Veritex Holdings Inc (VBTX) 2024 Q3 法說會逐字稿

Good morning and welcome to the Veritex Holding third-quarter 2024 earnings conference call and webcast. (Operator Instructions) Please note this event will be recorded.

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

Thank you. Before we get started, I'd like to remind you that this presentation may include forward-looking statements, and those statements are subject to risk and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to publicly revise any forward-looking statement.

If you're logged into our webcast, please refer to slide presentation and our safe harbor statement beginning on slide 2. For those on the phone, please note that the safe harbor statement and presentation are available on our website veritexbank.com. All comments made today are subject to that safe harbor statement.

Some financial metrics discussed will be on a non-GAAP basis which 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 Curtis Anderson, our Chief Credit Officer.

I'll now turn the call over to Malcolm.

Thank you, Will. Good morning, everyone, and welcome to our third-quarter earnings call. We review our third-quarter highlights as well as discuss the balance sheet transformation that's taken place over the past two years.

To accomplish these needed changes on the balance sheet, it's taken a conviction and focus of our executive team and candidly our entire company. The quarter reported operating earnings of $32.2 million or $0.59 per share. Pre-tax, pre-provision earnings were $44.6 million or 1.38%. NIM continues to increase slightly while capital is growing. The CET1 now at 10.86%. Increased profitability and efficiency is our primary priority and goal as we are dedicated to move our 1% ROAA higher.

Our balance sheet continues to get stronger through our focused efforts on deposit gathering and client re-selection that are full relationships and not just transactions. For the quarter, deposits through $311 million or 11.6% annualized, proving out our strategy to grow an attractively priced deposit funding sources. Terry's going to detail for you what we can -- what we call a desirable and non-desirable to deposit shortly. That will give you some insight on the source of these deposits.

On the loan side, we're still experiencing some large payoffs which has kept our loan growth down resulting in a decrease quarter over quarter of $126 million. I would also like to mention our CRE concentration ratios are virtually back in line on our 300, 100 buckets and we will continue to manage these below 300 and 100 going forward.

Moving to a couple of highlights, Curtis and his team remain committed to a top-tier credit bank. We're not where we want to be yet but we continue to make huge strides towards that goal. Third-quarter results reflect our ongoing drive to address credit issues as quickly as possible and to achieve final resolutions. Criticized totals were lower for the quarter primarily reflecting the impact of payoffs while the bank had a number of restructurings that improved risk profiles.

During the quarter, the bank realized $80 million in criticized payoffs and paydowns. OREO decreased from $24 million to $9 million primarily from the successful sale and closing a student housing property without loss to the bank. This sale was also the driver to a reduction on NPAs from $83 million to $67 million, now down 2.52% of assets. Charge offs were nominal at $269,000. A $1.6 million charge off of a long-standing credit problem was offset by $2 million in recoveries. Past dues including non-accruals were flat the second quarter as a percentage of total loans at 0.8% and down meaningfully 1.5% at year end.

We continue to build our credit loss reserve now at 11.21% of total loans or 1.3% excluding mortgage warehouse. Our credit team's efforts of early surveillance and priority to move undesirable loans out is producing some nice results. More work to do but encouraged by positive trends.

I'll now turn it over to Terry for some comments.

Thank you, Malcolm. When I look at the results for the third quarter, I'm encouraged, especially about the position of the balance sheet, the credit trends, and 7.2% revenue growth quarter over quarter, including NIM expansion.

Starting on page 7, the allowance now sits at 121 basis points, up significantly in the last six quarters and we've increased the reserve by almost 19% or $19 million. Additionally, when you exclude the mortgage warehouse, the ACL coverage rises to 130 basis points.

Our general reserves comprise 97% of the total allowance. We continue to use conservative economic assumptions in the CECL modeling with 75% of the waiting on downside scenarios. This seems appropriate given the level of economic uncertainty, election uncertainty, and global geopolitical risk.

