Veritex Holdings, Inc. (NASDAQ:VBTX) Q3 2024 Earnings Call Transcript

Veritex Holdings, Inc. (NASDAQ:VBTX) Q3 2024 Earnings Call Transcript October 23, 2024

Operator: Good morning, and welcome to the Veritex Holdings Third Quarter 2024 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. Please note, this event will be recorded. I’ll now turn the conference over to Will Holford with Veritex.

Will Holford: Thank you. Before we get started, I’d 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 anticipated results to differ. The company undertakes no obligation to publicly revise any forward-looking statement. If you’re locked into our webcast, please refer to slide presentation and our safe harbor statement beginning on Slide 2. For those on the phone, please note that the safe harbor statement and presentation are available on our website, veritexbank.com. All comments made today are subject to that safe harbor statement. Some financial metrics discussed will be on a non-GAAP basis, which management believes better reflects the underlying core operating performance of the business.

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

Malcolm Holland: Thank you, Will. Good morning, everyone, and welcome to our third quarter earnings call. We review our third quarter highlights as well as discuss the balance sheet transformation that’s taken place over the past two years. To accomplish these needed changes on the balance sheet, it’s taken a conviction and focus of our executive team and candidly, our entire company. For the quarter, we reported operating earnings of $32.2 million or $0.59 per share. Pretax pre-provision earnings were $44.6 million or 1.38%. NIM continues to increase slightly, while capital is growing with CET1 now at 10.86. Increased profitability and efficiency is our primary priority and goal as we are dedicated to move our 1% ROAA higher.

Our balance sheet continues to get stronger through our focused efforts on deposit gathering and client selection that are full relationships and not just transactions. For the quarter, deposits grew $311 million or 11.6% annualized, proving out our strategy to grow an attractively priced deposit funding sources. Terry is going to detail for you what we call a desirable and non-desirable deposits shortly that will give you some insight on the source of these deposits. On the loan side, we are still experiencing some large payoffs, which has kept our loan growth down, resulting in a decrease quarter-over-quarter of $126 million. I would also like to mention our CRE concentration ratios are virtually back in line on our 300, 100 buckets, and we will continue to manage these below 300 and 100 going forward.

Moving to credit. A couple of highlights. Curtis and his team remain committed to a top-tier credit bank. We’re not where we want to be yet but we continue to make huge strides towards that goal. Third quarter results reflect our ongoing drive to address credit issues as quickly as possible and to achieve final resolutions. Criticized totals were lower for the quarter, primarily reflecting the impact of payoffs, while the bank had a number of restructurings that improved the risk profiles during the quarter, the bank realized $80 million in criticized payoffs and paydowns. OREO decreased from $24 million to $9 million, primarily from the successful sale and close of a student housing property without loss to the bank. This sale was also the driver to a reduction in our NPAs from $83 million to $67 million, now down to 0.52% of assets.

Charge-offs were nominal at $269,000 and $1.6 million charge-off of a long-standing credit problem was offset by $2 million in recoveries. Past dues, including nonaccruals were flat to second quarter as a percentage of total loans at 0.8% and down meaningfully from 1.5% at year-end. We continue to build our credit loss reserve now at 1.21% of total loans or 1.3% excluding mortgage warehouse. Our credit team’s efforts on early surveillance and priority to move undesirable loans out is producing some nice results. More work to do but encouraged by positive trends. I’ll now turn it over to Terry for some comments.

Terry Earley: Thank you, Malcolm. When I look at the results for the third quarter, I’m encouraged, especially about the position of the balance sheet, the credit trends and 7.2% revenue growth quarter-over-quarter including NIM expansion. Starting on Page 7. The allowance now sits at 121 basis points, up significantly in the last 6 quarters, and we have increased the reserve by almost 19% or $19 million. Additionally, when you exclude the mortgage warehouse, the ACL coverage rises to 130 basis points. Our general reserves comprised 97% of the total allowance. We continue to use conservative economic assumptions in the CECL modeling with 75% of the weighting on downside scenarios. This seems appropriate given the level of economic uncertainty election uncertainty and global geopolitical risk.

