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Spirit of Texas Bancshares (NASDAQ:STXB)
Q3 2020 Earnings Call
Oct 21, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and welcome to the Spirit of Texas Bancshares third-quarter earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jerry Golemon, chief operating officer. Thank you, Mr.

Golemon. You may begin.

Jerry Golemon -- Chief Operating Officer

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Spirit of Texas Bancshares conference call and webcast to review 2020 third-quarter results. With me today is Mr. Dean Bass, chairman and chief executive officer; Mr.

David McGuire, president and chief lending officer; and Ms. Allison Johnson, interim chief financial officer. Following my opening remarks, we will provide a high-level review and commentary on the financial details of the third quarter before opening the call for Q&A. I'd now like to cover a few housekeeping items.

There will be a replay of today's call, and it will be available by webcast on our website at www.sotb.com. There will also be a telephonic replay available until October 28, 2020, and more information on how to access these replay features was included in yesterday's release. Please note that the information reported on this call speaks only as of today, October 21, 2020, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. In addition, the comments made by management during the conference call may contain certain forward-looking statements within the meaning of the United States federal securities laws.

These forward-looking statements reflect the current views of management. However, various risks, uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read the company's annual report, Form 10-K, filed with the SEC for the year ended December 31, 2019, to understand certain of those risks, uncertainties and contingencies. The comments today will also include certain non-GAAP financial measures.

Additional details and reconciliations to the most directly comparable GAAP financial measures are included in yesterday's earnings release, which can be found on the Spirit of Texas website. Now, I'd like to turn the call over to our chairman and CEO, Mr. Dean Bass. Dean?

Dean Bass -- Chairman and Chief Executive Officer

Thank you, Jerry, and good morning, everyone. I'm happy to report another strong quarterly performance. This quarter reflected improved earnings, a successful merger conversion, branch optimization, improving COVID-19 response results and strong asset quality metrics. During the quarter, we have reached another important milestone in the history of our bank.

We have thoroughly reviewed our capital needs and plans for future growth and determined that the time was right to authorize a quarterly cash dividend for our company. The dividend declared of $0.07 per common share is a solid starting point to share both our stable current earnings and future growth prospects. We have carefully chosen a dividend payout ratio that will reward our current investors for their continued support while enticing new investors with an attractive dividend yield. We'll also preserve a strong position and retain earnings to continue on the path of strong organic growth and revitalize our successful M&A program that has brought us to this milestone.

We are pleased to announce net income of $7.1 million for the third quarter and dilutive earnings per share of $0.41. Accretion of origination fees on PPP loans, net of deferred costs, continued to assist our financial performance and replace the reduction of interest income from the deep rate cuts experienced in the first quarter. As these loans are forgiven in the fourth quarter of 2020 and into the first and second quarters of 2021, we are actively finding new revenue sources and growth opportunities to further enhance profitability. Non-interest income for the third quarter, excluding gain on sale of securities, increased 48% over the second quarter.

And we will continue to find growth opportunities in non-interest income, given that we will likely be in a low interest rate environment for the immediate future. At the same time, we have been successfully optimizing our branch network by improving the bank's efficiencies by reducing noninterest expense. We have begun to see more clearly the impact of the COVID-19 pandemic and have made the strategic moves necessary to emerge stronger than ever, regardless of the shape of the recovery. We have a clear vision of the future of this great bank, and we'll continue to focus on serving the needs of our communities, generating stable core earnings for our investors and maintaining a strong capital position to serve as a bedrock for future growth.

Now, I'd like to turn the call over to Mr. David McGuire, our president and chief lending officer, to discuss the loan portfolio and asset quality. David?

David McGuire -- President and Chief Lending Officer

Thank you, Dean. The third quarter was a pivotal time for both the lending and credit administration staff and our fight to mitigate the impact of the global pandemic. Most of the borrowers were able to resume business operations, although at limited capacity, and we're able to gain a much clearer picture of the impact that the global pandemic will have going forward. Our lenders were provided a better sense of the borrower's ability to repay as the majority of the loans exited the deferment period during the quarter.

