Veritex Holdings, Inc. (NASDAQ:VBTX) Q3 2023 Earnings Call Transcript

Veritex Holdings, Inc. (NASDAQ:VBTX) Q3 2023 Earnings Call Transcript October 25, 2023

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

Susan Caudle: Thank you. Before we get started, I would like to remind you that this presentation may include forward-looking statements and those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The Company undertakes no obligation to publicly revise any forward-looking statements. At this time, if you are logged into our webcast, please refer to our slide presentation, including our Safe Harbor statement, beginning on slide two. For those of you joining us by phone, please note that the Safe Harbor statement and presentation are available on our website veritexbank.com. All comments made during today’s call are subject to that Safe Harbor statement. Some of the financial metrics discussed will be on a non-GAAP basis, which our management believes better reflects the underlying core operating performance of the business.

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Please see the reconciliation of all discussed non-GAAP measures in our filed 8-K earnings release. Joining me today are Malcolm Holland, our Chairman and CEO; Terry Earley, our Chief Financial Officer; and Clay Riebe, our Chief Credit Officer. I’ll now turn the call over to Malcolm.

Malcolm Holland: Good morning, and welcome to our third quarter earnings call. We certainly find ourselves in a challenging — in challenging days in our industries and markets, but we here at Veritex continue to focus on building long-term value for our shareholders. Q3 was a transformational quarter for Veritex in many areas. First, I’d like to formally welcome Dominic Karaba as our new President and Chief Banking Officer. Dom is a 28-year banking veteran with majority of his experience in leading and developing teams in a commercial bank space. Even though he’s only been here for six weeks, he is already making a difference in our company. I look forward to you all meeting him soon. Second, I want to talk about our continued commitment and efforts to reposition and strengthen the Veritex balance sheet.

Over one year ago, our team stacked hands to build a stronger balance sheet that could withstand all economic environments. We’ve always been a very profitable bank shown by our historical PPNR, ROAA, and efficiency ratios. But our balance sheet did not project the strength that is that is highly valued. Let me discuss four balance sheet ratios we have been keenly focused on: loan to deposit, dependence of wholesale funding; CET1; and our real estate loan bucket concentrations. I’d like to remind you these efforts were not as a result of March 8th SVB crisis. These efforts have been in — our major focus and strategy for the last four quarters. I’m happy to say we’re making progress candidly much quicker than we planned. Our loan deposit ratio has come down from a high of 108% at 331 to 95% at 930.

Our dependence of wholesale funding has come down from 32% at 331 to 21% at 930. Our CET1 now exceeds 10%. Our CRE portfolio continues to decline despite continued ADC fundings of approximately $400 million a quarter. Total CRE to risk-based capital has declined from 335 — 331 to 317 at quarter end. ADC has declined from 129 to 116 during those same dates. All of this positive momentum towards a stronger balance sheet takes the work and effort of our entire bank. It requires a mindset change to add full client relationships, not just borrowers. It requires disciplined efforts on the deposit-gathering space that comes in many forms. Better client selection, digital banking, direct marketing, MSRs, HLAs, family and friends promotions, commercial and community bank focus, et cetera, et cetera.

It takes everyone working together with a common goal. That’s how we’ve increased our deposit balances over $1 billion since 12/31/22. I couldn’t be prouder of our company and teams to embrace the changes we all felt had to happen. There is still much to do and much to accomplish. With all the great progress on the balance sheet, we understand that in these cycles, earnings will be under pressure. For the third quarter, we reported net operating income of $32.6 million or $0.60 per share. Our pre-tax provision income for the quarter was $50 million or 1.62%. Terry will provide some details shortly, but the main three drivers of our slight earnings decline were NIM pressure, continued lack of government loan fees, and increase in operating expenses.

