Veritex Holdings, Inc.

Good day, and welcome to Veritex Holdings' first quarter 2021 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 Cottle, Investor Relations Officer and Secretary to 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 Reedy, our chief credit officer. I will now turn the call over to Malcolm.

Good morning, everyone. We continue to manage our company and shepherd our clients through what we hope is the backside of this pandemic. Our state is 100% open Businesses are back operating, and many are being vaccinated, and it feels normal again. The bank is fully open, and we are currently operating at 92% of our team back working in the office. My team and I are excited to bring you our first quarter earnings. After several challenging quarters during 2020, the first quarter performance was our best to date on many fronts. Our net income for the quarter was $31.8 million, or 64 cents a share, 18 cents better than the previous period. Our pre-tax, pre-provision operating earnings also performed well, exceeding $40 million, or 1.82 return on average assets, while ROTCE continues to trend up, ending the quarter at 17.4%. As our economy continues to recover, our growth continues at expected levels. For the quarter, we had annualized loan growth of 8% less PPP and mortgage warehouse, both of which achieved small growth gains on their own. We did have several payoffs scheduled for Q1 that pushed into the second quarter, but we still like a mid-single-digit loan growth number for the year. Growth was equally divided between all loan categories. We told you about our new builder group, which started January 1st. They're having incredible success building their portfolio. It appears our timing is very good. Our lending team stayed focused and intentional during the pandemic, and some of the fruits of their labor is paying off. Our pipelines remain strong and building. We're seeing competition heat up, especially related to pricing. Deposits continue to grow at a very large rate despite our disciplined efforts to reduce deposit costs to 0.31 basis points from 0.38 last quarter. Our deposit teams continue to find ways to reduce our costs and still think we have some room to lower going forward. Credit continues to move in a positive direction in so many ways. For the second quarter in a row, we did not provide a loan loss provision. Total charge-offs for the quarter were not material at $150,000, and our NPA to total assets reduced from .99 to .92. Our forward look at our credit picture continues to be improving and encouraging. I'll now turn the call over to Terry to discuss our financial highlights.

