Q3 2020 Independent Bank Group Inc Earnings Call
Greetings and welcome to the independent Bank groups third quarter 2020 earnings call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
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I would now like to turn the call over to your host Mr., Paul Langdale, Senior Vice President and director of corporate development for Independent Bank group.
Thank you you may begin.
Good morning, everyone I'm, Paul Langdale, Senior Vice President and director of corporate development for Independent Bank Group and I would like to welcome you to the independent Bank Group third quarter 2020 earnings call. We appreciate you joining us the related earnings press release, and a slide presentation can be accessed on our website at <unk> Dot com I.
I would like to remind you that remarks made today may include forward looking statements. Those statements are subject to risks and uncertainties that could cause actual and expected results to differ we intend such statements to be covered by safe Harbor provisions for forward looking statements.
Please see page five of the text in the release or page two of the slide presentation for our Safe Harbor statement. All comments made today's call. During today's call are subject to that statement. Please.
Please note that if we give guidance about future results that guidance as a statement of managements beliefs at the time. The statement is made and we assume no obligation to publicly update guidance in.
In this call we will discuss a number of financial measures considered to be non gap under the Fccs rules reconciliations of these financial measures to the most directly comparable GAAP financial measures are included in our release I'm joined this morning by David Brooks, Our Chairman CEO and President Dan Brooks, Our Vice Chairman and Chief Risk Officer, and Michelle Hickox exactly.
<unk>, Vice President and CFO at the end of their remarks, David we'll open the call to questions with that I'll turn it over to David.
Thanks, Paul Good morning, everyone and thank you for joining us on today's call.
We are pleased to report strong third quarter results, which saw adjusted earnings per share of $1.38 adjusted return on average assets of 1.42%.
On an adjusted return on tangible common equity of 17.29%.
These results reflect our disciplined approach to banking and more importantly, the good work done in prior years to structure and you're right our portfolio to be able to withstand cyclical economic pressures.
As Dan will discuss further credit quality continues to exhibit the resilience that we would expect from our conservative underwriting standards.
While we continue to work with our relationship borrowers overall deferrals have now resolved to just 1% of loan customers were 5% of loan balances as of October 16.
During the quarter, we also completed the issuance.
$130 million.
In sub debt at a rate of 4%, which provides us with attractively priced capital that reinforces our strong balance sheet and enhance the strategic optionality into the future.
Our healthy capital ratios continued PPNR strain reinforce our ability to navigate the uncertain macro environment and with that I'll turn the call over to Michelle for more detailed operating results for the quarter.
Thank you David Good morning, everyone knows.
Note that slide six of the presentation includes selected financial data for the quarter.
Our third quarter adjusted net income was 59 point sixmillion or $1.38 per diluted share compared with 57.8 million. Our dollar 35 per diluted share for the third quarter last year, and 49.1 million or $1.14 per diluted share for the linked quarter.
Net interest income was 132 million in the third quarter up from 125.4 million in the third quarter last year and up from 128.4 million in the linked quarter.
Well net interest income was negatively impacted by year over year decrease of 2.6 million in purchase accounting accretion. This was more than offset by continued reduction in funding cost during the quarter in earning asset growth. It was primarily driven by increased mortgage warehouse loans.
The adjusted NIM, excluding all loan accretion was 3.32% for the third quarter compared with 3.54% from the third quarter last year and flat from the linked quarter well.
Well the NIM remains stable it continues to be impacted this my sustain high levels of liquidity.
Total non interest noninterest income was $25.2 million for the third quarter mortgage banking revenue increased by 4.2 million in mortgage warehouse fees increased by 590000 from the linked quarter due to both purchase and refinancing activity with the current low interest rate environment.
This was partially offset by an expected decline in interchange fee income as the Durbin Amendment became effective for us in the third quarter 2020.
Change fee income declined by approximately 1.4 million versus the linked quarter and by approximately 1.9 million versus the third quarter of 2019.
Total noninterest expense totaled 73.4 million for the third quarter 2020, with salaries and benefits and acquisition expenses, having the largest variance to the linked quarter.
