fast 91 rule, you know, it was definitely lower.

Brady Gailey: So we still feel pretty good about expenses, but looking forward our goals to hold them pretty flat if we can, but there's going to be some, there's certainly going to be some growth. I think it's probably fair to say we're paying more attention to expenses going into 2024 and at least my five year history will come. And my 13, that's pretty true.

Brady Gailey: Got it. That's good color. Then lastly, for me, just back to the capital question. I mean, you know, your profitability is pretty good. You know, it feels like you'll be able to still accumulate a decent amount of capital this year. I mean, the stocks at nine times earnings, 1, 1, a tangible.

Brady Gailey: Is this the year that you more seriously consider share by backs? Listen, it's certainly something we have to look at. And we had a board meeting yesterday and we it was a topic of discussion. You know, capital is king, and you know, I love to have some drive powder. But, you know, there may be a situation at some point in time in 24, where we try to put something in place and protect ourselves, you know, if the stock were to see some dips. So the answer to your question is like expensive.

Brady Gailey: We've had enough. We've had conversations about it. We don't have any place today, but I wouldn't be surprised that we didn't have something in place very shortly.

Operator: Okay. Got it. Thanks. Thanks for it. Thank you. One moment for our next question.

Brett Rabatin: Our next question will be coming from Brett. Robertton, a hovy group.

Brett Rabatin: Your line is open. Hey guys, good morning. One is to start on back on the margin and just thinking about the outlook. The decision to increase the securities portfolio. Is that is that purely from a balance sheet liquidity perspective, or can you guys talk about the decision to grab the securities book at this point? It's really, it's just a remixing of earning assets, it's building liquidity on the balance sheet. I think is what we've done through the four quarter has been to lock in good spreads by using the relative funding rates and the swap curve versus the investment to lock in good spreads for three years.

Brett Rabatin: I think going forward. So we're going to there's going to be an additional important factor, which is we're not going to hedge it as much and we want to have it for down rate protection. To help mitigate the nymph pressure on the way down.

Brett Rabatin: So that's, that's, it is going to kind of shift as rates have moved as if it's gotten clearer. What, you know, and what it's going to do with rates, we're tweaking a little bit as we look forward for the rest of 24 and the investing we've got to do to help provide that protection. And Fred, I would just say go go back about 18 months and we decided that we were going to change our balance sheet and this is an overall balance sheet strategy. And in order to get it down below 90% on the loan deposit ratio, you got to put your liquidity somewhere. And so there's got to be a bigger security book.

Brett Rabatin: So it's a remix as Terry said, but it's all part of the strategy that we started 18 months ago to remake this balance sheet. And we still think it makes sense to leave it sitting short, short rates overnight at the Fed because that's only going to exacerbate our down rate. Risk. Okay.

Brett Rabatin: And then given the commentary around the betas, you know, I know Malcolm, you've got quite a few deposit, you know, initiatives in place. Can you give us maybe an update on the deposit initiatives relative to the guidance for betas to continue to increase? You know, again, we've got seven or eight different levers that we're pulling, some are more expensive than others. You know, we're trying to stay away and reduce our wholesale funding. Dependence, if you will.

Brett Rabatin: But, you know, we're seeing some, we're seeing some good movement. I could, you know, I could pick out a couple right now that, that have actually done quite well. And this is the time of year where we see every bank, I think, sees a little bit of deposit shrinkage because of taxes, bonuses or what have you, but we've actually had a pretty decent start to the year terms of betas. Well, I mean, I just think in general, it's been, it's been so competitive and that's driven the deposit betas off.

Brett Rabatin: I would say this, you know, we talked on the last call of the Q3 call about bringing more balance, depressing and volumes. We saw that during the quarter and we've seen it already in Q1. Our total deposit cost, as of two days ago, had declined.

Brett Rabatin: Not a lot, but a few bips and I'm encouraged by that. Now, on the margin, our production rates right now are around 460 for new deposits. So all that to say, it's moving, starting to move. And as you can tell from the new client acquisition of 172% in new accounts, I mean, we're getting traction. It's, you know, it's just, it just takes time to rebuild, remake our deposit base and bring pricing balance to it. And that's what we're all about every day. Okay, that's helpful. I guess you can one last one.

Malcolm Holland: Malcolm, how do you feel about North Avenue this year and this maybe fee income generally speaking? No, North Avenue had a really handedly from a revenue standpoint. You know, they did revenue from a reduction standpoint. They're about 180 million in 23. Andedly, I would expect that, or maybe a little bit more in 24. They've got some good momentum. You know, we've talked about it time and time again about the government constraints we have from time to time, whether.

Malcolm Holland: They're, you know, they're funding stuff or not. But as a bank, we're helpful because we can do some of these, these interim fund fundings that is actually a huge advantage in the space. But listen, I think they're engaged.

Malcolm Holland: They, their pipelines are huge. And I expect them. I think it was a production.

Malcolm Holland: I mean, the revenue was 20 million in fees last year, approximately. And, you know, the one thing about that business that I think people do miss is they, they still have some, their loans on the books and their spread income. It's a spread income is, you know, covering the expenses of the company that the fee income is kind of the upside to it.

Malcolm Holland: So I expect at least what they did last year into 24. And just as I'm on that fee business, the SBA business we had. It would be unfair to say we've remade it in 23, but we hired a new guy to run it and he has done a phenomenal job and we expect a lot more out of SBA with what he's been able to do and we've hit the ground running already.

Malcolm Holland: So I would say the fee businesses will outperform 23. And their Q, SBA, Q4 production is indicative of the momentum you're seeing. I mean, they did 40 to 45% of their production in Q4 and really encouraged. I heard of everything Malcolm said on the USPA but I think the SBA has not been as big a contributor but our outlook on that is really bright.

Operator: Okay, that's really helpful. Thanks guys. Thank you. And one moment for the next question.

Stephen Scouten: And our next question will be coming from Stephen Scouten of Piper Sandler. Your line is open. Yeah, thanks. Good morning.

Stephen Scouten: Hey guys, I wanted to start with the loan and deposit new production spread that you listen inside 10. It looked like a pretty big jump quarter quarter, which is nice to see some kind of wondering that 493 basis points. What is that bait like what is that actually from a new loan perspective and a new deposit perspective and could that lead to some core name expansion apart from kind of the potential for rate cuts and the and the debt securities that you know. Well, the new loan production that the problem with that the question is, is it new deposit production to wash new loan production. The spread is good, but there ain't enough on it.

Stephen Scouten: New loan production is about 9%. And you know, new deposit production is there's been in the end of in the fours. You know, so, yeah, but just a much higher pace of deposit growth that makes sense. If you get the volume on the loan side, Stephen, you're going to see something possibly, but you know, we're not, we're not budgeting for that production. But if we, we are able to find it even mid single digits is going to be helpful. Yeah, I mean, we're going to grow loves mid single digits. You know, let's just use 5% since that's mid single digits. That's about 480 million.

Stephen Scouten: If we grow deposits, that means we need to grow deposits of billion dollars. So that's 480 million is going to have a really good spread, but the other 520 not so much. You know, the cost of funding and where you can invest for 2024, it's going to be about flat. But it's going to be nearly, but it's going to help going into 20 to 20. That's the point I was going to make is that once you make up that delta of that 500 or so. Now you're kind of on solid footing where, you know, if you want to do a dollar in loan, you only need a dollar and 10 in deposits. Today, you need double back to get our balance.

Stephen Scouten: So 25, you should hit the ground running, assuming we do the billion in deposits in half a billion. And I think 25 is also going to be once we get the balance sheet where we want it, 25 is going to be a year about optimizing deposit pricing because we're not going to need the excess growth to get the balance sheet where we want to correct Yeah, that all makes sense. Okay, and what I know you mentioned maybe not hedging to kind of bring down your overall rate sensitivity in the future.

Stephen Scouten: I mean, do you think you can move that for basis points for every 25 basis point cut? I mean, is that a number you're trying to cut in half? I mean, do you think you can work that number down or is it more just around the edges? No, I think we can work that number down with with a combination of things.

Stephen Scouten: What is how we how aggressively we price on the way down and we sick we exceeded expectations during the pandemic. And so we just got to replicate what we did before coupled with the way we're making more fixed rate loans today. And you know, and there's a lot more discussion on that, Veritex has never been a big fixed rate lender. I certainly have a much greater appetite for that. And there's a lot more discussions going on there.

Stephen Scouten: And you know, and then hedging as well, the problem with hedging right down rate risk right now with the shape of the forward curve. It's just so expensive to hedge it. And I would rather I think I would rather not do it in the derivative space, but do it in the cash base with fixed rate loans and securities. Yeah, makes sense. Okay.

Clay Ruby: And then just the last thing for me is kind of moving back to credit from that regular conversation. I mean, it sounds like the spike in past dues, maybe resolved itself to a large degree since quarter end. But I mean, if you think about charge off for next year, you know, what's kind of a reasonable pace off this, you know, off the elevation we saw in in 23 largely related to that one office credit, I know. Sure, sure. Thanks for the question.

Clay Ruby: Yeah, I think if I'm sitting here today looking forward into 2023. I couldn't identify more than $15 million in potential charge also today, but we're not we're not budgeting for that. We're budgeting for our downside than that. Yeah. I mean, I think you have a slide in their claim said we did average to 27 bips over the last five years. I'm sitting and you all choose sounds like a great place to start.

Clay Ruby: We think we'll do better. But, you know, 27 bips has been our historical number. And the answer in question out past this is, yeah, we got 20 something plus me. I think is already current on two deals. Okay, I would say I would rather you guys think the consensus charge off number for the year 29 30 bit. But I'd rather outperform on that would want to see anybody drop the estimate to be honest with it.

