Independent Bank Group Inc

NASDAQ:IBTX

Earnings Call Transcript 2020-Q1

[Operator]

Greetings. Welcome to Independent Bank Group First Quarter 2020 Earnings Call. At this time, all participants will be in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.

At this time. I will turn the conference over to Paul Langdale, Senior Vice President and Director of Corporate Development. Mr. Langdale, you may begin.

[Paul Langdale, SVP, Director, Corporate Development]

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 first 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 6 of the text in the release or Page 2 of the slide presentation for our Safe Harbor statement. All comments made 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’m 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 will turn it over to David.

[David Brooks, Chairman, CEO and President]

Thanks Paul. Good morning, everyone and thank you for joining us on today’s call. Before we discuss our operating results, I’d like to take a moment to address the current environment. Most importantly, we hope you and your loved ones are well. The Coronavirus pandemic has had a significant and widespread effect on our daily lives and our economy. During these difficult times, we have focused our efforts on supporting to health, safety and welfare of our employees, customers and communities.

As the pandemic unfolded, we quickly adapted to help and safety of our employees while remaining available to support our customers for all their banking needs. And in the midst of significant market disruption our bankers worked one-on-one with our customers to find solutions to work through the crisis. I’m especially proud of how our company is participating in the SBA Paycheck Protection Program. As of today we’ve received SBA authorization for over $730 million in loans to over 4,600 of our small business customers. Needless to say, I’m thankful for our incredible teams who as always have been willing to roll up their sleeves and put in hard work in the face of adversity, though much uncertainty remains about the unfolding crisis, our company remains in a position of strength to help our customers weather the storm.

Bank capital ratios remain strong and we maintain ample liquidity both on our balance sheet and through access to substantial contingent liquidity resources. While we’re encouraged by the results of recent stress testing on our loan portfolio our teams will remain vigilant in identifying and addressing risk while working with our borrowers to minimize the economic dislocation resulting from the COVID-19 pandemic. This disciplined approach has served us well for over three decades and earned our company a reputation for maintaining resilient credit quality through difficult times.

And with that, I’ll turn the call over to Michelle who will provide operating results for the quarter as well as some color on our securities deposits and liquidity positions.

[Michelle Hickox, EVP and CFO]

Thank you, David. Good morning, everyone. Please note that Slide 6 of the presentation includes selected financial data for the quarter. Our first quarter adjusted net income was $43.4 million or $1.01 per diluted share compared with $52 million or $1.19 per diluted share for the first quarter last year and $56.8 million or $1.32 per diluted share for the linked quarter. Net interest income was $123.2 million in the first quarter up from $121.7 million in the first quarter 2019 and down from $128.1 million in the linked quarter. The decrease from the linked quarter is primarily due to less loan accretion income and lower average correspondent bank and mortgage warehouse loan balances.

The net interest margin with 3.76% for the first quarter compared to 3.81% for the linked quarter and 4.05% for the first quarter last year. The five basis point decrease in the NIM from the linked quarter was primarily due to lower loan accretion income for the first quarter. The NIM excluding all purchase loan accretion decreased one basis point from the linked quarter to 3.48% as we railed to offset decreases in loan yields with lower funding cost.

Total non-interest income with $14.5 million a decrease of $3.7 million compared to the linked quarter. This reflect decreases of $1.3 million in mortgage banking revenue and $820,000 in the other non-interest income recalled that the linked quarter included $1.3 million gain on sale of the trust business in October 2019. Mortgage banking revenue of $2.5 million in the first quarter 2020 was negatively impacted by market volatility which resulted in a hedging derivative loss of $1.6 million compared to $675,000 loss in the linked quarter.

Total non-interest expense was $74.4 million for the first quarter of 2020. A decrease of $12.2 million compared to the first quarter of 2019 and a decrease of $6 million compared to the linked quarter. The decrease in the prior year is primarily related to a decrease of $14.4 million in acquisition related expenses as the Guaranty acquisition closed in the first quarter last year. The decrease from the linked quarter is related to a $3 million separation expense paid to a former executive in the fourth quarter as well as decreased acquisition expenses of $4.5 million that were incurred when the Texas Capital MOE was announced in December. First quarter non-interest expense was also impacted by higher depreciation and property tax expense related to our new corporate headquarters.