Thank you, Malcolm. On page five, you'll see multiple graphs. I want to focus on a couple of these. First, tangible book value per share. increased to $16.34 in the first quarter, reflecting strong, tangible capital generation of $32.9 million. This is a 16.3% increase on a linked quarter annualized basis and translates to an 18.3% year-over-year increase after adding back the impact of our quarterly dividends. Growing tangible book value per share remains an important priority for our management team. Second, our operating return on average tangible common equity remained very strong in the first quarter at 17.4% and has averaged 15.4 over the last four quarters as we weathered the pandemic. This level remains well above our cost of capital. Finally, the operating efficiency ratio shows that we've been under 50% over the last five quarters. This low efficiency ratio achieved through our branch-wide business model is the key to maintaining our strong pre-tax, pre-provision earnings and strong capital generation. On slide six, net interest income decreased $1.2 million from Q4 to Q1 at $66 million. The most significant drivers of the decrease was day count, which lowered net interest income by $1.5 million, $755,000 in lower purchase accounting accretion, and $510,000 from lower loan rates. This was significantly offset by disciplined deposit pricing, which improved net interest income by $1.1 million, and growth in our loan portfolio and loan volume also contributed $721,000. Next, the net interest margin declines seven basis points from Q4 to 3.22%. Looking forward, there are four factors which should provide support to the MIM. First, there are 923 million in CD maturities remaining in 2021. These mature at a rate of about 81 basis points and should be renewed around 25 basis points. Second, the forgiveness of PPP loans and the redeployment of that 1% loan into higher yielding asset classes. For Q1, the PPP portfolio represents a 10 basis point drag on the NIM. Third, average liquidity was approximately 80% higher than our normal target level. This had the impact of depressing the NIM by six basis points. The final factor is balance sheet hedging, and with that, let's transition to slide seven. As you can see on this slide, Veritech started Q1 highly asset-sensitive. especially to the short end of the curve, with 69% of our loan portfolio tied to LIBOR or Prime. We are exposed to rates falling or staying lower for longer. To mitigate that risk, we terminated a $500 million 10-year fixed-pay swap at a gain of $43 million. This gain will start to accrete into net interest income starting in March of 2022. Additionally, we put on $375 million of fixed-receive swaps with an average life of eight years. On these hedges, we received 131 basis points and paid one month LIBOR. Based on the current one month LIBOR rate, this should add six basis to the NIM in Q2 of 2021. On to slide eight, another strong non-interest income quarter with 14.2 million in revenue. Loan fees and mortgage banking income were up, but the most significant increase was in government guaranteed loan income. During the quarter, as we originated the PPP loans, Veritex continued to elect the fair value option as the GAAP accounting treatment. As a result, in using a broker quote to value these loans, we were able to recognize 6.3 million in PPP fees. This amount includes fees from round two originations and revenue that was deferred in round one, but is now recognized as the loans are forgiven. Operating expenses increasing to approximately two million, but 50% of the increase is due to lower loan deferred loan origination costs. Increased salaries were $200,000 for the quarter and very much in line with management expectations, given the investments and talent that we have highlighted in prior quarters. The remaining increases were employee benefits, including stock-based comp, and very much in line with management's outlook. Our trailing four-quarter operating efficiency ratio was 48.2%. To help maintain a strong efficiency ratio, the bank is closing four branches in 2021 and removing branch service from two others. This is a meaningful reduction in our already branch-like business model. Turning to slide nine in deposits, we have another strong quarter on the deposit front as transactional deposits grew 307 million, or over 24% annualized. Over the last year, transactional deposits were up $1.3 billion, or 31%. The graph on the bottom left shows the trend in quarterly deposit costs And again, as Malcolm mentioned, it declined by seven dips from Q4 to Q1. We now sit at 31 basis points. And our deposit pricing discipline is certainly helping to support the net interest margin. Looking past the first quarter, you see the time deposit repricing opportunity for the remainder of 2021 and beyond. Moving on to slide 10 in our loan portfolio, Malcolm's already talked about the growth for the quarter. We saw growth in all segments except multifamily and mortgage. Average mortgage warehouse balances grew 14.5% in the first quarter when you would normally expect seasonal contraction. This portfolio sits at 8% of average total loans, excluding PPP. Growth in this portfolio has been a wonderful way to absorb the excess liquidity generated by the deposit growth I've discussed earlier. It remains their intent to keep the average mortgage warehouse portfolio at 10% or less of average loans. Over the last three quarters, Veritex has grown total loans less PPP at an annualized rate of 8.3%. This execution, coupled with our talent investments, leads us to believe that we can achieve above-peer loan growth, especially when you factor in strengthening pipelines, CNI line utilization, and our unfunded ADC construction commitments. As you can see on the page, CNI utilization is down 12% from year-ago levels. For every 3% increase in line utilization, it translates into 1% growth in total loans. Additionally, our unfunded construction commitments have increased by approximately $800 million in the last four quarters. Slide 11 gives you an overview of the PPP portfolio, including Round 1 and Round 2 statistics. Round 2 was about 36% of Round 1. Loan forgiveness is making good progress, and we still have $2.1 million in deferred revenue to realize as PPP forgiveness occurs. On slide 12, the capital ratios at the holding company and the banks started the year from a strong position and remained robust. Those ratios were relatively flat due to deposit-driven balance sheet growth. Absolute capital levels are higher by about $26 million. We declared our regular quarterly dividend of 17 cents per share for about a 27% payout ratio. Also, during the quarter, we repurchased 148,000 shares at an average price of $27.31. We have $18.9 million left on our authorization and intend to remain opportunistic. Our capital deployment priorities, given the current valuation of our stock, are organic growth, dividends, strategic growth, and lastly, share with purchases. With that, I'd like to turn the call over to Clay for the discussion on credit.

