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Independent Bank Group (IBTX) Q3 2019 Earnings Call Transcript

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Independent Bank Group (NASDAQ: IBTX)
Q3 2019 Earnings Call
Oct 22, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings and welcome to the Independent Bank Group's third-quarter 2019 earnings Call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Paul Langdale, vice president, investor relations for Independent Bank Group.

Thank you. You may begin.

Paul Langdale -- Vice President and Investor Relations Officer

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 third-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 during today's call are subject to that statement.

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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 the 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, 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'll turn it over to David.

David Brooks -- Chairman, Chief Executive Officer, and President

Thanks, Paul. Good morning, everyone, and thank you for joining today's call. I will briefly cover some of the third-quarter highlights, Michelle will provide detail on operating results and Dan will discuss the loan portfolio, then I'll be back at the end with closing remarks and to open it up for questions. Independent Bank Group had another solid quarter with adjusted earnings per share of $1.35 and adjusted return on average assets of 1.56% for the quarter.

Our consistent earnings growth reflects that we operate with a focused presence in four of the best markets in the country. Organic loan growth was 5.6% for the quarter and six and a half percent annualized year to date. Our disciplined approach to growth demonstrates the continued commitment to the conservative credit culture that has served us well for over three decades. Asset quality metrics remain at historically strong levels, with total nonperforming assets representing just 12 basis points of total assets at quarter end.

Additionally, our deposit growth effort continues to show results, with organic deposit growth of 7.7% annualized for the quarter. I'll turn -- I'll now turn it over to Michelle, who will provide additional details on operating results for the quarter.

Michelle Hickox -- Executive Vice President and Chief Financial Officer

Thank you, David. Good morning, everyone. Please note, that on Slide 5 of the presentation includes selected financial data for the quarter. Our third-quarter adjusted net income was $57.8 million or $1.35 per diluted share compared with $36.6 million or $1.20 per diluted share for the third quarter last year and $52.9 million or $1.22 per diluted share for the linked quarter.

As you can see on Slide 7, net interest income was $125.4 million in the third quarter, up from $86.3 million in the third-quarter 2018 and down from $129.6 million in the linked quarter. The net interest margin was 3.84% for the third quarter compared to 4.11% for the linked quarter and 3.94% third quarter last year. Total accretion income decreased $6.4 million from the second quarter of 2019, which explains most of the decrease in NIM and net interest income. The NIM ex all purchase loan accretion decreased 6 basis points from the linked quarter, primarily due to lower yielding assets related to proxy competition on loans.

Total non-interest income was $27.3 million compared to $12.7 million in the third quarter of 2018 and $16.2 million in the linked quarter. The $14.6 million increase compared to the linked quarter includes $6.8 million in gains on the sale of consumer and residential mortgage loan pool, which were acquired in the Guaranty deal as well as the $1.5 million gain from the sale of a branch. Mortgage banking revenue also increased by $1.1 million from the linked quarter, reflecting increased demand, partly driven by refinance activity due to the interest rate environment. Additional increases from the linked quarter were related to mortgage warehouse, swap fee income and other miscellaneous fees.

Total non-interest expense was $76.9 million for the third quarter, a decreased of $1 million from the linked quarter. Acquisition expense increased by $5.7 million, it includes a $6.9 million charge for guarantees debit card provider contract, which was terminated after the operational conversion in July. In addition, we reported impairments on the right of use asset for a closed branch in CRA investment funds, totaling $1.2 million during the quarter. These increases were offset by a $2 million -- $2.9 million decrease in salaries and benefits and a $3.1 million decrease in FDIC insurance expense for the small bank assessment credit as well as a $1.5 million decrease in operational losses from the second quarter.

Slide 17 shows our deposit composition and costs. Total deposits were $11.7 billion as of September 30, 2019. Organic deposit growth was $225 million or 7.7% annualized for the quarter and is partially offset by $27.7 million transfer in connection with the branch sale in July. The average cost of interest-bearing deposits was 156 basis points, up 30 basis points in the third quarter of 2018 and up 3 basis points from the linked quarter.

