Veritex - Q4 2023
January 24, 2024
Transcript
Operator (participant)
Good morning, and welcome to the Veritex Holdings Fourth Quarter 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 Will Holford with Veritex.
Will Holford (Head of Investor Relations)
Good morning. Thank you for joining Veritex's Fourth Quarter 2023 Earnings Call. Before we begin, please be aware this call will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them. Statements made on this call should be considered together with cautionary statements and other information contained in today's earnings release and our most recent annual report, or Form 10-K in subsequent filings with the SEC. We will refer to investor slides during today's presentations, which can be found along with the press release in the Investor Relations section of our website at veritexbank.com.
Our speakers for the call today are Chairman and CEO, Malcolm Holland, our CFO, Terry Earley, and our Chief Credit Officer, Clay Riebe. At the conclusion of our prepared remarks, we will open the lines up for a Q&A session. I will now turn the call over to Malcolm.
Malcolm Holland (Chairman, President, and CEO)
Thank you, Will. Good morning, everyone. Today, we'll recap both our fourth quarter results as well as our 2023 annual results. As you will see, we continue to strengthen our balance sheet and add to tangible book value with a clear commitment to the things that will add long-term value to our shareholders. For the quarter, we reported operating earnings of $31.6 million or $0.58 per share, with a pre-tax, pre-provision operating return on average assets of 1.4%, 1.54%. For the year 2023, we reported operating earnings of $142.1 million, or $2.60 per share, with a pre-tax, pre-provision operating return on average assets of 1.81%.
Although not the year we had hoped for from an earnings perspective, we were able to use our earnings power to reposition our balance sheet to a much stronger place and still make a nice return for our shareholders. Our continued profitability also allowed us to meet our goal of CET1 being greater than 10%, ending the year at 10.29%, up over 120 basis points over year-end 2022. We were able to slow down our loan growth for the year to 1.7% or just $160 million, a far cry from our 2022 loan growth of 30%+ . This was accomplished by a focused strategy to move out non-relational borrowers, continued loan payoffs, and general market decline.
Concurrently, we were able to grow deposits during the year by 13.3% or $1.2 billion. Again, this was a focused strategy that went into place in the third quarter of 2022, which we're now seeing some of the expected outcomes coming to fruition. Certainly, a heavy lift and a testament to the resolve of our people during some challenging and volatile times. Looking forward to 2024, our priorities will remain the same: improving funding and its related costs and adding new clients that represent full relationships for 2024. We believe we can grow deposits at a high single-digit pace, while loans will grow in the mid-single digits. As we mention every quarter, our credit remains a top priority. Our NPA to total assets increased from $80 million to $96 million or 77.77%.
The net increase of $16 million were comprised of, one, a data center loan of $10.5 million, a C&I credit in the plastics industry of $3.8 million, and several government-guaranteed loans totaling $15 million. It should be noted on those specific loans that $5.2 million has a firm government guarantee, and as a reminder, we have a $5 million holdback that will be used for future losses in those loans in that loan category. We also have one large C&I upgrade out of the NPA category. Our ACL was $114 flat over 3Q, but up 21% over 12/31/2022, while criticized loans remained stable quarter-over-quarter as well as year-over-year.
We did have net charge-offs of $9.5 million through the quarter, $23.7 million for the year, or 25 basis points. Clay will provide some greater color on this shortly. I'll now turn the call to Terry.
Terry Earley (Senior Executive VP and CFO)
Thank you, Malcolm. We've made good progress, and Malcolm covered it, in strengthening our balance sheet. I'm thankful for the progress, but the job is not done. I want to spend time primarily drilling into the results for the year ended 12/31/2023, and a little for the fourth quarter. I think this is important because some of our businesses are seasonal, and we think about them on an annual basis and not just quarterly. Starting on page 3, our strong deposit growth and low loan growth allowed Veritex to reduce its loan to deposit ratio from 104.4% at 12/31/2022 to 93.6% at 12/31/2023. The deposit growth also allowed us to reduce our wholesale funding reliance to almost 20% at year-end.