In these cycles, loan growth and credit are always at the top of everyone’s mind and concerns. For the quarter, loans decreased and are only up by $137 million, a 1.4% for the first nine months of the year. We’ve been able to do this with a focused effort on pruning away loan-only clients and payoffs, mainly from the CRE sales — mainly from CRE sales transactions. NPAs for the quarter did increase $11.5 million to $80 million or 0.65% of assets. This increase was solely from the C&I shared national credit that Clay will discuss shortly. Net charge-offs were minimal at eight bps. We also increased our ACL from 105 at 630 to 114. Looking forward, our growth profile for 2024 will continue to be in the low to middle-single-digits. Our pipelines are off over 80% and candidly the demand from our clients has been muted.

In our opinion, this will continue until some economic and rate certainty is established. I’ll now turn the call over to Terry.

Terry Earley: Thank you. Malcolm has covered the progress we’ve made in strengthening our balance sheet. I think it is fair to say that we’ve made more progress in a quicker timeframe than I ever expected. I’ll spend some time drilling into the results for the third quarter and the year-to-date numbers, I think this is important because some of our businesses are seasonal, and we think about them on an annual basis and not just quarterly. Starting on page four, Malcolm mentioned the operating earnings were $0.60 a share. This is down slightly to $32.6 million. Tangible book value per share was also up slightly to $19.44, even with rising rates impacting Accumulated Other Comprehensive Income, AOCI, by approximately $0.45 per share.

Focusing on the year-to-date results, pre-tax pre-provision operating earnings increased 14% from 2022 to almost $175 million. Pre-tax pre-provision return on average assets is flat over the year and it’s flat year-over-year at 190 basis points. Veritex continues to be one of the more profitable banks among its peer group. Consistent with our intent to strengthen our balance sheet, we’ve only grown loans to $615 million in the last year, while growing deposits to $1.4 billion on a year-over-year basis. Year-to-date annualized charge-offs have been 20 basis points. Finally, we’ve grown CET1 by 102 basis points over the last four quarters to 10.11%. We achieved this target of being over 10% one quarter earlier than forecast. Moving to slide five, Veritex made meaningful progress improving its liquidity and funding profile over the third quarter.

Since June 30, Veritex has grown deposits by $963 million, and only $192 million of that was in the growth category. The deposit growth coupled with some reduction in earning assets, allowed us to reduce Federal Home Loan Bank borrowings by over $1.1 billion. As we’ve said before Veritex shifted its focus to the right size of the balance sheet late in Q3 of 2022. We started slowing loan growth. We shifted our loan production focus away from commercial real estate and ADC to C&I and small business. We changed our banker incentive program at the beginning of 2023 to give deposits a higher weight. 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 having a meaningful impact on our deposit growth.

Success on the deposit front for Veritex has three components; growing deposits, increasing our client acquisition rate, and increasing net client growth. I’m pleased to note that our net client acquisition rate in the third quarter was a little more than double what we saw in the first-half of the year. Similarly, our net client growth in the third quarter was up more than 4 times over the levels we experienced in the first half of the year. The effect of the Fed’s interest rate hikes on the deposit mix stabilized in the second quarter, and our non-interest-bearing deposits to total deposits remained in the 23% to 24% range. Deposit pricing competition continues to be intense, resulting in a total deposit beta of approximately 57%. Finally, uninsured and uncollateralized deposits were 31.5% of total, and our liquidity capacity is 2 times of the uninsured deposits.

And thinking about the loan portfolio, the shift away from ADC is showing progress. Our concentration level in CRE moved down during the quarter and the goal is to continue to move these levels down below the regulatory guidelines. The payoffs in the CRE portfolio remain strong. It should range between $800 million and $900 million for 2023, a sure sign of strength in the Texas economy. Unfunded ADC commitments continue to drop at the rate of $300 million to $400 million per quarter and are now well below total capital. Looking forward into 2024, we forecast ADC fundings to decline by 75%, as compared to 2023. On slide seven, we’re frequently asked about our Out of State loan portfolio. As you can see, our National Businesses and our — and Mortgages comprised 13% of our total loan book.

