Veritex Holdings, Inc.

Good day and welcome to the Veritex Holdings fourth quarter and year-end 2020 earnings conference call and webcast. All participants will be in a listen-only mode. Please note this event is being recorded. I will now turn the conference over to Ms. Susan Caudill, Investor Relations Officer and Secretary of the Board of Veritex Holdings.

Thank you. Before we get started, I would like to remind you that this presentation may include forward-looking statements, and those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to publicly revise any forward-looking statements. At this time, if you're logged into our webcast, please refer to our slide presentation, including our safe harbor statement beginning on slide two. For those of you joining us by phone, please note that the safe harbor statement and presentation are available on our website, veritexbank.com. All comments made during today's call are subject to that safe harbor statement. Some of the financial metrics discussed will be on a non-GAAP basis, which our management believes better reflects the underlying core operating performance of the business. please see the reconciliation of all discussed non-GAAP measures in our filed 8K earnings release. Joining me today are Malcolm Holland, our Chairman and CEO, Terry Early, our Chief Financial Officer, and Clay Reby, our Chief Credit Officer. I'll now turn the call over to Malcolm.

Good morning, everyone. Hope you all remain safe and healthy as we continue to endure these crazy times. We have certainly seen our fair share of cases over the last year, and even though several of our staff members have been sick, fortunately, we've only had a small handful hospitalized. Despite COVID numbers still rising, the leadership of the state of Texas has allowed our business to remain open with some restrictions, and we continue to operate at manageable levels with approximately 48% of our staff currently working from home. The fourth quarter was an outstanding quarter for Veritex. We recorded operating earnings of $29.7 million, or $0.60 per share, a 31 percent length quarter increase. Pre-tax, pre-provision continues to be a strong metric for us, producing $38.4 million, or $0.77 per share, producing a return on average assets of 1.75 percent for the quarter. Loan growth ex-PPP mortgage warehouse continued its positive trend, growing 4.3 percent annualized for the quarter and 2 percent for the year ended 2020. Mortgage warehouse continued its strong growth with 24 percent annualized increase for the quarter or 215 percent growth year over year. Yet it still remains only 8.5 percent of our outstanding loans at year-end 2020 and even lower from an average balance basis. We are proud of our lending staff and support personnel. Even with the challenges of 2020, we're still able to show positive loan growth. Pipelines remain strong. We feel like we have a great deal of momentum going into 2021. In the fourth quarter, our C&I team onboarded more new relationships than any other quarter during the year. We continue to see fallout from the M&A disruption in the Texas banking markets, as well as clients relocating out of the national and super regional institutions. These two scenarios boost our numerous growth opportunities. Growth has always been a core principle at Veritex. Another positive long growth year. Deposit growth continues to be incredibly strong. with total deposits growing 18.7 percent linked quarter, but more impressive is the annual growth in non-interest-bearing deposit growth of 35 percent year-over-year. Our credit picture is becoming clearer and is trending in a positive direction. For the quarter, we did not provide a loan loss provision. NPA decreased 12 basis points, and our ACL was reduced from 2.1 of loans to 1.8 percent of loans. We did have charge-offs of $16.5 million during the quarter, almost all of which came from acquired loans. Clay will give you some more color on that, but I'll now turn the call over to Terry to discuss the financial results.