Moving to page 8, over the last six quarters, total capital has grown approximately $132 million, while the loan portfolio excluding mortgage warehouse has declined by just over $200 million, a clear indication that the balance sheet is better positioned and more resilient. The CET1 ratio expanded by 37 basis points during the quarter and by 75 basis points year over year and now stands at 10.86%. A significant contributor to the expansion in the capital ratios has been a $450 million decline in risk weighted assets over the six-quarter period.

Tangible book value per share increased to [$21 and 72%]. That's a 15.8% increase on a year-over-year basis including the shareholder dividends. It's worth noting that since Veritex went public in 2014, its compounded tangible book value per share at a rate of 11.1% including the dividends that's been paid to shareholders.

Finally, Veritex only repurchased 2,000 shares during the quarter as the trading valuation improved from 102% of tangible book at the beginning of the quarter to 128% of tangible book at the end of the quarter. We have 93% of the authorization remaining and intend to be opportunistic in its use, if the valuation shows significant weakness.

On the page 9, our strong deposit growth and disciplined loan growth allow Veritex to reduce its loan-to-deposit ratio from almost 95% a year ago to 88% at 9/30/24. We intend to remain below 90%, going forward. Please note the loan-to-deposit ratio would have been just under 82%, if you exclude mortgage warehouse. This seems to be the more relevant metric you consider the short amount of time, mortgages stay on the warehouse lines.

As you can see in the bottom left graph, we've kept the time deposit portfolio short and have $2.6 billion in ceding maturities over the next two quarters with an average rate of 5.14%. We're certainly glad to have this maturity profile, given the potential for three to four Fed cuts over the next six months.

On the bottom right, we show the monthly cost of deposits. Note the 11 basis point decline since the month of June. Veritex has done -- Veritex did a good job this quarter in preparing for and executing on deposit pricing. The Fed cut rates by 50 basis points in September and our interest-bearing transaction accounts declined by 40 basis points from June 30, to September 30, an 80% beta. Similarly, total interest-bearing deposit accounts declined by 30 basis points from the end of Q2 to the end of Q3.

On slide 10, it's been a great quarter in attracting -- in producing attractively priced deposits with $397 million raised at an average rate of 2.84%. This allowed us to reduce brokered CDs about $294 million and public funds by $117 million. And our reliance on wholesale funding sits at 15.7%, down from 21% a year ago.

Moving to page 11, total loans declined 1.3% during the quarter and are virtually flat here today. Given the excess liquidity we've been carrying, it was good to see the increase in mortgage warehouse outstandings. We made significant progress in reducing our Korean ADC concentrations and ended the quarter at [302%] and 97% respectively.

The CRE maturity profile is shown in the bottom right graphs. We have just over $400 million in fixed rate maturities at an average rate of 5.93% over the next four quarters. As shown on the bottom left, loan production increased almost 75% from Q3 '23 to Q3 '24 but loan payoffs remain high. This payoff activity reflects the vibrant economic activity in the Texas market, but it does make organic loan growth challenge.

The office portfolio is down $112 million in the last year or 18% and now comprises 5.3% of total loans. Slide 12 provides the detail in the term pre and ADC portfolios by asset class including what is out of state.

Slide 13 illustrates a breakdown of our out-of-state loan portfolio including the significant impact of our national businesses and mortgage. A true percentage of the out-of-state loan portfolio is only 10.7% and this is predominantly where we have followed Texas real estate clients to other geographies.

On slide 14, net interest income increased by $3.9 million to just over $100 million in Q3, possibly impacting the results or higher loan rates on the mortgage warehouse and higher fixed rate yields of 24 basis points, which offset the decline in SOFR and Prime. Also possibly impacting results were higher earning asset volumes and day count.

The net interest margin increased 1 basis point from Q2 to 3.30%. The NIM was negatively impacted by the average level of cash, being approximately $425 million higher than our target. This lowered the NIM by approximately 12 basis points. We believe the NIM will remain in the range of 3.25% to 3.30% over the remainder of '24, assuming we get 50 basis points at Fed cuts during the fourth quarter.

