Veritex Holdings Inc

NASDAQ:VBTX

Earnings Call Analysis

Significant Progress in Strengthening Balance Sheet

Q3 was a crucial period for Veritex, marked by strengthening operations and leadership changes, including Dominic Karaba joining as President and Chief Banking Officer. Driven by broad-based efforts to reinforce the balance sheet, key financial ratios have improved notably. The loan-to-deposit ratio decreased to 95%, reliance on wholesale funding reduced to 21%, and CET1 ratio exceeded 10%. Loan growth is modest at 1.4% year-to-date, and the focus shifted from loans to adding full client relationships and gathering deposits, resulting in over $1 billion increased deposits since end of the previous year. Net operating income stood at $32.6 million, with earnings facing pressure from factors like net interest margin (NIM) contractions, absent loan fees, and increased operating expenses. Net charge-offs remained minimal, and the allowance for credit losses increased, reflecting a cautious outlook amidst economic uncertainties. Looking forward, loan growth is expected to remain in the low to mid-single digits, and no immediate plans for share buybacks are in place.

Welcome and Leadership Enhancements

Veritex Holdings started their third quarter of 2023 with a clear focus on providing long-term value for its shareholders amidst industry and market challenges. They introduced Dominic Karaba as the new President and Chief Banking Officer, who even within a brief tenure of six weeks, has begun to make a significant impact on Veritex's operations.

Balance Sheet Strengthening

Veritex underwent a transformation in Q3 with a strategic aim to bolster their balance sheet against any economic climate. This was not initiated as a reaction to an industry crisis but was a carefully crafted endeavor that started a year ago. Key balance sheet metrics have shown improvement, with the loan to deposit ratio dropping from 108% to 95% and reliance on wholesale funding reducing from 32% to 21%. The CET1 ratio now stands above 10%, and the concentration of commercial real estate loans has decreased, a strategic shift that has also resulted in deposit growth of over $1 billion since the end of 2022.

Earnings Performance and Loan Growth

The third quarter saw Veritex report a net operating income of $32.6 million, which translates to $0.60 per share. Although earnings faced pressure due to factors like NIM compression, absence of government loan fees, and rising operating costs, the loan portfolio only grew marginally by $137 million, or 1.4%, in the first nine months of 2023. This was attributed to a strategic pruning of 'loan-only' clients and payoffs primarily from commercial real estate transactions.

Credit Outlook and Provision for Credit Losses

Nonperforming assets (NPAs) witnessed an uptick by $11.5 million, reaching $80 million, or 0.65% of assets. This surge was solely due to a C&I shared national credit issue, while net charge-offs remained minimal at 8 basis points. The Allowance for Credit Losses (ACL) was also proactively increased from 1.05% to 1.14% to bolster the bank's credit defenses. Despite this, Veritex's forward outlook anticipates low to middle single-digit growth during 2024, in the wake of muted demand and an over 80% decline in pipelines.

Annual Performance and Profitability

Year-to-date figures reveal a solid 14% climb in pre-tax pre-provision operating earnings from the previous year, totaling nearly $175 million. Although return on average assets remained steady at 1.90%, Veritex maintained its rank among the more profitable banks in its peer group. Alongside modest loan expansion, deposit growth was markedly more robust at $1.4 billion year-over-year, and the CET1 ratio has impressively grown by 102 basis points to 10.11%.

Deposit Growth and Funding Profile

Deposits swelled by $963 million since June 30, allowing for a significant reduction in borrowings from the Federal Home Loan Bank by over $1.1 billion. This progression stems from a strategic reprioritization shifted toward deposit growth and away from commercial real estate and acquisition, development, and construction (ADC) lending. Veritex has put more emphasis on C&I and small business lending while boosting deposit gathering via incentive programs, marketing campaigns, and embracing digital banking.

Liquidity Position and Deposit Mix

A sustained deposit mix despite Federal Reserve rate hikes reflects Veritex's resilience with noninterest-bearing deposits accounting for 23-24% of the total. However, deposit competitiveness remained fierce, resulting in a total deposit beta of approximately 57%. Furthermore, liquidity continued to be robust, with the capacity at twice that of the uninsured deposits. There are concerted efforts to reduce the concentration in commercial real estate lending, aligning closely with regulatory guidelines.

