Independent Bank Group Inc (IBTX) Q1 2021 Earnings Call Transcript

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Independent Bank Group Inc (IBTX -3.82%)
Q1 2021 Earnings Call
Apr 27, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Independent Bank Group Q1 2021 Earnings Call. [Operator Instructions]

I would now like to turn the conference over to Paul Langdale, Senior Vice President and Director of Corporate Development.

Paul Langdale -- Senior Vice President and Director of Corporate Development

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 first quarter 2021 Earnings Call. We appreciate you joining us. The related earnings press release and the 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 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 R. Brooks -- Chairman, President & Chief Executive Officer

Thanks, Paul. Good morning, everyone, and thank you for joining us on today's call. We are pleased to report a solid start to the year, that reflects the continued hard work of our team members across Texas and Colorado.

For the first quarter, our Company reported adjusted earnings of $1.39 per share, recorded double-digit organic deposit growth and posted additional increases to our already strong capital ratios. Furthermore, credit quality metrics remained strong with just 1 basis point of annualized net charge-offs for the quarter. Given the continued strength of our earnings and balance sheet, our Board of Directors has authorized an increase in our regular quarterly dividend to $0.32 per share.

Year-to-date, we have originated an additional $273 million in PPP loans to help our customers through the final stretches of the pandemic. As we anticipated, loan growth continued to be impacted by the pandemic related pay-offs during the first quarter. However, we are beginning to see encouraging signs of accelerating loan growth and loan demand. As the pace of the economic recovery quickens, we anticipate net positive loan growth in the second quarter with a more normalized loan growth returning in the back half of the year.

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

Michelle S. Hickox -- Executive Vice President and Chief Financial Officer

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 $60.1 million or $1.39 per diluted share compared with $43.4 million or $1 per diluted share for the first quarter last year and $58 million or $1.34 per diluted share for the linked quarter. Net interest income was $129.7 million in the first quarter, up from $123.2 million in the first quarter last year, and down slightly from $132.8 million in the linked quarter.

Year-over-year net interest income growth was driven by a reduction in funding costs as well as higher earning asset balances due to mortgage warehouse growth, which offset a reduction in purchase accounting accretion. The slight reduction from the linked-quarter was due primarily to day count. The adjusted NIM, excluding all loan accretion was 3.13% for the first quarter compared with 3.48% for the first quarter last year and 3.24% in the linked quarter. The margin decreased by 11 basis points from the linked quarter with increased liquidity impacting it by 8 basis points and the remainder due to lower asset yields. Core loan yields were down 5 basis points and investment yields were down 26 basis points from the linked quarter.

Total non-interest income was $18.6 million for the quarter compared to $19.9 million in the linked quarter. Overall, mortgage production volumes remained strong in Q1, despite the rising rate environment and were down only about 15% compared to Q4. Compression and gain on sale margins impacted mortgage income relative to the linked quarter.

Non-interest expense totaled $75.1 million for the first quarter, a slight decrease from $75.2 million from the linked quarter. Q1 non-interest expense is always impacted by increased payroll taxes and other compensation items for bonuses and raises relative to the linked quarter. Payroll taxes were up $1.3 million from Q4 2020. Recruiter and signing bonuses were about $800,000 related to new production team investments and we had $650,000 of unusual RSA amortization for performance grants and accelerated vesting. Salaries and benefits were positively impacted by $3.3 million of deferred loan costs related to the origination of PPP loans.

Slide 20 shows our deposit mix and cost. Total deposits were $14.8 billion as of quarter end, an increase driven by organic deposit growth of $405 million or 11.4% annualized for the quarter. We also had about $350 million in reciprocal deposits we moved off balance sheet to reduce expenses that are not included in these numbers.

Capital ratios are presented on Slide 22. In the first quarter, the Company's consolidated capital ratios continued to grow with the common equity Tier 1 capital ratio increasing by 61 basis points to 10.94% and the total capital ratio increasing by 81 basis points to 14.13% for the quarter.

