U.S. Markets open in 8 hrs 53 mins

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

Q2 2019 Independent Bank Group Inc Earnings Call

McKinney Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Independent Bank Group Inc earnings conference call or presentation Tuesday, July 23, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Daniel W. Brooks

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

* David R. Brooks

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

* Michelle S. Hickox

Independent Bank Group, Inc. - Executive VP & CFO

* Paul Langdale

Independent Bank Group, Inc. - VP & IR Officer

================================================================================

Conference Call Participants

================================================================================

* Bradley Jason Milsaps

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Brady Matthew Gailey

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* 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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Independent Bank Second Quarter 2019 Earnings Conference Call. (Operator Instructions) I would now like to introduce your host for this conference call, Mr. Paul Langdale. You may begin, sir.

--------------------------------------------------------------------------------

Paul Langdale, Independent Bank Group, Inc. - VP & IR Officer [2]

--------------------------------------------------------------------------------

Good morning, everyone. I am Paul Langdale, Vice President and Investor Relations Officer for Independent Bank Group, and I would like to welcome you to the Independent Bank Group's Second Quarter 2019 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 today during today's call are subject to that statement.

Please note that if we give guidance about future results, that guidance will only be 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'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 the remarks, David will open the call to questions.

With that, I turn it over to David.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Paul. Good morning, everyone. I will briefly touch on some of the highlights for the quarter, and then Michelle will cover the operating results, and Dan will discuss the loan portfolio. I'll be back at the end then with some closing remarks and to open it up for questions.

Independent Bank Group had a solid second quarter. We continue to report healthy earnings with an adjusted EPS of $1.22 per share and adjusted return on average assets of 1.47% for the quarter. We have continued to see results from our positive growth efforts, and we had good, if a little more moderate, organic loan growth during the quarter. We had strong growth in mortgage warehouse, energy lending and 1 to 4 family held for investment with CRE loans decreasing as a percentage of total loans.

We successfully completed the operational conversion of Guaranty last month, and our teams did a great job ensuring the process went smoothly. We expect to recognize the full benefits of this acquisition during the second half of this year.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, David. Good morning, everyone. Please note that Slide 5 of the presentation includes selected financial data for the quarter.

Our second quarter adjusted net income was $52.9 million or $1.22 per diluted share compared with $32.2 million or $1.11 per diluted share for the second quarter last year and $52 million or $1.19 per diluted share for the linked quarter.

As you can see on Slide 5, net interest income increased to $129.6 million in the second quarter from $78.9 million in the second quarter 2018 and $121.7 million in the linked quarter. The net interest margin was 4.11%, up 6 basis points from the previous quarter at 4.05%. Excluding accretion related to the Guaranty acquisition, the NIM would have been 3.72% for the quarter compared to 3.82% in the linked quarter. This decrease is primarily related to the growth in the mortgage warehouse portfolio, which has significantly lower yields than other loans held for investment.

The adjusted yield on loans net of accretion decreased from 5.17% in Q1 to 5.11% this quarter. The NIM was also impacted by increased liquidity, lower security yields and increased deposit cost. Total noninterest income was $16.2 million compared to $10.1 million in the second quarter of 2018 and $16.4 million in the linked quarter. The decrease of $225,000 from the first quarter of 2019 is primarily due to a decrease of $1.2 million in other noninterest income, which was partially offset by increases of $303,000 in wealth management and trust services and $609,000 in mortgage banking revenue. Mortgage warehouse fee income also increased approximately $330,000 from the first quarter. The decrease in other noninterest income is primarily due to a decrease in acquired loan recoveries during the second quarter 2019 from $1.3 million to $258,000.

Total noninterest expense was $78 million, a decrease of $8.6 million from the linked quarter. This includes $6 million of expenses related to the Guaranty acquisition as well as a $988,000 impairment taken on former branch locations that were closed as part of our branch realignment strategy. We also had approximately $400,000 of costs related to our rebranding and expenses related to our headquarter relocation.

