Almost 70% of the Out of State portfolio are loans, where we have followed Texas developers. The rest are SNCs, 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. 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 as we work to achieve a loan-to-deposit ratio below 90%. This will require us to invest between $500 million and $600 million in excess funding into the investment portfolio during 2024, this additional investment in debt securities will drive eight to 10 basis points of NIM contraction.
Additionally, the NIM will contract approximately four basis points for every 25 basis point reduction in the Fed funds rate. On slide 10, loan yields are relatively flat, slight decline, investment yields are up and deposit costs increased 23 basis points. Slide 11, this shows certain metrics on our investment portfolio. Key takeaways are, currently only 10% of assets, 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 our capital ratios since it’s excluded. We did purchase $205 million in 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.
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 our gain on sale by 42% over 2022. Operating non-interest expenses were flat quarter-over-quarter, but increased to almost $30 million year-over-year. Significant drivers of the increase or 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. On slide 13, 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 it by 18 basis points to 1.14%. 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 sizable part of the ACL. With that, I’d like to turn the caller to Clay for comments on credit.
Clay Riebe: Thank you, Terry, and 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-quarter end. Secondly, our classified assets were reduced by 17 million, or 7%, 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 was an increase in NPAs, as previously discussed by Malcolm, $9.5 million in charge-offs, and elevated past dues. Past dues are elevated in the 30-60 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 at year-end and are now current. Commercial real estate relationship in the amount of $8.8 million was passed due to a year-end and as a waiting payoff. 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 NPA 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 NPA 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 C&I loan payoffs.
The year-over-year increase in net charge-offs is driven by the Atlanta office building charge-off. A 5-year look back on charge-offs is provided as context for the year. 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.
Malcolm Holland: Thank you, Clay. As we think about 2024, we believe it’ll 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 in. We’re committed to our purpose with unwavering persistence while being patient to make the right moves at the appropriate times. Operator, we can now take questions.
Operator: Thank you. [Operator Instructions] We will go into the Q&A now, and our first call will be coming from Matt Olney.
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?
Malcolm Holland: We’ll probably 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 ’24 than it has in ’23.