Capital is significantly stronger, and we made progress on reducing our commercial real estate concentrations. On page four, we knew that strengthening our balance sheet was going to come at a cost. Thankfully, we have the earnings power to absorb it. Pre-tax, pre-provision operating earnings were $222 million for the year, up slightly from 2022. Tangible book value per share increased to $20.21, up $1.57 for the year or 12.7% when you add back the dividends. This is the first time that Veritex has gone over $20 per share in tangible book value. Finally, we've grown CET1, as Malcolm mentioned, by 120 basis points to 10.29. We had a goal of 10%. We got there a quarter early, and we continue to strengthen capital. Moving to Slide 5.
Veritex continues its progress in improving its liquidity and funding profile over the fourth quarter. During the quarter, we grew deposits by $142 million or 5.6%, with little change in broker deposits. The deposit growth, combined with no loan growth, allowed us to pay down expensive FHLB, FHLB advances and invest $200 million into the investment portfolio. As we have said before, Veritex shifted its focus to the right side of the balance sheet late in the third quarter of 2022. We started slowing loan growth. We shifted our loan production focus away from CRE and ADC to C&I and small business. We changed our banker incentive program at the beginning of 2023 to give deposits a higher weighting. We have reallocated marketing spend to deposit products and launched a multi-wave direct marketing campaign in February.
Additionally, our digital bank, which we started in the second quarter, is making a meaningful impact on deposit growth. All these efforts are showing promise, as evidenced by the fact that our net new account growth in 2023 was 172% higher than in 2022. Non-interest bearing deposits declined during the quarter by $145 million due to seasonal outflows in our mortgage escrow deposits. This is reversed early in Q1. Deposit pricing competition continues to be strong, but not quite as intense as it was a few quarters ago. That being said, with our desire to move our loan-to-deposit ratio below 90% before the end of 2024, we're going to continue to feel pressure on the deposit beta and the NIM.
On Slide 6, in thinking about the loan portfolio, you notice that loan production declined 80% from 2022 to 2023. The shift away from CRE and ADC is showing progress. As stated earlier, our concentration level in CRE moved down during the year from 325% to 320%, and the level of ADC declined from 132% to 119%. The goal is to continue to move these levels down below the regulatory guidelines. Payoffs in the CRE and ADC portfolios remained strong and were slightly over $900 million for the year. Unfunded ADC commitments declined $1.2 billion in 2023 and now set at $900 million, heading into 2024.
Looking forward into 2024, we forecast ADC fundings to decline by 75% as compared to 2023. Slide 7 provides the detail on the commercial real estate and ADC portfolios by asset class, including what is out-of-state. Moving to Slide 8. We're frequently asked about our out-of-state loan portfolio, and as you can see, our national businesses and mortgage loans comprise 14% of our total loan portfolio. Our true out-of-state portfolio is $1.1 billion and makes up just under 12% of the total book. 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 9, 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 did decrease 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 8-10 basis points of NIM contraction. Additionally, the NIM will contract approximately 4 basis points for every 25 basis point reduction in the Fed funds rate.
On slide ten, 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, key takeaways are: it's currently only 10% of assets. The duration has remained steady at around 4 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 ratio, 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 to—in 2023 to almost $54 million.
The biggest drivers were government-guaranteed loan businesses, which increased their gain on sale revenue by 42% over 2022. Operating non-interest expenses were flat quarter-over-quarter, but increased almost $30 million year-over-year. Significant drivers of the increase are FDIC insurance, lower cost deferral from limited loan production, higher legal and professional fees, largely associated with being over $10 billion, and marketing costs. 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. Two factors continue to make up a sizable part of the ACL. With that, I'd like to turn the call over to Clay for comments on credit.