Professional fees related to acquired litigation with higher than expected about $300,000 more than was incurred in Q4, 2019. Consulting expense was also elevated by approximately $650,000 related to a compliance project that was completed in March. In addition, FDIC insurance increased by $758,000 from the linked quarter and $504,000 from first quarter 2019 due to the transition to the large bank assessment calculation.

Slide 19 shows our deposit mix and cost. Total deposits were $11.9 billion as of March 31, 2020. Deposits remained stable during the first quarter despite significant decreases in rate pay down term deposits and index fund accounts. The average cost of interest bearing deposits was 129 basis points down 13 basis points from the first quarter of 2019 and down 12 basis points from the linked quarter.

Slide 20 shows the detail of our investment portfolio. The company’s investment portfolio consists of a diversified mix of liquid low risk securities design to help bolster liquidity and manage interest rate risk. Securities and cash comprised 13.1% of assets as of March 31, 2020. Capital ratios are presented on Slide 21. Capital levels are strong at 8.94% total capital to tangible assets and 12.05% total risk weighted capital ratio.

That concludes my comments, so I’ll turn it over to Dan to discuss the loan portfolio.

[Dan Brooks, Vice Chairman and Chief Risk Officer]

Thanks Michelle. Good morning. Overall loans held for investment not including mortgage warehouse purchase loans grew at 3.4% annualized rate to $11 billion at March 31, 2020 compared to $10.9 billion at December 31, 2019. Mortgage warehouse purchase loans averaged $547.3 million for the quarter down from $575 million for the quarter ended December 31, 2019. The decrease from the linked quarter was due to continued volatility in the mortgage markets resulting from the COVID-19 pandemic.

Slide 12 shows the composition of our loan portfolio and our commercial real estate portfolio. As of March 31, 2020 commercial real estate makes up 49.5% of loans which is declined from 50.4% in the linked quarter and 53.3% in the first quarter of 2019. Our CRE book is well diversified in types of collateral with the largest segments in office and retail.

Slide 13 further breaks down the retail CRE portfolio by property type. Our retail portfolio is an extremely granular book off 1,048 loans off which 94.2% are collateralized by properties located in our company’s markets in Texas and Colorado. The average loan size in the retail portfolio as of March 31, 2020 is $1.6 million. In light of the current environment we thought it would be appropriate to provide additional information relating to segments of our loan portfolio potentially impacted by the COVID pandemic on Slides 15 and 16.

Our credit teams have performed stress test on potentially impacted segment and those tests encourage us that the portfolio will hold up well during this period of turmoil. While there were undoubtedly be impacts from the COVID-19 pandemic. We will be deliberate and actively managing our risk and working with our borrowers to ride out the storm. To that end, we’ve been granting deferrals on a case-by-case basis and providing other accommodations where appropriate across our footprint to help those borrowers that are experiencing temporary dislocations from the sheltering place orders and overall reduced economic activity. Through today we granted deferrals to approximately 6% of our loan customers.

Additional detail regarding our hotel and motel exposure can be found in Slide 15. In all our hotel and motel exposure was $432.3 million as of March 31, 2020. 91.3% of these loans are collateralized by properties located in either Texas or Colorado. Additionally 78.9% of these loans are on branded limited service hotels in predominantly suburban markets. We have limited exposure to the most impacted segments of the industry such as resort and conference hotels.

Our hotel and motel book is conservatively underwritten with an average loan to value to 57.3% and a $5 million average loan size. All of our hotel rooms are made to proven operators and fully 95% of the book is backed by either personal recourse or corporate guarantors.

Slide 16 contains details regarding our energy book. As of March 31, 2020 our energy loans were $181.5 million or 1.6% of total loans held for investment excluding mortgage warehouse purchase loans. Our energy book is mostly comprised of recently underwritten E&P loans by production roughly 46% of loans are secured by oil and liquids, while 54% is secured by natural gas assets. Majority of our E&P borrowers had hedging in place and those borrowers that do not have hedges in place have provided personal guarantees.