Thank you, Terry, and good morning, everyone. Overall, we're seeing our credit metrics stabilize and begin to show improvement As you can look at page 13 of the deck, I believe it's important to note that in the chart on the top right, you see our loans on non-accrual are trending down from their peak in the third quarter of 2020. The bank's past due trends reflected in the chart in the top left corner of the page reflect a bulge in 90-day plus past dues. This loan was made up of a $7.1 million SBA 504 loan that cured on the 15th of this month. Without that past due loan, our past due levels would be down from the fourth quarter. ACL to total loans remains relatively flat for the quarter at 1.76% as reflected in the chart on the bottom right of the page. The benefits of improved Texas GDP and unemployment forecast by Moody's during the quarter were offset by additional specific reserves identified as necessary during the quarter. Net charge-offs for the quarter were just shy of $150,000, and while we expect charge-offs will resume in future quarters, we do not expect them to be anywhere near the levels of Q4 of 2020. It's important to note that the Veritex-originated portfolio posted a net recovery of $78,000 over the past five quarters. Criticized assets have declined by 5 percent from the high water mark in the third quarter of 2020. Additionally, we've experienced a 24 percent decline in PCD loans over the same period. Overall, I'm encouraged by our trends in asset quality. Moving to page 14, this slide gives some detail on what we're seeing in our hospitality and office portfolios. Our hospitality book continues to produce encouraging results. Revenue trends continue to improve as do occupancy trends. We're tracking and logging data on 75% of the hospitality book relative to occupancy, revenue, and rev par. For the month of March, rev par for the book was 17% higher than the previous high water mark set in October of last year. Occupancy was 65% for March, up from the average of 49% from the fourth quarter of 2020. We expect continued improvement in the hospitality space as the state of Texas continues to open up and travel metrics continue to improve. We're looking to upgrade loans in this portfolio that are demonstrating consistent cash flow performance coming out of the pandemic. The Bank's Cree office portfolio makes up 9.8% of the book. The weighted average LTV for the portfolio is 59%. Our office portfolio is based in suburban locations, which we feel like are better positioned for success coming out of the pandemic. Our typical loan structure calls for significant cash equity of 35% or more, which provides us with significant downside protection. 51% of the office portfolio is located in Dallas suburban locations. Our top ten exposures in the office make up 32% of the total portfolio and are performing well with only one credit in the top ten with a risk rating of pass watch. Twenty-six percent of the office book received a deferral during the pandemic, with only 1.4% of the book receiving a second deferral. There's only one classified asset in this portfolio that comprises 1.6% of the office portfolio. Overall, the performance of the office book has been very encouraging given the headwinds experienced in this sector. With that, I'll turn it back over to Malcolm.

Thanks, Clay. As you've heard, we're excited about our quarter, but probably more excited about the bank's future. Part of this future is the continued work on one of our core competencies, M&A. We continue to have discussions with many different opportunities, both private and public banks, as well as non-interest income companies. But we will remain disciplined in our principles, underwriting, and continued focus to add scale and EPS growth. I would now like to talk about the press release we issued concerning our investment to buy 49% interest in Thrive Mortgage. Thrive is a 25-year-old mortgage company out of Georgetown, Texas, just north of Austin, owned and operated by the Jones family. Last year, our team decided that we needed to make a concerted effort to increase our non-interest income. We have looked at numerous businesses and identified Thrive as a potential partner. They've been clients of the bank and well-known to many of our bank officers. The partnership with Thrive is very compelling from a strategic standpoint. It provides a scale in the volume-intensive mortgage market. It provides an additional driver in our non-interest income category, which we have always lagged our peer group. Additionally, it provides a natural hedge to an ever-changing interest rate environment, and it also allows us to partner with a company focused on its employees, clients, and technology to make the mortgage process as streamlined and efficient as possible. We could not be more excited to partner with Thrive and the Jones family. The deck included some historical results for the company that should provide some indication of the return we expect going forward. With the company's results this quarter, we again feel strongly about giving back to our communities during these difficult days, and we have done so in many communities in our markets. Additionally, the ice storm, or we call Snowmageddon, was quite costly to many of our employees. To give you a little glimpse into our Veritex family culture, their fellow employees donated almost $50,000 out of their own pockets, which the bank decided to match, to assist in repairing damaged homes and apartments. These things continue to validate the culture of family and community that we are trying to live out every day. I'd now like to open the line for any questions.

Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touch-tone telephone. Again, that's the star, then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question will come from the line of Michael Rose from Raymond James. Your line is now live. Go ahead, please.

Hey, good morning, guys. How are you? Good. Hey, Michael. Hey, maybe we could just start with the Thrive acquisition. Can you just give us some color on how it came to be, your comfort level with buying something mortgage-related, potentially the top end of the cycle? And then how should we think about kind of the revenue contribution as we move forward? I assume it's going to come through. I appreciate the first quarter numbers. Do you have any expectations for, you know, what their pre-tax income contribution might be this year? And then are there any expenses related to it? Thanks.

