Veritex - Q4 2022
January 25, 2023
Transcript
Operator (participant)
Good day. Welcome to the Veritex Holdings Fourth Quarter 2022 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 statement. 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.
Please see the reconciliation of all discussed non-GAAP measures in our filed Form 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 will now turn the call over to Malcolm.
Malcolm Holland (Chairman and CEO)
Thank you, Susan. Good morning, everyone, welcome to our fourth quarter earnings call. Today, we want to focus on our fourth quarter results as well as our 2022 year-end results. For the quarter reported operating earnings of $0.74 per share or $40 million, and for the year, $2.74 per share or $147.9 million. Pre-tax, pre-provision returns were 2.15% for 4Q and 1.97% for the year. Year-over-year metrics continue to perform at levels with ROAA at 1.35%, TBV increase over the year of 6.6%, ROTCE of 16%, and efficiency ratio at 48%. The quarter did have a few items of note, which Terry will give you additional detail on momentarily.
Loan growth, less Mortgage Warehouse, continues to temper, trending down since 2Q to 25% for the quarter end and 34% for the year. It is clear that loan growth in 2023 will be much lower than in 2022, with our current pipelines down over 76%. We continue to think 2023 loan growth will be in the low double digits, primarily consisting of a to-be funded construction book. The market is certainly slowing down as the borrowers are uncertain of a looming recession and the interest rate forecast. They have done a good job of self-policing their credit requirements. Payoffs for the quarter remain fairly consistent with previous quarters at $400 million, but we do feel this level of payoffs will continue to decline in the coming quarters.
Overall credit trends are moving negatively as we are seeing signs of a slower economy with the rising rates creating some level of stress. We did record a $5 million C&I charge off of an acquired credit that we've been monitoring for several months. This loan is now fully extinguished. Our total provision of $11.8 million for the quarter accounts for the charge off, growth, and keeps our ACL at 1.01% of loans. NPAs to assets did increase 10 basis points, but still remain at an acceptable level of 0.36%. Deposit growth continues to be our greatest focus and with most banks, our greatest challenge. Our deposits did grow during the fourth quarter, 17% annualized, and shows our commitment and dedicated strategy to growing deposit at the same rate as our loans grow.
We are investing process, people and technology while making core deposit gathering our top strategic initiative. I'll now turn the call over to Terry.
Terry Earley (CFO)
Thank you, Malcolm. Starting on page five, Q4 was a challenging quarter on several fronts and would have been a lot better without the loss from prive and the charge-off on the acquired credit that Malcolm referenced earlier. The financial metrics around ROAA efficiency and ROTCE are still very acceptable. Tangible book value per share into the year up 18.64%, 5.2% for the quarter and 11% for the year after adding back the effect of our dividend. As you look at the financial results on a year-over-year basis, remember to factor in the capital raise in the first quarter, where we issued approximately $4.3 million common shares and raised $154 million in common equity. Given the current economic outlook, we are pleased to have achieved such a favorable result for the bank.
The capital raise certainly weighed on the year-over-year performance in EPS and return on tangible common equity. Additionally, 2021 was a very favorable credit year as we didn't need to provide for growth given the reserves established during the pandemic. In 2021, we also had over $9 million in PPP fees that did not reoccur in 2022. On slide nine, loan production declined 35% from Q3-Q4. Interest rates continued to increase, economic uncertainty rose and liquidity became more of a concern. With the termination of the interLINK deal late in Q3, our focus shifted to growing our deposit portfolio through greater emphasis on C&I and a lower appetite for ADC and CRE. Unfunded ADC construction continues to drop at the rate of $300 million-$400 million per quarter.
On slide 10, you see the evidence of the greater emphasis on C&I. During the fourth quarter, the C&I accounted for 41% of our production, up from 30% in Q3. On to page 11. Net interest income increased by $5.1 million, or just over 5%, to $106.1 million in Q4. The two biggest items in the increase are the Fed raising short-term interest rates, which represents $4.2 million of the increase, and growth, which also accounted for about $700.7 million. The net interest margin increased 10 basis points from Q3 to 3.87%. The margin for the month of December was 3.93%.
The Q4 NIM was negatively impacted by interest reversals on problem credits and intense deposit rate competition in our primary markets of DFW and Houston. This competition for deposit volume at a reasonable price is not just limited to other financial institutions. For the first time in my career, banks are competing directly with the U.S. Treasury. At the close yesterday, three-month T-bills were paying 4.7%, creating significant rate and volume pressure on the banking system. All this to say, NIMs are likely at or very near their peak. As the Fed pauses, deposit betas are going to catch up, making growth and net interest income harder to achieve. Veritex asset sensitivity is largely unchanged from Q3. We've been intentionally hedging floating rate loans to mitigate falling short rates out through 2026.
