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Veritex Holdings Inc (NASDAQ:VBTX)
Q4 2020 Earnings Call
Jan 27, 2021, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Veritex Holdings fourth quarter and year-end 2020 earnings conference call and webcast. [Operator Instructions] I will now turn the conference over to Ms. Susan Caudle, Investor Relations Officer and Secretary of the Board of Veritex Holdings.

Susan Caudle -- Secretary and Investor Relations Officer

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.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 -- Chairman and Chief Executive Officer

Good morning, everyone. Hope you all remain safe and healthy as we continue to endure these crazy times. We have certainly seen our fair share of cases over the last year, and even though, several of our staff members have been sick. Fortunately, we've only had a small handful hospitalized. Despite COVID numbers still rising, the leadership of the State of Texas has allowed our business to remain open with some restrictions and we continue to operate at manageable levels with approximately 48% of our staff currently working from home.

The fourth quarter was an outstanding quarter for Veritex. We recorded operating earnings of $29.7 million or $0.60 per share, a 31% 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 and we feel like we have a great deal of momentum going into 2021. In the fourth quarter, our C&I team on-boarded more new relationships than any other quarter during the year. We continue to see fallout from the M&A disruption in the Texas banking markets as well as clients relocating out of the national and super-regional institutions. These two scenarios boost our numerous growth opportunities. Growth has always been a core principle at Veritex, with [Technical Issues] another positive loan growth year. Deposit growth continued to be incredibly strong with total deposits growing 18.7% linked quarter, but more impressive is the annual growth in 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 ACO 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.

Terry Earley -- Chief Financial Officer

Thank you, Malcolm. On page 5, you'll see multiple graphs. I want to focus [Phonetic] on three of these. First, tangible book value per share increased to $15.70 in the fourth quarter, reflecting strong, tangible capital generation of $20.5 million, which 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 little [Phonetic] efficiency ratio achieved through our branch-like business model is the key to maintaining our strong pre-tax, pre-provision earnings. On to Slide 6. Net interest income increased approximately $1 million from Q3 to Q4 to $67 million for the quarter. The expansion in net interest income was achieved despite $1.4 million and lower purchase accounting accretion and $1.3 million in interest expense from the sub-debt raise. The core NIM excluding all purchase accounting accretion expanded 5 basis points to 3.15%. The GAAP net interest margin contracted 3 basis points to 3.29% in Q4. The most significant items affecting the NIM were lower accretion income in the sub-debt raise, negatively impacted the NIM by 13 basis points combined. This was offset by 6 basis points of NIM expansion from disciplined deposit repricing. There are additional opportunities to continue to drive deposit rates lower.

Finally, the prepayment of a $200 million FHLB advance positively impacted the NIM by 3 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 is $900 million in CD maturities in 2021. These mature at a rate of 105 basis points and should be renewed at a rate below 30 basis points. Second, the forgiveness of PPP loans and the redeployment of that 1% loan into higher-yielding asset classes. For Q4, the PPP portfolio represented a 12 basis point drag on the NIM.

On 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 to $312 million or 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 to 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 8 basis points in Q4, and now sit at 38 basis points.

Looking past the fourth quarter, the table in the bottom right corner shows the time deposit repricing opportunity for 2021 and beyond. On Slide 9, you see the details of our loan portfolio. Malcolm's already mentioned our growth for the quarter.

Our commercial real estate business remains strong. The Mortgage Warehouse portfolio grew $33 million in the fourth quarter when we would normally expect seasonal contraction. Line utilization is certainly weighing on C&I growth. As you can see on the page, year-end utilization levels are down 6% from 2019 and 11% from the peak levels in the second quarter. Regarding the PPP portfolio, we hada $50 [Phonetic] million or 12% [Technical Issues] during the quarter and we expect the pace of forgiveness to accelerate as we go through 2021. On to Slide 10 and our allowance for credit losses. This slide lays out the impact from CECL on each loan pool for Q3 and Q4. Moody's forecast to Texas unemployment and GDP continues the key economic inputs into the model.