Thank you, Malcolm. On page five, you'll see multiple graphs. I want to focus on three of these. First, tangible book value per share increased to $15.70 in the fourth quarter, reflecting strong, tangible capital generation of $20.5 million. This is an 11% increase on the linked quarter annualized basis. Second, our operating return on average tangible common equity remained very strong in the fourth quarter at 16.4%. This level remains well above our cost of capital. Finally, the operating efficiency ratio shows that we've now been below 50% over the last five quarters. This low efficiency ratio achieved through our branch-like business model is the key to maintaining our strong pre-tax, pre-provision earnings. On to slide six. Net interest income increased approximately $1 million from Q3 to Q4 to $67 million for the quarter. The expansion in net interest income was achieved despite $1.4 million in lower purchase accounting accretion and $1.3 million in interest expense from the sub-debt raise. The core NIM, excluding all purchase accounting accretion, expanded five basis points The gap net interest margin contracted three basis points to 3.29% in Q4. The most significant items affecting the NIM were lower accretion income and the sub-debt raise negatively impacted the NIM by 13 basis points combined. This was offset by six basis points of NIM expansion from discipline, deposit, repricing. There are additional opportunities to continue to drive deposit rates lower. Finally, the prepayment of a $200 million FHLV advance positively impacted the NIM by three basis points. Note that Q4 lung production was 3.84%, and Q4 interest-bearing deposit production was 26 basis points. There are two primary factors which should help the NIM to improve in 2021. First, there's 900 million in CD maturities in 2021. These mature at a rate of 105 basis points, and should be renewed at a rate below 30 basis points. Second, the forgiveness of PPP loans and the redeployment of that 1% loan into higher-yielding asset classes. For Q4, the PPP portfolio represented a 12 basis point drag on the NIM. On to slide 7, another strong non-interest income quarter with $9.3 million in revenue. This result was led by deposit fees and interest rate swap incomes. Expenses were up slightly in Q4 and very much in line with management expectations. Our full year 2020 efficiency ratio was below 48%. Turning to slide eight in deposits. As Malcolm said, we had another strong quarter on the deposit front as transactional deposits grew $312 million through over 26% annualized. The mix of the deposit portfolio has improved significantly since the beginning of 2019. with non-interest-bearing deposits exceeding 32% of total deposits, and our reliance on time deposits has now dropped slightly over 22%. The graph in the bottom left of the page shows the trend in quarterly deposit costs. Average costs of total deposits declined by 8 basis points in Q4 and now sit at 38 basis points. Looking past the fourth quarter, the table in the bottom right corner shows the time deposit repricing opportunity for 2021 and beyond. On slide nine, you see the details of our loan portfolio. Malcolm's already mentioned our growth for the quarter. Our commercial real estate business remains strong. The mortgage warehouse portfolio grew 33 million in the fourth quarter when you would normally expect seasonal contraction. Line utilization is certainly weighing on C&I growth. As you can see on the page, year-end utilization levels are down 6% from 2019 and 11% from the peak levels in the second quarter. Regarding the PPP portfolio, we had $50 million or 12% forgiveness during the quarter, and we expect the pace of forgiveness to accelerate as we go through 2021. On slide 10 in there, allowance for credit losses. This slide lays out the impact from CSUN on each loan pool for Q3 and Q4. Moody's forecast of Texas unemployment and GDP continues the key economic inputs into the model. Focusing on the column labeled December 31, 2020, the improving economic outlook positively impacted our allowance for credit losses on pooled loans to the tune of $18.6 million. We reduced our specific reserves on non-accrual loans to $16.9 million, or a reserve level of approximately 21%. This declined as a result of charge-offs during the quarter. Additionally, our reserves for PCD loans increased $4.1 million to 17% of the outstanding balance driven by various impairments within pools. As we said throughout the first three quarters of 2020, we were building the reserve in anticipation of future credit migration and net charge-offs. This approach, coupled with an improving economic forecast, allowed us to book zero provision for credit losses this quarter and reduce our overall allowance. As in prior quarters, in addition to the loss history and the economic forecast, consistent qualitative factors were used in the model That increased our final allowance by 35 basis points. Additionally, we still have $16 million of loan interest rate marks on the balance sheet from the green acquisition. This translates into 27 basis points of additional cushion on that part of the acquired portfolio. Finally, during Q4, we increased the reserve for unfunded commitments by $902,000 in the face of a favorable change in the economic forecast. This increase resulted from considerable commercial real estate production during the fourth quarter that has yet to fund up. On slide 11, capital ratios at the holding company and the bank started the year from a strong position and remain robust as we exit 2020. Most ratios declined modestly, even though absolute capital levels are higher. The modest decline in the ratios are due to balance sheet growth and a notable increase in unfunded commitments that pushed risk-weighted assets higher. The sub-debt and the increase in the allowance for loan losses were the primary reasons for the increase in the total capital ratio. Focusing on the graph in the bottom right corner of the page, we declared our regular quarterly dividend of 17 cents per share, or a 28% payout ratio of operating EPS. Also during the quarter, we repurchased 347,000 shares at an average price of $22.90. We have $23 million remaining on the buyback authorization and intend to remain opportunistic. With that, I'd like to turn the call over to Clay for the discussion on credit.

