Veritex Holdings, Inc.

Good morning, and welcome to the Veritex Holding Third Quarter 2024 Earnings Conference Calling Webcast. All participants will be in listen-only mode. Please note, this event will be recorded. I'll now turn the conference over to Will Horford 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 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 two. 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 may, if it believes, better reflect the underlying core operating performance of the business. Please see the reconciliation of all discussed non-GAAP measures in our filed 8K earnings release. Joining me today are Malcolm Holland, our chairman and CEO, Terry Early, 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.

For the quarter, we reported operating earnings of $32.2 million, or 59 cents per share. Pre-tax, pre-provision earnings were $44.6 million, or 1.38%.

NIM continues to increase slightly while capital is growing, with 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 selection that are full relationships and not just transactions. For the quarter, deposits through $311 million are 11.6% annualized. proving out our strategy to grow an attractively priced deposit funding sources. Terry's going to detail for you what we call desirable and non-desirable deposits 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 credit, a couple of highlights. Curtis and his team remain committed to a top-tier credit bank. We are 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 close of a student housing property without loss to the bank. This sale was also the driver to a reduction in our NPAs from $83 million to $67 million, now down to 0.52% 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 from 1.5% a year in. We continue to build our credit loss reserve now at 1.21% 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 seven, 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 weighting 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 this six-quarter period. Tangible book value per share increased to $21.72%. 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, It's 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 to 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 when 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 seeding 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 bed 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 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 30th to September 30th, 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 producing attractively priced deposits, with $397 million raised at an average rate of 2.84%. This allowed us to reduce brokered CDs by $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 credit ADC concentrations and ended the quarter at 302 and 97% respectively. Decreed 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 challenging. 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 CRE 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 were higher loan rates on the mortgage warehouse and higher fixed rate yields of 24 basis points, which offset the decline in SOFR and FRYM. Also positively impacting results were higher earning asset volumes and day count. The net interest margin increased one 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 325 to 330 over the remainder of 24, assuming we get 50 basis points at FedCups 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 three basis points and lowered 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 tours in March of 2025. On slide 50, this 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 930.24 and the trend since Q1 of last year. current available liquidity represents two times the level of uninsured and under 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 a 1 million dollar 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 performance. The $6 million increase in operating non-interest expense for the quarter was a function of a higher interest 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 a 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 has consisted of staffing, operational processes, and technology. We've identified meaningful opportunities to improve and 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 in attractively priced deposit production. And our NAM 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 in improving our credit risk profile, continuing to remix our deposit portfolio towards attractively priced, improving our USDA revenue performance. With that, I'd like to turn the call over to Malcolm, which is 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 that 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 challenge to better position Veritex. But like I said, our work is not done. We have more to accomplish. Operator will now take any questions.

Thank you. At this time, we'll conduct a question and answer session. To ask the question, you need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.

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

Your line is now open.

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 we 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 reacceleration once you get past the election and know what the rules are, so to speak. Can you just talk about... you know, trends in your pipeline, things like that, and then just separately outside of core loans, just any expectations for the warehouse. Thanks.

Yeah, I think we'd be in line with everybody else that's reported. You know, our pipeline, just to speak to that, is actually pretty good. We enjoy pipelines that are building, specifically in the CNI side, but you nailed it. I mean, the payoffs have been really strong. I think over the last A couple of quarters, it's been a billion dollars, is that right, Will?

Something to that line. So we had a billion dollars in payoffs. You know, if you remember, back in 2022, we had this massive loan growth, and we're starting to see the cliff on that loan growth payoff.

And so we actually expect the fourth quarter to be a pretty heavy payoff quarter and into early 2025. So, yeah, I've mentioned probably on the last two calls, Michael, kind of mid-single-digit loan growth. I just 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, you know, we did the right deals. But I do see the pipelines building. And, you know, 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 bankers, I think this whole election uncertainty is weighing on 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 expect it 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've got seasonality and you've got what's going on in rates. So, you know, 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 well, that their tax 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. So 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 as it relates to kind of 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 on March the 9th. And if you remember what was going on March the 9th of 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 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 beta of 100% because they're hedging brokered CDs. 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 NIMS.

Okay, very helpful. And then maybe just finally for me, I hear you.

Let me add one other thing, Will, reminding me of this. We have some collars and fixed pay hedges, though, that are 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 them. We've got hundreds of millions of dollars of fixed receive hedges that are going to help mitigate this. Probably $375,000 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. Okay, perfect. And then maybe just finally for 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 you know, they're targeting or that you plan to kind of implement and, you know, 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. You know, I touched on 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. Some of these are easier. Some are pretty hard and complex. 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 underpenetrated 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.

That's great, Collar. I'll step back. Thanks for taking my questions. Thank you. Thanks, Bob.

Thank you. One moment for our next question. Question comes from the line of Catherine Miller of KBW. Your line is now open.

Thanks. Good morning.

Good morning, Catherine.

I wanted to follow up on the margin. You mentioned a 325 to 330 margin this quarter, which makes sense. How we think about the margin as we move into 25? I mean, you're 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 kind of an asset sensitive downside?