Focusing on the column labeled December 31, 2020. The improving economic outlook, positively impacted our allowance for credit losses on improved loans to the tune of $18.6 million. We reduced our specific reserves on non-accrual loans to $16.9 million, or a reserve level of approximately 21%. This decline was the result of charge-offs during the quarter. Additionally, our reserves for PCD loans increased $4.1 million to 17% of the outstanding balance, driven by various impairments within pools.

As we said throughout the first three quarters of 2020, we were building the reserve in anticipation of future credit migration and net charge-offs. This approach coupled with an improving economic forecast allowed us to book zero provision for credit losses this quarter and reduce our overall allowance. As in prior quarters, in addition to the loss history in 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 from loan interest rate marks on the balance sheet from the Green acquisition. This translates into 27 basis points of additional cushion on that part of the acquired portfolio.

Finally, during Q4, we increased the reserve for unfunded commitments by $902,000 in the face of a favorable change in the economic forecasts. This increase resulted from considerable commercial real estate production during the fourth quarter that has yet to fund up. On Slide 11, capital ratios at the holding company and the bank started the year from a strong position and remain robust as we exit 2020. Most ratios declined modestly, even though absolute capital levels were higher. The modest decline in the ratios are due to balance sheet growth and a notable increase in unfunded commitments that pushed risk-weighted assets higher. The sub-debt and the increase in the allowance for loan losses were the primary reasons for the increase in the total capital ratio.

Focusing on the graph in the bottom-right corner of the page. We declared a 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.

Clay Riebe -- Chief Credit Officer

Thank you, Terry, and 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-day to 89-day category include a 504 loan in the amount of $7 million on a hospitality property that's well secured as well as a $2 million in administrative past dues that are now current [Phonetic]. Net charge is also 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 un-guaranteed 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 three [Phonetic] years, an overall reduction of 60%. Page 13 highlights our hospitality portfolio. The fourth quarter is typically a down quarter for hospitality properties. And that being said, October was the best revenue-generating month for our hospitality book since the pandemic began. Hospitality loans on deferment have dropped from 60% of the book in -- 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 in the hospitality industry in the fourth quarter of most years. None of the properties are on deferral and none were past due at quarter-end. I continue to be encouraged by -- 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 deferrals have dropped to $0. This is meaningful given that deferral for 51.7% on the book as of the second quarter. There is only one non-performing loan in this space, and 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 US government via the PPP program has and will continue to be instrumental in the ongoing performance of this portfolio. Deferment has been eliminated as we prepare for the SBA to begin making payments on SBA loans in the restaurant book.

The largest criticized relations -- relationship continues to perform at/for 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 in 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 required. 67% of our current net book balance of government guaranteed loans are secured by real estate. Having tangible real estate collateral as collateral on two-thirds of our SBA exposure will help limit losses in the SBA book as support -- stimulus support ends.

As you would expect, the levels of criticized and past due assets are elevated, given the impact of the -- 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.

Malcolm Holland -- Chairman and Chief Executive Officer

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 it's important to invest in our future and there is no better way than through the talent channel. We feel certain that these adds will make us a better and more productive company.

Concerning M&A, we feel 2021 will be an active year in our industry for numerous reasons, and we hope to be an active participant for the right fit. I continue to be encouraged by the direction we are headed and the momentum that is building. Our talent is in place and our prospects for the future are bright. Our two major markets are arguably two of the best MSAs in the country for population and business growth. We are all ready for this vaccine to do its work so we can get back to some level of normalcy.

Operator, I'll now like to open the line for any questions.

Questions and Answers:

Operator

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

Graham Dick -- Piper Sandler -- Analyst

Hey, guys. Good morning.

Malcolm Holland -- Chairman and Chief Executive Officer

Morning.

Graham Dick -- Piper Sandler -- Analyst

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

Malcolm Holland -- Chairman and Chief Executive Officer

You know, 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 -- the -- some in our markets or many in our markets are not even doing that, and so, our ability to get things done and execute is we're 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 if things get a little better, I wouldn't be surprised if there is going to -- decent pressure provided from some folks that haven't been in the game, but hopefully, we'll get some goodwill that shows that our -- that we're were something.

But I don't see it changing a whole bunch, at least, in the short term.