Looking Ahead to 2024

Veritex's future growth prospects are cautious, supported by the expectation of a low to middle single-digit profile for 2024. This caution is a reflection of the significant over 80% drop in loan pipelines and suppressed client demand, which the bank anticipates will persist until economic and interest rate stability is achieved.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, and welcome to the Veritex Holdings Third Quarter 2023 Earnings Conference Call and Webcast. [Operator Instructions] Please note this event will be recorded.I will now turn the conference over to Ms. Susan Caudle, Investor Relations Officer and Secretary of the Board of Veritex Holdings.

[Susan Caudle, executive]

Thank you. Before we get started, I would like to remind you that this presentation may include forward-looking statements, and those statements are subject to risks and uncertainties that could cause actual 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 2. 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, executive]

Good morning, and welcome to our third quarter earnings call. We certainly find ourselves in a challenging -- in challenging days in our industries and markets, but we here at Veritex continue to focus on building long-term value for our shareholders.Q3 was a transformational quarter for Veritex in many areas:First, I'd like to formally welcome Dominic Karaba as our new President and Chief Banking Officer. Dom is a 28-year banking veteran with majority of his experience in leading and developing teams in a commercial bank space. Even though he's only been here for 6 weeks, he is already making a difference in our company. I look forward to you all meeting him soon.Second, I want to talk about our continued commitment and efforts to reposition and strengthen the Veritex balance sheet. Over one year ago, our teams stacked hands to build a stronger balance sheet that could withstand all economic environments. We've always been a very profitable bank shown by our historical PPNR ROAA and efficiency ratios. But our balance sheet did not project the strength that is highly valued.Let me discuss 4 balance sheet ratios we've been keenly focused on; loan to deposit, dependence of wholesale funding, CET1, and our real estate loan bucket concentrations. I'd like to remind you these efforts were not as a result of March 8, SVB crisis. These efforts have been our major focus and strategy for the last 4 quarters. I'm happy to say we're making progress, candidly much quicker than we planned. Our loan deposit ratio has come down from a high of 108% at 3/31 to 95% at 9/30. Our dependence of wholesale funding has come down from 32% at 3/31 to 21% at 9/30.Our CET1 now exceeds 10%. Our CRE portfolio continues to decline despite continued ADC fundings of approximately $400 million a quarter. Total CRE to risk-based capital has declined from 335% on 3/31 to 317% at quarter-end. ADC has declined from [ $1.29 billion to $1.16 billion ] during those same dates. All of this positive momentum towards a stronger balance sheet takes the work and effort of our entire bank. It requires a mindset change to add full client relationships, not just borrowers.It requires disciplined efforts on the deposit-gathering space that comes in many forms: better client selection; digital banking' direct marketing; MSRs; HOAs; family and friends promotions, commercial and community bank focus, et cetera, et cetera. It takes everyone working together with a common goal. That's how we've increased our deposit balances over $1 billion since 12/31 '22. I couldn't be prouder of our company and teams to embrace the changes we all felt had to happen. There is still much to do and much to accomplish.With all the great progress on the balance sheet, we understand that in these cycles, earnings will be under pressure. For the third quarter, we reported net operating income of $32.6 million or $0.60 per share. Our pretax provision income for the quarter was $50 million or 1.62%. Terry will provide some details shortly, but the main 3 drivers of our slight earnings decline were NIM pressure, continued lack of government loan fees and increase in operating expenses. In these cycles, loan growth and credit are always at the top of everyone's mind and concerns. For the quarter, loans decreased and are only up $137 million or 1.4% for the first 9 months of the year. We've been able to do this with a focused effort on pruning away loan-only clients and payoffs, mainly from the CRE sales -- mainly from CRE sales transactions.NPAs for the quarter did increase $11.5 million to $80 million or 0.65% of assets. This increase was solely from the C&I shared national credit that Clay will discuss shortly. Net charge-offs were minimal at 8 bps. We also increased our ACL from 1.05% at 6/30 to 1.14%. Looking forward, our growth profile for 2024 will continue to be in the low to middle single digits. Our pipelines are off over 80% and candidly, the demand from our clients have been muted. In our opinion, this will continue until some economic and rate certainty is established.I'll now turn the call over to Terry.

