Over one year ago, our team stacked hands to build a stronger balance sheet that could withstand all economic environments. We've always been a very profitable bank shown by our historical PPNR, ROAA, and efficiency ratios. But our balance sheet did not project the strength that is that is highly valued. Let me discuss four balance sheet ratios we have been keenly focused on: loan to deposit, dependence of wholesale funding; CET1; and our real estate loan bucket concentrations. I'd like to remind you these efforts were not as a result of March 8th SVB crisis. These efforts have been in -- our major focus and strategy for the last four quarters. I'm happy to say we're making progress candidly much quicker than we planned. Our loan deposit ratio has come down from a high of 108% at 331 to 95% at 930.

Our dependence of wholesale funding has come down from 32% at 331 to 21% at 930. Our CET1 now exceeds 10%. Our CRE portfolio continues to decline despite continued ADC fundings of approximately $400 million a quarter. Total CRE to risk-based capital has declined from 335 -- 331 to 317 at quarter end. ADC has declined from 129 to 116 during those same dates. All of this positive momentum towards a stronger balance sheet takes the work and effort of our entire bank. It requires a mindset change to add full client relationships, not just borrowers. It requires disciplined efforts on the deposit-gathering space that comes in many forms. Better client selection, digital banking, direct marketing, MSRs, HLAs, family and friends promotions, commercial and community bank focus, et cetera, et cetera.

It takes everyone working together with a common goal. That's how we've increased our deposit balances over $1 billion since 12/31/22. I couldn't be prouder of our company and teams to embrace the changes we all felt had to happen. There is still much to do and much to accomplish. With all the great progress on the balance sheet, we understand that in these cycles, earnings will be under pressure. For the third quarter, we reported net operating income of $32.6 million or $0.60 per share. Our pre-tax provision income for the quarter was $50 million or 1.62%. Terry will provide some details shortly, but the main three drivers of our slight earnings decline were NIM pressure, continued lack of government loan fees, and increase in operating expenses.

In these cycles, loan growth and credit are always at the top of everyone's mind and concerns. For the quarter, loans decreased and are only up by $137 million, a 1.4% for the first nine months of the year. We've been able to do this with a focused effort on pruning away loan-only clients and payoffs, mainly from the CRE sales -- mainly from CRE sales transactions. NPAs for the quarter did increase $11.5 million to $80 million or 0.65% of assets. This increase was solely from the C&I shared national credit that Clay will discuss shortly. Net charge-offs were minimal at eight bps. We also increased our ACL from 105 at 630 to 114. Looking forward, our growth profile for 2024 will continue to be in the low to middle-single-digits. Our pipelines are off over 80% and candidly the demand from our clients has been muted.

In our opinion, this will continue until some economic and rate certainty is established. I'll now turn the call over to Terry.

Terry Earley: Thank you. Malcolm has covered the progress we've made in strengthening our balance sheet. I think it is fair to say that we've made more progress in a quicker timeframe than I ever expected. I'll spend some time drilling into the results for the third quarter and the year-to-date numbers, I think this is important because some of our businesses are seasonal, and we think about them on an annual basis and not just quarterly. Starting on page four, Malcolm mentioned the operating earnings were $0.60 a share. This is down slightly to $32.6 million. Tangible book value per share was also up slightly to $19.44, even with rising rates impacting Accumulated Other Comprehensive Income, AOCI, by approximately $0.45 per share.

Focusing on the year-to-date results, pre-tax pre-provision operating earnings increased 14% from 2022 to almost $175 million. Pre-tax pre-provision return on average assets is flat over the year and it's flat year-over-year at 190 basis points. Veritex continues to be one of the more profitable banks among its peer group. Consistent with our intent to strengthen our balance sheet, we've only grown loans to $615 million in the last year, while growing deposits to $1.4 billion on a year-over-year basis. Year-to-date annualized charge-offs have been 20 basis points. Finally, we've grown CET1 by 102 basis points over the last four quarters to 10.11%. We achieved this target of being over 10% one quarter earlier than forecast. Moving to slide five, Veritex made meaningful progress improving its liquidity and funding profile over the third quarter.

Since June 30, Veritex has grown deposits by $963 million, and only $192 million of that was in the growth category. The deposit growth coupled with some reduction in earning assets, allowed us to reduce Federal Home Loan Bank borrowings by over $1.1 billion. As we've said before Veritex shifted its focus to the right size of the balance sheet late in Q3 of 2022. We started slowing loan growth. We shifted our loan production focus away from commercial real estate and ADC to C&I and small business. We changed our banker incentive program at the beginning of 2023 to give deposits a higher weight. We reallocated marketing spend to deposit products and launched a multi-wave direct marketing campaign in February. Additionally, our digital bank which we started in the second quarter is having a meaningful impact on our deposit growth.

Success on the deposit front for Veritex has three components; growing deposits, increasing our client acquisition rate, and increasing net client growth. I'm pleased to note that our net client acquisition rate in the third quarter was a little more than double what we saw in the first-half of the year. Similarly, our net client growth in the third quarter was up more than 4 times over the levels we experienced in the first half of the year. The effect of the Fed's interest rate hikes on the deposit mix stabilized in the second quarter, and our non-interest-bearing deposits to total deposits remained in the 23% to 24% range. Deposit pricing competition continues to be intense, resulting in a total deposit beta of approximately 57%. Finally, uninsured and uncollateralized deposits were 31.5% of total, and our liquidity capacity is 2 times of the uninsured deposits.

