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Edited Transcript of IBTX earnings conference call or presentation 23-Apr-19 12:30pm GMT

Q1 2019 Independent Bank Group Inc Earnings Call

McKinney Apr 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Independent Bank Group Inc earnings conference call or presentation Tuesday, April 23, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel W. Brooks

Independent Bank Group, Inc. - Vice Chairman & Chief Risk Officer

* David R. Brooks

Independent Bank Group, Inc. - Chairman, President & CEO

* Mark S. Haynie

Independent Bank Group, Inc. - Executive VP & General Counsel

* Michelle S. Hickox

Independent Bank Group, Inc. - Executive VP & CFO

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Conference Call Participants

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* Brandon Thomas King

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Brett D. Rabatin

Piper Jaffray Companies, Research Division - Senior Research Analyst

* Matthew Covington Olney

Stephens Inc., Research Division - MD

* Michael Edward Rose

Raymond James & Associates, Inc., Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Independent Bank's First Quarter 2019 Earnings Conference Call. (Operator Instructions)

I would now like to turn the conference over to Mr. Mark Haynie. You may begin.

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Mark S. Haynie, Independent Bank Group, Inc. - Executive VP & General Counsel [2]

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Good morning. I am Mark Haynie, Executive Vice President and General Counsel for Independent Bank Group, and I would like to welcome you to the Independent Bank Group First Quarter 2019 Earnings Call. We appreciate you joining us. The related earnings press release and a slide presentation can be accessed on our website at ibtx.com.

I would like to remind you that remarks made today may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and expected results to differ. We intend such statements to be covered by safe harbor provisions for forward-looking statements. Please see Page 5 of the text in the release or Page 2 of the slide presentation for our safe harbor statement. All comments made during today's call are subject to that statement. Please note that if we give guidance about future results, that guidance will be only a statement of management's beliefs at the time the statement is made, and we do not publicly update guidance.

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

I am joined this morning by David Brooks, our Chairman and CEO; Dan Brooks, Vice Chairman and Chief Risk Officer; and Michelle Hickox, Executive Vice President and CFO. At the end of their remarks, David will open the call to questions.

With that, I'll turn it over to David.

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David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [3]

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Thank you, Mark. Good morning, everyone. We appreciate you joining us for today's call. Independent Bank is off to a strong start in 2019. We closed the Guaranty acquisition on January 1 and our first quarter results reflect the beginnings of the value of this premier Colorado franchise adds to our company. We continue to report solid earnings with adjusted EPS of $1.19 per share and adjusted return on average assets of 1.51% for the quarter. Organic loan growth of 7.2% annualized, reflects sustained demand for loans in the markets we serve as well as our conservative credit culture and efforts to reduce our CRE concentration over time.

Our teams are focused on ensuring the continued smooth integration of the Guaranty acquisition with the conversion scheduled for June. As part of this integration process, we announced a strategic realignment of our branch footprint, and we remain positive about the opportunity to realize synergies with our expanded presence in the Colorado market.

Now Michelle will provide some additional details on the operating results for the quarter.

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Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [4]

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Thank you, David. Good morning. Please note that Slide 5 of the presentation includes selected financial data for the quarter. Our first quarter adjusted net income was $52 million or $1.19 per diluted share compared with $29.2 million or $1.03 per diluted share for the first quarter last year and $34.1 million or $1.12 per diluted share for the linked quarter.

As you can see on Slide 7, net interest income increased to $121.7 million from $74 million in the first quarter 2019 and $87.1 million in the linked quarter.

The net interest margin improved to 4.05%, up 7 basis point from the previous quarter at 3.98%. The NIM was impacted by several things this quarter including lower yields on assets and cost on deposits from Guaranty as well as accretion recognized on the acquired loan portfolio related to the purchase accounting adjustments due to interest rates. A total of $6.9 million was recognized, which impacted the NIM by 23 basis points. In addition, we adjusted the way we account for deferred loans fees and costs to be consistent across our footprint. While we estimate this change reduced our reported loan yields by 10 basis points, it did not significantly impact net income. Excluding accretion related to the Guaranty acquisition interest rate mark, the NIM would have been 3.82% for the quarter.