Our true Out of State portfolio is about $1.2 billion and makes up about 12.5% of the total book, two-thirds of the Out of State portfolio or loans where we have filed the Texas developers. The rest are syndicated loans and C&I. A breakdown of the upstate commercial real estate portfolio is shown on the bottom right of the slide. Moving on to slide eight. Net interest income decreased by $1.5 million to just under $100 million in Q3. The biggest drivers of the decrease were higher earning loan yields, day count and lower volume, i.e., primarily FHLB volume, offset by increases in rates on deposits. The net interest margin decreased 5 basis points from Q2 to 3.46%. The NIM was helped by the increase in average non-interest bearing and the drop in volume and yield on our FHLB borrowings.

Given the deposit growth through the end of August, we were able to pull back on deposit pricing in September. This resulted in monthly deposit production rates following for the first time in 2023. All this to say, based on our current internal forecast, the net interest margin is due at the bottom assuming our deposit mix remains stable from here. On slide nine, please note our loan yields were up 7 bps to 6.92%, while deposit rates increased to 42 basis points. Q3’s new loan production rate of 8.06% and a spread of 330 basis points. Slide 10 shows certain metrics on our investment portfolio. The key takeaways are, it’s only 8.6% of assets, the duration is 4.3 years, and 83% of the portfolio sales in the middle of sale. Overall, the mark-to-market on the portfolio has a minimal impact on tangible equity, and didn’t have any impact on our capital ratios.

Non-interest income decreased by $4 million to $9.7 million. These declines were generally across the board. Thrive’s production volume increased 1% to $564 million, while as gain on sale margin declined by 43 basis points to 257 basis points. To maintain volume, Thrive had to sacrifice rate and therefore the gain on sale margin. Moving to slide 12 on the USDA front, we’ve always said, I mean think about this business on an annual basis. It’s been a record 12-months for this business. They produced over $21.6 million in revenue over the last four quarters. I was happy to get any revenue in Q3 of ‘23 given the funding situation to be in our vertical at the USDA, but we could only get one line closed in Q3. Our pipeline is at record levels, which bodes well for future revenue and Q4 revenue should be meaningfully higher than Q3.

Given the potential government shutdown and funding the government with continuing resolutions make it highly unlikely that Q4 will be as strong as Q4 ’22. Non-interest expenses increased $2.2 million, driven by higher personnel costs and regulatory fees. The increase in personnel cost is a function of higher bonuses, variable compensation for deposit growth, and lower loan production cost deferrals. Salaries are up slightly, but this was not the driver of the increase. On slide 13, total capital grew approximately $35 million during the quarter to almost $1.5 billion. Our CET1 ratio expanded 35 bps for the quarter and 101 basis points year-over-year, but now stands at 10.11%, a significant contributor to the expansion of the capital ratios has been a decline in risk-weighted assets.

It’s worth noting that since Veritex went public in 2014, its compounded tangible book value per share at a rate of 10.8%, including the dividends that have been paid to our shareholders. Finally, on slide 14, note that we continue to build the ACL. Since the beginning of 2023, we’ve grown it by $19 million or 21%. These additions to the allowance have increased by 18 basis points to 1.14%. Given all the uncertainty facing the U.S. and Texas economy, we decided to allocate more waiting to the downside scenarios in the model. Two factors continued to make that sizable part of our ACL. With that, I’d like to turn the call over to Clay for some comments [Technical Difficulty]

Clay Riebe: Thank you, Terry, and good morning, everyone. As Malcolm mentioned our NPAs are up for the quarter, driven by downgrade of a shared national credit in the most recent snick exam performed by the regulators in August. Our portion of the loan is $18 million of $157 million total facility. The company is in the defense space in government sector, and the company suffered from supply chain issues and inflation impact that significantly lowered the company’s financial performance. The credit was restructured in the third quarter with additional capital contributed by the equity sponsor and is currently performing under the restructured terms. Past dues for the quarter increased $2 million, mainly due to three commercial credits.

