Independent Bank Group Inc (IBTX) 2020 Q3 法說會逐字稿

Greetings, and welcome to the Independent Bank Group Third Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

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. You may begin.

Good morning, everyone. I am 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 ibtx.com.

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 5 of the text in the release or Page 2 of the slide presentation for our safe harbor statement. All comments made today -- during today's call are subject to that statement.

Please note that if we give guidance about future results, that guidance is a statement of management's beliefs at the time the statement is made, and we assume no obligation to publicly update guidance.

In this call, we will discuss a number of financial measures considered to be non-GAAP under the SEC's rules. Reconciliations of these financial measures to the most directly comparable GAAP financial measures are included in our release.

I am joined this morning by David Brooks, our Chairman, CEO and President; Dan Brooks, our Vice Chairman and Chief Risk Officer; and Michelle Hickox, Executive Vice President and CFO. At the end of their remarks, David will 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% and 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 underwrite 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, or 5% of loan balances as of October 16.

During the quarter, we also completed the issuance of $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 strategic optionality into the future. Our healthy capital ratios and continued PPNR strength reinforce our ability to navigate the uncertain macro environment.

And with that, I'll turn the call over to Michelle for more detail on operating results for the quarter.

Thank you, David. Good morning, everyone.

Note that Slide 6 of the presentation includes selected financial data for the quarter. Our third quarter adjusted net income was $59.6 million or $1.38 per diluted share compared with $57.8 million or $1.35 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. While 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 that 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. While the NIM remains stable, it continues to be impacted by sustained high levels of liquidity.

Total noninterest income was $25.2 million for the third quarter. Mortgage banking revenue increased by $4.2 million, and mortgage warehouse fees increased by $590,000 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. Interchange 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 of 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 PPP loans and deferrals in the second quarter. Deferred costs totaled $14.7 million in Q2 compared to a more normal run rate of $5.5 million in this quarter.

In addition, commissions increased $1.1 million from Q2 primarily due to the increased volumes in mortgage. These increases were offset by a decrease in severance-related expenses of $2.5 million that were paid in Q2.

In addition, increased activity related to the inherited Bank of Houston litigation pushed legal fees back up to $1.5 million for the quarter versus $395,000 in Q2.

Slide 22 shows our deposit mix and costs. Total deposits were $13.8 billion as of September 30, 2020, an increase driven by organic deposit growth of $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 30.

Borrowings decreased $435.9 million since June 30, 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 the sub debt issue as well as earnings. The common equity Tier 1 capital ratio increased by 7 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 TCE 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 30, 2020, compared to $10.9 billion at September 30, 2019. 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, but 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 from the quarter ended June 30, 2020. 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 are pleased that only 1% of our loan customers and 5% of our loan balances currently remain in deferral. Loans currently in deferral totaled approximately $548 million across 239 loans, which is only a small percentage of the $2.65 billion across more than 2,100 loans that ever received a deferral during the pandemic.

Hotel and motel loans remain by far the largest category of loans still in deferral, representing $204 million or 37% of total deferrals remaining as of October 16. Occupancy rates have been trending in the right direction. The lodging industry has remained 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 of 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 or 0.25% of total assets at September 30, 2020. Nonperforming assets increased over the linked quarter due to a $15.7 million commercial real estate loan, which has matured and is pending work out. Net charge-offs remain low at just 1 basis point annualized for the third quarter.

During the quarter, we adjusted the risk grades of several of our loans as the pandemic's 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. Loans 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 of risk rates 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 CECL 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 economic environment and uncertainty related to the COVID-19 pandemic. We continue to anticipate that our CECL provision will be materially the same as our incurred loss provision.

Upon the adoption of CECL, we anticipate that our ACL through the third quarter would be approximately $167.5 million or roughly 1.55% of loans held for investment, excluding mortgage warehouse and PPP loans.

These are all my comments I have related to the loan portfolio this morning. So with that, I'll 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 COVID-19 remains a part of daily life, we are 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 $0.30 per share. The Board 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?