Total noninterest income was $16.4 million compared to $9.5 million in the first quarter of 2018 and $9.9 million in the fourth quarter. We added revenue from Guaranty's wealth management and trust services of $2.2 million, which are new lines of business for us. The remaining increase is primarily due to increases in service charges, BOLI income, and other fees due to the Guaranty acquisition. Mortgage revenue was a $3.1 million this quarter versus $3.4 million in the linked quarter and was negatively impacted by hedging loss $369,000 in the first quarter versus a gain of $394,000 last quarter. Total noninterest expense was $86.6 million in the first quarter. This includes $19.2 million of acquisition expenses, primarily related to the Guaranty deal, a large portion of which consists of $3.2 million in severance and retention bonus payments and $8.7 million in change in control payments. The remaining increase from the linked quarter is primarily related to Guaranty, including a $1.7 million increase in amortization of core deposit intangibles.

Slide 16 shows our deposit composition and cost. Deposits totaled $11.2 billion as of March 31, 2019. We acquired $3.1 billion in the acquisition but also accrued deposits organically by $393 million during the quarter or 14.7% annualized. The average cost of interest-bearing deposits was 142 basis points, up 60 basis points from the first quarter of 2018 and down 4 basis points from the linked quarter. Deposit pricing and competition continues to be a challenge, especially in the Texas market. But the Federal Reserve's pause on interest rate increases has helped to alleviate some of the upward pressure on rates on a relative basis compared to 2018. Decrease costs from the linked quarter are reflective of a better mix and lower costs in the Colorado market.

That concludes my comments this morning, so I will turn it over to Dan to discuss credit metrics and give color on the loan portfolio.

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Daniel W. Brooks, Independent Bank Group, Inc. - Vice Chairman & Chief Risk Officer [5]

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Thanks, Michelle. Good morning. Organic loan growth was 7.2% annualized for the quarter. Overall, loans held for investment, not including mortgage warehouse loans, grew $3 billion or 38.5% for the quarter. This loan growth includes $2.8 billion of loans acquired as part of the Guaranty acquisition.

Slide 10 illustrates annual loan growth comparisons. Slide 11 shows the composition of our loan portfolio and our commercial real estate portfolio. As of March 31, 2019, commercial real estate makes up 53.3% of loans. CRE continued to be well diversified in types of collateral with the largest segments in office and retail. Slide 12 further breaks down the retail CRE portfolio by property type. The ratio of total construction and land development lending to the bank's regulatory capital has decreased to 99%, down from 122% a year ago. At the end of the first quarter, our total CRE-to-capital ratio stood at 384%, and we have plans to reduce this metrics below the 300% regulatory guidance over the next 3 to 4 years as we grow other areas of the portfolio.

Mortgage warehouse purchase loans averaged $128 million for the quarter, ending March 31, 2019, compared to $120.9 million for the quarter ending December 31, 2018, representing an increase of approximately $7.0 million or 5.8% for the quarter.

Credit quality metrics remained strong with total nonperforming assets of 0.12% of total assets at March 31, 2019. Charge-offs remained low at 0.06% annualized for the quarter but slightly increased due to a partial energy loan charge off of $827,000. This amount had been fully reserved in the prior period.

Provision for loan loss expense was $3.2 million for the first quarter, an increase of $314,000 over the linked quarter. Provision expense is primarily reflective of organic loan growth as well as charge-offs and specific reserves taken during the respective period. We established a $670,000 specific reserve on a $3 million commercial loan that was placed on nonaccrual during the first quarter.

