Q1 2021 Veritex Holdings Inc Earnings Call
[music].
Good day and welcome to vertex 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'll now turn the conference over to MS. Susan Caudle, Investor Relations Officer, and Secretary to the board of Barry <unk> 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 statement.
And this time, if youre 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 <unk> dot 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 with our management believes better reflects the underlying core operating performance of the business. Please see the reconciliation of all discussed non-GAAP measures and are filed 8-K earnings release.
Joining me today are Malcolm Holland, our chairman and CEO, Terry Earley, our Chief Financial Officer, and Clay Riebe, 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 call the backside of this pandemic.
Our state is on 100% open businesses are back operating and many are being vaccinated.
And it's normal again.
Bank is fully open and we are currently operating at 92% of our team back working and the office.
And Jim and are excited to bring 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 <unk> 64, a share 18 and better than the previous period.
Our pre tax pre provision earnings operating earnings also performed well exceeding $40 million or one eight to return on average assets, while Aro TCE 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 and 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 brought on new builder group, which started January 1st they are having incredible success builds.
And their portfolio. It appears our timing is very good on.
Our lending teams stayed focused and intentional during the pandemic and some of the fruits of their labor is paying off our pipelines remained strong and building.
Seeing competition heat up especially related to pricing.
Deposits continue to grow at a very large rate. Despite our disciplined efforts to reduce deposit cost 2.31 basis points from three eight last quarter. Our deposit teams continue to find ways to reduce our cost and still think we'd have some room to lower going forward.
Credit continues to move and a positive direction and so many ways for the second quarter and a row, we did not provide and loan loss provisions.
Total charge offs for the quarter were not material on 150000, and our NPA to total assets reduced from 99 point and that into our forward look at our credit picture continues to be improving and encouraging on.
Now I'll turn the call over to Terry to discuss our financial highlights. Thank you Malcolm on page five you will see multiple grafts and I want to focus on a couple of these first tangible book value per share increased to $16 34, and the first quarter, reflecting strong tangible capital generation of $32 $9 million.
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 and the first quarter at 17, 4% and is 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 light business model is the key to maintaining our strong pretax pre provision earnings and strong capital generation on slide six net interest income decreased $1 2 million from Q4 to Q1 and $66 million. The most significant drivers of the decrease was day count.
Which lowered net interest income about $1 5.755 million and lower purchase accounting accretion and 510000 and from lower loan rates. This was significantly offset by disciplined deposit pricing, which improved net interest income by $1 1 million and growth and our loan portfolio.
And loan volume also contributed 721000 net.
The net interest margin declined seven basis points from Q4 to $3 two 2% looking forward. There are four factors, which should provide support to them. Yeah. First there are $923 million and CD maturities remaining in 2021. These mature at a rate of about 81 basis points and should be renewed around 20.
And five basis points.
And the forgiveness of PPP loans, and the redeployment of that 1% one of the 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.
Final factors balance sheet hedging and with that let's transition to slide and stuff as.
As you can see on this slide vertex started in Q1 highly asset sensitive, especially to the short end of the curve was 69% of our loan portfolio is tied to LIBOR or prime and 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 40 <unk>.
$3 million this gain will start to accrete into net interest income starting in March of 'twenty. Two. 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 pay one month LIBOR based on the current one month LIBOR rate this should add six basis.
To the NIM and Q2 2021.
Onto slide eight another strong noninterest income quarter with $14 2 million and revenue loan fees and mortgage banking income were up but the most significant increase was and government guaranteed loan income during the quarter as we originated the PPP loans vertex continued to elect the fair value option and the GAAP accounting treatment as a.
<unk> and using a broker broker quotes to value. These loans, we were able to recognize.
$6 3 million and PPP fees.
This amount includes fees from round to originations and revenue that was deferred and round one but is now recognized as the loans are forgiven operating expenses increased in Q1, approximately $2 million, but 50% of the increase is due to lower loan deferred loan origination costs increased salaries were 200000 per the quarter and.