Clay Ruby: Yeah, no understood. And I guess I mean from a provision standpoint, obviously, even with some of the migrations, there wasn't a need for provision build. So it's not as if you see any, you know, large scale degradation that makes you see the need to build that correct. Correct. I would not think back to.

Operator: We need word positive to what the amount of group is here. Perfect. Thanks for all the color, guys. Appreciate the time. Thanks, David. Thank you and one moment for our next question.

Ahmad Hasan: And our next question will come from Ahmad Hassan of DA Davis in your line. It's open. Hey, guys, this is Ahmad Hassan on for Gary Tenner. Good morning.

Ahmad Hasan: So pretty good. So firstly, I might have missed this, but any color on the credit that went on approval and generated 1.9 million in interest reversal. We didn't have 1.9 million interest reversal, so I don't think. I think it was 6,500,000. And that's 6,000 or 7,000. I think I somewhere in that range.

Ahmad Hasan: So I agree with that part. The rest was that that was the move and the non accruals that affected the now. All right, thanks.

Ahmad Hasan: And looking through 24 and the wholesale funding reliance is a take over 20% at the end. Where would you like this target ratio to be? Yeah, it's already down meaningfully in the first quarter.

Ahmad Hasan: It's been as low as 17% so far this year, probably like for it to end somewhere between 15 and 17, 18% somewhere in that range. If it's lower, I'm going to be happy because we've done it that we've outperformed on the deposit growth core deposit growth side, but I would expect somewhere the 15 to 18. All right.

Ahmad Hasan: And lastly, I mean, you talked a bit about this, but thinking about the loan growth outlook for 2024, particularly given that the EP one is over 10%. How are we thinking about growing risk-related assets for the next year? I mean, we're going to be more measured in their growth on the risk-related assets side. As we mentioned many calls ago that we got that a little bit over our skis on our unfundits and what have you, but I think the goal now is to always keep that number inside our capital number. And that's what you should expect.

Ahmad Hasan: I'm definitely going to stay inside. I think as we are commercial real estate and ADC ratios get below 300 to 100. I think you will see production of ADC in 24 higher than it's been in 23. That will add some to the unfundits, some to the risk-related assets. But net net, I still say.

Ahmad Hasan: And so instead of unfundits shrinking, they're probably going to grow a little, but not a lot. And so I think that's going to be one of the things that's going to keep the TE-T1 ratio from growing as much as it did in 2023. But we're going to stay very, we're going to look for capital efficient investments and investment portfolio. And if we have more loan growth, that's going to help utilize or deploy the TE-T1 and some unfundit increase.

Ahmad Hasan: Thank you for the great color and a quick follow up on that within the low and book and unfunded construction commitments under $1 billion should we expect a larger ear over your decline in the balances in that segment versus the 50 million decline in 23. No, you expected to be flat, maybe a little growth but nothing painful.

Ahmad Hasan: Sounds good. That's it. Thank you. And one moment, please. For our next question.

Michael Rose: And our final question for today will be coming from Michael Rose of Raymond James. Your line is open. Hey, everyone.

Michael Rose: Thanks for taking my questions. Just two quick follow up. I'm sorry if I missed this. Terry, but certainly understand the desire to bring the loan to deposit ratio down. What should we expect for or what are your expectations for noninterstairing mix? I assume some of the growth is going to be in some higher cost. You know, categories that you have a sense for.

Michael Rose: I'm sorry if I missed this. Where that could drop out and what terminal data expectations could be. Thanks. Yeah, yeah, I would expect it to be pretty flat from here. Now, if we if we execute well, I would expect it to be pretty pretty flat. And that means our small business, our community bankers, our commercials, CNN guys are hitting their target. I would expect it to be flat.

Michael Rose: There's always seasonality. Like I said, at the fourth quarter, there's some outflows and that they've come back in the first quarter already, but generally we're going to see those outflows again in the fourth quarter of 24. So Michael, that's our best guess right now. Okay, that's that's helpful. And then just going back to credit quality. I know there's the two.

Clay Ruby: So I'm going to go back to office CRE loans that comprise I think 60% of your your MBAs at this point, any sort of update there and you know what's the outlook for, you know, potentially moving, moving those credits outside the bank. Thanks. It's just one of them, right?

Clay Ruby: Just it's just that one and we actually had that one note sale working on it. If it fell out late, so we wrote it down to where the note sale was going to be. We do have a participant in that partner in that, so we have to work with them. But our anticipation is that that asset will be gone this quarter, either through, you know, probably through a note sale of some sort. But we were really, we were really close. We just fell out at the end.

Terry Earley: Okay, great. And then maybe just finally for me, you know, I know this was kind of touched on earlier in the call, but Terry, do you have a sense for, you know, how if we do what the Delta would be, you know, from kind of what you talked about in terms of rate cuts, you know, kind of us being at three, four, curved, being at six. What that Delta could look like, if we don't get any cuts and then be if we get the full, you know, forward curve at this point, just just trying to look for the sensitivity since I assume it's not linear.

Terry Earley: Thanks. Well, I mean, you know, if it's about a million and a quarter for every basis pointed in, and so if, you know, if it's six cuts, you know, if you get 20 to 24 basis points in every reduction, there's, there's your math there, and if it stays flat, it's, it's, you know, and so it's kind of pretty, if rates were to stay flat, it's pretty meaningful to, you know, and to EPS, but I don't, you know, I'm not, I don't think he might think we're going to end the year flat, so that's the best way I know to answer mine. No, that's very helpful.

Operator: I appreciate you guys taking my questions. Thanks. Thanks, Michael. Thank you all for your time today. This concludes today's conference call. You may all disconnect. That's much greater than I thought.

Thank you.

Good morning, and welcome to the vertex Holdings fourth quarter 2023 earnings conference call and webcast all participants will be in a listen only mode. Please note. This event will be recorded I will now turn the conference over to will helpful.

Will Helpful: It's fair attacks.

Will Helpful: Good morning, Thank you for joining <unk> fourth quarter 2023 earnings call.

Will Helpful: Please be aware this call will include forward looking statements that are based on our current expectations of future results or events forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements are forward looking statements are adds up the date of this call.

Will Helpful: And we do not assume any obligation to update or revise the statements made on this call should be considered together with cautionary statements.

Will Helpful: To date in today's earnings release, and our most recent annual report on Form 10-K and.

Will Helpful: In subsequent filings with the SEC, we weren't first to investor slides during today's presentation, which can be found along with the press release and investor relation section of our website at <unk> Dot com our speakers for the call today are chairman and CEO, our CFO Terry.

Terry: Chief Credit Officer.

Terry: The conclusion of our prepared remarks, we will open the lines up for a Q&A session I'll now turn the call.

Terry: Okay.

Speaker Change: Thank you will good morning, everyone today, I will recap our fourth quarter results as well as our 2023 annual results.

Speaker Change: As you will see we continue to strengthen our balance sheet Andrew.

Speaker Change: Tangible book value with a clear commitment to the things that we're at.

Speaker Change: Long term value to our shareholders.

Speaker Change: For the quarter, we reported operating earnings of $31 6 million or 58 cents per share pretax pre provision operating return on average assets of one 4%.

Speaker Change: Five 4%.

Speaker Change: For the year 2023, we reported operating earnings of $142 1 billion or $2 60 per share with a pre tax pre provision operating return on average assets of 1.81%.

Speaker Change: So not the year, we'd hope for from an earnings perspective.

Speaker Change: We are able to use our earnings power to reposition our balance sheet to a much stronger place and still make a nice return for our shareholders. Our continued profitability also allowed us to meet our goal of CET, one being greater than 10%.

Speaker Change: 10.29% up over 120 bps over year end 2022.

Speaker Change: We were able to slow down our loan growth for the year to one 7% or just the $160 million.

Speaker Change: Far cry from our 2022 long growth of 31%.

Speaker Change: This was accomplished by a focused strategy to move out non relational borrowers continued loan payoffs and general market decline.

Speaker Change: Concurrently we were able to grow deposits during the year by 13, 3% or $1 2 billion.

Speaker Change: Again. This is a focused strategy that went into place against the third quarter of 2022.

Speaker Change: Which we're now seeing some of the expected outcomes coming to fruition.

Speaker Change: Certainly a heavy lift a testament to the resolve of our people during some challenging and volatile times.

Speaker Change: Looking forward to 2024 operating priorities will remain the same.

Speaker Change: Proving funding and its related costs, and adding new clients that represent full relationships for 2024.

Speaker Change: We believe we can grow deposits at a high single digit.

Speaker Change: While loans will grow in the mid single digits.

Speaker Change: As we've mentioned every quarter on credit remains a top priority.

Speaker Change: Our NPA to total assets increased from 8 million to 96 million or <unk> 77.

Speaker Change: Seven 7%.

Speaker Change: The net increase of 16 million were comprised of one data center long turn and a half million C&I credit the plastics industry of three 8 million and several government guaranteed loans totaling $15 million.

Speaker Change: It should be noted on those specific loans that $5 2 million as a firm government guarantee and as a reminder, we have a $5 million hold back that will be used for future losses.

Speaker Change: In that loan category.

Speaker Change: Also had one large C&I upgrades out of the NPA category.

Speaker Change: Our ACL was 114 flat over three Q, but up 21% over 12, 31, 22, while criticized loans remained stable quarter over quarter as well as year over year.

Speaker Change: Net charge offs of nine 5 billion to a quarter or 23, seven for the year or 25 bps.

Speaker Change: I'll provide some greater color on this shortly I will now turn the call to Terry.

Speaker Change: Thank you Malcolm.

Terry: We've made good progress and mountain <unk> and strengthening our balance sheet and thankful for the progress, but the job is not done.

Terry: I won't spend time, primarily drilling into the results for the year ended 12, 31 23 net a little for the fourth quarter. I think this is important because some of our businesses are seasonal and we think about them on an annual basis and not just quarterly star.