As of March 31, 2019, we have recorded a discount for the acquired loan portfolios of approximately $142.8 million. This includes a provisional $119.8 million fair market value adjustment in conjunction with the Guaranty acquisition with $80 million related to interest rates and $39.8 million related to credit. The recorded allowance for loan losses plus the remaining fair market value adjustments on loans acquired related to credit is approximately 1.02% of total loans held for investment as of March 31, 2019.

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.

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David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [6]

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Thanks, Dan. We believe that these first quarter results set us up for a successful 2019. We expect the second quarter earnings this year will continue to have some noise as we complete the systems and core conversion in Colorado as well as execute the branch consolidation we announced earlier this year. As a result, we expect to recognize virtually all of the cost saves by the end of this quarter and will get the full benefit of those efficiencies in the second half of this year.

Based upon our solid operating results and strong financial position we executed on our share repurchase program during the first quarter, we invested $10 million to take advantage of opportunities to purchase shares of company stock at attractive prices. We also increased our quarterly dividend to $0.25 per share and remained committed to paying a dividend of 20% to 25% of earnings in future quarters. We believe that these actions provide a meaningful return on investment to shareholders and demonstrate our continued focus on enhancing shareholder value.

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

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Questions and Answers

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Operator [1]

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

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Unidentified Analyst, [2]

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It's actually Woody on for Brady. So stripping out both the expected and unexpected accretion, we have a core NIM of 3.82%.What was the core NIM last quarter, in 4Q '18 if we stripped out both buckets of accretion?

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Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [3]

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I note our core NIM last quarter was 3.98%, I believe.

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David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [4]

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That was with accretions stripped down.

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Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [5]

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Right.

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Unidentified Analyst, [6]

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So that included the strip out of the expected accretion as well?

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Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [7]

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Right. That's true. Yes. As you guys know, we really haven't had a large amount of what I would call expected accretions. Most of our accretion that has come has been related to the credit mark. So that's a reason we reported that really differently this time. We pulled out anything related to credit in our core schedule in the back but then just communicated to you guys what the remaining amount is that's related to the interest rate mark.

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Unidentified Analyst, [8]

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Got it. That's helpful. And then looking at total accretion that was around $6.9 million, does that feel like a good quarterly run rate going forward?

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Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [9]

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It's probably a little -- it's always a little high the very first quarter when you close on acquisition because they have loans that pay off and such like that. But the remainder of this year I expect it would probably around $6 million, just estimating it. The marks right now are still provisional. However, they are very close to being finalized and I don't anticipate that they'll change very much.

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Unidentified Analyst, [10]

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Okay. And then last for me, it was nice to see you all buy back a little stock. Do you expect that to continue going forward in 2019?

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David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [11]

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We do, Woody. We have an approval to purchase -- to continue to purchase, and we actually didn't get our approval until almost midway through the first quarter. So we didn't have as much time as we would've liked to use that. Yes, we expect to use that here over the next few quarters.

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Operator [12]

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Our next question comes from the line of Michael Young of SunTrust.

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Brandon Thomas King, SunTrust Robinson Humphrey, Inc., Research Division - Associate [13]

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This is Brandon King on for Michael Young. So with the close of Guaranty, I just wanted to get a sense of the outlook for fee income and expenses going forward. Just trying to get a sense of what level of pro forma expenses and fee income we could expect over the next few quarters.

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Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [14]

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My outlook on noninterest expense hadn't really changed from where it was last quarter. One thing to note is when we did the acquisition of Guaranty and back to several acquisitions that we've done, we took this opportunity to make the way we account for loan fees consistent as opposed to deferring a net fee. Guaranty was deferring costs. So we've made that consistent across our footprint now. So if you'll notice, our NIM actually was impacted, loan yields were impacted by about 10 basis points because we did that because we're netting costs against the fees now and amortizing that. But it also reduced noninterest expense by about $3 million. So I think where you see maybe noninterest expense was lower-than-expected, it's primarily due to the way that we're accounting for loan fees now if that makes sense.

I think the thing to note is it really didn't impact net income. It really was just a matter of where we are putting it in our income statement. I know it may be a little bit confusing but that's the best way I can explain it.

