Veritex Holdings Inc

NASDAQ:VBTX

Earnings Call Analysis

Veritex Reports Mixed 2023 Results; Eyes 2024

Veritex Community Bank posted a challenging year in 2023 with an operating earnings of $142.1 million, or $2.60 per share, and a pretax pre-provision operating return on average assets of 1.81%. The bank has successfully slowed loan growth to 1.7% or $160 million, a significant decrease from the previous year's growth of over 30%. Deposits grew by 13.3%, or $1.2 billion. Noninterest income slightly increased to almost $54 million, while noninterest expenses rose nearly $30 million. Despite a compressed net interest margin, which is expected to narrow further to around 3.25%, the bank's capital position improved with CET1 ending the year at 10.29%, which exceeded the goal of 10%. Looking into 2024, they anticipate additional net interest margin contraction due to investing $500-$600 million in debt securities and potential Federal Reserve rate cuts.

Annual Performance and Capital Strength

The company reported strong operating earnings for the year 2023, standing at $142.1 million or $2.60 per share, which represented a substantial pretax pre-provision operating return on average assets of 1.81%. Impressively, the bank was able to significantly strengthen its capital, achieving a Common Equity Tier 1 (CET1) ratio of 10.29%, which exceeded the targeted threshold of 10% and marked an increase of over 120 basis points compared to the end of 2022. The total capital grew by approximately $105 million, while risk-weighted assets decreased by $612 million, showcasing a shrewd management of the balance sheet.

Modest Loan Growth and Deposit Expansion

The company deliberately slowed its loan growth to a mere 1.7% or $160 million, a stark contrast to the previous year's growth of over 30%. This was a strategic move to allow for the shedding of nonrelational borrowers and respond to the general market decline. At the same time, deposits swelled by 13.3% or $1.2 billion. Looking ahead to 2024, the company anticipates continuing on this trajectory of strong deposit growth at a high single-digit rate while expecting mid-single digits loan growth.

Asset Quality and Credit Performance

There was an uptick in nonperforming assets (NPAs) to total assets, from $80 million to $96 million, primarily due to a few notable problematic loans; however, the company maintains a solid allowance for credit losses (ACL) of 1.14%, which has been strategically increased by $19 million or 21% to brace for potential economic downturns. The company has also seen a reduction in classified assets and improvements in its office loan portfolio, though elevated past dues and $9.5 million in net charge-offs for the quarter indicated some challenges.

Liquidity Management and Reduction in Funding Costs

The bank successfully reduced its loan-to-deposit ratio from 104.4% to 93.6% due to its strategic growth in deposits, which also permitted a significant cut down of reliance on wholesale funding by nearly 20%. Moreover, the robust deposit growth provided flexibility to pay down expensive advances and invest $200 million into the investment portfolio.

Income and Margins

Despite a decrease in net interest income by $3.9 million in the fourth quarter and a compression of the net interest margin by 15 basis points to 3.31%, the bank maintained strong earnings. Operating noninterest income rose to around $54 million, indicating resilience in the bank's profitability. However, challenges are anticipated in 2024 regarding growth and rates, potentially impacting net interest income and margins.

Expense Management

The institution experienced a rise in operating noninterest expenses by nearly $30 million year-over-year, fueled by various factors such as FDIC insurance, limited loan production, and higher legal and professional fees. Despite these increases, the goal for the upcoming year is to keep expenses relatively flat, albeit acknowledging that some growth is likely due to business investments and external economic pressures.

Outlook for 2024

Facing a challenging growth and rate environment in 2024, the company remains committed to fortifying its balance sheet and performing at optimal levels. While specific capital targets for 2024 have not been set, there is an expectation of a slight increase in capital, with a more measured pace compared to 2023. The company's focus will remain on risk management and strategic decision-making in the face of volatile interest rates.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, and welcome to the Veritex Holdings Fourth Quarter 2023 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event will be recorded.

I will now turn the conference over to Will Holford with Veritex.

[Will Holford, executive]

Good morning. Thank you for joining Veritex' 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 and subsequent filings with the SEC. We will refer to investor slides during today's presentation, 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 out for a Q&A session.

I will now turn the call over to Malcolm.