There were also group of single-family mortgage loans in the amount of $4.4 million that were transferred to a third-party servicer, which created some administrative past dues, and we expect those issues to clear this quarter. Moving to criticized assets, classified assets were relatively flat for the quarter while total criticized assets increased by 3%. Our surveillance of the portfolio continues to be strong and we’re moving risk grades as we see issues arise. I’ve been encouraged by the level of payoffs that have occurred this year in the amount of $932 million with $645 million of that in the CRE book. $62 million of year-to-date payoffs have come from the criticized asset books. We experienced full payoffs of $10.4 million of classified credits just in the last quarter.

With that, I’ll turn it back over to Malcolm.

Malcolm Holland: As you can see, Veritex has made significant improvement on our strategy to build its 30-year balance sheet. Our focus on granular, stable funding will not cease. Terry mentioned, but I would like to mention again, just the new client acquisition is on the front of our minds every day. For the third quarter, client acquisition growth was almost 2,700 new clients, which is more than the first two quarters combined. It’s working, and we recognize we still have more work to do. Finally, I’d like to thank the many phone calls and Company text messages received from many of you concerning last quarter’s earnings call. Everyone involved is doing quite well. Thank you. And operator, we’ll take any questions.

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Q&A Session

Operator: Thank you. [Operator Instruction] Our first question comes from the line of Stephen Scouten of Piper Sandler. Your line is open.

Stephen Scouten: Hey, good morning, everyone.

Malcolm Holland: Hi, Steve.

Stephen Scouten: I guess, one of my questions is maybe around capital and what you could do with your capital today, you know, strong profitability, good capital, but you know, the stocks, obviously, not trading where you’d want on a tangible book value basis. So I’m just wondering if you guys would think about a share repurchase here today or kind of what your capital priorities could be at this point?

Malcolm Holland: You know, it’s — listen, if you keep making money and the capital, you’re going to have options. Our thinking right now is the environment that we’re in. It’s just to continue to add capital. And, you know, we know there’s potential options down there, but we don’t see a buyback in our immediate future. You know, I think, it’s just wise to build the capital base a little bit more. And, again, the options are always there.

Stephen Scouten: Okay. Fair enough. And then just thinking about the NIM, I know, Terry, you said, you think it’s, kind of, nearing the bottom. How should we think about loan yields moving forward? And just any portfolio churn? And just kind of remind me that fixed versus floating, so we can think about where, kind of, the loan side of the balance sheet you can get.

Malcolm Holland: Well, loan yields since we have so much floating, you know, 75%, 76% of the portfolio — 76% of the portfolio’s time to SOFR or Prime. Loan yields are going to be contingent that, you know, they’re going to move in correlation with what, you know, the Fed does on rates. Are they done, are they going one more time at — I don’t know, it’s a coin flip in my mind. I don’t think they’re going at their next meeting, but we’ll see what happens on out there. Yes, you know, we certainly have some fixed-rate loans that are — you know, I was working with the bank role one earlier this week that it’s in mid-3s. That’s up for renewal and so it’s a — you know, so we’re going to have some of that, Stephen, but given that so much of the portfolio is floating, I think it’s going to be helpful when it occurs.

But I don’t think it’s going to be a big enough number and change to really — change the dynamic of what the NIM is going to do. You know, I’m — look, we’re not really happy with how the NIM performed in the quarter, especially as I look across the industry, but you know as I said pricing competition on the deposit side is pretty intent, but we were able to pull back meaningfully on hours in September. We can see it in the data And so I’m hopeful that there’s — I think, there’s going to be some — especially CDs roll there’s going to be some NIM pressure, but you know, it looks like in their own internal modeling that, you know, we’re getting near the bottom anyway.