While we're discussing the impact of the excess cash levels, this also reduced Q3 ROA, return on average assets, by 3 basis points and lower the TCE to TA ratio by 40 basis points. Before leaving this topic, I want to remind analysts and investors that we have a $250 million, 42 basis point fixed pay hedge that was put on in March of 2020 and the matures in March of 2025.

On slide 15, it shows certain metrics on our investment portfolio. The key takeaways it's only 10.9% of assets. Duration is 3.6 years, and 87% of the portfolio is held and available for sale. Finally, on this slide, you see a snapshot of our cash and borrowing capacity at 9/30/24 and the trend since Q1 of last year. The current available liquidity represents 2 times the level of uninsured and uncollateralized deposits.

On slide 16, operating non-interest income increased $2.5 million to $13.1 million. The increase was driven by $428,000 increase in treasury management fees, $1 million increase in loan fees from syndications and loan repayment fees, and $1.2 million in revenue from operating the piece of OREO that was sold during the third quarter.

Our SBA business continues to build momentum, and we remain disappointed by the lack of USDA fee revenue and are evaluating every aspect of the business as we work to improve the performance. The $6 million increase in operating non-interest expense for the quarter was a function of a higher incentive accrual, OREO expenses, and marketing. The $2 million incentive increase reflects us moving our accrual target, our accrual up to 80% of target. This increase was warranted, given the improvement in earnings, credit, and deposits.

The OREO expense included about $1 million dollars in cost associated with the piece of OREO that was sold during the quarter as well as two office buildings in Houston that were foreclosed earlier in the year.

Recognizing the need to improve our operating leverage and efficiency, Veritex in the second quarter engaged a national consulting firm with extensive banking expertise to look at all aspects of the company. This review is consisted of staffing, operational processes, and technology. We've identified meaningful opportunities to improve, and we will be working to execute on those through the remainder of 2024 and 2025.

To wrap up my comments, I see a lot of positives in the quarter. The balance sheet is in a much stronger position with excess liquidity, lower CRE and ADC concentrations, higher capital, and improved credit metrics.

We successfully executed and had the best quarter in the history of Veritex and attractively priced deposit production. And our NIM expanded, led by good execution when the Fed reduced rates. But there's still things we need to work on. Continuing the past two quarter trend and improving our credit risk profile, continuing to remix our deposit portfolio towards attractive -- attractively priced, and improving our USDA revenue performance.

With that, I'd like to turn the call over the Malcom for concluding comments.

Thank you, Terry.

Two years ago, we embarked on a journey to remake and change our balance sheet. We knew at the time we had to build a company that could withstand all market swings and changes.

In the middle of this journey, we all had to deal with liquidity challenges in the first quarter of 2023 and further validated our need to change. Let me be honest. It has not been an easy couple of years and our work is not done. But it's nice to see the amazing progress our team has made in two years. Every metric has moved positively and made our company stronger.

Thank you to our nearly 900 team members who embraced our talent to better position Veritex. But like I said, our work is not done. We have more to accomplish.

Operator, we'll now take any questions.

(Operator Instructions) Michael Rose, Raymond James.

Hey. Good morning, everyone. Thanks for taking my questions. I just wanted to dig into loan growth this quarter. Obviously, some paydowns continue to impact the net balances. I think, previously, you talked about a mid-single-digit growth expectation for the back half of the year. I think what we're seeing across the industry though is that being ratcheted back in the hope for some acceleration once you get past the election and know what the rules are, so to speak.

Can you just talk about trends in your pipeline, things like that, and then just separately outside of a core loan, just any expectations for the warehouse? Thanks.

Yeah, I think we'd be in line with everybody else that's reported. Our pipeline, just speak to that, is actually pretty good. We enjoy the pipelines that are building, specifically in the C&I side, but you nailed it. I mean, the payoffs have been really strong. I think, over the last couple of quarters, it's been $1 billion. Is that right, Will, just in that line.

So we had $1 billion in payoffs. If you remember, back in 2022, we had this massive loan growth and we're starting to see the cliff on that loan growth pay off. And so we actually expect the fourth quarter to be a pretty heavy payoff quarter and into early '25.

