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LegacyTexas Financial Group Inc (LTXB)
Q3Â 2018 Earnings Conference Call
Oct. 17, 2018, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, and welcome to the LegacyTexas Q3 2018 Earnings Conference Call. (Operator Instructions)
I would now like to turn the conference over to Scott Almy, Executive Vice President and Chief Operating Officer. Please go ahead.
Scott A. Almy -- Executive VP, Chief Operating Officer, Chief Risk Officer & General Counsel
Thanks. Good morning, everyone, and welcome to the call.
Before getting started, I'd like to remind you that this presentation may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The Company undertakes no obligation to publicly revise any forward-looking statement.
At this time, if you're logged into our webcast, please refer to the slide presentation available online, including our safe harbor statement on Slide 2. For those joining by phone, please note that the safe harbor statement and presentation are available on our website at LegacyTexasFinancialGroup.com. All comments made during today's call are subject to that safe harbor statement.
I'm joined this morning by LegacyTexas' President and CEO, Kevin Hanigan; and Chief Financial Officer, Mays Davenport.
After the presentation, we'll be happy to address questions you may have as time permits. And with that, I'll turn it over to Kevin.
Kevin J. Hanigan -- President & CEO
Thanks, Scott, and thank you all for joining us on the call this morning.
I'll make some general comments on the quarter and quickly cover the first few pages of the slide deck before turning the call over to Mays. After he completes his prepared remarks, we will open up the call for your questions.
About 90 days ago, as we ended our -- up our second quarter call, we mentioned that we looked forward to demonstrating the earnings capacity of LegacyTexas in the near future. Well, Q3 does just that. We had a record quarter in several important metrics, records in earnings, EPS, returns on assets and equity, our best efficiency ratio ever, our lowest level of NPAs ever and our highest level of demand deposits ever.
Let's turn to Page 4 of the slide deck and take a closer look. Net income for the quarter was $42.8 million, up only(ph)$14.1 million higher than our best quarter ever, which was Q3 of last year. EPS was $0.91 on a GAAP basis, and our core ROAA was a very impressive 1.88%. Loans held for investment grew $92.9 million, and our demand deposits continued to grow by $76.7 million, now representing 26.5% of total deposits.
Non-performing assets continued to improve by declining $8.7 million in the quarter and now total just $18.3 million. Our capital numbers have gained strength, with tangible common equity at 9.67% and estimated Tier 1 common risk-based capital of 10.46%. Page 4 is one of my favorite pages in this slide deck as it displays many of the records we achieved this quarter.
Loans were up 1.4% on a linked-quarter basis, hurt somewhat by the high payoffs in the latter half of the quarter. Impressively, demand deposits continued to grow by 4.5% on a linked-quarter basis and are up nearly 18% over last year. As you can see, our earnings related numbers were all up 49% to 55% over last quarter in the third quarter of last year. We are particularly pleased with our 1.88% return on assets and our 16.9% return on equity.
Slide 6 depicts our multi-year view of our impressive and steady loan growth. As the pie chart illustrates, we continue to have a well-diversified loan portfolio.
Turning to pages or slides 7 and 8, which cover our energy portfolio. I would just point out two things on these slides. Our non-LTXB led SNC portfolio is only 11% of our total energy book. And after several quarters of rebalancing ourselves away from SNCs, our reserve-based energy loans grew by $60.6 million in Q3.
Slide 9 is also a favorite of mine in this slide deck. At the beginning of this year, we stated two primary goals for the year. One, to get asset quality right. And two, to grow our demand deposits. Slide 9 shows the tremendous effort our team has made to get our asset quality back into a best-in-class position.
With that, let me turn the call over to Mays and he can cover how well we're doing on growing non-interest-bearing demand deposits.
J. Mays Davenport -- Executive VP & Chief Financial Officer
Thanks, Kevin. I'll start on Page 10, where I want to repeat what Kevin has already said a couple times. We grew non-interest-bearing deposits $76.7 million, or 4.5% linked-quarter and $269 million, or 17.6% year-over-year. That results in a record high percentage of non-interest-bearing deposits to total deposits of 26.5% on the way to our goal of having 30% of our deposits non-interest-bearing.
The success we've experienced comes as a result of heightened focus and hard work. First, we made deposit growth and specifically non-interest-bearing deposit growth a component of executive officer compensation for 2018 and then made sure all loan officers know their compensation will be affected by their success in this area. Second, we continue to see deposit growth from our insurance lending team. This deposit-rich customer base was quick to bring in loans, but it's taken longer to bring their deposits. We continue to see those deposits come in during Q3. Third, we have seen deposits come in from our energy clients. As we've moved away from SNCs, we've gotten into more sole bank energy credits or clients where we lead the credit relationships. In these relationships, we get the deposits which can be substantial as that either raise capital or sell assets. Last, we have migrated a majority of our clients in terms of dollars to our new treasury management platform. This includes some clients, where we actually put them off from moving deposits until we were able to deliver the level of service they needed with the new system.
Despite the strong non-interest-bearing deposit growth, overall deposits decreased $101.5 million from June 30. This outflow was centered around higher-priced money market accounts and public funds. We had approximately $193 million of public funds that were redeemed during Q3. About 40% were funds that the municipality needed for projects and the other 60% we lost to other banks; they were paying what we believe to be above market rates. Our cost of deposits, including non-interest-bearing demand deposits, increased to 87 basis points in 2018, up from 64 basis points in 2017.
Slide 11 shows net interest income for the third quarter of $85.7 million, an increase of $1.7 million, or 2.1% linked-quarter and $6.7 million, or 8.5% higher than third quarter of 2017. Net interest margin was 3.90% compared to 3.93% linked-quarter and 3.71% for the same quarter last year. Prior quarter NIM included 3 basis points from the recognition of loan fees on prepayments. So our NIM was essentially flat for the quarter.