And very much and one of management expectations, given the investments and talent, we have highlighted in prior quarters and remaining increases were employee benefits, including stock based comp and very much in line with management fees.
Outlook, our trailing four quarter operating efficiency ratio was 48, 2%.
To help maintain a strong efficiency ratio. The bank is closing four branches and 2021 and removing branch service from two others. This is a meaningful reduction and are already branch light business model.
Turning to slide nine and deposits, we had another strong quarter on the deposit front as transactional deposits grew $307 million for over 24% annualized over the last year transactional deposits were up $1 3 billion on.
And our 31%.
Graph on the bottom left shows and transit quarterly deposit costs and against Malcolm mentioned and declined by seven bps from Q4 to Q1, we now sit at 31 basis points and our deposit pricing discipline is certainly helping to support the net and 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, and our loan portfolio Malcolm's already talked about the growth for the quarter, we saw growth in all segments, except on multifamily and mortgage average mortgage warehouse balances grew 14, 5% and the first quarter. When you would normally expect seasonal contraction. This portfolio sits at 8% of average total loans excluding.
PPP growth and this portfolio has been a wonderful way to absorb the excess liquidity generated by the deposit growth off discussed earlier and it remains our intent to keep the average mortgage warehouse portfolio at 10% or less of average loans over the last three quarters, where Texas grown total loans less PPP and annualized rate of <unk>.
Eight 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 C&I line utilization and our unfunded ADC construction commitments and she.
You can see on the page C&I utilization is down 12% from year ago levels for every 3% increase and line utilization it translates into a 1% growth and total loans. Additionally, our unfunded construction commitments have increased by approximately $800 million and the last four quarters.
Slide 11, and gives you an overview of the PPP portfolio, including round, one and round two statistics round two was about 36% of round one loan forgiveness is making good progress and we still have $2 1 million and deferred revenue to realize as PPP forgiveness occurs on slide 12 capital ratios at the holding company and the bank.
Started the year from a strong position and remain robust and those ratios were relatively flat due to deposit driven and balance sheet growth absolute capital levels are higher by about $26 million, we declared a regular quarterly dividend of <unk> 17 per share or about 27% payout ratio also during the quarter we reported.
<unk> 148000 shares and average price of $27 31.
We have $89 million left on our authorization and intend to remain opportunistic.
Our capital deployment priorities, given the current valuation of our stock or organic growth.
Dividends strategic growth and lastly share repurchases with that I'd like to turn the call over to claim for the discussion on credit.
Thank you Terry and good morning, everyone. Overall, we are seeing our credit metrics stabilize and begin to show improvement.
And as you can look at page 13 of the deck I believe and it's important to note that and the chart on the top right you see our loans on non accrual are trending down from their peak and the third quarter of 2020.
And the bank capacity trends reflected in the chart and the top left corner of the page reflect the bulge and 90 days plus past due and this bodes made up.
A $7 $1 million SBA 504 loans that cured on the 15th of this month.
Without that past due loan our past due levels would be down from the fourth quarter.
<unk> to total loans remained relatively flat for the quarter at 176% as reflected in the chart on the bottom right on the page.
Benefits of improved, Texas, GDP, and unemployment and forecast by Moodys during the quarter were offset by additional specific reserves identified as necessary during the quarter net.
Net charge offs for the quarter were just shy of $150000 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 is important to note that the vertex originated portfolio posted a net recovery of $78000 over the past five quarters.
Criticized assets have declined by 5% from the high watermark and the third quarter of 2020.
Additionally, we experienced a 24% decline and PCB loans over the same period overall I'm encouraged by our trends and asset quality.
Moving to page 14, this slide give some detail on what we're seeing and our hospitality and office portfolios.
Our hospitality book continues to produce encouraging results.