Clay Riebe (Chief Credit Officer)
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- to 60-day past due category, primarily due to a $15 million multifamily loan that's mature, and renewal discussions were in process on and ongoing at year-end. Two other loans totaling $21 million were past due 30 days at year-end and are now current. A commercial real estate relationship in the amount of $8.8 million was past due at year-end, and it's awaiting 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 types. The year-over-year increase in net charge-offs is driven by the Atlanta office building charge-off. A five-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. With that, I'll turn it back over to Malcolm for final comments.
Terry Earley (Senior Executive VP and CFO)
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 (participant)
Thank you. If you would like to ask a question, please press star one one on your telephone. You will then hear an automated message saying your hand is raised. We will go into the Q&A now, and our first call will be coming from Matt Olney.
Matt Olney (Managing Director)
I just wanted to start off on capital. You guys met your 2023 capital goals, and I was wondering if you had any set goals for 2024?
Terry Earley (Senior Executive VP and CFO)
That's a great, a good question. Yeah, you know, we're going to probably continue to build capital a little bit. We don't have any explicit targets. We will certainly—you know, I think as much as anything, we'd like to see growth get back to, you know, 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 2024 than it has in 2023.
Matt Olney (Managing Director)
Okay. Thank you. I appreciate the color there. And then one more from me. You guys laid out the impacts of the 25 basis point cuts throughout 2024. Can you give us an idea of what you're internally modeling for cuts?
Terry Earley (Senior Executive VP and CFO)
Yeah. If I had a crystal ball, I mean, look, the Fed says 6, the market says 3. Who, you know, who knows? I'm not—that's the reason I structured the comment the way I did, is you guys, I think, are modeling 3. So, you know, but, as volatile as rates have proven to be, making a statement is just not prudent on our part as to what we think. Our job is to try to insulate our balance sheet as best we can from rate movements and hedge the risk as best we can, and that's all we can do.
Matt Olney (Managing Director)
All right, I appreciate the color. Thank you.
Terry Earley (Senior Executive VP and CFO)
Thank you.
Operator (participant)
Thank you. One moment for our next question. Our next question will be coming from Brady Gailey of KBW. Your line is open.
Brady Gailey (Managing Director)
Hey, it's Brady. Good morning, guys.
Terry Earley (Senior Executive VP and CFO)
Hey, Brady.
Clay Riebe (Chief Credit Officer)
Good morning, Brady.
Brady Gailey (Managing Director)
So I understand the commentary about the NIM seeing some additional pressure. I mean, you're growing deposits faster than loans and putting in the bond book, so I understand that dynamic. When you look at NII dollars, do you expect to see, you know, downside in NII dollars relative to 4Q? Or do you think that could be stable to increasing?
Terry Earley (Senior Executive VP and CFO)
I think it should be relatively stable in the front half of the year, relative to 4Q, and maybe we start to build some positive momentum and growth in the back half, because I think our loan growth is going to help that. And, you know, obviously, with a lot of focus on deposit costs as well.
Brady Gailey (Managing Director)
Okay. And then how are you thinking about expenses? You know, expenses have been growing at a double-digit pace for the last few years, but it seems like it could be less than that this year. How are you thinking about expense growth in 2024?
Terry Earley (Senior Executive VP and CFO)
Yeah, that, that's certainly the goal, Brady. We've had a lot of discussion around expenses at the company, and continue to do. You know, the issue is we run a pretty efficient company today, and obviously, the biggest driver of any expense for a bank is people, and we continue to see opportunities in certain areas. You know, Dom's made a pretty good focus on our small business, our business banking group. That's going to require some folks to continue to grow that area. So, you know, our goal is to hold it somewhat flat. Some of this stuff's out of our control. I mean, we look back at last year, you had FDIC insurance, you had benefits costs, you had some marketing dollars that were driving some of these deposits.
Clay Riebe (Chief Credit Officer)
Lower cost deferrals because our loan production—
Terry Earley (Senior Executive VP and CFO)
Yeah.