Slide 12 depicts our continued disciplined expense management, with non-interest expense of $42.2 million, unchanged from Q2. As Kevin mentioned earlier, we had a record low core efficiency ratio of 42.5%. The efficiency ratio was favorably impacted by the higher level of net interest income and non-interest income. Non-interest income did include $1.5 million from the increase in value of our CRA investment funds and $1.3 million gain on the sale of our hospital ORE(ph), both of which would not be expected to repeat. I would expect efficiency ratio to move up to a more normal level in Q4.
Slide 13 shows the strengthening of our capital position at September 30, 2018. We ended the quarter with tangible common equity of 9.7%. We announced last night that as a result of strong capital accretion, the Board has approved an increase $0.06 to our dividend, increasing it to $0.22 for the quarter.
Operator, with that being the conclusion of our prepared remarks, let's go ahead and open up the line for questions.
Questions and Answers:
Operator
(Operator Instructions) The first question will come from Michael Rose of Raymond James. Please go ahead.
Michael Rose -- Raymond James Financial Inc. -- Analyst
Hey, good morning, guys. How are you?
Kevin J. Hanigan -- President & CEO
Good morning, Michael.
J. Mays Davenport -- Executive VP & Chief Financial Officer
Hey, Michael.
Michael Rose -- Raymond James Financial Inc. -- Analyst
Hey, Mays, maybe we can just start on the margin. So you guys have previously talked about keeping the margin in the 3.90% range. You have a headwind in the fourth quarter from the warehouse balances, which, I assume, aren't going to be down and loan to deposit ratio is around 100%. Appreciate the commentary and the good DDA growth and the progress you've made there. Treasury management should help. But as we think about some of the headwinds that you guys and everybody else are facing, I mean, is a 3.90-ish margin range still a realistic target as we move into next year? Thanks.
J. Mays Davenport -- Executive VP & Chief Financial Officer
Specific to fourth quarter, I think the 3.90-ish is a good number for Q4. Our model actually shows that number going up. And as you mentioned, we will see some lower warehouse (technical difficulty) increase that NIM. But just a couple of things. One, in September, we saw our spreads compress a little bit on loans. And then, I think we're going to have to continue paying up a little bit on deposits. We've got some broker deposits coming due that we'll have to renew. It will cost us a little bit more, so I do have some headwinds in that area.
And going out into 2019, I feel pretty comfortable with that 3.90-ish. Again, our model shows that number going up, but we continue to have the pressure on public funds, we have pressure on money markets. The key for us going into Q4 and then 2019 is going to be around our success with non-interest-bearing deposits. I mean, that's the -- as Kevin said many times, it's easy to make money when your cost of goods sold is zero. So, I think our NIM and continued increase in that is going to be dependent on our ability to grow those non-interest deposits.
Michael Rose -- Raymond James Financial Inc. -- Analyst
That's great color. And then, maybe separately, just on the held for investment loan growth front, you mentioned some pay downs. If you could give some color as to the dollar amount and if there's any sort of concentration in any of those pay downs? And then, as we think about moving forward, you guys previously talked about $125 million(ph)to $150 million(ph). Clearly, a lot of non-bank competition out there, and then just competition from traditional competitors. How should we think about your ability to continue to grow? And then maybe talk about some of the hiring initiatives. Thanks.
Kevin J. Hanigan -- President & CEO
Yes. Thanks, Michael. It's Kevin. I'll take this one. It's kind of an odd quarter for loan growth. First 45 days were really good. I'd say, we were up $85 million or $90 million, so well on track to do $125 million to $150 million. We were feeling pretty good at that stage of the game. And then, we went through about a two- or three-week period of time where we got hit with just a rash of payoffs, primarily in commercial real estate and C&I, and we were looking at a number of loan growth at zero for a couple of days; and here we were maybe 65 days into the quarter. And then, there was a rally from there to end up with the $92 million, $93 million-ish that we reported for the quarter. So, it was good, and then it was bad, and then it was good again.
I think $150 million is going to be challenging for the fourth quarter. I don't know if we can maybe put up $100 million to $125 million seems more realistic to us. There's just a lot of competition. I would say, the much hope for increase in loan demand from tax relief did not come. And to the extent it's come, it's come into the non-bank sources, whether that's BDCs, in our case, or debt funds, or for larger companies that have access to capital markets with longer term debt at these low rates. So I (technical difficulty) from a competitive standpoint. As you mentioned, it's a couple-fold bank competitors and there's more cash on balance sheets and more cash flow within our client base to fund a lot of things internally.
I would note to you, and I'm sure you guys all picked up on it, but this is the second quarter in a row we didn't grow our commercial real estate book of business, (technical difficulty) that business has grown every quarter for the 14 years prior to these last two quarters. So it's a really unusual time in commercial (technical difficulty) the way we have known it, and we have been unwilling to alter our model. I will tell you, we will remain unwilling to alter our model. That model has worked for us for a really long period of time. We're running hard, but it's a tougher environment in commercial real estate out there than I've seen in a really long time.
Michael Rose -- Raymond James Financial Inc. -- Analyst
Kevin, that's great color. Maybe just one more for me. Even with the dividend increase, capital is still going to build pretty nicely here. I mean, how should we think about you guys deploying? I mean, is M&A still in the cards? I mean, I know your valuation has kind of improved from where it was earlier this year, but, I mean, can you just give any thoughts as to how you would expect to keep that capital at (multiple speakers)
Kevin J. Hanigan -- President & CEO
Yes. First of all, Michael, you're right. Our models -- internal models show capital accreting even at a $0.22 dividend payout ratio and lower loan growth, obviously. We're in the budgeting process and planning process for next (technical difficulty) update our five-year plan. So we didn't want to get too far out there (technical difficulty) quarter. There's obviously room for that to go up.
