Veritex Holdings' (VBTX) CEO Malcolm Holland on Q1 2021 Results - Earnings Call Transcript

Veritex Holdings, Inc. (NASDAQ:VBTX) Q1 2021 Earnings Conference Call April 28, 2021 9:30 AM ET

Company Participants

Susan Caudle – Investor Relations Officer and Secretary to the Board

Malcolm Holland – Chairman and Chief Executive Officer

Terry Earley – Chief Financial Officer

Clay Riebe – Chief Credit Officer

Conference Call Participants

Michael Rose – Raymond James

Brady Gailey – KBW

Gary Tenner – D.A. Davidson

Matt Olney – Stephens

Graham Dick – Piper Sandler

Operator

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

Susan Caudle

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. 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 will now turn the call over to Malcolm.

Malcolm Holland

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 bringing 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 $0.64 a share, $0.18 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 ROATCE continue 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 1.

They are 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 cost 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 $150,000 and our NPA to total assets reduced from $0.99 to $0.92. 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.

Terry Earley

Thank you, Malcolm. On Page 5, 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 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-light business model is the key to maintaining our strong pre-tax pre-provision earnings and strong capital generation.

On Slide 6, 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 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 declined seven basis points from Q4 to 3.22%. Looking forward, there are four factors, which should provide support to the NIM. First, there are $923 million in CD maturities remaining in 2021. This maturity 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 6 basis points.

The final factor is balance sheet hedging. And with that, let’s transition to Slide 7. As you can see on this slide, Veritex 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 receipt 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 8, 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 at the GAAP accounting treatment. As a result, and using the broker quote to value these loans, we were able to recognize $6.3 million from 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 increased in Q1 approximately $2 million, but 50% of the increase is due to lower loan – deferred loan origination cost. Increased salaries were $200,000 for the quarter and very much in line with management expectations given the investments in 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 full-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-light business model.

Turning to Slide 9 in 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 or 31%. The graph on the bottom left shows the trend in quarterly deposit costs. And again, as Malcolm mentioned, it declined by 7 bps 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 and our loan portfolio. Malcolm has 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 our 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 we factor in strengthening pipelines, C&I line utilization and our unfunded ADC construction commitments.

As you can see on the page, C&I 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 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 in deferred revenue to realize as PPP forgiveness occurs.

On Slide 12, the capital ratios at the holding company in the bank 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 $0.17 per share or 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 repurchases.

With that, I’d like to turn the call over to Clay for the discussion on credit.

Clay Riebe

Thank you, Terry, and good morning, everyone. Overall, we’re seeing our credit metric 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 the bulge a 90-day plus past due. This bulge was made up of a $7.1 million SBA 504 loan that cured on the 15 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 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% from the high watermark in the third quarter of 2020. Additionally, we’ve experienced a 24% decline in PPP 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% on the hospitality book relative to occupancy, revenue and RevPAR. For the month of March, RevPAR for the book was 17% higher than the previous high watermark 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 CRE 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 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 10 exposures in the office – in office make up 32% of the total portfolio and are performing well with only one credit in the top 10 with a risk rating of past watch. 26% 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.

Malcolm Holland

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 mean 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 us 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. 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.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] Your first question will come from the line of Michael Rose from Raymond James. Your line is now live, go ahead please.

Michael Rose

Hey, good morning guys. How are you?

Malcolm Holland

Good. Hey, Mike.

Michael Rose

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 fee income. I appreciate the first quarter numbers. Do you have any expectations for what their pre-tax income contribution might be this year? And then are there any expenses related to it? Thanks.

Malcolm Holland

Yes. 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, 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, 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. And so we said, all right, let’s go somewhere where we have some competency. And we had hired a gal to run our mortgage warehouses very well known in the business. And we thought, let’s figure out somebody that we know.