Revenue trends continued to improve as to occupancy trends were tracking and logging data on <unk> 75 per cent of the hospitality book relative to occupancy revenue and Revpar for the month of March Revpar for the book with 17, 17% higher than the previous high watermark setting off.
Total of last year's occupancy.
Occupancy.
65% from March up from the average of 49% from the fourth quarter of 2020, we expect continued improvement and the hospitality space is the state of Texas continues to open up and travel metrics continued to improve.
We're looking to upgrade loans and this portfolio that are demonstrating consistent cash flow performance coming out of the pandemic.
The banks pre office portfolio makes up and nine 8% of the book the weighted average LTV for the portfolio was 59% on.
Our office portfolio is based in suburban locations, which we still locker and better positioned for success coming out on and then there are physical loan structure calls for significant cash and equity at 35% or more which provides us with significant downside protection.
51% on the office portfolio is located in Dallas suburban locations are.
Our top 10 exposures and the office.
And office make up 32% on the total portfolio and are performing well with only one credit and the top and what the risk rating on the past watch.
6% on the office book received the deferral during the pandemic with only one 4% on the book receiving a second deferral.
There's only one classified assets in this portfolio that comprises one 6% on 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.
As you've heard we're excited about our quarter, but probably more excited about the banks future.
This feature is the continued work on <unk>.
One of our core competencies M&A, we continue to have discussions with many different opportunities, both private and public banks as well as noninterest income companies.
But we will remain disciplined and our principles underwriting and continued focus to add scale and EPS growth.
I would now like to talk about the press release released we issued concerning our and divestment Dubai, 49% interest and drive mortgage.
Rogers and 25 year old mortgage company out of Georgetown, Texas, just north of Austin owned and operated by the Jones family.
Last year, it came decided that and needed to make a concerted effort to increase our noninterest income.
We have looked at numerous businesses and identified drive as a potential partner they've been clients of the bank and well known to many of our bank officers and the partnership with thrive and very compelling from a strategic standpoint, it provides us scale and the volume intensive and mortgage market. It provides.
And additional driver and our noninterest income categories category, which we have always lagged our peer group. Additionally, it provides a natural hedge to and 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 and 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.
Indications of the return we expect going forward.
But the company's result, this quarter, we again feel strongly about giving back to our communities. During these difficult days and we have done so in many communities and our markets. Additionally, the ice storm or we call snow again was quite costly and many of our employees to give you a little glimpse into our vertex family culture.
Their fellow employees donated almost $50000 out of their own pockets, which are bad bank decided to match to assist and 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 would now like to open the line for any questions.
Thank you, Sir ladies and gentlemen, and do you have a question at this time. Please press the star and the number one can you touch on telling Palestine and again, that's the Star then the number one key touchstone telephone and maybe a question has been answered or you wish to remove yourself from the queue. Please press the pad.
Cool.
Your first question will come from the line of Michael Rose from Raymond James Your line is now live go ahead.
Hey, good morning, guys how are you.
Hey, Michael.
Hey, maybe we could just start with the with the thrive acquisitions can you just give us some color on.
Howard.
How it came to be your comfort level with.
Buying something and you know it.
Mortgage related essentially to the top end of.
But 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.
<unk> income.
I appreciate the first quarter numbers do you have any expectations for what.
And what their pretax income contribution might be.
And this year and then are there any expenses related to it. Thanks.
Yes, I'll give you an idea of how it came together and let Terry dress some of the financial considerations you discussed.
And we did buy my team sat around and then our strategic planning session last year and said you know where do we make it to get better and non.
Noninterest 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 insurance business or the title business and.
So we started looking around and you know we really were we had a small mortgage company and we had a pretty decent SBA business and so we said all right, let's go somewhere where we have some competency and and you know we had hired.
Our galvo run our mortgage warehouse is very well known and the business and.
And we thought you know, let's let's.
And let's figure out somebody that we know characters and big Big.
Deal for Us and.
And so we started looking and this one and kind of popped out and so we actually went to them and said Hey, what do you guys think and.