M&A is always on the table, even though the market doesn't seem to really be rewarding much M&A to us in the last six or seven months. I think most deals that have been announced have traded down and we've all taken note of that. There are still things that are interesting to us. The same things that were interesting to us in terms of things we like to buy are interesting to us today. If one of those became available, we still (technical difficulty) recognizing that even if the market may not like it temporarily in the longer term, we think the things we're interested in make us a much, much better company. So, short-term (technical difficulty) is not going to scare us away from doing something. We don't have anything imminent at this time, but we're still talking to all the folks we used to talk to. But, as you know, it's a much more challenging environment in terms of market reaction to M&A, and we haven't seen any change in that of late.
Michael Rose -- Raymond James Financial Inc. -- Analyst
Great, guys. Thanks for taking my questions.
Operator
The next question will come from Brady Gailey of KBW. Please go ahead.
Brady Gailey -- Keefe Bruyette & Woods Inc. -- Analyst
Hey, good morning, guys.
Kevin J. Hanigan -- President & CEO
Hey, Brady.
J. Mays Davenport -- Executive VP & Chief Financial Officer
Hey, Brady.
Brady Gailey -- Keefe Bruyette & Woods Inc. -- Analyst
So if you look at the deposit base, non-interest-bearing has been up nicely last couple of quarters, but total deposits have been down, and I heard your comments on the public funds that exited the bank, but you're now at a 100% loan to deposit ratio. When do you think the new treasury management system will really help drive total deposit growth?
Kevin J. Hanigan -- President & CEO
I think we're there. We're experiencing it right now. The system became live in early September, just -- I mean, exactly right on the schedule we had it on from -- for our 10-month plan of this whole system. The earliest conversions on those systems were a handful of clients that work with us on being beta clients, hey, let's make sure this really works before you roll it out to a larger client set. So we did that in the first two weeks of September. The second two weeks, we kind of converted our simplest clients onto the system, and now we're converting everybody onto the system, including about a pent-up list of brand new clients, brand new to the bank in terms of deposits that we have been holding off in that list. If we include both the commercial and the retail side of that list, that list is probably 85 or 90 clients. Don't get carried away thinking, oh my gosh, that's a ton. The commercial side of that of any volume was probably 10 or 11 clients that have very meaningful volume.
So, I think we expect to see the results of the system this quarter and carrying into next year. As Mays said, if that's largely that we're hanging our head on and our current and last four or five quarters of success in non-interest-bearing DDA growth, as it pertains to NIM, we're going to have to pay up, Brady, on money market accounts and CDs. There is no doubt. The betas are going to go up there. We are (technical difficulty) the deposit ratio. And while today's policy at the Board level allows us to go to 110%, Mays and I, when we talk about this and we talk about it nearly every day, a 100% is kind of the limit in our mind that we need to drive that level down. And that's going to be two things, that's going to be continued growth in non-interest-bearing, we hope, at accelerated levels; and to pay up, if you will, on more wholesale-related or larger kind of money market accounts and CD stuff. It's common, but we think we can fight off the overall cost of liabilities with the continued growth in non-interest-bearing.
J. Mays Davenport -- Executive VP & Chief Financial Officer
Yes, that's what I was going to say, Brady, is that -- I mean, we can't and we don't expect for that treasury management DDA kind of growth to handle all of our loan growth. So, unfortunately, loan to deposit ratio is a point in time, so it's calculated on the last day of the quarter, and you'd have no control over our clients. So, in this particular quarter, right at the very last couple days, we had some fairly large deposits go out of the bank, specifically public funds. So, those are things you can't necessarily plan for, because, I've mentioned before, it's (technical difficulty) managing our loan deposit ratio. So, as Kevin mentioned, our goal is to stay below 100% loan to deposit ratio, and we'll do that by whatever means possible, obviously, focusing on the cheaper sources of funds from our core deposits.
Brady Gailey -- Keefe Bruyette & Woods Inc. -- Analyst
All right, got it. And then, I know, 90 days ago, Kevin, you talked about kind of a new loan monitoring system or an early warning system that you guys put in place. We were looking at performing both(ph)classified and criticized energy loans, and I know they went up pretty meaningfully in the quarter. Was that as a result of this new early warning system?
Kevin J. Hanigan -- President & CEO
It was. Let me give you all a little color on this, and I fully recognize we were kind of the credit crap(ph)show there for several quarters and we believe that's behind us, but it doesn't -- this is our first really cleaner quarter, so we get answering questions about credit maybe for the next several quarters. The early warning system was put in place, and that's a big part. I'd say, two of those three credits, Brady, were early warning system credits that were moved into the criticized category. It's important, probably, for you all to know what criticized category actually means. It's a very low bar to get in there to boil down about a page and a half of regulatory definition. To get in the criticized category, the credit must have a potential weakness. It's just as simple as that. It's got a -- that could be a disruption in supply chain, that could be a slowdown in liquidity due to receivables collection extending, that could be the death of an owner in a sole proprietorship. So it doesn't take much to get into that category. And as an illustration of that, in the last two quarters, we've had something get into that category and get out of it intra-quarter. So, those things tend to not stay in this category for very long. They're either getting better or getting worse.
The classified category definitionally is a potential weakness that's gone unresolved and it's become a defined weakness. So, it's -- you had a potential weakness and it hasn't been in, let's call it, a six-month period of time. You don't see it in the criticized category for very long, you either get better or you get worse. And if you get worse or unresolved, you've moved into classified.
And then the last one is the NPAs, where we're obviously doing really well. In NPAs, I would just say, is -- that would be a defined weakness plus an impairment. So, that's probably 15 pages of -- I have the regulator's handbook boiled down into some really simple terms. So we had two energy credits that moved into that potential weakness category. One of those was the death of an owner. It was a $21 million credit, so that was the bulk of that. The other one was a temporary -- what we believe is a temporary liquidity tightness. That company is out raising capital. They've got circled(ph)$35 million out of a $50 million capital raise that should close in November. So I think those two are well on the road to recovery.
The third downgrade and the other thing we did outside of our early warning system is we've got (technical difficulty) independent reviews of our credit portfolio a year. We've hired an outside firm, basically ex-bank examiners, to come in and report to our Board three times a year on credit quality after going through our portfolio. And then we have, like everybody does, one safety and soundness exam. So, we got a lot of highs on credit. That third downgrade, which was a $9.7 million credit, came from an external source. We didn't argue with them about the downgrade. We had a slight disagreement, but we accept an opposing view when we go to the lowest common denominator here.