Stephen Scouten: Got it. Okay. And then just maybe last thing for me, I know you’ve talked about that USDA business that — to think about it more annualized. But I’m just kind of curious what you’re seeing from a funding perspective if that’s kind of — if that vertical is kind of back open for business, obviously, the pipeline looks really strong, and so that was — I don’t know $40 million — $90 million line item last year. Is that, you know, think about still that range? Or because of some of the government issues, is that going to be, you know, lower year-over-year still?

Malcolm Holland: No. I don’t think it’s going to be lower year-over-year. You know, in that end. You know — but I think the timing is — I thought Q4 90-days ago, I would have thought Q4 was going to be a really strong quarter with the new fiscal year for the Federal government. Now that they’re doing it on continuing resolutions. There’s just — the level of funding and certainty of funding is what’s lowered my view of Q4. I mean, we have specific loans we believe we’re going to get closed, but, you know, just getting a little bit allocation out of continuing resolutions. It’s hard to manage your business that way. And this was some say differently. They’re managing their business just fine. It’s hard for me to give you clarity in terms of what I think revenue is going to do.

So that’s why I tried to say, I think it’s going to be meaningfully better than Q3, but not nearly as good as last year’s Q4 unless something really pops a negative buzzy passed, but I feel really good about ‘24. I think it’s going to be in line, you know, with what we’re seeing, and — you know, we would love to see it be a little bit better — pipelines are better today versus where they were going into ‘24. So if the fundings there, we could do better, but there’s that macro circumstance there that’s really outside of our control.

Stephen Scouten: Sure. That makes lot of sense. All right, guys, thanks for all the color. Congrats on all the progress.

Malcolm Holland: Thanks, Steve.

Operator: Thank you. One moment, please. Our next question comes from the line of Brady Gailey of KBW. Your line is open.

Brady Gailey: Hey, thank you. Good morning guys.

Malcolm Holland: Good morning.

Terry Earley: Hey, Brade.

Brady Gailey: I mean, you talked about all the progress that’s been made over the last year, I think you called out kind of four or five different areas that have seen some pretty nice improvement. You know are we done at this point what kind of the things that you’re focused on improving internally? Or is there more work to be done on like the loan-to-deposit ratio and capital? And I think, you mentioned you still want to get below the 300 and 100 CRE AMD threshold. I’m just wondering, you know, what inning are we in? And is there a lot of work left to be done to get the company where you guys would like to see it?

Malcolm Holland: So the easy answer is no, we’re not, we’re not done at all. Internally, we call what we accomplished in the third quarter, Phase 1, Phase 2 is a continued effort to strengthen the balance sheet in a whole bunch of areas, the ones I’ve mentioned and a few others. And so we don’t believe the definition of fortress balance sheet runs at 95% loan to deposit ratio. So we will continue one of the things in the hiring, Dom, is that — is focus itself is to continue to do that. And really, I think, I said it, but it’s — the granular side of the business, which I told my folks at our strategic planning session, Phase 2 will never be out of. That’s our work to really, you know, support our funding levels in smaller, more sticky business funding areas.

And so we still have more work to do Brady. And we’re not going to stop. And so I want to be real clear that we are — we do feel like we accomplished Phase 1 of that a year or more ahead of time. But now we’re into Phase 2, and that’s the real heavy lift and the hard work, but that’s what we intend to do.

Terry Earley: The progress of change will probably slow, you would not expect to see Q4.

Malcolm Holland: Yes.

Terry Earley: It look like Q3.

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

Brady Gailey: Alright. And then on the expense side, you saw some expense growth quarter-on-quarter, I think a lot of it was in compensation. But you know compensation is kind of back at the level that you saw in Q1 of this year. So I’m just wondering, as we look forward, I think expenses were a little under $60 million in the third quarter. How should we think about that expense run rate in the fourth quarter and maybe more importantly into 2024?