And so that started to track down to where we are today.
They are a very high quality family and a very high quality business.
I would tell you their technology is.
Very very good.
And there's a husband and wife team and then and there's some that run the business, they're very in tune to it and it just it can be kind of a perfect match and so.
We've never had any issues during the whole negotiating diamond.
And I think it's come together really nice so we just felt like it was an area that would be helpful to our business going forward from the strategic reasons that I mentioned so we're.
And we're really really excited and Terry can address some of the financial stuff and.
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 pretax earnings and <unk>.
And through the fee line.
Investment and mortgage banking company I don't know exactly what we'll call it but you'll be able to see us and we'll certainly have enhanced disclosures.
Certainly have a little bit and transaction cost mainly for financial advice and legal and other than that it's not and that's not going to be a big number.
Relatively speaking to what were undertaking here today.
From a financial standpoint.
I think I think thrive and don't have really really good job and growing their business I think it's important to note how much of their business is coming purchase versus refi and how much better. They are doing on the purchase side than the typical MBA statistics and and as you think about it.
And they did as you can see from the volume numbers on slide 18, I mean, you know they did a couple of billion dollars last year, they're certainly off and their year end is 11 30, and so you see and your Q1 from December through February I mean, that's the slowest and the mortgage banking space of the year and Theyre 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 and 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 and certainly through through March it wouldn't it wouldn't indicate that the debt and and I already have 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 'twenty to the forecast for the and beat from the MBA is down about 30%.
And so that's and I think theres going to be a little bit of pressure on the gain on sale margins as volume drives up so that's the way I would think about the earnings contribution it's.
Obviously, theres not anything to really integrate here. So theres no cost of so there's really no distraction and those costs to kind of put this putting it on our systems. So we leave a lot of strategic bandwidth. If you will to do other things.
And so anyway, that's the way I think the biggest thing is we're shooting to get this closed by June 30, obviously, theres a theres a lot to do along that path.
But I think exactly when we get it closed is going to be the biggest driver.
'twenty, one because I think they are off to a great start and then 'twenty. Two 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 part of.
I appreciate all the all the color and maybe just as my follow up and.
Another quarter.
Loan growth X P. P P ware and ex warehouse of high single digits. 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 and regards to the pipeline the homebuilder Finance group lender hires.
Et cetera is there we just setting the bar low here or.
Is there some pay downs that you expect just any color there would be helpful. Thanks.
Pay downs is certainly something that were 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.
I think we're being reasonable but to your point and we have a lot of things working on our direction, whether it's the unfunded piece or the C&I utilization, while the builder group or the new hires we have a lot of great momentum and and I made it during the pandemic our folks came into the office.
And they were calling on people we work through the pandemic.
And so yeah.
Yeah, I think those are those are very attainable numbers without throughout.
Okay. Thanks for taking my questions.
Thanks, Mike.
Thank you Sir your next question will come from the line of Brady Gailey from <unk>. Your line is non life go ahead. Please.
Hey, Thank you good morning, guys.
Okay great.
And somehow you just mentioned the hiring that you're saying and I know you guys talked a lot about.
Hiring and a lot of talent last year and 2020.
Has that continued on.
This year in 2020, one and 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 and Houston and a couple and Dallas. So the answer is yes.
And everybody's playing in that arena, we're not we're not really hiring and we feel really good about our commercial real estate teams and both Dallas Fort worth and Houston, So they're really they're really non commercial real estate tax folks, but yes that iron continues and.
It will always continue.
If we don't do any other deals or don't do anything and it will be organic growth piece is always the piece at pace.
And the most and it's the most value to our shareholders and we just think were and are really good situation with all of these.
These mergers and anticipated.
It's just a very disjointed in terms of the banking talent and we have that candidly, we had some they're calling us.
And so we're going to take advantage of it.
Yeah and.