[Terry Earley, executive]

Thank you. Malcolm has covered the progress we've made in strengthening our balance sheet. I think it is fair to say that we've made more progress and in a quicker time frame than I ever expected. I'll spend some time drilling into the results for the third quarter and the year-to-date numbers, 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 4, Malcolm mentioned the operating earnings were $0.60 a share, this is down slightly to $32.6 million. Tangible book value per share was also up slightly to $19.44, even with rising rates impacting Accumulated Other Comprehensive Income, AOCI, by approximately $0.45 per share. Focusing on the year-to-date results, pre-tax pre-provision operating earnings increased 14% from 2022 to almost $175 million. Pre-tax pre-provision return on average assets is flat over the year -- is flat year-over-year at 190 basis points. Veritex continues to be one of the more profitable banks among its peer group.Consistent with our intent to strengthen our balance sheet, we've only grown loans to $615 million in the last year, while growing deposits to $1.4 billion on a year-over-year basis. Year-to-date annualized charge-offs have been 20 basis points. Finally, we've grown CET1 by 102 basis points over the last 4 quarters to 10.11%. We achieved this target of being over 10%, 1 quarter earlier than forecast.Moving to Slide 5, Veritex made meaningful progress improving its liquidity and funding profile over the third quarter. Since June 30, Veritex has grown deposits by $963 million, and only $192 million of that was in the growth category. The deposit growth coupled with some reduction in earning assets, allowed us to reduce Federal Home Loan Bank borrowings by over $1.1 billion. As we've said before, Veritex shifted its focus to the right side of the balance sheet late in Q3 of '22 -- 2022. We started slowing loan growth. We shifted our loan production focus away from commercial real estate and ADC to C&I and small business. We changed our banker incentive program at the beginning of 2023 to give deposits a higher weight.We 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 having a meaningful impact on our deposit growth. Success on the deposit front for Veritex has 3 components, growing deposits, increasing our client acquisition rate and increasing net client growth. I'm pleased to note that our net client acquisition rate in the third quarter was a little more than double what we saw in the first half of the year. Similarly, our net client growth in the third quarter was up more than 4 times over the levels we experienced in the first half of the year.The effect of the Fed's interest rate hikes on the deposit mix stabilized in the second quarter, and our noninterest-bearing deposits to total deposits remained in the 23% to 24% range. The deposit price of competition continues to be intense, resulting in a total deposit beta of approximately 57%. Finally, uninsured and uncollateralized deposits were 31.5% of total, and our liquidity capacity is 2x of the uninsured deposits.In thinking about the loan portfolio, the shift away from ADC is showing progress. Our concentration level in CRE moved down during the quarter and the goal is to continue to move these levels down below the regulatory guidelines. The payoffs in the CRE portfolio remained strong and it should range between $800 million and $900 million for 2023, the sure sign of strength in the Texas economy. Unfunded ADC commitments continue to drop at the rate of $300 million to $400 million per quarter and are now well below our total capital. Looking forward to 2024, we forecast ADC fundings to decline by 75% as compared to 2023.On Slide 7, we're frequently asked about our out-of-state loan portfolio. As you can see, our national businesses and mortgages comprised 13% of our total loan book. Our true out-of-state portfolio is about $1.2 billion and makes up about 12.5% of the total book, two-thirds of the out-of-state portfolio or loans where we have filed the Texas developers. The rest are syndicated loans and C&I. A breakdown of the upstate commercial real estate portfolio is shown on the bottom right of the slide.Moving on to Slide 8. Net interest income decreased by $1.5 million to just under $100 million in Q3. The biggest drivers of the decrease were higher earning loan yields, day count and lower volume, i.e., primarily FHLB volume, offset by increases in rates on deposits. The net interest margin decreased 5 basis points from Q2 to 3.46%. The NIM was helped by the increase in average noninterest bearing and the drop in volume and yield on our FHLB borrowings. Given the deposit growth through the end of August, we were able to pull back on deposit pricing in September. This resulted in monthly deposit production rates falling for the first time in 2023. All this to say, based on our current internal forecast, the net interest margin is [ during ] the bottom assuming our deposit mix remains stable from here.On Slide 9, please note that loan yields were up 7 bps to 6.92% while thee deposit rates increased by 42 basis points. Q3's new loan production had production rate of $8.06 and a spread of 330 basis points.Slide 10 shows certain metrics on our investment portfolio. The key takeaways are, it's only 8.6% of assets, the duration is 4.3 years, and 83% of the portfolio sell and available for sale. Overall, the mark-to-market on the portfolio has a minimal impact on tangible equity. And doesn't have any impact on our capital ratios.Noninterest income decreased by $4 million to $9.7 million. These declines were generally across the board. Thrive's production volume increased 1% to $564 million, while as the gain on sale margin declined about 43 basis points to 257 basis points. To maintain volume, Thrive had to sacrifice rate and therefore the gain on sale margin.Moving to slide 12 on the USDA front, we've always said that we think about this business on an annual basis. It's been a record 12 months for this business. They produced over $21.6 million in revenue over the last 4 quarters. I was happy to get any revenue in Q3 of '23 given the funding situation to be in our vertical at the USDA, but we could only get 1 loan closed in Q3. Our pipeline is at record levels, which bodes well for future revenue and Q4 revenue should be meaningfully higher than Q3. But given the potential government shutdown and funding the government with continuing resolutions make it highly unlikely that Q4 will be as strong as Q4 '22. Noninterest expenses increased $2.2 million, driven by higher personnel costs and regulatory fees. The increase in personnel cost is a function of higher bonuses, variable compensation for deposit growth and lower loan production cost deferrals. Salaries are up slightly, but this was not the driver of the increase.On Slide 13, total capital grew approximately $35 million during the quarter to almost $1.5 billion. Our CET1 ratio expanded 35 bps for the quarter and 101 basis points year-over-year and now stands at 10.11%. A significant contributor to the expansion of the capital ratios has been the decline in risk-weighted assets. It's worth noting that since Veritex went public in 2014, is compounded tangible book value per share at a rate of 10.8%, including the dividends that have been paid to our shareholders.Finally, on Slide 14, note that we continue to build the ACL. Since the beginning of 2023, we've grown it by $19 million or 21%. These additions to the allowance have increased 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, 2 factors continue to make that a sizable part of our ACL.With that, I'd like to turn the call over to Clay for some comments [ on his end. ]