Moving to Page 8. Over the last six quarters, total capital has grown approximately $132 million, while the loan portfolio, excluding mortgage warehouse, has declined by just over $200 million, a clear indication that the balance sheet is better positioned and more resilient. The CET1 ratio expanded by 37 basis points during the quarter and by 75 basis points year-over-year and now stands at 10.86%. A significant contributor to the expansion in the capital ratios has been a $450 million decline in risk-weighted assets over the 6-quarter period. Tangible book value per share increased to $21 and 72%. That’s a 15.8% increase on a year-over-year basis, including the shareholder dividends. It’s worth noting that since Veritex went public in 2014, its compounded tangible book value per share at a rate of 11.1%, including the dividends that’s been paid to shareholders.

Finally, Veritex only repurchased 2,000 shares during the quarter as the trading valuation improved from 102% of tangible book at the beginning of the quarter to 128% of tangible book at the end of the quarter. We have 93% of the authorization remaining and intend to be opportunistic in its use if the valuation shows significant weakness. On to Page 9. Our strong deposit growth and disciplined loan growth allowed Veritex to reduce its loan-to-deposit ratio from almost 95% a year ago to 88% at September 30 2024. We intend to remain below 90% going forward. Please note the loan-to-deposit ratio would have been just under 82% if you exclude mortgage warehouse. This seems to be the more relevant metric when you consider the short amount of time more mortgages stay on the warehouse lines.

As you can see in the bottom left graph, we’ve kept the time deposit portfolio short and have $2.6 billion in ceding maturities over the next two quarters with an average rate of 5.14%. We’re certainly glad to have this maturity profile given the potential for 3 to 4 Fed cuts over the next six months. On the bottom right, we show the monthly cost of deposits, note the 11 basis point decline since the month of June. Veritex did a good job this quarter in preparing for and executing on deposit pricing. The Fed cut rates by 50 basis points in September our interest-bearing transaction accounts declined by 40 basis points from June 30 to September 30 and 80% beta. Similarly, total interest-bearing deposit accounts declined by 30 basis points from the end of Q2 to the end of Q3.

On Slide 10, it’s been a great quarter in producing attractively priced deposits with $397 million raised at an average rate of 2.84%. This allowed us to reduce brokered CDs by $294 million and public funds $117 million, and our reliance on wholesale funding sits at 15.7%, down from 21% a year ago. Moving to Page 11. Total loans declined 1.3% during the quarter and are virtually flat year-to-date. Given the excess liquidity we’ve been carrying, it was good to see the increase in mortgage warehouse outstandings. We made significant progress in reducing our Korean ADC concentrations and ended the quarter at 302% and 97%, respectively. The CRE maturity profile is shown in the bottom right graphs. We have just over $400 million in fixed rate maturities at an average rate of 5.93% over the next four quarters.

As shown on the bottom left, loan production increased almost 75% from Q3 ’23 to Q3 ’24, but loan payoffs remain high. This payoff activity reflects the vibrant economic activity in the Texas market, but it does make organic loan growth challenge. The office portfolio is down $112 million in the last year or 18% and now comprises 5.3% of total loans. Slide 12 provides the detail on the term CRE and ADC portfolios by asset class, including what is at state. Slide 13 illustrates a breakdown of our out-of-state local portfolio, including the significant impact of our national businesses and mortgage. A true percentage of the out-of-state loan portfolio was only 10.7%, and this is predominantly where we have followed Texas real estate clients to other geographies.

On Slide 14, net interest income increased by $3.9 million to just over $100 million in Q3, positively impacting the results were higher loan rates on the mortgage warehouse and higher fixed rate yields up 24 basis points, which offset the decline in SOFR and Prime, also positively impacting results were higher earning asset volumes and day count. The net interest margin increased 1 basis point from Q2 to 3.30%. The NIM was negatively impacted by the average level of cash being approximately $425 million higher than our target. This lowered the NIM by approximately 12 basis points. We believe the NIM will remain in the range of $3.25 to $3.30 over the remainder of ’24, assuming we get 50 basis points of Fed cuts during the fourth quarter. While we’re discussing the impact of the excess cash levels, this also reduced Q3 ROA, Return on Average assets by 3 basis points and lowered the TCE/TA ratio by 40 basis points.