And Terry I, just wanted to talk about the outlook for spread income and margin Yeah. I heard your comments about you have some CD maturities.
Coming up and you know hopefully excess liquidity will go down and the P. P. P will be less of a drag and how how do you think about all those would lead you to believe.
Good for spread income and margin, but do you think theres still some downward pressure the spread and margin here.
Well I think there's going to be I think loan price thing Theres, certainly downward pressure coming from that and I don't think it's going to get easier or better as the year goes along and now I'm tickled to death. When you look at the slide on net interest income and we were able to offset the downward pressure from loan rate with more than offset it.
The profit rates.
Slide six and.
So yes, there is.
And if you don't know what the government's going to do on the stimulus, but if theres 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 the NIM pressure from from excess liquidity is probably going to get.
Worse I think deposit pricing is if we still have I mean, I couldn't be more thrilled about the job our teams have done and deposit prices I mean.
31 basis points and headed lower because I can say that with confidence because march was low.
Meaningfully lower than the quarter total so, but we can continue to push that down and if we can just to offset what's going on and on the one side look and we're trying to grow net interest income the nims a bit out of our control given what's going on on the funding side and we just don't want to go and go.
To go too Crazy and.
Yeah.
And put debt into fixed income market and our investment portfolio too much of that so yeah, but and also well.
The fixed income or the fixed receive hedges are going on I said six basis points of NIM expansion from that alone because if look with 70% of your portfolio tied to LIBOR and prime if rates go up we went and big you see that any interest rate risk measures.
What we're trying to do is offset the interest rate risk by.
Of rate staying down lower for longer and I know, that's not the conventional wisdom, but we and if rates go the other way in spite of the hedges and a big what you still see it and the table and we thought this is a way with rate staying down six.
Six basis points, and NIM was $1 $2 million per quarter.
So.
And we that's going to help too.
Alright, that's good color and then finally for me, it's great to see the thrive mortgage deal I think I understand that it's pretty pretty simple transaction or does that.
Having that deal pending and does that set you back a couple of quarters as far as you know getting back out there and trying to pursue.
And with traditional bank M&A target and.
As you.
Focus on bank M&A just can.
Give us a little color on on what Youre looking for are you looking for a smaller kind of downstream of targets are you looking for something more transformational that's either larger slash and are we just give us a player as far as what you'd really like when it comes to bank M&A.
Yeah. So to answer your first question Barry does it does it take us out per quarter to the answer is unequivocally no.
It doesn't I mean, this is an investment there.
No integration risk.
Terry is going to have some tenant board meeting once a month.
No systems risk none of our FERC, none of their personnel transfer to our system, they're operating their company just like they were yesterday post close so.
No. It does it does not.
In terms of what we're doing on the M&A side.
I mean, we've talked to banks between.
And 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 would tell you that just because I think it's important to have conversations.
The great news about their attacks and 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 and MLR and we're one of the key banks that have done too.
And Mlps and the last 36 months and we've got them successfully so.
So we have that going for us does that mean, we do another one I don't know.
Nothing in them and.
And the intimate intimate that we're doing and that's the wrong word but and.
And the imminent and that's the word im on for Sarah.
But we have a lot going on and we'll continue to average conversations and theres. Other non interest income opportunities that could help our company as well and so 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.
Yes, great well that's good color. Thank you guys.
Thanks, Brian.
Thank you. Thanks. Your next question will come from the line of Gary Tenner from D. A Davidson. Your line is now lines go ahead. Please.
Thanks, guys good morning.
Good morning, Good morning, I just wanted to go back to thrive for a second you said that they've been a customer and they've been a mortgage warehouse customer of vertex or just property accounts.
Now that's the customer more mortgage warehouse and some operating businesses operating accounts as well primarily mortgage warehouse.
Okay. So in the deck, where you talked about deploying excess liquidity and capital is that just vis 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 any other anything else beyond just the pure fee flow.
And so from there and net income.
Go ahead, Sir Yeah, Yeah. Good question, Gary I mean.