Thanks. It's a great question. And if I had a crystal ball on what the money I've given up on the forward curve, I'm kind of moved to the Fed dot flight, which I think is probably the most reliable, but who knows? I mean, I mean, especially when you look at the recent, you know, employment, employment inflation data, what's going to happen. We've gone from, you know, a lot of cuts to now there's, it's less than a hundred percent guarantee of a cut in November. We'll see. I think, you know, it's, The NIM is going – I don't see the NIM expanding in 25. I think that the best we can hope for, you know, is to just do a good job on pricing down. We did the first cut. I talked about the 80% beta on the interest-bearing transactional accounts. But the deeper it goes, I don't think it's, you know, I don't think it's going to go that deep. I mean, what's the dot plot, say, 3.5% Fed Funds? the end of next year. So if it's gradual and whatnot and we can execute well, and if we can get the balance sheet to do the excess cash, I think we can stay somewhere in the 320s. But I just don't see it getting right now. I don't see it getting into the 330s. 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-360s 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 see it staying in that 320 plus, somewhere in the 320s.

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 quarters, but just curious kind of what you're doing there and maybe what a good run rate is to targets.

I'll answer your good way to model it. No, there's no good way to model it. You know, a good USDA year is going to close between 8 and 12 months. And if they're bigger, that gets really, really lumpy, and it's hard to model. Now, we've tried to change some of the focus at 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 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. What 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 kind of blows it out of the water. And so 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, if you think about it 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 nauseum. 23, just don't look at USDA. Look at government guaranteed. 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 earnings. in the SBA, less on the USDA, in terms of product mix, in terms of what drives that revenue, but just really trying to get back to 2023 type levels.

That's helpful. Thank you very much.

Thank you. One moment for our next question.

Our next question comes from the line of Ahmad Hassan of DA Davidson. Your line is now open.

Hey, guys. I'm Ahmad Hassan on for Gary Tanner. Good morning. Good morning. I had a quick one 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 mean, 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 OREA-related, and that property is gone. So that's going to, you know, that $700, $800 million 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, you know, 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 this Oreo thing. But the incentive accrual and, you know, some of the other things we need to do, I see expenses, you know, staying higher. Not that much higher from here, but I don't see them coming back down a lot. Not yet. As we work through 25 and some of these efficiency initiatives, I think that's a longer-term question. In Q4, you just can't move the needle that quick.

Right. That makes sense. And then maybe one on deposits. 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 in the prepared remarks, but how are you thinking about deposit pricing given the expected rate cuts ahead?

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 certainly made some exceptions where relationship profitability warranted it, But we just got to continue to do that and remix deposits by continuing to attract, continuing to produce attractively priced deposits and reducing wholesale, you know, reducing public funds, reducing some other that have very high, you know, things like 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 businesses. I mean, it's just 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-rearing deposit costs?

I'm sure I do. That's interest-bearing.

No, interest-bearing is 438. Total is 333. Sorry. That doesn't include hedges, by the way. So that doesn't include hedges. That's our contractual rates on our deposit franchise, our deposit accounts. Right. Thank you for taking my questions.

Thanks.

Thank you. One moment for next question. Our next question comes from the line of Matt Balney of Stevens. Your line is now open.

Yeah, thanks for taking the question, guys. 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 billion dollars. Just curious about the plans for that. Should we just assume that this maintains this level the next few quarters? Or do you expect to deploy any of this into securities? 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 5% starting here next week. 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's, you know, it's It's going to look a little bit different, but it's everything I just said is NIM enhancing. So, and so that, I said about $450 million above our target. A good quarter is if we can get down, you know, from, and I'm looking at 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%. You know, Veritex, that never moves around very, very much. Our index deposits, I thought I had a sheet paper on that. Two, two and a half, about two and a half billion dollars 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 or contractually indexed to the Fed funds rate.

So that's what I'll say immediately. Thank you. One moment for our next question.

Our next question comes from the line of Brett Robertson of Update Group. Your line is now open.

Hey, guys. Good morning. Good morning. 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 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 be 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. Payoffs, 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. And 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 it, 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 done in really starting in the past watch stage and thinking about, because when a loan's 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 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. There's 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, Brett, 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. You know, we've 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 onto this capital. And so I think that's what you're going to see us do over the next period. You know, the buyback, you know, we're not really interested in the buyback at these levels. It's more of a defensive play for us. Our dividend's in a good place. And so you're going to see us build a little capital. and will still give us the ability to potentially, you know, work on some opportunities in the future. I would tag on and add that if we get our growth profile to where we want it, capital ratios will stabilize. And you also, you know, given where our ratios are on Cree, we're already looking at new, we haven't been in the Cree 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's 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 take care of themselves.

Okay, that's helpful. And then just lastly, back on fee income and excluding kind of the North Avenue stuff, You know, 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, net, net, 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, get our mortgage business going more and selling more of that product. So, you know, it's an important focus for us. You know, card fees, and we've introduced some new card products on the commercial side. So it's an ongoing effort. and others just, you know, bullies buried in there and some real estate we own, like our office building here, 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 there because it's certainly a good driver of profitability and ROA.

Okay. That's helpful, guys. Appreciate all the color.

Okay. Thanks, Brett.

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