On slide 12, please note that during Q4, our loan yield was up 97 basis points to 5.98%, while deposits increased 70 basis points. Q4 loan originations were 93% floating, these floating rate loans carrying an interest rate at quarter end of 7.19%. Thankful to have a predominantly floating rate loan book to offset the deposit beta impact. Slide 13. A productive quarter on the deposit front, with growth of $375 million and a 16% CAGR since the beginning of 2020. Our cycle to date, the total deposit beta is approximately 30%, as total deposit rates have increased 119 basis points, and the average Fed funds effective rate has moved 353 basis points.
We've seen the deposit mix start to change during Q4, with DDA declining 6% and time deposits growing 25%. On slide 14, non-interest income increased by $1.2 million-$14.3 million. Great performance in the USDA business was largely offset by an increased loss at Thrive and lower swap revenue. We'll come back with additional comments on USDA and Thrive in just a minute. Non-interest expense, including severance costs, increased $6.1 million-$56.7 million, reflecting the investments in talent we have discussed for many quarters. Salaries were up $1.7 million, and variable comp was up the same. A meaningful part of the variable comp increase is due to the exceptional fee performance at North Avenue Capital during the fourth quarter. The rest of the expense increases reflect inflationary pressure and is spread across the other categories.
Even though operating expenses are up, the efficiency ratio remains strong in the 47% range. Looking forward, the pace of hiring is slowing. This seems prudent as loan production and growth slow in 2023. Slower loan growth will translate into stronger capital ratios and less funding pressure. Turning to slide 15. As I noted earlier, Q4 was a great fourth quarter for NAC, with $75 million in USDA loans closed. Additionally, for the full year in 2022, we closed $117 million. We enter 2023 with positive momentum, premiums looking pretty well, and our pipeline is full. Our SBA business continues to strengthen as new leadership and recent hires gain traction. We closed almost $40 million in SBA volume in 2022, including $16 million in Q4. The pipeline is up 46% since the end of the third quarter.
Gain on sale premiums in the SBA business are stronger than a quarter ago, but much weaker than the USDA side. Moving to Thrive. Veritex recorded an equity method loss of over $5 million as funded volume decreased to almost $415 million, but gain on sale margins collapsed to 1.89% due to rising rates, significant rate volatility, and the impact of long-dated rate locks. Given these results in Q4, they stopped issuing mortgage rate locks longer than 90 days and initiated an effort to rightsize the expense structure of the company, given forecasted 2023 volume. We expect both actions to meaningfully improve Thrive's financial performance. On slide 16, total capital grew approximately $41 million during the quarter and $296 million during 2022 to end the year at $1.4 billion.
CET1 ratios have expanded by 51 basis points year-over-year. Looking forward on capital, we believe that moderating loan growth and lower unfunded commitments, coupled with higher earnings from rising rates, should allow us to achieve our CET1 target of 10% by the end of 2023. 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. Good morning, everyone. Moving to page 17, you can see an increase in criticized assets during the quarter that's driven by our quarterly review process for credit.
The largest change during the quarter was driven by a move to special mention of a customer in our note finance business that has experienced negative earnings but continues to maintain good liquidity and capitalization. We downgraded three office properties during the quarter that have demonstrated underperformance. Surveillance is the word of the year for credit team. As Malcolm mentioned, we had an uptick in NPAs during the quarter. That was driven by a downgrade in a PCD pool of loans to non-accrual status. A single credit that made up 95% of the outstanding balance of one of our PCD pools was posted for foreclosure. Because the pool is a unit of accounting for these acquired loans, they all must be graded the same.
Our ACL for the quarter grew by $6 million, mostly due to the change in Moody's projections for Texas unemployment and GDP, which accounted for $5.2 million of the increase. Growth in loans accounted for an additional $6.3 million of the build, offset by charge-offs. During the quarter, we had a bulge in past dues in the 30-60 day range. Most of the increase was created primarily by administrative past dues caused by the end-of-year season delays. $10.2 million of the bulge was cleared in early January. Turning to charge-offs, during the quarter, we experienced an unexpected deterioration in an acquired $5.2 million commercial credit in the power generation space. During the quarter, the borrower became unresponsive and missed several established milestones that led us to question the viability of the borrower.
Given the facts that we acted quickly to remove the credit from the books and will treat any collection proceeds as a recovery in future quarters. With that, I'll turn it back over to Malcolm.
Malcolm Holland (Chairman and CEO)
Thank you, Clay. As we look into 2023, I think we all have some level of economic uncertainty on our minds. I assure you, Veritex is well positioned and remains confident in a positive 2023 performance. With that, we'll be happy to answer any questions. Operator?
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)
Hey, Brady.
Malcolm Holland (Chairman and CEO)
Hi, Brady.