On January 1, 2021, the Company adopted CECL which resulted in a day one adjustment of $82 million to the allowance for credit losses for both loans and unfunded commitments. This includes $13 million related to previously acquired loans that had been recorded at a discount. The adjustment to retained earnings was about $54 million after tax.

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

Daniel W. Brooks -- Vice Chairman and Chief Risk Officer

Thanks, Michelle. Overall loans held for investment, excluding mortgage warehouse purchase loans were $11.7 billion at quarter end compared to $11.6 billion at December 31, 2020. Excluding PPP loans of $912.2 million, loans held for investment decreased year-over-year by $241 million, primarily as a result of the economic dislocation caused by the pandemic.

Average mortgage warehouse purchase loans remained flat at $1.2 billion for the quarter, reflecting our strategy to maintain average warehouse balances in an appropriate proportion to our overall balance sheet.

Overall, our credit quality metrics continue to remain strong with total nonperforming assets of $61 million or 0.34% of total assets at March 31, 2021. The increase in nonperforming assets versus the linked quarter was primarily due to the adoption of CECL during the quarter, which resulted in the addition of $10 million in purchase credit deteriorated loans that were excluded prior to CECL adoption.

Classified loans totaled $253 million at March 31, 2021, up slightly from $239.6 million in the linked quarter. Net charge-offs remain low, at just a single basis point annualized for the first quarter. At March 31, 2021, the CECL allowance for credit losses is $165.8 million or 1.54% of loans held for investment, excluding PPP and mortgage warehouse loans.

These are all the comments I have related to the loan portfolio this morning, so with that, I'll turn it back over to David.

David R. Brooks -- Chairman, President & Chief Executive Officer

Thanks, Dan. For the past year, we have focused on being there for our customers and communities, while strengthening our infrastructure and ensuring a scalable platform that meets evolving customer expectations. We continue to see the results of these investments in terms of both internal operational efficiencies and in new digital offerings, like our online account opening platform, which launched earlier this month. We also continue to attract new talent to the organization, including a new Chief Digital Officer who joined us earlier this month.

Looking ahead, our Company operates in four of the strongest growth markets in the country and we are well positioned to capitalize on significant growth opportunities as the economic recovery accelerates across this footprint. As always, we remain committed to create sustainable, long-term value for our shareholders. To that end, 2021 appears to be shaping up to be an active year for bank M&A, and I expect our Company to pursue strategic, financially attractive and well structured deals as opportunities present themselves.

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

Questions and Answers:

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] The first question is from Michael Young from Truist Securities. Please go ahead.

Michael Young -- Truist Securities -- Analyst

Hey, good morning.

David R. Brooks -- Chairman, President & Chief Executive Officer

Hey, good morning, Michael.

Michael Young -- Truist Securities -- Analyst

Thanks for taking the question. Wanted to just start on the loan growth outlook, you've been pretty optimistic, I think, about the second half of the year and you know, kind of a rebound in loan growth there. Are you still seeing kind of those trends, whether it be customer communications or loan pipeline building that, that keep that confidence in place?

David R. Brooks -- Chairman, President & Chief Executive Officer

Yes, Michael, we are confident in the loan growth forecast that we've been talking about. Previously we were off a little in the first quarter, now we weren't surprised about that, but the pipeline picked up, the fundings were accelerating toward the end of the quarter and that's resulted in, already in April we're positive for the year. So our net fundings in April have been very strong so far, and the pipeline is as good as it's been since before the pandemic. So we have reason to believe that, we'll have positive growth here in the second quarter, and then evolving back in the second half of the year to a more normal range of 6% to 8% for us on a go-forward basis. So we're feeling better about that now as it's playing out on the ground.

Michael Young -- Truist Securities -- Analyst

Okay. And I guess my follow-up would just be, your comments on the inorganic side, you mentioned there at the end, you know, I think, the market has been hot and cold and hot and cold, so it sounds like maybe a little more optimism, a little more conversation is being had now, and I would just be curious for updated thoughts there, especially related to maybe size as we've seen a few more MOEs kind of get announced recently.