[Malcolm Holland, executive]

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 in pretax 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 pretax 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 bps over year-end 2022.

We're 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-plus percent. This was accomplished by a focused strategy to move out nonrelational 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 is 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 -- 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 mentioned, every quarter, our credit remains a top priority. Our NPAs to total assets increased from $80 million to $96 million or 77.77%. The net increase of $16 million were comprised of one data center loan of $10.5 million, a C&I credit of 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 -- in that loan category. We also had one large C&I upgrade out of the NPA category. Our ACL was $1.14, flat over 3Q but up 21% over 12/31/22, 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 and 23.7% for the year or 25 bps. Terry will provide some greater color on this shortly. I'll now turn the call to Terry.

[Terry Earley, executive]

Thank you, Malcolm. We've made good progress and now 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 12/31/23, not 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 12/31/22 to 93.6% at 12/31/23. 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 4, we knew that strengthening our balance sheet is going to come at a cost. Thankfully, we have the earnings power to absorb it. Pretax 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, about 120 basis points to 10.29%. We had a goal of 10%. We got there a quarter early and we continued to strengthen capital.

Moving to Slide 5. Veritex continued 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 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 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 is evident by the fact that net new account growth in 2023 was 172% higher than in 2022.

Noninterest-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 noticed that loan production declined 80% from 2022 to 2023. This 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 sit 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 frequently asked about our out-of-state loan portfolio and as you can see, our national businesses and mortgage loans comprised of 14% of our total loan portfolio. Our 2 out state portfolio was $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 decreased 15 basis points from Q3 to 3.31%. The NIM change was primarily related to these same drivers. As stated earlier, the NIM is going to continue to feel pressure as we work to achieve a loan-to-deposit ratio below 90%. This will require us to invest between $500 million and $600 million in excess funding into the investment portfolio during 2024. This additional investment in debt securities will drive 8 to 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 10. Loan yields are relatively flat, slight decline. Investment yields are up and deposit cost increased basis points.

Slide 11. This shows certain metrics on our investment portfolio. Key takeaways are currently only 10% of assets, the duration has remained steady at around 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 has 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 3 years.

On Slide 12. Operating noninterest income increased slightly 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 noninterest 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 cost. This was offset by lower variable compensation.

On Slide 13. During 2023, total capital grew approximately $105 million. CET1 ratios expanded by 18 points during the quarter and 120 basis points for the year. A significant contributor to the expansion in the capital ratios has been a $612 million decline in risk-weighted assets. It's worth noting that since Veritex went public in 2014, it is 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 to about 18 basis points to 1.14%. Given all the uncertainty faced in 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.

[Michael Riebe, executive]

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 matured and renewal discussions were in process and ongoing at year-end.

Two other loans totaling $21 million were past due 30 days at year-end and are now current. Commercial real estate relationship in the amount of $8.8 million was past due at year-end and is a weighting payoff. Charge-offs for the quarter were spread out across 8 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 loan types.

The year-over-year increase in net charge-offs is driven by the Atlanta office building charge-off. A 5-year look back on charge-offs is provided as a context for the year. Charge-offs of acquired credit makes up 72% of all charge-offs for the previous 5 years. And with that, I'll turn it back over to Malcolm for final comments.

[Malcolm Holland, executive]

Thank you, Clay. As we think about 2024, we believe it will be somewhat challenging from a growth and rate standpoint. Despite that, our team is fully engaged on building a stronger balance sheet that we 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]

[Operator Instructions] and our first call will be coming from Matthew Olney.

[Matt Olney, analyst]

I just want to start off on capital. You guys met your 2023 capital goals, and I was wondering if you had any set goals for 2024?

[Terry Earley, executive]

That's great. Good question. We will probably continue to build capital a little bit. We don't have any explicit targets. We will certainly -- I think as much as anything, we'd like to see growth get back to the mid-single digits and be able to leverage that capital in an efficient way, continue to pay our dividends, and you'll probably see capital build but slower in '24 than it has in '23.

[Matt Olney, analyst]

Okay. I appreciate the color there. And then one more from me. You guys laid out the impacts of the 25 bps cuts throughout 2024. Can you give us an idea of what you're internally modeling for cuts? .