Brady Gailey (Managing Director of Equity Research)
I wanted to start with your outlook for the net interest margin, and the bottom right corner of slide 11, where you talk about your interest rate sensitivity. You have, you know, base case interest rate scenario, and that kind of points to a 3.68% net interest margin. You know, you just said you did, like, a 3.93% in December, so I'm trying to reconcile those two numbers. Just some color on the net interest margin and how you think that'll trend in 2023.
Terry Earley (CFO)
Well, I think, you know, as I said, I think net interest margin's at or near their near their peak, if they haven't peaked. I think, our personal, you know, our view is that, you know, look, we did $106 in net interest income in Q4. That model shows the base case on a static balance sheet with, you know, at $420. That tells you that even with growth, growing net interest income is really not very possible. In large view, it's not because of where rates are going from here, it's deposit funding cost pressure. You know, I said, it's gonna be hard to grow net interest income with deposit betas. That's how, you know, that's how we get to a view that NIMs will be difficult to grow net interest income. NIMs will be under pressure downwards likely throughout the year.
Brady Gailey (Managing Director of Equity Research)
Okay. just to make sure-
Terry Earley (CFO)
Q1 could be flat, but I think, you know, it might also be down. Brady, it's so hard to predict. I've never seen deposit pricing competition like this. Anyone who doesn't believe the U.S. Treasury is our primary competitor is kind of-
Malcolm Holland (Chairman and CEO)
Head in the sand.
Terry Earley (CFO)
Yeah, got your head in the sand.
Brady Gailey (Managing Director of Equity Research)
Just make sure if I'm hearing you right, it's hard to grow NII dollars, even including low double-digit loan growth, or is that excluding the loan growth for the year?
Terry Earley (CFO)
I mean, it's a static balance sheet, so it doesn't include what the... If you just took this balance sheet and roll it forward with a rate shock, knowing what's gonna happen to deposit betas, I'm not, I actually think we can grow net interest income next year because of the loan growth we've been talking about, low double digits. It's just gonna be harder. You're not gonna get the same level or same amount of leverage from loan growth in 2023 that you've been getting because of deposit pricing pressures.
Brady Gailey (Managing Director of Equity Research)
Okay. All right. That's, that's helpful. Next on expenses, you know, it feels like you guys are still hiring, and your expenses came a little higher than my estimates. Any color on what you're investing in and how we should think about expenses in 2023?
Malcolm Holland (Chairman and CEO)
Yeah. Let me just address the hiring piece of it. You know, we still have some replacements that we're working through. There are a couple of key positions that we still are looking at. I would say most of them are gonna be focused on the deposit generation side. Almost all of them would be actually. We do have an internal audit program that we're gonna put in place in 2023. Again, that's a, you know, growing over $10 billion size deal.
The hiring is not gonna be as it's been in the past two or three years. There are a couple of replacements areas that we have. Cara was telling me yesterday, I think, you know, our total is down less than at 50%, 60% from where it was in terms of the amount of people. I don't think that's gonna drive a huge increase in where we are from the expense base right now. You wanna talk about expenses, Terry?
Terry Earley (CFO)
I mean, I think, you know, I think I mean, inflation is real. Surprise, surprise. In addition to, I don't see us the net adds, like Malcolm's saying, the net adds to FTEs are not gonna be that great going through 2023. We can't do that. One thing we're gonna spend more money on is marketing dollars on the deposit side. We, it, you know, we're staffing up that area, and we're gonna put more, way more dollars focused that way to help build this deposit base in a more significant, more granular way. I think expenses, you know, are probably if you annualize Q4 and add a little, you're probably about in the right place.
you know, but, you know.
Malcolm Holland (Chairman and CEO)
I'll just say this too, Brady. One of the phenomenons where as I look back on 2022, you know, you could arguably say we bought a $2 billion bank in 2022. I mean, we grew $2 billion. Part of that was, I think our expenses on the comp side were a little on the salary side, were a little low in the third quarter because we had some people moving out, and we had some new people coming in late 3Q. In 4Q, it just kinda all caught up to us. We look hard at the efficiency ratio, which has remained stable despite this spike in increases on the expense side. I think we're just settling into a new expense level with adding $2 billion in assets over the last year.
Terry Earley (CFO)
Yeah. Let me add to that. I mean, year-over-year, total assets, not average assets, year-over-year grew, you know, on the average, $1.6 billion. From Q4-Q4, they grew right at $2 billion. Yet for the year, NIE to average assets is only up 5 basis points, 1.78%-1.83%, you know, for the year. Malcolm's right. We grew a $2 billion bank, and our, and our NIE to average assets is, while up 5 basis points, it's been one heck of an inflationary period.
Brady Gailey (Managing Director of Equity Research)
Yeah. All right. Finally for me, you know, a lot of volatility with the USDA fees having a great quarter, but then Thrive not having a great quarter. I mean, I know it's hard to, you know, look at those two on an ongoing basis. Any idea about the forecast for those two volatile line items?