While deposit costs peaked in July, they started trending down a few basis points each month in August and September. We are actively monitoring deposit products and costs and have lower rates on certain account types and promotional products. That concludes my comments. I will turn it over to Dan to discuss credit metrics and give color on the loan portfolio.

Dan Brooks -- Vice Chairman and Chief Risk Officer

Thanks, Michelle, good morning. Organic loan growth was $152.9 million or 5.6% annualized for the quarter. Overall, loans held for investment, not including mortgage warehouse purchase loans, grew to $10.9 billion at September 30, 2019 compared to $10.8 billion 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 September 30, 2019, commercial real estate makes up 51% of loans versus decline from 51.4% 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.

Mortgage warehouse purchase loans averaged $434.1 million or the quarter ending September 30, 2019, compared to $295.9 million for the quarter ending June 30, 2019, representing an increase of approximately $138.2 million or 46.7% for the quarter. This growth partially reflect seasonality and the impact of lower mortgage risk during the quarter as well as our focus on growing this line of business this year. Credit quality metrics remained strong, with total nonperforming assets decreasing to $18.4 million or 0.12% of total assets at September 30, 2019, compared to $28.0 million or 0.19% of total assets at June 30, 2019. The decrease in nonperforming assets is primarily due to $4.5 million in OREO sales and $5.6 million of charge-offs on two promotional credits, which were partially reserved in prior periods.

Despite these two specific charge-offs, overall charge-offs remained low at 0.21% annualized for the third quarter compared to 0.01% annualized in the linked quarter and 0.14% annualized in the third quarter of 2018. Provision for loan loss expense was $5.2 million for the third quarter, an increase of $494,000 over the linked quarter. Provision expense is primarily reflective of the growth in our loan portfolio as well as charge-offs and specific reserves taken during the respective period. Provision expense was elevated this quarter due to two commercial credits which were charged-off and excess of specific reserves placed on the -- in the previous periods.

One of these loans is the same loan that was partially reserved in the linked quarter, with the other being an energy loan that has been in work out for several quarters. 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 Brooks -- Chairman, Chief Executive Officer, and President

Thanks, Dan. With the successful conversion of the Guaranty Bancorp acquisition behind us now, we are taking advantage of this period of relative quiet on the M&A front to ensure the company is well positioned for our next stage of growth. And to that end, we focused our teams on ensuring our people, processes, technology and systems are ready to take Independent Bank Group into the future. This fine-tuning of our infrastructure is designed to facilitate healthy future growth while maintaining the conservative culture of risk management that has serve us well for over three decades.

While we carry out this infrastructure initiative, we continue to have strategic conversations with other banks in attractive markets. We will -- we take the long view with regard to our company and believe that continuously building strong lasting relationships with customers, employees and potential partners will best serve our shareholder's interest. As we embark on the next chapter of our company's history, we will continuously strive to maintain the discipline, focus and forward-banking mentality that we believe will continue to create sustainable, long-term value for all of our shareholders. Thank you for taking the time to join us today, and we'll now open the line to questions.

Operator?

Questions & Answers:


Operator

[Operator instructions] Our first question comes from the line of Brett Rabatin with Piper Jaffray. Please proceed with your question.

Brett Rabatin -- Piper Jaffray -- Analyst

Hey, good morning, everyone.

David Brooks -- Chairman, Chief Executive Officer, and President

Good morning, Brett.

Brett Rabatin -- Piper Jaffray -- Analyst

Wanted to -- I guess, first, just talk about the charge-offs on the quarter. I mean you guys have had better energy exposure than most of your peer banks. Can you give us maybe just a little bit more color on the net charge-offs? And then just talking about energy generally, how do you feel about the remaining portfolio that you've got?