Terry: Starting on page three our strong deposit growth and low loan growth allow vertex to reduce its loan to deposit ratio.

Terry: 104, 4% at 12, 31, 22 to 93, 6% at 12 31 23.

Terry: The deposit growth also allowed us to reduce our wholesale funding reliance to almost 20% at year end capital is significantly stronger and we made progress on reducing our commercial real estate concentrations on page four we knew the strengthening our balance sheet is going to come at a cost thankfully thankfully we have the earnings power.

Terry: To absorb it.

Terry: Tax pre provision operating earnings were $222 million for the year up slightly from 2022.

Terry: Book value per share increased to $20 21.

Terry: $1 57 for the year or 12, 7%.

When you add back the dividends. This is the first time that vertex has gone over $20 per share and tangible book value.

Terry: Finally, we've grown CET, one as Mark mentioned about 120 basis points to 10, two nine we had a goal of 10% we got there a quarter early and we continue to strengthen capital.

Terry: Moving to slide five.

Terry: <unk> continued its progress in improving its liquidity and funding profile over the fourth quarter. During the quarter. We grew deposits by 142 million or five 6% with little change in brokered deposits. The deposit growth combined with no loan growth allowed us to pay down expensive FHA FHA advances.

Terry: And invest $200 million into the investment portfolio as.

Terry: As we have said before <unk> shifted its focus to the right side of the balance sheet late in the third quarter of 2022, we started slowing loan growth we shifted our loan production focus away from Korea, and ADC to C&I and small business, we changed our banker incentive program at the beginning of 2023 to give deposits a higher wage.

Terry: We have reallocated marketing spend to deposit products and launched a multi wave direct marketing campaign in February.

Terry: Additionally, our digital bank, which we started in the second quarter is making a meaningful impact on deposit growth.

Terry: All these efforts are showing promise is evidenced by the fact that our new net new account growth in 2023 was 172% higher than in 2022.

Terry: Noninterest bearing deposits declined during the quarter by $145 million due to seasonal outflows in our mortgage escrow deposits. This is reversed early in Q1 deposit pricing competition continues to be strong, but not quite as intense as it was a few quarters ago that being said with our desire to move our loan to dip.

Terry: Posit ratio below 90% before the end of 2024, we're going to continue to feel pressure on the deposit beta and the name of <unk>.

Terry: Slide six.

Terry: And thinking about the loan portfolio he noticed that loan production declined 80% from 2022% to 2023.

The shift away from Korea, and ADC is showing progress.

Terry: Stated earlier, our concentration level and create moved down during the year from 325% to 320% and the level of ADC declined from 132% to 119%.

Terry: Goal is to continue to be at these levels down below the regulatory guidelines.

Terry: And the Korean ADC portfolios remained strong and were slightly over $900 million for the year.

Terry: Funded ADC commitments declined $1.2 billion in 2023, and now stands at 900 million heading into 2024 looking forward into 2024, we forecast ADC fundings to declined by 75% as compared to 2023.

Terry: Slide seven.

Terry: The detail on the commercial real estate and ADC portfolios.

Terry: Asset class, including what is at stake.

Terry: Moving to slide eight we're frequently asked about our out of state loan portfolio and as you can see our national business isn't mortgage loans comprised 14% of our total loan portfolio.

Terry: Throughout the state portfolio was $1 1 billion and makes up just under 12% of the total book almost 70% of the out of state portfolio are loans, where we have followed Texas developers the rest are snacks syndicated loans and C&I.

On slide nine.

Net interest income decreased by $3 9 million to just over $95 million in Q4. The biggest drivers of the decrease were higher deposit costs and lower loan yields offset by higher yields on the investment portfolio.

Terry: The net interest margin decreased 15 basis points from Q3 to 331%. The NIM change was primarily related to the same drivers.

Terry: Stated earlier, the NIM is going to continue to feel pressure as we work to achieve a loan to deposit ratio below 90%.

Terry: This will require us to invest between 500 $600 million in excess funding into the investment portfolio during 2024.

Terry: This additional investment in debt Securities will drive eight to 10 basis points of NIM contraction.

Terry: Additionally, the NIM will contract approximately four basis points for every 25 basis point reduction in the fed funds rate.

Terry: On slide 10 loan yields are relatively flat slight decline.

Terry: Investment yields and deposit costs increased 23 basis points.

Terry: Slide 11 shows certain metrics on our investment portfolio key key takeaways are currently only 10% of assets. The duration has remained steady at around four years, its $4, one and 86% of the portfolio was held in available for sale.

Terry: For all the Mark to market on the portfolio has a minimal impact on tangible equity and capital ratios since it's excluded.

Terry: We did purchase 205 billion in securities in the first half of Q4. These securities were capital efficient and deliver to hedge spread of 133 basis points over the next three years.

Terry: On slide 12.

Terry: Operating noninterest income increased slightly in 2023 to almost $54 million. The biggest drivers were government guaranteed loan businesses, which increase your gain on sale revenue by 42% over 2022.

Terry: Operating noninterest expenses were flat quarter over quarter, but increased almost $30 million year over year significant drivers of the increase our FDIC insurance lower cost deferral from limited loan production higher legal and professional fees largely associated with being over $10 billion and marketing.

Terry: Cost this was offset by lower variable compensation.

Terry: On slide 13.

Terry: During 2023 total capital of approximately $105 million CET, one ratios expanded by 18 points during the quarter and 120 basis points for the year.

Speaker Change: Thats a good contributor to the expansion into capital ratios has been a $612 million decline in risk weighted assets.

Speaker Change: Worth, noting that since <unk> went public in 2014. It is compounded tangible book value per share at a rate of 11, 4%. When you include the dividends that had been paid to shareholders.

Speaker Change: Finally on slide 14, 2023, it was a year of building the ICL since the beginning of 2023, we've grown at about $19 million or 21%.

Speaker Change: These additions to the allowance increased you about 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 Q factors continue to make up a sizeable part of the ACL.

Speaker Change: I'd like to turn the call over to clay for comments on credit.

Clay: Thank you Terry and good morning, everyone.

This quarter, it's been a mixed bag of credit improvements and challenges on.

Clay: The improvement was a reduction in the bank's office exposure by $65 million or 10% over the last 90 days.

Clay: That does not include an $8 $5 million sub standard office loan that paid off post quarter end.

Clay: Secondly, our classified assets were reduced by $17 million or 7%.

Clay: Due to the diligent efforts of our team to resolve problem credits classified assets were at their lowest amount for 2023 in the fourth quarter.

Clay: On the challenge side.

Clay: It was an increase in NPA is as previously discussed by Malcolm $9 $5 million of charge offs and elevated past dues.

Clay: Past dues are elevated in the 30 to 60 day past due category, primarily due to a $15 million multifamily loan that's matured.

Clay: Renewal discussions, we're in and process and ongoing at year end.

Clay: Two other loans totaling $21 million were past due 30 days at year end and are now current.

Clay: Commercial real estate relationship in the amount of $8 $8 million was past due at year end and as a way to pay off.

Clay: Charge offs charge offs for the quarter were spread out across eight borrowers.

Clay: Largest of which was a $2 9 million dollar charge off on the data Center office property that was moved to NPA during the quarter.

Clay: <unk> largest charge off in the amount of $2 5 million, what's taken to exit the Atlanta office property that was moved to NPA in Q2.

Clay: A $2 $6 million charge off was taken on in medical practice that was filed for bankruptcy in 2023 and there are a few other smaller charge offs it amounted to $1 2 million.

Clay: Spread across various C&I loan types.

Clay: The year over year increase in net charge offs was driven by the Atlanta office building charge offs.

Clay: Our five year look back on charge offs is provided as context for the year.

Clay: Charge offs of acquired credit makes up 72% of all charge offs for the previous five years.

Clay: That I will turn it back over to Malcolm.

Malcolm: Thank you clay as we think about 2024, we believe it will be somewhat challenging from a growth and rate standpoint.

Malcolm: Alright that our team is fully engaged on building a stronger balance sheet that perform at the highest level regardless of the time, we find ourselves in.

We're committed to our purpose with unwavering persistence lumpy and patient to make the right moves at the appropriate times.

Malcolm: Operator, we can now take questions.

Speaker Change: Thank you.

Speaker Change: We would like to ask a question. Please press star one on your telephone.

Operator: Good morning, and welcome to the Veritech Holding fourth quarter 2023 earnings conference call and webcast. All participants will be in a listen-only mode. Please note, this event will be recorded. I will now turn the conference over to Will Holford, CEO of Veritech.

Speaker Change: We'll then hear an automated message, saying your hands right.

Speaker Change: Yeah.

Speaker Change: We will go on to the Q&A now and our first call will be coming from Matt Ali Lee.

Thank you for joining Barrett Texas' fourth quarter 2023 earnings call. Before we begin, please be aware this call will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements.

Speaker Change: I just wanted to start off on capital you guys met your 2023 capital goals and I was wondering if you had any set goals for 2024.

Speaker Change: Great good questions.

Speaker Change: Yes.

Speaker Change: We are going to probably continue to build capital a little bit we don't have any explicit targets we will certainly.

Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them. Statements made on this call should be considered together with cautionary statements and other information contained in today's earnings release and our most recent annual report or Form 10-K and subsequent filings with the ICPSR. We will refer to Investors Live during today's presentation, which can be found along with the press release in the Investor Information section of our website at veritexbank.com. Our speakers for the call today are Chairman and CEO Malcolm Holland, our CFO Terry Earley, and our Chief Credit Officer Clay Riebe. At the conclusion of our prepared remarks, we will open the lines up for a Q&A session. I'll now turn the call over to Malcolm. Thank you, Will. Good morning, everyone.

Speaker Change: I think as much as anything we'd like to seek growth get back.

Speaker Change: Mid single digits.

And be able to leverage that capital in an efficient way continue to pay our dividends and youll, probably see capital build but but slower in 'twenty four than it has in 'twenty three.