During the quarter, we recorded a $1.4 million operational loss reserve arising from a charge back liability on a merchant card deposit account acquired in the Guaranty deal. As of June 30, we have estimated a total loss of $5.2 million on this account, of which we believe $3.8 million existed at close and has been recorded as an increase to goodwill.

Slide 17 shows our deposit composition and costs. Deposits totaled $11.5 billion as of June 30, 2019. Deposits grew by $291.2 million or 2.6% for the quarter, 10.4% annualized. The average cost of interest-bearing deposits was 153 basis points, up 51 basis points from the second quarter of 2018 and up 11 basis points from the linked quarter. While the relative upward pressure on deposit rates has abated somewhat with the change in the consensus federal funds market outlook, customers continue to expect higher rates on deposits and competition from other banks continues to make funding costs a challenge.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Michelle. Good morning. Organic loan growth was $175.4 million or 6.6% annualized for the quarter. Overall, loans held for investment, not including mortgage warehouse loans, grew to $10.8 billion at June 30, 2019, compared to $10.7 billion at March 31, 2019.

Subsequent to June 30, we sold a student loan pool and a residential mortgage pool, which were acquired in the Guaranty acquisition. These loan pools, which totaled $83.5 million, are recorded in loans held for sale at June 30, 2019.

Slide 10 illustrates annual loan growth comparisons. Slide 11 shows the composition of our loan portfolio and our commercial real estate portfolio. As of June 30, 2019, commercial real estate makes up 51% of loans which has declined from 53% in the linked quarter. CRE continues 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 is 106% as of June 30, 2019, which is down from 130% a year ago. At the end of the second quarter, our total CRE to capital ratio stood at 386%. The increase in the CRE ratio was primarily due to the reduction of capital resulting from our stock repurchase this year. We continue to focus on reducing this ratio 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 $295.9 million for the quarter ending June 30, 2019, compared to $128 million for the quarter ended March 31, 2019, representing an increase of approximately $167.9 million or 131.2% for the quarter. This is reflective of our strategy to grow this line of business as well as seasonality and the impact of lower mortgage loan rates during the quarter.

Credit quality metrics remained strong. Total nonperforming assets increased to $28 million or 0.19% of total assets at June 30, 2019, compared to $16.9 million or 0.12% of total assets at March 31, 2019. The increase in nonperforming assets is primarily due to the transfer of 6 former branches to OREO as a result of our branch realignment. These properties were recorded in OREO at $6.8 million. We also placed 3 credits on nonaccrual during the quarter totaling $5.3 million. Charge-offs remained low at 0.01% annualized for the second quarter compared to 0.06% annualized in the linked quarter.

Provision for loan loss expense was $4.7 million for the second quarter, an increase of $1.5 million over the linked quarter. Provision expense is primarily reflective of the growth of our loan portfolio as well as charge-offs and specific reserves taken during the respective period. Provision expense was elevated this quarter due to the addition of a $1.4 million specific reserve allocated to a commercial loan in Houston. This specific reserve is due to the declining financial condition and operations of this borrower. We do not believe that this is an indication of a weakening market.

As of June 30, 2019, we have recorded a discount for the acquired loan portfolios of approximately $115.5 million, of which $27.3 million is nonaccretable. The recorded allowance for loan losses plus the remaining nonaccretable discount on loans acquired is approximately 0.73% of total loans held for investment as of June 30, 2019. These are all the comments I had related to the loan portfolio this morning.