Over the last month we’ve conducted rigorous stress testing of our energy portfolio assuming $25 oil for the next two years and we’ve been pleased to confirm that the stress test does not indicate material losses under this scenario. Overall our credit quality metrics remain strong with total non-performing assets remain stable at $31.6 million or 0.2% of total assets at March 31, 2020 compared to $31.5 million or 0.21% of total assets at December 31, 2019.

Net charge-offs were 0.5% annualized for the first quarter 2020 compared to 0.2% annualized in the linked quarter. Charge-offs increased over the linked quarter due to the charge-offs totaling $1.3 million related to a commercial real estate credit and an energy credit. As allowed by the CARES Act, we elected to defer the adoption of CECL. And our allowance in first quarter 2020 provision we’re calculating using our historical incurred loss model.

Provision from loan loss expense was $8.4 million for the first quarter, an increase of $6.8 million over the linked quarter. The increase from the linked quarter represents increase general provision for economic factors related to the COVID-19. Previously mentioned charge-offs and $2.8 million specific reserve.

Once CECL was adopted effective January 1, 2020 we expected day one increase to the reserve to be $80 million. This includes $22 million for purchase credit deteriorated lines. We estimate that the provision expense for the first quarter would not have been substantially different under CECL. These are all the comments I had related to the loan portfolio this morning. So with that I’ll turn it back over to David.

[David Brooks, Chairman, CEO and President]

Thanks Dan. The challenges presented by the COVID-19 pandemic are unprecedented, that said we remain confident that the approach that has served has well for three decades conservative credit culture, disciplined underwriting and efficient operations will allow us to face these challenges head-on. For the many reasons Dan and Michelle have just described we remain very confident in the strength of our balance sheet.

Our footprint encompasses four of the country’s strongest market across Colorado and Texas. Having great customers in great markets has helped us deliver strong return on assets and return on equity metrics and consistently grow earnings’ per share, tangible book value per share and or annual dividend while no bank will be immune to the economic turbulence that lies ahead we believe our bank is well positioned to weather the storm and emerge in a position of competitive strength.

In the meantime, we will continue to roll up our sleeves and do the hard work. I can’t thank our teams enough for their resolve, tenacity and dedication and being there for our customers and communities during this crisis. As community bankers, our prosperity is closely linked with those we serve and we will work tirelessly to remain a source of strength to our customers and communities both through this crisis and well into the future.

Thank you for taking the time to join us today. We will now open the line to questions. Operator?

[Operator]

[Operator Instructions] thank you. And our first question comes from the line of Matt Olney with Stephens. Please proceed with your questions.

[Matt Olney, Stephens]

Want to start with CECL and what else can you tell us about the decision to delay CECL implementation, what were the major factors that drove this and specifically was decision impacted all about depending MOE? Thanks.

[Michelle Hickox, EVP and CFO]

Matt, this is Michelle. We were working really hard on our CECL model through the end of last year. We did make some significant adjustments to it right at the end of the year and when we got the option to defer adopting it, that week when we were trying to get our first quarter closed between Moody’s economic forecast, they were sending one out every day, we weren’t sure how that would be impacted by the stimulus and ultimately decided we were more comfortable recording a provision using the model that we have been using historically and feel comfortable with. The deferral is not ideal because we will have to take it back to 01/01 [ph] at some point. But we really felt more comfortable with that model and recording a provision using our current model rather than CECL and then having an opportunity to see how this COVID pandemic in the economy plays out through Q2 and Q3.

[Matt Olney, Stephens]

Okay, understood. Thank you for that. And then David, I respect that there’s some limited comments you can make around that the pending MOE. I’m trying to appreciate when the merger was announced back in December. I think the estimate loan mark [ph] was around $200 million and obviously that was just an estimate loan mark [ph], the world’s changed since then considerably. So can you just talk about the macro changes and how that could impact the credit market and the rate market for this, the MOE?

[David Brooks, Chairman, CEO and President]

Sure, Matt. We’re continuing to assess the impact of the COVID-19 and the all the rapidly developing and really unprecedented economic and market events we’re dealing with. I won’t comment on Texas Capital. But as far as Independent Bank goes - our capital ratios liquidity and asset quality will remain strong and as described by Dan and Michelle in our comments.