Recall that salaries were impacted by increased deferred loan costs due to P.P.P. loans and deferrals in the second quarter.
Deferred cost totaled 14.7 million in Q2 compared to a more normal run rate of five and a half million in this quarter.
In addition commissions increased 1.1 million from Q2, primarily due to the increased volumes and mortgage.
These increases were offset by decrease in severance related expenses of two and a half million that were paid in Q2.
In addition increased activity related to the inherited bank of Houston litigation fish legal fees back up to one and a half million for the quarter versus 395000 in Q2.
Slide 22 shows our deposit mix and cost.
Total deposits were 13.8 billion as of September 32020, and increase driven by organic deposit growth at 498.5 million or 14.9% annualized for the quarter.
We estimate approximately 541 million of deposits related to PPP borrowers remains on the balance sheet as of September thirtyth.
Borrowings decreased 435.9 million since June 30, as as we continue to have excess liquidity this quarter.
We let short term FHLB advances mature early in the quarter, but these decreases were partially offset by proceeds of the sub debt. We issued in September which was 127.5 million net of issuance costs.
Capital ratios are presented on slide 24 in the third quarter. The company's consolidated capital ratios continue to grow as a result of both said that issue as well as earnings.
The common equity tier one capital ratio increased by seven basis points to 10.24% for the quarter and the total capital ratio increased by 85 basis points to 13.29% for the quarter.
The Tc ratio improved to 8.68%.
That concludes my comments this morning, I will turn it over to Dan to discuss the loan portfolio.
Thanks Michelle.
Overall loans held for investment not including mortgage warehouse purchase loans were 11.7 billion at September 32020, compared to 10.9 billion at September 32019.
Loans held for investment remained flat compared to the linked quarter.
Demand for loans increased in the third quarter as the economic recovery accelerated across our footprint.
This increase in loan production was offset by elevated payoffs in the third quarter.
Mortgage warehouse purchase loans averaged $894.9 million for the quarter up from 665.8 million.
During the quarter ended June 32020.
Our mortgage warehouse continues to see sustained demand from the current low mortgage rate environment.
Slide 17 provides additional detail on our loan deferrals as of October 16, 2020.
We're pleased that only 1% of our loan customers and 5% of our loan balances currently remain in deferral.
Loans currently in deferral totaling approximately 548 million across 239 loans, which is only a small percentage of the 2.65 billion across more than 2100 loans ever received a deferral during the pandemic.
Hotel and motel loans remain by far the largest category loans still in deferral, representing 204 million or 37% of total deferrals remaining as of October 16.
While our occupancy rates have been trending in the right direction. The lodging industry has remain acutely impacted by the pandemic and we anticipate that some borrowers will require additional time to return to full payment.
Our hotel and motel book is comprised conservatively underwritten credits with a low average LTV of 52.7%.
Additionally, the vast majority of our hotel and motel credits are backed by strong liquid personal and corporate guarantors.
Overall, our credit quality metrics continue to remain strong with total nonperforming assets of 43.2 million, 4.25% of total assets at September 32020.
Nonperforming assets increased over the linked quarter due to a 15.7 million dollar commercial real estate loan, which has matured and is pending workout.
Net charge offs remained low at just one basis point annualized for the third quarter.
During the quarter, we adjusted the risk grades of several of our loans as the Pandemics impact on borrowers became clearer.
Classified loans increased by 52.3 million to $190 million or 1.63% of loans held for investment excluding mortgage warehouse at quarter end.
Bone Springs on special mention also increased by $118.5 million during the quarter.
These increases are mainly reflective of the migration of several hotel loans as well as a few loans in the office and senior living portfolios.
This prudent adjustment risk grades is reflective of our longstanding credit culture.
And our lenders continue to facilitate constructive engagement with our borrowers through these challenging times.
As noted in our first quarter call, we elected to defer the adoption of Cecil as provided under the cares Act and our allowance in third quarter 2020 provision were calculated using our incurred loss model.
Provision for loan loss expense was 7.6 million for the third quarter.