Malcolm Holland: Thank you. And in Q4, you know, I would be — I think it’s going to be $16 million or might be a tad over, just, you know, but that’s up a little bit, but not tremendously, you know, up 1% to 2%, I would say. I think as we look into ‘24, you know, I think it’s — I don’t see the efficiency ratio for the year getting much better than where it is today because, I’ll take one thing — two, let me take two things. Benefit costs are going through the roof. Two FDIC insurance premiums. As I rebuilt the funds and those things, they’re largely outside our control. And so that’s, you know, in terms of, that’s where I expect to see the most expense pressure, generally speaking, going into next year.

Brady Gailey: Okay. All right. Great. Thanks for the color, guys.

Malcolm Holland: Thanks, Brady.

Operator: Thank you. One moment please. Our next question comes from the line of Gary Tenner of D.A. Davidson. Your line is open.

Gary Tenner: Thanks. Good morning. Hey, I was curious if you could talk a little about kind of the success on the deposit side. You know and — you know maybe plans to expand what you’ve already done in terms of the digital bank, you know, direct marketing channels or otherwise? Are you slowing the spend on the direct marketing at this point and kind of relying more on standing up digital banks and kind of local areas the way you did to a degree of digital bank can be local, of course. So just curious for any color on that.

Malcolm Holland: Yes. I think we’re always going to have the digital bank direct marketing lever. We’ll always play in that arena. We had to get digital banking government. So I mean that took a lift just to get into the areas we want. We could always go into new areas, you know, most of — all of our digital banking went outside of our current markets and we identified certain spots in Texas only that we wanted to be. There are many more markets that we can tap into that area. You know, direct marketing, that’s going to be something that we do, but we probably won’t do as hard as we did in the third quarter, but it’s always going to be there. Again, I think this is not — it’s not a once — one event is going to cure this thing.

It continues to be a lever of six, seven or eight different places, where people have to pull from. Now the reason I think it gets a little slower and a little bit harder going forward is now we’re moving into, you know, more of the commercial bank space, the community bank space, the business banking space, the private banking space, where those become much more granular things that have some lead times in order to get them closed and get them moved over. But those are the ones that are harder but are much more valuable from a treasury management standpoint, from a granularity standpoint. So I think, we continue all efforts. We may put more emphasis on different areas depending on what the balance sheet needs.

Terry Earley: Yes, let me, let me add two things. One, on direct marketing. Gary, I think you’ll see us move from more product-specific direct marketing to more small business-focused direct marketing to help drive more — new client acquisitions, specifically in that space. And I have another. That’s what happens when you get all of your free things.

Gary Tenner: Yes. I appreciate that. Maybe just a question for Dominic to a degree, but is there — you know, the customers that you’re acquiring through the digital bank. Are these, you know, they’re in state — are they customers that you think you would have an opportunity to do more business with other than just the depository side?

Malcolm Holland: Absolutely. I mean, that’s the whole goal. It was just a one CD client or one money market client that doesn’t really do much for us. And I think the metric that Terry mentioned and I gave you in the very end was, our new client acquisition was just shy of 2,700 in the third quarter. That’s double the first quarter and second quarter — and so combined. And so what that does is, I now I — my folks in the branches and my folks have the opportunity to cross-sell. And today, I believe, we have 68% retention ratio of those clients. And so, if you can — all you got to do is get them in our company and mainly our service levels at the branches are incredibly high as you look at our ratings and all that, they are just incredibly high. So we can get them in. They’re not going to leave and we can sell of other stuff.

Gary Tenner: Appreciate that. And then just really quickly, in terms of that credit — national credit that was downgraded and restructured. Was there any accrued interest be reversed related to that credit?

Terry Earley: There was $1.2 million.

Gary Tenner: Great. Thank you.

Malcolm Holland: Thank you.

Operator: Thank you. One moment, please. Our next question comes from the line of Michael Rose of Raymond James. Your line is open.