Thank you, Terry. Good morning, everyone. Page 12 of the deck highlights some of our asset quality metrics for the quarter. The top left chart on page 12 demonstrates that loans on deferral have dropped from a high of $1.2 billion as of late July to $36 million or 0.6% of total loans as of January 21st. This is particularly encouraging when combined with the fact that past due loans have remained relatively flat year over year, as you can see in the chart in the bottom left of the page. Past dues in the 30 to 89-day category include a 504 loan in the amount of $7 million on a hospitality property that's well-secured, as well as a $2 million in administrative past dues that are now current. Net charges are also reflected chart on the top right of the page. The charge-offs for the quarter were concentrated in two credits. First was a C&I credit highlighted in last quarter's MPA review that was showing going concern issues. The business was shut down and liquidated during the quarter, resulting in the subsequent charge-off of $12 million. The second charge-off was a loan secured by a Houston office building that was transferred to Loans Health for sale. and marked the market based upon the most recent offers we received to acquire our loan, which resulted in a charge-off of $2.4 million. The balance of the charge-offs for the quarter were primarily the unguaranteed portion of acquired SBA loans that were liquidated and charged off. Our reserve bill over the first three quarters was done in anticipation of these charge-offs and do not change our overall view of the lost expectations in the portfolio. You can see in the bottom right-hand corner that PCD loans have reduced to 2% of the loan book over the last two years, an overall reduction of 60%. Page 13 highlights our hospitality portfolio. The fourth quarter is typically a down quarter for hospitality properties. That being said, October was the best revenue-generating month for our hospitality books since the pandemic began. Hospitality loans on deferment have dropped from 60% of the book at 7.24 of 20 to 0.65% as of 12.31 of 20. Criticized assets in the hospitality portfolio moved up slightly for the quarter from 38.6% of the book to 40.6% as we get deeper into some of the smaller loans in the portfolio. Moving on to page 14, you see a summary of the top 10 hospitality loan balances, which make up 50% of our current outstandings. Revenues for the top eight properties have increased by 35% over the five months of June through October, or an annualized rate of 84%. Average occupancy for the quarter declined by 4% to 51% for the fourth quarter. This was not unexpected given the historical performance of the hospitality industry in the fourth quarter of most years. None of the properties are on deferral and none were passed due at quarter end. I continue to be encouraged with the performance of the hospitality book and the steps that we see our borrowers taking to manage through the travel restrictions that are in place. Moving on to retail CREE, which is on page 15, our total retail deferrals have dropped to $0. This is meaningful given that deferrals were 51.7% of the book as of the second quarter. There's only one non-performing loan in this space. This loan of $3.4 million is secured by 130,000 square foot property in Marietta, Georgia that's struggling from an occupancy standpoint but has more than sufficient value to secure the loan. Today, I don't see any significant issues coming out of this portfolio. Page 16 highlights the restaurant portfolio. The additional stimulus support provided by the U.S. government via the PPP program has and will continue to be instrumental in the ongoing performance of this portfolio. Deferments have been eliminated as we prepare for the SBA to begin making payments on SBA loans in the restaurant book. The largest criticized relationship continues to perform after one 90-day payment deferment. Page 17 is a new slide that provides some additional color on our SBA portfolio, which we reference frequently. In late third quarter, we engaged in an external review of operations and process used by the Veritex SBA team to originate government guaranteed loans. We received the results of that review in Q4 And from a process and creditworthiness standpoint, the SBA department was deemed to be substantially compliant with minor corrected measures required. 67% of our current net book balance of government-guaranteed loans are secured by real estate. Having tangible real estate collateral as collateral on two-thirds of our SBA exposure will help limit losses in the SBA book as stimulus support ends. As you would expect, the levels of criticized and past due assets are elevated given the impact of the pandemic. Our teams are working with these borrowers as encouraged by the SBA to try to keep these businesses open through the impact of the current pandemic. I'll now turn it back over to Malcolm for closing remarks.