Additionally, our credit administration staff received more accurate information regarding borrower financial position and ability to service debt going forward. During the quarter, 90-day deferment periods have expired on approximately 81.5% of the 520 million in loans requesting deferment and 81% have resumed regularly scheduled payments. Over the coming months, we expect the remaining 18.5% of loans exiting periods of deferment will have similar results. For loans not able to resume regularly scheduled payments and/or loans associated with businesses that have permanently closed, our credit team is working diligently to mitigate losses wherever possible.

We initially focused our attention on a group of industries expected to be unfavorably impacted by the COVID-19 pandemic. However, over the past quarter, we have a much clearer picture of which borrowers have been impacted the most and which borrowers will experience a longer impact and possibly need additional assistance. Specifically, current stability in oil prices and the ability of restaurants to open dining rooms has significantly assisted borrowers in those segments. Additionally, housing demand and retail spending remains strong with no significant signs of future deterioration.

With respect to commercial real estate, capitalization rates are stable, though we do expect compression in the coming quarters, which we will keep a close eye on. Travel and leisure appear to be the most negatively impacted segments as business and leisure travel have slowed tremendously, and hotel occupancy rates are below levels necessary to service the underlying debt. At September 30, 2020, our total exposure in the hospitality segment consisted of 97.6 million or 4% of our loan portfolio. Gross loan growth during the third quarter showed significant signs of improvement.

However, loan payoffs, specifically on large relationships, offset the majority of growth, and net growth for the quarter was approximately 4% annualized. The lending pipeline remains robust, and we continue to see that many potential borrowers have delayed as opposed to cancel future plans. During the fourth quarter, uncertainty surrounding the election, the severity of the latest wave of COVID-19 cases and the development of a vaccine should decline and enable us to return to a more normalized level of loan demand. The yield on loans in the third quarter of 2020 was 4.87%, which decreased 27 basis points from Q2 2020.

The reduction in yield was expected as the remaining population of our variable rate loans repriced and higher yielding loans paid off during the quarter. As of September 30, 2020, the majority of our variable rate loans remain at their floors, and we expect loan yields to stabilize. Asset quality remains strong and stable as we now have a much clearer picture of exposure in troubled segments and have taken steps to mitigate losses in these areas. Nonperforming loans to outstanding loans increased to 36 basis points at the end of Q3 2020, compared to 31 basis points at the end of Q2 2020.

The provision for losses for the third quarter was $2.8 million, which increased the allowance to $12.2 million or 50 basis points of our loans outstanding. At quarter end, the coverage ratio on the organic portfolio was 94 basis points, excluding PPP loans. Annualized net charge-offs were eight basis points for the third quarter of 2020. Throughout the coming quarter and into next year, our focus will be on assisting the relatively small population of borrowers still needing assistance, quickly working through problem credits and returning to more normal levels of loan growth.

With that, I'll turn the call back over to Jerry Golemon to provide a review of the funding side of the company. Jerry?

Jerry Golemon -- Chief Operating Officer

Thank you, David. Total deposits at the end of Q3 were $2.3 billion, a decrease of $127 million or 5.2% from Q2 2020 and an increase of $702 million or 44.3% over Q3 2019. Of the $127 million sequential decrease from Q2 2020, approximately $63 million was the anticipated run-off of PPP-related deposits. Additionally, public fund deposits, due to their cyclical nature, were down $31 million.

Non-interest-bearing deposits decreased $78.4 million or 10.5% from Q2, again with PPP deposits accounting for $63 million of the decrease. Exclusive of PPP-related deposits, non-interest-bearing deposits now make up 27.4% of total deposits, up from 23.1% at the end of Q3 2019. This improved shift in deposit mix, along with aggressive repricing of deposits, resulted in a 0.57% cost of deposits, a decrease of 10 basis points from Q2 2020. The bank has no brokered deposits.

The reported loan-to-deposit ratio at the end of Q3 is 107.2%. Excluding PPP activities, the loan to deposit ratio drops to 88.8%, up slightly from 86.6% at the end of Q2. Borrowings increased by $84.7 million during the third quarter to 277.7 million due to our $37 million sub debt issuance and $79 million in additional draws on the PPP LF, offset by FHLB paydowns. Borrowings totaled 9.5% of assets at the end of Q3.

The company has significant sources of available liquidity, including $50 million in a holding company line of credit, fed funds lines totaling $108 million and Federal Home Loan Bank availability of $522 million. I would now like to turn the call over to our interim chief financial officer, Allison Johnson, to provide a financial overview of the third quarter. Allison?