Yeah, I'll give you an idea of how it came together and let Terry address some of the financial considerations you discussed. We did. My team sat around in our strategic planning session last year and said, you know, where do we need to get better? And non-interest income always has been something that's been a little difficult for us being a major metropolitan area and not having a wealth business or an insurance business or a title business. So we started looking around and we really were – we had a small mortgage company and we had a pretty decent SBA business. So we said, all right, let's go somewhere where we have some competency. We had hired a gal to run our mortgage warehouse who's very well known in the business. We thought, let's figure out somebody that we know. Character is a big deal for us. We started looking and this one kind of popped out. We actually went to them and said, hey, what do you guys think? That started the trek down to where we are today. They are a very high quality family, a very high quality business. I would tell you their technology is very, very good. There's a husband and wife team and their son that run the business. They're very in tune to it. It came to be kind of a perfect match. We've never had any issues during the whole negotiating time. I think it's come together really nice. We just felt like it was an area that would be helpful to our business going forward for the strategic reasons that I mentioned. We're really, really excited. Terry can address some of the financial stuff.

Yeah, Michael. First, on the accounting, obviously this is an equity method investment, so we do not have to consolidate. It will not generate any goodwill or intangibles. and we will pick up our pro rata share of their pre-tax earnings, and it will come through the fee line, you know, investment and mortgage bank income. I don't know exactly what we'll call it, but you'll be able to see it, and we'll certainly have enhanced disclosures. We'll certainly have a little bit in transaction costs, mainly for financial advice and legal. Other than that, and that's not going to be a big number, you know, relatively speaking to what we're undertaking here today. From a financial standpoint, I think Thrive has done a really, really good job in growing their business. I think it's important to note how much of their business is coming purchased versus refi and how much better they're doing on the purchase side than the typical MBA statistics. As you think about it, they did, as you can see from the volume numbers on slide 18, they did a couple of billion dollars last year. They're certainly off, and their year end is 1130. And so you see in their Q1 from December through February, I mean, that's the slowest time in the mortgage banking space of the year, and they're off to a great start. So while the Mortgage Banking Association forecast for 2021 is down about 15%, that's not at all what we're expecting from Thrive. And our... work with them and their forecast and our expectations, we're not expecting a decline in volume by any stretch of the imagination. And certainly through March, it wouldn't indicate that that's – and I already have a sense from what April is going to look like. There's no sense that that's going to be the case. Certainly, as we go into 22, the forecast from the NBA is down about 30%. I think there's going to be a little bit of pressure on the gain on sale margins as volume drives up. That's the way I would think about the earnings contribution. Obviously, there's not anything to really integrate here. There's really no distraction, no cost to putting it on our systems. We leave a lot of strategic bandwidth, if you will, to do other things. So anyway, that's the way. I think the biggest thing is, you know, we're shooting to get this closed by June 30. Obviously, there's a lot to do along that front. But I think exactly when we get it closed is going to be the biggest driver of 21 because I think they're off to a great start. And then, you know, 22, we just want to continue to work with them and grow with them, and they have a great business that we're excited to be a part of.

I appreciate all the color. Maybe just as my follow-up, you know, another quarter of loan growth ex-PPP and ex-warehouse of high single digits. You know, I think you said at the outset that you'd still expect kind of mid-single digits this year, but I think everything I heard in your prepared commentary was pretty positive in regards to the pipelines, the home builder, finance group, you know, lender hires, you know, et cetera. Are we just setting the bar, you know, low here, or... Is there some paydowns that you expect? Just any color there would be helpful. Thanks.

You know, paydowns is certainly something that we're challenged with, as is everybody in the industry, and those are a little bit harder to predict. Your question, are we setting the bar low? You know, I think we're being reasonable, but to your point, we have a lot of things working in our direction, whether it's the unfunded piece or the CNI utilization or the builder group. or the new hires, we have a lot of great momentum. During the pandemic, our folks came into the office. They were calling on people. We worked through the pandemic. So, yeah, I think those are very attainable numbers that I threw out.

Okay. Thanks for taking my question. You got it. Thanks, Mike.

Thank you, sir. Your next question will come from the line of Brady Gailey from KBW. Your line is now live. Go ahead, please.

Hey, thank you. Good morning, guys.

Hey, Brady.

So, Malcolm, you just mentioned, you know, the hiring that you're saying. I know you guys talked a lot about, you know, hiring a lot of talent last year in 2020. Has that continued this year in 2021 so far?