(Operator Instructions) Our first question comes from the line of Brady Gailey with KBW.

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 ran the numbers, it seems, like of the $150 million buyback, you have about $100 million left of authorization. Is that number correct?

No. Our Board reauthorized.

No. Yes. No, we just reauthorized the new $150 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 intend to be active, Brady, in acquiring our stock at these current price levels. I -- as we look around at merger and acquisition opportunities and other strategic alternatives out over the next several quarters, the high-quality names of other really strong companies in Texas that we're interested in are going to want a significant price for their company and it exceeds what our stock is trading at today. So I think, as long as that's the case, our stock is an attractive buy in here.

Okay. So you kind of hit on my next question, but it seems like M&A doesn't feel near term for you 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's a lot of political uncertainty for at least another week here and then -- and maybe longer beyond that, but -- and 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 that's -- while a lot of people are keeping relationships warm and current, I just don't think the activity level in M&A is going to pick up for a few more quarters now until we begin to get some clarity around the pandemic economic fallout, what the physical stimulus might look like and what the political environment is 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, NPAs were up a little bit. They're still very low, especially relative to peers, but you call out a roughly $16 million commercial real estate loan. I'm guessing that's a hotel. Any additional color on what that commercial real estate nonperformer is?

Brady, this is Dan. That one credit actually was an office credit that all the payments were made current on it. We just left it matured as we work with them on their plans for the renewal on it. So just that one credit.

And as you pointed out, total NPAs at 0.36% are very low. So any time you add one to the pile, it's going to move that needle more on our book than it may appear on other ones.

Yes. It's funny, the low numbers right, Brady. If you have 1 and you add 1, you increased 100%, but that's still 2.

That's right.

That's right. Is it a Colorado or a Texas line?

It's a Texas one.

Our next question comes from the line of Brett Rabatin with Hovde Group.

Wanted to first ask -- or just around the growth outlook, and you talked about the quarter, you had some payoffs and you're seeing some better demand. Can you talk maybe just about the gross versus net in 3Q, how much paid off in the quarter?

And then as you -- I know it's probably tough for 2021, but just kind of given what you're seeing with the pipeline, just growth reemerge here in the commercial book.

Yes. So the loan demand in this -- in the third quarter was strong and really what we had anticipated coming into the quarter. What surprised us a bit in the quarter was the level of payoffs.

So to give you a little color around that, 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 the $580 million of net fundings was really strong and one of the best quarters we've had in the last year, the payoffs, which are primarily asset sales where our families that we bank and investor groups we bank chose to sell some high-quality assets at really low cap rates, and that you can't -- you can never fault someone for realizing a big gain on something they've invested in, so that's positive for them. 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 that we were willing to do 20-year fixed rates in the 2s. We just don't -- we just -- that's just not what we've done, and it's not how we manage our balance sheet. So we -- again, when someone gets a 20- or 25- or 30-year fixed rate at 2 75, then you congratulate them on that and accept the payoff with a smile and move on.

So it's that kind of thing. So it's not -- and the only other -- where 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 were -- their performance was okay, not great. The cash flow coverages and things weren't industry leading for that segment, and we saw some banks coming in and paying those loans off and doing 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's just 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 payoffs were asset sales and long-term refinancings, things that were wins for our customers. And look, those investors do more business, so we're in this for a long time. They're terrific customers who've had a good opportunity to realize a good event. And they're on that asset, whether it's selling it or refinancing it. And it just -- they 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's some pending asset sales and things as well. So my guess is we're down just a hair 1% -- a little over 1% for the year in terms of loans held for sale, excluding PPP and excluding warehouse, and so we should end up flattish for the year here for 2020.

And then as we look out into 2021, our sense is, again, I referenced in my earlier comments about all the uncertainty that's still in the market and the risks that still exist 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 I'll define for the year as a mid-single-digit 5% -- call it, 5%, plus or minus 1% in that range for the full year 2021. And what we expect it will probably start with -- again, we're predicting the future here, which is very risky business.

