VBTX (2020 - Q4)

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 Caudle, Investor Relations Officer and Secretary of the Board of Veritex Holdings. Susan Ca

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 2. 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 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'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. You 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 is the line of 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% linked 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% for the quarter. Loan growth ex-PPP and mortgage warehouse continued its positive trend growing 4.3% annualized for the quarter and 2% for the year ended 2020. Mortgage warehouse continued its strong growth with 24% annualized increase for the quarter or 215% growth year-over-year. Yet it still remains only 8.5% 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 came onboard in more new relationships than any other quarter during the year. We continue to see fall out 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, [Audio Dip] another positive loan growth year. Deposit growth continues to be incredibly strong with total deposits growing 18.7% linked quarter, but more impressive is the annual growth and non-interest bearing deposit growth of 35% year-over-year. Our credit picture is becoming clear and is trending in a positive direction. For the quarter, we did not provide a loan loss provision, NPAs decreased 12 basis points. And our ACL was reduced from 2.1% of loans to 1.8% 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 5, 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 book capital generation of $20.5 million. This is an 11% increase on a 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-light business model is the key to maintaining our strong pre-tax pre-provision earnings. On Slide 6, net interest income increased approximately $1 million from Q3 to Q4 to $67 million for the quarter. The expansion of 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 rise. The core NIM excluding all purchase accounting accretion expanded five basis points to 3.15%. The GAAP 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 disciplined deposit repricing, there are additional opportunities to continue to drive deposit rates slower. Finally, the prepayment of a $200 million FHLB advance possibly impacted the NIM by three basis points. Note, the Q4 loan 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 lines and redeployment of that 1% loan into higher yielding asset classes, for Q4, for the PPP portfolio represented a 12 basis point drag on the NIM. On 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 income. 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 8, deposits. As Malcolm said, we had another strong quarter on the deposit front as transactional deposits grew $312 million to 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 cost. Average cost of total deposits declined by eight basis points in Q4 and now stayed 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 9, you see the details of our loan portfolio. Malcolm has 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 the C&I growth. As you can see on the page, year-end utilization levels are down 6% from 2019 and 11% in the peak levels in the second quarter. Regarding the PPP portfolio, we had $50 million or 12% [Audio Dip] the quarter. And we expect the pace of forgiveness to accelerate as we go through 2021. On Slide 10, in allowance for credit losses. This slide lays out the impact from CECL on each loan pool for Q3 and Q4. Moody's forecast, the Texas unemployment and GDP continuous that 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've reduced our specific reserves on non-accrual loans to $16.9 million or reserve level of approximately 21%. This decline was to resolve 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 reduced 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 on $902,000 in the face of a favorable change in economic forecast. This increase resulted from considerable commercial real estate production during the fourth quarter that has yet to find out. On Slide 11, capital ratios at the holding company and the bank started the year from strong position and remain robust as we exit 2020. Most ratios declined modestly, even though absolute capital levels are higher than modest decline in the ratios are due to balance sheet growth and a notable increase in unfunded commitments that push 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 $0.17 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 deferrals have dropped from a high of $1.2 billion as of late July to $36 million as of – or 0.6% of total loans as of January 21. 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 504 loan in the amount of $7 million on a hospitality property that's well secure as well as a $2 million in administrative passengers that are now current. Net charge-offs are reflected in the 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 NPA 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 Houston Office building that was transferred to loans held for sale and mark-to-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 build over the first three quarters was done in anticipation of these charge-offs and do not change our overall view of the loss 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 and 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 model for our hospitality books since the pandemic began. Hospitality loans on deferment had dropped from 60% of the book and at 7/24/20 to 0.65% as of 12/31/20. 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 to the 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 CRE, which is on Page 15, our total retail referrals 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 that 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 has been eliminated as we prepare for the SBA to begin making payments on SBA loans in the restaurant, the largest criticized relationship continues to perform after 190 day payment deferment. Page 17 is a new slide to provide some additional color on our SBA portfolio, which we referenced frequently. In late third quarter, we engaged in an external review of operations and the 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 credit worthiness standpoint, the SBA department was deemed to be substantially compliant with minor corrective measures require 67% of our current net book balance of government guaranteed loans are secured by real estate. Having tangible real estate collateral on two-thirds of our SBA exposure will help limit losses in the SBA book as stimulus support. And as you would expect, the levels of criticize 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 feels 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 to the best NSA's 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.

[Operator Instructions] Your first question comes from Graham Dick from Piper Sandler.

Hey, guys. Good morning.

Good morning.

So 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?