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Brandon Thomas King, SunTrust Robinson Humphrey, Inc., Research Division - Associate [15]

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Okay. Got you. And what about the fee income side? I know with the addition of investment management trust, what is the typical run rate of that per quarter?

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Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [16]

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Well, I don't know if we have a typical run rate yet because since it's our first quarter of having Guaranty with wealth management. I think mortgage will do better as we move into the summer season because that's just the way mortgage tends to work and with rates being down a bit, I think their volume has been up. I wouldn't anticipate significant increases on the income side for the remainder of the year other than maybe that seasonal adjustment for mortgage though.

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David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [17]

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So the first quarter run rate would be...

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Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [18]

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Yes. We may get an additional $1 million of fee income in Q2 and Q3 related to mortgage. Probably the best way to look at it.

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Brandon Thomas King, SunTrust Robinson Humphrey, Inc., Research Division - Associate [19]

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Okay. Very helpful. And just one more. Now that you guys are over $10 billion, do you see any additional investment needs for 2019 now that you've crossed that mark?

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David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [20]

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Meaning for infrastructure costs, Brandon?

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Brandon Thomas King, SunTrust Robinson Humphrey, Inc., Research Division - Associate [21]

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Yes?

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David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [22]

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That's something that we've been completely focused on making sure we get the integration of Guaranty executed properly. I think we said in the comments that our conversion, too, on the Core System conversion would be in early June and that will get all the costs out, virtually all of the costs, duplicate overrun cost out in the second quarter. We continue to look. We did prep work going into last years. We knew we're going to be over $10 billion and we've been working on that. And we've gone to a continuous exam cycle with the regulators and other changes. So I think we are in good shape where we are right now. That's something we continue to evaluate over time though to make sure that we have everything in place in terms of enterprise risk management, internal audit and the technology piece and all that. So we feel good about where we are today but we're continuing to work towards that.

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Operator [23]

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

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [24]

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Just wanted to follow up on the accretion question. I understand the split between the interest rate and the credit mark. The $6 million, Michelle, that you just referenced, is that per quarter or for the remainder of the year? I just wanted to be clear in terms of kind of what the scheduled accretion is.

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Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [25]

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Yes. It'll be per quarter, Michael.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [26]

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Okay. That's what I thought. I just wanted to make sure. So if I balance all that in the comments from the last question, you guys have talked about getting to an efficiency ratio of 46%. But if I'm doing the math right, with the higher accretion and probably what most of us expect, it seems like it's going to be a little bit lower than that. Am I putting the pieces together correctly here? Because it looks like I think the conversion is scheduled for June 1. Clearly, the run rate this quarter on expenses was lower. You'll get the rest of the cost saves, I think, for this quarter. So how should we think about your expectations for the efficiency ratio towards the end of the year?

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Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [27]

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It could be a little bit lower. I think my comments earlier about how we're accounting for loan fees also impacts that calculation. So with the expense run rate being lower, one thing that I did mention earlier the amortization of our intangibles came in a little bit higher than what I had guided earlier. Not a lot. I think I said it was $1.5 million and ended up being $1.7 million. So there's a little bit more expense there. Our new building is coming online so we'll have some expenses related to that. So I wouldn't -- it could be a little bit lower than what we have guided, but I don't know that I would plan on that at this point.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [28]

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Okay. That's a helpful reminder on the building coming online. You have a sense for what the incremental costs are related to that?

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Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [29]

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I think it's about $600,000 a quarter.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [30]

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$600,000 a quarter. Okay. That's helpful. And then just moving over to the loan side. I'm sorry if I missed this earlier but can you give a sense for what the growth trends were in both Texas and then in the Colorado markets?