David R. Brooks -- Chairman, President & Chief Executive Officer

Sure. I think the activity, the questions, or the conversations rather certainly are picking up, in Texas as well we have seen a lot of activity. Nationally, more on bigger deals, as you allude to there, Michael. I still think our sweet spot is going to be downstream high quality acquisitions of companies here in Texas in the major markets. And you some good, very good positive conversations there and some very good companies and, and I think as people, part of what's going on, I think, Michael, is, that is people get more confidence in where this economy is landing here post-pandemic and what their opportunities are, and then I think some of the public companies are getting to get a, beginning to get a better feel for what their opportunity to do downstream acquisition is, and that's affecting how they're thinking been about, a merger partner for themselves. And so I'm more encouraged than I was in the first quarter. We'll see, obviously, we haven't seen much activity in Texas. So we'll see how that comes about. My understanding is, there's a lot of activity in the pipeline across the country and I'll be surprised if they can get to Texas sooner than later.

Michael Young -- Truist Securities -- Analyst

Okay, thanks.

David R. Brooks -- Chairman, President & Chief Executive Officer

Okay. Thanks, Michael.

Operator

The next question is from Brad Milsaps from Piper Sandler. Please go ahead.

Brad Milsaps -- Piper Sandler -- Analyst

Hey, good morning.

David R. Brooks -- Chairman, President & Chief Executive Officer

Hey, good morning, Brad.

Michelle S. Hickox -- Executive Vice President and Chief Financial Officer

Brad.

Brad Milsaps -- Piper Sandler -- Analyst

Michelle, maybe I wanted to start with expenses, pretty flat linked quarter and I think in line with your guidance, but there was sound like, there were a number of pluses and kind of minuses within the quarter. Just kind of curious how you're thinking about sort of expense run rate as we move through the year kind of taking into account all those items that you discussed?

Michelle S. Hickox -- Executive Vice President and Chief Financial Officer

Yeah, sorry, you're exactly right, Brad, there was a lot of noise, specifically in the salaries and benefits line that I referred to in my comments earlier. I think when I look at it, we probably had around $2 million of expense that I would sort of called non-recurring after first quarter, but then that was offset by the deferred costs that we had related to PPP. So if you pull out all of that, noninterest expense probably would have been around a $1 million higher than what we reported. One of the things we have is about a $650,000 expense related to the PPP portal that we recorded that will continue, probably through Q3, as we get those loans paid off. So that's made the run rate a little bit higher than what I expected. So I think if you sort of add all that up, that the run rate will be between $75 million and $76 million is what I would expect the rest of the year.

Brad Milsaps -- Piper Sandler -- Analyst

Great, that's helpful. And then as my follow-up question, I was curious, the impact of PPP fees in the quarter. I apologize if I missed that. And then what are the amount of fees that you have remaining to recognize for the remainder of the year?

David R. Brooks -- Chairman, President & Chief Executive Officer

We're in the program.

Michelle S. Hickox -- Executive Vice President and Chief Financial Officer

Yes, so, we recognized about $4.8 million of PPP fees in the first quarter and that compares to $4.2 million in Q4, but there was about, I think a $1.5 million [Phonetic] of that was related to loans that were paid off. And we have about $14 million remaining from the first round and then now the second round to recognize. We expect that, right now, we expect we'll recognize about 70% of those this year, and then there will be some that will probably carry over into 2022.

Brad Milsaps -- Piper Sandler -- Analyst

Great, thank you guys. I'll hop back in queue.

David R. Brooks -- Chairman, President & Chief Executive Officer

Thanks.

Michelle S. Hickox -- Executive Vice President and Chief Financial Officer

Thanks, Brad.

David R. Brooks -- Chairman, President & Chief Executive Officer

Thanks, Brad.

Operator

The next question is from Matt Olney from Stephens. Please go ahead.

Matt Olney -- Stephens -- Analyst

Hey, thanks. Good morning, guys.