Allison Johnson -- Interim Chief Financial Officer

Thanks, Jerry, and good morning, everyone. We provided detailed financial tables in yesterday's earnings release. On a consolidated basis, net income for the three months ended September 30, 2020, was 7.1 million with fully diluted EPS of $0.41 compared to earnings of 5.3 million and fully diluted EPS of $0.34 in the third quarter of 2019. Our financial results continue to benefit from the second-quarter success with the Payroll Protection Program via net accretion of origination fees.

As we look to the next few quarters and we prepare for the remaining 7.8 million of net origination fees to amortize in the income as loans are forgiven, it is imperative that we diligently look for new sources of noninterest income, while continuing to reduce noninterest expense. Our tax-equivalent margin in the third quarter of 2020 was 3.97% compared to second-quarter 2020 tax-equivalent margin of 4%, representing a three basis point decrease. Excluding the impact of PPP loans, our tax-equivalent net interest margin was 4.28% for the quarter. Compression within the net interest margin has abated as the impact of rate cuts by the Federal Open Market Committee have been fully realized within the portfolio, and the majority of our loans are at their respective floors.

As of September 30, 2020, our loan yield declined 27 basis points to 4.87% from Q2 2020. While we do expect to remain in a low interest rate environment for at least the next few quarters, we do not expect further compression within interest-earning assets. The net interest margin will continue to improve on the interest-bearing liability side as higher rate CDs continue to roll off. Additionally, during the quarter, we issued $37 million of subordinated debt at an interest rate of 6%.

We have neutralized this earnings drag through reinvestment in other banks' debt issuances. We also implemented a balance sheet strategy to monetize efficient gains in the investment portfolio to offset the loss on high-cost FHLB borrowing. We took a $1 million gain on the sale of $36.1 million of investment securities with a duration of less than one year to unwind $10 million of FHLB borrowings with a duration of 2.3 years and reinvested the proceeds. This strategy will be immediately accretive to net interest margin.

The provision for loan losses for the second quarter was $2.8 million, which increased the allowance to 12.2 million or 50 basis points of our loans outstanding or 60 basis points, excluding the 100% government-guaranteed PPP loans. The majority of the provision expense for the quarter related to increase in qualitative reserves as a result of our annual allowance model update and in response to the current economic environment. Specifically, we reconfigured qualitative weightings to weigh external factors more heavily than internal factors. This change resulted in an additional provision of approximately 1 million.

The coverage ratio on the organic portfolio was 94 basis points on the 1.3 billion in organic loans outstanding, excluding PPP loans at quarter end. Additionally, we have 5.8 million in unamortized discount on the acquired loan portfolio at September 30, 2020. As David mentioned, we are currently closely monitoring specific portfolio segments and expect the coverage ratio to continue to increase in the next two quarters as we gain more clarity on borrowers within these segments. Additionally, we would expect another quarter or two of elevated provision as loans are downgraded, and we obtain updated collateral valuations on newly impaired loans.

Non-interest income totaled $4.8 million for the third quarter of 2020 compared to 2.6 million for the second quarter of 2020. Excluding the $1 million gain on the sale of securities, noninterest income rose 48% to 3.8 million. During the quarter, we have seen increased demand for interest rate swaps and have seen an increase in SBA lending activity. We expect these trends to continue and slightly improve over the next few quarters as we emerge from recession.

We have also experienced higher mortgage sales volume, given the overall health of the housing market, driven by low interest rates. We will focus heavily on expanding noninterest income wherever possible in the coming quarters to build a solid foundation to replace interest income loss due to the rate cuts and origination fees on PPP loans. Non-interest expense totaled 19.3 million in the third quarter of 2020, an increase of 19.8% from 16.1 million in the second quarter of 2020. When excluding the deferral of salaries related to PPP loan origination during the second quarter of 4.9 million, noninterest expense declined 1.7 million from the second quarter of 2020.

This reduction is the result of cost-saving initiatives implemented early in the third quarter, which include targeted force reductions in key areas with weaker declining demand. We will continue to look for productivity efficiencies and reduce redundancies from recent acquisitions in the coming quarters to further reduce noninterest expense. As noted in yesterday's press release, on October 16, we closed the previously announced sale of our Clear Lake branch, which resulted in the sale of deposits of approximately 24.2 million. Final settlement on the sale will occur during the fourth quarter of 2020 and is expected to result in a gain on sale of approximately 700,000 and a reduction in rental and personnel expenses of 350,000.