This reflects a qualitative factor to prudently recognize the economic environment and uncertainty related to the COVID-19 pandemic.
We continue to anticipate that our Ses will provision will be materially the same as our incurred loss provision.
Upon the adoption of C., So we anticipate that our hcl through.
Through the third quarter would be approximately 167.5 million or roughly 1.55 per cent of loans held for investment excluding mortgage warehouse and PPP loans.
These are all my comments I had related to the loan portfolio. This morning, so with that I will turn it back over to David.
Thanks, Dan.
These third quarter results are a testament to our company's resilient culture and reflect the tireless efforts of our dedicated teams across Texas and Colorado.
I'm grateful to all our employees for demonstrating tremendous resolve and serving as a source of strength for our customers and communities since the beginning of the pandemic, though.
Though COVID-19 remains a part of daily life. We were encouraged as we continue to see increase in economic activity across our footprint given the strong position our company's balance sheet, coupled with continued healthy earnings our board of directors has elected to increase the quarterly dividend to 30 cents per share to be.
It has also authorized the renewal of our stock repurchase program and increased the maximum limit to $150 million of our common stock.
These actions reflect our continuing commitment to deliver long term value to our shareholders.
Thank you for taking time to join us today.
We'll now open the line to questions operator.
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Our first question comes from the line.
Brady Gailey with KBW. Please proceed with your question.
Hey, Thanks, Good morning, guys Hey.
Hey, good morning, Greg.
So it's great to see the dividend and the buyback go higher.
On the buyback.
Do you think that you'll be active here and then I read.
In the numbers it seems like of the 150 million buyback you have about a 100 million left of authorization is that is that number correct.
No no upward reauthorized, yes, I know, we just reauthorize the new hundred 50 million, which is an increase from 75 million over the last 12 months. So it's kind of 12 months from now forward at $150 million.
Got it and your likelihood of actually buying stock back here.
Yes, we.
We intend to be active Brady in acquiring our stock at these current price levels site.
As we look around at merger and acquisition opportunities.
Other strategic alternatives out over the next several quarters.
The high quality names.
Yes, really strong companies in Texas that were interested in.
You know going to what a significant price for their company and it exceeds what our stocks trading at today. So I think as long as that's the case, our stocks and attractive buying here.
Okay. So you try to hit on my next question, but.
Seems like M&A doesn't feel near term per year, just relative to where your stock trades and probably what sellers want.
Look I think a lot of people are just watching what's going on with the pandemic watching what's going on with the economy. There is a lot of political uncertainty for at least another week here and then.
And maybe longer beyond that but.
Beyond what's going to happen on stimulus package, there's a lot of uncertainty and I think a lot of perceived risk still ahead of us Brady. So I think thats, while you don't a lot of people are.
Or keeping relationships warm in current.
I just don't think the activity level in M&A use pick up for a few more quarters now until you know until we begin to get some clarity around that.
And then a economic fallout with the fiscal stimulus might look like and what the political environments going to be going forward and I think by.
Second quarter next year, hopefully, we'll have a lot more clarity on some of this.
And we'll see where that goes from there.
All right and then finally for me.
Yeah.
These were up a little bit the still very low, especially relative to peers would you call out a roughly $16 million a commercial real estate loan I'm guessing that's a hotel, but any additional color on on what the commercial real estate non performers.
Good morning, Brady. This is Dan that one credit actually was in office credit.
That all the payments were made current on it we just loved it matured as we work with them on their plans for the renewal on it.
So just one credit as you pointed out total M.B.A.'s at 0.36 are very low so anytime you add one to the pile, it's going to move that needle more on our book that it may appear on other ones.
Yeah, it's funny the long enough numbers right Brady if you had one and you add one you increased a 100% [laughter], but that's still too right that's right.
Is it a a colorado or Texas on.
The Texas one.
All right great. Thanks for the color guys.
Hey, Thanks Brady.
You bet.
Thank you. Our next question comes from the line of Brett Robinson with Hovde Group. Please proceed with your question.
Hey, good morning, everyone.
Hey, good morning, Brett.