So with that, I'll turn it back over to David.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Dan. During the first half of the year, we focused on executing our plans for a smooth integration of the Guaranty Bank's customers, employees and communities into our systems. We also enhanced the returns to shareholders by increasing our quarterly dividend and executing our stock repurchase plan. Through June, we've repurchased an aggregate of $49 million of our common stock. We believe the company is well positioned for the second half of 2019. We continue to carry out our key strategic initiatives: driving disciplined growth, delivering consistent earnings, maintaining a strong credit culture and creating sustainable long-term value for our shareholders and our communities. We have an established platform in 4 of the most dynamic markets in the country, upon which we can continue to build into the future. Thank you for taking the time to join us today, and we'll now open it up to questions. Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [2]

--------------------------------------------------------------------------------

So I had a question on the expense base, it seems like there is a lot of noise in expenses this quarter. As it relates to the $1.4 million loss that was from the Guaranty merchant card issue, that $1.4 million, was that included in the $6 million merger charges or is that above and beyond that $6 million?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

That was not included in merger charges, Brady.

--------------------------------------------------------------------------------

Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [4]

--------------------------------------------------------------------------------

Okay. All right. So I know -- I think last quarter, when we talked about expenses in the back half of the year, we had the conversion done, you should have some positive -- some lower expenses from that. But I think we've talked about an expense run rate around $64 million a quarter. Does that still feel like the right number? Or could that be a little higher?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I think that run rate is going to be a bit higher. There were some other things, though, in the second quarter, that I would -- that pushed our expense run rate up in addition to that loss. Legal expenses were up. If you guys remember, we inherited a lawsuit from Bank of Houston. That sort of has ramped up so we're going to expect additional legal expenses going forward for that of close to $400,000 to $500,000 a quarter. So that's going to be in addition to that run rate I'd given you guys the last time.

We also had some expenses related to branding and are just moving to our new location of $400,000 to $500,000 this quarter that I don't expect will repeat. But I would say, I would push that run rate of $64 million up to $65.5 million, just given the legal and some other things we're doing. Even though we will get the cost saves on the Guaranty transaction, we've had some other expenses that have come into our run rate not related to that.

--------------------------------------------------------------------------------

Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [6]

--------------------------------------------------------------------------------

Okay. All right. And then yield accretion was up notably from 1Q, it went from $7 million last quarter, was a little over $12 million this quarter. I know that's very hard to predict, but I think I remember you guys saying that number should be around $6 million going forward. How -- what are your thoughts on how that number trends in the back half of this year?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Right. You're right. That number is hard to predict, especially right in the very beginning before we do our conversion. So in first part, we really probably had about $1.7 million of accretion income that should have been recognized in the first quarter, just we were conservative with our estimates. I think going forward, and if you're looking at the second half of this year, Q3 and Q4, accretion income should be about $7 million. And then it's going to -- we have about $88 million total that's going to come into income over the next 4 years. So it will trend down from there over those next 3 years, if that makes sense.

--------------------------------------------------------------------------------

Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [8]

--------------------------------------------------------------------------------

All right. And then, David, on the buyback, it was great to see the elevated buyback this quarter. If you look at it year-to-date, you guys have repurchased a little over 2% of the company. How do you think -- do you think this level of buyback will continue at this pace? Or do you think that this was more of an opportunity to buy your stock, and you don't anticipate repurchasing at such a big level going forward?

--------------------------------------------------------------------------------

David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [9]

--------------------------------------------------------------------------------

Yes, it would be the latter, Brady. We were opportunistic in the second quarter, purchasing at prices when it dipped and the $39 million we purchased in the second quarter after a $10 million in the first quarter. I would say our outlook right now for the second half would be closer to what the first quarter was as opposed to what the second quarter was. But we'll continue to be -- we have some other levers we could pull if we wanted to be more aggressive. But I think our outlook right now is a more limited buyback in the second half of the year compared to the first half.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Our next question comes from Brad Milsaps with Sandler O'Neill.

--------------------------------------------------------------------------------

Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [11]

--------------------------------------------------------------------------------

Michelle, just a follow-up on Brady's question around accretion. In the release you give the core NIM, excluding the marks relating to Guaranty. I know those are the biggest marks that you have left, but I was just curious, do you have the total accretion number for the quarter? The core loan yield of 5.11% would imply maybe a little bit more than the $12.3 million that you disclosed in the release. Just wanted to get a sense of total accretion for the quarter.

