Veritex - Q1 2023
April 26, 2023
Transcript
Operator (participant)
Good morning, welcome to the Veritex Holdings Q1 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 Miss Susan Caudle, Investor Relations Officer and Secretary to the Board of Veritex Holdings.
Susan Caudle (Investor Relations Officer and Secretary to the Board)
Thank you. Before we get started, I would like to remind you that this presentation may include forward-looking statements. 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're logged into our webcast, please refer to our slide presentation, including our Safe Harbor statement, beginning on slide two. For those of you joining us by phone, please note that the Safe Harbor statement and presentation are available on our website, 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. 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 (Chairman and CEO)
Good morning, everyone, and welcome to our Q1 earnings call. Despite the challenges in the marketplace, Veritex continues to produce results that accrue to our shareholders' benefit. For the , we reported net operating income of $43.3 million or $0.79 per share. Our pre-tax, pre-provision for the quarter was $66.4 million or 2.2% return on average assets. From an operating standpoint, our return on average tangible common equity was in excess of 17.7%, our return on average assets was 1.44%, and efficiency remained in the mid-forties at 45.6%. As our market and industry face new challenges, we also reevaluate priorities and give extra attention to the challenges we have been presented. Liquidity management is part of every discussion.
We have included some detailed slides addressing this topic that Terry will discuss momentarily. Overall, we have seen little deposit outflows since 31 December 2022. Our bankers have done an amazing job at communication, answering questions, and offering deposit solutions to all of our clients and prospects. As expected, growth at Veritex has been reducing. For the quarter, we reported 9% annualized loan growth, with the majority of that coming from our funding in our already on the books construction portfolio. Our pipelines across the bank are down over 60%. We expect growth to continue to decline going forward to the mid-single digits. A great deal of our forecasting loan growth depends on the level of payoffs, which are a bit unpredictable in this market during these times.
Payoffs for the quarter were $235 million, and as of now, our Q2 payoff pipeline looks to exceed by 15%. Credit continues to be a major focus for me, our credit team, and our bankers. The surveillance of our portfolio has never been higher. We recognize that as interest rates stay higher for longer, additional credit stress will continue to appear. We have taken an extra deep dive on our entire real estate portfolio and each product type. You can find that detail on page 19 of the slide deck. For the quarter, net charge-offs were nominal at less than $1 million. NPAs to assets was slightly down, and we increased our reserve to 1.07%. You will also see that criticized assets decreased 9% versus the previous quarter.
Clay will give you some additional color in a moment. I'll now turn the call over to Terry.
Terry Earley (CFO)
Thank you, Malcolm. Starting on page 5. Q1 was a quarter of strong financial metrics despite the financial market turmoil in March. Tangible book value per share ended the quarter at $19.43, up 5.1% in the quarter and 9.3% on a year-over-year basis after adding back the effect of the dividends. A new metric that we added to our earnings release is pre-tax, pre-provision operating return on average loans. I believe it's a good barometer of loss absorption capacity from the loan portfolio without impacting TBV or regulatory capital. Our result for Q1 is 284 basis points and is up over 21% on a year-over-year basis. On slide six, for the first 67 days of the quarter, we were growing core deposits in an annualized rate of over 11.5%.
Everything changed on March 8th. Fear took over the deposit environment, there was a flight to scale was perceived as safe. For Veritex, this was most evident with our correspondent money market clients. During Q1, we lost 51% of these index deposits as clients moved excess liquidity to the safest venue, the Fed. Overall, our deposits were down $88 million or 1% for the quarter as we replaced correspondent funding with broker deposits. Since the end of Q1, deposit activity continues to return to normal, as evidenced by our increase in core deposits of almost $100 million. Veritex started the journey to transform the balance sheet starting in Q3 of 2022. We did this by slowing loan growth, shifting our loan production focus away from CRE and ADC to C&I and small business, and building capital, especially the CET1 ratio.
After Labor Day, we heightened our focus on the deposit portion of the balance sheet. We changed our banker incentive program at the beginning of January to give deposit value and volume a much higher weight in our balanced scorecard. We reallocated marketing spend to deposit products, then launched a direct marketing campaign in February with encouraging results. All of these efforts, and many more, will continue through 2023 and beyond. Finally, since March 28, we've reduced our non-core funding by $258 million and materially improved our liquidity capacity. Currently, our liquidity capacity exceeds uninsured deposits by $1.6 billion, or almost 50%. Moving forward to slide seven, continuing the discussion on deposits, the effect of the Fed's interest rate hikes can be clearly seen in the shift of deposits out of non-interest bearing to other interest-bearing categories.