Before leaving this topic, I want to remind analysts and investors that we have a $250 million, 42 basis point fixed pay hedge that was put on in March of 2020 and matures in March of 2025. On Slide 15, we showed certain metrics on our investment portfolio. The key takeaways, it’s only 10.9% of assets, duration is 3.6 years and 87% of the portfolio was held in available for sale. Finally, on this slide, you see a snapshot of our cash and borrowing capacity at September 30 2024 and the trend since Q1 of last year. The current available liquidity represents 2 times level of uninsured and uncollateralized deposits. On Slide 16. Operating noninterest income increased $2.5 million to $13.1 million. The increase was driven by $428,000 increase in treasury management fees, a $1 million increase in loan fees from syndications and loan repayment fees and $1.2 million in revenue from operating the piece of OREO that was sold during the third quarter.

Our SBA business continues to build momentum, and we remain disappointed by the lack of USDA fee revenue and are evaluating every aspect of the business as we work to improve the performance. The $6 million increase in operating and noninterest expense for the quarter was a function of a higher interest incentive accrual, OREO expenses and marketing. The $2 million incentive increase reflects us moving our accrual target, our accrual up to 80% of target. This increase was largely given the improvement in earnings, credit and deposits. The OREO expense included about $1 million in costs associated with the piece of OREO that was sold during the quarter as well as two office buildings in Houston that were foreclosed earlier in the year. Recognizing the need to improve our operating leverage and efficiency, Veritex in the second quarter engaged a national consulting firm with extensive banking expertise to look at all aspects of the company.

This review has consisted of staffing, operational processes and technology. We’ve identified meaningful opportunities to improve, and we’ll be working to execute on those through the remainder of 2024 and 2025. To wrap up my comments, I see a lot of positives in the quarter. The balance sheet is in a much stronger position with excess liquidity, lower CRE and ADC concentrations, higher capital and improved credit metrics. We successfully executed and had the best quarter in the history of Veritex and attractively priced deposit production, and our NIM expanded led by good execution when the Fed reduced rates. But there’s still things we need to work on, continuing the past two quarter trend and improving our credit risk profile, continuing to remix our deposit portfolio towards attractive attractively priced improving our USDA revenue performance.

With that, I’d like to turn the call over to Malcolm for concluding comments.

Malcolm Holland: Thank you, Terry. Two years ago, we embarked on a journey to remake and change our balance sheet. We knew at the time we had to build a company that could withstand all market swings and changes. In the middle of this journey, we all have to deal with liquidity challenges in the first quarter of 2023 that further validated our need to change. Let me be honest, it has not been an easy couple of years. and our work is not done, but it’s nice to see the amazing progress our team has made two years. Every metric has moved positively and made our company stronger. Thank you to our nearly 900 team member who embrace their talents to better position Veritex. But like I said, our work is not done. We have more to accomplish. Operator, we’ll now take any questions.

Q&A Session

Operator: Thank you. At this time, we’ll conduct the question-and-answer session. [Operator Instructions] Our first question comes from the line of Michael Rose from Raymond James. Your line is now open.

Michael Rose: I just wanted to dig into loan growth this quarter. Obviously, some paydowns continue to impact the net balances. I think previously, you kind of talked about a mid-single-digit growth expectation for the back half of the year. I think what we’re seeing kind of across the industry, though, is that being ratcheted back and the hope for some reacceleration once you get past the election and kind of know what the rules are, so to speak. Can you just talk about trends in your pipeline, things like that? And then just separately outside of core loans, just any expectations for the warehouse?

Malcolm Holland: Yes. I think we’d be in line with everybody else that’s reported. Our pipeline, just speak to that, is actually pretty good. We enjoy pipelines that are building, specifically in the C&I side. But you nailed it, I mean the payoffs have been really strong. I think over the last couple of quarters, it’s been $1 billion — is that how I remember it well? Something along line. So we had $1 billion in payoffs. If you remember, back in 2022, we had this massive loan growth, and we’re starting to see the cliff on that loan growth payoff. And so we actually expect the fourth quarter to be a pretty heavy payoff quarter and into early ’25. So yes, I’ve mentioned probably in the last two calls, Michael, mid-single-digit loan growth.