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Daniel W. Brooks, Independent Bank Group, Inc. - Vice Chairman & Chief Risk Officer [31]

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Michael, we had, as we announced 7% -- a little over 7% annualized growth. The growth was really pretty well spread across our markets. Colorado did really well given the whole transition and convert -- conversion onto our systems, et cetera. We were off to a stronger start in Colorado than we could have been. And really, the loan growth was muted out, I would say, somewhat by just pretty intense pricing competition.

And in some cases, we just made decisions not to compete on certain pieces of business where we thought the pricing just wasn't adequate for the structure and the risk that was being proposed. And then we're also always watching our various markets and sub-pieces within those markets. Areas where we think hospitality or multifamily or office or whatever may be saturated or there's plenty of it maybe getting overbuilt. And we may, pass on opportunities and have passed on opportunities in certain marks around Dallas, as an example, where we thought hospitality was overbuilt and certain areas around Houston were multifamily.

So those things can cause us to have a little bit of a muted loan growth at any one given quarter if we just -- the deals that we saw and the pipeline that we have ended up the pricing or the type of product underlying. And also just our general move towards continuing to really putting in place our plan to diversify our loan portfolio away from being so CRE-centric toward more equipment finance and energy and SBA mortgage warehouse, other single-family residential, things like that. And that takes a while to get that turn or get those hires in place and things like that.

So we felt good about the loan growth. It was really consistent across our footprint and I feel good about our pipeline going into the second quarter here. We're just keeping our eye on pricing and structure and things here at this point of the cycle.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [32]

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So balancing all that, David, you previously talked about 8% to 10% if you would have included Guaranty at the beginning -- or at the end of last year for growth. It seems like maybe that softened a little bit. And I wouldn't taunt you for that. But is that a range that might prove to be a little bit too high?

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David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [33]

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No. I think 8% to 10% is still where we sit today. Looks fine to us, Michael. But to your point, if the market continues to -- we continue to see the pricing pressure we saw in the first quarter in structure and overbuilding and a few product types in certain markets. We could be -- the lower end of that range could become more than the focus. It could be high single-digit number as opposed to anyone thinking it's 10% to 12%. It really is kind of 8% to 10% and with what we saw in the first quarter it may be more like 8% -- 8%or 9%.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [34]

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Fair enough. Last one for me. Michelle, any initial stab at the day 1 impact from CECL? And then can you just explain what you expect to happen when you switch from PCI to PCD?

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Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [35]

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We don't have a number yet. We will have an impact primarily -- I don't think we expect a large impact on our originated loan portfolio. But we will have to take a seasonal reserve on our required loans, which at that point, will primarily be Guaranty. But we're not in a position to disclose a number at this point.

PCD, obviously in acquisitions, I think you're going to see more people allocate loans to PCD coming up within any reason they can to make a loan, a PCD loan. But I really -- I think we've been pretty conservative on how we've accounted for them under PCI. So I don't know if it will be significantly different for us.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [36]

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All right. So no major capital impacts and -- for Michelle?

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Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [37]

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No. I don't think it will have a significant impact on our capital.

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Operator [38]

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The next question comes from the line of Brett Rabatin of Piper Jaffray.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [39]

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I wanted to go back to the margin just for a second and just talk some about the discount accretion going forward. If just we're thinking about the core margin and with the addition of Guaranty, it would seem like your balance sheet has a little more optionality in terms of the core deposit funding. Does the core margin, Michelle, kind of stay flattish here? Or do you think you can improve it with some mix shift change on either side of the balance sheet?

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Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [40]

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I think if you're talking about core margin like net of all accretion, including the interest rate mark currently, if the Fed outlook remains at neutral for the rest of this year and even if rates go up again, which I don't know will happen at this point, we anticipate what I would call our core margin to be pretty much stable the rest of this year.