Terry Earley (CFO)
You know, I, yeah, I tried to say it in my, in my comments, which is Thrive is making pretty, not pretty, very significant expense changes. While their gain on sale margin for the fourth quarter was 1.83%, I think it.
Malcolm Holland (Chairman and CEO)
1.89%.
Terry Earley (CFO)
1.89%. The year was 3.35%. Okay? If, if I can just, by stopping the long-dated locks, letting the gain on sale margin revert to where they've historically been, deal with their expense cuts, you should see much better financial performance out of Thrive. NAC, we, you know, I mean, you see their pipeline, you see their quarter, you can tell that, you know, if we close $75 million in the fourth quarter and only $117 million for the year, I mean, we've got... Some of that's pent-up demand after Q2 and Q3, and the USDA really came through for us. We're, we're pretty-- we feel good about 2023 in NAC.
Brady Gailey (Managing Director of Equity Research)
All right, great. Thanks, guys.
Terry Earley (CFO)
I'm still answering the question, but that's as good as I can do.
Brady Gailey (Managing Director of Equity Research)
I hear you. All right. Thank you.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Gary Tenner with D.A. Davidson. You may proceed.
Gary Tenner (Managing Director and Senior Research Analyst)
Thanks, guys. Good morning.
Malcolm Holland (Chairman and CEO)
Good morning.
Terry Earley (CFO)
Morning.
Gary Tenner (Managing Director and Senior Research Analyst)
Terry, just to kind of start on your recent comment on, the expense line, kind of annualizing your fourth quarter and adding a little bit, as you said, in 2023. You know, I think last quarter you had talked about kind of high single-digit growth in 2023. You know, that comment you just made sounds like you're more kind of mid-to-high teens expense growth. Is that what you kind of intended to suggest in your comment?
Terry Earley (CFO)
Well, you know, what I would say high single digits over the full high single, low double digits over the full year 2021 is more what I'm thinking right now. Certainly, look, I was surprised by Q4. Just that, you know, it was all across the board. I'm not, I'm not trying to, you know, go as high as it maybe it seems. Let me. I hope I cleared that up. More high single, low double from 2022 levels.
Gary Tenner (Managing Director and Senior Research Analyst)
Okay. Thank you. Also on Thrive, I mean, based on your comments you just made, is there visibility to the degree there's visibility in mortgage at all? Is there visibility in 2022 based on board and 2023 based on what you were talking about on the expense side, to where at least Thrive would be, you know, a break-even scenario in 2023 to where it's not a headwind for VBTX?
Terry Earley (CFO)
Absolutely. That's, you know, look, we've spent a lot of time over the last 60 days talking to some of the best people in the industry on what the success for Thrive look like in 2023, and it's exactly what you just said. It's kind of where the industry is based on all the feedback we can get.
Malcolm Holland (Chairman and CEO)
They have put together a clear roadmap to get there. It's not a hope and a prayer.
Terry Earley (CFO)
Yeah.
Malcolm Holland (Chairman and CEO)
They're making the appropriate expense reductions. Candidly, they have some really nice volume. You know, they did a small acquisition at the end of the year, that was not very costly, that helped on the volume side. We feel pretty darn confident in, you know, in a break-even year for Thrive.
Gary Tenner (Managing Director and Senior Research Analyst)
Okay, great. Last for me, just on the deposit side and the growth there, I think last quarter you had talked about, you know, probably utilizing some more in the way of brokered time deposits in the fourth quarter. I didn't see it called out anywhere. I wonder if you could kind of talk about what your activity was on that side of things in the fourth quarter.
Terry Earley (CFO)
like I've seen many peers report, it was, the brokerage side was very meaningful in the fourth quarter. you know, we still grew. Absent brokered, we still grew...
Malcolm Holland (Chairman and CEO)
We still grew.
Terry Earley (CFO)
We still grew 4% or 5%. I haven't done the math, and I'm doing it in my head. I'm somewhere on the linked quarter annualized, absent brokered. That kinda tells you that, yeah, that's the right number, 4%-5%. If we did 17%, that tells you where the rest of it was.
Gary Tenner (Managing Director and Senior Research Analyst)
Okay. Can you talk at all about how you kind of laddered those out in terms of maturities? We've got a sense.
Terry Earley (CFO)
We are from an interest rate risk, I would like to keep them under 12 months. From a thinking about the overall balance sheet and how we balance out liquidity, we're going out 18-24 with some. I'd say it's skewed to 12 months and under, but there is some that we're doing that's a little bit longer. I don't want to go real long because, you know, and customers are way more frequently asking for longer-term CDs, and that's just not where we're pricing aggressively or as aggressively. We're trying to keep everything, you know, 12, 15, 18 months and in.
Gary Tenner (Managing Director and Senior Research Analyst)
Okay. Thank you.