These deposits have declined from 35% of total deposits in Q1 2022 to 24% in Q1 2023. Deposit pricing competition has morphed into hand-to-hand combat. Our cycle to date to total deposit beta is approximately 46%. I expect deposit betas to continue to increase given funding requirements in the competitive landscape. On slide 8, uninsured and uncollateralized deposits are at 38.4%, down from 44.1% at 12/31/2022. Veritex's average account balance is $132,000. On slide nine, loan production declined 73% from Q4 to Q1 as interest rates continued to increase, economic uncertainty increased, and liquidity became much more of a concern. Unfunded ADC commitments continued to drop at the rate of $300 million-$400 million per quarter. On slide 10, you see the evidence of this greater emphasis on C&I.
During the , C&I and owner-occupied real estate accounted for 48% of our production, up from 41% in Q4. On to page 11, net interest income decreased by $2.7 million or 2.6% to $103.4 million in Q1. The three biggest drivers of the decrease were higher rates on interest-bearing deposits and liabilities, day count, and this was significantly offset by higher loan yields. The net interest margin decreased 18 basis points from Q4 to 3.69% in Q1. The Q1 NIM was negatively impacted by carrying higher cash balance at the Fed. This is approximately five basis points of contraction on the NIM. Interest reversals on problem credits was about three basis points, and the rest is due to deposit flows and pricing.
All this is to say NIMs are likely to remain under pressure given the amount of liquidity that has left the banking system and the ongoing war for deposits. Veritex's interest rate sensitivity is largely unchanged since Q4, and we remain slightly asset sensitive. On slide 12, during Q1, our loan yield was up 53 basis points to 6.51%, while deposit rates increased 78 basis points. Q1 loan production carries an interest rate of 7.56%. Thankful to have a predominantly floating rate loan book to offset the deposit beta impact and to be able to deliver acceptable new production spreads. On slide 13, shows certain key metrics on our investment portfolio. First, it's only 9% of assets. The duration is four years.
83% of the portfolio is in AFS, and the mark-to-market on the entire portfolio is less than $90 million. On slide 14, non-interest income increased by $4.5 million to $18.9 million. This excludes the loss on the investment portfolio deleveraging trade executed before March eighth. Revenue diversification is becoming a more important part of the Veritex revenue stream. For the second consecutive quarter, we got outstanding performance in our USDA business, and it was also helped by a much smaller loss at Thrive and partially offset with lower customer interest rate swap revenue. We'll come back with additional comments on USDA and Thrive in just a minute. Non-interest expense decreased by $949,000 to just under $56 million, reflecting lower variable compensation, partially offset by higher data processing and software expense. Turning to slide 15.
As I noted earlier, Q1 was another great quarter for North Avenue Capital, with $114 million in USDA loans closed during the quarter. We sold the guaranteed portion on approximately $80 million of those loans. Gain on sale premiums remained very strong. We have a strong pipeline of loans in the closing stage as we look forward to Q2. It's worth noting that the USDA B&I program could once again run out of funding before the end of the government's 2023 fiscal year. This is consistent with what happened in 2022 and could impact revenue later in the year. Our SBA pipelines continue to build as new leadership and recent hires gain traction. Gain on sale margins are slightly stronger than at the end of Q4. Moving to Thrive.
Veritex recorded an equity method loss of just over $1.5 million, as funded volume increased 3% to $426 million. Gain on sale margins improved from Q4 levels, are still below historical results. Thankfully, the negative margin impact of the long-dated locks has now been flushed through the P&L. These losses represented 50% of our Q1 loss we recognized from Thrive. Thrive's efforts to re-rightsize the expense structure of the company, given expected 2023 production volume, is bearing fruit. We continue to believe breakeven performance in 2023 from Thrive is possible. On slide 16, total capital grew approximately $42 million during the quarter to $1.438 billion. CET1 ratios have expanded by 23 basis points during this period. Please note the impact. This slide.