But our 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 -- the logic behind it.

Okay. That's great color. And then, Michelle, maybe just thinking about expenses, obviously, noise this quarter, last quarter on the expense base. Any thought on an expense level from here as you think about everyone's trying to figure out how to get more efficient, maybe close branches, et cetera?

Yes. The expense run rate was a little higher than what I had guided to, but that was primarily due to mortgage because mortgage had such a great quarter. I think their commissions expense was up over $1 million for the quarter. So if you back that out, you get back to that [71, 72] that I had guided to. 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 sort of cranked back up. The lawyer started working again after they got past the 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 of 3% is sort of what we're looking at for '21 related to expenses.

Our next question comes from the line of Matt Olney with Stephens Inc.

I want to circle back on the updated loan grades that Dan mentioned, 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?

Matt, this is Dan. Yes, 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've given and how we manage our credits historically.

Specifically, as it relates to loss, again, based on the cash equity and the guarantor support that we have, as well as the small pieces, the granularity we've always spoken of 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. And then on the hotel portfolio, I think you've mentioned it's the largest category of deferred loans. Is there anything else you can tell us about how this has trended over last few months? I think when we spoke back in July, the occupancy rates were grinding higher. Are they still grinding higher? Are they flattened out?

Yes. I think the hotel book actually has continued to rebound. Just a 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 payments based on the improved occupancy. And of those that are still in deferral, most of them are leased back on interest only. So there's been some improvement in that category there as their occupancies have improved.

Okay. And then I guess, just lastly on credit, help us appreciate the loan loss provision expense, just $8 million, despite the big loan downgrade that we mentioned. Help us just reconcile the negative loan migration, but still very moderate level of provision expense, especially compared to 2Q levels.

Yes. I think as we indicated in the Q2 earnings conference, the impact of COVID, at least our assessment of that was largely carried in the second quarter. In the third quarter, we continued to review qualitative factors related to the deferrals and the grade migration.

In spite of a flat growth for the quarter, the fact that we still added $7.5 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, 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.

Yes. I think, Matt, just so you guys know, we will adopt CECL this quarter, Q4, and we've 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.

Our next question comes from the line of Brad Milsaps with Piper Sandler.

Michelle, I just wanted to maybe ask a question on the margin. Nice shot keeping that stable linked quarter, which is kind of what you were looking for. I'm just curious on the deposit side. I think, it seems like you might still have some room to move deposit cost 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 what's kind of out and -- versus kind of what's out in the market in terms of the competition within some of your markets?

Yes. Sure, Brad. Yes, we have -- Amy, our Treasurer has done a really great job of moving -- helping move our deposits down, working with our relationship managers to move exception rates down. We still do have primarily the promotional CDs that are going to roll off really by the beginning of '21 that we'll get some benefit from.

The cost of deposits was 47 basis points for the third quarter. As of today, spot is at 41. She thinks we can push it to 35 by the end of the first quarter. So it started at 101 at the end of February, so it's come down significantly, but the challenge for us is asset yields are continuing to come down as we have payoffs. Unfortunately, people are not paying off their lower rate loans, and so that's impacting our asset yields.

And so I think we could get a bit -- if that continues, we could get a bit of margin compression, still not a lot, but some, a few basis points. We could mitigate it. We ended up having more liquidity this quarter than what I anticipated, so we probably will start putting some of that in our bond portfolio.

Now the yields there are not great, 1 25, 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, Brad, around 4, a little below 4 on all the new funding when you stack it up for the third quarter for that $575 million, $600 million that we booked in the third quarter. Those came on an average of just a hair under 4, I think, but that is probably 25, 30 basis points below what the current book is yielding, so thereby the pressure that Michelle was referencing, we can continue to make good progress on deposits. But the loan pricing competition is probably a little stronger than we would prefer to see.

Got it. Got it. And then maybe -- yes. Sure, sure. And maybe just one kind of follow-up around expenses and as it relates to mortgage. You guys historically had not been a big mortgage bank. Revenues are up maybe 3x what they were from a year ago. Michelle, do you see any expense relief if and when those mortgage revs 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?