Wanted to first ask are just around the growth outlook can you talk about the quarter you had some pay offs and you're seeing some better demand can you talk maybe you just about the.
The gross versus net in Threeq do you know how much paid off and another in the quarter and then as you I know, it's probably tougher 2021, but just kind of given what you're seeing with the pipeline.
Not just growth for your Mircera in the commercial book.
Yes, so the loan demand in this in the third quarter was with strong and and really what we had anticipated coming into the quarter, what surprised us a bit in the quarter was a level of payoffs sobi to give you a little color around that.
Our.
Our.
Loan fundings, I guess would be the right way to think about our loan fundings was around 580 million.
Our loan payoffs were around 600 million and so while you have the 580 million of net fundings was really strong and one of the.
Best quarters, we've had in the last year.
The pay offs, which are primarily asset sales.
There are families that we bank in Investor groups, We bank.
Joe to sell some high quality assets at really low cap rates.
And that you can you can never fault someone for realizing a big gain on something they've invested in so that's positive for them and then and then we did see some insurance companies and some long term debt providers stepping in and.
We could have grown a lot more and probably avoided some of those payoffs who were willing to do.
20 year fixed rates in the twos, we just don't we just that's just not what we've done is not how we manage our balance sheet. So so we you know again when someone gets a 20% 25 or 30 year fixed rate it to 75.
Than you congratulate them on that and accept the pay off with a smile and move on.
So is that kind of thing so it's not a.
And the only other word we're seeing banks pay us off we had a couple of instances during the quarter on some assets that we thought were fine, but you know were their performance was okay, not great the cash flow coverages and things weren't yet.
<unk> industry, leading for that segment and we saw some banks coming in and paying those loans, often do and cash out refinances and loaning out the equity that was in the project into what we thought was a marginal cash flow and again that is.
Not what our credit.
Bar looks like and when we would choose to pass on those opportunities. So we saw just but I would say the preponderance of the pay offs were asset sales and long term refinancings things that were wins for our customers and and what those investors do more business. So we're in this for a long time.
Yeah.
They're terrific customers who've had a good opportunity to.
To realize a good event in there.
That asset, whether it's selling it or refinancing it and you know it just bait piled up this quarter more than we expected and so we do continue to see a nice robust pipeline thinking about answering your question about the future Brett the pipeline for the fourth quarter looks good but we also know there is some pending.
You know asset sales and things as well. So my guess is were down just a hair what loads of 1% for the year in terms of loans held for sale, excluding PPP excluding warehouse.
And so yeah, we should end up flattish.
For the year here for 2020.
And then as we look out into 2021, our sense is again you know my reference my earlier comments about all the uncertainty that still in the market and the risks that still exists out there ahead of us.
With all that considered it appears to us that we're going to see pretty positive loan growth in 2021, which held the fine for the year as a mid single digit.
I'd call, it, 5% plus or minus a percent.
In that range for the full year 2021, but we expect it would probably started.
Again, we're predicting the future here, which is very risky business, but.
I sense is it will start a little slower and then accelerate as the year goes on and we get clarity and we hopefully get the pandemic under better control in the second half of the year that should be more favorable. So again, that's just our logic behind it.
Okay. That's a that's great color.
And then Michele maybe just thinking about expenses, obviously noise this quarter last quarter.
On the expense base.
Any any thought on expense.
So from here as you think about everyone's trying to figure out how to get more efficient maybe close branches et cetera.
Yeah the expense run.
Run rate was a little higher than what our guidance here, but that was primarily due to mortgage because mortgage had such a great quarter I think their commissions expense is up over a million dollars for the quarter. So if you back that out you get back to that 70, 172 that I had gotten too.
I think that they will have a good quarter Q4, and so I think that level of commissions will probably be consistent.
We did have some sort of some consulting fees and legal was higher because of that activity related to that bank of Houston lawsuit that we inherited cranked back up the lager started working again you know after they got past that early part of the pandemic and that will probably be consistent this quarter. So I think our.
Run rate on expenses for Q4 will be similar to Q3, and then if you look out to 21 I would expect a normal increase at 3% is sort of what were looking at for 21 related to expenses.