I just don’t see it. The payoffs are — and listen, that’s a sign of a positive healthy loan portfolio so the other side of the coin is that we did the right deals. But I do see the pipelines building, and we’ve invested, as I’ve told you, and certain people on the commercial side, the middle market side, our community banks and business banking are doing well. It’s just hard to move the needle in those spaces. But I would probably say it’s going to be a little bit less than single mid-digits.

Terry Earley: Yes, Michael, let me jump in a couple of things. One, when we hear this from our bankers, I think this whole election uncertainty is weighing all on companies and what they’re doing. And we hear that pretty consistently. I’d also add that there’s a silver lining to these payoffs, look at the falloff in our commercial real estate concentration from 320 to 302. I mean you couldn’t have done that without significant payoffs. So there’s definitely a silver lining there. Three, the mortgage warehouse was strong for us this quarter, we expect for it in Q3, we’re looking forward to be strong again in Q4. Having said that, what’s going on with the 10-year and mortgage rates it may not be as strong as we would like or had hoped or even if it was at the end of Q3 because you’ve got seasonality and you’ve got what’s going on in rates.

So it being flat in the back half of the year, I would be pretty happy with that. I don’t think that’s going to be easy. But we’ve got — I think Malcolm said it well that Veritex has shifted from getting liquidity to repositioning the balance sheet to now the focus is on revenue growth, disciplined growth, disciplined loan growth and efficiency. So — it’s just where we are in our evolution as a company, and it’s good to be at this stage.

Michael Rose: And then just a question on the hedge that you mentioned as it relates to kind of the margin. I mean is the expectation that you would look to maybe renew that closer to expiration or not? And then what is the impact if it were just to roll off in context of the margin?

Terry Earley: Well, if I could renew that hedge at 42 basis points, believe me, I’d be on the phone and not talking to you right now. But the market wouldn’t give me that hedge again. I put it all on March 9. And if you remember what was going on March 9, 2020, when COVID kicked off, and we just had to work the presence of mind to see the opportunity and grab it.

Malcolm Holland: Good fortune.

Terry Earley: Yes. Sometimes, it’s better to be lucky than good. But that’s so we can’t nor would we want to if you believe what the forward curve and what the Fed dot plot says, I won’t this — I mean, if I wouldn’t rehedge it at current rates because I just don’t think we need to do that, I would rather have these things — they have a beta of 100% because they’re hedging brokered CDs. So they’re going to price down as the market moves down, and we keep these things pretty short, as you know. The effect of this is $1 million a month in NIM. Let me add one other thing. Will reminded me of this. We have some collars and fixed pay hedges, though that are going to get more and more in the money. So they’re going to help mitigate some of this. It’s not just dollar for dollar, what’s going to happen to NIM. We’ve got hundreds of millions of dollars of fixed received hedges that can help mitigate this, probably $375 million, if my memory is serving me right.

Michael Rose: So like a net impact of like $600,000 a month in that ballpark is fair to consider?

Terry Earley: Maybe a little less than that, but [Indiscernible].

Michael Rose: And then maybe just finally for me. I know you kind of mentioned last quarter that you had engaged a consulting firm. You mentioned it again today. Any early read on things that they’re targeting or that you plan to kind of implement and — just would love any sort of color there.

Terry Earley: I mean, look, we’re excited about the opportunity. I’ve actually worked with them in two previous lives, if you will. And so I have a lot of confidence in — they’re working with a fair number of our peers tells you a lot about the need for scale in your industry doesn’t it? And efficiency. Look, it’s pretty broad-based as I touched on. The big parts are around process and technology and fully leveraging the technology we have, negotiating down the prices in some of our technology contracts improving our commercial lending processes. Just so it’s — but some of these are easier, some are pretty hard and complex and they’re not just expenses, they’re revenue opportunities as well. We can do a better job on certain things around — we had a good quarter in treasury management fees, we can do better. We’re underpenetrated there.