Yes, so that will impact the expense run rate. If mortgage revenues come down, then 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 $1 million more in commissions.

So -- but it will -- it could impact the run rate going forward. And I really would -- we anticipate mortgage, they think they're going to continue to do well for a while now, but 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.

Our next question comes from the line of Michael Young with Truist Securities.

David, I wanted to start with the share buyback authorization. Just trying to think through kind of the puts and takes that would allow you to be maybe more aggressive on it versus what might cause you to back off a little bit, just in timing or magnitude. It sounds like maybe a low-growth environment for a couple of quarters, so maybe you'd 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 capital efficiency standpoint, Michael, the way we think about it, as you said, we're watching the growth of the balance sheet on the one hand. We're expecting the PPP loans to begin to be forgiven or repaid here over the next couple of quarters. So we'll see how that plays out. That's --- it's a factor.

And then, of course, the risk and how we see the economy, and all those are -- those are the high-level macro things we're watching. And then it really comes down to price and how the market is doing. I think we'll be active here in these -- at these price levels.

Obviously, if you gave a scenario where the pandemic were to get under control, which sounds odd right now given what's going on across the country, but if at some point there's a vaccine, and we begin to get a better control on what's going on with pandemic, and we could get better visibility on the risk, the credit, et cetera, then you'd have more information. And then the market could trade up under those circumstances, in which case, 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 as things clear up in the future, we could be more active if things get more positive. We could be less active if it looks like we need the capital for credit or anything like that.

Okay. And maybe for Dan, just a couple of follow-ups on the credit. So you have a special mention and classified increases. I guess, the right way to think about it is maybe there's just some cash flow shortfall, but the collateral values there are still well above kind of where the loans are -- the outstanding amount of the loans. Is that the right way to think about that?

Yes. I think so, Michael. The -- as I said before, 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 classifieds, even with the increase, are still only at 1.63%. That's going to be on the low side, right, and it's consistent with the way that we run the bank.

So they're not of concern to us, and we don't see the loss built in, as I noted there, just based on the equity and the guarantor support that we have, and primarily the CRE book, 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 the one that moved to NPA 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 3 quarters?

Yes, I don't. As of today, I don't see any that would be in that same kind of category.

Yes. And 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 also our approach has always been 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 moving credits to whatever grade we think they're headed to and doing 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 -- the fact that we -- if you look back at the Great Recession, as an example, 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 are your secondary and tertiary sources of repayment, and that's where we think the differentiation is.

And so while you'll see here our NPAs tick up a little bit, our great migration, and we're going to be fully transparent about that, what we believe is that, because of the stronger underwriting, because of the smaller pieces that 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, and it's not what we've seen historically in our portfolio.

We're going to work with our borrowers. We're going to be aggressive in structuring and working through these things with our borrowers. And at the end of the day, we think the underwriting 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 and appropriate given what we know today. And as Dan indicated, we made our big provision in the 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 -- again, that has not been our history, is to do more measured approach, put in there on a conservative side more than what we need -- what we think we need in the second quarter just to be cautious and then to watch and see what happens here in the third and fourth and first quarters of next year and to continue to add appropriately as we see what the migration is. But the level of provision this quarter right now from what visibility we have probably looks similar for fourth quarter, as Michelle said, and we're also checking that against CECL, which we'll adopt this quarter as well.

So at the end of the day, Paul, what was our -- with this provision, what's our loss provision with full adoption of CECL is at 1...

1 55x PPP in warehouse.

Yes. So ex-PPP warehouse, we're at 1 55, which is up, I think, 10 basis points from the third quarter -- or from the second quarter. And so we'll continue to let it migrate up a little, if that's what we think the risk calls for. But we think we're very -- more than adequately reserved today for what we see ahead.

Our next question comes from the line of Michael Rose with Raymond James.