And thinking about the loan portfolio, the shift away from ADC is showing progress. Our concentration level in CRE moved down during the quarter and the goal is to continue to move these levels down below the regulatory guidelines. The payoffs in the CRE portfolio remain strong. It should range between $800 million and $900 million for 2023, a sure sign of strength in the Texas economy. Unfunded ADC commitments continue to drop at the rate of $300 million to $400 million per quarter and are now well below total capital. Looking forward into 2024, we forecast ADC fundings to decline by 75%, as compared to 2023. On slide seven, we're frequently asked about our Out of State loan portfolio. As you can see, our National Businesses and our -- and Mortgages comprised 13% of our total loan book.

Our true Out of State portfolio is about $1.2 billion and makes up about 12.5% of the total book, two-thirds of the Out of State portfolio or loans where we have filed the Texas developers. The rest are syndicated loans and C&I. A breakdown of the upstate commercial real estate portfolio is shown on the bottom right of the slide. Moving on to slide eight. Net interest income decreased by $1.5 million to just under $100 million in Q3. The biggest drivers of the decrease were higher earning loan yields, day count and lower volume, i.e., primarily FHLB volume, offset by increases in rates on deposits. The net interest margin decreased 5 basis points from Q2 to 3.46%. The NIM was helped by the increase in average non-interest bearing and the drop in volume and yield on our FHLB borrowings.

Given the deposit growth through the end of August, we were able to pull back on deposit pricing in September. This resulted in monthly deposit production rates following for the first time in 2023. All this to say, based on our current internal forecast, the net interest margin is due at the bottom assuming our deposit mix remains stable from here. On slide nine, please note our loan yields were up 7 bps to 6.92%, while deposit rates increased to 42 basis points. Q3's new loan production rate of 8.06% and a spread of 330 basis points. Slide 10 shows certain metrics on our investment portfolio. The key takeaways are, it's only 8.6% of assets, the duration is 4.3 years, and 83% of the portfolio sales in the middle of sale. Overall, the mark-to-market on the portfolio has a minimal impact on tangible equity, and didn't have any impact on our capital ratios.

Non-interest income decreased by $4 million to $9.7 million. These declines were generally across the board. Thrive's production volume increased 1% to $564 million, while as gain on sale margin declined by 43 basis points to 257 basis points. To maintain volume, Thrive had to sacrifice rate and therefore the gain on sale margin. Moving to slide 12 on the USDA front, we've always said, I mean think about this business on an annual basis. It's been a record 12-months for this business. They produced over $21.6 million in revenue over the last four quarters. I was happy to get any revenue in Q3 of ‘23 given the funding situation to be in our vertical at the USDA, but we could only get one line closed in Q3. Our pipeline is at record levels, which bodes well for future revenue and Q4 revenue should be meaningfully higher than Q3.

Given the potential government shutdown and funding the government with continuing resolutions make it highly unlikely that Q4 will be as strong as Q4 ’22. Non-interest expenses increased $2.2 million, driven by higher personnel costs and regulatory fees. The increase in personnel cost is a function of higher bonuses, variable compensation for deposit growth, and lower loan production cost deferrals. Salaries are up slightly, but this was not the driver of the increase. On slide 13, total capital grew approximately $35 million during the quarter to almost $1.5 billion. Our CET1 ratio expanded 35 bps for the quarter and 101 basis points year-over-year, but now stands at 10.11%, a significant contributor to the expansion of the capital ratios has been a decline in risk-weighted assets.

It's worth noting that since Veritex went public in 2014, its compounded tangible book value per share at a rate of 10.8%, including the dividends that have been paid to our shareholders. Finally, on slide 14, note that we continue to build the ACL. Since the beginning of 2023, we've grown it by $19 million or 21%. These additions to the allowance have increased by 18 basis points to 1.14%. Given all the uncertainty facing the U.S. and Texas economy, we decided to allocate more waiting to the downside scenarios in the model. Two factors continued to make that sizable part of our ACL. With that, I'd like to turn the call over to Clay for some comments [Technical Difficulty]

Clay Riebe: Thank you, Terry, and good morning, everyone. As Malcolm mentioned our NPAs are up for the quarter, driven by downgrade of a shared national credit in the most recent snick exam performed by the regulators in August. Our portion of the loan is $18 million of $157 million total facility. The company is in the defense space in government sector, and the company suffered from supply chain issues and inflation impact that significantly lowered the company's financial performance. The credit was restructured in the third quarter with additional capital contributed by the equity sponsor and is currently performing under the restructured terms. Past dues for the quarter increased $2 million, mainly due to three commercial credits.

There were also group of single-family mortgage loans in the amount of $4.4 million that were transferred to a third-party servicer, which created some administrative past dues, and we expect those issues to clear this quarter. Moving to criticized assets, classified assets were relatively flat for the quarter while total criticized assets increased by 3%. Our surveillance of the portfolio continues to be strong and we're moving risk grades as we see issues arise. I've been encouraged by the level of payoffs that have occurred this year in the amount of $932 million with $645 million of that in the CRE book. $62 million of year-to-date payoffs have come from the criticized asset books. We experienced full payoffs of $10.4 million of classified credits just in the last quarter.

With that, I'll turn it back over to Malcolm.

Malcolm Holland: As you can see, Veritex has made significant improvement on our strategy to build its 30-year balance sheet. Our focus on granular, stable funding will not cease. Terry mentioned, but I would like to mention again, just the new client acquisition is on the front of our minds every day. For the third quarter, client acquisition growth was almost 2,700 new clients, which is more than the first two quarters combined. It's working, and we recognize we still have more work to do. Finally, I'd like to thank the many phone calls and Company text messages received from many of you concerning last quarter's earnings call. Everyone involved is doing quite well. Thank you. And operator, we'll take any questions.

See also 20 States with the Lowest Unemployment Rates and 15 Skills Employers Look for in Candidates.

To continue reading the Q&A session, please click here.