Additionally, yesterday, the bank entered into a branch purchase and assumption agreement for the sale of our Jacksboro location, which is expected to close in the fourth quarter of 2020. As of September 30, 2020, we continue to enjoy strong capital ratios with the Tier 1 leverage ratio at the bank of 9.91% and 9.62% at the company on a consolidated basis. Maintaining a strong capital position is a current priority so that we can capitalize on any growth opportunities that arise in coming quarters. We also continue to focus on initiatives designed to return shareholder value.

We continue to repurchase undervalued shares of our stock under the current stock repurchase plan and will continue to do so in the coming quarters and for as long as the stock remains at undervalued levels. I'd now like to turn the call back over to Mr. Bass for closing remarks. Dean?

Dean Bass -- Chairman and Chief Executive Officer

Thank you, Allison. As we prepare to close out 2020, we must reflect on the past nine months to understand fully the challenges we have faced and the accomplishments we have achieved. The first quarter ended with nationwide fear and concern. Our primary focus was on protecting our investment, our great employees and customers while working diligently to understand the government programs designed to assist them.

We experienced a call to serve and support our communities during the second quarter and the magnitude of which we may never see again, and one that made us all extremely proud to be community bankers and an essential part of the fight against the virus. During the third quarter, we took a hard look at our current financial and operational position and began making strategic plans for a bigger and better future at the same time, continuing to focus on asset quality, improving earnings and branch optimization. We will close out 2020 excited about the year to come and the ability to share future successes with our bankers, support staff and investors. We have been battle-tested this year and can now proceed with absolute confidence that our overall strategy of growing by partnering with other extraordinary bankers while focusing on our security, stability and strength is a winning formula for success.

This concludes our prepared remarks. I'd like to ask the operator to open up the line for any questions. Operator?

Questions & Answers:


Operator

[Operator instructions] Our first question comes from the line of Brad Milsaps with Piper Sandler. Please proceed with your question.

Brad Milsaps -- Piper Sandler -- Analyst

Hey. Good morning, guys.

Dean Bass -- Chairman and Chief Executive Officer

Good morning, Brad.

Brad Milsaps -- Piper Sandler -- Analyst

David, maybe I want to start with deferrals. If my math's right, you're down to, I don't know, maybe 100 million-or-so deferrals. And it sounds like you have some confidence around those going off deferral. But would you kind of say that that is kind of the group you're watching the closest? Kind of ultimately, where do you think that number falls to as you kind of close out that program?

David McGuire -- President and Chief Lending Officer

Yeah, you're correct. It is approximately 100 million left in some form of deferral. Some are still in their first round of deferral, some are in their second round, and very little has gone to the third round. So, right now, we expect that that number will decline significantly throughout the rest of the fourth quarter, as scheduled, into the beginning of the first quarter of 2021.

Brad Milsaps -- Piper Sandler -- Analyst

OK. And just wanted to maybe get some more color on your comments around loan growth returning. Can you maybe give us a little more color there? Maybe percentage-wise on kind of what you're thinking in terms of growth you might be anticipating, or how much bigger is your pipeline relative to where it was, maybe at the lows in June or something? Just any additional color there would be great.

David McGuire -- President and Chief Lending Officer

Sure. Currently, our pipeline has almost returned to pre-COVID levels. Back in March, it was approaching $1 billion. Today, it's slightly below that.

All of our same mom-and-pop stuff we like to do across the whole gamut, if you look at our granularity of our portfolio that's remaining, we're seeing larger deals, smaller deals and in-between deals. So what we're seeing also is that our customers have taken their fingers off the pause button, and they're now actively planning for their projects or expansions going into 2021. So, we expect that that pipeline that we have accumulated today will start producing this quarter into 2021. Overall, we're very happy with the organic growth we've seen in the third quarter.

We expect there'll be more in the fourth and going into what we believe will be a good year for 2021 right now.

Brad Milsaps -- Piper Sandler -- Analyst

OK. Great. And then just a final question from me. I know you guys have been hard at work on the -- with some branch sales and getting cost savings out from some of those deals from last year.