Clay Riebe (Chief Credit Officer)
Was down 80%.
Terry Earley (Senior Executive VP and CFO)
Yeah. The old FAS 91 rule, you know, was definitely lower. So, we still feel pretty good about expenses. But looking forward, our goal is to hold them pretty flat if we can, but there's certainly going to be some growth.
Clay Riebe (Chief Credit Officer)
I think it's probably fair to say, we're paying more attention to expenses going into 2024 than at least my five-year history with the company.
Terry Earley (Senior Executive VP and CFO)
And my 13.
Clay Riebe (Chief Credit Officer)
Okay.
Terry Earley (Senior Executive VP and CFO)
That's for sure.
Brady Gailey (Managing Director)
Got it. Got it. That's, that's good color. Then lastly, for me, just back to the capital question. I mean, you know, your, your profitability is pretty good. You know, it, it feels like you'll be able to still accumulate a decent amount of capital, this year. I mean, the stock's at 9x earnings, 1x tangible. Is, is this the year that you, you more seriously consider share buybacks?
Terry Earley (Senior Executive VP and CFO)
Listen, it's certainly something we have to look at. And we had a board meeting yesterday, and it was a topic of discussion. You know, capital is king, and, you know, I'd love to have some dry powder, but, you know, there may be a situation at some point in time in 2024 where we try to put something in place and protect ourselves, you know, if the stock were to see some dips. So the answer to your question is, like expenses, we've had conversations about it. We don't have anything in place today, but I wouldn't be surprised if we didn't have something in place very shortly.
Brady Gailey (Managing Director)
Okay, got it. Thanks, guys.
Clay Riebe (Chief Credit Officer)
Thanks, Brady.
Operator (participant)
Thank you. One moment for our next question. Our next question will be coming from Brett Rabatin of Hovde Group. Your line is open.
Brett Rabatin (Director of Research)
Hey, guys. Good morning. Wanted to start back on the margin and just thinking about the outlook. The decision to increase the securities portfolio, is that purely from a balance sheet liquidity perspective, or can you guys talk about the decision to grow the securities book at this point?
Terry Earley (Senior Executive VP and CFO)
It's really just a remixing of earning assets. It's building liquidity on the balance sheet. I think it's what we've done through the fourth quarter, has been to lock in good spreads by using the relative funding rates in the swap curve versus the investment to lock in good spreads for three years. I think going forward, though, we're gonna—it's—there's going to be an additional important component factor, which is, we're not going to hedge it as much, and we want to have it for down rate protection to help mitigate the NIM pressure on the way down.
So that's—it is going to kind of shift as the rates have moved, as the Fed's gotten clearer on what, you know, and what it's going to do with rates. We're tweaking a little bit as we look forward for the rest of 2024 and the investing we've got to do to help provide that protection.
Malcolm Holland (Chairman, President, and CEO)
Brett, I would just say, go back about 18 months, and we decided that we were gonna change our balance sheet, and this is an overall balance sheet strategy. In order to get it down below 90% on loan deposit ratio, you got to put your liquidity somewhere, and so there's got to be a bigger securities book. So it's a remix, as Terry said, but it's all part of the strategy that we started 18 months ago to remake this balance sheet.
Terry Earley (Senior Executive VP and CFO)
We just don't think that it makes sense to leave it sitting at, in short, short rates overnight at the Fed, because that's only going to exacerbate our down rate risk.
Brett Rabatin (Director of Research)
Okay. And then, given the commentary around the betas, you know, I know, Malcolm, you've got quite a few deposit, you know, initiatives in place. Can you give us maybe an update on the deposit initiatives relative to the guidance for betas to continue to increase?