Please note the impact on the capital ratios from the mark-to-market on the AFS and HTM portfolios. These ratios remain meaningfully above the well-capitalized threshold, plus the capital buffer. Looking forward on capital, we believe that moderating loan growth and lower unfunded commitments should allow us to achieve our CET1 target of 10% by the end of 2023. Finally, on slide 17, note that we increased the weighting on the downside economic scenarios in the CECL model to reflect the uncertainty in the economic outlook and the greater recessionary risk that's out there. These changes increase the allowance by five basis points to 107. With that, I'd like to turn the call over to Clay for some comments on credit.
Clay Riebe (Chief Credit Officer)
Thank you, Terry, and good morning, everyone. Please turn your attention to page 18 of the deck. Q1 was a quiet quarter overall from a numbers perspective, but a very active quarter from a surveillance perspective. We saw a meaningful reduction in criticized assets due primarily to a large paydown in the lender finance facility discussed on last quarter's call, resulting in a 9% reduction in criticized assets during the quarter. NPAs remain essentially flat for the quarter and reducing to 35 basis points of total assets. Past dues remain manageable. Annualized net charge-offs were down to four basis points and were primarily due to the cleanup of several SBA credits that went through liquidation. Moving on to page 19, we've provided a snapshot of the primary loan types held in the CRE portfolio.
This information came from an individual review of every credit in excess of $1 million in each sub-subsegment highlighted. The office portfolio is the primary focus of many during this season. Our office portfolio is 6.7% of the total loan book and contains a significant amount of our classified assets and all of the NPAs in the CRE subsegments evaluated. There are some troubled loans in the portfolio that will require reworking. However, overall, losses are not expected to be outsized. We currently have 11% of the office portfolio classified, and quarterly surveillance is ongoing on the portfolio. There's very limited construction activity in the office portfolio, and all future funding will be for good news money for newly added tenants. 84% of our office exposure is located in our primary markets, and we are able to put our eyes on the properties frequently.
We have virtually no office exposure near central business districts where the portfolio is located. Industrial and multifamily make up 46% of total CRE outstandings. The majority of multifamily and industrial exposure are for construction of Class A properties in the Texas market. Limited issues are expected from industrial and multifamily, given the equity and value considerations. Hospitality has held up very well, overall the last three years since COVID came on the scene and continues to hold up well. We do not see meaningful losses coming from the hospitality book. Retail is performing very well at this point in the cycle, and sales activity in this portfolio is actually picking up. With that, I'll turn it back over to Malcolm.
Malcolm Holland (Chairman and CEO)
Thank you, Clay. These times are a challenge for our industry and our country. I look back at the last seven weeks, and I'm grateful for my team and the bank we have built. Business life is always going to throw you some challenges. It's how you have prepared for those unexpected days that will set you apart. These times also create opportunities that may not have existed prior. Our goal and my charge is to continue to produce results that accrue to the value of our franchise, focusing on continuing to build a fortress balance sheet, deliver sound credit, and build tangible book value. Your team is engaged and committed. Operator, we'll now take any questions.
Operator (participant)
Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our first question comes from Brady Gailey with KBW. You may proceed.
Brady Gailey (Managing Director of Equity Research)
Hey, thank you. Good morning, guys.
Terry Earley (CFO)
Morning, Brady.
Malcolm Holland (Chairman and CEO)
Morning, Brady.
Brady Gailey (Managing Director of Equity Research)
Thrive had, or not Thrive, North Avenue had another great quarter in Q1. Terry, I heard your comments about how the USDA could be running out of funding again. I know if we look at last year, so 2022, you know, North Avenue had a great Q1 and a great Q4. You know, fees there were pretty limited in Q2 and Q3. Should we think about that same timing potentially for this year if this program runs out of funding similar to how it did last year?
Terry Earley (CFO)
Brady, it's a great question. I do think 2023 is going to be a little bit different than 2022. One, there's already a concerted lobbying effort going on in D.C. to make sure it doesn't happen, but I just felt it was appropriate to point it out. Secondly, the pipelines, the loans we've got closed, the commitments we've gotten from the USDA gives me more optimism that Q2 will be better than last year. I say, you know, that's why I said in my comments, I think the revenue implications are probably more in the back half of the year. I'm really more focused on Q3 in that comment because the new fiscal starts on 1 October.