Thank you, Clay. One of the brightest spots and greatest opportunities for Veritex is our ability to attract incredible talent in many areas of the bank. As you can see on slide 18, the last six months have afforded us the ability to add additional meaningful talent to our team. The majority of these hires were revenue producers, either directly or through our credit process, and most have large bank experience. I've said that Veritex Fields is important to invest in our future, and there's no better way than through the talent channel. We feel certain that these ads will make us a better and more productive company. Concerning M&A, we feel 2021 will be an active year in our industry for numerous reasons, and we hope to be an active participant for the right fit. I continue to be encouraged by the direction we are headed and the momentum that is building. Our talent is in place, and our prospects for the future are bright. Our two major markets are arguably two of the best MSAs in the country, for population and business growth. We're all ready for this vaccine to do its work so we can get back to some level of normalcy. Operator, I'd now like to open the line for any questions.

To ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or the hash key. And please stand by while we compile the Q&A roster. Your first question comes from Graham Dick from Piper Sandler.

Hey, guys. Good morning. So I was just wondering, can you guys talk a little bit about what you're doing to defend the core loan yield in the current environment? Maybe specifically what occurred in the fourth quarter to keep that yield essentially stable, and then also where you see this kind of trending over the next few quarters?

You know, we haven't seen a whole bunch of pricing pressure, candidly. You know, our folks have been calling on, been in people's offices when allowed and making contact. Some in our markets or many in our markets are not even doing that. And so, you know, our ability to get things done and execute is worth something. And so at this point, we haven't seen any real pricing pressure. As you mentioned, it's been kind of consistent quarter over quarter. I think as things get a little better, I wouldn't be surprised if there's going to be some pressure provided from some folks that haven't been in the game. But hopefully we've built up some goodwill that shows that we're worth something. But I don't see it changing a whole bunch, at least in the short term.

And I would add to that, Terry, that I think our lending teams have done a very good job in using interest rate floors to help boost spreads during this period of zero interest rates, if you will. And so I think you're seeing that day off for us.

Okay, great. That's super helpful. And then you guys also had pretty good loan growth this quarter. How do you think this is going to play out in 2021? It looks like line utilization at the bank is starting to starting to tick back up a bit, but it's still pretty low relative to where it would be in a normal environment.

Yeah, line utilization is certainly down a little bit from where it was. But listen, as Texas goes, you know, we go, people continue to move here, businesses move here. I mean, you read the papers. We've had some large corporate reloads, but then there's a whole bunch of smaller reloads that you don't ever read about. And so, You know, we look for positive loan growth, you know, take out mortgage warehouse and PPP. We still think that 2021 is going to be, well, it'll be a positive loan growth year. We still get some payoffs, a fair amount of payoffs. And to me, that's just a sign of a healthy portfolio, but we've got to work a little bit harder to stay ahead of it. But, you know, I think, you know, Mid-single digits probably for 2021 ex-PPP mortgage warehouse is something that we're certainly going to aspire to.

Okay, great. Thanks for the call. That's all from me, guys. Congrats on the quarter. Thank you.

Your next question comes from Matt Olney with Stevens, Inc.

Hey, thanks. Good morning, guys. Hey, Matt. Hi, Matt. Hi. I want to start on slide 18. It's a good new slide about the talent investment the last six months, taking advantage of some of the market disruption. I think that was an initiative we talked about a year ago, so great to see you follow through there. I guess the question is, where do we go from here? Is there still lots of opportunity to add significant talent, or could this initiative remain positive but perhaps slow from here? Just trying to figure out kind of where we go from here. Thanks.

You know, yeah, I think I said quarters ago that we were going to invest in people, and I just wanted to respond with, hey, this is what we've been doing. You know, these are several in this group are upgrades, but most of them are just additions. And, you know, I think there's a lot of runway with this group right here specifically. but we will never take our eye off the ball and continue investing in people. We're in the people business. The disruption is only going to get greater with the big PNC BBVA deal. We're already seeing that disruption. I read this morning that a new bank holding company is moving to Dallas from California. it's just going to get more disruptive. And so people are what make the difference, and we're talking to some right now that could continue to move the needle for us.