Malcolm Holland: There’s no silver bullet here, Michael. It’s about making our company more process-driven focused on efficiency. And it won’t happen in a quarter or two. It will take some time. But it’s all really good stuff.

Operator: The next question comes from the line of Catherine Mealor of KBW. Your line is now open.

Catherine Mealor: I wanted to follow up on the margin. You mentioned a 3.25% to 3.30% margin this quarter, which makes sense. How should we think about the margin as we move into ’25? I mean you’re asset sensitive, clearly, but you’ve got a lot of opportunity on the deposit cost to lower deposit costs probably more than most asset-sensitive banks. So just kind of trying to think about do you think there’s enough on the funding side where you can still keep that margin stable to maybe even higher as we move into next year? Or is there still kind of an asset-sensitive downside?

Terry Earley: It’s a great question. And if I had a crystal ball — I’ve given up on the forward curve. I’m kind of going to move to the Fed dot plot, which I think is probably the most reliable. But who knows, I mean, especially when you look at the recent employment inflation data of what’s going to happen, we’ve gone from a lot of cuts to now. It’s less than 100% guarantee of a cut in November, we’ll see. I think it’s — the NIM is going — I don’t see the NIM expanding in ’25, I think that the best we can hope for is to just do a good job on pricing down. We did the first cut. I talked about the 80% beta on the interest-bearing transactional accounts. But the deeper it goes, I don’t think it’s going to go that deep. I mean what’s the dot plot say?

3.5% Fed funds at the end of next year. So if — it’s gradual and whatnot, and we can execute well. And if we can get the balance sheet, the excess cash, I think we can stay somewhere in the 320’s, but I just don’t see it getting — right now, I don’t see it getting into the 3.30’s. Now one of the things weighing on, it’s interesting for me to have that point of view because when you look at our new loan production rates, we’re just over 8% and you look at our new deposit production rates, excluding brokered and all — and I talked about attractively priced, we have some production that’s not attractively priced with the new production rates there in the mid-360s were a spread of almost 390 basis points. So I feel good about what we’re doing on the margin in terms of just how we’re pricing on the margin, we do need more loan production, as we talked about, we need growth.

But I don’t — I see it staying in that 320-plus — somewhere in the 320’s.

Catherine Mealor: On the USDA outlook, any additional comment here you can give us on what what’s a good way to model that? I know it’s been lumpy and has come under your expectations for the past couple of quarters, but just curious kind of what you’re doing there and maybe what a good run rate is to target.

Malcolm Holland: I’ll answer your good way to model it. No, there’s no good way to model it. A good USDA year is going to cost between 8, 12 loans and if they’re bigger, that gets really, really lumpy. And it’s hard to model. Now we try to change some of the focus with USDA to move down market. Let’s not chase the big elephants, easier to model it. And what we’re really trying to do, Catherine, is trying to going to leverage the USDA and the SBA business together. There’s a lot of similarities, specifically on the loan production side. And so we’re trying to put match those people together. In fact, lower this last quarter for the first quarter, we have our USDA group originating some SBA loans. And hopefully, they’ll cross pollinate on that a little bit.

But it’s — what we’re trying to get to is where we don’t have the lumpiness and this cross-pollinization will help create some of that going forward. But I can’t give you any huge insight on how to model USDA because if you get a big one, it kind of blows it out of the water. And so we’re just trying to guide to a low number and if the big one pops up, it pops up.

Terry Earley: Catherine, I would say, if you look at — if you think about the way Malcolm said, think about it in total, I would say ’24 is going to be a down year as we’ve all talked about that ad nauseam. ’23 and not — just don’t look at USDA, look at government guarantee, look at the ’23 government guaranteed earnings. Our goal is to get back to that, but it’s going to have a really different mix, much more heavily weighted in the SBA less on the USDA and in terms of product mix, in terms of what drives that revenue, but just really trying to get back to 2023 type levels, [Indiscernible].

Operator: Our next question comes from the line of Ahmad Hasan of D.A. Davidson.

Ahmad Hasan: I’m Ahmad Hasan on for Gary Tenner. I had a quick one regarding expenses. Expenses ticked up a little bit this quarter. So how should we be thinking about them in the near term?