It has not quite to that level, but I can tell you that there have been a couple of key hires, especially in our Fort Worth area, and there are some that we're working on currently in Houston and a couple in Dallas. So the answer is yes, and everybody's playing in that arena. We're not really hiring. We feel really good about our commercial real estate teams in both Dallas-Fort Worth and Houston. So they're really non-commercial real estate type folks. But yes, that hiring continues. And it will always continue. If we don't do any other deals or don't do anything, the organic growth piece is always the piece that pays the most and it's the most value to our shareholders. And we just think we're in a really good situation with all these... these mergers and it's just very disjointed in terms of banking talent. And we have, candidly, we have some, they're calling us. And so we're going to take advantage of this.

Yeah. And then Terry, I just wanted to talk about, you know, the outlook for spread income and margin. You know, I heard your comments about you have some CD maturities coming up and, you know, hopefully excess liquidity will go down and, you know, PPP will be less of a drag. But how do you think about all those, you know, would lead you to believe it's, you know, good for spread income and margin, but do you think there's still some downward pressure to spread and margin here?

Well, I think there's going to be, I think loan pricing, there's certainly downward pressure coming from that. And I don't think it's going to get easier or better as the year goes along. Now, I'm tickled to death when you look at the slide on that interest income. And we were able to offset the downward pressure from loan rates with more than offset it with the profit rates. I think that's slide six. And, you know, so, yeah, there's... You don't know what the government's going to do on the stimulus, but if there's more liquidity pumped into the market, which there's likely to be, and deposit flows continue as robust as we've seen over the last year, I think that the NIM pressure... from excess liquidity is probably going to get worse. I think deposit pricing is, we still, I mean, I couldn't be more thrilled about the job our teams have done in deposit pricing. I mean, you know, 31 basis points and headed lower because I can say that with confidence because March was meaningfully lower than the quarter total. So, but we can continue to push that down and if we can just offset what's going on on the loan side. Look, we're trying to grow net interest income The MIMs have been out of our control given what's going on on the funding side. And we just don't want to go too crazy and put that in the fixed income market in our investment portfolio, too much of that. And also, the fixed income or the fixed receipt hedges are going to – I said six basis points and MIM expansion from that alone. Because, look, with 70% of your portfolio tied to LIBOR and Prime, if rates go up, we win big. You see that in the interest rate risk measures. What we're trying to do is offset the interest rate risk of rates staying down lower for longer. I know that's not the conventional wisdom, but we win if rates go the other way in spite of the hedges in a big way. You still see it in the table, but we thought this is a way, with rates staying down, The six basis points in them is $1.2 million a quarter. So, you know, we, we, we, that's going to help too.

All right. That's, that's good color. And then finally for me, you know, it's great to see the thrive mortgage deal. I think I, uh, understand that it's pretty, pretty simple transaction or does that having that deal pending, does that, you know, set you back a couple of quarters as far as, you know, getting back out there and trying to pursue, uh, you know, a traditional bank M&A target. And, you know, as you, you know, focus on bank M&A, just give us a little color on what you're looking for. Are you looking for a smaller kind of downstream target? Are you looking for something more, you know, transformational that's either larger slash MOE? Just give us a flare as far as what you really like when it comes to bank M&A.

To answer your first question, Brady, does it take us out for a quarter or two? The answer is unequivocally no. It just doesn't. This is an investment. There's no integration risk. Terry's going to have to attend a board meeting once a month. No systems risk. None of their personnel transferred to our system. They're operating their company just like they were yesterday post-close. No, it does not. In terms of what we're doing on the M&A side, I mean, we've talked to banks between just shy of $20 billion all the way down to $700 million. And it sounds a little trite, but it's a little bit of a shotgun approach. But I will tell you that just because I think it's important to have conversations. The great news about Veritex is that we have optionality. And we've created optionality for a reason. And so that optionality could be, to your point, a couple of small downstream private banks. It could be a smaller public bank, or it could be an MOE. I mean, we're one of the few banks that have done two MOEs in the last 36 months, and we've done them successfully. So we have that going for us. Does that mean we do another one? I don't know. There's nothing in the interim. intimate that we're doing, and that's the wrong word, but you know what I mean. Imminent. That's the word I'm looking for. Sorry. But we have a lot going on, and we'll continue to have those conversations, and there's other non-interest income opportunities that can help our company as well. But we don't have to do anything. We have a really nice organic growth story, and so we're in a really good place, and we're not going to do anything that doesn't make sense.

Yep. Great. Well, that's good color. Thank you, guys. Thanks, Brady.

Thank you, sir. Your next question will come from the line of Gary Tanner from DA Davidson. Your line is now live. Go ahead, please.

Thanks, guys. Good morning.