The real important thing, when it gets into this category to me, is not the grade we put on, it gets to the next three questions I ask, which is, is it impaired? And in this case, the answer clearly came back from (technical difficulty) on it. No, it's not impaired. Do we have a plan? Yes, we have a plan. And how long is it going to take us to execute the plan? Those are the three questions I asked, and I got really good answers to all three of those on this credit (technical difficulty).
The company is up for sale. Some of the early bids are in, and the bids are coming in not a ton in excess of our loan value, but they're in excess of our loan value. So, (technical difficulty) I hate the fact that that happened, and then otherwise, fantastic quarter. I'm really satisfied with the answers I'm getting on it.
(technical difficulty) on NPAs. Our remaining NPAs are really -- they're down. Guys, it's $18 million on a $9 billion balance sheet. That is low. And it's not only low, this is different from our NPAs of the past, these are really granular. Almost 40% (technical difficulty) NPAs as consumer loans and 90% of that are single-family first mortgages, and that's spread among 75 Notes, right. So it's -- you're talking to average loan size of less than $100,000 a pop. I will tell you, the largest in there is $1 million; the second largest is less than $600,000. So it's -- and that's not an asset class that has a whole lot of loss given default. We got about $6 million in C&I; that's 23 Notes. So, again, granular. There's one -- larger one in there. The largest one is $1,581 million(ph)to be exact. So (technical difficulty) number. We got one left in energy. I think you know straggler(ph), it's $1.281 million. And then in CRE, there's six notes totaling $3.9 million, probably $3.1 million of that $3.9 million is one deal. It's owner-occupied facility that's nice. So we're -- we think we've got an appropriate mark on that.
So it's small and it's granular. As you all know, and this was -- that first part is all of a calm down any fears. Now I'm going to instill a little fear, is that -- because this is not going to be as good. If we look at this, 20 basis points clearly ranks us in the top decile for NPAs, no question about it. I'll give you a data point. Go to the KRX. The medium for the peer in the KRX is 63 basis points NPAs to assets. So we are miles better than the 63 basis points. And again, calming, I believe this number is going to go lower before it goes higher. We are on the verge of solving a couple other meaningful NPAs in this quarter, I believe. So there is a -- if I just look at where we stand today, Brady, there is a really good chance we end the year up with less than $10 million(ph)in NPAs in this bank. That is incredible, but it's unrealistic, OK?
The market is at 63 basis points. We think the costs of the early warning system. We think the cost maybe we've been sensitized to credit before others have been, because we did have a bit of a credit crap show for several quarters. Our sensitivity is high to this. I don't think we're going to return to where the market is at 63 basis points. We intend to be better than them, but we can't remain at 10 or 20 basis points forever either. We're in the risk business, and we'd like to stay in the top quartile. So, while I think it's going to go down in the near term, over a period of time, our NPAs are going to look more like we're in the top quartile of business rather than the top decile of the business. We're just -- we have to be realistic about it. We're a spread lender with 100% loan to deposit ratio. It's good to be in the top quartile. We're (technical difficulty) top decile, but I don't think that lasts forever, because of the nature of the business we're in. We take risk.
So the good news is, I'm not worried and things are going to get better, and that's just a fact, OK? Those are just facts. The bad news is, my belief is this number doesn't go down forever, it begins to go back up. So, just a shot across the bow that we're great but we're not perfect.
Brady Gailey -- Keefe Bruyette & Woods Inc. -- Analyst
That's great color. Thanks, Kevin.
Operator
The next question will come from Brad Milsaps of Sandler O'Neill. Please go ahead.
Brad Milsaps -- Sandler O'Neill & Partners LP -- Analyst
Hey, good morning, guys.
Kevin J. Hanigan -- President & CEO
Good morning, Brad.
Brad Milsaps -- Sandler O'Neill & Partners LP -- Analyst
Mays and Kevin, just wanted to follow up on the NIM a bit. You guys continue to hold your interest-bearing savings and money market deposit costs below 1%. Even the interest-bearing deposit costs went down, I think, about 23 basis points linked-quarter, probably because of the public funds leaving the bank. Just kind of curious, as you think about the $400 million, $500 million of loan growth that you expect over the next year, and if you can maybe fund 25% or 30% of that with DDA, how do you think about the cost of those categories kind of moving higher? Is it -- at the margin, do you need to fund closer to 1.75% or 2%? Just kind of wanted to get a sense of kind of where, in your mind, those numbers could be headed.
Kevin J. Hanigan -- President & CEO
Yes. Before Mays gets to that, he's way better to answer that than I, I want to cover one part of it. I think we're going to do better than 25% funded through DDA. I mean, if you just look at the last four quarters of DDA growth, we had a couple -- we had a $47 million(ph), I think, in there; we had $100 million(ph)in the fourth quarter of last year; we had a $60 million(ph)something last quarter; we had $70 million(ph)something this quarter; all without the new system. So, that was just based on grinding things out, hard work, incentives and the insurance group. But it is our belief we're going to fund more than 30% of that through the DDA growth, but --
J. Mays Davenport -- Executive VP & Chief Financial Officer
Kevin stole my thunder. That was (multiple speakers) good part of the answer. The decrease in rate that you noticed on one of the categories there on the interest-bearing demand deposits was really just a reclass. We've got some broker deposits that -- one-way broker deposits that depend on how the -- ultimately the depositor wants those, whether they're in the form of interest-bearing demand or money market. So that was really just kind of a reclass, and that was what really impacted that. It wasn't so much public funds. So that was just to clear that up of why there was a little bit of reclass there.