David R. Brooks -- Chairman, President & Chief Executive Officer

Hey, good morning, Matt.

Matt Olney -- Stephens -- Analyst

Saw some really nice deposit growth this quarter and it looks like you were deployed some of the liquidity into the investment securities portfolio. Saw the duration did extend that a little bit. Would love to hear more about the strategy around liquidity, deposit growth and then what you bought in the first quarter and could we see additional growth in that securities portfolio from here? Thanks.

Michelle S. Hickox -- Executive Vice President and Chief Financial Officer

Yeah, liquidity has been at least my biggest challenge this year, Matt. And I think we guided that we were going to start putting some of that liquidity into the investment portfolio, which we have been doing. We haven't really changed our strategy there though, that portfolio is very low risk, we tend to keep it pretty short. Our -- what we're investing at has probably been about 150 [Phonetic]. So you've seen the overall yield of that portfolio has come down even though as we're putting more in there. Right now, our expectation is we'll grow it to about $1.5 billion by the middle of the year. Now as liquidity keeps coming, and as we have the PPP payoff, our liquidity has continued to increase, so we might decide to increase that a bit more, if the loan growth we are seeing does not continue. So we'll manage that as we see opportunities on our balance sheets. We've been investing in primarily agencies and mortgage-backs, again, all very high quality, low risk portfolios.

Matt Olney -- Stephens -- Analyst

Okay, thanks for that, Michelle. And then on the mortgage warehouse, would love to hear more about the customers in your portfolio and it seems like the market's shifting from a refi to purchase market. Do you have what that split is for your portfolio as far as the mix, and I guess secondly as industry volumes are expected to slow, in the back half year, it seems like we could see pricing come in incrementally, I think you guys have been focused more on smaller customers. So would love to hear your views on volumes and also yields for the balance of the year? Thanks.

David R. Brooks -- Chairman, President & Chief Executive Officer

Yes, so I don't, I don't know in the warehouse, if we have an exact split, as you said, we're certainly seeing the same trend, Matt, of the refi shifting to purchase. One of the challenges in Texas is, there just an under-supply, if you will, of homes for sale, the builders are building as fast as they can and selling every house they build, and homes going on the market and lasting 24 hours. And so that's, in talking with our mortgage folks, both the retail mortgage and the mortgage warehouse, that's, the concern is, as the shift continues from refi to purchase, will there be enough supply on the purchase side. That said, of course, supply and demand, could affect pricing. We saw a little bit of a decline in the first quarter in our gain on sale on -- in our retail portfolio. The mortgage warehouse for the first quarter was actually average balance is a little higher than we'd expected holding pretty flat with fourth quarter at around $1.2 billion.

Michelle S. Hickox -- Executive Vice President and Chief Financial Officer

$1.2 billion.

David R. Brooks -- Chairman, President & Chief Executive Officer

$1.2 billion. I think we're expecting that to come down to something in the $900 million, maybe average for the second quarter, it could be a little lower, a little better than that, but if we were picking a number right now, we'd say, average mortgage warehouse down from $1.2 billion to $900 million would be, I think a good guess, a good safe estimate. And then the retail mortgage side, their volumes have been very good so far in April, and their pipeline looks good, so I think on the retail mortgage side, Brad, probably flat for this quarter for Q2 from what we saw in Q1 would be a safe thought on that. And our mortgage warehouse has actually moved more upscale over time to more, I'd call it mid-tier and a little bit larger-tier clients. So we'll take the same headwind there that some other banks are facing, but probably on average, we still do have some smaller customers, probably more so than some of our peers.

Matt Olney -- Stephens -- Analyst

Okay, thanks for the commentary.

David R. Brooks -- Chairman, President & Chief Executive Officer

Yeah, thanks, Matt.

Operator

The next question is from Brett Rabatin of Hovde Group. Please go ahead.

Brett Rabatin -- Hovde Group -- Analyst

Hey, good morning, Dave and Michelle.