Dan Brooks -- Vice Chairman and Chief Risk Officer

Good morning, Brett, this is Dan. I'll answer that question. Yes, the fee charge-off that we had during the quarter really is a continuation of the two that we've had previously reserved and identified as substandard nonperforming loans. We had been substantially reserved and just recognized those this quarter.

I would say, on this particular energy loan, this is the last of the loans that had some hair on it from the previous downturns, we worked through that. As it relates to the rest of the energy portfolio, as you know, we've been in the process of continuing to look at good opportunities and built some book after we added a team in January of this year and have had a really good run there. As you know, the energy portfolio is less than 2% of our book at this point. And we've been very selective ensuring, picking the best-of-class companies that we've added at this point with the management change that have proven ability to manage through the downturn.

The levers of those types of new credits have been added is less than two times with low advance rates. So we feel very good about that book.

Brett Rabatin -- Piper Jaffray -- Analyst

OK. That's a good color. And then wanted to talk about the margin, Michelle. Can you maybe give us some color around the cost of funds from here in particular, can you lower that quite a bit? And just maybe your outlook on the margin? And how you see that playing out over the next few quarters?

Michelle Hickox -- Executive Vice President and Chief Financial Officer

Yeah. There's lots of moving parts. And I would say, this year has been a challenge related to margin. I do think that we are going to get benefit for being able to lower our cost of funds.

We already have seen a trend, it's a short trend right in October, but we have lower deposit rates significantly. We've been aggressive, working with our relationship managers, trying to get those exception rates that we made as rates were going up. Lower -- we've lowered our promotional product rates. I anticipate that cost to deposits could go down as much as 10 basis points this quarter just based on the trend I'm seeing right now.

The other side of that though is, loan yield which is really where -- what puts the most pressure on our margins this quarter. I will tell you, it doesn't look like we're seeing the same, at least, thus far, again, it's a short time frame. Yields going on at the rates that they were at the end of the last quarter. So if we can hold that up and if we'll get -- if we'll continue to see the yield curve go up, I think we'll be able to -- I'm guessing that our margin this quarter will be stable to maybe down a couple of basis points.

I don't think it's going to contract as much as it did in Q3. And again, I'm taking what I call core margin ex all of our accretion, which was down 6 basis points this quarter.

Brett Rabatin -- Piper Jaffray -- Analyst

OK. And then if I could sneak in one last one -- I'm sorry.

Michelle Hickox -- Executive Vice President and Chief Financial Officer

Yeah. I was just going to address accretion. Our accretion income was a little higher then what I expected it to be this quarter. So I still think it's probably going to run about $7 million a quarter for the next couple of quarters anyway.

Brett Rabatin -- Piper Jaffray -- Analyst

OK. That's helpful. And then if I could sneak in one last one, obviously, a lot of noise in the expenses numbers. Can you give us, maybe, Michelle, a kind of a core rate going forward at least for the fourth quarter?

Michelle Hickox -- Executive Vice President and Chief Financial Officer

Yeah. So if you add back the FDIC credit that we got this quarter, I have that -- what I would call, our adjusted expenses were right about $68 million. And we did have some lags and cost saves on the data processing side related to Guaranty. We're having to continue some of their systems for a little longer than what we expected.

We got through conversion really well. But just having access to some information. So that we weren't able to get some of that out, that's probably $0.5 million a quarter. Legal actually was higher than what I expected it to be, and then we had some more branding costs.

So that's where kind of the expenses were a little higher than what I guided to last quarter. We are starting to make some investments in infrastructure, particularly, in risk management, those types of things. So I think, going forward, $67 million is probably a good number for this quarter. Going into '20, first quarter is always a bit higher just because of comp adjustments and those type of things, probably a 3% to 5% increase through '20 is a good number to use.

Brett Rabatin -- Piper Jaffray -- Analyst

OK. Great. Appreciate all the color.

Dan Brooks -- Vice Chairman and Chief Risk Officer

OK. Thanks, Brett.

Michelle Hickox -- Executive Vice President and Chief Financial Officer

Thanks, Brett.