--------------------------------------------------------------------------------

Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [12]

--------------------------------------------------------------------------------

Are you talking about -- well, that number doesn't -- there's some what we call noncore accretion that we pull out of our adjusted net income, and that was about $2.8 million.

--------------------------------------------------------------------------------

Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [13]

--------------------------------------------------------------------------------

Okay. So the $12.3 million doesn't include the $2.8 million?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

That's right. Yes.

--------------------------------------------------------------------------------

Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [15]

--------------------------------------------------------------------------------

Okay.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

That's where we include the amounts we -- what I call the interest rate mark. If that makes sense.

--------------------------------------------------------------------------------

Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [17]

--------------------------------------------------------------------------------

Okay. That's helpful. So that would align more with what you have in the Q every quarter. Okay. And just to follow-up on the margin. What -- it obviously appears we're going to get a rate cut this month, maybe more coming. How do you guys feel about kind of how you're ready for lower short-term interest rates and how the NIM might respond?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I think a cut from the Fed actually will help us. I think the outlook on our margin, I'm going to get away from predicting exactly how much I think it could go down. I don't think we're going to get the same compression of 10 basis points like we did this quarter. But if loan rates continue to be competitive, and we're -- while our costs on our deposits, the increases has abated from where it was last year, that's still very competitive as well. So if that continues, we will see some compression in our margin, a few basis points through the rest of this year. I think if Fed cuts rates, that will help on some of the pressure on some of our deposits, specifically like our specialty treasury; some of those are tied to Fed Funds so that will help us. So I guess the way to put it is, we're going to have some compression with the Fed decrease that will be a little less than what I would expect today.

--------------------------------------------------------------------------------

David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [19]

--------------------------------------------------------------------------------

Yes, Brad, I would add in that the loan pricing competition was stiffer in the second quarter than we had expected. And so we were not able to -- the loans that we booked, the assets we book were not able to get the same kind of pricing that we were getting in the fourth quarter last year and first quarter of this year so it has come back a little bit. And I think part of that was just expecting the rate decrease that we're expecting here in the second half of the year.

And then just -- we've had loan demand, the economies, the 4 markets we're in -- Dallas-Fort Worth, Austin, Houston and Denver -- are all doing well at the core. But the demand has been good, but probably not as robust as it was a year, 18 months ago. And then consequently, the banks that are hustling for loan growth are all competing for a little bit smaller pie right now, and that's just driving down pricing. We're passing on some loans. That's really the #1 reason why our loan growth was 7% in the first half of the year as opposed to 8% to 10% as we've been guiding to for the year, because it -- the competition has just been difficult around pricing and a little bit around structure.

We've seen a lot of cash out refinances on commercial real estate, which we're not generally big fans of. And so a little bit of structure, but more pricing has driven that. And then that, obviously, translates into the NIM that Michelle's talking about. So where we felt like we were going to be fairly stable we just didn't -- the asset side of that didn't hold up in the second quarter.

--------------------------------------------------------------------------------

Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [20]

--------------------------------------------------------------------------------

And the other comment I would make to that is that we did see significant growth in our warehouse portfolio. And you guys know the yields on those, while we get fee income and noninterest income, the yields on those are about 100 basis points lower than our other loans held for investment. So that impacted our overall loan yields as well. I don't think we anticipate warehouse is going to grow at that same rate this quarter so that would be a positive to the loan yields.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Our next question comes from Brett Rabatin with Piper Jaffray.

--------------------------------------------------------------------------------

Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [22]

--------------------------------------------------------------------------------

Wanted to first ask just on credit. You guys still have really good credit metrics, but just wanted to get a little more color, if we could, on the one loan that -- the $1.4 million reserve was made on -- or specific reserve was made on. Any thoughts on the industry or any color on what was occurring with that particular credit?