[Michael Riebe, executive]

Thank you, Terry, and good morning, everyone. As Malcolm mentioned, our NPAs are up for the quarter, driven by a downgrade of a shared national credit in the most recent [ snick ] exam performed by the regulators in August. Our portion of the loan is $18 million of $157 million total facility. The company is in the defense, space and government sector, and the company suffered from supply chain issues and inflation impact that significantly lowered the company's financial performance.The credit was restructured in the third quarter with additional capital contributed by the equity sponsor and is currently performing under the restructured terms. Past dues for the quarter increased $2 million, mainly due to 3 commercial credits. There were also a group of single-family mortgage loans in the amount of $4.4 million that were transferred to a third-party servicer, which created some administrative past dues, and we expect those issues to clear this quarter.Moving to Criticized Assets. Classified assets were relatively flat for the quarter, while total criticized assets increased by 3%. Our surveillance of the portfolio continues to be strong, and we're moving risk grades as we see issues arise. I've been encouraged by the level of payoffs that have occurred this year in the amount of $932 million with $645 million of that in the CRE book; $62 million of year-to-date payoffs have come from the criticized asset books. We experienced full payoffs of $10.4 million of classified credits just in the last quarter.With that, I'll turn it back over to Malcolm.

[Malcolm Holland, executive]

As you can see, Veritex has made significant improvement in our strategy to build a sturdier balance sheet. Our focus on granular, stable funding will not cease. Terry mentioned, but I would like to mention again, just the new client acquisition is on the front of our minds every day. For the third quarter, client acquisition growth was almost 2,700 new clients, which is more than the first 2 quarters combined. It's working, and we recognize we still have more work to do.Finally, I'd like to thank the many phone calls, encumbering text messages we received from many of you concerning last quarter's earnings call. Everyone involved is doing quite well. Thank you, and operator, we'll take any questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Stephen Scouten of Piper Sandler.

[Stephen Scouten, analyst]

I guess, one of my questions is maybe around the capital and what you could do with your capital today, strong profitability; good capital, but the stock, obviously, not trading where you would want on a tangible book value basis. So I'm just wondering if you guys would think about a share repurchase here today or kind of what your capital priorities could be at this point?