Operator

Our next question comes from the line of Woody Lay with KBW. Please proceed with your question.

Woody Lay -- KBW -- Analyst

Good morning, guys.

David Brooks -- Chairman, Chief Executive Officer, and President

Hey, good morning, Woody.

Woody Lay -- KBW -- Analyst

So looking at expenses, again, that FDIC benefit, did you recognize the entire benefit this quarter, could we see some more benefit next quarter?

Michelle Hickox -- Executive Vice President and Chief Financial Officer

No, that's it. So going forward, we should return to our regular run rate, which is a little over $1 million a quarter.

Woody Lay -- KBW -- Analyst

Got it. And then with deposit costs, is there any opportunity to run off some higher costs in deposits? Or will the decrease in the costs primarily just come from cutting rates across the board?

David Brooks -- Chairman, Chief Executive Officer, and President

I think, it would be a combination of those things. Woody, we've been able to really hold down our rates. As Michelle said, we've lowered all our promotional rates as rates have come down. And we're seeing renewals on some of our promotional CDs in the 60%, 70% range.

Thereby, we are running -- those who weren't willing to roll are leading. And so to that extent, I guess, you could consider that us running off some higher-yielding deposits, higher cost deposits. And then as rates continue to come down, we're able to adjust -- continue to adjust. So we're actually, as Michelle said earlier, encouraged about our ability so far, being pretty aggressive on driving those cost down.

We saw some good pickups in the last half, the last quarter and seems to be doing even better now, getting the full benefit of that here in October.

Woody Lay -- KBW -- Analyst

Got it. That's helpful. And last from me, so the energy portfolio did see some modest growth. What's the sort of target you'll have for the portfolio in terms the -- to represent the loans -- total loans.

So I think you said it's 2% right now. Do you hope it gets to 5% in maybe a couple of years?

David Brooks -- Chairman, Chief Executive Officer, and President

Yeah. So I think our view generally is, as we try to go these other verticals that are non-CRE mortgage warehouse and energy and C&I and equipment finance and those other lines, we generally had set around 5% each ultimately as our bucket. So I think energy in the 4% to 5% of total loans is at 2% now. So -- but we think that's going to take some time, that's not going to be next quarter.

We have -- as you know, we hired a team from another bank in the Fort Worth area last year. They've had a lot of good early success here moving some relationships. And doing, as Dan said, some deals that we consider to be some of the best credits we booked in the seven years now that we've been in the energy lending business. The stuff we're booking now is better structured.

More conservatively structured with better coverage. So we feel good about that. I think ultimately though, we peaked out in 2014 for the same history at about -- between 7% and 8% of our loan portfolio. We did not expect it to go back to that level at least in the near-term future.

We'll be targeting around 5% over time. Same thing with mortgage warehouse, around 5% of average outstanding balances of our loan portfolio feels about right to us.

Woody Lay -- KBW -- Analyst

Great. Thank you, guys.

David Brooks -- Chairman, Chief Executive Officer, and President

Hey, thanks.

Operator

Thank you. Our next question comes from the line of Michael Young with SunTrust Robinson Humphrey. Please proceed with your question.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Hey, good morning, everyone.

David Brooks -- Chairman, Chief Executive Officer, and President

Good morning, Michael.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Wanted to ask just on the total loan growth side. What was the level of payoffs and paydowns this quarter? It wasn't called out. So I didn't know if it was higher, given kind of the backup in the rates, if you guys saw elevated levels of that?

David Brooks -- Chairman, Chief Executive Officer, and President

No, it was really pretty much the way we've been seeing it run all year, nothing extraordinary. Normal amounts of payoffs and refinances. And so constantly, our five and a half percent loan growth, while I wasn't at the pace that we'd expected going into the quarter or going into the year. We're just seeing, as we've talked about previously, and I've overheard a number of our peers talking about is the competition has got really difficult out there.