Terry Earley (CFO)
Thanks, Peter.
Malcolm Holland (Chairman and CEO)
Mm-hmm.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Brett Rabatin with Hovde Group. You may proceed.
Brett Rabatin (Managing Director and Head of Research)
Hey, guys. Good morning.
Malcolm Holland (Chairman and CEO)
Morning, Brett.
Terry Earley (CFO)
Hey, Brett.
Brett Rabatin (Managing Director and Head of Research)
Wanted to circle back on credit, and just a few pieces to it and just make sure I understood, I know you guys make downgrades pretty quick, and you're aggressive with that, but just the three office properties, can you maybe talk about that and what you've done, taking a look at your commercial real estate portfolio and maybe what led to those downgrades?
Malcolm Holland (Chairman and CEO)
Yeah. That's a great question, Brett. Thanks for the question. We did a deep office dive, during the quarter that we looked at every loan over $1 million in the book. you know, just to make sure that we, you know, appropriately had everything graded and we're addressing anything that we saw that had any weakness in the deal. We looked at every credit over $1 million in that portfolio, and that's just part of our surveillance pro-process for the entire year.
Brett Rabatin (Managing Director and Head of Research)
Any color on what specifically led to the downgrade of those three credits?
Malcolm Holland (Chairman and CEO)
Loss of tenants. One has just been a historical problem asset that came out in the PCD acquisition of Green Bank that has been had some damage to it from Hurricane Harvey that has never really recovered from that.
Brett Rabatin (Managing Director and Head of Research)
Okay. It sounds like it's a, it's a, instead of an LTV, it's basically a cash flow perspective, and they're-
Malcolm Holland (Chairman and CEO)
Yes.
Brett Rabatin (Managing Director and Head of Research)
having issues with... Yeah.
Malcolm Holland (Chairman and CEO)
Mm-hmm. Yeah.
Brett Rabatin (Managing Director and Head of Research)
Do you guys have any color on how much Class B office space you might have kind of inside the loop?
Malcolm Holland (Chairman and CEO)
Inside of which loop?
Brett Rabatin (Managing Director and Head of Research)
Houston specifically.
Malcolm Holland (Chairman and CEO)
None that I'm aware of. We have no CBD, office exposure. Class B in general, that makes up 33% of our office book today. 62% of our office book is in Class A, which is encouraging to me because that's where I think we'll see the least amount of stress.
Brett Rabatin (Managing Director and Head of Research)
Okay. Were these three-- I'm sorry for so many questions on this, but were these three credits, you know, the bulk or all of the increase in criticized assets linked quarter?
Malcolm Holland (Chairman and CEO)
No, that's not all of them. The largest one that I discussed was in our note finance group, a move to special mention of one of those borrowers. That's actually the largest office was second. Those are the two largest areas of downgrade during the quarter.
Brett Rabatin (Managing Director and Head of Research)
Okay. Back on deposits for a second. You know, obviously, you funded the balance sheet in the fourth quarter with CDs. You know, last year, you know, there were some various efforts to find alternative sources to grow funding that would, you know, maybe be market-oriented, but maybe not be CDs. Given the environment, you know, and Terry, you guys sound a little shell-shocked with just the competition from the Treasury market, you know, has your view changed, or could you maybe pivot to a different strategy in terms of, you know, looking for alternative sources to grow deposits, whether it be, you know, fintech or other sources that might not entail CD funding?
Terry Earley (CFO)
Yeah, I mean, our To answer your question, strategy hasn't changed. It just ramped up. You know, I think we said in the third quarter that this was a multi-year strategy. You know, Canada, we just hired one of our lead guys. They just started this week. We hired a consultant in the fourth quarter, he's now producing some really good work. There is no magic pill or magic vertical that's gonna solve this funding problem. It's about six, seven, and maybe eight different things, we're pulling every single one of those levers. I think you're starting to see some movement. You can see back, you know, we did grow deposits. I know the industry shrank, we did grow deposits, albeit not what we wanted to.
Some of our efforts, a lot of our efforts are moving in a very positive direction. It's just gonna take some time. As when Terry talks about short-term funding in these CDs, these are we're hoping these are gap fillers as we continue to be successful in our strategy. The fintech piece specifically, I mean, is when we talked about hires, there's a couple of hires that we're making in that area. We have a specific group. They have some opportunities as of this week that are gonna be nice funding opportunities for us. We continue on that strategy. We haven't diverted off of it. We think it's the right one. It's just gonna take a little bit more time.
Brett, there are meaningful opportunities there, but they are gonna be high beta. If you're thinking about rates down, that's not a bad thing. Yeah.
Brett Rabatin (Managing Director and Head of Research)
Okay. Maybe just one last follow-up on that. You know, as we think about betas, as you just mentioned, you know, do you guys feel like you took, What percentage of the pain do you guys think maybe you took in the fourth quarter versus where you might have to get to in terms of the relative Treasury curve?