Speaker Change: Okay. Thank you I appreciate the color there and then one more for me you guys laid out the impacts of the 25 bit cuts throughout 2024 can you give us an idea of what's your internally modeling for cuts.

Speaker Change: Yeah.

Speaker Change: I had a crystal ball.

Speaker Change: I mean look.

Today, we'll recap both our fourth quarter results as well as our 2023 annual results. As you will see, we continue to strengthen our balance sheet and add tangible book value with a clear commitment to the things that will add long-term value to our shareholding. For the quarter, we reported operating earnings of $31.6 million, or $0.58 per share, with a pre-tax, pre-provisioned operating return on average assets of 1.4%. 1.54 percent.

Fifth fixed the market says three.

Speaker Change: Yeah sure Dennis.

Speaker Change: That's the reason that structured the comment the way I did you guys I think are modeling three.

Speaker Change: So.

Speaker Change: Okay. Okay.

Speaker Change: As volatile as rates have proven to be making a statement. It's just not prudent on our part as to what we think our job is to try to insulate our balance sheet as best we can from rate movements.

Speaker Change: Ed.

Speaker Change: Hedge the risk as best we can and that's all we can do.

For the year 2023, we reported operating earnings of $142.1 billion, or $2.60 per share, with a pre-tax, pre-provision operating return on average assets of 1.81%. Although not the year we'd hoped for from an earnings perspective, we were able to use our earnings power to reposition our balance sheet to a much stronger place and still make a nice return for our shareholders. Our continued profitability also allowed us to meet our goal of CET1 being greater than 10%, ending the year at 10.29%, up over 120 pips over year-end 2022. We were able to slow down our loan growth for the year to 1.7% or just 160 million, a far cry from our 2022 loan growth of 30 plus percent. This was accomplished by a focused strategy to move out non-relational borrowers, continued loan payoffs, and general market decline. Concurrently, we were able to grow deposits during the year by 13.3% or $1.2 billion. Again, this was a focus strategy that went into place. The third quarter of 2022, we are now seeing some of the expected outcomes coming to fruition.

Speaker Change: Alright, I appreciate the color. Thank you.

Speaker Change: Yeah.

Speaker Change: Thank you one moment our next question.

Speaker Change: And our next question will be coming from Bradley Gailey.

Brady Gailey: Daily Cape VW Your line is open.

Brady Gailey: Hey, its Brady good morning, guys.

Speaker Change: Hey, Brady.

Brady Gailey: So I understand the commentary about the NIM are seeing some additional pressure on your growing deposits faster than loans and put it in the bond book, but understand that dynamic when you look at NII dollars.

Brady Gailey: Do you expect to see.

Brady Gailey: Downside in NII dollars relative to <unk> or do you think that could be stable to increasing.

Speaker Change: I think it's I think it should relative to <unk>.

I think it should be relatively stable in the front half of the year.

Speaker Change: Maybe we start to build some some positive.

Speaker Change: The momentum in growth in the back half because I think our loan growth is going to help that.

Speaker Change: Ed.

Speaker Change: With a lot of focus on deposit cost as well.

Speaker Change: Okay, and then how are you thinking about.

Speaker Change: Expenses.

Certainly a heavy lift and a testament to the resolve of our people during some challenging and volatile times. Looking forward to 2024, our priorities will remain the same, approving funding and its related costs, and adding new clients that represent full relationships in 2024. We believe we can grow deposits at a high single-digit pace while loans grow at a mid-single-digit rate. As we mention every quarter, our credit remains a top priority. Our NPA to total assets increased from $80 million to $96 million, or 77.77%.

Speaker Change: <unk> had been growing at a double digit pace for the last few years, but it seems like it could be less than that this year. How are you thinking about expense growth in 2004.

Speaker Change: Yes, that's certainly the goal Brady we've had a lot of discussion around expenses at the company.

Speaker Change: Continue to do.

Speaker Change: The issue is we run a pretty efficient company today.

Speaker Change: Obviously, the biggest driver of any expense for a bank is people and we continue to see opportunities in certain areas.

Speaker Change: <unk> made a pretty good.

Speaker Change: Focus on our on our small business or business banking group and that's going to require some folks to continue to grow that area. So.

The net increase of $16 million was comprised of one data center loan of $10.5 million, a C&I credit in the plastics industry of $3.8 million, and several government-guaranteed loans totaling $16 million. It should be noted on those specific loans that $5.2 million has a firm government guarantee, and as a reminder, we have a $5 million holdback that will be used for future losses in that long category. We also have one large CNI upgrade out of the NPA category.

Speaker Change: Our goal is to hold it somewhat flat some of this stuff is out of our control I mean, if we look back at last last year.

Speaker Change: FDIC insurance, you add benefits cost.

Speaker Change: You had some.

Speaker Change: The marketing dollars that were driving some of these deposits lower cost deferrals, because our loan production was down to 80.

Speaker Change: <unk> 91 role.

Speaker Change: Definitely lower so.

Speaker Change: We still feel pretty good about expenses, but looking forward our goal is to hold them pretty.

Our ACL was 114, flat over 3Q, but up 21% over 12-31-22, while criticized loans remain stable quarter over quarter as well as year over year. We did have net charge-offs of $9.5 million for the quarter, $23.7 million for the year, or 25 bips. Clay will provide some greater color on this shortly. I'll now turn the call to Terry. Thank you, Malcolm.

Speaker Change: Flat, if we can but theres going to be some.

Speaker Change: They are certainly going to be some growth I think it's probably fair to say.

Speaker Change: More attention to expenses can we get to 2024 and at least my five year history with the company.

Speaker Change: <unk> okay.

Speaker Change: Got it.

Speaker Change: Got it that's good color and then lastly for me just back to the capital.

Speaker Change: Yes.

Speaker Change: I mean, you know your profitability is pretty good.

Speaker Change: It feels like you'll be able to still accumulate a decent amount of capital. This year I mean, the stock's at nine times earnings <unk> tangible.

Terry S. Earley: We've made good progress, and Malcolm covered it, in strengthening our balance sheet. I'm thankful for the progress, but the job is not done. I want to spend time primarily drilling into the results for the year ended 12-31-23, not a little on the fourth quarter.

Speaker Change: Is this the year that youre more seriously consider share buybacks.

Speaker Change: Listen, it's certainly something we have to look at.

Terry S. Earley: I think this is important because some of our businesses are seasonal, and we think about them on an annual basis and not just quarterly. Starting on page 3, our strong deposit growth and low loan growth allowed Veritex to reduce its loan to deposit ratio from 104.4% at $1231.22 to 93.6% at $1231.23. The deposit growth also allowed us to reduce our wholesale funding reliance to almost 20% of year end. Capital is significantly stronger, and we made progress on reducing our commercial real estate concentrations.

Speaker Change: And we had a board meeting yesterday and we it was a topic of discussion.

Speaker Change: Capital is king and.

Speaker Change: Love to have some dry powder.

Speaker Change: But there may be a situation at some point in time and 24, we tried to put something in place and protect ourselves if the stock were to see some dips.

Speaker Change: So to answer your question is.

Speaker Change: <unk> expenses, we've had and we've had conversations about it we don't have any in place today, but I wouldn't be surprised if we didn't have something in place very shortly.

Terry S. Earley: On page four, we knew that strengthening our balance sheet was going to come at a cost. Thankfully, we have the earnings power to absorb it. Pre-tax, pre-provisioned operating earnings were $222 million for the year, up slightly from 2022. Tangible book value per share increased to $20.21, up $1.57 for the year or 12.7% when you add back the dividends. This is the first time that Veritex has gone over $20 per share in tangible book value.

Speaker Change: Okay got it thanks guys.

Speaker Change: Thanks, Greg.

Thank you one moment our next question.

Speaker Change: Our next question will be coming from Brett.

Speaker Change: Robinson.

Brett: Hopefully group your line is open.

Brett Robinson: Hey, guys. Good morning wanted to just start back on the margin and just thinking about the outlook.

Brett Robinson: The decision to increase the securities portfolio is that is that purely from a balance sheet liquidity perspective, or can you guys talk about the decision to grow the securities book at this point.

Terry S. Earley: Finally, we've grown CET1, as Malcolm mentioned, by 120 basis points to 10.29. We had a goal of 10%, we got there a quarter early, and we continue to strengthen CAP. Moving to slide 5, Veritech continues its progress in improving its liquidity and funding profile during the fourth quarter.

Brett Robinson: Okay.

Speaker Change: It's really it's a.

Speaker Change: Just a remixing of earning assets, it's building liquidity on the balance sheet.

Speaker Change: I think as what we've done through the fourth quarter has been to lock in good spreads by using that relative funding rates in the swap curve versus the investment to lock in good spreads for three years I think going forward. So we're going to.

Terry S. Earley: During the quarter, we grew deposits by $142 million, or 5.6%, with little change in broker deposits. The deposit growth, combined with no loan growth, allowed us to pay down expensive FHLB advances and invest $200 million in the investment portfolio. As we have said before, Veritek shifted its focus to the right side of the balance sheet late in the third quarter of 2022, and we started slowing loan growth. We shifted our loan production focus away from CRE and ADC to CNI Small Business.

Speaker Change: It's going to be an additional important caught.

Speaker Change: Factor, which is we're not going to hedge it as much and we want a habit for downright protection.

Speaker Change: To help mitigate the NIM pressure on the way down.

Speaker Change: So that's that's it is going to kind of shift.

Speaker Change: As rates have moved as the fed's gotten clearer outlook.

Terry S. Earley: We changed our banker incentive program at the beginning of 2023 to give deposits a higher weighting. We 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 making a meaningful impact on deposit growth. All these efforts are showing promise, as evidenced by the fact that our net new account growth in 2023 was 172% higher than in 2022. Non-interest-bearing deposits declined during the quarter by $145 million due to seasonal outflows in our mortgage escrow deposits.