Primarily we were just talking about the cash investment and obviously, it's got a pretty minor impact on our capital levels.
Certainly we're going to look to do more business with them.
Well.
And we're not really looking we think it's important for them and I think they would agree is that they keep their their current list of mortgage warehouse.
Providers do we want to be a bigger piece of that sure we do but they they have growth aspirations.
Did a team lift out from Colorado, and the last 30 days that meaningful to their volume.
So so yes, we will increase the size of our lending commitments to them, but we want them to maintain the other relationships. They have also for us we get the chance to Dubai.
Portfolio mortgage loans too, we've been originating a lot and our portfolio.
And 60% of our in house mortgage volume has been going through our portfolio and we still can't grow it and so we're partnering with them on the full 5171, jumbo arms and things like that we love the product and with two thirds of their business and 65% on their business in Texas.
And we love that and are certainly happy to deploy some excess liquidity that way.
So and.
And that and then we'll see where the partnership takes us from there, but we think theres a lot of synergies and this from.
And that can accrete to the benefit of the company and to their company and it will just come and look for more and more ways to work together.
That's actually that was me and my next question in terms of are you use this as a channel and the 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 and maintain over time.
Yes, yes, I mean, that's definitely an area, where we want to grow our loan portfolio. Obviously, its a great risk weighted assets, we've had really no issues and our single family Jumbo bucket, we want to grow it and this is going to give us the ability to really add to that and we'd love to see it get to get to.
10, and maybe even higher yes, as a percentage of the portfolio absolutely.
Be mindful of where we are and the rate cycle and youll see our appetite for the product increase.
As rates go up over the last five quarters, we've put almost $200 million and on and our portfolio mortgage product and it's shrunk 10%.
So and and.
<unk> refis are going to slow, but we're certainly looking to be a pretty active active buyer with them on the portfolio of products.
Okay and then last question from me, if I can and terms of the investment portfolio. I mean, it's it's crept up a little bit, but given kind of b b positive expectations for loan growth.
And to kind of add to the single family.
As well over time do you expect more upward creep and the portfolio or do you think that liquidity could get deployed elsewhere.
Got it set up.
$100 million question given that much right.
Liquidity, we're about $400 million and excess liquidity to do that.
Trying to resist the urge to balloon and the portfolio.
I believe and the people, we've hired and and the levers that Malcolm referenced and you know in terms of talent and lines of business opportunities, We've got room and mortgage warehouse, we've got room and builder our community group is doing real well and we've got I mean so.
And don't look for them.
We will be opportunistic and there will 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 debt portfolio and the stable yield it's given us over the last five quarters the cash.
<unk> come off coming off off it's not excessive and our premium risk and reinvestment risk is lower than most of our peers. So we.
And we feel good about where it is we'll let it grow a little but not too too much.
Great. Thanks for taking my questions.
And I got here thanks.
Thank you Sir your next question will come from the line of Matt Olney from Stephens. Your line is all I said go ahead. Please.
Great. Thanks, and good morning, guys. Most of my questions have been addressed but I wanted to ask about credit, but clay on the spot and I'm curious what your updated thoughts on around the hospitality portfolio. It seems like that was a.
Area, where he thought there could be some some higher loss content and a few quarters ago, but I'm curious what your updated thoughts are around loss content and the hospitality book.
Yes, Gary.
For the question and I'm, sorry, Matt Thanks for the question.
Yeah, we continue to feel better and better about the hospitality portfolio.
And just anecdotally, we upgraded the $32 million credit since the end of the first.
<unk>.
And.
Performed with about a one four debt service coverage ratio from.
Through the pandemic so you know.
And that's one anecdotal piece of evidence that the all of the numbers that we're tracking in that portfolio are continuing to improve and.
And you know.
And we just we just don't see a lot of loss and that portfolio right now that we would we would say.
Yes, we have.