[Matt Olney, Stephens]

Okay, last question from me. I think we’re still waiting the final S-4 filing that would include the dates for the upcoming shareholder vote. When should we expect that filing to be finalized?

[David Brooks, Chairman, CEO and President]

We don’t currently have an update on timing of the transaction which obviously depends on regulatory and shareholder approvals and other factors that are outside of our control. We continue to focus on running the bank here. These are difficult times, I know we and Texas Capital have continued to focus on taking care of our customers and our employees and our communities at this time so I don’t have an update on the timing, Matt.

[Matt Olney, Stephens]

Okay, I’ll hop back in the queue. Thank you, guys.

[Operator]

Our next question is from the line of Brad Milsaps with Piper Sandler. Please proceed with your question.

[Q –Brad Milsaps]

I know there’s a lot of moving parts this quarter. But David or Dan, just kind of curious if you could add a little bit more color on, what the process was and reviewing the commercial real estate book, how you handled the deferral request, just any additional color around due diligence you did, stressing against that book to – do you—feeling more comfortable is where you settled out on your provisioning this quarter?

[Dan Brooks, Vice Chairman and Chief Risk Officer]

Brad, this is Dan. Good morning. As it relates to our book, the review we have always ongoing on a commercial real estate continue this quarter. Specifically evaluating each of the asset classes that we think certainly are showing more stress across the nation including in Texas. And based on the stress testing we did on that there’s no additional provision that was created specifically in this quarter for that.

I think we’ve given some good detail in our slide deck as it relates to some of those buckets’ hotel and motel, retail CRE and then again further commentary there on energy as we always give you. Specifically on the retail CRE book, you saw some granularity there and I think we also provided some comments in there related to the deferrals. Specifically on that Brad, I think important to note, in our case we potentially ask our customers to come to us and ask for a deferral as oppose to providing a blanket deferral out there for credits and the importance of that I think as we just want to know story. So when they came and said, hey I’d like to have a payment deferral. We said, tell us your story so we can understand what kind of stress you’re under and then based on that fairly standard would have been a 90-day deferral which was allowed to give them time to work through the immediate issues that they had. I’m not sure about fully answered your question. Come back to me, if you have?

[Q –Brad Milsaps]

No that’s helpful, do you feel like the pace of deferral request has begun to slow?

[Dan Brooks, Vice Chairman and Chief Risk Officer]

It has slowed. We had an initial push development [ph] while there is still some trickling in, the bulk of those seemed to have already come through.

[Q –Brad Milsaps]

Great and then maybe a follow-up question for Michelle. Your core NIM held in really well this quarter, just curious what opportunities you see on the deposit side of things sort of your outlook for the NIM maybe excluding the impact of the PPP loans?

[Michelle Hickox, EVP and CFO]

Yes, so related to the NIM, our deposit cost actually were stable from fourth quarter through February until Fed tap [ph] rates again. And I will tell you we have significantly lowered rates on our product. We took away our promotional CD that we had out there. I looked this morning, so from since March our funding costs have dropped about 30 basis points so we’ve seen really good success there in lowering funding cost.

I think on the other side though on assets, while we were seeing a decreasing yields from earlier in first quarter, that really is sort of slugged down at this point, just given the economic environment not as likely to give up pricing relative to what’s going on, so ex-the PPP because you’re right that will cause our NIM to be really lumpy probably mostly in Q3. I think our NIM will be stable. It could even be up, a few basis points, Brad. If what’s happening currently continues through the quarter.

[Q –Brad Milsaps]

Great, thank you all. I’ll jump back in queue.

[Operator]

The next question is from the line of Michael Rose with Raymond James. Please proceed with your question.

[Q –Michael Rose]

Just wanted to go back to the MOE, when you guys announced it. You guys sort of mid-2020 close just given the impacts of the pandemic could that be pushed out a little bit potentially?

[David Brooks, Chairman, CEO and President]

Michael, we’ve filed the initial drafts with the S-4 and the regulatory applications and I just don’t have any further update at this time on, what the timing might be on the proposed previously announced merger.

[Q –Michael Rose]

Okay, maybe just switching to credit. I heard the comments on the stress test for the energy portfolio which is good to hear. Can you give some color around maybe some of the other stress categories like hotel and motel specifically and what some of the stress test metrics that you ran there looked like both under the incurred model and what it could mean potentially under CECL? Thanks.