Character is a big, big deal for us. And so we started looking and this one kind of popped out. And so we actually went to them and said, hey, what do you guys think? And so that started to track 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-wife team and their son that run the business. They’re very in tune to it. And it just – it came to be kind of a perfect match. And so we’ve never had any issues during the whole negotiating time, and it’s – 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 for the strategic reasons that I mentioned. So we’re really, really excited. And Terry can address some of the financial stuff.

Terry Earley

Yes, 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. They’ll come through the fee line investment in mortgage banking company. 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, it’s not – and that’s not going to be a big number, and 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 businesses come in purchased versus refi and how much better they’re doing on the purchase side than the typical MBA statistics.

And as you think about it, they did – as you can see from the volume numbers on Slide 18, I mean, they did a couple of billion dollars last year. They’re certainly often – their year-end is 11/30. And so you see in your 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, there’s – as we go into 2022, the forecast from the MBA count about 30%. And so that’s – and I think there’s going to be a little bit of pressure on the gain on sale margins as volume dries up. So that’s the way I would think about the earnings contribution. It’s – obviously, there’s not anything to really integrate here. So there’s no cost of – there’s really no distraction, no cost to kind of put this – put 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, 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 2021 because I think they’re off to a great start. And then 2022, 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.

Michael Rose

I appreciate all the color. Maybe just as my follow-up, another quarter of loan growth ex-PPP 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 in regards to the pipeline, the homebuilder finance group, lender hires et cetera. Is there – are we just setting the bar low here? Or is there some paydowns that you expect? Just any color there would be helpful. Thanks.

Malcolm Holland

Paydown 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? 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 C&I utilization or the builder group or the new hires. We have a lot of great momentum. And I mean it. During the pandemic our folks came into the office, they were calling on people. We worked through the pandemic. So yes, I think those are very attainable numbers that I threw out.

Michael Rose

Okay, thanks for taking my question.

Operator

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

Brady Gailey

Hey, thank you. Good morning guys. So Malcolm, you just mentioned the hiring that you’re seeing. I know you guys talked a lot about hiring a lot of talent last year in 2020. Has that continued this year in 2021 so far?

Malcolm Holland

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 I – there are some that we’re working on currently in Houston and a couple in Dallas. So the answer is, yes, and everybody is 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 mergers and just to – 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 it.

Brady Gailey

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

Terry Earley

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 net interest income, and we were able to offset the downward pressure from loan rates with more than offset it with deposit rates. I think that’s Slide 6. And so yes, there’s – if – you don’t know what the government is 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, 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 NIMs a bit 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 and our investment portfolio, too much of that.

So – yes, but – and also, look, the fixed income or the fixed receive hedges are going to – I said 6 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 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 – 6 basis points in NIM is $1.2 million a quarter. So we – that’s going to help too.

Brady Gailey

All right. 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 simple transaction. Does that – having that deal pending, does that set you back a couple of quarters as far as getting back out there and trying to pursue a traditional bank M&A target? And as you 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 transformational that’s either larger/MOE? Just give us a flare as far as what you really like when it comes to bank M&A.

Malcolm Holland

Yes. So to answer your first question, Brady, does it take us out for quarter two? The answer is unequivocally no. It just doesn’t. I mean, this is an investment. There’s no integration risk. Terry is going to have to attend a Board meeting once a month. No systems risk. None of their personnel transferred our system there. Operating their company just like they were yesterday at post close. So 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. 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 forward. Does that mean we do another one? I don’t know. There’s nothing in the intimate that we’re doing, and that’s the wrong word, but…

Terry Earley

Imminent.

Malcolm Holland

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 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.

Brady Gailey

Yes. That’s good color. Thank you guys.

Operator

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

Gary Tenner

Thanks guys, good morning. 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 account type of customer?

Malcolm Holland

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

Gary Tenner

Okay. So in the deck where you talk about deploying excess liquidity and capital, is that just vis-à-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 from their net income?

Malcolm Holland

Go ahead, Terry.