David R. Brooks -- Chairman, President & Chief Executive Officer

Good morning, Brett.

Brett Rabatin -- Hovde Group -- Analyst

I wanted just to talk about loan yields and just about the margin a little bit, the average rate in the first quarter for 42 [Phonetic]. I'm just curious where you're originating new production relative to the existing yield? And then Michelle, I was just hoping for any commentary, I know it's tough with liquidity and PPE, but would you assume the margin, given that funding costs are probably getting closer to the bottom, it's tougher to keep the margin where it is or do you feel like you can improve it? Any commentary on the margin would be helpful.

David R. Brooks -- Chairman, President & Chief Executive Officer

Let me talk first Brett about the loan yields we're seeing a pretty even split, kind of, 50-50 on our growth right now between C&I and our CRE portfolio. The yields on the CRE portfolio are a little better than the commercial C&I yields on average. And, but I think we're now, seeing average yields come in the upper-3s, 390 [Phonetic] maybe, Michelle sound about right for what we booked in late in the first quarter, so we're seeing yields of the oncoming around 390 [Phonetic] and we would expect that to be pretty steady here as we go forward and then I'll let Michelle talk about the NIM, but if we continue to try to find homes for that liquidity other than 10 basis points at the Fed, we've begun to increase that mortgage book. As I mentioned, we've had very positive loan growth so far in the second quarter, it's early, but we're back to net positive for the year and expect that to continue to accelerate during the course of the year. So hopefully that will be a home for some liquidity as well. But Michelle on the NIM.

Michelle S. Hickox -- Executive Vice President and Chief Financial Officer

Yeah, I think, I think what David said is accurate. We're really focused on trying to grow net interest income at this point, and not so much focused on margin, just because of the amount of liquidity we've had and how it's impacted the margin. But my outlook is, if you look at core margin ex accretion, it's -- at this point it looks like it could compress 6 basis points to 8 basis points just because we are trying to be opportunistic at putting assets on our books, as David mentioned that would replace funds that we're holding at 8 basis points at the Fed. So really just looking to be able to grow net interest income versus so much focus on margin.

Brett Rabatin -- Hovde Group -- Analyst

Okay, that's helpful. And then I guess the other thing I was curious about was just, you're a CECL Bank now, and it kind of looks to me like you're provisioning needs will be pretty light just given your strong asset quality trends. Can you give any outlook on provisioning from here? Obviously, the negative adjustment in the first quarter, around CECL, but it just seems like you're provisioning needs will be pretty light going forward.

Daniel W. Brooks -- Vice Chairman and Chief Risk Officer

Hey, Brett. This is Dan. I'll take that one. While the Moody's forecast data that is used by our bank, and most of the banks certainly continues to point to improvements in economic conditions, I think it's going to take a few quarters still for us to ultimately see what the impact will be for all of the different asset classes that we and the other banks loan into. As an overall comment, we feel very good about our portfolio and we believe the credits that are deserving of reserves are already listed on the watchlist and have some reserves against them and depending primarily on loan growth and any additional reserves needed on specific loans, if needed, I think you could see some additional reserve releases could occur in the future quarters.

Brett Rabatin -- Hovde Group -- Analyst

Thank you.

David R. Brooks -- Chairman, President & Chief Executive Officer

We certainly don't expect at this point, Brett, to take any additional loan loss for the foreseeable quarters ahead. And is this a question of whether between the Moody's and our loan growth, and any additional provisions for any credits we're working on would drive us to how much of a negative provision or flat or whatever, but I don't think, Michelle, unless you've seen anything differently than we see, we see the likelihood of taking any additional provision.

Michelle S. Hickox -- Executive Vice President and Chief Financial Officer

Right. Based on what we know about our portfolio right now, I would not expect it.

Brett Rabatin -- Hovde Group -- Analyst

Okay, that's great color. Thank you so much.

David R. Brooks -- Chairman, President & Chief Executive Officer

Thanks, Brett.