But yes, I think, going forward, I mean we're seeing -- and I think you said 1.75% to 2% in terms of rate, I mean, we're seeing, from a money market, new -- specifically new money, money market accounts coming in at the 1.75% to 2%. It could be a little bit higher. I mean, if you remember our correspondent account is Fed Funds plus (technical difficulty). So we're looking at 2.50%(ph)range in that. While we've been decreasing that account and we've seen money flow out as we get closer to the 100% loan to deposit ratio, those deposits start looking a little bit better.
So, the process is just trying to get the cheapest bonds that we can get, and we do that typically from our core (technical difficulty) competing with Bank of America, Wells Fargo, because they're still getting next to nothing from those banks on the stated rates. But we do have about, what, $2 billion(ph)in retail deposits that come from about (technical difficulty). And those are all looking at the ads from BBVA/Compass; they're looking at Capital One. And those are ones that, as I've mentioned before, call the day after -- a couple of days after a rate increase. So, those are ones, in addition to the correspondent accounts, that have close to a 100% beta. We do our best to get them to bring in more dollars. We do our best to give maybe 60% to 70% of the rate increase (technical difficulty). But those rates are continuing to increase and will continue.
And like I said, the public funds, I think, we've got maybe one bank in this area, maybe two that are really paying off. They've got some kind of liquidity (technical difficulty) continue to lose out not just by a basis point or two, but substantial amounts, 10, 15, 20 basis points on these public funds. So, just toward -- just in this month, we've started winning some. So I'm thinking maybe they're moving out of the market (technical difficulty) for liquidity. So maybe rates will get a little bit more reasonable, and we'll actually have some success in public funds. But our model, as shown, is going over 4% NIM in 2019. As I've mentioned, I don't really trust that; I don't believe it, because of the competition. And that's why, I think, we -- but I think we can stick in the 3.90-ish range for all of next year.
Brad Milsaps -- Sandler O'Neill & Partners LP -- Analyst
Great, that's helpful. And maybe just to follow up on the flip side of that. Everyone's focused on deposit betas. But, Kevin, just kind of curious -- on the asset side of the balance sheet, you talked about competition, but just kind of curious what you guys would expect? And Mays, maybe you touched on this a bit, from additional Fed Fund moves or moves in LIBOR, as it relates to your loan book, kind of vis-a-vis, all the competitions that are out there competing away higher rates?
Kevin J. Hanigan -- President & CEO
Yes. Again, we've held the line on those across the Board, Brad, as best we can, but in a lot of respects, that's cost us some loan growth that we've been so far willing to let it cost us. It's a -- this was a competitive market for loans, and I think it is across the country. This is a particularly -- DFW is a particularly competitive market on the deposit side. I think the pressure we feel will be most intense in the mortgage warehouse business. I think you've probably seen that in the early releases to date that the weighted average coupons have not gone up nearly as much as one would think with the Fed hikes. We were fortunate to hold a 15 basis point increase Q-over-Q. I just think, if you wanted to ask me about my wall of worry for next year -- this quarter and next year is, I think the mortgage warehouse business is going to be a tough business for a period of time (technical difficulty) here. With rates going up, that doesn't help -- with interest rates going up, that doesn't help. Lot of competition in the business that doesn't help, the likes of rocket mortgage and technology doesn't help. I just feel like gestation periods, both length and time, these loans sit on our balance sheet are going to go down from 14 days to something much lower over time.
The (technical difficulty) business is going to continue to (technical difficulty). The purchase business will get weaker as rates go up. That's a business I'm worried about in terms of volume for 2019 more so than any other business we're in. We're fortunate it's only $1 billion category. But it wouldn't surprise me if, in Q4, that category is off on an average basis, Brad, $250 million. (technical difficulty) average in Q4 and probably something similar to that in (technical difficulty) guessing today. And again, longer term, I think dwell times go down, and competition keeps pricing -- keeps pushing pricing down. I said this to our Board and I said this to a group of investors that were in town, I think we just had our last really good quarter in mortgage warehouse for a really long period of time.
Brad Milsaps -- Sandler O'Neill & Partners LP -- Analyst
Thanks, Kevin. That's really helpful.
Kevin J. Hanigan -- President & CEO
Thank you very much.
Operator
The next question will come from Brett Rabatin of Piper Jaffray. Please go ahead.
Brett Rabatin -- Piper Jaffray -- Analyst
Hey, guys. Good morning.
Kevin J. Hanigan -- President & CEO
Good morning.
J. Mays Davenport -- Executive VP & Chief Financial Officer
Good morning.
Brett Rabatin -- Piper Jaffray -- Analyst
Wanted to just talk about the warehouse a little more for a second. Was there -- you mentioned, Kevin, some of the non-bank competition, but did it seem like in the quarter that there's one bank that's kind of trying to consolidate the industry to some degree and was that a bigger issue than anything else this quarter, because one bank has been super aggressive with rate?
Kevin J. Hanigan -- President & CEO
I wish it was one. I think it's more than one, and the one you're thinking about is obviously aggressive. What I think we see happening is the banks who do a lot of mortgage servicing, financing and have tons of deposits from those mortgage servicing clients, I mean tons of deposits from them, those clients, over the last, call it, seven years really haven't had to leverage that deposit relationship; they haven't had to lever -- to leverage those deposit relationships very much. But with rates going up now, they're going to their bank who's in their mortgage warehouse facility saying, hey, we got $0.5 billion in DDA with you guys that we don't own but we control, and you can't pay us for these DDA, but you can lower the rate on your mortgage warehouse facility for us to make up for it, or we're going to move those deposits. So, that dynamic is probably the principal dynamic creating pressure on weighted average coupons, and that's not going to go away. As rates continue to go up and if we get more rate hikes, that's going to get even more intense. That's -- we don't have a whole lot of deposits related to our mortgage warehouse business, it's probably less than $100 million.
So, what we see happening -- and I could talk very specifically about, what we see happening is our multi-bank clients who have deposits somewhere go get a really cheap rate from that bank and then come down and try to part that rate on us. And we give a little bit but we don't give 50 basis points. We give -- we try to give 10 basis points, we try to give 5 basis points; sometimes we give 15 basis points; rarely do we give 25 basis points(ph). So we're fighting for every basis point in that business. It's just going to get tougher and tougher and tougher as rates rise. And those non-interest bearing deposits that they control, they're going to continue to lever, just like they did in every other cycle.