Just had a couple of questions, follow-up on the loan growth commentary. So does that -- I assume that, that doesn't include the expectation for PPP runoffs. So maybe if you can just give an update there.

And then maybe just by category, it seems like, obviously, energy is not going to grow terribly much, same with office and hospitality, things like that. So where are you expecting the growth? Is it universal across the footprint? Or -- and then is it -- any market share takeaway from lenders you might have hired? Or is it just kind of pent-up demand growth of the market?

Sure, Michael. 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, really seeing good business generation in all 4 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 implemented 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 in 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&I focus, building our middle market C&I 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 really pretty much other than that, we're not -- I mean, I don't think anyone is booking a lot of hotel loans today. So I don't expect you'll see growth in the hotel book.

But the other lines of business, look, whether it's retail centers, our retail centers, Dan can comment on this, have bounced back really well. And we're seeing opportunistic acquisitions by some of our wealthy families and investor groups buying some of these properties while they're under a little distress, putting a lot of equity in. So yes, you're going to see us be willing to make real estate loans as we always have. With the additional capital we put in, those numbers have come down substantially, the CRE capital, those guidelines and things.

So we're -- we feel good about the market. I don't think -- there's not a particular -- if that was the question, Michael, there's not a particular line of business where we're doubling down, and it's just going to continue to be a moderate -- modest 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 to grow.

And Dan, you and Michelle may talk about the PPP.

I think if I understood your question correctly, Michael, part of it relates to the loan growth component there and the impact that PPP would have related to it. The net growth number that David quoted around 5% would be excluding any impact from PPP.

Obviously, all the banks are expecting, hoping, believing that at some point, the Fed and SBA will figure this out, and we'll ultimately get those paid off. Our expectation is that happens primarily in 2021, starting probably in the first quarter and leading 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? So...

Perfect. And just -- okay, I'm sorry.

A comment on the -- just the income on PPP. On I think I mentioned last time, we're -- it's getting accretive into income. I think it's about $1.3 million a month now. We have a little over $14 million net -- of those net fees to recognize, so it will be -- I expect, whether they're paid off or they continue accreting, a little over $10 million will go into '21 income.

Okay. That's perfect. And just to be clear, that kind of mid-single-digit growth is ex PPP. Does that also inclusive of warehouse? Or is that just core kind of ex warehouse?

That's ex warehouse, ex PPP, just our core held for investment loans. And the warehouse, by the way, Michelle was speaking about mortgage, and there was a question earlier about kind of what the expectations are. 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 phasing out, those kinds of things, we are trying to position it to land where we'll be able to stay in that $800 million to $1 billion in average outstandings over the course of the quarters.

We expect the revenue from that to tail off a lot in 2021. We think that what we're seeing 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 refi boom and the rates are low enough or long enough. Most people will get their refis done, and we'll see that return to a more normal level.

However, we have hired a lot of new lenders, and we've been really expanding our business in Colorado. And so it -- so just to give you a magnitude, let's say, we were booking at a run rate of around, call it, $500 million a year in those retail mortgages, fundings, pre -- this pre 20 -- pre-pandemic, pre the last rate decline. We're now seeing volumes around double that, and that's what's accounting for this large revenue increase, this large increase in compensation expense.

We don't think that comes all the way back to the $500 million, but what we don't know is where does it -- from $1 billion in gross production, where our historical run rate has been about half of that, how far does it come back, and that we don't know. We think it's somewhere 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 as maybe some companies will is my point.

That's great color. I just have one follow-up question for Michelle. 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 mix shift, you'd deployed some of the securities and then the loan growth picks up, as David mentioned, through the year. It does seem like the core margin can probably stabilize and maybe expand a little bit. Is that the way to think about it?

I don't know that I would -- I wouldn't bet on it expanding. But I think we're going to get some compression, and then it should stabilize. Like you said, if we were able to get the change in mix a bit from so much in cash and if we do get some loan growth, that will help.

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. We appreciate everyone being on today and appreciate your interest in Independent Bank Group, and we appreciate your time this morning. Hope you have a great day. Thanks.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.