We haven't seen a whole bunch of pricing pressure, candidly. Our folks have been calling on, been in people's offices when allowed and making contact. There are some in our markets or many in our markets are not even doing that. And so now our ability to get things done and execute is worth something. And so at this point, we haven't seen any real pricing pressure because 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, build up some goodwill that it shows that we're worth something. But I don't see it changing a whole bunch at least in the short-term.

I would add to that, it’s Terry. I think our lending teams have done a very good job 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 they offer 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 tick back up a bit, but it's still pretty low relative to where it would be on a normal environment.

Yes. Line utilization is certainly down a little bit from where it was. But as Texas goes, 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 have a read about. And so, we look for positive loan growth, take out mortgage warehouse and PPP. We still think that 2021 is going to be, 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 out of it. But I think mid single-digits probably for 2021 ex-PPP and mortgage warehouse is something that we're certainly going to aspire to.

Okay, great. Thanks for the color. That's all for me guys. Congrats on the quarter.

Thank you.

Thank you.

Your next question comes from Matt Olney with Stephens Inc.

Hey, thanks. Good morning, guys.

Hey, Matt.

Hi, Matt.

I want to start on Slide 18. I think it's a good new slide about the talent that's in 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 it 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, that perhaps flow from here, just trying to figure out kind of where we go from here. Thanks.

Yes, 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. These are several and these groups are upgrades, but most of them are just additions. And 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 to investing in people. I mean, we're in the people business, the disruption is only going to get greater with one of what's the big PNC-BBVA deal. We're already seeing that disruption. And I saw yesterday – 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 prepared 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-offs from here? Thanks.

Yes. 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 and we did not up our estimates for loss exposure going forward by [indiscernible] what happened in the fourth quarter with these couple of large credits.

Yes, Matt. I think – it’s Terry, I think this is the beauty of people. It was not exactly an accounting standard. I was excited to see but I am having become a fan because it allowed us to use economic forecast to build reserves in anticipation of what might happen. And I think you've seen over the course of bank releases this quarter, a lot of banks were 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 – I think by and large, most banks’ loss expectations are coming down as have ours from Q2 to Q3, from Q3 to Q4 of overall cycle losses. And this is something you knew was going to happen when we started down this path, when the pandemic, just didn't know when it was going to be or who it was going to be. And so I think the challenge is, we provided for it. We did what we should do, and our losses are in great shape. I mean, our portfolio really – I mean, yes, we had charge-offs, but we knew we were going to have charge-offs in the cycle. And the challenging, I think internally is really not to overreact to that. You knew stuff is coming and let's just get it behind us and 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 just kind of laid out that your credit loss expectations through the cycle really haven't changed, maybe improved over the past couple of quarters. Is there any reason to think that you guys couldn't get back to a reserve level that was kind of where it was pre the CECL day one adjustment as we move forward, assuming the economy continues to get better, et cetera.

Yes. I mean, your question specifically is can we get back to reserve levels prior to the pandemic, for CECL…

CECL day one.

CECL day one and the answer is absolutely, lot of its dependent on the economy. But we actually sitting here today, we feel as good about our credit outlook as we've had since April 1 of last year. And so, yes, 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 quick we win, right. I mean, there's just still a lot of unknowns, but yes, I think when you – 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 CECL day one. And that was 1.23%.

Very helpful. The other question I wanted to ask, the outlook seems relatively positive, right. So kind of mid single-digit loan growth, maybe the warehouse comes off a little bit, you get some margin expansion, deposit inflows have been good. 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.

Yes. I mean, look, and when you got $910 million of CDs repricing. And they’re repricing down, let's just call it 75 bps or so, I mean, that's meaningful net interest income growth. And then you couple that with the loan growth we're talking about, we believe we're going to seek some, we don't think it's going to – we're very focused on that. And I mean, so yes, we believe, we'll see net interest income growth really led by deposit repricing growth and 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 and in terms of what you would look at, just in terms of complexion and size? You guys are about $8.8 billion 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 by 10 billion guideposts are – would you be looking at something smaller tuck-in cost APAC deal? Thanks.

Yes, I mean, in a perfect world, we'd love to 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 makes some really good sense for us. 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 always thinking out, how could we improve our deposit franchise being in a major metropolitan area? It’s more difficult, 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.

Thanks, Michael.

Your next question comes from Brady Gailey with KBW.

Hey, thanks. Good morning, guys.

Good morning, Brady.

Hey, Brady.

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

I do. 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 – and we’re 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 2020 at all. We don’t want to be that dependent on that business. I think we’re 8.5% as of period end. And on an average basis; we are 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 2020.