Michelle S. Hickox -- Executive Vice President and Chief Financial Officer

Thanks, Brett.

Operator

The next question is from Brady Gailey from KBW. Please go ahead.

Brady Gailey -- KBW -- Analyst

Hey, thank you. Good morning, guys.

David R. Brooks -- Chairman, President & Chief Executive Officer

Hey, Brady. Good morning.

Brady Gailey -- KBW -- Analyst

So I think I heard Dan mentioned something about, as it relates to the mortgage warehouse keeping that at an appropriate size. I'm not as concerned about next quarter this year, but as you look longer-term, I think it's about 9% of average loans now. But what would you think is an appropriate size, like do you guys have -- once it hits 10% of loans, that's kind of where you slow down or how big could you allow the warehouse to get over time?

David R. Brooks -- Chairman, President & Chief Executive Officer

I think we are flexible Brady and how we think about it in terms of, you know, at any given point in time. But our general thought is that 8% to 10% of the loan portfolio is a good range for us to be in. Certainly, if there is a bulge in the market and we went to 11% or 12% for a quarter, we wouldn't panic about that, but just we try to continue to guide that our core belief is the mortgage warehouse is a great business as long as it's in the right proportion to your balance sheet and earning assets and your capital, and we think somewhere in that range. So we set out at a -- at $11.5 billion, $12 billion of loans held for investment, somewhere around $1 billion is a good place to be. It could be, as I said earlier, it could be $800 million or $900 million in any given quarter, it could be a $1.2 billion or $1.3 billion in any given quarter, but somewhere around there. And then your question, maybe, Brady, as we continue to grow the bank or if we were to make an acquisition, and we have a $25 billion balance sheet with $17 billion in loans, would we think differently? Of course, again 8% to 10% of that might lead us to the target of $1.3 billion to $1.5 billion. So we, it is a business we expect to grow as we continue to grow our balance sheet, both organically and with strategic M&A. And if you say, hey, in two or three years out, we're a $30 billion company, and we have a $1.5 billion to $2 billion mortgage warehouse, we'd be fine with that.

Brady Gailey -- KBW -- Analyst

Yeah, all right. It was great to see the dividend increase this quarter. And it appears you did not do any share repurchases. Maybe just an update on, I know your stock's now north of 2 times, but any update on how you're thinking about the share buyback from here?

David R. Brooks -- Chairman, President & Chief Executive Officer

Yeah, we still continue to believe that our stock trading north, well north of 2 times book is, we're better off to look for strategic acquisitions for that capital and that's our primary target. In the meantime, as you mentioned, our Board increased the dividend. I expect that we'll continue to look at increasing the dividend in the quarters ahead, assuming everything that we know today about continuing strong profitability trends and strong capital improvement trends, and then ultimately that we would deploy that excess capital in a strategic opportunity.

Brady Gailey -- KBW -- Analyst

Yeah, and I actually wanted to follow-up on the M&A too, I'm surprised we haven't seen more activity in Texas, and we saw BancorpSouth cadence, which was a big deal, but outside of that, it's been pretty quiet despite seeing your M&A pickups in other areas of the country. I just wanted to, is it a seller expectation issue or do you think this is just a way that's building and we're about to see a lot more activity coming out of Texas?