Terry Earley -- Chief Financial Officer

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

Graham Dick -- Piper Sandler -- Analyst

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 will be in a normal environment?

Malcolm Holland -- Chairman and Chief Executive Officer

Yeah, line utilization is certainly down a little bit from where it was. But -- listen, I guess [Phonetic] as Texas goes, we go, people continue to move their business [Phonetic], move here, I mean, you read the papers. We've had some large corporate reloads [Phonetic]. But then, there's a whole bunch of smaller reloads, which you don't ever read about. And so, we look for positive loan growth, take out Mortgage Warehouse and PPD.

We still think that 2021 is going to be up -- well, it will 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 got to work a little bit harder to stay ahead 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.

Graham Dick -- Piper Sandler -- Analyst

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

Malcolm Holland -- Chairman and Chief Executive Officer

Okay, thank you.

Operator

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

Matt Olney -- Stephens, Inc. -- Analyst

Hi, thanks. Good morning, guys.

Terry Earley -- Chief Financial Officer

Hey, Matt.

Matt Olney -- Stephens, Inc. -- Analyst

I want to start on Slide 18. I think it's a good new slide about the talent investment in the last six months, taking advantage of some of the market disruptions. 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 [Phonetic] slow from here? Just trying to figure out kind of where we go from here. Thanks.

Malcolm Holland -- Chairman and Chief Executive Officer

Yeah, I think, I said quarters ago that we were going to invest in people and I just wanted to respond with, hey, this is -- this is what we've been doing, these are -- several in these group are upgrades, but most of them are just additions. And you know, I think there's a lot of runway with this group right here, specifically. But we will never take our eye off the ball and continue to invest in people.

I mean, we're in the people business the disruption is only going to get greater with what with the big PNC-BBVA deal. We're already seeing that disruption. And I saw yester -- I read this morning, 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.

Matt Olney -- Stephens, Inc. -- Analyst

Okay, thanks for that. Not to mention, as a follow-up, I just want to go back to credit quality. I think you mentioned in the 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.

Terry Earley -- Chief Financial Officer

I'll just repeat what we said, yeah.

Clay Riebe -- Chief Credit Officer

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

Terry Earley -- Chief Financial Officer

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

Matt Olney -- Stephens, Inc. -- Analyst

Got it. Okay, thanks, guys.

Malcolm Holland -- Chairman and Chief Executive Officer

Thanks, Matt.

Operator

Your next question comes from Michael Rose with Raymond James.

Michael Rose -- Raymond James -- Analyst

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 this 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, etc?

Malcolm Holland -- Chairman and Chief Executive Officer

Yeah, I mean, your question specifically is can we get back to reserve levels prior to the pandemic and prior CECL [Phonetic]? [Speech Overlap] CECL day one. And the answer is, absolutely. You know, a lot of it's dependent on the economy, but we actually, sitting here today, we feel as good about our credit outlook as we've had since April 1 of last year. And so, yeah, I think that's very, very reasonable.

Terry Earley -- Chief Financial Officer

Michael, I think that's where we target, where we think we're going. I think -- I think we agree with getting there. What's hard is knowing how quickly [Speech Overlap] we'll get there. I mean there's just still a lot of unknowns, but yeah, I think when you know, as we come out of this pandemic, the allowance should be in line with somewhere in the range in vicinity, up where we were on CECL day one and that was 1.23%.

Michael Rose -- Raymond James -- Analyst

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, you know, 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? So, I think if you did, you'd clearly be in the minority.

Terry Earley -- Chief Financial Officer

Yeah, I mean, I think -- I mean, look, and when you've got a $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, you know -- now, we believe we're going to see some, we don't think it's going to, you know, we're very focused on that. And I mean, so, yeah, we believe we'll see net interest income growth really led by deposit repricing, growth on the loan side, and then whatever happens with PPP.

Michael Rose -- Raymond James -- Analyst

Very helpful. Maybe just one last one for me. Can you give us a reminder on kind of your M&A targets in terms of what you would look at, just in terms of complexion in size, you know [Phonetic], you guys are about $8.8 billion in assets, close to $10 billion. I know PPP will run off, but then we got around $2 billion [Phonetic]. I mean, would you want a deal to kind of take you and move you beyond that $10 million -- $10 billion guidepost, or would you be looking at something smaller, tuck-in, cost-save type deal? Thanks.