Speaker Change: What it's going to do with rates.

Speaker Change: We're tweaking a little bit as we look forward for the rest of 'twenty four and the investing we've got to do to help provide that protection.

Speaker Change: I would just say go back about 18 months, and we decided that we're going to change.

Speaker Change: Change your balance sheet and this is an overall balance sheet strategy and in order to get there.

Speaker Change: Down below 90% on a loan deposit ratio you got it.

Speaker Change: Liquidity at somewhere and so theres got to be a bigger securities book. So it's a remax has very sad, but it's all part of the strategy that we started 18 months ago to remake this balance sheet and we just don't think it makes sense to leave it.

Terry S. Earley: This was reversed early in Q1. Deposit pricing competition continues to be strong, but not quite as intense as it was a few quarters ago. That being said, with our desire to move our loan-to-deposit ratio below 90% before the end of 2024, we're going to continue to feel pressure on the deposit beta and the NEM. On slide six.

Short short rates overnight at the fed because thats only going to exacerbate our down rate risk.

Speaker Change: Okay.

Speaker Change: And then given the commentary around the betas.

Speaker Change: I know Malcolm you've got quite a few deposit initiatives in place can you give us maybe an update on the deposit initiatives relative to the guidance for betas to continue to increase.

Terry S. Earley: In thinking about the loan portfolio, you notice that loan production declined 80% from 2022 to 2023, loan origination is shipped away from Korea, and ADC is showing progress. As stated earlier, our concentration level in CREEP moved down during the year from 325% to 320%, and the level of ADC declined from 132% to 119%. The goal is to continue to move these levels down below the regulatory guidelines; payoffs in the Korean ADC portfolios remained strong and were slightly over $900 million for the year. Unfunded ADC commitments declined $1.2 billion in 2023 and are now set at $900 million heading into 2024. Looking forward into 2024, we forecast ADC funding to decline by 75% as compared to 2023. Slide seven provides detail on the commercial real estate and ADC portfolios by asset class, including what is out of state. Moving to slide 8.

Speaker Change: Okay.

Malcolm: The initiatives continue.

Malcolm: No different this quarter than it was the prior quarter and what we're doing.

Malcolm: Again, we've got seven or eight different levers that we're pulling some are more expensive than others.

Malcolm: We're trying to stay away reduce our wholesale funding.

Malcolm: Okay.

Malcolm: Pendants, if you will.

Malcolm: But where we're seeing some we're seeing some good movement.

Malcolm: I can pick out a couple right now.

Malcolm: That has actually done quite well and this is the time of year, where we see every bank I think sees a little bit of deposit shrinkage.

Malcolm: Taxes.

Malcolm: This is or what have you, but we've actually had a pretty decent.

Malcolm: Start to the year in terms of betas theory.

Malcolm: I just think in general it's been it's been so competitive and that's driven the deposit beta is up.

Malcolm: I would say this.

Malcolm: We talked on the last call the Q3 call about bringing more balance to pricing and volumes, we saw that during the quarter.

Terry S. Earley: We're frequently asked about our out-of-state loan portfolio, and as you can see, our national businesses and mortgage loans comprise 14% of our total loan portfolio. Our true out-of-state portfolio is $1.1 billion and makes up just under 12% of the total book. Almost 70% of the out-of-state portfolio is loans where we have followed Texas Development. The rest are SNCCs, syndicated loans, and C&I, on slide nine. Net interest income decreased by $3.9 million to just over $95 million in Q4.

Malcolm: And we've seen it already in Q1, our total deposit cost as of two days ago had declined.

Malcolm: Not a lot, but a few bps and I'm encouraged by that are on the margin on our production rates right now are around $4 60.

Malcolm: For new deposits. So all of that to say, it's starting to move and as you can tell from the new client acquisition up 172% of new accounts I mean, we're getting traction.

Terry S. Earley: The biggest drivers of the decrease were higher deposit costs and lower loan yields, offset by higher yields on the investment. The net interest margin decreased 15 basis points from Q3 to 3.31%. The NIM change was primarily related to these same drivers.

It's Ed.

Ed: It just takes time to rebuild remake our deposit base and bring pricing balance.

Speaker Change: Got it.

To it and Thats what were all about every day.

Speaker Change: Okay. That's helpful. If I could sneak in one last one.

Speaker Change: The outcome, how do you feel about North Avenue this year and this maybe fee income generally speaking.

Terry S. Earley: As stated earlier, NIMS is going to continue to feel pressure to do work to achieve a loan-to-deposit ratio below 90 percent. This will require us to invest between $500 and $600 million in excess funding into the investment portfolio during 2024. This additional investment in debt securities will drive eight to ten basis points of NIMS contraction. Additionally, the NIM will contract approximately four basis points for every 25 basis point reduction in the Fed Fund's revenue, on slide 10. Loan yields are relatively flat, a slight decline, investment yields are up, and deposit costs increased 20 to the base. Slide 11.

Speaker Change: No north adding to it hasn't really candidly from a revenue standpoint.

Speaker Change: Revenue from production standpoint, they are about $180 million and 23.

Speaker Change: And then Lee I would expect that or maybe a little bit more in 'twenty forward they've got some good momentum.

Speaker Change: We've talked about it time and time again about the government constraints that we have from time to time, whether they.

Speaker Change: We're funding stuff or not but as a bank. We're helpful. Because we can do some of these these interim fun fundings that is accelerating its advantage in this space but.

Speaker Change: Listen I think they're engaged they.

Speaker Change: Pipelines are huge.

Speaker Change: And I expect that I think protection revenue was $28 million in fees last year approximately.

Speaker Change: And the one thing about that business and I think people do Miss is they still have some loans on the books and they're spread and mix of spread and gummies covering the expenses of the company that the fee income is kind of the upside to it. So I expect at least what they did last year into 'twenty four and just.

Terry S. Earley: This shows certain metrics on our investment portfolio. Key takeaways are that currently, only 10% of assets are in the portfolio, the duration has remained steady at around four years, it's 4.1, and 86% of the portfolio is held and available for sale. Overall, the mark-to-market on the portfolio has a minimal impact on tangible equity and capital.

Speaker Change: On that fee business.

<unk> business.

Speaker Change: It would be unfair to say, we've really made it in 'twenty three but we hired some new a new guy to run it and he has done a phenomenal job.

Terry S. Earley: We did purchase 205 million securities in the first half of Q4. These securities were capital efficient and delivered a hedge spread of 133 basis points over the next three years, as shown on slide 12. Operating non-interest income increased slightly in 2023 to almost $54 million. The biggest drivers were government-guaranteed loan businesses, which increased their gain on sale revenue by 42% over 2022. Operating non-interest expenses were negative quarter over quarter, but they increased almost $30 million year over year. Significant drivers of the increase are FDIC insurance, lower cost deferral from limited loan production, higher legal and professional fees, largely associated with being over $10 billion, and marketing costs. This was offset by lower variable compensation on slide 13.

Speaker Change: We expect a lot more out of SBA with what he's been able to do and we've hit the ground running already so.

Speaker Change: I would say the fee businesses will outperform 'twenty three.

Speaker Change: There are cute SBA Q4 production is indicative of the momentum you're seeing.

Speaker Change: They did 40% to 45% of their production in Q4.

Speaker Change: Really encouraged I agree with everything you said on the USPI, but I think the SBA has not been as big a contributor but our outlook on that is really is really Brian.

Brian: Okay. That's really helpful. Thanks, guys.

Speaker Change: Thank you.

Speaker Change: Thank you and one moment for the next question.

Speaker Change: And our next question will be coming from Stephen Scouten of Piper Sandler Your line is open.

Stephen Kendall Scouten: Yeah. Thanks, Good morning, Hey.

Terry S. Earley: During 2023, total capital grew approximately $105 million. CET1 ratios expanded by 18 points during the quarter and 120 basis points for the year. A significant contributor to the expansion in the capital ratios has been a $612 million decline in risk-weighted assets. It's worth noting that since Veritex went public in 2014, it has compounded tangible book value per share at a rate of 11.4% when you include the dividends that have been paid to shareholders. Finally, on slide 14, 2023 was a year of building the ACL. Since the beginning of 2023, we've grown it by $19 million, or 21%. These additions to the allowance increased by about 18 basis points to 1.14%.

Stephen Kendall Scouten: Hey, guys I wanted to start with.

Speaker Change: Loan and deposit new production spread that you listed in slide 10, it looks like a pretty big jump quarter over quarter, which was nice to see so I'm kind of wondering that 493 basis points.

Speaker Change: What does that bake like what does that actually from a from a new loan perspective, and a new deposit perspective and could that lead to some core NIM expansion apart from kind of the potential for rate cuts.

Speaker Change: And the debt Securities that you noted.

Speaker Change: Well the new loan production that the problem with the question is is it new deposit production dwarfs.

Speaker Change: This spread is good but there are enough of it.

Speaker Change: New loan production.

Speaker Change: About 9%.

Speaker Change: No.

Speaker Change: New deposit production.

Speaker Change: He has been in the fours.

Speaker Change: So.

Speaker Change: Yes, but just a much higher pace of deposit growth that makes sense. Okay.

Speaker Change: The volume of loan side, Steven Youre going to see something possibly but we're not we're not budgeting for that production.

Given all the uncertainty facing the US and Texas economies, 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. With that, I'd like to turn the call over to Clay for comments on credit. Thank you, Terry, and good morning, everyone.

Speaker Change: But if we were able to find it even mid single digits is going to be helpful.

Speaker Change: Exactly yes.

Speaker Change: If we're going to grow low to mid single digits.

Speaker Change: Let's just use 5% since that's mid single digits. That's about 480 million. If we grow deposits that means we need to grow deposits a billion dollars. So that's 490 million, it's going to have a really good spread but the other five twining not so much.