There's been some competition on pricing and structure that we're just not comfortable with. And so we've passed on some deals and let some deals refinance or payoff that we could have kept, and we were willing to do things that are out of our normal credit policy and credit character. So as we look forward, I really think probably is 6%, given where the economy is now, given the way some nonbank insurance company, nonbank lender as well as some banks are the approach that people are taking is leading us to believe that in our markets we're still seeing good growth. It's not as exuberant as it was a year and a half or two years ago, but is still very strong.

Good pipeline of economic activity out there that we're being cautious given where we are in this cycle. And so we're -- so we'll pass up a little bit this year over last year. There -- they've been really pretty level over the last quarter.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

OK. So the slower growth is really a function of the competition. It's not -- if we saw an ability to get cheaper deposits, kind of, into the future, would you guys look to maybe accelerate growth a little bit, to grow NII a little more? Or is that still -- you just kind of don't think of the markets where you want it to be right now?

David Brooks -- Chairman, Chief Executive Officer, and President

Yeah, I think we feel like -- and again, we're just trying to tell you what we see on the ground. I'm an optimist, as you probably remember Michael. And I always tend to think we can grow at 8% when the market is right now growing at 6%. And so I certainly think we can -- we have a team that's built to grow the bank more quickly, grow our loan portfolio more quickly.

But we just haven't seen those opportunities get through the pipeline, get through our credit process and get on books as quickly as we thought they would going into the year. And it's a matter of all the things we've talked about already. So yes, I think going forward, 6% is a better target for us.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

OK. And then just on CECL, Michelle, and if you had any early thoughts around that? And what that might mean in terms of onetime true-up in the first quarter on the reserve or higher provisioning levels potentially in 2020?

Michelle Hickox -- Executive Vice President and Chief Financial Officer

Yeah. We're still not in a position where we can disclose the number at this point. But -- I mean that thought process around -- we don't believe it's going to be a significant number or impact to capital at this point, especially on, what I would call, our originated portfolio. We don't think that number is going to be significant.

We will have to take a CECL reserve against the acquired loan portfolios, which at this point is primarily just Guaranty. But again, we don't think that number will have a significant impact on capital at this point.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

OK. Thanks.

David Brooks -- Chairman, Chief Executive Officer, and President

Hey, thanks, Michael.

Operator

Thank you. Our next question comes from the line of Matt Olney with Stephens. Please proceed with your question.

Matt Olney -- Stephens Inc. -- Analyst

Hey, thanks. Good morning, everybody.

David Brooks -- Chairman, Chief Executive Officer, and President

Hey, good morning, Matt.

Matt Olney -- Stephens Inc. -- Analyst

I want to go back to the core NIM discussion. And it sounds like, Michelle, you expect the core NIM pressure in the fourth quarter to be a little bit less than we through in the third quarter. I just want to appreciate, if the Fed does move next week in -- and cut rates again, does your commentary already assume that? Or if the Fed does move next week and cut rates, could the core margin compression levels in the fourth quarter approach the third-quarter level, which was down, I think, 6 bps?

Michelle Hickox -- Executive Vice President and Chief Financial Officer

Yeah, I -- it doesn't really assume anything that, but I don't think it changes my commentary. It's really probably -- this probably more likely would benefit us if Fed lowers rates again because then I think that gives us more opportunity to press down deposit costs. While I'm not sure that on the loan yield side that will be impacted that much at this point. So I would say, it's most likely going to be stable to down a couple of basis points either, right? I mean whether they lower or whether they don't.

Matt Olney -- Stephens Inc. -- Analyst

OK. And then...

David Brooks -- Chairman, Chief Executive Officer, and President

Go ahead, Matt.

Matt Olney -- Stephens Inc. -- Analyst

No, I'm sorry. Go ahead, David.

David Brooks -- Chairman, Chief Executive Officer, and President

No. I really think that -- as Michelle said, I think further drops by the Fed allow us a chance to lower our deposit rates. And loan rates seem to have hit the deck pretty early in the downturn here. And so -- while rates -- certainly the floating rates will -- could continue to go down -- would continue to go down, by and large given the balance in our portfolio.