[Malcolm Holland, executive]

It's -- listen, if you keep making money adding the capital, you're going to have options. Our thinking right now with the environment that we're in, is just to continue to add capital. And we know there's potential options down there, but we don't see a buyback in our immediate future. I think, it's just wise to build the capital base a little bit more. And again, the options are always there.

[Stephen Scouten, analyst]

Okay. Fair enough. And then, just thinking about the NIM, I know Terry, you said you think it's kind of nearing the bottom. How should we think about loan yields, moving forward? And just any portfolio churn? And just kind of remind me the fixed versus floating, so we can think about where kind of the loan side of the balance sheet can get.

[Malcolm Holland, executive]

Well, loan yields since we have so much floating, 75%, 76% of the portfolio, 76% of the portfolio is time to [ SOFR or ] prime, loan yields are going to be contingent, they're going to move in correlation with what the Fed does on rates. Are they done? Are they going one more time? I don't know. It's a coin flip in my mind. I don't think they're going at their next meeting, but we'll see what happens on out there.Yes. We certainly have some fixed rate loans that are -- I was working with a banker on one earlier this week, it's in the mid-3s, that's up for renewal. And so it's an -- so we're going to have some of that, Stephen. But given that so much of the portfolio is floating, I think it's going to be helpful when it occurs, but I don't think it's going to be a big enough number and change to really -- change the dynamic of what the NIM is going to do. And look, we're really -- I was really happy with how the NIM performed in the quarter, especially as I look across the industry.But as I said, pricing competition on the deposit side is pretty intense, but we were able to pull back meaningfully on ours in September. We can see it in the data. And so, I'm hopeful that -- I think there's going to be some -- especially at CDs role, there's going to be some NIM pressure. But it looks like in their own internal modeling, that we're getting near at the bottom anyway.

[Stephen Scouten, analyst]

Got it. Okay. And then just maybe last thing for me. I know you've talked about that USDA business to think about it more annualized. But I'm just kind of curious what you're seeing from a funding perspective, if that's kind of -- that vertical is kind of back open for business. Obviously, the pipeline looks really strong. And so that was, I don't know, $14 million -- $19 million line item last year. Is that, think about still that range? Or because of some of the government issues, is that going to be lower year-over-year still?

[Malcolm Holland, executive]

No, I don't think it's going to be lower year-over-year, but I think the timing is -- I thought, Q4 -- 90 days ago, I would have thought Q4 was going to be a really strong quarter with the new fiscal year for the federal government. Now that they're doing it on continuing resolutions, they are just -- the level of funding and the certainty of funding is what's lowered my view of Q4.I mean, we have specific loans, we believe we're going to get closed, but getting a little bit of allocation out of continuing resolutions, it's hard to manage your business that way, and this was some say differently. They're managing their business just fine. It's hard for me to give you clarity in terms of what I think revenue is going to do. So that's what I'm trying to say, I think it's going to be meaningfully better than Q3, but not nearly as good as last year's Q4, unless something really pops a negative buzzy passed. But I feel really good about '24, I think it's going to be in line with what we're seeing and we'd love to see it be a little bit better.The pipelines are better, the day versus where they were going into '24. So if the funding is there, we could do better, but there's that macro circumstance there that's really outside our control.

[Stephen Scouten, analyst]

Sure. That makes a lot of sense. Congrats on all the progress.

[Operator]

Our next question comes from the line of Brady Gailey of KBW.

[Brady Gailey, analyst]

Great. I mean, you talked about all the progress that's been made over the last years. I think, you've called out kind of 4 or 5 different areas that have seen some pretty nice improvement. Are we done at this point with kind of the things that you all are focused on improving internally? Or is there more work to be done on like the loan-to-deposit ratio and capital? And I think you mentioned you still wanted to get below the 300, 100 CRE A&D thresholds. I'm just wondering in what inning are we in? And is there a lot of work left to be done to get the company where you guys would like to see it?

[Malcolm Holland, executive]

So the easy answer is, no. We're not done at all internally. We call what we accomplished in the third quarter Phase 1. Phase 2 is a continued effort to strengthen the balance sheet in a whole bunch of areas. The ones I've mentioned and a few others. And so, we don't believe the definition of fortress balance sheet runs at 95% loan-to-deposit ratio. So we will continue.One of the things in the hiring, Dom, is that -- that his focus is to help us to continue to do that. And really, I think I said it, but it's the granular side of the business, which I told my folks at our strategic planning session in Phase 2, we'll never be out of. That's our work to really support our funding levels in smaller, more sticky business funding areas. And so, we still have more work to do, Brady, and we're not going to stop. And so, I want to be real clear that we are -- we do feel like we accomplished Phase 1 about a year or more ahead of time, but now we're into Phase 2, and that's the real heavy lift and the hard work, but that's what we intend to do.