Allison, just curious if you think this represents a pretty good expense run rate kind of less what you talked about with the two pending branch closures or sales, excuse me, or do you think there are more cost savings to come sort of off of this run rate that we saw in the third quarter?

Allison Johnson -- Interim Chief Financial Officer

I think going into Q4, you should expect to see roughly a 3% decline in noninterest expense. We made significant strides between Q3 and Q2. We had an 11% decline if you add back in the 4.9 million of salary deferrals that we took in Q2 of 2020. And so, we saw quite a bit of progress from Q2 to Q3, and then we'll continue to see that going into Q4.

Brad Milsaps -- Piper Sandler -- Analyst

OK, great. Thank you.

Operator

Our next question comes from the line of Matt Olney with Stephens. Please proceed with the questions.

Matt Olney -- Stephens Inc. -- Analyst

Hey, great. Good morning, everybody. One follow-up on the margin. It sounds like you expect some nice improvements here.

If we remove the impact of PPP, which can obviously be volatile, I think the margin was around 4.28% FTE in the third quarter. I want to make sure you also expect improvements from those levels as well.

Allison Johnson -- Interim Chief Financial Officer

Yeah. Good question, Matt. Yeah, we definitely saw some improvement of seven basis points to 4.28%, excluding PPP. But as reported, you saw it was at 3.97%, and we like to maintain that margin north of 4%.

So, David's team has been doing a good job at drawing the line in the sand as far as rates at what we're putting on new loans at. And as we mentioned on the call, we've got our higher cost CDs rolling off in the next. We've got 20% of those actually rolling off in the next quarter and then 75% of those will reprice in the next 12 months. So, we expect to see some pickup there in the net interest margin.

And we're just committed going forward to maintaining that net interest margin at 4% or better.

Matt Olney -- Stephens Inc. -- Analyst

OK. And then the core loan yields in the third quarter, if I do my math right, if I take out the PPP impact, I think, around 5.40%, does that sound about right? And David, any color on where the new and renewed loan yields are coming on more recently?

Allison Johnson -- Interim Chief Financial Officer

I'll take the first part of that. So, yes, excluding PPP, 5.40% is about right. New loans are getting -- David, do you want to take that?

David McGuire -- President and Chief Lending Officer

Yeah. As Allison said earlier, we have drawn a line in the sand and are really targeting yields above 5% where possible. Competition is out there, of course, but we'll compete on rate if it's a good enough deal for us, but we're not going to compete on credit terms at all. And so, far, we're able to get what we have striven for with our customer.

And maintaining yields above 5% and up into the mid-fives is a target for us. And with our current cost of funds, that will yield us the NIM that we want to see. New stuff coming on today is no different than it was 90 days ago as far as pricing for us.

Matt Olney -- Stephens Inc. -- Analyst

OK. Got it. And then on the PPP fees, I think originally, you said around 15 million. Just remind us how far are we -- how much we've recognized so far? And how you expect to recognize that from here?

Allison Johnson -- Interim Chief Financial Officer

Yeah. So, growth, 15 million in fees, we've recognized roughly 3 million of those. Net of those deferred costs that we deferred in Q2, we've got about 7.8 million remaining on PPP fees.

Matt Olney -- Stephens Inc. -- Analyst

And from here, Allison, how do you see that flowing in from 4Q into 1Q?

David McGuire -- President and Chief Lending Officer

Right now, Matt, we're in the process of finishing up all the loans above 150,000 for forgiveness. We've made very good progress on that. We should be finished by the end of this month. And that represents approximately 300 million in loans that will have applied for forgiveness.

And with the expectation that some of them will start paying off, we've already had a total of three pay off. And we've submitted well over 300. So, we expect most of that will come into the fourth quarter or overrun into the first quarter. And then the next, by mid-November, we're starting on the loans below 50,000 because they're much simpler to process and faster than the ones above 50,000.

And we think that that will be -- that process, that's 1,800 loans, and we'll be finished with that project by the end of the year. And then that will leave us with approximately 900 loans that will get taken care of in the late fourth quarter, early first quarter. So, we're hopeful to have all the forgiveness taken care off into the first quarter of 2021. And then whenever the SBA pays us, that's when we'll recognize the fee.

Matt Olney -- Stephens Inc. -- Analyst

OK. OK. Great. And then just lastly for me on the credit front.