Okay, that's great color. Thanks, so much.
Thanks, Brett.
Thank you. Our next question comes from the line of Matt Olney with Stephens Inc. Please proceed with your question.
Hey, Thanks, good morning, guys.
Good morning, Matt Hey, I want to circle back on the updated loan grade that Dan mentioned, a higher levels of special mention and classified I think the driver that Dan mentioned I wrote down hotels office and senior living can you talk more about potential loss content for these loans. Thank you.
Hey, Good morning, Matt This is Dan.
As we have said in the last quarter earnings call.
The downgrades that we have seen.
In my opinion are expected and appropriate as we work with our customers.
That's consistent with the message, we given and how we manage our credits historically.
Specifically as it relates to loss.
Again based on the cash equity and the guarantor support.
Support that we have as well as the small pieces the granularity we've always spoken up with you.
We do not see outsized loss exposure in any of these and those that have some exposure. We think are accounted for appropriately in the provision as we have it right now.
Okay, great. Thanks for that band and then.
On the hotel portfolio I think you mentioned, it's the largest category of deferred loans is there anything else. You can you can tell us about how this has trended over the last.
A few months I think when we spoke back in July the occupancy rates were grinding higher or are they still acquiring higher are they.
Flattened out thanks.
Yeah, I think the hotel book actually has continued to rebound couple of interesting stats for you of the hotel loans that we had with any deferral on them over 50% of those are back on full payment.
Based on the improved occupancy and of those that are still in deferral I'm. Most of them are at least back on interest only so there has been some improvement in that category.
Category.
Their as their occupancy them improve.
Okay. Thank you. Thank you and then.
I guess, just lastly on credit.
Help us appreciate the loan loss provision expense just $8 million despite the big.
Loan downgrades that we mentioned help us reconcile that negative loan migration, but still very moderate level of provision expense, especially compared to twoq levels.
Yeah, I think as we indicated in the Q2 earnings conference.
The impact of Cove is at least our assessment of that was largely carried in the second quarter and third quarter. We continued to review qualitative factors related to the deferrals and grade migration in spite of a flat growth for the call.
Order of the fact that we still added seven and a half million tells you that the qualitative factors continue to pick up on deferrals and grade migration there.
And the expectation as we think about the fourth quarter it would be similar to what we see in the third quarter.
Just continuing on the same we don't see much of a change in that.
Yeah, right now well, we're just so you guys know we will adopt Cecil this important Q4, and we have continued to run that model along with our incurred loss model through the year, we still don't believe that there's a material difference in provisioning and we don't expect that we'll have to take a significant catch.
Up adjustment for Q4.
Thank you.
Yes sure.
Sure.
Thank you. Our next question comes from the line of Brad Milsaps with Piper Sandler. Please proceed with your question.
Hey, good morning, guys.
Hey, good morning, Brett.
Michele just wanted to maybe ask a question on the margin.
Nice job keeping that stable linked quarter, which is kind of what you're looking for I'm. Just curious on the deposit side of things. It seems like you might still have some some room to move.
The deposit costs, lower particularly in money market, maybe interest checking obviously in the Cds just kind of curious can you talk about your opportunity there versus maybe whats kind about you know in versus kind of what's out in the market in terms of competition within some of your markets.
Yes, sure Brad Yeah, we have and any our treasurer has done a really great job of nave and helping move our deposits down and working with our relationship managers and they've exception writes down.
We still do have primarily in the promotional Cds that are going to roll off really by the beginning of a 21 that we'll get some benefit from and the cost of deposits is 47 basis points for the third quarter.
As of today spot it's at 41.
She thinks we can assess it to 35.
By the end of the first quarter.
So you know it started at one to one at the end of February So it's come down significantly that the challenge for US is asset yields are continuing to come down as we have pay off Unfortunately people are not paying off their lower rate loans and so that's impacting our asset yields and so I think we could.
I'd get a bit if that continues we could get a bit of margin compression still you know not a lot, but some a few basis points weaker.