Terry Earley: Do you need to be thinking we want them to go down? I mean, I said, some of this is incentive driven based on performance where we took our accrual up. And that accrual is not coming down in Q4. Some of it’s OREO related, and that property is gone. So that’s going to — that’s $700, $800 million in expenses. It inflated both the fee side and the expense side, largely, it was an offset. So that’s going to come down. marketing probably is not going to be as high. And we’re working on some of these efficiency initiatives. So I don’t see expenses coming, they’re going to come down a little bit from this OREO thing, but the incentive accrual and some of the other things we need to do, I see expenses staying higher, not that much higher from here, but I don’t see them coming back down a lot, not yet. As we work through ’25 and some of these efficiency initiatives, I think that’s a longer-term question in Q4, as you just can’t move the needle that quick.

Ahmad Hasan: And then maybe one on deposits. You guys have pretty good deposit success, specifically in [Indiscernible] can you talk about changes you’ve made on deposit pricing? I know you touched it on a little bit in the prepared remarks. But how are you thinking about deposit pricing given the expected rate cut to hedge?

Terry Earley: We want to execute as well as we did at the September rate cut. We got in front of that. We were talking to our bankers, we certainly made some exceptions where relationship profitability warranted it. But — and we’ve just got to continue to do that and remix deposits by continuing to produce attractively priced deposits and reducing wholesale reducing public funds, reducing some other that have very high effective rates. So that’s just what we’ve got to continue to do. The key thing to our good quarter in deposits is every line of business is contributing. They’re contributing to production growth and good rates from retail to small business to middle market to specialty. I mean, it’s just been across our community group.

It’s the first time in my tenure at Veritex, where I’ve seen good, quality deposit productions at attractive rates across all lines of business. And that’s the key. And it’s about the changes that Dom and his leaders are making in terms of prospecting outbound calls, targeting the right customer segments, et cetera that fits in with our strategy, and it’s just about continuing to execute there.

Ahmad Hasan: And maybe a follow-up. Do you have a quarter end spot rate for total or interest-bearing deposit costs?

Terry Earley: Sure. Interest bearing is 438 total is 333. That does include hedges, by the way, so that doesn’t include hedges. That’s just — that’s our contractual rates on our deposit franchise, our deposit accounts.

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

Matt Olney: With that deposit growth that we just talked about, it looks like that allows you to build the overnight liquidity position to pretty strong levels, just over $1 billion. Just curious about the plans for that. Should we just assume that this maintains this level of the next few quarters? Or do you expect to deploy any of this into securities? Just any thoughts on that build?

Terry Earley: No. Success is not carrying that much excess liquidity. I think it will be a combination of three things. We have wholesale broker deposit paydown opportunities with rates over 5% that starting here next week. So you will see us continue to reduce that; two, we will probably put some money in securities; 3, we want to have a better loan growth quarter; and four, we want to move out some very expensive deposits other than brokered that we’re currently working on and expect to move out. So that’s — it’s going to look a little bit different, but it’s — everything I just said is NIM enhancing. And so that — I said about $450 million above our target. A good quarter is if we can get down from — and I’m looking at averages more if we can get down from that and do those things then that will be good. That’s the plan.

Matt Olney: And then going back to the balance sheet repricing. Just remind us of the dollar amount of the floating rate loans and the index liabilities? And just remind us how quickly these will reprice, reset?

Terry Earley: Index liability — the floating rate loans are about 75%. At Veritex, that never had never moved around very, very much. Our index deposits, I don’t know, thought I had [indiscernible] on that, about $2.5 billion that is either contractually or functionally indexed.

Matt Olney: And then, Terry, just how quickly those reset following the Fed?

Terry Earley: Immediately. Functionally — or contractually indexed to the Fed funds rate. So that’s why I say immediately.

Operator: Our next question comes from the line of Brett Rabatin of Hovde group. Your line is now open.