Okay. Thanks for that, Malcolm. And then as a follow-up, I just want to go back to credit quality. I think you mentioned in your paid remarks that the elevated charge-off in the fourth quarter doesn't really change your expectations of charge-offs for the cycle. Any other color you can add to your view of that charge-off from here? Thanks.

I'll just repeat what we said, yeah. Yeah, we don't expect our estimates of charge-offs to change meaningfully. I mean, we've been looking at this for the last six months hard, and we did not up our estimates for loss exposure going forward based upon what happened in the fourth quarter with these couple of large credits.

I think this is the beauty of CECL. It was not exactly an accounting standard I was excited to see, but I have become a fan because it allowed us to use economic forecasts to build reserves in anticipation of what might happen. And I think you've seen over the course of bank releases this quarter that You know, a lot of banks were really, really, including us, were very conservative and remain very conservative. And with all the government has done with stimulus, I mean, I just think that, you know, I think by and large most banks' loss expectations are coming down, as have ours from Q2 to Q3 and from Q3 to Q4 of the overall cycle losses. And this is something you knew was going to happen when you started down this path with the pandemic. You just didn't know when it was going to be or who it was going to be. And so I think the challenge is, you know, we provided for it. We did what we should do. And our losses are in great shape. I mean, our portfolio really, I mean, yeah, we had charge-offs. But we knew we were going to have charge-offs in this cycle. And the challenge, I think, internally is really not to overreact to that. You knew stuff was coming. And let's just get it behind us and, you know, keep focusing on the good things that are going on with the company.

Got it. Okay. Thanks, guys.

Thanks, Matt. Your next question comes from Michael Rose with Raymond James.

Hey, good morning. Thanks for taking my questions. Just a follow-up on Matt's question. you know, you just kind of laid out that your credit loss expectations through the cycle really haven't changed, maybe improved over the past couple quarters. Is there any reason to think that you guys couldn't get back to a reserve level that was, you know, kind of where it was pre the, you know, Cecil day one adjustment as we move forward, you know, assuming the economy continues to get better, you know, et cetera?

Yeah, I mean, your question specifically is can we get back to reserve levels prior to the pandemic and post-CECL?

CECL day one.

CECL day one. And the answer is absolutely. You know, a lot of it's dependent on the economy. But we actually, sitting here today, we feel as good about our credit outlook as we've had since April 1st of last year. And so... Yeah, I think that's very, very reasonable.

Michael, I think that's where we target, where we think we're going. I think we agree with getting there. What's hard is knowing how quickly we'll get there. I mean, there's just still a lot of unknowns. But, yeah, I think as we come out of this pandemic, the allowance should be in line with somewhere in the range and vicinity of where we were on Cecil Day 1, and that was 1.23%.

Very helpful. The other question I wanted to ask, you know, the outlook seems, you know, relatively positive, right? So kind of mid single digit loan growth, maybe the warehouse comes off a little bit, you get some margin expansion, you know, deposit inflows have been good. You know, is there any reason to think with kind of that backdrop and outlook that you guys couldn't actually grow NII year over year? Because I think if you did, you'd clearly be in the minority.

Yeah, I mean, look, when you've got $910 million of CDs repricing and they're repricing down, let's just call it 75 bips or so, I mean, that's meaningful net interest income growth. And then you couple that with the loan growth we're talking about. No, we believe we're going to see some. We don't think it's going to – We're very focused on that. And, I mean, so, yeah, we believe we'll see net interest income growth really led by deposit repricing, you know, growth on the loan side, and then whatever happens with PPP.

Very helpful. Maybe just one last one for me. Can you give us a reminder on kind of your M&A targets in terms of what you would look at just in terms of complexion and size? You guys are about $8.8 billion now. in assets close to $10 billion. I know PPP will run off, but then we got round two. I mean, would you want a deal to kind of take you and move you beyond that $10 billion guidepost, or would you be looking at something smaller, tuck-in, you know, cost-safe type deal? Thanks.