Terry Earley (CFO)
Say that one more time. You broke up a little bit.
Brett Rabatin (Managing Director and Head of Research)
Oh, sorry. so just, you know, just looking at, the slide on deposit growth, you know, and the deck and showing rates versus rates and average Fed funds effective. You know, there's an obvious upward movement in 3Q, and then in 4Q, your interest-bearing rates and your total deposit rate accelerated 3Q-4Q. You know, I don't know if it has to go to the effective Fed funds rate, but do you feel like you've taken, you know, a meaningful portion of the hit that you need to in terms of deposit pricing pressure?
Terry Earley (CFO)
Yeah. No, I think it's still coming just because I think you've got time deposits, you've got money market customers that you're gonna fight hand-to-hand combat to retain these customers, these relationships and these dollars. I think, you know, I think the deposit beta, you know, Pricing on the margin every day gets more aggressive, is what I would tell you. It's just the way the environment is. I don't expect this deposit beta thing. We're nowhere near its peak.
Brett Rabatin (Managing Director and Head of Research)
Okay.
Terry Earley (CFO)
I, look, the Fed's got, you know, if the Fed got another 50 or another 75, you know, somewhere in there, I would say, they're gonna hang out there, it seems like, for the balance of the year. That's why I think there's gonna be NIM pressure as we get maybe in Q1, but certainly as we get later in the year.
Brett Rabatin (Managing Director and Head of Research)
Okay. Thanks for the color.
Terry Earley (CFO)
All right. Thanks, Brett.
Malcolm Holland (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Michael Rose with Raymond James. You may proceed.
Michael Rose (Managing Director of Equity Research)
Hey, good morning, guys. Most of my questions have been kind of asked and answered. Just on credit, you know, you guys are sounding a pretty cautious tone. I think that's, you know, your conservative nature. You know, the loan loss reserve was only up 1 basis point despite the increase in, you know, criticized classified. You know, why not, you know, just build that a little bit more now just given the cautious tone? You know, would you expect to see that ratio build as you move through the year. Thanks.
Terry Earley (CFO)
I mean, we'd expect to see it build, but, you know, we do have, you know, CECL is a pretty constraining metric, and there's a lot that goes into it, as you well know. It's not. You know, we can't tweak here and tweak there. Candidly, we've done a fair amount in changing, you know, our weightings on some of the possibilities that could happen. You know, we haven't messed with our Q factors. We work pretty hard to keep it at those levels because the model just spits out a much lower number sometimes. It's gonna be difficult, but, you know, certainly our desire is to have a little bit more in there.
going forward, yeah, we hope to accomplish it, but we're not certain. Let me add, just to add to that, which is year-over-year, our allowance to loans went down from$ 115-$104. Our general reserve, excluding specifics, went up from 82 basis points-90 basis points, and I would expect that trend to continue. Does that make sense, Michael?
Michael Rose (Managing Director of Equity Research)
Yep, got it. Maybe just back to Thrive. Obviously, the outlook, I'm just looking at the MBA forecasts are, you know, down a significant amount in 2023. You know, obviously, this is a tough quarter. I understand they're making, you know, expense structure changes, you know, kind of et cetera. Do you actually expect that you can actually earn money from the investment this year?
Terry Earley (CFO)
No, I would go back. I mean, I think success, I mean, is it possible? Yes. It would... Success would be a positive number. I think target is to break even. Look, the only reason this option is available to them is the small acquisition Malcolm referenced that brought on $3 billion in volume at good margins. The margin was 3.33% for the year, where they've had significant expense cuts. They've been able to strip out close to 60% of the cost of the company that bring the volume onto their platform. That's what, without that, and without fixing the long-dated locks and rightsizing the expense structure of legacy Thrive, do I think break even or better is achievable? No.
That's where we stand heading into 2023. December, it was a good month. They closed 567 units in December, which was above their average for last year. Always remember close to between 65% and 70% of their business is in Texas. The three key markets is DFW, Houston, San Antonio, and that's why it's encouraging. I've already seen the, you know, I've seen the result. I know what the results were for December, obviously. That's what tells me that this idea about where we can get, where Thrive can go is you can see it from here, from the December results.
Michael Rose (Managing Director of Equity Research)
All right, helpful. Just finally for me, you know, stock trading about 1.5x tangible. You noted earlier that you expect capital to grow as kind of loan growth and balance sheet growth slows. Any thoughts around a buyback at this point and, you know, what you could do there? Thanks.
Terry Earley (CFO)
You know, I think that's something we think about in the back half of 2023 when the recession outlook is clear, situation is clear, and capital has built close to this if it's at 10% CET1 or better and credit, the recession looks mild and credit looks fine, it's something we'll think about. I mean, it's not that we don't like the valuation. I just don't think now is the time to be, right now, especially in the first half of the year, that's just, it's just not the time to be looking at it. I just wouldn't rule it out for the back half. Right now, we have no plans in the back half. It's just something that we could get to if everything goes as planned.