And lower volume -- the last thing I'd say about the businesses we're going deeper into it is, of lower volumes, these customers are having trouble making money, they're not making anywhere near what they were making a year ago (technical difficulty) numbers and comp numbers over last year looked pretty awful, right. So, that coupled with the lack of technology for a lot of these folks, I think, is going to drive an M&A wave in the business in the next couple of years. And the M&A wave makes this worse for us, banks, to further climb my wall of worry, you have merged two companies together and they might have 12 banks between them and they don't need 12 banks going forward, because volume is down, right. (technical difficulty) what kind of coupon you'll take this stuff (technical difficulty) going to pick the best six. Well, that's just -- again, I think we just experienced the last good quarter, at least for us (technical difficulty) when people run. But for a really long period of time, I am planning on that business being worse than it was in Q3.
Brett Rabatin -- Piper Jaffray -- Analyst
Okay. That's helpful. And then the other thing I wanted just to touch on was energy and what you're doing now. Do you have a goal, Kevin, of kind of getting the SNC portfolio down, or will you grow the energy book more overall, and do you think about kind of a level that you're comfortable with? Can you give us maybe a little more thoughts on your longer term plan with the energy book and what you're trying to achieve there?
Kevin J. Hanigan -- President & CEO
Yes. Look, I think it's going to stay at about 7%, 7.5% of our loan assets. That's -- it's not going to grow from where it is relatively speaking other asset classes. We've had all the fund we could stand in the energy business. I don't -- we don't want it to be bigger.
As it pertains to SNC, our goal was to get it down but not to zero. I mean, to give you a case in point, we've got a couple of really good credits that we lead that are $90 million(ph)in drilling, and they're going to go up above $100 million(ph)and be classified as SNC. So we're not going to kick them to the curve, because we're leaving the credit. We've got a couple others that we're in that weren't SNCs, because they were $85 million(ph)or $90 million(ph), that are now $105 million(ph)or $110 million(ph). We've elected to stay in those. What we will not be in is taking a $15 million or $20 million piece of a $400 million credit led by one of the big four or five, and we're the only smaller bank in it. That's where we suffered outsized pain for the size of the bank we are, particularly in the gas side. We have done a exhaustive study on where we went wrong in oil and gas, and that was where we went wrong 101(ph)top of the list. The other interesting thing that's come out of that study is 70% of our losses were in gas-heavy names. Gas has just always been a more volatile side.
So, Brett, it's going to stay about where it is in terms of relative size on the balance sheet, it's going to be concentrated in sole bank deals. What we are finding in these sole bank deals, if something does have a potential weakness, we can deal with it in a matter of weeks or a month, because we don't have to talk to anybody else. So if you're in a syndication, you got a consensus building, you got opposing opinions, it just takes time. Our early warning system pops something up and we are on it literally that afternoon. We're working on a plan without having to call anybody else. And I've liked that side of the business. So, long answer, but I hope that covered it.
Brett Rabatin -- Piper Jaffray -- Analyst
Yes. No, that's very helpful. Thanks, Kevin.
Operator
The next question will come from Matt Olney of Stephens. Please go ahead.
Matt Olney -- Stephens Inc. -- Analyst
Hey, thanks. Good morning, guys.
Kevin J. Hanigan -- President & CEO
Hey, Matt.
Matt Olney -- Stephens Inc. -- Analyst
I want to go back to the mortgage warehouse discussion. And I appreciate all the commentary you're giving us. One of the things you mentioned was the potential for dwell times to slow. Is that the thing you're seeing yet, or you're just kind of doing the math thinking over time it's going to -- it's more inevitable it's going to happen?
Kevin J. Hanigan -- President & CEO
That not seeing it yet. But e-notes and e-signature notes and things of that nature, and some of the technology out there, I firmly (technical difficulty) conviction about the dwell times is going down, supported by talking to our guys who also believe they're going to go down, guys (technical difficulty) the business every day. They have (technical difficulty) Matt, at 14 days for -- I think this is the fourth quarter in a row. Actually, this quarter was 15 days, and it actually went up, so it's contravening to my thesis here, but they went up because of the hurricane volumes in September, dwell times extended in the month of September, which pulled the 14 days up to 15 days. So I think that's going to revert right back to 14 days. I just think, over time, it's going down because of -- first of all, because of e-notes; and second of all, because of the things like rocket mortgage. They've come out of nowhere to be the largest mortgage lender in the country, because they got a better mousetrap.
Matt Olney -- Stephens Inc. -- Analyst
And remind me of your funding strategy of the warehouse at LegacyTexas.
Kevin J. Hanigan -- President & CEO
A large part of that is funded by the Federal Home Loan Bank.
Matt Olney -- Stephens Inc. -- Analyst
And so, as far as the impact to the overall margin, Mays, you were saying before, if the warehouse did contract considerably in the fourth quarter, wouldn't that help the margin, if I'm doing my math right?
J. Mays Davenport -- Executive VP & Chief Financial Officer
Well, it's a very low-margin business. So if we're borrowing from the Federal Home Loan Bank at 2.25%(ph)and then we're lending out on LIBOR plus 2.50%(ph), so we're maybe at 4.68%(ph), I think was our average yield. I mean, you're only looking at a spread of two-thirds (technical difficulty) like that. So it's a fairly low spread. So as that business comes down, NIM is positively impacted.
Kevin J. Hanigan -- President & CEO
That's part of the -- Mays talked about our modeling shows NIM going up and being above 4%(ph)next year. That's part of it, but the warehouse brings NIM down. It used to not do that; it does now.
Matt Olney -- Stephens Inc. -- Analyst
And then, Mays, I think you also mentioned earlier that the spreads compressed during the third quarter. Can you talk about -- more about the spreads compressing and how much of that was from the LIBOR drag in July and August? I just can't recall how much of your loan book is LIBOR versus prime and how much is variable?