[Dan Brooks, Vice Chairman and Chief Risk Officer]

Mike, this is Dan. Let me talk about just the hotel and motel book. We stressed occupancy you can imagine and off the revenues there and the coverages’ that they would have – I think it’s important to note on that portfolio that it has been built with a very granular process as we do on all of our CREs, so average loan size is smaller. It’s always been important to us have cash equity upfront as opposed to appraised equity, that’s absolutely the case in that book as well. All of those credits were performing well prior to COVID that vast majority of those 90% plus had meaningful guarantees in place with capacity.

The overall debt service coverage on that portfolio was strong before. A few of them I think will suffer, but most will come through just fine so we expect no material losses in that portfolio. As it relates to the retail CRE as I already commented the same there, strong cash equity 93% of those credits have guarantees on them. Again that portfolio has performing extremely well prior to COVID as you recall there and because we indicated in the deck. There was over 1,000 loans in there, the average size is $1.6 million and all within [ph] our footprint and all the operators have been in business for a long time and so therefore we expected those will do fine as well. Their payment deferrals and of course in both of those categories, but hopefully that gives you a little bit more color.

[Q –Michael Rose]

Yes, so this 6% [ph] deferral rate. I mean, is it mostly in those categories?

[Dan Brooks, Vice Chairman and Chief Risk Officer]

I would say it’s broad across the whole spectrum of real estate loans that we have. I would say retail CRE clearly has a higher percentage in there. You’re in 20s, 22% I think is the average that we had in there. The hotel, motel book as you would expect based on the fact that most of the hotels in the US are shut down as a much higher percentage closer to 50%, which is not unexpected given the current environment.

[Q –Michael Rose]

Okay and maybe just one final one from me. Just around the commentary or language in the press release around the potential goodwill write down. And we’ve seen at least one other bank take a goodwill impairment charges quarter so, can you just walk us through the thought process for not doing it, thanks.

[Michelle Hickox, EVP and CFO]

So the comment in the press release. I appreciate you asking that question because I wanted to point that out. We felt like given where our stock price was, there was a trigger to evaluate our goodwill. We have had a third party valuation done at this point that currently indicates that we do not have goodwill impairment. Our auditors had not completed all of their procedures to get fully signed off as of yesterday. So it’s not completed, so it’s provisional at this point. It is a possibility that they could come back with questions or changes and that we could end up recording goodwill impairment as of March 31st.

[Q –Michael Rose]

Got it. All right, thanks for taking my questions.

[David Brooks, Chairman, CEO and President]

Thanks Michael, one other thing regarding your question Michael and I think earlier to Matt’s initial question around CECL and why we chose to keep the incurred loss model, this quarter versus CECL. And then your follow on question Michael which was I think pertaining to how much different our loan loss provision could have been in the quarter under CECL versus the incurred loss and we have run our model side-by-side for this quarter and the actual CECL charge was right on top of the incurred loss model charge for this quarter, so there is no material different for this quarter now. Obviously, we’ll watch that and as Michelle said we understand why we have to at some point we’re just deferring this and we’ll have to come back and make the entries. But right now as I understand it and Michelle and Dan can comment, but it was the proposed CECL charge under our current model was right on top of the incurred loss model.

[Operator]

Thank you. The next question is from the line of Brady Gailey with KBW. Please proceed with your questions.

[Q –Brady Gailey]

One more question on the CECL delay. I was wondering if this is an opportunity to you guys to potentially close the TCBI merger and then adopt CECL and that would allow you to put the CECL mark on the new combined computing effectively this is – could this potentially be a way for you to put an additional mark on TCBI’s required loan balances as well or does the CECL mark still have to be as the economic backdrop on January 1.

[Michelle Hickox, EVP and CFO]

I would just say that, that really didn’t have any impact on our decision to defer adopting CECL, Brady.

[Q –Brady Gailey]

Okay, is it maybe just bigger picture David, lot has changed in the last four or five months since you announced the TCBI deal? You have oil rates, COVID - there’s a lot that’s happened, maybe just give us your updated thoughts on how you view both depositors and the risk of the pending TCBI merger?