Malcolm Holland (Chairman and CEO)
The other thing is that, Brady, remember, we can actually do and get an approval and do an interim loan. We have an approval, and we fund it where, you know, the folks out there that don't have a bank or don't have a line, they're just brokers, they're stuck. We do have an advantage in closing loans that others may not.
Terry Earley (CFO)
Then Brady, just to tag on that, the beauty of these interim loans is it gives me incredible insight into future revenue because it's sitting on our balance sheet while the USDA lines up its funding, we know that's coming through.
Brady Gailey (Managing Director of Equity Research)
Yeah, those are great points. Terry, I heard your comment about the margin continuing to be under pressure. It was down about 18 basis points linked quarter and Q1. How are you thinking about, you know, how much pressure it could be under throughout the rest of the year?
Terry Earley (CFO)
You know, I think most of the pressure is going to come in Q2, to be honest. You know, a lot of this depends on the things totally outside our control. What does the Fed do about rates? Secondly, when do deposits start to return to the banking system again? You know, I think the pressure is going to be there. I would expect that if the Fed quits raising in Q3 and pauses, that level of pressure is going to start to ease off. Look, it's hard. You're asking me to read it, look into the future, and read a crystal ball.
It's, you know, I think last quarter I said NIMs have peaked, and I think I didn't have any idea they would have done what they've done. It just feels like there's. You know, I would say it this way, Brady. We can see how people are pricing on the margin in our markets, and I'm shocked at some of the ways deposits are. We've lost some deposits over the last 45 days at prices I would have never dreamed of that competitors are paying on rates. That's what leads me to that conclusion.
Brady Gailey (Managing Director of Equity Research)
And then finally.
Terry Earley (CFO)
Yeah.
Brady Gailey (Managing Director of Equity Research)
Sorry, go ahead.
Terry Earley (CFO)
No, I'm just going to say, we just, you know.
Malcolm Holland (Chairman and CEO)
We've let some leave at crazy, stupid pricing.
Terry Earley (CFO)
Irrational pricing is, you know, Fair, I mean, competitive one thing, irrationality is another.
Brady Gailey (Managing Director of Equity Research)
All right. Final question for me, the stock is under tangible book value. I know you guys haven't been active in the buyback, and I know these are very interesting times. But, you know, do you think about buying the stock back below tangible book value here?
Malcolm Holland (Chairman and CEO)
We think about it, but we're not going to do it right now because we wouldn't think it would be prudent.
Brady Gailey (Managing Director of Equity Research)
Okay, great. Thanks, guys.
Operator (participant)
Thank you. Our next question comes from Brett Rabatin with Hovde Group. You may proceed.
Brett Rabatin (Managing Director and Head of Equity Research)
Hey, guys. Good morning.
Malcolm Holland (Chairman and CEO)
Hey, Brett.
Terry Earley (CFO)
Hey, Brett.
Brett Rabatin (Managing Director and Head of Equity Research)
Excuse me. My allergies are pretty bad this morning. wanted to, I guess, first start off on the decrease in the criticized assets, the linked quarter $41 million reduction. I heard the comment about the lender finance credit. Was there anything else that changed linked quarter in the criticized asset bucket?
Malcolm Holland (Chairman and CEO)
There is, you know, well, you know, a lot of movement because of the surveillance that we're doing. That is the standout event that shows a reduction in criticized assets, so.
Brett Rabatin (Managing Director and Head of Equity Research)
Okay. You mentioned the multi-family construction. You feel pretty good about that, you know, not being a credit issue. You know, just wanted to, you know, obviously appreciate all the color in the slide deck on LTVs and all that. The confidence on the multi-family construction, you know, is that a line of sight just into occupancy that you're expecting? Maybe just any color around your confidence on the multi-family construction book.
Terry Earley (CFO)
Thanks. Primarily driven by, you know, the fact that, you know, it's all very high-quality product. There is typically always an open market for multifamily product. Finally, our metrics associated with the portfolio are very strong. Yeah, and I would just add, Brett, if you take a look at locations, 87% are in Texas, 67% in the big multi markets of DFW and Houston. With that said, you go and look at the migration numbers and the people moving to Texas, and you got 87% of your product, of which 78% is Class A, and they got a whole bunch of equity in there.
Candidly, of our portfolios that we look at, that's probably the one we have the least concern about.