This quarter has been a mixed bag of credit improvements and challenges. On the improvement side, we saw a reduction in the bank's office exposure by 65 million, or 10%, over the last 90 days. That does not include an $8.5 million substandard office loan that paid off post order in. Secondly, our classified assets were reduced by 17 million, or 7%.

Speaker Change: The cost of funding and where you can invest for 2024 is going to be about flat.

Is going to be NIM dilutive, but it's going to help going into 'twenty five 'twenty. That's the point I was going to make is that once you make up that delta of that 500, or so now you are kind of on solid footing, where if you want to do it a dollar amount you only need $1 intend and deposits today you'd be double that.

Due to the diligent efforts of our team to resolve problem credits, classified assets were at their lowest amount for 2023 in the fourth quarter. On the challenge side, there was an increase in MPAs, as previously discussed by Malcolm, $9.5 million in charge-offs, and elevated past due. Past dues are elevated in the 30 to 60 day past due category primarily due to a $15 million monthly family loan that's mature, and renewal discussions were in process and ongoing at year end. Two other loans totaling $21 million were past due 30 days a year and are now current. Commercial real estate financing in the amount of $8.8 million was passed due a year in, and is awaiting payoff.

Speaker Change: Okay.

Speaker Change: So let's see.

Speaker Change: So 25, you should hit the ground running assuming we do the 1 billion in deposits and have a beta blocker.

Speaker Change: And I think 25 is also going to be once we get the balance sheet, where we want it 25 is going to be a year about optimizing deposit pricing.

Speaker Change: Because we're not going to need the excess growth to get the balance sheet, where we want it correct.

Speaker Change: Yes that all makes sense, Okay, and I know you mentioned, maybe not hedging to kind of bring down your overall rate sensitivity in the future. I mean do you think you can move that four basis points for every 25 basis point cut I mean is that a number youre trying to cut in half I mean do you think you can work that number down or is it more.

Charges for the quarter were spread out across eight borrowers, the largest of which was a $2.9 million charge-off on the data center office property that was moved to MPA during the quarter. The second largest charge-off, in the amount of $2.5 million, was taken to exit the Atlanta office property that was moved to MPA in Q2. A $2.6 million charge-off was taken on a medical practice that filed for bankruptcy in 2023, and there are a few other smaller charge-offs that amounted to $1.2 million spread across various HANF alone. The year-over-year increase in net charge-offs is driven by the Atlanta office building charge-off. A five-year look back on charge officers provided as context for the year, charge-offs of acquired credit made up 72% of all charge-offs for the previous five years. With that, I'll turn it back over to Malcolm. Thank you, Clay.

Speaker Change: Around the edges.

Speaker Change: No I think we can work that number down with with a combination of things one is how we how aggressively we price on the way down.

Speaker Change: And we seek we exceeded expectations during.

Speaker Change: During the pandemic and so we just got to replicate what we did before coupled with the way, we're making more fixed rate loans today.

Speaker Change: A lot more discussion on that vertex has never been a big fixed rate lender or certainly have a much greater appetite for that and Theres a lot more discussions going on there and.

Speaker Change: And then hedging as well the problem with hedging right down rate risk right now what the shape of the forward curve look it's just so expensive to hedge it and.

As we think about 2024, we believe it will be somewhat challenging from a growth and rate standpoint. Despite that, our team is fully engaged on building a stronger balance sheet that will perform at the highest level, regardless of the time we find ourselves. We are committed to our purpose with unwavering persistence while being patient to make the right moves at the appropriate time. Operator, we can now take questions. Thank you. If you would like to ask a question, please press star 11 on your telephone. You will then hear an automated message saying your hand is raised.

Speaker Change: I would rather I think I would rather not do it in the derivative space, but do it in the cash space with fixed rate loans and securities.

Speaker Change: Yeah makes sense, Okay, and then just the last thing for me is kind of moving back to credit from the earlier conversations I mean, it sounds like the spike in past dues maybe.

Speaker Change: Resolved itself to a large degree since quarter end.

Speaker Change: But I mean as you think about charge offs for next year.

Speaker Change: Whats kind of a reasonable pace off this.

Speaker Change: Elevation, we saw in <unk> and 'twenty three largely related to that one all of its credit Dino.

Speaker Change: Sure sure. Thanks for the question, Yeah, I think if I'm sitting here today looking forward into 2023.

Operator: We will go into the Q&A now, and our first call will be from Matt Olney. I just want to start off on capital. You guys met your 2023 capital goals, and I was wondering if you had any set goals for 2024. That's a great, good question.

Speaker Change: Identify more than $15 million in potential charge offs today, but we're not we're not budgeting for that we're budgeting for our downside than that yes.

Speaker Change: Sliding their client said, we did average at 27 bps over the last five years.

You know... We're probably going to continue to build capital a little bit. We don't have any explicit targets. We will certainly, I think as much as anything, we'd like to see growth get back to the mid-single digits and be able to leverage that capital in an efficient way, continue to pay our dividends, and you'll probably see capital build, but slower in 2024 than it was in 2035. Okay, thank you. I appreciate the color there. And then, one more for me, you guys laid out the impacts of the 25 bit cuts throughout 2024. Can you give us an idea of what you're internally modeling for cuts?

Speaker Change: And you all choose it sounds like a great place to start we think we'll do better but 27, Vince has been our historical number and your answer any question I'll pass throughs, yes, we can.

Speaker Change: <unk>.

Speaker Change: Plus million.

Speaker Change: Current.

Speaker Change: Two deals.

Speaker Change: Okay.

Speaker Change: Afternoon, guys.

Speaker Change: Steve I was just going to say I would rather you guys I think the consensus charge off number for the year to 29 30 bps I'd rather.

Speaker Change: Perform on that with modest see anybody dropped the estimate to be honest with you.

Yeah. If I had a crystal ball, I mean look, the Fed says six, the market says three, you know, who knows? I'm not, that's the reason I structured the comments the way I did.

Speaker Change: Yeah, no understood and I guess, I mean from a provision standpoint, obviously, even with some of the migration there wasn't a need for provision build so it's not as if you see any.

Speaker Change: Large scale degradation that makes you see the need to build back correct.

You guys, I think, are modeling three, so, you know, but... As volatile as race has proven to be, making a statement is just not prudent on our part as to what we think. Our job is to try to insulate our balance sheet as best we can from race movements and hedge the risk as best we can, and that's all we can do. All right, I appreciate the color.

Speaker Change: Correct correct.

Speaker Change: Nothing coming back.

Speaker Change: To grow anywhere close to what the amount of growth this year.

Speaker Change: So.

Speaker Change: Perfect perfect. Thanks for all the color guys I appreciate the time.

Speaker Change: Thanks, David.

Speaker Change: Thank you and one moment our next question.

Speaker Change: And our next question will come from Ahmad Hasan.

Ahmad Hasan: Of D. A Davidson your line is open.

Operator: Thank you. Thank you. Thank you.

Ahmad Hasan: Hey, guys. This is that MA on for Gary Tenner.

Operator: One moment for our next question. And our next question will be coming from Bradley Gailey of KBW. Your line is open. Hey, it's Brady. Good morning, guys. Awardee.

Speaker Change: Morning, Joe.

Joe: So are you doing.

Joe: Pretty good firstly.

Joe: Hey, I might have missed this but any color on the credit that went nonaccrual and generated.

Brady Gailey: So I understand the commentary about the NIM seeing some additional pressure; you're growing deposits faster than loans and putting in the bond book. So I understand that dynamic. When you look at NII dollars, do you expect to see a downside in NII dollars relative to 4Q, or do you think that could be stable or increase? Hello.

Joe: $1 9 million and interest reversal.

Speaker Change: We didn't have $1 9 million in interest reversals I don't think.

Speaker Change: Thank you.

Terry S. Earley: I think it's relative to 4Q. I think it should be relatively stable in the front half of the year and maybe we start to build some positive momentum and growth in the back half because I think our loan growth is going to help that and, you know, obviously with a lot of focus on deposit costs as well. Okay. And then how are you thinking about expenses? Expenses have been growing at a double-digit pace for the last few years, but it seems like it could be less than that this year. How are you thinking about expense growth in 24? Yeah, that's certainly the goal, Brady. We've had a lot of discussions around expenses at the company and continue to do so. You know, the issue is that we run a pretty efficient company today. And obviously, the biggest driver of any expense for a bank is people.

Speaker Change: Six 700000.

Speaker Change: And that six bps or seven bps, I think somewhere in that range. So I agree with that part the rest of it that was the move in the non accruals that affected that now.

Speaker Change: Alright. Thanks.

Speaker Change:

Speaker Change: Living through if any for any for the wholesale funding.

Reliance is a take over 20% at the end where would you like this target ratio it could be.

Speaker Change: Yes, it's already down meaningfully in the first quarter, it's been as low as 17%. So far this year, probably like for it to end somewhere between 15, and 17%, 18% somewhere in that range.

Speaker Change: If it's lower I'm going to be happy because we've done that we have out performed on the deposit.

And we continue to see opportunities in certain areas. You know, Dom's made a pretty good focus on our small business, our business banking group, and that's going to require some folks to continue to grow that area. So, you know, our goal is to hold it somewhat flat. Some of this stuff's out of our control. I mean, we look back at last year and FDIC insurance. You had benefits costs.

Speaker Change: Growth core deposit growth side, but I would expect somewhere in the 15 to 18.

Speaker Change: Alright and.

Speaker Change: Lastly.

Speaker Change: I know you've talked a bit about this but.

Speaker Change: Thinking about the loan growth outlook for 2024.

Speaker Change: Particularly given the CET one is over 10% how are you thinking about growing risk weighted assets for the next year.