--------------------------------------------------------------------------------

Daniel W. Brooks, Independent Bank Group, Inc. - Vice Chairman & Chief Risk Officer [23]

--------------------------------------------------------------------------------

Brett, just in the normal course just long as it fit right in there. It's a loan that we had identified as a substandard loan before we already had a reserve on it, we just boosted that reserve in the second quarter in anticipation of resolving it. But I would say no trending. That particular industry was a medical-related facility, a C&I credit, not real estate, but just a one-off credit is what I would describe it as.

--------------------------------------------------------------------------------

Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [24]

--------------------------------------------------------------------------------

Okay. And then the other question was just back on growth. And David, you've been talking about kind of 8% to 10%. Given your comments, should we assume more of a mid- single-digit pace from here? Or can you give us some color on what you think the market might give you?

--------------------------------------------------------------------------------

David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [25]

--------------------------------------------------------------------------------

Our -- looking at the pipeline and talking with our lending team and our Chief Lending Officer this past few weeks, as we evaluated the second quarter and looking at the pipeline going forward, we still feel good about our pipeline and our -- the demands out there, expecting price to continue to be difficult. I still think it's the low end of what we've been guiding to, the 8% to 10% is where we expect to be in the second half. Something more like 8% as opposed to 6% or 7% and also as opposed to 9% or 10%, if that makes sense. So kind of in that 7% to 8%. We're still encouraged that we can do something around 8% in the second half of the year, depending, again, the economy and politics and all those things.

--------------------------------------------------------------------------------

Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [26]

--------------------------------------------------------------------------------

Okay. And then maybe just one last one around fee income. You had positive momentum in a couple of line items. Any thoughts on the back half of the year? And I know mortgage is somewhat tough to forecast, but any thoughts on fee income generally?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I don't think you're going to see a significant change on our fee or noninterest income line for the back half of this year.

--------------------------------------------------------------------------------

Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [28]

--------------------------------------------------------------------------------

Okay. Great. Appreciate all the color.

--------------------------------------------------------------------------------

David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [29]

--------------------------------------------------------------------------------

We are somewhat encouraged, but obviously, low rates should generate more residential activity. We've seen some momentum there on our residential mortgage side, but we'll see how material that is here as the year progresses.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Our next question comes from Michael Rose of Raymond James.

--------------------------------------------------------------------------------

Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [31]

--------------------------------------------------------------------------------

Just following up on the growth outlook, the 7% to 8%. A, does that include the outlook for the warehouse? And then, B, if we do get a couple of rate cuts here, would those cash out refis continue and pressure loan growth? And as I look at C&I, ex energy, it looks like balances were down. So maybe if you can just give some commentary there.

--------------------------------------------------------------------------------

David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [32]

--------------------------------------------------------------------------------

Yes. I think just some hesitancy of people -- I'll answer last part of that first, Michael, the -- I think there's some hesitancy we're seeing. We haven't seen the level of outstanding on our lines of credit in things that are out there. We've also been cautious about any leverage lending in those types of things that could drive that core C&I number. But we do think that energy will be a big part of the C&I growth story going forward, so we've been pretty clear about that. The 8% loan guidance is not -- does not include the warehouse. That's our -- the held for investment loans. Although we are encouraged about the success we've had, we hired a new team in our mortgage warehouse. And we saw the benefit here in the second quarter of some relationships and things they've been able to move over and things they've been able to change and do, but we expect that to moderate -- that growth rate anyway to moderate here in the back half of the year. We had communicated I think that our target on the mortgage warehouse was to get that up to $500 million in an $11 billion portfolio so somewhere in that range. And that's where we still see it being here by the end of the year.