Terry Earley

Yes. Yes, a good question, Gary. I mean, primarily, we’re just talking about the cash investment. And obviously, it’s got a pretty minor impact on our capital level. Yes, certainly, we’re going to look to do more business with them. We’ll – we’re not really looking – 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. They just did a team lift out from Colorado in the last 30 days. That’s meaningful to their volume.

So yes, we’ll 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 buy 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 we’re partnering with them on the five one, seven one jumbo arms, things like that. We love the product and with two-thirds of their business and being 65% of their business in Texas. We love that and are certainly happy to deploy some excess liquidity that way.

So – and that – and then we’ll see where the partnership takes us from there. But we think there’s a lot of synergies in this from – 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.

Gary Tenner

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?

Malcolm Holland

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 jumbo bucket, we want to grow it. And this is going to give us the ability to really add to that.

Terry Earley

And we’d love to see it get to – yes, let’s get to 10% and maybe even higher as a percentage of the portfolio.

Malcolm Holland

Absolutely.

Terry Earley

We want to be mindful of where we are in the right 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 shrunk 10%. So – 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.

Gary Tenner

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?

Terry Earley

Yes. That’s the $300 million question, given how much...

Malcolm Holland

Right. On excess liquidity.

Terry Earley

We’re about $400 million in excess liquidity today. 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, and we got a lot – I mean, so don’t look for the – 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 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 much.

Gary Tenner

Great thank you for taking my questions.

Operator

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

Matt Olney

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. And I’m curious, Clay, what your updated thoughts around the hospitality portfolio. It seems like that was a area where we thought there could be some higher loss content a few quarters ago, but I’m curious what your updated thoughts are around loss content in the hospitality book.

Clay Riebe

Yes, Gary, thanks for the question – I’m sorry, Matt. Thanks for the question. Yes. 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 1.4 debt service coverage ratio for the – through the pandemic. So 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 exist. We have no specific reserves that I can recall on a hospitality loan today.

Matt Olney

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

Terry Earley

I said we were closing four offices and reducing service in two others. That certainly – look, the impact of that is on an annual basis on our expense run rates, not all that mid – it’s nice. It’s significant. Look, we – I mean, 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 so we’re continuing to do that. And look, if there’s one thing I’ve learned from Malcolm is you are always recruiting, and it didn’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 for – 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 that snowmageddon definitely slowed that down a little bit this quarter, but then they’re unfunded and others kind of kicked in and helped us. So we’re glad to have the cost saves. 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.

Matt Olney

Okay, perfect. Thanks guys.

Operator

Thank you, sir. And for your last question, we have Mr. Graham Dick from Piper Sandler. Your line is now live. Go ahead, please.

Graham Dick

Hey, guys. Good morning.

Malcolm Holland

Good morning.

Graham Dick

I 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.

Malcolm Holland

I mean, the SBA business has been up and now you take it for the last year and you throw PPP in there for everybody, the focus have 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. And so if the market gives us the ability to sell, we’ll sell. If the market doesn’t, we won’t. And so 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. So we are very committed to it. And 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. And so it’s coming to a close. And so I do see that area ramping up just a bit.

Terry Earley

Yes. 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 sale 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 whole versus sale. 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.

Graham Dick

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 suggested 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.

Terry Earley

For the bank with Thrive or for Thrive stand-alone?

Graham Dick

Just for Thrive stand-alone.

Terry Earley

Well, and I think you make the right point that technology is certainly going to play a key role in that. They’re pretty darn efficient in terms of how they – they’re probably running in the – from a mortgage company in the mid-60s, maybe 70% efficiency approved. So fortunately, for us, because it’s an equity method investment, then 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 stand-alone basis because of their technology and their business model. It’s going to hold up better than most in the industry.

Graham Dick

Okay, that’s it for me. Thanks guys. Congrats in the quarter.

Malcolm Holland

Thanks, Graham.

Operator

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.

Malcolm Holland

Thank you.

Terry Earley

Thank you very much.

Operator

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