[Terry Earley, executive]

The progress of change will probably slow, as you would not expect to see Q4.

[Malcolm Holland, executive]

Yes.

[Terry Earley, executive]

It look like Q3.

[Malcolm Holland, executive]

Absolutely. Yes. Don't think, I'm going to have 85% loan-to-deposit ratio by the end of the year. We could do that, because as Terry always says, you misprice your deposits, you can get all you want. And we're not doing that shown by a slower rates in September. So we feel like we're in a comfortable place right now from a balance sheet strength standpoint, but we still have more to do.

[Brady Gailey, analyst]

All right. And then, on the expense side, you saw some expense growth quarter-on-quarter. I think a lot of it was in compensation. Compensation is kind of back at the level that you saw in Q1 of this year. So, I was just wondering, as we look forward, I think our expenses were a little under $60 million in the third quarter. How should we think about that expense run rate in the fourth quarter? And maybe more importantly, into 2024?

[Malcolm Holland, executive]

I think in Q4, I would be -- I think, it's going to be $60 million or maybe a tad over just -- but that's up a little bit but not tremendously, up 1% to 2%, I would say. I think, as we look into '24, I think, it's -- I don't see the efficiency ratio for the year getting much better than where it is today, because I'll tell you one thing -- two, let me tell you 2 things. Benefit costs are going through the roof. Two, FDIC insurance premiums, as they rebuild the fund. And those things, they're largely outside our control. And so, that's -- in terms of -- that's where I expect to see the most expense pressure, generally speaking, going into next year.

[Brady Gailey, analyst]

Okay. All right. Great.

[Operator]

Our next question comes from the line of Gary Tenner of D.A. Davidson.

[Gary Tenner, analyst]

I was curious, if your could. Terry, I was curious if you could talk a little about kind of the success on the deposit side and maybe plans to expand what you've already done in terms of the digital bank, direct marketing channels or otherwise. Are you slowing the spend on the direct marketing at this point, and kind of relying more on standing up digital banks in kind of local areas the way you did to the degree of digital bank can be local, of course? So I was just curious for any color on that.

[Malcolm Holland, executive]

Yes. I think we're always going to have the digital bank direct marketing lever. We'll always play in that arena. We had to get digital banking going. So I mean that took a lift just to get into the areas that we want. We could always go into new areas, most of -- all of our digital banking went outside of our current markets, and we identified certain spots in Texas only that we wanted to be, and there are many more markets that we can tap into that area. Direct marketing, that's going to be something that we do, but we probably won't do as hard as we did in the third quarter, but it's always going to be there. Again, I think this is not -- it's not a 1 event is going to cure this thing. It continues to be a lever of 6, 7 or 8 different places where people have to pull from.Now the reason I think it gets a little slower and a little bit harder going forward, is now we're moving into more of the commercial bank space, the community bank space, the business banking space, the private banking space where those become much more granular things that have some lead times in order to get them closed and getting them moved over. But those are the ones that are harder but are much more valuable from a treasury management standpoint, from a granularity standpoint. And so, I think we continue all efforts. We may put more emphasis on different areas, depending on what the balance sheet needs.

[Terry Earley, executive]

Yes. Let me add 2 things. One, on direct marketing. Gary, I think you'll see us move from more product-specific direct marketing to more small business focused direct marketing to help drive more new client acquisition, specifically in that space, and I have another. So that's what happens when you get all of your free things, anyway

[Gary Tenner, analyst]

Yes, I appreciate that. And maybe this is a question for Dominic to a degree, but is there -- the customers that you're acquiring through the digital bank, are these -- they're in state? Are they customers that you think you would have an opportunity to do more business with other than just the depository side?

[Malcolm Holland, executive]

Absolutely. I mean, that's the whole goal. If it was just a 1 CD client or on money market client, that doesn't really do much for us. And I think the metric that Terry mentioned and I gave you at the very end was, our new client acquisition was just shy of 2,700 in the third quarter. That's double the first quarter and second quarter.