We could mitigate it we didn't we ended up having more liquidity this quarter than what I anticipated. So we probably will start and putting some of that in our bond portfolio now that the yields they're not great 125.
But it is better than the 10 basis points you can earn at the fed and so we can mitigate some of that compression there and then obviously, if we get more loan growth than expected that will help as well.
Sure and maybe just a little bit of sense on kind of where new loans are coming on the books.
Yes so.
We're seeing rates spread it around for a little below for all the new fundings when you stack it up for the third quarter for that 575 600 million that we booked in the in the third quarter. Those came on at an average of just a hair under four I think.
But that is.
Probably 25 30 basis points below what the current book is yielding so there by the pressure that Michelle was referencing.
Yes, we can continue to make.
Good progress on deposits, but.
The the loan pricing competition is probably little stronger than we would prefer to see.
Got it sure shot it and then maybe yes.
Sure sure and maybe just one kind of follow up around expense.
<unk> expenses as it relates to mortgage you guys historically not been a big mortgage bank.
Revenues are up maybe three times, what they were from a year ago.
So do you see any expense relief, if and when those mortgage revs, but begin to come down or is your guidance for.
21 on the expense side, assuming we get.
Some of the mortgage kind of returns to a more normal level.
Yeah, I said that will impact the extent trend right. If if mortgage revenues come down their commissions come down as well, but the hard thing about that Brad is to predict it right I mean I'll take what they made in revenue this quarter every quarter right and pay them a million more in commission [laughter]. So.
But it will it could impact the run rate going forward and I really would have you know we anticipate mortgage they think they're going to continue to do well for a while now that you guys know that has a lot to do with the market and where rates are and so I would hesitate to predict what that will be on into 21.
Great. Thank you guys.
Hey, Brent.
Thank you. Our next question comes from the line of Michael Young with True Securities. Please proceed with your question.
Hey, good morning.
Morning, Michael.
They want to start with the share buyback authorization, just try and think through kind of the puts and takes that would allow you to be more aggressive on it versus what might cause you to back off a little bit just in.
And timing or magnitude.
I'd like maybe a low growth environment for for a couple of quarters and maybe be a little more aggressive until the growth returns is that kind of the right way to think about that from a modeling perspective.
I think from a from a capital fish.
Fishing fee standpoint, Michael the way, we think about it as you said you were watching the growth of the balance sheet on the one hand.
Were expecting you know the PPP loans to begin to be forgiven or repaid have year over the next couple of quarters. So you will see how that plays out that's that's a factor and then of course, the risk and how we see the economy and and all those are the those at high level Mac.
So things were watching and then it really comes down to price and and how the market's doing.
I think we'll be active here.
In these at these price levels.
So you you know if you gave a scenario where the.
The pandemic.
You know where to get under control, which sounds odd right now given what's going on across the country, but you know if at some point Theres a vaccine and we begin to get you.
Better control on what's going on with the pandemic.
And we could get better visibility on or.
On the risk of the credit et cetera.
Yes, Vin you'd have more information in the market could you know.
To trade up.
For those circumstances in which case you know we'd have to take a look and just understand so without getting into too much specificity or granularity, we intend to be active in this environment and then ask things clear up in the future we could be more active if things get more positive. If we can be less active if it looks like you need the capital for credit or.
Or anything like that.
Okay. Thanks.
Maybe for Dan just a couple of follow ups on the credit So yes special mention and classified increases I guess that the right way to think about it is maybe there's just some cash flow shortfall, but you know the collateral values. They are still well above kind of where the loans are valid.
The outstanding amount of loans that the right way to think about that.
Yes, I think so Michael.
As I said before that.
In the course of working with your customers to assist there's under the normal standards, you're going to have some great migration. That's what we've seen happen and I think it's important to note that the classified ads even with the increase are still only at 1.63% that's going to be on a low side right and is consistent.
Well the way that we run the bank so they're not of concern to us and we don't see the loss a built in as I noted there just based on the equity and the guarantor support that we have and and primarily to see every book, which is which is where that would be most represented.