Morning.

Morning. I wanted to go back to Thrive for a second. You said that they've been a customer. Have they been a Mortgage Warehouse customer of Veritex or just operating accounts? type of customer?

Mortgage warehouse and some operating businesses, operating accounts as well, but primarily mortgage warehouse.

Okay. So in the deck where you talk about deploying excess liquidity and capital, is that just vis-a-vis the cash purchase or will there be some additional partnership in terms of mortgage warehouse utilization that they may move lines over to you that were at other banks or anything else beyond just the pure fee flow from their net income?

Go ahead, Gary. Yeah, yeah, good question, Gary. I mean, you know, primarily we're just talking about the cash investment, and obviously it's got a pretty minor impact on our capital levels. You know, certainly we're going to look to do more business with them. You know, we're not really looking, you know, we think it's important for them, and I think they would agree, is that they keep their current list of mortgage warehouse providers. Do we want to be a bigger piece of that? Sure we do. But they had growth aspirations. You know, they just did a team lift out from Colorado in the last 30 days that's meaningful to their volume. So, you know, yeah, we will increase the size of our lending commitment to them, but we want them to maintain the other relationships they have. Also for us, we get the chance to buy, you know, portfolio mortgage loans too. We've been originating a lot in our portfolio. 60% of our in-house mortgage volume has been going to our portfolio, and we still can't grow it. So, you know, we're partnering with them on the 5171, Jumbo Arms, things like that. We love the product. And with two-thirds of their business and, you know, 65% of their business in Texas, We love that and are certainly happy to deploy some excess liquidity that way. And then we'll see where the partnership takes us from there. But we think there's a lot of synergies in this that can accrete to the benefit of the company and to their company. And we're just going to look for more and more ways to work together.

That's great. Actually, that was going to be my next question in terms of are you going to use this as a channel to kind of refill the single family bucket, which is down to 7%. I think it was over 9% a year or so ago. Is there a level you'd like to kind of have that single family portfolio maintain over time?

Yes. I mean, that's definitely an area where we want to grow our loan portfolio. Obviously, it's a great risk-weighted asset. We've had really no issues in our single family and Jumbo bucket, we want to grow it, and this is going to give us the ability to really add to that.

We'd love to see it get to 10 and maybe even higher as a percentage of the portfolio. We want to be mindful of where we are in the rate cycle, and you'll see our appetite for the product increase as rates go up. Over the last five quarters, we've put almost $200 million in our portfolio mortgage product, and it's shrunk 10%. And I think refis are going to slow, but we're certainly looking to be a pretty active buyer with them on the portfolio product.

Okay, and then last question for me if I can. In terms of the investment portfolio, I mean, it's crept up a little bit, but given kind of the positive expectations for loan growth, the ability to kind of add to the single family bucket as well over time, Do you expect more upward creep in the portfolio, or do you think that liquidity could get deployed elsewhere?

Gosh, that's the $300 million question, given how much excess liquidity. We're about $400 million in excess liquidity today. You know, I'm trying to resist the urge to balloon the portfolio. I believe in the people we've hired and the levers that Malcolm referenced in terms of talent, lines of business, opportunities. We've got room in Mortgage Warehouse. We've got room in Builder. Our community group is doing real well. We'll be opportunistic in there. We'll certainly reinvest cash flows. It will grow slightly, but don't look for the portfolio to balloon up. I'm really thankful for the team and how they've managed that portfolio. And the stable yield it's given us over the last five quarters, the cash flow coming off of it is not excessive. And our premium risk and reinvestment risk is lower than most of our peers. So we feel good about where it is. We'll let it grow a little, but not too, too much.

Great. Thank you for taking my questions. Thank you, Gary. Thanks.

Thank you, sir. Your next question will come from the line of Matt Olney from Stevens. Your line is online, sir. Go ahead, please.

Great. Thanks. Good morning, guys. Most of my questions have been addressed, but I wanted to ask about credit, so I'll put Clay on the spot. I'm curious, Clay, what your updated thoughts are around the hospitality portfolio. It seems like that was a area without there could be some some higher loss content a few quarters ago, but I'm curious what your updated thoughts are around loss content in the hospitality book.