We have no specific reserves that I can recall on a hospitality and alone to debt.
Okay.
Okay. That's helpful color. Thanks for that and then just following up Terry you mentioned in your prepared comments.
Reducing and a few branches could you just from kind of repeat what you said on that and and what are the thoughts on the cost savings there there's gonna be reinvested and producers are technology, just just kind of broadly what your thoughts are there.
And I said, we were closing four offices and and reducing service and two others.
You know that that certainly.
The impact of that is.
On an annual basis on track on our expense run rate not all bad.
It's nice it's significant.
Look what we read and I mean, certainly we're going to have to continue to invest and technology purchases.
And to learn from thrive and they're doing some amazing things with their.
And so we're continuing to do that and look and if Theres. One thing Ive learned from Malcolm is you are always recruiting and it didn't matter really what the budget is it if the right opportunity on the personnel talent side presents itself. We're gonna take advantage. So I mean, I'm not looking for and I'm looking for.
Looking for our expenses to actually come down from where we were in Q1, but the biggest driver of that is just more deferred cost from originations, which that snow would get and definitely slipped we slowed that down a little bit this quarter, but did and our unfunded and others kind of kicked in and helped us.
And we're glad to have the cost saves.
And not earmarked specifically to do anything and I still think overall costs are going to trend down from where they were on the first quarter.
Okay perfect. Thanks, guys.
Thanks Pat.
Thank you Sir.
And for your last question, where you have Mr. Graham debt from Piper Sandler. Your line is on like please go ahead.
Hey, guys good morning.
Good morning.
And.
And just kind of wondering what your appetite might be to sell more SBA loans going forward.
And just interested to hear from you on this it seems like premiums have been pretty healthy recently.
And the SBA business, it's been up and now you can take it for the last year, and you're thrilled ETP and there and for everybody.
<unk> has been really on the PPP side.
But we're still very very committed to it.
Terry when we when we have an SBA loan sale Jerry doesn't analysis on every single loan on whether it makes sense or not and so if the market gives us the ability to sell and we will sell if the market does it we want and so on.
Sometimes it makes sense on on holding but.
And that is an area, where we're focused on.
Made a few moves.
But we think enhance that area, we've actually hired a few new lenders in that area.
So.
We are very committed to it and once we get through and and really the PPP thing I think John said yesterday, and we're getting one or two a day now and so it's coming to a close.
And so I do see that area and 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 and the business is picking up look gain on sale premiums are as good as I've ever seen in my career.
And so.
We've certainly been in the market and we will continue to be and and we do a discounted cash flow of hold versus sale and if it's strong enough given these premiums will.
Phil.
And you know and.
I agree with everything mountain and said I'm looking for good things coming from this business as we go through the rest of the year.
Alright, great and then thanks again for a disclosure on thrive last night.
You guys had talked a little bit about their technological capabilities.
And to me that suggests what they might be able to scale up our scaled down more efficiently than traditional mortgage originators. So on.
And just kind of wondering what kind of efficiency ratio, you would expect and a and a more normal environment versus.
Like what we'd be seeing today or over the last 12 months.
For the bank with thrive or per drive stand alone.
Gesture thrive stand alone.
Well I mean, I think you make the right point that the technology is certainly going to play a key role and that.
They're there.
We're pretty darn efficient.
In terms of how they.
They're probably running and the mortgage company in the mid sixties.
Maybe 70% efficiency, so fortunately for us because it's an equity method investment and we just pick it up on a pretax basis, it's going to be very accretive and helpful to our efficiency ratio is going to push it and push it down meaningfully because we're picking it up on a net basis, but overall I agree with you I.
You know I think their efficiency ratio on a standalone basis, because of their technology and their business model.
Hold up better than most and the industry.
Okay. That's it from me.
Thanks, guys congrats on the quarter.
Thanks, Greg.
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 for that business and again. Thank you everyone for participating. This concludes today's conference you may now disconnect and have a lovely day.
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