Brett Rabatin (Managing Director and Head of Equity Research)
Okay. That's great color. Just lastly on deposits from here, are there any categories that, you know, you're focused on in terms of growing? Are you looking to do money market promotions, CDs, use FHLB or brokered? What's your strategy in terms of the growth of the funding base from here?
Terry Earley (CFO)
You know, from my perspective, there's just so much going on in this space. You know, our digital and direct marketing is focused around money market and shorter term CDs. I want to be less reliant on brokered, you know, and the FHLB. We have a insurance vertical that we've staffed up in, which is a good source of that, when we've hired people with a lot of deep expertise in this space. That's another important source. Our mortgage warehouse business is showing good growth. It's around commercial, community, digital and direct marketing and insurance. Let me just say, you know, we've had a plan.
I know you guys have heard from us before, we put this plan into place in the third quarter of last year, it's just been something we've been focused on. Like I said, I think in my comments, I mentioned this is part of a daily conversation at our company, but it was before March eighth. We're changing the way we look at client selection, changing the way at, you know, who we're lending to and why. We've hired somebody full-time as of January 1, that that's all they do. They get up every day, and they think about deposits. Really think about more than that, just how to acquire the right type of client. We're changing that.
We've got seven or eight, nine different verticals, if you will, or places or levers that we can pull deposits from. Not one or two of them is going to solve our issue. All of them have to be successful. Terry just went through a list, most of those, and there's some other things that we're looking at. It's not a one-size-fits-all, I promise you. This is an effort to change our company on who we acquire and what they provide to the bank, and then how we can provide that service back on the loan side.
Brett Rabatin (Managing Director and Head of Equity Research)
Okay, that's great color. Appreciate it.
Operator (participant)
Thank you. Our next question comes from Brad Milsaps with Piper Sandler. You may proceed.
Brad Milsaps (Managing Director)
Hey, good morning.
Terry Earley (CFO)
Hey, Brad.
Brad Milsaps (Managing Director)
Thanks for taking my question. Maybe, Terry Earley, wanted to ask on expenses. You know, you had some nice expense control in the quarter. You mentioned lower variable compensation. I maybe would've thought, given the strong quarter that North Avenue Capital, NAC had, that maybe variable comp would've been up. Can you just kind of give us some puts and takes on expenses and sort of how you're thinking about, you know, the trajectory of growth off this kind of $50 million-$56 million number on a core basis in the ?
Terry Earley (CFO)
You know, variable comp at North Avenue Capital would've been up. When you cut your loan production 75%, it has a pretty significant impact on variable comp on other parts of the business. I think that's the reason I say variable comp's down. How we're moderating growth, as you know, from last year's pretty high number to, as Malcolm said in his comments, we did 9% in Q1, mid-single digits for the rest of the year. All those things give me reason to believe that expenses are going to be well controlled. We've made all the investments, you know, that we need to make. We made, you know. I can't think of anything significant. We staffed up last year to prepare for going over 10.
I, you know, I think from here, you know, from here, I think expenses should be, you know, pretty stable. I just can't see anything that's going to cause them to move up dramatically. There's certainly inflationary pressures, but, you know, I don't think that's going to be, you know, a big driver of expenses up for us for the rest of this year. Now, we'll see where it goes in 2024 and beyond. I feel pretty good about where the expense levels are and think that we can keep them pretty tight in this range.
Brad Milsaps (Managing Director)
Great. That's helpful. Just as my follow-up, just to follow up on Brady's question. I mean, you guys, even on, you know, the reduced outlook, you're still earning, you know, probably somewhere, you know, mid-teen ROTCE, which will more than, you know, provide the capital you need. I understand that, you know, we're in a dynamic environment. Is there a certain level of CET1 or another ratio that you look at or focus on that, you know, you feel like you're trying to target, as kind of an area, hey, we, you know, we feel okay, this is kind of where we want to be in terms of our capital ratios?
Terry Earley (CFO)
I mean, you know, look, Brad, it's, it's a cheap, great buy at these levels. You cannot debate that. Given the economic uncertainty and the need to build capital, we just, you know, as much as we would love to be out there buying shares, it's just not the prudent, safe, and sound thing to do right now.