Yeah, I mean, in a perfect world, we'd love to, you know, do something that would take us measurably over $10 billion for a lot of reasons that you and everybody on this call know about. The second part of your question, would we be interested in smaller tuck-in acquisitions? And the answer is maybe. It's possible. I mean, there's some that actually make some really good sense for us. You know, I've got a fairly long memory, and I remember when funding and deposit pricing were really, really important. They're just not today. When you put $3 trillion into the system, there's deposits everywhere, but this too shall pass. And so, you know, always thinking out, you know, how could we improve our deposit franchise being in a major metropolitan area? You know, it's more difficult. You know, the rural areas provide us a little bit more stability and some better funding and pricing. So those are options, and we are looking at those as well as ones that would jump us over 10 in one deal.

Very helpful. Thanks for taking my questions. Thanks, Michael.

Your next question comes from Brady Gailey with KBW.

Hey, thanks. Good morning, guys. Good morning, Brady. So I heard the guidance for kind of ex-PPP, ex-warehouse loan growth amid single digits. You know, PPP, it's hard to know what's going to happen with round two and how big that's going to be, but But looking just at the warehouse, you guys have had some great growth there. But, you know, you're going to have some headwinds with mortgage likely with volumes coming down this year. So how do you think about, you know, your ability to continue to take market share versus your national mortgage volumes that are going to be off? Do you think that the warehouse will still grow from this level?

You know, I do. You know, we've got an incredible team there. And what you don't see is really the change out of the portfolio. The portfolio we acquired was not the credit quality that the current portfolio is. So the real growth in that portfolio is much more than you see in the numbers because we changed out a fair amount. And the quality of who we're dealing with now is measurably better. And with saying that, Amy, who runs our group there, who is known nationally, is taking market share. And so, yes, the market itself will probably contract a bit, but I believe we will get more than our fair share as people decide to do business with Veritex and with Amy. So I do see some growth there. I don't see the kind of growth we had in 20 at all. You know, we don't want to be that dependent on that business. I think we were 8.5% as of period in on an average basis. We were 7.1% on the average loans for the quarter. So we still have some room there, but you won't see the growth you saw in 20.

But thank goodness that it's been there because from a liquidity standpoint, it's been a wonderful bridge from the start of the pandemic to where we may ultimately be. And so we're very, very thankful for its ability to soak up some of this liquidity.

And I'm telling you that frequently. Oh, yeah. That was great. Great for 2020. So how should you think about buyback? You have some left in the authorization, but the stock has done relatively well, like all bank stocks have done well recently. But it's now at $175 a tangible. I mean, is it right to think that buyback probably aren't as likely as you shift more towards, you know, a focus on M&A?

Yeah, I mean, you know, I've been very careful to use the word opportunistic, and I think that's what we were in Q4 and intended to remain. You know, Brady, our general view is, you know, to use capital, the priority for capital is organic growth, strategic growth, dividends, and buyback. And so, you know... In the buyback world, kind of what we're saying, we're happy and eager to be a buyer when the tangible book value earned back from the dilution is less than five years. If it gets over that, you're not going to see us doing a lot. So, you know, the math's pretty simple. You know, if that's kind of our guideline, you know, you can tell where we're going to be. And so how much we do in 2021 is going to be a function of valuation. We're going to generate a fair amount of capital, and we're willing to use it there if the valuations warrant it.

All right. And then just looking at the $10 billion in asset threshold, you're at 8.8 today. You back out PPP, you're at about 8.4, and then you still have some excess liquidity there. I mean, it feels like for you to hop over 10 – with maybe some of this asset shrinkage that's coming up and it feels like you're going to have to do, you know, a two to $3 billion deal, if not more than that. So, I mean, is that, maybe ask, maybe ask it differently. You know, how big of a bank M&A deal would you consider as far as the targets asset size?