[Terry Earley, executive]

Combined.

[Malcolm Holland, executive]

Combined. And so what that does is, I now -- I, are my folks in the branches and my folks have the opportunity to cross-sell. And today, I believe we have 68% retention ratio of those clients. And so, if you can -- all you got to do is get them in our company and leave. Our service levels at the branches are incredibly high if you look at our ratings and all that, they're just incredibly high. So we can get them in, they're not going to leave [ when you ] sell them other stuff.

[Gary Tenner, analyst]

Appreciate that. And then just really quickly, in terms of that credit, [ the ] national credit that was downgraded and restructured, was there any accrued interest be reversed related to that credit?

[Terry Earley, executive]

There was $1.2 million.

[Operator]

Our next question comes from the line of Michael Rose of Raymond James.

[Michael Rose, analyst]

Just a couple of follow-ups here. So obviously, a lot of progress on the deposit front. A lot of that's been discussed. The mix of noninterest-bearing down to about 23%. Terry, you'd kind of, coinflip in your eyes between kind of what happens with rates here. But where do you think that could fall through? And if you could give us any sort of updated beta expectations it would be appreciated.

[Terry Earley, executive]

Yes. I mean, I think -- I mean, look, we grew DDA -- so even though the mix went down, it's a function of the overall growth in total deposits. So, I think it's -- I think, the mix -- look for 2 quarters, we've held in. And I believe, that DDA is going to continue. Internally, I'd say we view it as more likely than not to continue to hold in this range. It may be depending on how successful we are. Over time, I would expect it to grow, as we -- with all the work we're doing in the small business and low to middle market, et cetera. But in the short run, I expect it to stay stable through Q4, and as far as I can see into '24.One thing I would note, the rate of migration, and then is it we analyze pretty granularly our deposit base, the level of migration for the last 2, 50 basis points of move has really, really slowed down, meaning they've take out new customers, just look at the existing customers that we started -- that we started to say Q2 with the rate of migration for the last 2 moves has been way less. We've been able to offset it and grow this quarter, but still, it seems like customers obviously was just not having as much of an impact. Those people who are -- and customers who are aggressively managing liquidity seems to be not as high a priority, I would say.

[Michael Rose, analyst]

Yes, And certainly didn't mean to discount the fact that you're one of the few banks have actually grown DDA this quarter. So certainly appreciate the progress and a lot of stuff that you can't -- that may not be apparent in that's under the hood. So a lot of good stuff there. But the deposit costs continue to increase. Obviously, you guys added some higher cost deposits this quarter. Are we getting closer to a peak in deposit costs in your eyes?

[Terry Earley, executive]

[ That was ] the way I think CDs are going to roll. I don't think we could have peak in deposit cost. We've lowered production rates. But just as we've got fixed rate loans, I talked about it, 3.5% being renewed. We've got some earlier dated CDs at lower rates that are going to roll too. So I think it's going to -- that's why I think, we're near the bottom, not at the bottom on them.

[Michael Rose, analyst]

Okay. Helpful. And then maybe just last for me. Through the pandemic, obviously, you guys hired a lot of producers, got a lot of growth during that period. Now the fundings increased. It seems like growth is kind of poised to kind of pick up and -- just wanted to get some kind of initial nearer-term thoughts on what the drivers would be? And then obviously, you're trying to bring the CRE and A&D concentration down. Where would you expect kind of that growth to be? Just trying to get the puts and takes as we think about next year.

[Malcolm Holland, executive]

Yes. So the growth is going to be largely dependent on payoffs, and then the whole funding look -- outlook, which we have some really good vision into is, by the second quarter of next year, it basically falls off the cliff because we've been funding $300 million, $400 million, closer to $400 million a quarter.By the time we get to Q2 next year, that falls off. And so, your funding -- some of the funding, that's already in the book, it's going to stop. If payoffs continue then growth is going to be a pretty good challenge. But some of the things that we're doing here, and we are focused on growth, but we're focused on growth on what the market is going to give us. We not outsized growth is what we're looking for. And we're still trying to determine what that looks like. I mean, candidly, our clients have not asked for a lot lately. But I do see some things getting a little better.So overall, I think I would tell you it's a low to single -- low to middle digits on growth for next year. But depending on payoffs, that could be a challenge.