So yeah, I've mentioned probably on the last two calls, Michael, mid-single-digit loan growth. I just -- I don't see it. The payoffs are -- and listen, that's a sign of a positive, healthy loan portfolio. So the other side of the coin is that we did the right deals. But I do see the pipelines building. And we've invested, as I've told you, in some people on the commercial side, the middle market side. Our community banks and business banking are doing well. It's just hard to move the needle in those spaces. But I would probably say it's going to be a little bit less than single-mid digits.

Yeah, Michael, let me jump in a couple of things. One, when we hear this from our bank, I think this whole election uncertainty is weighing on companies and what they're doing and we hear that pretty consistently. I'd also add that there's a silver lining to these payoffs. Look at the falloff in our commercial real estate concentration from 320 to 302.

I mean, you couldn't have done that without significant payoffs. So there's definitely a silver lining there. Three, the Mortgage warehouse was strong for us this quarter. We expected in Q3. We're looking forward to be strong again in Q4. Having said that, what's going on with the [10 year] and mortgage rates, it may not be as strong as we would like or had hoped or even as it was at the end of Q3 because you got seasonality and you've got what's going on in rate.

So being flat in the back half of the year, I would be pretty happy with that. I don't think that's going to be easy. But we've got -- I think Malcolm said it. Veritex has shifted from getting liquidity to repositioning the balance sheet to now the focus is on revenue growth, discipline growth -- discipline loan growth and efficiency. But that's just where we are in our evolution as a company and it's good to be at this stage.

Okay, perfect. And then just a question on the hedge that you mentioned. Is it related to the margin? I mean, is the expectation that you would look to maybe renew that closer to expiration or not? And then what is the impact, if it were just to roll off in context of the margin? Thanks.

Well, if I could renew that hedge at 42 basis points, believe me, I'd be on the phone and not talking to you right now. But the market wouldn't give me that hedge again. I put it on March 9. And if you remember what was going on March 9, 2020, when COVID kicked off, and we just had to work the presence of mind to see the opportunity and grab it.

Good fortune.

Yeah. Sometimes it's better to be lucky than good. But so we can't. Nor would we want to, if you believe what the forward curve and what the Fed dot plot says. I want this -- I mean, if I wouldn't re-hedge it at current rates because I just don't think we need to do that. I would rather have these things. They have a weight of 100% because they're hedging brokered CD. So they're going to price down as the market moves down and we keep these things pretty short as you know. The effect of this is $1 million a month in NIM.

Okay. Very helpful. And then maybe just finally for me --

Let me add one other thing. Will reminded me of this. We have some collars in fixed pay hedge, so that you're going to get more and more in the money. So they're going to help mitigate some of this. It's not just dollar for dollar what's going to happen to NIM. We've got hundreds of millions of dollars of fixed receive hedges that are going to help mitigate this. Probably, $375 million, if my memory is serving me right.

All right. So like a net impact of like $600,000 a month, in that ballpark, is fair to consider?

Maybe a little less than that but --

Okay. Perfect. And then maybe just finally from me, I know you kind of mentioned last quarter that you had engaged a consulting firm. You mentioned it again today. Any early read on things that they're targeting or that you plan to implement. And yeah, just would love any sort of color there. Thanks.

I mean, look, we're excited about the opportunity. I've actually worked with them in two previous lives, if you will. And so I have a lot of confidence. And they're working with a fair number of our peers. Tells you a lot about the need for scale in our industry, doesn't it, and efficiency.

Look, it's pretty broad based. I touched on -- and for the big parts are around process and technology and fully leveraging the technology we have, negotiating down the prices in some of our technology contracts, improving our commercial lending processes. Just so it's -- but these -- some of these are easier. Some are pretty hard and complex. But -- and they're not just expenses, they're revenue opportunities as well. We can do a better job on certain things around.

We had a good quarter in treasury management fees. We can do better. We're under penetrated there.

There's no silver bullet here, Michael. It's about making our company more process-driven and focused on efficiency. And it won't happen in a quarter or two. It'll take some time. But it's all really good stuff. Yeah.