Michael Rose (Managing Director of Equity Research)
Understood. Appreciate all the color, guys. Thanks.
Terry Earley (CFO)
Thanks, Michael.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Brad Milsaps with Piper Sandler. You may proceed.
Brad Milsaps (Managing Director of Equity Research)
Hey, good morning, guys.
Terry Earley (CFO)
Hey, Brad. Morning, Brad.
Brad Milsaps (Managing Director of Equity Research)
You've addressed most everything. Just a couple maybe housekeeping questions. Terry, I apologize if I missed it, but what was the spot rate for the loan portfolio at the end of the year?
Terry Earley (CFO)
Gosh, I didn't bring that number with me.
Brad Milsaps (Managing Director of Equity Research)
Okay. No, no, we can follow up later.
Terry Earley (CFO)
I may have it before the end of the call. If I do, I'll just say it.
Brad Milsaps (Managing Director of Equity Research)
Okay. Just curious, you mentioned the increase in expenses some, you know, somewhat tied to the big quarter you had at NAC. Just kind of curious, is that, you know, trying to think about those numbers going forward, is, you know, is that kind of a 40% or 50% payout on that revenue? Is that how to think about it? Or is it some, you know, just wanted to see how much of it was actually tied to the good USDA performance?
Terry Earley (CFO)
No, it's not. No, it's not nearly that much. It's, you know, in the low double digits.
Brad Milsaps (Managing Director of Equity Research)
Okay
Terry Earley (CFO)
... you know, it meaningfully moved the variable comp. That's just you know, given the gain on sale premiums and dollars in that space right now, that's just market if you wanna attract the really good producers, and we have some.
Brad Milsaps (Managing Director of Equity Research)
Got it.
Terry Earley (CFO)
Brad. The 12/31 end of year loan rate is 6.36%.
Brad Milsaps (Managing Director of Equity Research)
That's a loan held for investment?
Terry Earley (CFO)
Yes.
Brad Milsaps (Managing Director of Equity Research)
Okay. Would this, you know, maybe saying, you know, I've noticed the securities yield was up quite a bit as well. Any kind of one-timers in there? Is that just, you know, you know, lower yielding stuff rolling off and just a general improvement?
Terry Earley (CFO)
I'm sorry.
Malcolm Holland (Chairman and CEO)
One more time, Brad. You broke up just a smid.
Brad Milsaps (Managing Director of Equity Research)
Yeah, apologize. The securities portfolio yield was also up quite a bit. Just kind of curious if there was anything in there.
Terry Earley (CFO)
Got it.
Brad Milsaps (Managing Director of Equity Research)
... would be one time in nature.
Terry Earley (CFO)
No.
Brad Milsaps (Managing Director of Equity Research)
If that's just...
Terry Earley (CFO)
No. Okay. That's it. Also that rate I gave you does not include Mortgage Warehouse, so.
Brad Milsaps (Managing Director of Equity Research)
Okay. Great.
Terry Earley (CFO)
Mortgage Warehouse rates they're not materially different, to be honest with you. They are definitely in the sixes. That rate just excluded them.
Brad Milsaps (Managing Director of Equity Research)
Okay, great. Then final bigger picture question. You know, you guys do a lot of construction. Some of these projects are coming to an end. Can you talk about the environment for, you know, other folks providing, you know, permanent financing? Are you guys doing that in some cases? I know you're pretty capped out on CRE, but just curious, you know, kind of what the environment is out there for, you know, some of these construction projects, you know, finding a new home once they are completed.
Malcolm Holland (Chairman and CEO)
Yeah, I mean, there's still commerce going on, especially in our specific markets. you know, you read the paper every day about a new I read one this morning, a huge industrial deal, which just sold, 'cause Nike became the tenant there. People are still selling industrial. The cap rates certainly have increased a bit, but there is absolute commerce going on. I think in the fourth quarter, we sold or paid off about $400 million. Half of that was the CRE projects. Just, we do see that slowing down. In terms of us doing more term, we haven't really seen the requests come in.
A lot of this stuff is coming out of the REITs and the bigger fund type people that are buying this stuff 'cause they're quality assets, mainly multi and industrial. We haven't seen it slow down, but we are certainly anticipating it slowing down.
Terry Earley (CFO)
The agency CMBS is a much more viable outlet than it has been. You can get 10-year fixed rate in the 5.70%-5.75% range. Also, I mean, a big payoff yesterday in Craig Davis' portfolio in Fort Worth.
Malcolm Holland (Chairman and CEO)
Yeah.
Terry Earley (CFO)
About $25 million. I mean.
Malcolm Holland (Chairman and CEO)
Industrial.