Brett Rabatin: I wanted to talk a little bit about the classified criticized. And Terry, I think you said that you had reduced the criticized $80 million this quarter with payoffs. So I guess there was some in and out migration. Can you just maybe talk about how you see the classified criticized bucket here? And then specifically, I know about 1/3 of the criticized is office. And maybe just an outlook on the office book that’s criticized and kind of how you see that playing out?

Curtis Anderson: Brett, this is Curtis Anderson. I’ll address that. We’re working through our criticized classified carefully. We’ve got multiple strategies in flight with our special assets team. We’re working to manage the cycle time on that group of loans quickly and carefully. We’re using all of the strategies that are at hand to address them. Payoffs, of course, is a key one. If we can have a property owner, for example, sell a property and we get alignment on that. We will do that. Our team actively uses note sales. So all the strategies are in place. My view is that, that category should be relatively stable given the focus that we’ve got on it for the near term, always can have something pop up. But again, the team has done such a good job anticipating risk and looking out and getting ahead of risk at all risk categories.

And I’m fairly confident based on what we know today, that we should see relative stability in that asset class. I don’t know if there’s anything Malcolm, Terry you’d add to it, but really pleased with the work by the entire bank, but in particular, our special assets team.

Terry Earley: I think the key has just been to the effort, Brett, that Curtis and team have done and really starting in the past watch stage. And thinking about — because when the loans in past watch, there’s options. And if that thing migrates the number of options available to you shrinks as everyone knows, so I just think the work they’ve done in getting — looking out, anticipating 6 months, 9 months ahead is what’s paying dividends for us. And even though you may see it be relatively stable, trust me, there’s a lot going on underneath.

Brett Rabatin: And then maybe, Terry, any thoughts on capital from here? And you’ve obviously been in a reduction mode on commercial real estate and construction and improving your capital ratios. Are we to the point that you’re happy with the capital ratios and maybe you might use excess capital for something? Or do you still think you want to build capital levels further?

Malcolm Holland: Yes. Brett, this is Malcolm. Listen, we’re Happy with the capital ratios where they are, we’re grateful to being able to grow it. A lot of change on the balance sheet helped us with that reduction of risk-weighted assets and obviously, profitability over the year. And we’re going to continue to build capital. But I think it’s prudent today to have some dry powder. We’ve run a pretty — we run our own peer group, which is a very, very high-performing peer group. And candidly, we’re below the median on CET1. So it’s not just us, it’s a lot of people that are holding on to this capital. And so I think that’s what you’re going to see us do over the next period. The buyback, we’re not really interested in the buyback at these levels. It’s more of a defensive play for us. Our dividend is in a good place. And so you’re going to see us build a little capital. And will still give us the ability to have potentially work on some opportunities in the future.

Terry Earley: I would tag on and add that if we get our growth profile to where we want it, capital ratios will stabilize. And also, we are — given where our ratios are once, we’re already looking at — we have been in the [indiscernible] production business in any significant way in two years. And so that’s ticking back in. So you’re going to see some increases in the ADC unfunded as we look out over the next 4 to 6 quarters. And so that’s going to have an effect on risk-weighted assets, too. I think for me, the reality is more capital gives you more options and that’s what we want strategically right now. And the market is focused on profitability, not return on tangible common equity right now. And so let’s don’t worry about capital and equity, let’s improve profitability and get this growth profile, earnings profile where we want it and the capital levels to take care of themselves.

Brett Rabatin: And then just lastly on — back on fee income and excluding kind of the North Island stuff, the other bucket obviously had some OREO income in it. How should we think about that other bucket from here?

Terry Earley: Look, I think about it more. I mean we had a good quarter even if you back out the income and you net out the OREO expense, net-net, we still grew fees. We’ve got to continue to do that whether it’s swap fees, syndication fees, loan prepayment fees, government guaranteed fees, treasury management fees, mortgage — get our mortgage business going more and selling more of that product. So it’s an important focus for us in card fees. So we’ve introduced some new card products on the commercial side. So it’s an ongoing effort and others just all these buried in there and others and some real estate we own, like our office building here and rental income stuff like that. But I think, Brett, it’s more about the totality of fee income, and we’ve got a huge focus there because it’s certainly a good driver of profitability and ROA.

Operator: Thank you. This concludes the question-and-answer session. Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.