Cartherine Mealor, KBW.

Thanks. Good morning. I want to follow on the margin. You mentioned a 3.25% to 3.30% margin this quarter, which makes sense. How should we think about the margin as we move into '25? I mean, your asset sensitive clearly, but you've got a lot of opportunity on the deposit cost to lower deposit costs probably more than most asset sensitive banks. So just kind of trying to think about, do you think there's enough on the funding side where you can still keep that margin stable to maybe even higher as we move into next year or is there still an asset sensitive downside? Thanks.

It's a great question. And if I had a crystal ball on what the -- I've given up on the forward curve. I'm kind of moved to the Fed dot plot, which I think is probably the most reliable. But who knows? I mean, especially when you look at the recent employment inflation data, what's going to happen. We've gone from a lot of cuts to now there's -- it's less than 100% guarantee of a cut in November. We'll see.

I think, the NIM is going -- I don't see the NIM expanding in '25. I think that the best we can hope for give -- is to just to do a good job on pricing down. We did the first cut. I talked about the 80% beta on the interest-bearing transactional account. But the deeper it goes -- I don't think it's going to go that deep. I mean, once the dot plot say 3.5% Fed funds the end of next year. So if that is gradual and whatnot and we can execute well and if we can get the balance sheet, the excess cash, I think, we can stay somewhere in that 3.20%s. But I just don't see it getting right now. I don't see it getting into the 3.30%s.

Now, one of the things weighing on it, it's interesting for me to have that point of view because when you look at our new loan production rates, we're just over 8%, and you look at our new deposit production rates excluding brokered and all -- and I talked about attractively priced. We have some production that's not attractively priced. But the new production rates there in the mid-3.60%s were a spread of almost 390 basis points. So I feel good about what we're doing on the margin.

In terms of just how we're pricing on the margin, we do need more loan production as we talked about. We need growth. But I don't -- I see it staying in that 3.20% plus -- somewhere in the 3.20% so.

Okay. Yeah, that makes a lot of sense. And that's about where we are.

On the USDA outlook, any additional commentary you can give us on what's a good way to model that? I know it's been lumpy and has come under your expectations for the past couple of quarters, but just curious what you're doing there and maybe what a good run rate is to target.

I'll answer your good way to model it. No, there's no good way to model it. A good USDA year is going to close between 8 and 12 loans. So -- and if they're bigger, that gets really, really lumpy. And it's hard to model. Now, we tried to change some of the focus of the USDA to move down market. Let's not chase the big elephants. Easier to model it.

And what we're really trying to do, Catherine, is we're trying to leverage the USDA and the SBA business together. There's a lot of similarities specifically on the loan production side. And so we're trying to put -- match those people together. In fact, over this last quarter, for the first quarter, we have our USDA group originating some SBA loans and hopefully they'll cross pollinate on that a little bit.

But it's -- what we we're trying to get to is where we don't have the lumpiness and this cross pollinization will help create some of that going forward. But I can't give you any huge insight on how to model USDA because if you get a big one, it blows it out of the water. And so we're just trying to -- we're just trying to guide to a low number. And if the big one pops up, it pops up.

I would say --

That's helpful. Thank you .

Catherine, I would say if you look -- think about the way Malcolm said, think about it in total. I would say '24 is going to be a down year as we've all talked about that ad nauseam. '23 -- and not -- just don't look at USDA. Look at government guarantee. Look at the '23 government guaranteed earnings. Our goal is to get back to that, but it's going to have a really different mix, much more heavily weighted in the SBA, less on USBA in terms of product mix, in terms of what drives that revenue but just really trying to get back to '23 type levels.

Ahmad Hasan, DA Davidson.

Hey, guys. Ahman Hasan on, on for Gary Tanner. Good morning.

I had a quick regarding expenses. Expenses picked up a little bit this quarter. So how should we be thinking about them in the near term?