Michael Rose: Hey, good morning guys. Just a couple of follow-ups here. So, obviously, a lot of progress on the deposit front, a lot of that’s been discussed the mix of non-interest-bearing down to about 23%. Terry, you had kind of sequentially in your eyes between kind of what happens with rates here. But where do you think that could fall through? And if you can give us any sort of updated beta expectations there would be appreciated. Thanks.

Terry Earley: Yes, I mean, I think, I mean, look, we grew DDA. You know, so even though the mix went down, it’s a function of the overall growth in total deposits. You know, so I think it’s — you know, I think the mix, look, for two quarters, we fell down. My belief is DDA is going to continue, you know, internally I say we view it is more likely than not to continue to hold in this range. It may be depending on how successful we are over time I would expect it to grow as we — with all the work we’re doing in the small business and low to middle market et cetera. But in the short run, I expect it to stay stable through Q4 and as far as I can see into 2024. One thing I would note, you know, the rate of migration and then — as we — as we analyze pretty granularly our deposit base, the level of migration for the last 250 basis points of move has really slowed down, meaning take out new customers.

Just looking at the existing customers that we started — that we started say Q2 with, that the rate of migration for the last two moves has been way less. We’ve been able to offset it and grow this quarter. But still, it seems like customers, obviously, they just not having us much of an impact. Those people who are — and customers, who are aggressively managing liquidity. It seems to be not as high a priority, I would say.

Michael Rose: Yes. It certainly didn’t mean to discount the fact that you’re one of the few banks that’s actually growing DDA this quarter. So certainly appreciate that — the progress and a lot of stuff that you can — that may not be apparent kind of what’s under the hood. So a lot of good stuff there. So — but the deposit costs continue to increase. Obviously, you guys added some higher-cost deposits this quarter. Are we getting closer to a peak in deposit costs in your eyes?

Malcolm Holland: Not with the way I think CDs are going to roll. I don’t think — I don’t think we’ve hit a peak in deposit costs. We have lowered production rates. But just as we’ve got fixed rate loans, I talked about it, 3.95% being reduced. We’ve got some earlier dated CDs at lower rates that are going to roll too. So I think it’s going to — that’s why I think we’re near the bottom, not at the bottom or down.

Michael Rose: Okay, helpful. And then maybe just last for me. Through the pandemic, obviously, you guys hired a lot of producers, got a lot of growth during that period. Now the fundings increased. It seems like growth is kind of poised to kind of pick up. And, you know, just wanted to get some kind of initial nearer-term thoughts on what the drivers would be? And then, obviously, you’re trying to bring the CRE and A&D concentration, you know, down. Where would you expect kind of that growth to be just trying to get the puts and takes as we think about next year? Thanks.

Malcolm Holland: Yes, so the growth is going to be largely dependent on payoffs. And then the whole funding look — outlook, which we had some really good vision into is on the second quarter of next year. It basically falls off a cliff because we’ve been funding $300 million and $400 million closer to $400 million a quarter. By the time we get to Q2 next year, that falls off. And so you’re funding — some of the funding, it’s already in the book. It’s going to stop. If payoffs continue then growth is going to be a pretty good challenge, but some of the things that we’re doing here and we are focused on growth, but we’re focused on growth, on what the market is going to give us. We are not outsized growth is what we’re looking for.

And we’re still trying to determine what that looks like. I mean, candidly, our clients have not asked for a lot lately. But I do see some things getting a little better. So overall, I think, I would tell you it’s low-to-single — low-to-middle-digits on growth for next year, but the paying on payoffs that could be a challenge.

Michael Rose: Totally understand. Thanks for the color. I appreciate it guys.

Malcolm Holland: Yes, let me remember this and my memory came back and I remember other items in Terry, I was just going to make a comment that — if you look at our deposit pipelines, to our loan pipelines, it’s 4 times today. Yes, deposits to loan. Yes, it’s four — deposits pipelines four times greater than our loan pipelines today. So that’s just new one. Operator, next question.