--------------------------------------------------------------------------------

Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [33]

--------------------------------------------------------------------------------

Okay. As a follow-up, Michelle, you had talked about a 46% efficiency ratio by year-end. It seems like the accretion income is going to be a little bit higher. Understand the loan growth outlook, maybe the expense run rate a little bit higher than expected, fees kind of flattish from here. Does that 46%-ish range still feel good at this point?

--------------------------------------------------------------------------------

Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [34]

--------------------------------------------------------------------------------

I think it could be a little higher than that. But I do think it's going to be sub-47%. So somewhere in that range, 46% to 47%.

--------------------------------------------------------------------------------

Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [35]

--------------------------------------------------------------------------------

Okay. And maybe one final one for me. David, you talked about energy lending being a big part of the growth driver moving forward. We have seen some negative migration on the energy side. Is there any hesitancy to grow or go after that segment at this point in the cycle?

--------------------------------------------------------------------------------

David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [36]

--------------------------------------------------------------------------------

Well, we're being quite cautious. I'll let Dan speak to the credit metrics here, but as part of our strategy we had gotten that book down to such a low level, Michael, that the growth that we had is really off a pretty low base. And so while the percentages look high, we think it's really a pretty measured approach we've got to growing it. From a high level, we did see progress not only in mortgage warehouse, energy, single-family loans held for investment, equipment finance continues to build out. So we're seeing some positive progress overall in our strategy. CRE loans were down a couple of percent this quarter from 53% to 51%, I think, of the total portfolio. So we're making progress as we've indicated we would on our strategy to bring that CRE number down. With the stock buybacks, obviously our capital was down a little more than we had planned for the quarter. And that drove the percentage of CRE loans not to come down as much, but we think that will continue to migrate the right direction over time. Dan, do you want to talk about the energy piece of that?

--------------------------------------------------------------------------------

Daniel W. Brooks, Independent Bank Group, Inc. - Vice Chairman & Chief Risk Officer [37]

--------------------------------------------------------------------------------

Yes. To add to David's comments, I think we mentioned before, we hired an additional energy lending team around the 1st of the year, and the loans that were booked in the second quarter are really a result of that. We're seeing some very nice opportunities there, and the quality of those credits is very high. So we're certainly very confident. And if we continue to see that kind of quality then we'll have an opportunity to continue to book very comfortably.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Matt Olney with Stephens.

--------------------------------------------------------------------------------

Matthew Covington Olney, Stephens Inc., Research Division - MD [39]

--------------------------------------------------------------------------------

I guess similar to Michael's question on energy, but just a little bit broader. We've seen some of your Texas peers report some challenging credit results so far this year. So I'm just curious on what you're seeing on the ground in Texas. And does it make you rethink your growth outlook of continuing in that high single-digit pace?

--------------------------------------------------------------------------------

Daniel W. Brooks, Independent Bank Group, Inc. - Vice Chairman & Chief Risk Officer [40]

--------------------------------------------------------------------------------

Matt, this is Dan. We're certainly continuing to see some nice opportunities in there and really across the types of loans that we do. As you know, we're not a large leveraged lender. And we're not a big buyer of SNCs. As you know, that's been our history. And so therefore, we've not experienced some of the credit difficulties that some of our peers have apparently in those categories. So I think we expect the credit quality to continue to be as good as it has been and continue to hold up.

--------------------------------------------------------------------------------

David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [41]

--------------------------------------------------------------------------------

So we're not really seeing that as -- and Dan and I spoke about this last week, we're just not seeing any fundamental change in our past due loans or customers reporting bad results or the things that you would normally see if you were expecting to see a deterioration in credit. And we're not seeing that. We're not seeing, as I mentioned earlier on the call, Matt, we're not seeing the really robust growth in all sectors we saw 18 months ago. But we're still seeing very good solid loan demand, smart deals being done that we're getting a chance to participate in. And we're just not seeing at our core level, our core customer base, the -- any credit deterioration or any signs of real concern on the ground.