Terry Earley (CFO)
I just saw it this morning.
Malcolm Holland (Chairman and CEO)
Yeah.
Terry Earley (CFO)
They're gonna slow. you know, there's viable ways, and then there is a lot of commerce going on.
Malcolm Holland (Chairman and CEO)
Yeah.
Brad Milsaps (Managing Director of Equity Research)
Okay, great. Thank you, guys.
Malcolm Holland (Chairman and CEO)
Thanks, Brad.
Terry Earley (CFO)
Thanks, Brad.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Matt Olney with Stephens. You may proceed.
Matt Olney (Equity Research Analyst)
Hey, thanks. Good morning, guys.
Malcolm Holland (Chairman and CEO)
Hey, Matt.
Matt Olney (Equity Research Analyst)
want to go back to the credit discussion, and I think Clay referenced a note financing as one of the primary sources of the downgrades in the fourth quarter. Just remind me exactly what it is you're financing in these types of loans and what was the size of the specific credit that was downgraded in the fourth quarter.
Clay Riebe (Chief Credit Officer)
It, thanks, Matt. You know, it's very, very granular exposure. It's financing This particular borrower is financing small, fix and flip, single-family residences. That, that is, give you some color on the actual, what we're talking about there. The overall note finance portfolio is made up of a broad categories, you know, touching various product types. This particular borrower has very granular exposure in the single-family space. The size of that was the total commitments on a $100 million facility.
Matt Olney (Equity Research Analyst)
If I remember correctly, this is something you guys have been doing for several years.
Clay Riebe (Chief Credit Officer)
Yes. Yes. We have deep experience and broad experience in that space.
Matt Olney (Equity Research Analyst)
Okay. I guess help me think about the risk here of these types of loans. Sounds like it's more residential, single family in the, in the Metro Texas markets.
Clay Riebe (Chief Credit Officer)
Yes. I mean, yeah, the risk is that, you know, you know, slow in that space, which, you know...
Terry Earley (CFO)
Everyone's gotta do it. You have hundreds of.
Clay Riebe (Chief Credit Officer)
Mm-hmm
Terry Earley (CFO)
hundreds of borrowers, very, very granular.
Matt Olney (Equity Research Analyst)
Mm-hmm.
Terry Earley (CFO)
We're financing a percentage of what they finance.
Matt Olney (Equity Research Analyst)
Mm-hmm.
Terry Earley (CFO)
It's a, you know, it's a 65%-70% advance on an already 75%-80% advance. Collateral values are way down there. The reason that one hit there was that they had an operating loss.
Matt Olney (Equity Research Analyst)
Right.
Terry Earley (CFO)
Remain heavy on cash and very strong on capital. This is a very strong company. We think it's, you know, we're quick to put stuff on special mention when they need to be. When they showed the loss, that's why they ended up there. We don't have any. There's no, not much anxiety on our side that we'd ever get to the collateral. This is a very strong company.
Matt Olney (Equity Research Analyst)
Okay, great. Appreciate the color there. Then I guess shifting back on deposits. I'm sorry, the average non-interest-bearing deposits were down quite a bit in the fourth quarter, and we're seeing this across the industry with all your peers. I guess the message we're getting from others is there could be more headwinds there in the first half of the year from the NIBs. I'm curious kind of what your expectations are of the outflows there for the bank and when do you think those could stabilize?
Terry Earley (CFO)
Well, I think the outlook you just described is accurate. I think it's gonna continue to trend down. I mean, customers are as aware as I've ever seen of rates, and there's so much incentive to aggressively manage liquidity. You know, I don't think we have found we were at the end of that mix shift going on. I think that's why the whole importance of our C&I business, and we've been investing in that heavily over the last year. You see it in the production side, and it's our community and our C&I that are gonna help us stabilize and get the deposit growth going. You know, even, you know, and they had good years. They had good quarters.
Especially in community and commercial, it's just a harder time.
Matt Olney (Equity Research Analyst)
Yep. Okay. Thanks for that, Terry. Thinking about funding, securities portfolio, any material cash flows coming off that in 2023 that could help kind of fund the loan growth here?
Terry Earley (CFO)
Well, I mean, I think if here's what I would say. If you look at the loan growth minus the loan growth was $445 million, roughly. Deposit growth was $375 million. The difference between those two. We only borrowed $25 million from the FHLB. We funded $45 million of loan growth from the securities books and earnings. You know, that $50 million a quarter type should continue. Is that helpful? I mean, there's gonna be, you know, $100 million-$120 million for the year in terms of cash flow projected to come off on the base case of rates. You know, it's gonna continue to meaningfully help us, but and earnings as well.
Matt Olney (Equity Research Analyst)
Yep. Okay. Thanks, guys. Appreciate it.
Terry Earley (CFO)
All right. Thank you.
Operator (participant)
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.