Oh gosh, that's a hard one to answer. You know, how big we would consider because, you know, my history has been very opportunistic and in the first, Four deals we did were just small deals, and then we did an MOE, and then we did a really small deal, and then we did another MOE. And so, you know, I think to just be totally transparent, we would look at everything from, you know, sub-billion or close to an MOE of some sort. Obviously, you know, I think one thing we have definitely learned, and this isn't new news, is that scale is, is hugely important in our business. We've got to build an asset base that we can spread these expenses over wider and try to become more efficient. Everyone would ask, what's that size? How big do you want to be? I think the answer for everybody is the same, depending on what size you are. We want to be double. If you're three billion, you want to be six, and if you're six, you want to be 12. If you're eight and a half, you want to be 17. It's hard to say, but again, remaining very opportunistic. It is a core competency of ours, and we want to be in that space, and we are already having conversations with big ones, medium-sized ones, and little ones, and we'll see.

All right. That's helpful. And then finally for me, I'm just curious. The loan that Clay mentioned in Marietta, Georgia, and that's a suburb here in Atlanta that's It seems pretty far out of your footprint. How did you all get that loan?

Yeah, good question. That was an existing relationship that we had with a local business, and they had a location in Georgia, and that's how we got it. It wasn't that we were going to Georgia to find a customer. We had a customer here in Dallas that we followed out of state. Got it. Okay. All right, great. Thank you, guys.

Thanks, Brady. Thanks, Brady.

Your next question comes from Gary Center with DA Davidson.

Thanks. Good morning, guys. Hey, I wanted to ask about just your thoughts on kind of balance sheet management and liquidity in 2021 as you get the PPP repayments coming in. You talked about kind of core loan growth. But beyond that, you know, in terms of the investment portfolio, what are you thinking about there in terms of reinvesting cash flows, and how should we think about kind of the mix over the course of 2021?

That's a good question. I mean, you know, you've seen that the portfolio, the investment portfolio shrank. I mean, on an average basis, we ran with a little more liquidity than I would have liked in the quarter, but that's driven really by what's going on on the deposit inflow side. I mean, you know, you'll see us play on both sides of the balance sheet. I mean, obviously, we prepaid a pretty sizable FHLB advance, you know, because the economics just made sense. So, you know, and in terms of the portfolio, you know, we're not crazy about getting out so far. I mean, you know, we positioned this portfolio well for falling rates. We have very flat convexity. So we're not getting – we have reasonably – premium position. So we don't have a lot of premium risk that the negative convexity if we added in the portfolio and how it would really impact us. So we like where the portfolio is. Growing earning assets are important. I don't want to see the portfolio shrink a lot. And so we're going to have to work hard to find opportunities that will help us to reinvest those cash flows. You kind of do a lot of hard work to find something you like or something you can stomach. I don't think you find anything you like. I mean, you know, we're not, I mean, we have a muni portfolio, but I'm just not going out to double-digit duration on those things to get crowd one yields. It's just, I just don't think that's a smart move right now. But so, you know, we're going to just try to be opportunistic. We'll prepay stuff when we can. And, you know, we'd much rather continue to grow the mortgage warehouse business I mean, our kind of internal limit is 10% of average. And Amy and the team, not only has Amy done a great job, but we've brought in and strengthened that team behind her. So I would much rather see us continue to use excess liquidity over there versus trying to take long-duration fixed income plays in the investment portfolio.

That's great. And then the core non-interest expenses quarter, $37.5 million or so. Give us a sense of at least early 21 outlook there given all the hires you've made and where some expense may settle out.

Well, I think we're so efficient. Again, the 2020 efficiency ratio was under 48%. We ended the year even with all those hires down. you know, just under 50 for the quarter, look, it's not really going to go down. Discretionary spend for marketing and travel, things like that's going to be higher in 21. Some of these people that we brought on in the last six months of the year will have full-year expenses for them next year. And, you know, we're all hoping that it's going to be, you know, we're all hoping that variable incentive costs are going to be better, too. You know, but, you know, it's, I mean, look, we're very sensitive to the efficiency ratio. We know that's the key to generating organic capital. And, you know, so, you know, it'll be up, you know, steady to up some, but not going crazy.

Thank you.

All right.

Thanks, Gary. Thanks, Gary.

I'm showing no further questions at this time. I would like to turn the conference back to Ms. Susan Caudill.

This is Malcolm Holland. Thanks, everybody, and you all have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.