J. Mays Davenport -- Executive VP & Chief Financial Officer
LIBOR is about 50% of our floating rate?
Kevin J. Hanigan -- President & CEO
Yes.
J. Mays Davenport -- Executive VP & Chief Financial Officer
Yes, somewhere in there. So what I mentioned earlier wasn't (technical difficulty) we had a little tightening in those spreads, but I do think that that (technical difficulty) did have an impact on spreads for (technical difficulty) to project into Q4 and then also into 2019 what's going to happen there. But, I think, my hesitancy is again the model showing over 4%(ph), I think is just a gut feel that there is going to be competition that's going to make that more difficult.
Matt Olney -- Stephens Inc. -- Analyst
Understood. Thank you, guys.
Operator
The next question will come from Gary Tenner of D.A. Davidson. Please go ahead.
Gary Tenner -- D.A. Davidson & Co. -- Analyst
Thanks, Kevin. Excuse me. Thanks, and good morning, guys.
Kevin J. Hanigan -- President & CEO
Good morning.
J. Mays Davenport -- Executive VP & Chief Financial Officer
Hey, Gary.
Gary Tenner -- D.A. Davidson & Co. -- Analyst
Hey, just want to clarify a couple of things. First on the three credits you were talking about as you're running through the classified and criticized loans. Were all three of those -- was that the total increase in classified plus criticized, or were those only the -- was that only the increase in criticized?
Kevin J. Hanigan -- President & CEO
About $26 million of that was in the criticized category. That was the death of the owner, $21 million; and the guys outraising capital was a $5 million deal. And then there was a $9.7 million, to be exact, increase in the classifieds, and that was a third-party review. I'm mindful it was the only one all year, only third-party review downgrade of the year. We're pretty good at grading these things ourselves. But we just didn't disagree with them, we said that we went to questions two, three, and four right away, which was, are we impaired? Do we have a plan? When can we execute the plan?
Gary Tenner -- D.A. Davidson & Co. -- Analyst
Okay, got you. I just wanted to make sure those three covered the whole delta(ph)there.
Kevin J. Hanigan -- President & CEO
Yes, that did.
Gary Tenner -- D.A. Davidson & Co. -- Analyst
And then, the increase in the non-LTXB led shared national credits in energy, just to clarify as well, that was driven simply by some of those credits growing into --
Kevin J. Hanigan -- President & CEO
Yes. So the new origination, it was a -- the new regulatory definition, it's got to be over $100 million in three banks or more. And we (technical difficulty) written that was -- I think, it was a $95 million credit, went to $110 million, because of some drilling success, and we elected to stay in the credit. It's a very clubby deal. So, what I was trying to get across is we're going to be out of the large bank, large deal syndications that have a ton of banks in them. We'll still, from time to time, Gary, do something that's called a SNC, but it'll be, what I call, a very clubby deal. It will be (technical difficulty). And it will be closer to $100 million, not $250 million. It would be unusual for us. And I would say we probably would not enter a credit facility that was $250 million.
Gary Tenner -- D.A. Davidson & Co. -- Analyst
Okay, thanks for that color. And then just last question from me, related to the mortgage warehouse, my recollection was that you guys run that as a pretty lean operation in terms of headcount. Is that right? I mean, is there any -- as you look at your business, your expectations for the warehouse business overall over time, is there any opportunity in terms of cost related to that to offset maybe similar volume?
Kevin J. Hanigan -- President & CEO
(technical difficulty) portfolio on it's exactly 45 names of customers in that portfolio. We have three lenders and then a back-office staff. And it -- it's -- while it's a low margin business, it is a very efficient business. I mean, probably our most efficient business. So, what we give up on the margin, we make up in terms of non-interest income. It's sufficient, and the room for (technical difficulty) further improvement in efficiency.
Gary Tenner -- D.A. Davidson & Co. -- Analyst
Okay. Thank you for the additional color. Appreciate it.
Operator
The next question will come from Michael Young of SunTrust. Please go ahead.
Michael Young -- SunTrust Robinson Humphrey -- Analyst
Hey, good morning.
J. Mays Davenport -- Executive VP & Chief Financial Officer
Michael. Good morning, Michael. I think they've taken all of the questions for you.
Michael Young -- SunTrust Robinson Humphrey -- Analyst
Almost. They let one slide through to me (technical difficulty) efficiency ratio. So just wanted to touch on that real quick. Obviously, very good expense control again this quarter, efficiency ratio dropping down. You had a branch exit expense this quarter. So just kind of wanted to get an outlook on when you'd be able to exit that branch, and any kind of future outlook on the expense side, especially now with a little slower loan growth, will that allow you to keep that expense level flat or pretty low growth for a long time.
J. Mays Davenport -- Executive VP & Chief Financial Officer
Yes, I was getting my feelings hurt, and I believe that's the (technical difficulty). So, thank you, Michael for getting there. Yes, for Q4, I do think that expenses will probably be flat from where we were in Q3. We had kind of a shifting in Q3 between salaries, which were up substantially for Q3, but that was primarily related to a higher stock price, which we had to catch up a little bit on the stock-based compensation. And then, we also had -- because of our continued strong performance, specifically in ROE area, we were -- had a little bit of catch up to do on our bonus accrual. And so, you saw that increase, but then you also saw some expenses such as consulting and legal and advertising expenses that were a lot lower. And we typically have that in Q3. We just don't advertise a lot. But what you'll see is that kind of flipping in Q4, you'll see advertising and other non-interest expenses going up a little bit, whereas salaries, I think, will be down from where they were in Q3. But on whole, I think we'll be pretty much flat in the fourth quarter.