Operator: Thank you. One moment, please. Our next question comes from the line of Matt Olney of Stephens. Your line is open.

Matt Olney: Hey, thanks guys. I appreciate all the good commentary this morning. And I apologize if I missed this, but want to ask about the overnight liquidity levels, cash balances, I think, with the third quarter liquidity build, I think cash balances are now 6% of earning assets. Where are you looking to maintain these levels in the fourth quarter and into 2024?

Terry Earley: I would like the cash levels to be a little lower. Actually, we’ve started investing excess liquidity this quarter, you know, cash balances, you know, I would like for it to be, you know, 5% to 10% lower. But the important thing is just, you know, when this whole thing went off the rails with Silicon Valley on March 8, the available liquidity to the bank right now is double what it was. We’ve got $6.25 billion cash in available cash. So we — team has done a good job and getting everything placed in the right place, et cetera. So, but I do want to see this managed cash a little tighter — and depending on what loan growth does start to invest in excess liquidity in a very capital-efficient way.

Matt Olney: And Terry, just following up to that you say and invest that, are you talking about maintaining investment securities portfolio? Or are you talking about building that from here slightly?

Terry Earley: I’m talking about growing the portfolio over the course. You know, if we’re going to continue to make progress as Malcolm talked about on the overall strength of the balance sheet, we’ve got to put more liquidity into the investment portfolio. The other good thing it does is it can help protect for downgrades given our floating rate loan book. So, and so it — I’m not going to leverage to do it now. I’m not looking immediately to do a loss trade to do it, but as we have excess liquidity, we are investing, blocking in spreads and we’ll build that portfolio over Q4 into ‘24.

Matt Olney: Yes, okay. That makes sense. And then I guess shifting over different topic, on the out-of-state loan portfolio. I appreciate that disclosure in the deck there. As we think about next year, is there a strategy to change the amount and the shift at all of the out of state 8% or are you just trying to update us the community here in light of some of the questions you’ve gotten on that topic?

Malcolm Holland: I would say, the latter to start. There has been some confusion and frustration. And I understand and that’s why we just got really, really clear and granular. I would see, so just as a function of the property type, you’re going to see that out of state number come down fairly drastically with almost $0.5 billion in that 800 in warehouse and retail multi — actually for that much closer to 600. A lot of those are construction deals. And they’re going to be paying off. The payoffs are going to come out of those books. So you’re going to see that number come down.

Matt Olney: Okay, perfect. And then I guess, for Clay on the office portfolio. That disclosure this quarter in the deck was a little bit different than last quarter. So I can’t tell if there is any migration in office. Any — just commentary on the office portfolio?

Clay Riebe: We had one loan in the portfolio that moved to criticized assets during the quarter in the office portfolio. But since June 30, portfolio is down $30 million. Q – Matt Olney Got it. Okay. That’s helpful. And then just lastly, as we take a step back and think about just general profitability, I think you disclosed in the deck the PPNR ROAA this quarter was around 160, I think. If we focus — I was going to ask, if we think about just profitability in terms of the next year as far as balance sheet management and all the things you’re focused on, how should we think about that PPNR ROAA level?

Malcolm Holland: Probably pretty similar is what I would say, somewhere in that, you know…

Terry Earley: Give or take 10 bps…

Malcolm Holland: Yes, 150 bps to 170 bps.

Terry Earley: Yes, that’s what I would say. A lot of it has to do, Matt, some of this, USDA income and what levels they performed. But I think it’s fair to say between 150 bps and 170 bps. You’re going to see us this shipment.

Matt Olney: Okay. Okay. That’s helpful, guys. Thanks for taking my questions.

Malcolm Holland: Certainly. Thanks, Matt.

Operator: Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you all for participating. You may now disconnect. Have a great day.