[David Brooks, Chairman, CEO and President]

Thanks Brady. I just unfortunately don’t have any update this morning on the previously announced merger with Texas Capital. We are as I mentioned earlier continue to assess the impact of COVID on our balance sheet and on our income statement at this time and just can’t comment on Texas Capital.

[Q –Brady Gailey]

Okay, all right. Thanks guys.

[Operator]

[Operator Instructions] the next question is from the line of Michael Young with SunTrust Robinson Humphrey. Please proceed with your questions.

[Michael Young, SunTrust Robinson Humphrey]

Sorry to ask one more question regarding the merger, but it is from the IBTX perspective. I’m just curios if shareholders were to vote down or not approve the merger on your side of the equation, would $150 million be required to be paid to Texas Capital?

[David Brooks, Chairman, CEO and President]

Really have no comment on that at this, Michael. Appreciate the question. But we – the transaction is subject to as I said a moment ago shareholder approval and regulatory approvals which are in process and really don’t have an update on timing or status or really our view on that.

[Michael Young, SunTrust Robinson Humphrey]

Okay, I was just trying to ask procedurally. But I guess bigger picture is on capital kind of looking at levels now and then looking forward it potential growth opportunities that are out there especially with warehouse balances likely to be pretty strong in 2Q, just wanted to get an update on kind of how you’re thinking about growth relative to capital at this point in the cycle?

[David Brooks, Chairman, CEO and President]

We had 3. – was it Dan?

[Dan Brooks, Vice Chairman and Chief Risk Officer]

.4.

[David Brooks, Chairman, CEO and President]

3.4% growth for the quarter excluding the warehouse Michael that feel to us like pretty good rate of growth in that 3% to 5% range maybe for this year just knowing what we know now it’s obviously very hard to predict, what thing is going to look like over the next few months. But one thing I think that people should keep in mind about Independent is that our track record in credit and we have the strongest capital ratios and we really ever had as a public company and so we feel like we’re well positioned going into this uncertainty ahead.

In the past in these times uncertainty we’ve been able to be on offense if you will and enable to get market share by having a clean balance sheet and clean credit, we’ve avoided struggles with the regulators in terms of problem credit and being in the penalty box so to speak, so we have – and these opportunities in the past at least that provided us really good opportunity to grow relative to our peers and we expect that to be the case this time as well.

[Michael Young, SunTrust Robinson Humphrey]

Okay. And maybe just one last one, I don’t know if you have a breakdown of the reserve on the few kind of specifically called out loan books hotel, motel, retail and energy?

[David Brooks, Chairman, CEO and President]

Yes, there are no specific reserves against those books that you mentioned there. Energy you have a specific one that we added this quarter for $2.8 million on one specific credit which is long time classified loan we’ve had and we just added some there, but as it relates to the retail CRE, the hotel books there are no specific reserves or extra allocation that were added this quarter. What’s the general reserve against the energy? It’s 4% is the reserves on the energy book at this point.

[Michael Young, SunTrust Robinson Humphrey]

Okay, but there’s been no build of the general reserve I guess above just kind of normal book for hotel, motel or retail at this point, right?

[David Brooks, Chairman, CEO and President]

Not at this point.

[Michelle Hickox, EVP and CFO]

Not specifically for those. I mean we did build the general reserve just for the overall pandemic – the economy. But I wouldn’t say it was specifically allocated to any of those portfolios.

[David Brooks, Chairman, CEO and President]

The $8.3 million charge we took this quarter, Michael for loan loss provision related to some of the specifics Dan spoke about, but also a general bill for the COVID-19 stress on the portfolio that we were seeing both under the incurred loss and the CECL model. And as we think about it going forward, we’ve been talking about a lot and Dan and this team have really been doing the hard work to inform the discussion.

We expect right now, today, we expect slightly elevated loan loss reserve over the next three to six, seven quarters depending on how slowly, how quickly, how slowly we come out of this or quickly the economy recovery. But at this time as Dan said with the granularity of our portfolio, we don’t expect those large charges from quarter-to-quarter. We’ll slowly build the reserve as the model indicate we need to, but we had it as of to-date putting specific side for the hotel, motel or any of these other books.