Malcolm Holland -- Chairman and Chief Executive Officer

Yeah, 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 everyone 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 is some that actually make some really good sense for us. You know, I've got a fairly long memory and I remember when funding and deposit pricing were really, really important. They're just not today when you put $3 trillion into this system and there's deposits everywhere, but this too shall pass. And so, you know, always, always thinking out how could we improve our deposit franchise being in a major metropolitan area, you know it's more difficult. You know, the rural areas provide us a little bit more stability and some better funding and pricing.

So those are -- those are options and we are looking at those as well as ones that would jump us over $10 billion in one deal [Phonetic].

Michael Rose -- Raymond James -- Analyst

Very helpful. Thanks for taking my questions.

Malcolm Holland -- Chairman and Chief Executive Officer

Thanks, Michael.

Terry Earley -- Chief Financial Officer

Thanks, Michael.

Operator

Your next question comes from Brady Gailey with KBW.

Brady Gailey -- KBW -- Analyst

Hey, thanks. Good morning, guys.

Malcolm Holland -- Chairman and Chief Executive Officer

Good morning, Brady.

Brady Gailey -- KBW -- Analyst

So, I heard the guidance for kind of ex-PPP, ex-warehouse loan growth of mid-single digits. You know, PPP, it's hard to know what's going to happen with round two and how big that's going to be. But, 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 off [Phonetic], and do you think that the warehouse will still grow from this level?

Malcolm Holland -- Chairman and Chief Executive Officer

You know, 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 this -- and [Phonetic] saying that Amy [Phonetic], who runs our group there, who is known nationally, is taking market share. And so, yes, the market itself will probably contract a bit, but I believe we will get more than our fair share as people decide to do business with Veritex, and with Amy.

So I do see some growth there. I don't see the kind of growth we had in '20 at all, you know. We don't want to -- we don't want to be that dependent on that business. I think we're 8.5% as of period in on an average basis. We were --

Terry Earley -- Chief Financial Officer

7.1%

Malcolm Holland -- Chairman and Chief Executive Officer

7.1% on average loans for the quarter. So we still have some room there, but you won't see the growth you saw in '20.

Terry Earley -- Chief Financial Officer

Thank goodness that it's been there because, from a liquidity standpoint, it's been a wonderful bridge from the start of the pandemic to where we may ultimately be, and so we're very, very thankful for its ability to soak up some of this liquidity [Speech Overlap] And I [Technical Issues] anything that frequently.

Brady Gailey -- KBW -- Analyst

Fair enough. That's great -- great for 2020. So, how should we think about buybacks? Do you have some left in the authorization? But you know the stock has done relatively well like all bank stocks have done well recently, but it's now at $175 million [Phonetic], tangible. And is it right to think that, you know, buybacks [Phonetic] probably aren't as likely as you shift more toward -- you know, a focus on M&A?

Terry Earley -- Chief Financial Officer

Yeah, I mean, with [Indecipherable], I have been very careful to use the word opportunistic and I think that's what we were in Q4 and intend to remain. You know, Brady, our general view is to use capital -- the priority for capital is organic growth, strategic growth, dividends, and buyback. And so, you know -- but in the buyback world, kind of what we're saying, we're happy and eager to be a buyer when the tangible book value earn back from the dilution is less than five years. If it gets over that, you're not going to see us doing a lot.

So you know, the math is pretty simple. That's kind of our -- if 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 of valuation. We've got -- we're going to generate a fair amount of capital and we're willing to use it there if the valuation's warranted.

Brady Gailey -- KBW -- Analyst

All right. And then, just looking at the $10 billion in asset threshold, and you're at $8.8 billion today. You back out, PPP's 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, 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 target's asset size?

Malcolm Holland -- Chairman and Chief Executive Officer

Oh, gosh, that's a hard one to answer. How big we would consider, because you know, my history has been very opportunistic, and the first four deals we did were just small deals, and then we did a MOE, and then we did a really small deal, and then we did another MOE. And so, you know, I think to just be totally transparent, we would look at everything from some $1 billion are close to it, to a MOE of some sort. Obviously, I think we -- one thing we have definitely learned and this isn't new news with this scale [Phonetic] is, it's hugely important in our business and we've got to build an asset base that we can spread these expenses over wider and we try to become more efficient.