Colorado, their deposits, they did have a better mix, and they do have lower rates relative to Texas. But incrementally there, we're having to pay probably 100 basis points higher than their cost of funds, which is still probably 100 basis points lower than it is in Texas. So that does benefit us and there are opportunities there and our treasury management group is working hard. I don't know that we've seen -- we're a quarter in but we're doing a lot of work there to try to grow deposits in that market versus Texas.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [41]

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Okay. I appreciate the color there. And then just want to go back to efficiency and expenses. Maybe can you talk about, David, in 2000 -- I realized it's not this year, but sort of what's the goal for the efficiency ratio as we go into 2020? And then maybe there's a lot of noise around expenses and 2Q and then maybe just kind of what the half might be for the expense level, Michelle, at the back half of this year.

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David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [42]

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Brett, my goal for efficiency ratio is almost 30% something. But Michelle has a different thinking on that, so maybe I'll let her comment.

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Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [43]

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I would -- we want to be at efficient as possible. But the things that we talked about earlier and now that we're over $10 billion and continuing to need to invest in our infrastructure and technology and those types of things, we will have to make those investments. And so I don't really see that it's realistic for our efficiency ratio to go sub-45% next year. But I think our goal would be to keep it in the range where it currently is, between here and 45% for sure. I think our -- the expense run rate -- when I can give you what I think it's going to be. I think if you look at just our core expenses relative to where they were this quarter, we're probably going to be about $68 million and then drop to $64 million for the rest of the year, which is about where I had said they would be earlier but just taking into account we changed the way we were accounting for those fees.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [44]

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Okay. Great. And just one last one. You guys' asset quality continues to be really good. You got a little exposure to the health care and some other areas where people have taken a few lumps. Are you guys seeing anything on the asset quality front that leads you to want to pull back anything in particular or you just feel like your portfolio is so much more granular and you are just not involved in some of these things?

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Daniel W. Brooks, Independent Bank Group, Inc. - Vice Chairman & Chief Risk Officer [45]

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Brett, this is Dan. As you know, we've not participated in significant Shared National credits on those categories of health care and others like that. So I would agree with what you just said. I think the granularity of our portfolio and the diversity of it has served us well and we'll continue to. So we're not seeing any issues related to that.

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Operator [46]

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(Operator Instructions) Our next question is from the line of Matt Olney of Stephens.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [47]

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Going back to the deposit cost. I think there was some commentary that the pressure on the deposit costs eased somewhat during the quarter within the Texas market maybe towards the back end of the quarter. Any more details or anymore numbers you can put behind that and common outlook for the next few quarters within your Texas market deposit costs?

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Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [48]

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It's really what I have is mostly anecdotal, Matt. It's just my team who takes the exemption request from our branches and our relationship managers and the requests for rates and competition have seemed to abate a bit. I know that some of the banks that had special rates out there, those have come down just a bit. I've noticed over the last couple of weeks. So really, it's anecdotal evidence is what I have and we have not been making as many exemptions outside of our stated rates as what we have been if you go back to like third and fourth quarter of 2018.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [49]

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Okay. And then Michelle, you just gave us your expectation for the operating expenses for the, I think, the second or third quarter. I assume those were more core numbers, excluding any kind of knowledge from integration?

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Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [50]

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Right. Yes. That excludes any deal-related costs.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [51]

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Okay. Great. And then I think Dan may have mentioned that remaining marks on the loan portfolio on the credit fund and rate mark. I didn't write those down fast enough. Could you just go over those again?

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Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [52]

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Yes. I think the credit mark is around $39 million. And the -- let me pull it up. Let me look at it so I don't give you the wrong number, Matt. And the interest rate mark is...

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David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [53]

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It's $80 million, Michelle.

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Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [54]

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$80 million and $39.8 million.

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David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [55]

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$80 million on the interest rate mark and just under $40 million on the credit mark, being combined.

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Operator [56]

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Thank you. And that does conclude today's question-and-answer session. I like to turn the call back over to Mr. David Brooks for any closing remarks.

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David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [57]

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Hey, we appreciate everyone being on. We're excited about the start to 2019 and getting the Guaranty integration done. So with that, we appreciate your participation in our call and look forward to talk to you soon. Thanks.

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Operator [58]

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Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.