Terry S. Earley: You had some marketing dollars that were driving some of these deposits. Lower cost deferrals because our loan production was down 80%. Yeah, the old FAS 91 rule, you know; it was definitely lower.

Speaker Change: I mean, we're going to be more measured in that growth on the risk weighted asset side.

Speaker Change: As we've mentioned many calls ago.

Speaker Change: Got that little bit over our skis on our unfunded what have you but.

Terry S. Earley: So we still feel pretty good about expenses. But looking forward, our goal is to hold them pretty flat if we can. But there's going to be some, there's certainly going to be some growth. I think it's probably fair to say we're paying more attention to expenses going into 2024 than at least in my five-year history and my third team. Okay, that's pretty sure. Got it. Yeah, that's good color.

Speaker Change: I think the goal now is to always keep that number inside of our capital number.

Speaker Change: And that's what you should expect that.

Speaker Change: It's definitely going to stay inside I think as we as our commercial real estate and ADC ratios get below the 301 hundred.

Speaker Change: Thank you, we'll see production of ADC and <unk> 24 higher than it's been in 23.

Brady Gailey: Then lastly, for me, just back to the capital question. I mean, you know, your profitability is pretty good. It feels like you'll be able to still accumulate a decent amount of capital this year. I mean, the stock's at nine times earnings, which is one tangible.

We'll add some to the unfunded some to the risk weighted assets, but net net still.

Speaker Change: So instead of unfunded shrinking there.

Speaker Change: Probably going to grow a little but not a lot and so I think that's going to be one of the things thats going to keep the CET one ratio from growing as much as it did in 2023, but we're going to stay we're going to look for capital efficient investments in the investment portfolio and if we have more loan growth.

Is this the year that you more seriously consider share buybacks? Listen, it's certainly something we have to look at, and we had a board meeting yesterday, and it was a topic of discussion. Capital is king, and I love to have some dry powder, but there may be a situation at some point in time in 24 where we try to put something in place and protect ourselves if the stock were to see some dips. So the answer to your question is, like expenses, we've had conversations about it. We don't have any in place today, but I wouldn't be surprised if we didn't have something in place very shortly.

Speaker Change: To help.

Speaker Change: Utilize or deploy the CET, one and some unfunded increase but nothing like we've seen in the past.

Speaker Change: Thank you for the great color and a quick follow up on that within the loan book and unfunded construction commitments under $1 billion.

Speaker Change: Should we expect a larger year over year decline in the volume in that segment versus the $53 million decline in plenty of it.

Okay, I got it. Thanks, guys. Thanks, Brady.

Speaker Change: No you would expect it to be flat, maybe a little growth.

Operator: Thank you. One moment for our next question. Our next question will be coming from Brett. Rabatin, Hovi Group, your line is open.

Speaker Change: Nothing meaningful.

Speaker Change: Sounds good.

That's it.

Speaker Change: Thank you. Thank you.

Speaker Change: Thank you.

Speaker Change: And one moment please.

Speaker Change: Our next question.

Brett D. Rabatin: Hey guys, good morning. Wanted to start back on the margin and just think about the outlook. The decision to increase the securities portfolio, is that purely from a balance sheet liquidity perspective? Or can you guys talk about the decision to go to the securities book at this point? It's really just a remixing of earning assets.

Speaker Change: Okay.

Speaker Change: And our final question for today will be coming from Michael Rose of Raymond James Your line is open.

Michael Rose: Hey, everyone. Thanks for taking my questions. Just two quick follow ups I'm, sorry, if I missed this terry but.

Michael Rose: Certainly understand the desire to bring the loan to deposit ratio down.

Michael Rose: What should we expect for or what are your expectations for noninterest bearing mix I assume some of the growth is going to be in some higher cost.

Terry S. Earley: It's building liquidity on the balance sheet. I think what we did through the fourth quarter was to lock in good spreads by using the relative funding rates in the SWOT curve versus the investment to lock in good spreads for three years. I think going forward, though, there's going to be an additional important factor, which is we're not going to hedge it as much and we want to have it for downrate protection to help mitigate the NIMH pressure on the way down. So it is going to kind of shift as rates have moved, as the Fed's gotten clearer on what it's going to do with rates. We're tweaking a little bit as we look forward to the rest of 2024 and the investing we've got to do to help provide that protection. And Brent, I would just say go back about 18 months when we decided that we were going to change our balance sheet. And this is an overall balance sheet strategy. And in order to get it down below 90% on a loan deposit ratio, you have got to put your liquidity somewhere. And so there's got to be a bigger security book.

Michael Rose: Categories, but do you have a sense for what I'm, sorry, if I missed this.

Michael Rose: That could drop out what terminal beta expectations could be thanks.

Speaker Change: Yes, yes, I would expect it to be pretty flat from here.

Speaker Change: Now if we if we execute well I would expect it to be pretty pretty flat and that means our small business, our community bankers or commercial C&I gas.

Speaker Change: Are hitting their targets I would expect it to be flat.

Speaker Change: There is always seasonality like I said at the fourth quarter. There is some outflows that that have come back in the first quarter already but generally we're going to see those outflows again in the fourth quarter of 'twenty four.

Speaker Change: Michael That's our best guess right now.

Speaker Change: Okay.

Michael Rose: Okay. That's that's helpful. And then just go on.

Michael Rose: Back to credit quality I know theres the two.

Michael Rose: Office CRE loans that comprise I think 60% of your your NPA is at this point any sort of update there.

Michael Rose: Whats the outlook for potentially moving.

So it's a remix, as Terry said, but it's all part of the strategy that we started 18 months ago to remake this balance sheet. And we just don't think that it makes sense to leave it sitting at short rates overnight at the Fed, because that's only going to exacerbate our down rate. OK. And then given the commentary around the betas, you know, I know Malcolm, you've got quite a few deposit initiatives in place. Can you give us maybe an update on the deposit initiatives relative to the guidance for betas to continue to increase? The initiatives continue. I mean, there's nothing different this quarter than it was the prior quarter in what we're doing. You know, again, we've got seven or eight different levers that we're pulling. Some are more expensive than others.

Michael Rose: Moving those credits outside of the bank.

Michael Rose: It's just one of them just it was just that one had we.

Michael Rose: We actually have that one note sale working on it.

Michael Rose: It fell out late so we wrote it down to where the sale was going to be we do have a participant in that.

Michael Rose: That said, we obviously have to work with them but.

Our anticipation is that that asset will be gone this quarter either through <unk>.

Michael Rose: Probably through a note sale of some sort, but we were really we were really close to just fell out at the end.

Speaker Change: Okay, Great and then maybe just finally for me.

Speaker Change: I know this was kind of touched on earlier in the call but.

Speaker Change: Terry do you have a sense for.

Speaker Change: How.

Terry: We do what the Delta would be.

Terry: From kind of what you talked about in terms of rate cuts kind of us being at three forward curve being at six what that Delta could look like if we don't get any cuts in that would be if we get the full.

You know, we're trying to stay away and reduce our wholesale funding, dependents, if you will. But, you know, we're seeing some good movement. I can pick out a couple right now that have actually done quite well. And this is the time of year where every bank, I think, sees a little bit of deposit shrinkage because of taxes, bonuses, or whatever have you. But we've actually had a pretty decent start to the year.

Terry: The forward curve at this point just trying to look for the sensitivity since I assume it's not linear.

Speaker Change: Well I mean.

Speaker Change: Okay.

Speaker Change: It's about a million in a quarter for every basis point of that.

Speaker Change: And so if.

Speaker Change: If it's six cuts.

Speaker Change: No.

Speaker Change: You get 20% to 24 basis points of NIM reduction. There is there is your math, there and if it stays flat.

In terms of betas, Terry, you might want to talk about that. Well, I just think in general it's been so competitive, and that's driven the deposit betas up. I would say this. We talked on the last call, the Q3 call, about bringing more balance to pricing and volumes. We saw that during the quarter, and we saw it already in Q1.

Speaker Change: Yes.

Speaker Change: So it's got a pretty.

Speaker Change: Rates were to stay flat, it's pretty meaningful.

Speaker Change: And the EPS.

Speaker Change: But I don't think.

Speaker Change: I'm not.

Speaker Change: He buys thinking we're going to end the year flat so.

Terry S. Earley: Our total deposit cost, as of two days ago, had declined. Not by a lot, but by a few bips, and I'm encouraged by that. Now, on the margin, our production rates right now are around $4.60. So all of that to say it's moving; it's starting to move. And as you can tell from the new client acquisition of 172% in new accounts, I mean, we're getting traction. It just takes time to rebuild, remake our deposit base and bring pricing balance to it, and that's what we're all about every day. Okay, that's helpful. If I could sneak in one last one,

Speaker Change: That's the best way I know to answer Mike.

Speaker Change: No that's very helpful. Terry I appreciate you guys taking my questions.

Thanks, Michael.

Speaker Change: Okay.

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

Speaker Change: Not as much credit for that film.

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: Okay.

Brett D. Rabatin: Malcolm, how do you feel about North Avenue this year and maybe fee income generally speaking? North Avenue had a really, candidly, from a revenue standpoint, they did revenue from a reduction standpoint, they're about $180 million in 2023. Candidly, I would expect that or maybe a little bit more in 2024. They've got some good momentum.

Speaker Change: Okay.

Speaker Change: [music].

We've talked about it time and time again about the government constraints that we have from time to time, whether they're funding stuff or not. But as a bank, we're helpful because we can do some of these interim fund fundings, which is actually a huge advantage in the space. Listen, I think they're engaged.

Their pipelines are huge. I think the revenue was $20 million in fees last year, approximately. The one thing about that business that I think people do miss is there's loans on the books, and there's spread income. Spread income is covering the expenses of the company.