You need to be thinking we want them to go down. I mean, I said, I think some of this is incentive driven, based on performance where we took our accrual up. That accrual is not coming down in Q4. Some of it's OREO related, and that property is gone. So that's going to -- that [$700,000, $800,000], $1 million dollars in expenses, it inflated both the fee side and the expense side. Largely, it was an offset. So that's going to come down. Marketing probably is not going to be as high.

So -- and we're working on some of these efficiency initiatives. So I don't see expenses coming -- they're going to come down a little bit from OREO thing, but the incentive accrual and some of the other things we need to do, I see expenses staying higher, not from -- not that much higher from here. But I don't see them coming back down the line. Not yet.

As we work through '25 and some of these efficiency initiatives, I think that's a longer-term question. In Q4, I think you just can't move the needle that quick.

All right. that makes sense. And then maybe one on deposits. So you guys have pretty good deposit success, specifically in [NIBs]. Can you talk about changes you've made on deposit pricing? I know you touched it on a little bit on the prepared remarks. But how are you thinking about deposit pricing, given the expected rate cuts?

We want to execute as well as we did at the September rate cut. We got in front of that. We were talking to our bankers. We made -- we certainly made some exceptions where relationship profitability warranted it. But -- and we just got to continue to do that and remix deposits by continuing to attract -- to continuing to produce attractively priced deposits and reducing wholesale, reducing public funds, reducing some other that have very high effective rates.

So that's just what we've got to continue to do. The key thing to our good quarter deposits is every line of business is contributing. They're contributing production, growth, and good rates from retail to small business to middle market to specialty. I mean, it's just been across -- it's been across our community group. It's the first time, in my tenure at Veritex, where I've seen good-quality deposit productions at attractive rates across all lines of business.

And that's the key. And it's about the changes that Dom and his leaders are making in terms of prospecting outbound calls targeting the right customer segments, et cetera, that fits in with our strategy and it's just about continuing to execute there.

That's good to hear, AND maybe a follow-up. Do you have a quarter end spot rate for total or interest-bearing deposit cost?

Okay. I'm sure. [3.30]. That's interest bearing. Interest bearing is [4.38]. Total is [3.33]. Sorry. It does include hedges, by the way. So that doesn't include hedges. That's just -- that's our contractual rates on our deposit franchise or deposit accounts.

Matt Olney, Stephens.

Yeah, thanks for taking the question, guy. With that deposit growth that we just talked about, it looks like that allows you to build the overnight liquidity position to pretty strong levels just over a $1 billion. Just curious about the plans for that. Should we just assume that this maintains this level next few quarters or do you expect to deploy any of this into security? Just any thoughts on that bill? Thanks.

No, success is not carrying that much excess liquidity. I think it will be a combination of three things. We have wholesale broker deposit, pay down opportunities with rates over the 5% that starting here next week. So that -- so you will see us continue to reduce that. Two, we will probably put some money in securities. Three, we want to have a better loan growth quarter. And four, we want to move out some very expensive deposits other than brokered that we're currently working on and expect to move out. So that, it's going to look a little bit different, but it's everything I just said is NIM enhancing. So that I said about $450 million above our target. A good quarter is if we can get down from -- and I'm looking at it averages more, if we can get down from that and do those things, then that'll be good. That's the plan.

Okay, great. Thanks for that, Terry. And then going back to the balance sheet repricing, just remind us of the dollar amount of the floating rate loans and the index liabilities and just remind us how quickly these will reprice, reset? Thanks.

Index liability -- the floating rate loans are about 75% at Veritex. That never moves around very, very much. Our index deposits -- hold on, I have a sheet of paper. On that -- it's $2 billion, $2.5 billion -- about $2.5 billion that is either contractually or functionally indexed.

And, then Terry, just how quickly those reset following the Fed?

Immediately.

Okay. All right. Thank you, guys.

They're functionally indexed or contractually indexed to the Fed funds, right? So that's why I say immediately.

Brett Rabatin, Hovde Group.