Malcolm Holland (Chairman, President, and CEO)
I mean, the initiatives continue. I mean, there's no different this quarter than it was the prior quarter in what we're doing. You know, again, we've got seven or eight different levers that we're pulling. Some are more expensive than others. You know, we're trying to stay away and reduce our wholesale funding dependence, if you will. But, you know, we're seeing some good movement. I could, you know, I could pick out a couple right now that have actually done quite well. And this is the time of year where we see every bank, I think, sees a little bit of deposit shrinkage because of taxes, bonuses, or what have you. But we've actually had a pretty decent start to the year. In terms of betas, Terry, you might-
Terry Earley (Senior Executive VP and CFO)
Well, well, I mean, I mean, I just think in general, it's been so competitive, and that's driven the deposit betas up. I would say this, you know, we talked on the last call, the Q3 call, about bringing more balance to pricing and volumes. We saw that during the quarter, and we've seen it already in Q1. Our total deposit cost, as of two days ago, had declined, and not a lot, but a few bps, and I'm encouraged by that. Now, on the margin, our production rates right now are around 4.60, for new deposits. So all that to say, it's moving, it's starting to move, and we're, and as you can tell from the new client acquisition, up 172% in new accounts, I mean, we're getting traction.
It's, you know, it's just takes time to rebuild, remake our deposit base and bring pricing balance to it, and that's what we're all about every day.
Brett Rabatin (Director of Research)
Okay, that's helpful. If I could sneak in one last one. Malcolm, how do you feel about North Avenue this year and just maybe fee income, generally speaking?
Malcolm Holland (Chairman, President, and CEO)
You know, North Avenue had a really, candidly, from a revenue standpoint, you know, they did a revenue from a reduction standpoint. They're about $180 million in 2023. Candidly, I would expect that or maybe a little bit more in 2024. They've got some good momentum. You know, we've talked about it time and time again, about the government constraints that we have from time to time, whether, you know, they're funding stuff or not. But as a bank, we're helpful because we can do some of these interim fundings. That is actually a huge advantage in the space. But listen, I think they're engaged. They've—their pipelines are huge, and I expect them, I think, was it production? I mean, the revenue was $20 million in fees last year, approximately.
You know, the one thing about that business that I think people do miss is they still have some, there's loans on the books, and there's spread income. And so spread income is, you know, covering the expenses of the company, that the fee income is kind of the upside to it. So I expect at least what they did last year into 2024. And just as I'm on that fee business, the SBA business we have, it would be unfair to say we've remade it in 2023, but we hired a new guy to run it, and he has done a phenomenal job. And we expect a lot more out of SBA with what he's been able to do, and we've hit the ground running already. So, I would say the fee businesses will outperform 2023.
Terry Earley (Senior Executive VP and CFO)
There, the SBA Q4 production is indicative of the momentum you're seeing. I mean, they, they did 40%-45% of their production in Q4, and really encouraged. I, I agree with everything Malcolm said on, on the USDA, but I, I think the, the SBA has not been as big a contributor, but it's, our outlook on that is really, is really bright.
Brett Rabatin (Director of Research)
Okay, that's really helpful. Thanks, guys.
Malcolm Holland (Chairman, President, and CEO)
Thank you.
Operator (participant)
Thank you. And one moment for the next question. And our next question will be coming from Stephen Scouten of Piper Sandler. Your line is open.
Stephen Scouten (Managing Director)
Yeah, thanks. Good morning. Hey, guys, I wanted to start with the loan and deposit new production spread that you listed in Slide 10. It looked like a pretty big jump quarter-over-quarter, which is nice to see. So I'm kind of wondering, that 493 basis points, what is that like, what is that actually from a new loan perspective and a new deposit perspective? And could that lead to some core NIM expansion apart from kind of the potential for rate cuts and the debt securities that you noted?
Terry Earley (Senior Executive VP and CFO)
Well, the new loan production, the problem with that, the question is that new deposit production dwarfs new loan production. The spread's good, but there ain't enough of it. New loan production's in about 9%. And, you know, new deposit production is. It has been in the fours, you know? So,
Stephen Scouten (Managing Director)
Yeah, but just a much higher pace of deposit growth. That makes sense. Okay.