[Terry Earley, executive]

Yes. If I had a crystal ball -- I mean, look, the Fed says 6, the market says 3. Who does? I'm not -- that's a reason I structured to comment the way I did. If you guys, I think, are modeling 3 -- so -- with 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.

[Operator]

And our next question will be coming from Brady Gailey of KBW.

[Brady Gailey, analyst]

It's Brady. So I understand the commentary about the NIM seeing some additional pressure. I mean, you're growing deposits faster than loans and put it in the bond. So I understand that dynamic. When you look at NII dollars, do you expect to see downside in NII dollars relative to 4Q? Or do you think that could be stable to increasing?

[Terry Earley, executive]

I think it should -- relative to 4Q, I think it should be relatively stable in the front half of the year 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 I'll just leave with a lot of focus on deposit costs as well.

[Brady Gailey, analyst]

Okay. And then how are you thinking about expenses? 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 '24?

[Malcolm Holland, executive]

Yes. That's certainly the goal, Brady. We've had a lot of discussion around expenses at the company and continue to do. 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. Dom has 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 our goal is to hold it somewhat flat. Some of the stuff is out of our control. I mean, we look back at last year, in FDIC insurance, you had benefits costs, you had some marketing dollars that were driving some of these deposits.

[Unknown Executive]

Lower cost deferrals because our loan production was down 80%.

[Malcolm Holland, executive]

Yes, our deal of FASB 91 rule 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 going to be some -- there's certainly going to be some growth.

[Terry Earley, executive]

I think it's probably fair to say, we're paying more attention to expenses going into 2024 and at least my 5-year history with the company.

[Malcolm Holland, executive]

And my 13.

[Brady Gailey, analyst]

Got it. Got it. That's good color. And then lastly from me, just back to the capital question. I mean, your profitability is pretty good. It feels like you'll be able to still accumulate a decent amount of capital this year. I mean, the stock is at 9x earnings, [ 1,1 ] tangible. Is this the year that you more seriously consider share buybacks? .

[Malcolm Holland, executive]

Listen, it's certainly something we have to look at. And we had a Board meeting yesterday, and it was a topic of discussion. Capital is king, and I love to have some dry powder, but there may be a situation at some point in time in '24 where we try to put something in place and protect ourselves 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 any in place today, but I wouldn't be surprised that we didn't have something in place very shortly.

[Operator]

Our next question will be coming from Brett Rabatin, Hovde Group.

[Brett Rabatin, analyst]

Why don't you just 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, executive]

It's really -- it's just a remixing of earning assets. It's building liquidity on the balance sheet. I think 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 3 years. I think going forward, so we're going to -- there's going to be an additional important 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 rates have moved, as the Fed's gotten clear on what it's going to do with rates. We're tweaking a little bit as we look forward for the rest of '24 and the investing we've got to do to help them provide that protection.

[Malcolm Holland, executive]

And Brett, I would just say, if you go back about 18 months, and we decided that we were going to change our balance sheet and this is an overall balance sheet strategy. And in order to get it down below 90% on the 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, executive]

And we just don't think that it makes sense to leave it in short rates overnight at the Fed because that's only going to exacerbate our down rate risk.

[Brett Rabatin, analyst]

Okay. And then given the commentary around the betas. I know, Malcolm, you've got quite a few deposit 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, executive]

I mean, the initiatives continue. I mean, it is no different this quarter than it was the prior quarter and what we're doing. Again, we've got 7 or 8 different levers that we're pulling. Some are more expensive than others. We're trying to stay away and reduce our wholesale funding dependence, if you will. But we're seeing some good movement. I can pick out a couple right now that have actually done quite well. And this is the time of the 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, executive]

Well, I mean, I just think, in general, it's been so competitive and that's driven the deposit betas off. I would say this, 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 2 days ago had declined. Not a lot, but a few bps, and I'm encouraged by that.

Now on the margin, our production rates right now are around 0 for new deposits. So all that to say, it's move -- it's starting to move. And as you can tell from the new client acquisition of 172% in new accounts, I mean, we're getting traction. It 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, analyst]

Okay. That's helpful. If I could sneak in one last one. Malcolm, how do you feel about North Avenue this year and maybe fee income generally speaking?