Lower rate environment going forward just allows us to catch up from this kind of whiplash we had in the second and third quarter. And that's why I think, as Michelle said, we think the worst of NIM compression was the third quarter for us. It's better in the fourth quarter. Eventually, we should level out.

And that's certainly what our model tells us. And we just got surprised. I think, like, a lot of banks did this quarter with the loan pricing pressure. So we've been very happy with the success we've had getting deposits rate down, and we think that'll continue.

But the loan rates, they're already extremely competitive. And I don't think other than the floating rate loans that loan -- the fixed rate core -- three to five-year fixed rates are going to go down lower than where they already are.

Matt Olney -- Stephens Inc. -- Analyst

OK. OK, that's great. And then on the fee side, there's another great quarter of fees in 3Q. And even if I take out some of the items that you called out, the branch sale, the loan sale, it looks like it was still a really good quarter of fees.

Anything else you'd call out that was particularly ahead in the third quarter. Just trying to get a good run rate for the fees going into the fourth quarter. And specifically, I think in the past, in the mortgage lines, you've had some hedging volatility within that. Anything you can call out within the mortgage piece?

Michelle Hickox -- Executive Vice President and Chief Financial Officer

No. I think the hedging on the mortgage has finally stabilized. It's really not impacting. Mortgage had a really good quarter like most banks with the rates environment.

They're doing really well. I think that they're probably going to be -- it looks like about the same in the fourth quarter. I mean maybe don't just a bit just from seasonality. We did have some good slot fee income, probably $300,000 to $400,000 more than normal.

And then -- yes, we sold the trust department that's about $0.5 million in fee income. But -- so I would say maybe down $700,000 or $800,000 from where it was this quarter, Matt. It's probably a good run rate.

Matt Olney -- Stephens Inc. -- Analyst

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

David Brooks -- Chairman, Chief Executive Officer, and President

Hey, thanks, Matt.

Operator

[Operator instructions] Our next question is a follow up from the line of Brett Rabatin with Piper Jaffray. Please proceed with your question.

Brett Rabatin -- Piper Jaffray -- Analyst

Hey, thanks. David, I just want to go back to the comment you made in your prepared remarks, talking about M&A, and wanted to hear maybe a little more color around that and what you're -- one, what you're seeing? And then it's regard to your preference, are you expanding more in Texas, Colorado? Are you infilling the new markets? Kind of give us maybe a little color if you can on just what you want to accomplish? And what you're seeing out there?

David Brooks -- Chairman, Chief Executive Officer, and President

Sure. Yeah, and a big part of our lapse, six years, going on seven years now, Brett, has been the M&A piece. And so we continue -- I continue to work diligently on that, both -- staying in close touch with the banks here in Texas that we're interested in. And given the volatility in the market, it seems like there have been some smaller deals this year, and then of course, the legacy prosperity deal.

But what I would call, the ones in between that, $1 billion to $5 billion, which is a lot of the banks, that we're looking at and talking to. There doesn't seem to be a rush right now of sellers to sell into this environment. So I think that's going to continue to be slow for the next few quarters in my view, depending on what happens with the markets and the election. Then -- and then obviously, having other discussions.

Let me, I guess, finish on that topic first to say, it's not our intention to go outside of Texas and Colorado with any others, what I'll call, downstream M&A. And so we're not going to go buy a $2 billion bank in Arizona or Arkansas or Louisiana as a market expansion. And then there's just -- there continues to be a lot of conversation, as all companies, ours and the others are looking at a lot of headwind in the next year or two in terms of NIM compression and fee income, and how are you going to drive shareholder returns. And so there are a lot of other discussions going on, Brett.

But we continue to have discussions, we continue to be approached by people to talk about various kinds of partnerships. And -- but as I've continued to say, when we'd be finished with this that we very much like the hand that we've got, wherein Dalfort, Austin, Houston and Denver are four of the best markets in the country. And we like that a lot. And we think any move materially outside of our current footprint has the risk of kind of diluting our growth story and diluting our future in some ways.