Yeah, Gary, we thanks for the question. I'm sorry, Matt. Thanks for the question. Yeah, we continue to feel better and better about the hospitality portfolio. I mean, just anecdotally, we upgraded a $32 million credit since the end of the first quarter because it had performed with about a 1.4 debt service coverage ratio for the through the pandemic so you know that that's one anecdotal piece of evidence that all of the numbers that we're tracking in that portfolio are continuing to improve and we just don't see a lot of loss in that portfolio right now that we would say exists. We have no specific reserves that I can recall on a hospitality loan today.

Okay, that's helpful, Clay. Thanks for that. And then just following up, Terry, you mentioned in your prepared comments reducing a few branches. Can you just kind of repeat what you said on that and what are the thoughts on the cost savings there? Are those going to be reinvested in producers or technology? Just kind of broadly what your thoughts are there.

You know, I said we were closing four offices and reducing service in two others. You know, that certainly, you know, look, the impact of that is on an annual basis on our expense run rates, not all that. I mean, it's nice. It's significant. You know, look, certainly we're going to have to continue to invest in technology. We're excited to learn from Thrive. They're doing some amazing things with theirs. And, you know, so we're continuing to do that. And look, you know, if there's one thing I've learned from Malcolm is you are always recruiting and it doesn't matter really what the budget is. If the right opportunity on the personnel talent side presents itself, we're going to take advantage. So, I mean, I'm not looking, I'm looking for, you know, I'm looking for expenses to actually come down from where we were in Q1. But the biggest driver of that is just more deferred costs from originations, which the Snowmageddon definitely slowed that down a little bit this quarter, but then our unfunded and others kind of kicked in and helped us. So, you know, we're glad to have the cost saves. You know, they're not earmarked specifically to do anything, and I still think overall costs are going to trend down from where they were in the first quarter.

Okay, perfect. Thanks, guys.

Thanks, Matt. Thank you, sir. And for your last question, we have Mr. Graham Dick from Piper Sandler. You're live, sir. Go ahead, please.

Hey, guys. Good morning. Good morning. I'm just kind of wondering what your all's appetite might be to sell more SBA loans going forward. Just interested to hear from you all on this. It seems like premiums have been pretty healthy recently.

The SBA business has been up and down. You take it for the last year and you throw PPP in there. For everybody, the focus has been really on the PPP side. But we're still very, very committed to it. Terry, when we have an SBA loan sale, Terry does an analysis on every single loan on whether it makes sense or not. So if the market gives us the ability to sell, we'll sell. If the market doesn't, we won't. Sometimes it makes sense on holding, but that is an area we're focused on. We've made a few moves that we think enhance that area. We've actually hired a few new lenders in that area. We are very committed to it. Once we get through it, and really the PPP thing, I think that John said yesterday, we're getting one or two a day now. It's coming to a close. And so I do see that area ramping up just a bit.

Yeah, it's hard for them when they're trying to deal with all the PPP stuff. I mean, I think the momentum in the business is picking up. Look, gain-on-sell premiums are as good as I've ever seen in my career. And so we've certainly been in the market and will continue to be. And we do a discounted cash flow of hold versus sell. And if it's strong enough, given these premiums, we'll sell. And I agree with everything Malcolm said. I'm looking for good things coming from this business as we go through the rest of the year.

All right, great. And then thanks again for the disclosure on Thrive last night. You guys have talked a little bit about their technological capabilities. And to me, that suggests that they might be able to scale up or scale down more efficiently than traditional mortgage originators. So I'm just kind of wondering what kind of efficiency ratio you would expect in a more normal environment versus like what we'd be seeing today or over the last 12 months.

For the bank with Thrive or for Thrive Standalone? Just for Thrive Standalone. Well, I think you make the right point that technology is certainly going to play a key role in that. You know, they're pretty darn efficient in terms of how they, you know, they're probably running in the, for a mortgage company in the mid-60s, you know, maybe 70% efficiency. So... Fortunately for us, because it's an equity method investment and we just pick it up on a pre-tax basis, it's going to be very accretive and helpful to our efficiency ratio. It's going to push it down meaningfully because we're picking it up on a net basis. But overall, I agree with you. I think their efficiency ratio on a standalone basis, because of their technology and their business model, it's going to hold up better than most in the industry.

Okay, that's it for me. Thanks, guys. Congrats on the quarter. Thanks, Brian.

Thank you, sir. There are no further questions from the phone line at this time, presenters. You can go ahead and proceed with your closing remarks.

Thank you. Thank you very much.

Thank you, presenters. And, again, thank you, everyone, for participating. This concludes today's conference. You may now disconnect. Stay safe and have a lovely day.