It looks like nonaccrual loans were relatively flat linked quarter. That's great to see. What about special mention loans? Substandard loans? I think those amounts were around $16 million and $32 million last quarter. Any updates on those two lines?

David McGuire -- President and Chief Lending Officer

Coming out of our watchlist committee meeting about six or eight weeks ago, we had more upgrades than downgrades. But the expectation is that that -- and it hasn't materialized yet, is that of the $100 million in deferrals that are still remaining out there, a certain percentage of them will be downgraded at some point further down into special mention or into down further into substandard. Particularly, if they ask for a third deferral, which we're being very stingy on that. But the reality of it is there's going to be some that do that.

Right now, that number is about $6 million in third deferral. And that's below expectations by about 40%. And then also, we have approximately 70-odd million dollars in SBA loans that are coming off of their SBA stimulus payments this month. There were over 561 loans, the SBA loans, that this is their last -- their first payment is due in during October.

We were projecting a 20% request for a deferral that they didn't get in the first place because the SBA was paying on their behalf. It's coming in at about 60% of that number. So, we're very happy with that result. So, the SBA portfolio certainly has our attention.

The results, so far, look like that it's going to come in below what our remodeling is telling us it was going to come, which is a very, very positive for us.

Matt Olney -- Stephens Inc. -- Analyst

OK, great. That's all for me. Thanks, guys.

Dean Bass -- Chairman and Chief Executive Officer

Thanks, Matt.

Operator

Our next question comes from the line of Will Jones with KBW. Please proceed with your question.

Will Jones -- KBW -- Analyst

Hey. Thanks. Good morning, guys.

Dean Bass -- Chairman and Chief Executive Officer

Good morning, Will.

Will Jones -- KBW -- Analyst

So Allison, I know a time or two, you alluded to maybe enhancing some of your revenue streams on the fee income side or boosting up some noninterest income. Just curious if you guys have thought about M&A to expand fee income or any possible initiatives to just expand your current business lines there?

Allison Johnson -- Interim Chief Financial Officer

I'm going to let Mr. Bass take the first half of that question.

Dean Bass -- Chairman and Chief Executive Officer

OK. M&A is in our DNA, Will. As you know, over the 10 years and 11 years we've been together in this investment group, we've had about that many. If you average it, it's probably per year, whether it's branch or full bank.

Yes. Yes to that question. We continue to be very active in the areas that are in-market. We look very closely, and we are on the edges as well.

And there are certain regions in Texas that we're not in yet, so those that we think can be marketed successfully. But at the same time, if we think we have locations that are not performing up to standards, we will not be quick to move in that direction, but we'll move in that direction appropriately. We did announce the closing of three of our locations, two of which we sold to two other banks, and the third we rolled up into one of ours. But at the same time, in the next quarter or this quarter, we'll also open up our LPO into a full bank in Corpus and also add another location in Austin, a market that we like very much.

We continue to focus in the San Antonio market as well. So, yes to that question. We're very, very interested in that. Allison, anything you want to say on that?

Allison Johnson -- Interim Chief Financial Officer

Yeah. Will, as far as your question regarding our existing lines of business, with these, the new Austin, San Antonio group that we brought on, as well as our corporate banking group, their borrowers are looking for interest rate swap opportunities. So, we hope to get into that market a little bit more and be able to offer that to some of our borrowers, as well as we see nice fee income and mortgage referral fees, obviously, given to the health of the housing market currently. And it's nice to see a SBA gain on sale of loans come back a little bit this quarter.

So, we hope to see that trend into the remainder of the year also.

Will Jones -- KBW -- Analyst

Great. Now, that's great color. And maybe just last one for me. And a lot of -- we've discussed a lot of questions thus far.

But maybe Allison, I know you referenced just another quarter to be expected of elevated provisioning. Over the past two or three quarters, you know you guys have averaged in that 2 or 3 million range. Does that number still feel right moving into 4Q, or are you guys starting to get comfortable with the reserve levels? So maybe just some thoughts around that provision.

Allison Johnson -- Interim Chief Financial Officer

So we've got a number of factors that could impact the provision for Q4 and Q1 of next year. As David mentioned earlier, the majority of our loans will be coming out of their deferment period, as well as the SBA portfolio is coming out of a period where the SBA has been paying their note. We also have both our Comanche and Beeville acquired loan portfolios, which had a weighted average life of 40 months. It's approaching the back half of that 40 months.