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 might ultimately be. And so we’re very, very thankful for its ability to soak up some of this liquidity and yes, we’re aiming that frequently.

Oh, yes. That was great for 2020. So, how should we think about buyback? Do you have some left in the authorization? But the stock has done relatively well like all banks stocks have done well recently. but it’s now at 1.75% intangible, and is it right to think that if buybacks aren’t as likely as you shift more towards focus on M&A?

Yes. I mean, I’ve been very careful to use the word opportunistic, and I think that’s what we were in Q4 and intended to remain. Brady, our general view is to use capital; the priority for capital is organic growth, strategic growth, dividends, and buybacks. And so 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, the math is pretty simple. That’s kind of our – that’s kind of our guideline, you can tell, where we’re going to be. And so how much we do in 2021 is going to be a function evaluation. we’ve got – we’re going to generate a fair amount of capital and we’re willing to use it there if the valuations wanted.

All right. And then just looking at the $10 billion in asset threshold and you’re at $8.8 billion today, you back up PPP, you’re at about $8.4 billion, and then you still have some excess liquidity there. I mean, it feels like for you to hop over $10 billion with maybe, some of this asset shrinkage that’s coming up and it feels like you’re going to have to do a $2 billion to $3 billion deal, if not more than that. I mean, is that – maybe to ask it differently, 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, how big we would consider. Because my history has been very opportunistic and 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 I think to just be totally transparent, we would look at everything from sub-billion or close to it to MOE of some sort. Obviously, I think, one thing we have definitely learned and this is a new news with its scale is hugely important in our business. And we’ve got to build an asset base that we can spread these expenses over a wider and we try to become more efficient. And so everyone would ask, so what’s that size? How big do you want to be? And I think the answer for everybody is the same, depending on what size you are. we want to be double, if you’re $3 billion, you want to be $6 billion and if you’re $6 billion, you want to be $12 billion. And if you’re $8.5 billion, you want to be $17 billion. So, 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 it.

All right. That’s helpful. And then finally, from me, I’m just curious the loan that Clay mentioned in Marietta, Georgia, and that’s a suburb here in Atlanta, that seems pretty far out of your footprint. What – how did you all get that loan?

Yes. 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.

Thanks, Brady.

Your next question comes from Gary Tenner with D.A. Davidson.

Thanks. Good morning, guys.

Good morning.

What – hey, I’m going to ask about just your thoughts on kind of currency management and liquidity in 2021 as you get the PPP repayments coming in. you talked about kind of core loan growth, but beyond that, in terms of the investment portfolio, what are you thinking of – 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, that’s a good question. I mean, you’ve seen us the portfolio – the investment portfolio strength. I mean, we’re – on an average basis, we ran with a little more liquidity than I would have liked in the quarter, but that’s driven really about what’s going on in the deposit inflow side. I mean, you’ll see us play on both sides of the balance sheet. I mean, obviously, we prepaid a pretty sizeable FHLB advance, because the economics just made sense. So, in terms of the portfolio, we’re not crazy about getting out so far. I mean, 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 risks that the negative convexity that we added in the portfolio and how it really impacted us. So, we like, where the portfolio is. We will – we’re not – we don’t – growing earning assets are important. I don’t want to see the portfolios shrink a lot. And so we’re going to have to work hard to find opportunities that will call 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, we’re not – I mean, we have a muni portfolio, but I’m just not going out to double-digit duration on these things to get have one yield. And just, I just don’t think that’s a smart move right now. but so – we’re going to just try to be optimistic, we’ll prepay stuff when we can. And we’d much rather continue to grow the mortgage warehouse business, I mean, or kind of internal limit, 10% of average in any of entertainment, I know that Amy has done a great job. We’ve broadened and strengthened that 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 for quarter $37.5 million or so, give us a sense of kind of the – at least early 2021 outlook there, given all the hires you’ve made and where some expense may settle out?

Well, I mean, I think, we’re so efficient that, again, the 2020 efficiency ratio was under 48%. We ended the year with – even with all those highest if – just under 50% for the quarter. It’s not really going to go down, discretionary spend for marketing and travel, things like that’s going to be hiring 2021. Some of these people that we brought on in the last six months of the year; will have full-year expenses for the next year and we’re all hoping that it’s going to be a – we’re all hoping that variable incentive costs going to be better too. But it’s – I mean, we’re very sensitive to the efficiency ratio. We know that’s a key to generating organic capital. and so it’ll be up – steady to up song, but not going crazy.

Thank you.

Thanks, Gary.

Thanks, Gary.

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

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

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