Malcolm Holland (Chairman, President, and CEO)
Yeah. If we get the volume on the loan side, Steven, you're going to see something possibly, but, you know, we're not, we're not budgeting for that production. But if we're able to find it, even mid-single digits is going to be helpful.
Terry Earley (Senior Executive VP and CFO)
Exactly. Yeah. I mean, we're—I mean, if we're going to grow loans mid-single digits, you know, let's just use 5%, since that's mid-single digits. That's about $480 million. If we grow deposits, that means we need to grow deposits $1 billion. So that's $480 million is going to have a really good spread.
Malcolm Holland (Chairman, President, and CEO)
Right.
Terry Earley (Senior Executive VP and CFO)
But the other 520, not so much. You know, the cost of funding and where you can invest for 2024 is going to be about flat, but, and it's going to be NIM diluted, but it's going to help going into 2025, 2026.
Malcolm Holland (Chairman, President, and CEO)
That's the point I was going to make, is that once you make up that delta of that 500 or so, now you're kind of on solid footing where, you know, if you want to do a dollar in loan, you only need $1.10 in deposits. Today, you need double that.
Terry Earley (Senior Executive VP and CFO)
To get our balance sheet.
Malcolm Holland (Chairman, President, and CEO)
So 2025, you should hit the ground running, assuming we do $1 billion in deposits and $500 million in loans.
Terry Earley (Senior Executive VP and CFO)
I think 25 is also going to be once we get the balance sheet where we want it, 25 is going to be a year about optimizing deposit pricing.
Malcolm Holland (Chairman, President, and CEO)
Totally.
Terry Earley (Senior Executive VP and CFO)
Because we're not going to need the excess growth to get the balance sheet where we want it.
Malcolm Holland (Chairman, President, and CEO)
Correct.
Stephen Scouten (Managing Director)
Yeah, that all makes sense. Okay. And what, I know you mentioned maybe not hedging to kind of bring down your overall rate sensitivity in the future. I mean, do you think you can move that 4 basis points for every 25 basis point cut? I mean, is that a number you're trying to, you know, cut in half? I mean, do you think you can work that number down, or is it more just around the edges?
Terry Earley (Senior Executive VP and CFO)
No, I think we can work that number down with a combination of things. One is how aggressively we price on the way down. And we exceeded expectations during the pandemic, and so we just got to replicate what we did before, coupled with the way we're making more fixed rate loans today. You know, and there's a lot more discussion on that. Veritex has never been a big fixed rate lender. I certainly have a much greater appetite for that, and there's a lot more discussions going on there. And, you know, and then hedging as well. The problem with hedging down rate risk right now, with the shape of the forward curve, it's just so expensive to hedge it.
I think I would rather not do it in the derivative space, but do it in the cash space with fixed rate loans and securities.
Stephen Scouten (Managing Director)
Yeah, makes sense. Okay. And then just the last thing for me is kind of moving back to credit from that earlier conversation. I mean, it sounds like the spike in past dues maybe resolved itself to a large degree since quarter end. But I mean, as you think about charge-offs for next year, you know, what, what's kind of a reasonable pace off this, you know, off the elevation we saw in 2023, largely related to that one office credit, I know.
Malcolm Holland (Chairman, President, and CEO)
Sure. Sure. Thanks for the question. Yeah, I think if, if I'm sitting here today, looking forward into 2023, I couldn't identify more than $15 million in potential charge-offs today. But we're not, we're not budgeting for that. We're budgeting for higher downside than that.
Terry Earley (Senior Executive VP and CFO)
Yeah. I mean, I think you had a slide in there, Clay. It said we did an average of 27 bps over the last five years. I'm sitting in y'all's shoes, sounds like a great place to start. We think we'll do better, but, you know, 27 basis points has been our historical number. And your answer and question on past dues is, yeah, we got $20-something plus million, I think, is already current on 2 deals.