The fee income is kind of the upside to it. So I expect them to do at least what they did last year in 2024. And just on that fee business, the SBA Business Week High. It would be unfair to say we've remade it in 23, but we hired a new guy to run it, and he has done a phenomenal job, and we expect a lot more out of SBA with what he's been able to do, and we've hit the ground running already.

Terry S. Earley: So I would say the fee businesses will outperform 23, and their SBA Q4 production is indicative of the momentum you're seeing. I mean, they did 40 to 45 percent of their production in Q4 and are really encouraged. I agree with everything Malcolm said about the USPA, but I think the SBA has not been as big a contributor, but our outlook on that is really bright. Okay, that's really helpful. Thanks, guys. You there?

Operator: Thank you, and one moment for the next question. And our next question will be coming from Stephen Scouten on Piper Sandler. Your line is open. Yeah, thanks. Good morning.

Stephen Kendall Scouten: Hey, guys. I wanted to start with the Loan and Deposit New Production Spread that you list on slide 10. It looks like a pretty big jump, quarter to quarter, which is nice to see. So I'm kind of wondering about that 493 basis point. What is that, actually, from a new loan perspective and a new deposit perspective, and could that lead to some core NIM expansion apart from the potential for rate cuts? and the debt securities that you noted. Well, the new loan production, the problem with that, the question is, is that new deposit production dwarfs new loan production. The spread's good, but there ain't enough opportunity. New loan production, about 9%, and new deposit production. It's been in the force for a while, you know, so.

Terry S. Earley: Yeah, but just a much higher pace of deposit growth, if that makes sense. Okay. Yeah, if we can get the volume on the loan side, Stephen, you're gonna see something, possibly, but you know, we're not budgeting for that production. But if we are able to find it, even mid-single digits is going to be helpful.

Terry S. Earley: Exactly. Yeah. I mean, if we're going to grow love's mid-single digits, you know, let's just use 5% since that's mid-single digits. That's about $480 million. If we grow deposits, that means we need to grow deposits by a billion dollars. So that $480 million is going to have a really good spread, but the other $520 million, not so much, you know, the cost of funding and where you can invest for 2024. It's going to be about flat, but it's going to be nil diluted, but it's going to help going into 2025. That's the point I was going to make is that once you make up that delta of that 500 or so, now you're kind of on solid footing where, you know, if you want to lend a dollar, you only need $1.10 in deposits.

Terry S. Earley: Today you need double that to get our balance sheet. And I think 25 is also going to be, once we get the balance sheet where we want it, 25 is going to be a year about optimizing deposit pricing because we're not going to need the excess growth to get the balance sheet where we want it. Yeah, that'll make sense. Okay. And as you mentioned, maybe not hedging to kind of bring down your overall rate sensitivity in the future. I mean, do you think you can move that four basis points for every 25 basis point cut?

Terry S. Earley: I mean, is that a number you're trying to, you know, cut in half? I mean, do you think you can work that number down? Or is it more just around?

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

Terry S. Earley: I certainly have a much greater appetite for that, and there are a lot more discussions going on there. And then there are hedges as well.

Terry S. Earley: The problem with hedging right now is that, with the shape of the forward curve, it's just so expensive to hedge it. And I think I would rather not do it in the derivative space but do it in the cash space with fixed-rate loans and security. Yeah, it makes sense. Okay. And then just the last thing for me is kind of moving back to credit from that earlier conversation. I mean, it sounds like the spike in past dues has, maybe, resolved itself to a large degree since quarter end. But, I mean, if you think about charge-offs for next year... you know, what's kind of a reasonable pace off this, you know, off the elevation we saw in 23, largely related to that one oblast. Sure, sure.

Thanks for the question. Yeah, I think if I'm sitting here today looking forward into 2023, I couldn't identify more than $15 million in potential charge-offs today, but we're not budgeting for that. We're budgeting for a higher downside than that. I mean, I think you had a slide in there, Clay, that said we did an average of 27 bips over the last five years. If I'm sitting in y'all's shoes, it sounds like a great place to start.

We think we'll do better. But, you know, 27 bips has been our historical number. And your answer and question on past dues is, yeah, we've got 20-something plus million that is already current on two deals. OK. I would recommend that you do.

Stephen Kendall Scouten: Stephen, I was just going to say, I would rather you guys, I think the consensus charge-off number for the year is $29.30 billion. I'd rather outperform on that. Wouldn't want to see anybody drop the estimate, to be honest with you. Yeah. No, understood. And I guess, I mean, from a provision standpoint, obviously, even with some of the migrations, there wasn't a need for provision build.

So it's not as if you see any, you know, large-scale degradation that makes you see the need to build that. Correct. Correct, correct. I would not expect the results to be anywhere close to what the amount of group is here. Perfect, perfect. Thanks to all the color guys.

Stephen Kendall Scouten: Appreciate that. Thanks, Steve. Thank you and one moment for our next question. And our next question will come from Hamad Hassan of D.A. Davis, and your line is open. Hey guys, this is Ahmad Khan on behalf of Gary Tenner.

Operator: Good morning. How are you doing? Pretty good. First of all, I might have missed this, but any color on the credit that went non-approval and generated 1.9 million in interest reversal. We didn't have 1.9 million in interest reversals, I don't think. And I think it was, six, seven hundred thousand, and six, about six BIPs or seven BIPs, I think, somewhere in that range.

Terry S. Earley: So I agree with that part. The rest was, that was the move in the non-accruals that affected the NIM. All right, and looking through 2024 and the wholesale funding, Reliance is a takeover 20% at the year end. Where would you like this target ratio to be?

Terry S. Earley: Yeah, it's already down meaningfully in the first quarter, it's been as low as 17% so far this year, and I would probably like for it to end somewhere between 15 and 17, 18%, somewhere in that range. If it's lower, I'm going to be happy because we've outperformed on the core deposit growth side, but I would expect somewhere in the 15 to 8 range. All right, and

Lastly, uh... I know you talked a bit about this, but I was thinking about the loan growth outlook for 2024. Particularly given that CET1 is over 10%, how are we thinking about growing risk-weighted assets for the next year? I mean, we're going to be more measured in our growth on the risk-taking asset side. As we mentioned many calls ago, we got that a little bit over our skis on our unfunded and what have you, but I think the goal now is to always keep that number inside our capital number, and that's what you should expect. So I don't see that growing. I think it's definitely going to stay inside. I think as our commercial real estate and ADC ratios get below 300 and 100, I do think you will see production of ADC in 24 higher than it was in 23. That will add some to the unfunded liabilities and some to the risk-weighted assets. But net-net, I still see it.

Terry S. Earley: And so instead of unfunded shrinking, they're probably going to grow a little, but not a lot. And so I think that's going to be one of the things that's going to keep the CET1 ratio from growing as much as it did in 2023. But we're going to stay very, we're going to look for capital efficient investments in the investment portfolio. And, you know, if we have more loan growth, that's going to help utilize or deploy the CDT-1 and some unfunded increase, but nothing like we've seen in the past. Thank you for the great color.

Operator: And a quick follow-up on that. Within the loan book and unfunded construction commitments under $1 billion, should we expect a larger year over year decline in the balances in that segment versus the 53 million decline in 2023? No, you expect it to be flat. Maybe a little gross, but...

Terry S. Earley: Nothing meaningful. Sounds good. That's it. Thank you. And one moment, please, for our next question. And our final question for the day will be coming from Michael Rose of Raymond James. Your line is open. Hey, everyone.

Michael Rose: Thanks for taking my questions. Just two quick follow-ups. I'm sorry if I missed this, Terry, but I certainly understand the desire to bring the loan-to-deposit ratio down. What should we expect for, or what are your expectations for, non-interest bearing mixed?

Terry S. Earley: I assume some of the growth is going to be in some higher cost categories, but do you have a sense for, and I'm sorry if I missed this, where that could drop out and what terminal beta expectations could be? Thanks. Yeah, yeah, I would expect it to be pretty flat from here. Now, if we execute well, I would expect it to be pretty, pretty flat. And that means our small businesses, our community bankers, our commercial CNI guys, are hitting their targets. But I would expect it to be flat.

Terry S. Earley: There's always seasonality. Like I said, the fourth quarter, there are some outflows in that that have come back in the first quarter already, but generally, we're going to see those outflows again in the fourth quarter of twenty-four. So, Michael, that's our best guess right now. Okay, that's helpful. And then just going back to credit quality, I know there are the two office CRE loans that comprise I think 60% of your MPAs at this point. Any sort of update there? What's the outlook for, you know, potentially a movement, moving those credits outside the bank? It's just one of them, right?

Terry S. Earley: It's just that one, and we actually had that one, a note sale, working on it. It fell out late, so we wrote it down where the note sale was going to be. We do have a participant in that, a partner in that, so we always have to work with them, but our anticipation is that that asset will be gone this quarter, either through a note sale of some sort, but we were really close. It just fell out at the end.

Terry S. Earley: Okay, great. And then maybe just finally for me, you know, I know this was kind of touched on earlier in the call, but Terry, do you have a sense for, you know, how the delta would be, you know, from kind of what you talked about in terms of rate cuts, you know, kind of us being at three, and the forward curve being at six, what that delta could look like, A, if we don't get any cuts, and then B Thanks. Well, I mean, you know, if it's about a million and a quarter for every basis point again.

Terry S. Earley: And so if, you know, if it's six cuts. You know. If you get 20 to 24 basis points in M-reduction, there's your math there, and if it stays flat...

Terry S. Earley: They're there. Yeah, it's, you know, and so it's kind of pretty, if rates were to stay flat, it's pretty meaningful to NII and to EPS. But I don't, you know, I'm not, I don't think anybody's thinking we're going to end the year flat, so.

Terry S. Earley: That's the best way I know to answer it. I know. That's very helpful, Terry. I appreciate you guys taking my questions. Thanks. Bye. Thank you all for your time today. This concludes today's conference call. You may all disconnect. Not as much credit as I thought. Thanks for watching!