David R. Brooks -- Chairman, President & Chief Executive Officer

I just don't think there is a sense of urgency maybe, Brady, that a lot of people expected coming out of the pandemic that everybody would be looking around and trying to get something done and announced quickly up. I think there is a sense that, hey, we're heading into a strong economy here, a strong recovery over the next 18 months, 24 months, the concerns are you may be a raising -- rising rate environment in the future if, with the amount of stimulus and infrastructure spending and things that, it appears we're going to be doing that, that could drive rates higher, people are thinking about that I think and how it affects them. Some banks believe that would be -- for some banks that would be a really positive event. And so there may be some thought of, gosh, if rates are going to go up in a year or two, maybe I wait until I get my NIM and my earnings up, and I'll get a better price for my shareholders. And as we've talked about before. Brady, some of the other smaller public companies here in Texas, I believe are really looking around to see if they can find, one of the things that drives that, actually if they can find strategic options to purchase downstream banks, and one of the things that drives that is the same thing we're facing which is increasing capital, and some of the, I think smaller public companies are sitting on very nice capital ratios and feel like, if they could deploy that capital into a smaller acquisition themselves with their balance sheet and their earnings up, then they can command a better price for their shareholders, and that I think theoretically, that's absolutely correct. I think practically it's just difficult to find a good partner, to execute well, and then, and then to see all of those increased earnings in this window that we're going to have right, where I think it's going to be a good opportunity, the next 12 months to 18 months for the strategic merger activity. So I think it's a lot of those factors going on, Brady. But I still think that you will see some of it come together here in the next two to three quarters, and there'll be some activity in Texas, but I am more encouraged as I said than I was in January, but not, still not -- I still don't think there's a floodgate about to open, I'll say that.

Brady Gailey -- KBW -- Analyst

Okay, that's helpful. And then finally from me, I just wanted to ask about kind of the local five there in Texas. We've heard from a lot of the other Texas banks that have reported, that have been pretty upbeat on the local economies, and Texas is clearly back to business and is really doing well. Is that the vibe that you guys are seeing in your markets as well?

David R. Brooks -- Chairman, President & Chief Executive Officer

Absolutely. I think the economic numbers here in Texas, in particular, are very strong. There is continued job growth. People are generally getting back to business. There is still some, a little bit of hesitation may be on the restaurant, hospitality side, that is a little slower to get going here, but they'll be rolling we think here in the next few months, and so, no, very positive. Our customers' attitude seems to be good. And that's, as I mentioned earlier, playing out in very strong funding so far in the second quarter with a big pipeline increasing our new teams in C&I and retail are beginning to get some tailwind on their production as well. So yeah, we feel good about the loan growth, feel good about the economy, which undergoes that loan growth, and continuing to see job relocation announcements all across our footprint, and so we feel good. In Denver, the same thing. Denver has maybe been a little slower to get back to the level of activity that we've seen in Texas, but they're doing extremely well and we expect that to be back in full stride as well by summer.

Brady Gailey -- KBW -- Analyst

Great, thanks for the color, guys.

David R. Brooks -- Chairman, President & Chief Executive Officer

Thanks, Brady. [Operator Instructions] The next question is from Michael Rose from Raymond James. Please go ahead.

Michael Rose -- Raymond James -- Analyst

Hey, good morning, everyone. Most of my questions have been asked and answered, but I wanted to go back to kind of the loan growth outlook. I think you previously, David, talked about kind of mid-single digits ex warehouse, ex PPP, loan balances were down a little bit again this quarter, clearly, there's going to be some headwinds in some of the COVID impacted portfolios in the energy book as we move forward. Can you just talk about some of the hiring efforts that you made? I know that drove an increase in expenses this quarter and maybe what gives you confidence that you can get to that, that range by year-end? Obviously the backdrop is certainly improving, it looks like, Denver will come back on later this year. Just can you give us some color as to where you would expect the growth and maybe what the contribution from some of the newer hires might be as we move forward? Thanks.