[Michael Rose, analyst]

All right. Totally understand.

[Malcolm Holland, executive]

Yes. Let me -- remember just -- and my memory came back. I remember other items, Terry's. I'm just going to make a comment that if you look at our deposit pipeline to our loan pipelines, it's 4x today.

[Terry Earley, executive]

Yes.

[Malcolm Holland, executive]

Deposits to loans

[Terry Earley, executive]

Yes.

[Malcolm Holland, executive]

It's 4 -- it's deposit -- 5x, 4x down greater than our loan pipeline today. So that's just new one. Operator, next question?

[Operator]

Our next question comes from the line of Matt Olney of Stephens.

[Matt Olney, analyst]

Appreciate all the good commentary this morning. And I apologize if I missed this, but I want to ask about the overnight liquidity levels, cash balances. I think, with the third quarter liquidity build, I think cash balances are now 6% of earning assets. Where are you looking to maintain these levels in the fourth quarter into 2024?

[Terry Earley, executive]

I would like for cash levels to be a little lower. Actually, we've started investing excess liquidity this quarter. And cash balances, I would like for this to be -- it's 5% to 10% lower. But the important thing is just when this whole thing went off the rails with Silicon Valley on March 8, the available liquidity to the bank right now has doubled what it was. We've got $6.25 billion cash in available cash. So we -- the team has done a good job and getting everything placed in the right place, et cetera. So, but I do want to see us manage cash a little tighter -- and depending on what loan growth does, start to invest in excess liquidity in a very capital-efficient way.

[Matt Olney, analyst]

And Terry, just following up to that, you say invest that. Are you talking about maintaining the investment securities portfolio? Or are you talking about building that from here slightly?

[Terry Earley, executive]

I'm talking about growing the portfolio over the course -- if we're going to continue to make progress, as Malcolm talked about, on the overall strength of the balance sheet, we've got to put more liquidity into the investment portfolio. The other good thing it does is, it can help protect for down rates given our floating rate loan book. And so to the -- I'm not going to leverage to do it. I'm not looking immediately to do a loss trade to do it. But as we have excess liquidity, we are investing blocking in spreads and we'll build that portfolio over Q4 into '24

[Matt Olney, analyst]

Yes. Okay. That makes sense. And then I guess, shifting over a different topic on the out-of-state loan portfolio. I appreciate that disclosure in the deck there. As we think about next year, is there a strategy to change the amount and to shift that all of the out-of-state 8%? Or are you just trying to update us the community here in light of some of the questions you've got on that topic?

[Malcolm Holland, executive]

I would say the latter to start. There's been some confusion and frustration. And I understand, and that's why we just got really, really clear and granular. I would see -- so just as a function of the property type, you're going to see that out-of-state number come down fairly drastically with almost $0.5 billion in that 800, in warehouse and retail, multi -- [ actually for not ] much closer to 600. A lot of those are construction deals, and they're going to be paying off -- the payoffs are going to come out of those books. So you're going to see that number come down.

[Matt Olney, analyst]

Okay. Perfect. And then I guess, for Clay on the office portfolio. That disclosure this quarter in the deck was a little bit different than last quarter. So I can't tell if there is any migration in office. Any just commentary on the office portfolio?

[Michael Riebe, executive]

We had one loan in the portfolio that moved to criticized assets during the quarter in the office portfolio. But since June 30, portfolio is down $30 million.

[Matt Olney, analyst]

Got it. Okay. That's helpful. And then just lastly, as we take a step back and think about just general profitability, I think you disclosed in the deck the PPNR ROAA this quarter was around 160, I think. If we focus -- I was going to ask, if we think about just profitability in terms of the next year as far as balance sheet management and all the things you're focused on, how should we think about that PPNR ROAA level?

[Malcolm Holland, executive]

Probably pretty similar is what I would say, somewhere in that, you know.

[Terry Earley, executive]

Give or take 10 bps.

[Malcolm Holland, executive]

Yes, 150 bps to 170 bps.

[Terry Earley, executive]

Yes, that's what I would say. A lot of it has to do, Matt, some of this, USDA income and at what levels they perform. But I think it's fair to say between 150 bps and 170 bps. You're going to see us [ upsetting that. ]

[Matt Olney, analyst]

Okay. Okay. That's helpful, guys.

[Operator]

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.