Brad Milsaps (Managing Director)
Yeah. No, I understand that. Yeah, is there just a ratio that you guys are, you know, maybe targeting by the end of the year to try to build to? Just, hey, we're sort of going to let it just go?
Terry Earley (CFO)
No. I mean, look, we've been saying for multiple quarters now, we want to get CET1 over 10%. We definitely think we're going to get there in the back half of the year. Once we get there, then look at the economic outlook and the recession and how credit's behaving, et cetera, then I think it's a more relevant discussion.
Brad Milsaps (Managing Director)
Yep. Makes sense. Great.
Terry Earley (CFO)
We don't even have an approved buyback right now. You know, we still have some work to do if we were even to get to that point. We're just focused on CET1 and future outlook.
Brad Milsaps (Managing Director)
Got it. Great. Thank you, guys.
Terry Earley (CFO)
Thanks, Brad.
Operator (participant)
Thank you. Our next question comes from Gary Tenner with D.A. Davidson. You may proceed.
Gary Tenner (Managing Director and Senior Research Analyst)
Thanks. Good morning. A couple questions.
Terry Earley (CFO)
Good morning.
Gary Tenner (Managing Director and Senior Research Analyst)
Hey. First, in terms of as you're thinking about the excess liquidity that you have, you know, on balance sheet, how long do you think, Terry, you may carry that, as things have sort of calmed a little bit, you know, with regards to, you know, liquidity fears?
Terry Earley (CFO)
Well, you know, at the end of the quarter, we had $808 million of cash and cash equivalents. The average was certainly less than that for the quarter, but you can tell we really ramped up our cash holding starting March 9th. I think we're going to get cash levels down materially from $800 million. Probably, if I had to put it in the old world pre-March 8th, I would've said $300 million-$350 million was probably our target. I'd say our new target's closer to $500 million.
Gary Tenner (Managing Director and Senior Research Analyst)
Okay. Great. In terms of Office Tree and the additional information is appreciated in the deck, can you remind us kind of the dynamics of that existing office NPA? How long has it been a non-accrual resolution progress, et cetera? Any other maybe commonalities just in terms of those, you know, those criticized office loans?
Clay Riebe (Chief Credit Officer)
Yeah. Thanks for the question, Gary. That loan that you're referring in NPA has been in NPA since the Q4 of 2022. It was a former PCD loan that was, you know, acquired. As we moved forward with trying to execute our strategy to resolve that asset, the borrower filed bankruptcy on us, we're stuck in that one for a little bit until we work through that process.
Gary Tenner (Managing Director and Senior Research Analyst)
Any commonality in the other ones?
Clay Riebe (Chief Credit Officer)
In the classified assets? No. That one is a very specific property that is really, its long-term use is not as an office, but as another site for a different type of property.
Gary Tenner (Managing Director and Senior Research Analyst)
We're carrying it at land value?
Clay Riebe (Chief Credit Officer)
Yeah, we're carrying it at the land value. Yes. Yeah. That's correct. That's correct.
Gary Tenner (Managing Director and Senior Research Analyst)
I'm sorry. Does that, the $69 million in classified, is that, is there one sizable credit within that number you were just discussing?
Clay Riebe (Chief Credit Officer)
There are about three different credits that make up the majority of that $69 million. We have, you know, have our eyes on those, very, very closely. We're working those hard.
Gary Tenner (Managing Director and Senior Research Analyst)
Great.
Terry Earley (CFO)
I would just add, those, Gary, a couple of them have very, very strong sponsors that have lots of cash flow outside of the office space, and they put in a big old chunk of equity in there. That goes back to our A borrowers, lots of equity philosophy. We don't, we're not concerned about those assets as they reposition them.
Gary Tenner (Managing Director and Senior Research Analyst)
Okay, great. Last question. In terms of Thrive, and, you know, I think in the prepared remarks, you noted that you think breakeven is, you know, possible for the year. Can you ballpark, say, on a quarterly basis what type of volume they need right now, to be breakeven in a given quarter, you know, based on their kind of, you know, expense reduction exercise they went through, et cetera?
Terry Earley (CFO)
Yeah, one second. I got to do a quick calculation for you. They need about four hundred and... ASC.
Clay Riebe (Chief Credit Officer)
Did $4.38 last.
Terry Earley (CFO)
$4.38. They need about $4.60. They did $4.26. They need about $4.50.