Stephen Scouten (Managing Director)
Okay.
Terry Earley (Senior Executive VP and CFO)
I would rather you guys—Stephen, I was just going to say, I would rather you guys- I think the consensus charge-off number for the year is 29-30 bps. I'd rather outperform on that. Wouldn't want to see anybody drop the estimate, to be honest with you.
Malcolm Holland (Chairman, President, and CEO)
Yeah.
Stephen Scouten (Managing Director)
No, understood. And I guess, I mean, from a provision standpoint, obviously, even with some of the migrations, there wasn't a need for a provision build, so it's not as if you see any, you know, large-scale degradation that makes you see the need to build that. Correct?
Malcolm Holland (Chairman, President, and CEO)
Correct. Correct.
Terry Earley (Senior Executive VP and CFO)
I would not expect the reserves to grow anywhere close to the amount of growth this year.
Malcolm Holland (Chairman, President, and CEO)
No. So—
Stephen Scouten (Managing Director)
Perfect. Perfect. Thanks for all the color, guys. Appreciate the time.
Terry Earley (Senior Executive VP and CFO)
Thanks, Stephen.
Operator (participant)
Thank you. One moment for our next question. Our next question will come from Ahmad Hasan of D.A. Davidson. Your line is open.
Ahmad Hasan (Equity Research Associate)
Hey, guys, this is Ahmad Hasan on for Gary Tenner. Good morning.
Terry Earley (Senior Executive VP and CFO)
How you doing?
Ahmad Hasan (Equity Research Associate)
So—
Malcolm Holland (Chairman, President, and CEO)
How you doing?
Ahmad Hasan (Equity Research Associate)
Pretty good. So firstly, I might have missed this, but any color on the credit that went nonaccrual and generated the $1.9 million in interest reversal?
Terry Earley (Senior Executive VP and CFO)
We didn't have $1.9 million in interest reversals, I don't think.
Ahmad Hasan (Equity Research Associate)
Okay.
Terry Earley (Senior Executive VP and CFO)
I think it was $600,000-$700,000, and about 6 basis points or 7 basis points, I think. Somewhere in that range. So I agree with that part. The rest was that, that was the move in the non-accruals that affected the NIM.
Ahmad Hasan (Equity Research Associate)
All right, thanks. And looking through 2024 and the wholesale funding reliance is a tick over 20% at the year-end. Where would you like this target ratio to be?
Terry Earley (Senior Executive VP and CFO)
Yeah, it's already down meaningfully. In the first quarter, it's been as low as 17% so far this year. Probably like for it to end somewhere between 15 and 17-18%, somewhere in that range. If it's lower, I'm going to be happy because we've outperformed on the deposit growth, core deposit growth side, but I would expect somewhere in the 15%-18%.
Ahmad Hasan (Equity Research Associate)
All right. And lastly, I know you talked a bit about this, but thinking about the loan growth outlook for 2024, particularly given the CET1 is over 10%, how are we thinking about growing risk-weighted assets for the next year?
Terry Earley (Senior Executive VP and CFO)
I mean, we're going to be more measured in our growth on the risk-weighted asset side. As we've mentioned many calls ago, that we, you know, got that a little bit over our skis on our unfundeds and what have you. But, you know, I think the goal now is to always keep that number inside our capital number, and that's what you should expect. So I don't see that growing. I think it's definitely going to stay inside. I think as we, as our commercial real estate and ADC ratios get below 300 and 100, I do think you will see production of ADC in 2024 higher than it's been in 2023. That will add some to the unfunded, some to the risk-weighted assets.
But net-net, I still say—and so instead of unfunded shrinking, they, they're probably going to grow a little, but not, not, not a lot. So I think that's going to be one of the things that's going to keep the, the CET1 ratio from growing as much as it did in 2023. But we're going to stay very—we're going to look for capital-efficient investments in the investment portfolio. And, you know, we're gonna—if we have more loan growth, that's going to help, you know, utilize or deploy the CET1 and some unfunded increase, but nothing like we've seen in the past.