--------------------------------------------------------------------------------

Matthew Covington Olney, Stephens Inc., Research Division - MD [42]

--------------------------------------------------------------------------------

Okay. Understood. And then, I guess, circling back to the margin discussion, Michelle. I wasn't quite clear on your point on if the Fed does cut next week. Are you saying that the core NIM is under pressure currently and if the Fed does cut that, that margin pressure would ease somewhat? Or would that accelerate? I was a little confused about that.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, I think a Fed cut helps us because I think that will help us on our deposit funding side.

--------------------------------------------------------------------------------

Matthew Covington Olney, Stephens Inc., Research Division - MD [44]

--------------------------------------------------------------------------------

So you're saying -- I think you're saying that the margin remains under pressure, but if the Fed does cut, that pressure will be somewhat mitigated?

--------------------------------------------------------------------------------

Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [45]

--------------------------------------------------------------------------------

Right. Yes, I think it will be under pressure, regardless, Matt, a few basis points, but I think it will be better with a Fed cut.

--------------------------------------------------------------------------------

David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [46]

--------------------------------------------------------------------------------

Less pressure.

--------------------------------------------------------------------------------

Michelle S. Hickox, Independent Bank Group, Inc. - Executive VP & CFO [47]

--------------------------------------------------------------------------------

Yes, less pressure.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

Our next question comes from Michael Young with SunTrust.

--------------------------------------------------------------------------------

Brandon Thomas King, SunTrust Robinson Humphrey, Inc., Research Division - Associate [49]

--------------------------------------------------------------------------------

This is Brandon King on for Michael Young. Yes, I wanted to discuss your M&A outlook. I know you discussed previously that in 2019, you're focused on integrating Guaranty. But with the large deal announced in your state last month, I was wondering if the outlook has changed or what you're seeing now as far as opportunities?

--------------------------------------------------------------------------------

David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [50]

--------------------------------------------------------------------------------

No. Obviously, the bank stocks have been under pressure, Brandon. And so the traditional M&A that we've been successful with in our history, and particularly the last 6 years since the IPO, we think that's going to be difficult here for the foreseeable future just because seller expectations continue to be high for high-quality franchises. And then the stock prices are still trading at really relatively low prices, given where Texas banks have traded in the last 5 years, at numbers of 13, 14, 15x earnings. We're now -- most are trading in the 10 to 12x earnings, so that makes the smaller M&A a little challenging.

The deal that was announced a couple of weeks ago here in the market was a larger deal. And obviously, more -- it wasn't an MOE, although there's a lot of MOE discussions, but it was a larger bank acquiring another larger bank. And so that's a little different dynamic, and there's a lot of footprint overlap there. So there's some cost save opportunities that maybe just there. So no, it really hasn't changed fundamental outlook. We continue to try to look around. We know a lot of people, we continue to talk and create relationships in Texas and in our region. And there's a lot of dialogue, a lot of people looking for how do you grow earnings per share, how do you grow your shareholder value going forward in these markets that we're in.

We continue, as I said at the end of our prepared remarks, we continue to feel really good about the 4 markets that we're in, where we've got material footprints in 4 of the best 7 to 10 markets in the country. And we think we've got really good growth prospects here. And the traditional M&A, us acquiring smaller banks, will come back around and be possible in the future, it just doesn't look very promising at the moment.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

And I'm not showing any further questions at this time. I'd like to turn the call back over to our host.

--------------------------------------------------------------------------------

David R. Brooks, Independent Bank Group, Inc. - Chairman, President & CEO [52]

--------------------------------------------------------------------------------

Well. Thanks. We'll conclude the first quarter call -- our second quarter call, I'm sorry. And quarters go by fast. We appreciate you being a part of it today. If you have any questions, obviously, feel free to reach out to Michelle or I or Paul, with anything we can provide for you. We hope everyone has a great day. Thanks.

--------------------------------------------------------------------------------

Operator [53]

--------------------------------------------------------------------------------

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.