Clay Riebe (Chief Credit Officer)
$4.50.
Terry Earley (CFO)
Yeah.
Clay Riebe (Chief Credit Officer)
That's, you told me $4.50.
Terry Earley (CFO)
Yeah. All right. Thanks, guys.
Malcolm Holland (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from Michael Rose with Raymond James. You may proceed.
Michael Rose (Managing Director of Equity Research)
Hey, good morning, guys. Thanks for taking my questions. Just wanted to go back to the loan growth outlook. Certainly understand in light of the environment, I think you mentioned pipelines are down about 60%. You know, some of the tailwind that you're experiencing from construction fund ups. Just as it relates to the outlook for the year, how much of the kind of mid-single-digit growth is, you know, related to construction fund ups versus, you know, core portfolio, you know, growth ex that impact? Thanks.
Malcolm Holland (Chairman and CEO)
Yeah. I'd say a majority of the fund up is going to be in construction loans that we already have, but we're hoping to offset a big portion of that is through payoffs. That's the number that's really hard to predict in this market. Although, we're still getting them, and we feel good about the Q2, but most of the fund up is coming out of the construction book.
Terry Earley (CFO)
I'd say the net growth is probably going to come from somewhere other than CRE.
Malcolm Holland (Chairman and CEO)
Yeah. Right. Payoffs versus construction are going to hopefully.
Terry Earley (CFO)
Is hopefully offset.
Malcolm Holland (Chairman and CEO)
Offset.
Terry Earley (CFO)
Right.
Malcolm Holland (Chairman and CEO)
Correct.
Terry Earley (CFO)
The growth from here is going to be in other parts, which should help on the funding side because they're more relational.
Malcolm Holland (Chairman and CEO)
Yeah. I wouldn't expect we're going to be putting on any construction deals, Michael.
Michael Rose (Managing Director of Equity Research)
Perfect. Appreciate it. Then just on loans as well, just on the warehouse, any sort of, you know, colors we look forward there. Obviously the rates have remained, you know, mortgage rates have remained relatively sticky. I know there's the inventory issue, just wanted to get a sense for what you guys were kind of expecting as we move forward. They were down a little bit on average. Thanks.
Malcolm Holland (Chairman and CEO)
Yeah. I think they'll probably stay around where they are. I will say that a lot of folks are deciding to get out of that business. There's going to be some opportunities. The group's done a really nice job of moving out a few, but there are going to be some opportunities. I don't see us growing that business substantially. There is a deposit feature to that industry that we have tapped into. We're not getting out of the business. We like the business, especially with some of the deposits that come with it.
Terry Earley (CFO)
Michael, there will be seasonality, obviously. Q2 and Q3 are.Will be up. I agree, everything else is. Just wanted to tag that on.
Michael Rose (Managing Director of Equity Research)
Okay. Helpful. Then maybe just finally for me, appreciate the spot deposit rate data in the slide deck. You know, obviously with slower growth on the loan side, maybe just going back to Brady's question, just putting kind of everything together, full quarter impact of everything post the failures, the higher funding costs, obviously some tailwinds on, you know, loan repricing as well. Can you just kind of help us from a magnitude perspective as it relates to the Q2 in terms of the NIM? It seems to me just back of the envelope that, you know, margin could be down roughly just as much as it was in the .
Understand the comments that, you know, you expect that most of the pressure as it relates to the rest of the year to be incurred in the Q2. Just trying to put a little finer point on the Q2 in particular, what you're expecting.
Terry Earley (CFO)
I wouldn't, you know, I wouldn't disagree with anything you said. Somewhere in that range, you know, is what I think is possible. We've been saying for months now that the opportunity for Veritex on the outperformance side is going to come through the fee line and our fee businesses. I think that's still true today. Even after two good quarters in NAC, you know, we've got the best pipelines in that business we've ever had. Yeah, I think the NIM's going to feel pressure, especially in Q2.
I think the whole thing about revenue diversification, Thrive improving in Q2, NAC having another good quarter, maybe not as good as Q4 and Q1, but another good quarter is what I think is the key to, you know, to continue to perform well.
Michael Rose (Managing Director of Equity Research)
Okay, great. Thanks for taking my questions.
Malcolm Holland (Chairman and CEO)
Thanks, Michael.