Ahmad Hasan (Equity Research Associate)
Thank you for the great color. A quick follow-up on that. Within the loan book and unfunded construction commitments under $1 billion, should we expect a larger year-over-year decline in the balances in that segment versus the $53 million decline in 2023?
Terry Earley (Senior Executive VP and CFO)
No, you expect it to be flat. Maybe a little growth, but nothing meaningful.
Ahmad Hasan (Equity Research Associate)
Sounds good. That's it.
Terry Earley (Senior Executive VP and CFO)
Thank you.
Clay Riebe (Chief Credit Officer)
Thank you.
Operator (participant)
Thank you. One moment, please, for our next question. Our final question for the day will be coming from Michael Rose of Raymond James. Your line is open.
Michael Rose (Managing Director)
Hey, everyone. Thanks for taking my questions. Just two quick follow-ups. I'm sorry if I missed this, Terry, but certainly understand the desire to bring the loan-to-deposit ratio down. What should we expect for—or what are your expectations for non-interest-bearing mix? I assume some of the growth is going to be in some higher cost, you know, categories, but do you have a sense for, and I'm sorry if I missed this, where that could drop out and what terminal beta expectations could be? Thanks.
Terry Earley (Senior Executive VP and CFO)
Yeah. Yeah, I would expect it to be pretty flat from here. Now, if we execute well, I would expect it to be pretty, pretty flat. And that means our small business, our community bankers, our commercial C&I guys are hitting their targets. I would expect it to be flat. There's always seasonality, like I said, at the fourth quarter. There's some outflows in that have come back in the first quarter already, but generally, we're going to see those outflows again in the fourth quarter of 2024. So, Michael, that's our best guess right now.
Michael Rose (Managing Director)
Okay, that's helpful. And then just going back to credit quality. I know there's the two office CRE loans that comprise, I think, 60% of your MPAs at this point. Any sort of update there, and you know, what's the outlook for, you know, potentially moving those credits outside the bank? Thanks.
Terry Earley (Senior Executive VP and CFO)
It's just one of them, right? Just, it's just that one, and we actually had that one, a note sale working on it. It fell out late, so we wrote it down to where the note sale was going to be. We do have a participant in that, partner in that, so we obviously have to work with them. But our anticipation is that that asset will be gone this quarter, either through a, you know, probably through a note sale of some sort. But we were really close. It just fell out at the end.
Michael Rose (Managing Director)
Okay, great. Then maybe just finally for me, you know, I know this was kind of touched on earlier in the call, but, Terry, do you have a sense for, you know, how, if we do, what, what the delta would be, you know, from kind of what you talked about in terms of rate cuts, you know, kind of us being at 3, forward curve being at 6. What that delta could look like, A, if we don't get any cuts, and then B, if we get the full, you know, forward curve at this point? Just trying to look for the sensitivity, since I assume it's not linear. Thanks.
Terry Earley (Senior Executive VP and CFO)
Well, I mean, you know, if. It's about $1.25 million for every basis point in NIM. And so if, you know, if it's six cuts, you know, you get 20-24 basis points in NIM reduction, there's your math there, and if it stays flat, it's-
Clay Riebe (Chief Credit Officer)
There's your math there.
Terry Earley (Senior Executive VP and CFO)
Yeah. It's, you know, and so it's kind of. If rates were to stay flat, it's pretty meaningful to NII and to EPS. But I don't, you know, I'm not. I don't think anybody's thinking we're going to end the year flat. So, that's the best way I know to answer it, Michael.
Michael Rose (Managing Director)
No, that's very helpful, Terry. Appreciate you guys taking my questions. Thanks.
Terry Earley (Senior Executive VP and CFO)
Thanks, Michael.
Operator (participant)
Thank you all for your time today. This concludes today's conference call. You may all disconnect.