And so, everyone would ask, so what's that size? How big 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. You know, 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.

Brady Gailey -- KBW -- Analyst

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

Clay Riebe -- Chief Credit Officer

Yeah, a good question. That was a 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.

Brady Gailey -- KBW -- Analyst

Got it. Okay, all right, great. Thank you, guys.

Terry Earley -- Chief Financial Officer

Thanks, Brady.

Malcolm Holland -- Chairman and Chief Executive Officer

Thanks, Brady.

Operator

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

Gary Tenner -- D.A. Davidson -- Analyst

Thanks. Good morning, guys.

Malcolm Holland -- Chairman and Chief Executive Officer

Good morning.

Gary Tenner -- D.A. Davidson -- Analyst

What -- I wanted to ask about just your thoughts on kind of balance sheet management and liquidity in 2021 as you get the PPP repayments coming in, you talked about kind of core loan growth. But beyond that, in terms of 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 '21?

Terry Earley -- Chief Financial Officer

That's a good question. I mean, you've seen it, the portfolio, the investment portfolio shrank. I mean we are -- on an average basis, we ran with a little more liquidity than I would have liked in the quarter but that's driven really by what's going on on the deposit inflow side. I mean, you will see us play on both sides of the balance sheet, I mean obviously, we prepaid a pretty sizable FHLB advance because the economics just made sense. So and 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 looked very flat in density [Phonetic]. So we're not -- and we have reasonably premium position. So we don't have a lot of premium risks that -- with the negative convexity, if we had it in the portfolio, and how it'd really impact 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 portfolio shrink a lot. And so we're going to have to work hard to fund to find opportunities that -- or close to reinvest those cash flows. You kind of do a lot of hard work to find something you like, where it's something you can stomach. I don't think you find anything you like. I mean, we're not, I mean we have a newly [Phonetic] portfolio, but I'm just not going out the double-digit duration on those things to get cloud one yields. And it's just -- I just don't think that's a smart move right now.

But, so we're going to just try to be opportunistic with prepaid stuff when we can, and we'll much rather continue to grow the Mortgage Warehouse business. I mean, our kind of internal limit's 10% average on average, and Amy and her -- and the team have not only, again, done a great job, but we've brought in and strengthened that team behind her, so I would much rather see us continue to use excess liquidity over there versus trying to take long duration, fixed income plays in the investment portfolio.

Gary Tenner -- D.A. Davidson -- Analyst

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

Terry Earley -- Chief Financial Officer

Well, I mean I think, we're so efficient, you know again the 2020 efficiency ratio was under 48%. We ended the year with -- even with all those hires just under 50% for the quarter. Look, it's not really going to go down. Discretionary expand for marketing and travel, things like that's going to be higher in '21. Some of these people that we brought on in the last six months of the year, will have full year expenses for them next year. And you know, we're all hoping that it's going to be -- we're all hoping that variable in credit [Phonetic] cost is going to be better too, you know.

But, it's happening. Look, we're very sensitive to the efficiency ratio, we know that's the key to generating organic capital, and so, we'll -- it will be up, steady to up some, but not going crazy.

Gary Tenner -- D.A. Davidson -- Analyst

Thank you.

Terry Earley -- Chief Financial Officer

Thanks, Gary.

Malcolm Holland -- Chairman and Chief Executive Officer

Thanks, Gary.

Operator

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

Malcolm Holland -- Chairman and Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

Susan Caudle -- Secretary and Investor Relations Officer

Malcolm Holland -- Chairman and Chief Executive Officer

Terry Earley -- Chief Financial Officer

Clay Riebe -- Chief Credit Officer

Graham Dick -- Piper Sandler -- Analyst

Matt Olney -- Stephens, Inc. -- Analyst

Michael Rose -- Raymond James -- Analyst

Brady Gailey -- KBW -- Analyst

Gary Tenner -- D.A. Davidson -- Analyst

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