David R. Brooks -- Chairman, President & Chief Executive Officer

No, good question. Good morning, Michael. Good question. And we are continuing to see opportunities to hire really talented relationship officers, particularly in the middle-market team that we've been continuing to build out. We also added strategically on, other -- in other areas of the bank including real estate, where we see an opportunity in a market where, and we've seen a little bit of turnover as well, just I think normal people looking at other opportunities and in us getting a chance to replace as well. So continuing, -- the new expenses were related more to, I'd say the middle market and the retail hires in the retail team and they're getting, as I mentioned earlier, some good traction as well. The growth is really coming in all of the major Texas markets, we're in Dallas-Fort Worth, Austin and Houston. And then Denver, as I mentioned as well, is a little slower to get going, but expecting that to be in full bloom here shortly. The contribution from these new teams is going to be significant and is picking up now, we think by the second half of the year. A combination of the improving economy, improving borrowers' expectations for their own businesses and then our new teams and the new relationships that we're cultivating as a result of that, all that adds together to a normal run rate we think, Michael, of upper single digits 7%, 8% kind of growth long term. We think we'll get back there in the second half of the year, maybe toward the end of the year, we expect to be significantly positive here in the second quarter, which then with the slight decline we had in the first quarter means, I think we're about -- it's playing out about how we thought with the kind of a low-single digit growth for the first half of the year and then a mid-upper single-digit growth in the second half of the year, resulting in a total for the year of 4%, 5% maybe. If you look at December 31 of last year to December 31st of this coming year, that our loans held for investment should go up we think 4% to 5%, overall, again low single in the first half, upper single in the second half due to that 4%, 5%, and that's, we're very confident in that growth.

Michael Rose -- Raymond James -- Analyst

Great, that's great color, David. I appreciate it. Maybe just one for Dan, you noted in the slide deck that, on the hotel book you might need some additional time for those borrowers to recover, but I guess what we're hearing kind of across the Southeast and in Texas for that matter is that occupancy rates are surging and there is, last week, in [Indecipherable], large hotel chain basically saying there was more product needed at this point. Can you define more time, because it seems like the hotel bookings are coming on very strong as people are getting back out there again. Thanks.

Daniel W. Brooks -- Vice Chairman and Chief Risk Officer

You bet. Good morning, Michael. My take on it is, we are certainly seeing improvement and occupancy and I would say all of the hotel owners have said it's about time that we see that. And I suppose in some areas, in particular, it has been surprising how quickly it bounced back, and it wasn't that temporary, what was the cause of it, I don't think we really know yet, but certainly the outlook is better. What we have heard from our customers, what we continue to believe is that, you would in fact see it recover, but the question is how long. And I would say, it depends on where those properties are located. As we've talked about before, if you have a hotel property that's right next to an airport, where they have struggle to get occupancies, in particular, those those hotels have been impacted. They've seen a nice bounce back here and that should be sustainable. So I think in 2021, in large part, many of them will recover to places where they're comfortably covering their debt service and making some return. There'll be others that still probably languish a little bit longer, so probably not a whole lot of new guidance to you in that other than, yeah, we're all glad to see the improvement that we've had so far.

Michael Rose -- Raymond James -- Analyst

Great. I appreciate all the color. Thanks for taking my questions.

David R. Brooks -- Chairman, President & Chief Executive Officer

Thanks, Michael.

Operator

This concludes the question-and-answer session. I would like to turn the call back over to David Brooks for closing comments.

David R. Brooks -- Chairman, President & Chief Executive Officer

Thank you. Really appreciate everyone joining today. I wanted to close by just reiterating how proud I am of our team across all of our markets. We've got 1,600 people, we get up every day and go to work taking care of customers and helping us build communities, doing the investments that we do, we have a first-rate team across the Board and I'm deeply grateful for the work they've done on this last year with all the challenges we've had and they've been just great teammates to each other and had done a great job for the shareholders. So I appreciate everyone's time and investment of time this morning in the Independent Bank Group's story, and we're going to continue to execute as we have and we appreciate your support. Hope everyone has a great day. Thanks. [Operator Closing Remarks]

Duration: 42 minutes

Call participants:

Paul Langdale -- Senior Vice President and Director of Corporate Development

David R. Brooks -- Chairman, President & Chief Executive Officer

Michelle S. Hickox -- Executive Vice President and Chief Financial Officer

Daniel W. Brooks -- Vice Chairman and Chief Risk Officer

Michael Young -- Truist Securities -- Analyst

Brad Milsaps -- Piper Sandler -- Analyst

Matt Olney -- Stephens -- Analyst

Brett Rabatin -- Hovde Group -- Analyst

Brady Gailey -- KBW -- Analyst

Michael Rose -- Raymond James -- Analyst

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