Hey, guys. Good morning. Wanted to talk -- hey, guys. Wanted to talk a little bit about the classified, criticized, and Terry, I think, you said that you had reduced the criticized $80 million this quarter with payoffs. So that I guess there was some in and out migration. Can you just maybe talk about how you see the classified criticized bucket from here? And then specifically, I know about a third of the criticized is office and maybe just an outlook on the office book that's criticized and how you see that playing out?

Good morning, Brett. This is Curtis Anderson. I'll address that. We're working through our criticized classified carefully. We've got multiple strategies in flight with our special assets team. We're working to manage the cycle time on that group of loans quickly and carefully. We're using all of the strategies that are at hand to address them. Pay off, of course, is a key one. If we can have a property owner, for example, sell a property and we get alignment on that, we will do that. We actively use -- our team actively uses note sales. So all the strategies are in place.

My view is that that category should be relatively stable, given the focus that we've got on it for the near term. Always can have something pop up. But again, the team has done such a good job anticipating risk and looking out and getting ahead of risk at all the risk categories. I'm fairly confident based on what we know today that we should see relative stability in that asset class.

I don't know if there's anything, Malcolm, Terry, you'd add to this. But really pleased with the work by the entire bank, but in particular, our special assets team.

I think the key has just been the effort, Brett, that Curtis and team have been -- have done and really starting in the past watch stage and thinking about when the loans in past watch, there's options. And as that thing migrates, the number of options available to you shrinks as everyone knows. So I just think the work they've done in getting -- looking out anticipating six months, nine months ahead is what's paying dividends for us. And even though you may see it be relatively stable, trust me, there's a lot going on underneath -- a lot of turbulence underneath.

Okay. That's helpful. And then, maybe, Terry, any thoughts on capital from here and you've obviously been in a reduction mode on commercial real estate and construction and improving your capital ratios. Are we to the point that you're happy with the capital ratios and maybe you might use excess capital for something, or do you still think you want to build capital levels further?

Yeah. Brent, this is Malcolm. Listen, we're happy with the capital ratios where they are. We're grateful we've been able to grow it. A lot of change on the balance sheets helped us with that and reduction of risk weighted assets, and obviously, profitability over the year. And we're going to continue to build capital. But I think it's prudent today to have some dry powder.

We run a pretty -- we run our own peer group, which is a very, very high-performing peer group. And candidly, we're below the median on CET1. So it's not just us. It's a lot of people that are holding on to this capital. And so I think that's what you're going to see us do over the next period. The buyback -- we're not really interested in a buyback at these levels. It's more of a defensive play for us. Our dividends in a good place. And so you're going to see us build a little capital. And we'll -- it'll give us the ability to have potentially work on some opportunities in the future.

I would tag on and add that that if we get our growth profile to where we want it, capital ratios will stabilize. And you are -- also we are -- given where our ratios are on CRE we, we're already looking at new -- we haven't been in the CRE production business in any significant way in two years. And so that's ticking back in. So you're going to see some increases in the ADC unfunded as we look out over the next four to six quarters. And so that's going to have an effect on risk weighted assets too.

I think for me, the reality is more capital gives you more options and that's what we want strategically right now and the market doesn't -- the market is focused on profitability, not return on tangible common equity right now. And so let's don't worry about capital and equity. Let's improve profitability and get this growth profile, earnings profile, where we want it and the capital levels to take care of themselves.

Okay. That's helpful. And then just, back on fee income and excluding the North Avenue stuff, the other bucket obviously had some ORE income in it. How should we think about that other bucket from here?

Look, I think about it more. I mean, we had a good quarter. Even if you back out the ORE income and you net out the ORE expense, net0net, we still grew fees. We've got to continue to do that, whether it's swap fees, syndication fees, loan prepayment fees, government guaranteed fees, treasury management fees, mortgage -- get our mortgage business going more and selling more of that product. So it's an important focus for us. Card fees, and we've introduced some new card products on the commercial side. So it's an ongoing effort.

And other is just (inaudible) buried in there and others that, and some real estate we own like our office building here and rental income, stuff like that. But I think, Brett, it's more about the totality of fee income. And we've got a huge focus here because it's certainly a good driver of profitability and ROA.

Thank you. This concludes the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.