[Malcolm Holland, executive]

No, North Avenue had really -- candidly from a revenue standpoint, they did revenue from a redundant standpoint, they were about $180 million in '23. Candidly, I would expect that or maybe a little bit more in '24. They've got some good momentum. We've talked about it time and time again about the government constraints that we have from time to time whether they're funding stuff or not. But as a bank, we're helpful because we can do some of these interim funding that is actually a huge advantage in this space. But listen, I think they're engaged. Their pipelines are huge. And I expect them -- I think it was a production -- I mean, the revenue was $20 million in fees last year approximately.

And the one thing about that business that I think people do miss is they still have some -- there's loans on the books and they're spread income. And so spread income is covering the expenses of the company, the fee income is kind of the upside to it. So I expect at least what they did last year into '24. And just as on that fee business, the SBA business, it would be unfair to say we've remade it in '23, but we hired some -- 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 $23 million.

[Terry Earley, executive]

And the SBA Q4 production is indicative of the momentum you're seeing. I mean, they did 40% to 45% of production in Q4 and really encouraged. I agree with everything Malcolm said on the USDA, but I think the SBA has not been as big a contributor, but our outlook on that is really broad.

[Operator]

And our next question will be coming from Stephen Scouten of Piper Sandler.

[Stephen Scouten, analyst]

I wanted to start with the loan and deposit new production spread that you list in Slide 10. It looks like a pretty big jump quarter-over-quarter, which was nice to see. So I'm kind of wondering that 493 basis points, 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, executive]

Well, the new loan production. The problem with the question is, is it new deposit production towards new loan production. The spread is good, but there isn't enough of it. New loan production is about 9%. And new deposit production has been in the 4s.

[Stephen Scouten, analyst]

Yes. But just a much higher pace of deposit growth. That makes sense.

[Malcolm Holland, executive]

It may be at the volume on the loan side, Stephen, you're going to something possibly, but we're not budgeting for that production. But if we are able to find it, even mid-single digits is going to be helpful.

[Michael Riebe, executive]

Exactly.

[Terry Earley, executive]

Yes. I mean, if we're going to grow loans mid-single digits, 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 $480 million is going to have a really good spread. But the other $520 million, not so much. The cost of funding and where you can invest for 2024, it's going to be about flat and it's going to be NIM dilutive, but it's going to help going into '25, '26.

[Malcolm Holland, executive]

Yes, 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 if you want to do a $1 in loan, you only need $1.10 in deposits. Today, you need double that. So '25, you should hit the ground running, assuming we do the $1 billion in deposits and $0.5 billion in loans, yes.

[Terry Earley, executive]

And 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 because we're not going to need the excess growth to get the balance sheet where we want it correct.

[Stephen Scouten, analyst]

Yes. 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 cut in half? I mean, do you think you can work that number down? Or is it more just around the edges?

[Terry Earley, executive]

No, I think we could 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, 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 then hedging as well. The problem with hedging down rate risk right now with the shape of the forward curve, look, it's just so expensive to hedge it. And I would rather -- 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, analyst]

Yes, makes sense. Okay. And then just the last thing from me is kind of moving back to credit from the earlier conversations. 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, what's kind of a reasonable pace of this -- of the elevation we saw in '23, largely related to that one office credit, I know?

[Michael Riebe, executive]

Sure, sure. Thanks for the question. Yes, I think 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 budgeting for that. We're budgeting for our downside than that.

[Malcolm Holland, executive]

Yes. I mean, I think you have a slide in there, Clay, it said we did average of 27 bps over the last 5 years. If I'm sitting -- and you all choose, it sounds like a great place to start. We think we'll do better, but 27 bps has been our historical number. And the answer to the question you've asked, yes, we got $20-something plus million that is already current on 2 deals.

[Terry Earley, executive]

Stephen, I just got 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. We'd want to see anybody drop the estimate, to be honest with you.

[Stephen Scouten, analyst]

No, understood. And I guess, I mean, from a provision standpoint, obviously, even with some of the migrations, there wasn't a need for provision build. So it's not as if you see any large-scale degradation that makes you see the need to build that, correct?