[Michelle Hickox, EVP and CFO]

I think the other thing to note is that, our day one charge for CECL is $80 million and so had we adopted CECL the reserve would have been 1.25% in total loans at the end of the quarter which we will have to do at some point.

[David Brooks, Chairman, CEO and President]

Right so, we’re operating under that while we haven’t adopted CECL we’re obviously paying close attention to what it does, what it says and 1.25% we feel good about that from historical standpoint where we’ve had typically around 1% between our reserve and any marks on acquired loans. Generally been in that 90 bps to 110 bps now with CECL we’ll have a starting point of 1.25% and could go up from there, if we see the need.

[Michael Young, SunTrust Robinson Humphrey]

Thanks.

[Operator]

Our next question is from the line of Matt Olney with Stephens. Please proceed with your question.

[Matt Olney, Stephens]

Thanks for taking the follow-up. Wanted to ask about operating expenses, was pretty noisy in the first quarter. I believe you estimated that the core number in 1Q was around $73 million, once you’ve moved the non-core items. Can you provide an outlook over the next few quarters on that core OpEx number? Thanks.

[Michelle Hickox, EVP and CFO]

Yes, so what I would say Matt is that, those expenses for first quarter were elevated I think about $1.5 million and that’s still primarily due to professional fees if you noticed that line item was up significantly even from Q4 which was already up significantly. We do know there is some non-recurring related to a compliance project that started in the fourth quarter ended in March and then the acquired litigation fees have been outsized in fourth quarter and then first quarter. The outlook for that expense should go down significantly. We do know at least in Q2 it will because everybody had to stop traveling and doing deposition. So I still think that $71 million to $72 million that I got it to at the end of Q4 is still a good run rate when you pull out those expenses.

[Matt Olney, Stephens]

Got it. Okay that’s helpful and then circling back to the retail portfolio, you guys gave us some great new details there. If in fact the media has picked up rent collections from tenants was very low in April, are there any details you can share with us about the rig collections within your retail portfolio?

[A –David Brooks]

Matt, I think the percentages of rents collected, we don’t have a stat that I can provide to you here. Clearly the fact that we’ve had some request for payment deferrals in this book as I mentioned earlier is an indication that if you’re a non-essential business and you had to shut your doors for some weeks expected those tenants went back to their landlords and say, hey, can you help me out there and there are some rent abatement. What we have seen is interesting in many cases the rent is not waived, but it’s in deferred and so they’ll give them 90-day period here or whatever period depending on that specific tenant and then they’re taking and adding it back in about a year from now and allowing them to just add to whatever would have been the normal rent, some portion of that, so it is a future obligation of that tenant, when they return to more normal times as an exchange for helping them right now. But I don’t have a stat on it, I think you can expect many and more asking for some assistance particularly if they were a non-essential. In other cases where you had essential businesses still operating there, they’re still paying but – does that help you?

[Matt Olney, Stephens]

Yes, that’s helpful a lot, appreciate that. And I guess as a follow-up, the retail portfolio obviously a little bit larger in Independent Bank versus some of your peers and it sound like it’s a core competency, something you guys have done for a while. Anymore background you can give us, had this always been something core at the bank, was this picked in an acquisition? Any more history you can give us on the retail portfolio within the bank?

[David Brooks, Chairman, CEO and President]

Yes, you bet. We’ve been in that business for a long time, Matt and have worked closely to with our borrowers and our bankers who been at this a long time to structure these in a way that are built to last. Certainly recessions and would expect as I had said earlier based on that, based on the cash equity and the guarantees that we have and the kind of performance we’ve seen in the past. The capacity of those guarantors to support their deals. We fully expect that these will perform well certainly there’ll be a slowdown here as we’re seeing now. But expect them to be that. And we have been at it a long time, so this is not a something that was acquired through an acquisition.

[Matt Olney, Stephens]

Okay, thank you.

[Operator]

Thank you. At this time, this concludes our question-and-answer session. And I will turn the floor back to management for closing remarks.

[David Brooks, Chairman, CEO and President]

If there are no further questions. We will conclude the call. I really appreciate every one’s interest in Independent Bank Group today and hope you have a great day, be safe, bye.

[Operator]

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