And then maybe as you look forward are there any kind of lingering maturities or anything like that the one that moves to NPL. This quarter do you see anything like that on the horizon.
That we should just kind of have an eye out for over the next kind of three quarters.
Yeah, I don't as of today I don't see any that would be in that same kind of category.
Yeah. So this is David Michael I would just say from again from a high level.
We're trying to be as transparent as we can be and and also our.
Our approach has always been you earlier to deal with these things earlier to downgrade if that's what we see coming.
And so I think we're taking it with that lens of of moving.
Moving credits to whatever grade, we think you know they're headed to do it sooner than later working with our credits the differences and I thought about this when we were.
Talking with Matt and Brad earlier about credit.
Your.
[music].
The fact that we if you look back at the great recession as an example.
You know.
Our portfolio.
Like a lot of portfolios are going to have we're going to have to work with our customers work through these challenging times. The question is at the end of the day what was the original underwriting how much equity what you what was the quality of the underlying collateral how strong or your second secondary and tertiary so.
Sources of repayment and that's where we think the differentiation is and so while you'll see here, our NPH tick up a little bit our grade migration and we're going to be fully transparent about that what what we believe is that because of the stronger underwriting because the smaller pieces things Dan referenced.
Earlier, there's just not the loss content. So this isn't a.
Deferrals are followed by downgrades are followed by big losses, that's not in our view what we see today is not what we've seen historically in our portfolio, we're going to work with our borrowers were going to be aggressive in structuring and working through these things with our borrowers and at the end of the day, we think the underwriter.
We will stand up and there aren't going to be material losses, and so consequently, our current what we have funded in the reserve. We think is adequate given everything you know inappropriate given what we know today and you know as Dan indicated we made our big provisions second quarter like a lot of banks did now I know some.
Companies took a big provision and started doing negative provisions already that's not you again that has not been our history is to do more measured approach put in there you on a conservative side more than what we need what we think we need on you in the second quarter just to be cautious and then to watch and see what happens here in the third and fourth in for.
At quarters of next year and to continue to add appropriately as we see with the migration is but the level of provision this quarter.
Right now from what visibility we have probably look similar for fourth quarter as Michelle said and we're also checking that against seasonal which will adopt this quarter as well. So at the end of the day you know Paul what was our with this provision what's our.
Loan loss provision with full adoption of Cecil that one 155 X PPP and yes, yes. So XP were asked where 155, which is up I think 10 basis points from the third quarter, our EPS for the second quarter and so we'll continue to work to migrate up a little bit if that's what we think the risk calls for but.
Where we think we're very more than adequately reserved today for what we see ahead.
That all makes sense. Thanks.
Thanks, Mike.
Thank you. Our next question comes from the line of Michael Rose with Raymond James. Please proceed with your question.
Hey, good morning, everyone. Just had a couple of questions a follow up on the on the loan growth commentary.
So does that I assume that that doesn't include the expectation for for PPP run off so maybe if you can just give an update there and then maybe just by category you know it seems like obviously energy not gonna grow terribly much same with office and hospitality things like that so so where are you expecting the growth is it universal across the footprint or.
And then is it.
Any market share take away lenders you might have hired or is it just kind of pent up demand growth of the market. Thanks for the color.
Sure Michael Good morning.
Let me comment on the general loan growth and I'll, let Dan talk about PPP and Michelle what we expect the payment of those to be and how that will play out over the next few quarters, but.
In terms of the loan growth, we really see it across all our markets released.
Good.
Business generation in all four of our major markets.
And so nothing really there that would be interesting to you and then in terms of the loan buckets, yes, we have we've implemented a.
A a retail strategy, we've talked about a little bit we think that will begin to show. Some results next year, we think both in deposit generation and generation of small business loans and things like that we have hired some lenders here during this period as well and so.
We expect that.
Our c. and I focus building, our middle market see an eye book of business or our line of business would be a better way to say that here in Texas over the next year is going to have an impact.
And then and then really pretty much other than that.
Yes, we're not.