[Terry Earley, executive]

Correct. I would not expect that we're anywhere close to what the amount it grew this year, so.

[Operator]

And our next question will come from Ahmad Hasan of D.A. Davidson.

[Ahmad Hasan, analyst]

This is Ahmad Hassan on for Gary Tenner.

So firstly, I might have missed this, but any color on the credit that went nonaccrual and generated $1.9 million in interest reversal?

[Terry Earley, executive]

We didn't have $1.9 million in interest reversals, I don't think. And I think it was $600,000, $700,000 and about 6 bps or 7 bps, I think it's somewhere in that range. So I agree with that part. The rest -- that was the move in the nonaccruals that affected the NIM.

[Ahmad Hasan, analyst]

All right. 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, executive]

Yes. 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 done. We've outperformed on the deposit growth -- core deposit growth side, but I would expect somewhere in the 15% to 18%.

[Ahmad Hasan, analyst]

All right. And lastly, I know you talked a bit about this, but thinking about the loan growth outlook for 2024, particularly given that ET1 is over 10%. How are you thinking about growing risk-weighted assets over the next year?

[Malcolm Holland, executive]

I mean, we're going to be more measured in that growth on the risk-weighted asset side. As we've mentioned many calls ago that we got that a little bit over our [indiscernible] on our unfunded and what have you. But 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 growth.

[Terry Earley, executive]

I'd say, it's definitely going to stay inside. And 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 '24 higher than it's been in '23. That will add some to the unfunded, some to the risk-weighted assets. But net-net, still -- and so instead of unfunded shrinking, they're probably going to grow a little, but not a lot. And so I think that's going to be one of the things that's going to keep the CET1 ratio from growing as much as it did in 2023. But we're going to stay -- we're going to look for capital-efficient investments in the investment portfolio. And if we have more loan growth, that's going to help utilize or deploy the CET1 and some unfunded increase, but nothing like we've seen in the past.

[Ahmad Hasan, analyst]

And 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 '23?

[Malcolm Holland, executive]

No. We expect it to be flat, maybe a little growth, but nothing meaningful.

[Operator]

And our final question for the day will be coming from Michael Rose of Raymond James.

[Michael Rose, analyst]

Just 2 quick follow-ups. I'm sorry if I missed this, Terry, but I certainly understand the desire to bring the loan-to-deposit ratio down. What should we expect for -- or what are your expectations for noninterest-bearing mix? I assume some of the growth is going to be in some higher cost 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?

[Terry Earley, executive]

Yes, I would expect it to be pretty flat from here. Now if we execute well, I would expect it to be 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, in the fourth quarter. There's some outflows in that, that have come back in the first quarter already. But we're going to see those outflows again in the fourth quarter of '24. So Michael, that's our best guess right now.

[Michael Rose, analyst]

Okay. That's helpful. And then, just going back to credit quality. I know there's the 2 office CRE loans that comprise, I think, 60% of your NPAs at this point. Any sort of update there? And what's the outlook for potentially moving those credits outside the bank?

[Malcolm Holland, executive]

Just one of them, right? It's just about one, and we actually had that one 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 -- probably through a note sale of some sort. But we were really close to just [fill] out at the end.

[Michael Rose, analyst]

Okay. Great. And then maybe just finally from me. I know this was kind of touched on earlier in the call. But Terry, do you have a sense for how -- if we do, what the delta would be from kind of what you talked about in terms of rate cuts, 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 forward curve at this point? Just trying to look for the sensitivity since I assume it's not linear.

[Terry Earley, executive]

Yes, if I may. It's about $1.25 million for every basis point in NIM. And so if it's 6 cuts, you get 20 to 24 basis points in NIM reduction, there's your math there. And if it stays flat, yes, it's -- 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 -- I'm not -- I don't think anybody is thinking we're going to end the year flat. So that's the best way I know to answer it, Mike.

[Michael Rose, analyst]

No, that's very helpful, Terry. I appreciate you guys taking my questions.

[Terry Earley, executive]

Thanks, Michael.

[Operator]

Thank you all for your time today. This concludes today's conference call. You may all disconnect.