Terry Earley (CFO)
Great.
Operator (participant)
Thank you. Our next question comes from Matt Olney with Stephens. You may proceed.
Matt Olney (Research Analyst)
Hey. Thanks. Good morning, everybody. I wanted to go back to the discussion around credit quality. Clay, you talked about the larger lender finance loan that was paid down and came out of the criticized loan bucket. I think you said last time that loan was $100 million. Is that right? If so, I guess that would imply there were some inflows or inmigration into that criticized loan bucket. Anything, any color you want to provide on the migrations into the criticized loan bucket?
Malcolm Holland (Chairman and CEO)
Sure. It was the loan that you're referencing was the commitment was $100 million. The balance was not $100 million. Yeah, there have been migrations into the criticized asset portfolio, and it's done primarily from the deep dive, the results of the deep dive that you see on page 19. Just more surveillance on that. The majority of that has come in our CRE office book is where most of the movement has been. There's also been other good guys that came out of the portfolio that were upgraded during the quarter as well. The comment on the movement being related to the one particular asset, there's just a lot of activity this month in that based upon the surveillance that we're doing.
Matt Olney (Research Analyst)
Okay, that's helpful. I appreciate that. Then I guess sticking on credit, what are the updated thoughts around potential loss content in the overall classified buckets? I know that's a tough question and, you know, impacted by lots of external factors, but just love to appreciate any kind of thought you have as far as, you know, what's the real loss content within those buckets. Thanks.
Clay Riebe (Chief Credit Officer)
Yeah. I don't, you know, I don't see anything today. If we saw it today, we would have it reserved for and we would have already charged it off. You know, I mean, losses are coming, you know? But it's very difficult to predict the magnitude of those at this point, given the fact we don't know what future financial conditions hold.
Malcolm Holland (Chairman and CEO)
You know, I mean, we're resting in our loan to values, our debt coverages, our great markets with big in-migration. For us to guess what that loss content would be, if any, is really hard to predict.
Matt Olney (Research Analyst)
Yep, understood. Understood. Just lastly, we've talked a lot about the construction portfolio and the unfunded balance on that. Just to clarify, I think that construction book is now 19% of total loans, and obviously, the unfunded piece is declining each quarter that Terry mentioned. Have we now seen a peak in the dollar amount of the construction book, or is there still another quarter or two where we could see that increase? Thanks.
Malcolm Holland (Chairman and CEO)
No, I think our peak was actually two quarters ago, or at least the Q4.
Clay Riebe (Chief Credit Officer)
It's Q4.
Malcolm Holland (Chairman and CEO)
Q4, yeah. It's on the way down pretty rapidly. I think we fund $300 million-$400 million per quarter on the construction side and payoffs coming, so that book's declining. We expect that book to be less than $1 billion by the end of the year.
Clay Riebe (Chief Credit Officer)
The unfunded.
Malcolm Holland (Chairman and CEO)
Unfunded piece. Yeah, yeah.
Clay Riebe (Chief Credit Officer)
Yeah.
Malcolm Holland (Chairman and CEO)
The unfunded piece. We started at, what?
Clay Riebe (Chief Credit Officer)
Yeah
Malcolm Holland (Chairman and CEO)
Was our high water mark?
Clay Riebe (Chief Credit Officer)
Something like that.
Malcolm Holland (Chairman and CEO)
Yeah.
Clay Riebe (Chief Credit Officer)
Yeah, so the balance is still going up, but if you look at it on a commitment perspective which you guys don't see coming down. That's what he's talking about.
Malcolm Holland (Chairman and CEO)
That's what I'm looking at.
Clay Riebe (Chief Credit Officer)
Yeah.
Matt Olney (Research Analyst)
Okay.
Clay Riebe (Chief Credit Officer)
Based upon the actual numbers from Q4 to the Q1 , our ADC to risk-based capital dropped from 135%, I believe, down to 129%. It actually dropped for the quarter as a percentage of capital.
Matt Olney (Research Analyst)
Got it. Okay. That's helpful, guys. Thanks for taking my questions.
Malcolm Holland (Chairman and CEO)
Thanks, Matt.
Clay Riebe (Chief Credit Officer)
Thank you.
Operator (participant)
Thank you. This concludes today's conference all. Thank you for participating. You may now disconnect.