So, our analysis will probably yield a small provision on that acquired portfolio in Q4. So, with that being said, I would expect a provision expense of 4 to 5 million, in the 4 to $5 million range in Q4.

Will Jones -- KBW -- Analyst

OK. Awesome. Great. And then maybe, I guess, just last one for me.

You guys still remain a little active on the repurchasing stock. Your stock traded at 9% of tangible book value, which is not the cheapest it's been, but still at attractive levels. Just wanted to get your thoughts on maybe future repurchase activity. How you guys are thinking about the buyback?

Dean Bass -- Chairman and Chief Executive Officer

It's a bargain, but I'll let Allison fill in the blanks.

Allison Johnson -- Interim Chief Financial Officer

No. We worked aggressively in the first half of the year. We aggressively repurchased shares, particularly when we were trading around 9, $10 a share. Now, we've eased up on that this quarter.

I think we bought back roughly 750,000 in stock as we've seen our stock price getting closer to that tangible book level. We're going to continue to repurchase our shares as long as we maintain below that tangible book level, but we'll reassess that when our stock price breaks that threshold.

Will Jones -- KBW -- Analyst

OK, great. Well that's all for me, guys. Congrats on the quarter.

Dean Bass -- Chairman and Chief Executive Officer

Thank you, Will. Appreciate it.

Operator

We have a follow-up question from the line of Matt Olney with Stephens. Please proceed with your question.

Matt Olney -- Stephens Inc. -- Analyst

Yeah, guys. Just to follow-up, the press release mentioned the $436,000 prepaid penalty. Allison, was that in the interest expense or the noninterest expense? I couldn't find it.

Allison Johnson -- Interim Chief Financial Officer

That ran through noninterest expense where that prepayment penalty was.

Matt Olney -- Stephens Inc. -- Analyst

OK. OK. So, I guess just trying to understand the -- you mentioned your expectations for operating expenses in the fourth quarter. I think you said it would be about 3% lower versus the third quarter you just reported.

Does that include the reported number you guys gave us at $19.3 million, or does that consider the prepayment penalty and those conversion costs?

Allison Johnson -- Interim Chief Financial Officer

Sorry, that's the reported $19.3 million number.

Matt Olney -- Stephens Inc. -- Analyst

OK. So, 3% lower than that number. Got it. And then on the other side, the fees were strong across the board.

Maybe you mentioned it in the remarks, but I missed it. Just any commentary on fees as far as anything unusual this quarter? If you consider for our forecasting or should we consider -- just assume additional build from here with the growth that you guys have invested over the last few quarters?

Allison Johnson -- Interim Chief Financial Officer

I think, really, the fee income was driven by people starting to see some green shoots and actually putting the -- taking their finger off the pause button. So, going forward, I would expect it to continue to increase from here on out. I don't know if Dave, do you want to add anything to that?

David McGuire -- President and Chief Lending Officer

Yeah. We're seeing real good opportunities to institute fees with our customers. And as mentioned earlier, the swap fee income is a good expectation for this quarter and into 2021 as people try to lock in lower rates on a long-term basis in which we benefit from with the nice fees. And then we're starting to see a return of the SBA premiums.

Our volume there is steady. And so, that had some impact for us in the third quarter. And then just our normal origination fees, we've always been able to get origination fees on most of the loans that we originate.

Matt Olney -- Stephens Inc. -- Analyst

Got it. OK, guys. Thanks for all your help.

Dean Bass -- Chairman and Chief Executive Officer

Thank you, Matt. Appreciate it.

Operator

There are no further questions. I'd like to hand the call back to management for closing remarks.

Dean Bass -- Chairman and Chief Executive Officer

We just like to thank everyone for their continued support and interest in us, and we welcome any questions and calls after this meeting. So, thank you very much for being a part of this today.

Operator

[Operator signoff]

Duration: 43 minutes

Call participants:

Jerry Golemon -- Chief Operating Officer

Dean Bass -- Chairman and Chief Executive Officer

David McGuire -- President and Chief Lending Officer

Allison Johnson -- Interim Chief Financial Officer

Brad Milsaps -- Piper Sandler -- Analyst

Matt Olney -- Stephens Inc. -- Analyst

Will Jones -- KBW -- Analyst

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