I don't think anyone's book in a lot of hotel loans. Today. So you know I don't expect you will see growth in hotel book, but the other lines of business look whether its retail centers, our retail centers Dan can comment on this you don't have bounced back really well.
And yeah, we're see an opportunistic acquisitions by some of our wealthy families and investor groups.
Buying some of these properties.
Properties, while they're under little distressed, putting a lot of equity and so.
So yes, you are going to see us be willing to make a real estate loans as we always have with the additional capital we put in those numbers have come down substantially so.
You read the capital those are.
Those guidelines and things. So so we're we feel good about the market I don't think there's not a particular.
That was the question Michael there is not a particular line of business, where we're doubling down and it's just going to continue to be a moderate modest to kind of approach across all the lines of business with the hardest one to grow obviously hotel, but the other lines of business I expect growth and then you have to show me talk about the Pvp.
I think if I understood your question correctly Michael.
Part of it is related to loan growth component, there and the impact of PPP would have related to it.
The net growth number that David quoted around 5% would.
Would be excluding any impact from PPP, obviously, all the banks are.
Specking, hoping believing that at some point the fed and SP, a we'll figure this out and will ultimately get those paid off our expectation is that happens primarily in 2021, starting probably in the first quarter and bleeding into the second quarter, you'll see most of those.
Be dealt with but our growth forecasts are ex that always we don't include that because it's always those are always viewed as temporary loans right.
Perfect and I want to just okay.
Okay I'm sorry.
The fee income on TPP I think I mentioned last time, where you know its getting accreted into income I think its about 1.3 million a month now we have a little over 14 million that doesn't that seems to recognize.
So I mean, I expect whether they're paid off and they continue that creating a little over $10 million will go into 21 income.
Okay, that's perfect and just to be clear that that kind of mid single digit growth is like CPP is that also inclusive of warehouse or is that just core kind of ex warehouse that's X.
Ex warehouse X PPP, just our core held for investment loans and the warehouse by the way Michelle will speak about mortgage and there was a question earlier about you know kind of what the expectations are yeah fourth quarter as Michelle said looks to still be very robust both in the warehouse and on the retail side.
The warehouse, we actually don't expect it to back off a lot from where it is now even through next year, even when the mortgage volumes slow down so we're really managing that.
The relationships, we're adding the relationships that are you know are phasing out those kinds of things we are trying to position it.
The land, where you will be able to stay in that 800 million to a billion in average outstandings over the course of the quarters. So we don't expect the revenue from that too.
Tail off a lot in 2021, we think that what we're seeing for for third quarter, what we'll see in the fourth quarter, we expect something in that general range to continue through 2021, So we're not going to see a lot of headwind there, where we will see headwind is on the retail mortgage as the revised.
And the rates are low enough for long that most people will get the revised done and we'll see that returned to a more normal level.
However, we have a lot of new lenders and weve been really expanding our business in Colorado and so.
So just to give you a magnitude would say we were booking.
At a run rate of around call. It 500 million a year in those retail mortgages fundings.
Pre you know this is pretty 20.
Pre pandemic pre the last rate decline.
We're now seeing volumes around double that.
What's accounting for this large revenue increases large increase in compensation expense.
We don't think that comes all the way back to the 500 million, but but what we don't know is where does it from a billion and in gross production, where our historical run rates been about half of that how you how far does it come back and that we don't know we think its sub.
We're in between is where it will level out.
There. So I don't think we're going to have as much headwind on.
Mortgage revenue is maybe some companies will use my my point.
That's right that's great color I just have one follow up question for a former shall it sounds like maybe a little bit of core margin pressure here, but as we get into next year and you kind of have a a mix shift you support some into securities and then.
The loan growth picks up a you know this is David mentioned through the year. It does seem like the core margin can probably stabilizing and maybe expand a little bit is that that is that the way to think about it.
I don't know that I would I wouldn't bet on expanding but I think we're going to get some compression and then it should.
Stabilize like he said, if we were able to get the change in mix of bed from so much in cash and if we do get some loan growth that will help.
Okay. Thanks for taking my questions Hey, Thanks Bye.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Mr. Brooks for any final comments.
Thank you.
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