And so we've been cautious around that.

Brett Rabatin -- Piper Jaffray -- Analyst

OK. That's good color. And then I wanted to go back to the comments you made around growth. David, and -- it sounds like you were surprised by some of the rationality in the market, but you're expecting to be more normalized.

And thinking about the growth over the next year, are you expecting some level of payoffs on the loan portfolio? Or can you give us some color on kind of how you're thinking about origination versus the existing book and kind of the challenge that banks have had with the payoff activity?

David Brooks -- Chairman, Chief Executive Officer, and President

So let me take the last part of that first, Brett. I do not expect heightened levels of payoff. But I don't think they're going to go down either. I think we just continue as we look ahead to expect the same kind of payoff level we've had.

And in the face of that, we think we can grow around 6% our organic loan growth. To the irrational pricing you mentioned, I don't think it's going to become less irrational. But I just don't think it's going to -- it can become much more irrational. I guess as my message there, we expect to continue to have the same kind of behavior in the market, but in the face of that we believe we can grow 6%.

If they were going to be less irrational, if that's proper grammar, then I think we could grow faster. But right now, given kind of the difficulty. And there have been some rates with -- in upper threes fix for five, seven and 10 years out there. And we just have chosen not to do that.

But I expect that to continue as long as -- so long into the curve as low as it is. I just don't think it's going to get worse. So that was the point I was trying to make, Brett, is we think the loans that have been booked in the last quarter and that we're looking into this quarter, that's about as low as we think rates are going to go generally. And then if we can press our deposit rates down at least we think we got some stability or protection there on the NIM.

Brett Rabatin -- Piper Jaffray -- Analyst

OK. And then as a follow up to that. I know you've been wanting to grow other pieces of the loan portfolio to kind of diversify away from commercial real estate to some degree. Can you just maybe talk about your expectations for equipment finance and general C&I over the next year?

David Brooks -- Chairman, Chief Executive Officer, and President

Yeah. We're going to continue to make progress on that. I think we did see CRE beginning to come down this quarter for the first time. I think it would've been down last quarter, but we're doing stock buybacks and our capital ratio was going down at the same time we were diversifying.

But I think we're going to see, I think, I believe, a steady drop. There may be a blip here and there a quarter, depending on what we do in stock buybacks and all of that. But I think in general, you'll see a trend down. We've mentioned mortgage warehouse, we're having some success there.

We are having success in the energy side. Equipment finance is kind of slow but steady. We always knew that would be a longer build out. And then our C&I team in Colorado continues to do a great job.

We're looking for ways to port that to Texas. And we think, again, none of these things are going to move the needle, and our CRE rate's going to drop by 50 or 75 bps in any one quarter. But if we can just chip a way out of it, 5, 10, 15 bps a quarter in three or four years we'll get to where we want to be, which has been guiding to all along.

Brett Rabatin -- Piper Jaffray -- Analyst

OK. Great. Appreciate all additional color.

David Brooks -- Chairman, Chief Executive Officer, and President

Hey, thanks a lot, Brett.

Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Brooks for any final comments.

David Brooks -- Chairman, Chief Executive Officer, and President

I appreciate everyone dialing in this morning, and that's going to conclude our earnings call. We remain encouraged about the future of the company, both near and long term. Thanks for your interest. Have a great day.

Operator

[Operator signoff]

Duration: 36 minutes

Call participants:

Paul Langdale -- Vice President and Investor Relations Officer

David Brooks -- Chairman, Chief Executive Officer, and President

Michelle Hickox -- Executive Vice President and Chief Financial Officer

Dan Brooks -- Vice Chairman and Chief Risk Officer

Brett Rabatin -- Piper Jaffray -- Analyst

Woody Lay -- KBW -- Analyst

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Matt Olney -- Stephens Inc. -- Analyst

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