Going into 2019, I do think you're going to see some increase. First of all, we've got a 3% -- 3.5% (technical difficulty) increase in salaries. So, (technical difficulty) February-March timeframe. So I see it's getting more in the $43.5 million to $44 million a quarter from non-interest expense on the higher end of those in Q1, as we have payroll taxes that start over in the first quarter of the year. And then we -- as you mentioned, we did have one branch that we're closing. I think we're closing it at the end of this month. And so, you'll see some personnel costs. Really, it's a shifting. We don't typically let those people go. We actually -- it's only two or three people that we'll just do attrition, move them to other locations and absorb them through that. So, from a rent perspective, it's probably one of our higher cost locations. That will help a little bit from rent, but that is closing in the end of this month.
Kevin J. Hanigan -- President & CEO
Yes. And just one last point of clarification, just to nail that down, I think, while it closes at the end of the month, we have expenses associated with it through end of the (multiple speakers) through the end of the -- oh, sorry, never mind. Through the end of the year, so the cost save I thought was coming next year (technical difficulty) it will come in this quarter.
J. Mays Davenport -- Executive VP & Chief Financial Officer
Yes. And as Kevin mentioned, I mean, while NIM has improved by strengthening warehouse, the efficiency ratio goes back up as warehouse comes down. So that's why I cannot, in my comments, say that I do believe that NIM will get more in the -- I'm sorry, efficiency ratio will get more to the 44%, 45% area for Q4.
Michael Young -- SunTrust Robinson Humphrey -- Analyst
Okay, great. And one last follow-up just on the loan growth. Given the competition you're seeing in the CRE space, are you seeing greater strength in just kind of core C&I, or do you see other areas that you might pursue to kind of drive growth, or is really kind of the CRE growth going to be the ultimate determinant where loan growth ends up kind of as we move forward?
Kevin J. Hanigan -- President & CEO
Yes. And I think we're going to -- we don't have anything new planned. New wasn't so great to us when we got in the healthcare, and we're still smarting from that to be very, very frank and honest with you. We're hopeful that CRE does pickup for us. We have a lot of clients fortunately, but by the very nature of their business or by the nature of their partnership agreements with their pref equity that require low leverage. And we're going to continue to win with those guys. I think, despite the pouring rain yesterday, I was out with our Head of Real Estate yesterday going through a project for one of those kind of clients. And it was good to hear for a change, I'm not talking to anybody else, I just need to hear yes out of you guys on this really nice project he's working on.
So we're going to continue to win with that client base that believes in low leverage. But once (technical difficulty) pricing is more about leverage. People are doing what we traditionally do with 75% and 77% LTVs, and we're a 60% LTV lender. This thing yesterday was a $75 million project, and they're like, we'll put in 42% of the money, 40% of the cost of the project and all of the attendant costs around that, including your loan fees and everything else. So we need you in for 59% -- 58% or 59% LTV, 60% of cost. That's our sweet spot. We'll continue to win those and I'm hoping this quarter we get a few more of them, and we do see some growth in CRE. I'm feeling better about it, just based upon the first 18 -- 17, 18 days of the quarter.
Michael Young -- SunTrust Robinson Humphrey -- Analyst
Okay, great. Thanks guys.
Operator
The next question will come from Charles Griege of Blue Lion Capital. Please go ahead.
Charles W. Griege -- Blue Lion Capital -- Analyst
Good morning, guys.
Kevin J. Hanigan -- President & CEO
Hey, Chuck.
J. Mays Davenport -- Executive VP & Chief Financial Officer
Hey, Chuck.
Charles W. Griege -- Blue Lion Capital -- Analyst
This was a really good quarter. Just a couple follow-up questions, based on what has been asked previously. You're guiding to solid loan growth, good cost controls, even improving credit, with core earnings in the quarter being probably somewhere between $0.85 and $0.88. $0.90 a quarter looks very achievable. When we get into 2019, what are the ingredients in your opinion to get you to $1 share of earnings? Is that sustainable? And how does the $10 billion asset level weigh in on that? Thanks.
Kevin J. Hanigan -- President & CEO
Yes, good question, Chuck. I think the core ingredients are really simple. It's a little better loan growth, right. Then with the $92 million, it's continued growth in DDA, which I think we're going to have. So out of those two, it's how do we drive a little better loan growth than we've been driving, while funding it reasonably because of growth in DDA and its continued expense control management. I feel really good about the DDA and I feel really good about the expense control management. Those are two things that we are exceptional at.
We are looking at ways to drive the better loan growth. And we may have to give up a little bit on pricing to win a couple of these things. Again, I don't mind that. I'm not going to give up on structure. And if structure just isn't there, we won't get (technical difficulty) to get us quickly to $1, Chuck. But, look, that dollar a quarter is in our heads of what we talk about, what it would take to get to $1 a lot. So those are the characteristics. As it pertains to $10 billion, we still have a pretty heavy cost of $10 billion, because of Durbin. It's $5.3 million or $5.4 million pre-tax for us, so it's $4 million after tax. So it's about a $0.095 a share. It's not overwhelming, but it's meaningful.
As I look at next year and because my bearish outlook, which I would love it for it to be wrong on the mortgage warehouse, but I think it's going to be right. Because of the bearish outlook on warehouse, (technical difficulty) M&A acquisition and if we grew $400 million to $500 million, we end next year at below $10 billion. I mean, it's -- the weakness in the warehouse may allow us again outside of an M&A transaction, which if we saw the right one we love to do, I think we can go another year staying below $10 billion.
Charles W. Griege -- Blue Lion Capital -- Analyst
Okay. And at a high level, what are you seeing economically in your core markets, principally Dallas, and then you sprinkle(ph)in Fort Worth and Houston?
Kevin J. Hanigan -- President & CEO
Chuck, really strong. I mean the market is strong. This is a very -- you live here, so it's a vibrant community, it remains a vibrant community. People are still migrating here from the salt states in (technical difficulty) numbers. So I think we're going to continue to have really good job growth, and this economy is good.
As I look at the broader picture, now I was looking at (technical difficulty) is relatively high. It's just not on bank's balance sheets today. But if I compare net debt to EBITDA, it's at 2006 year-end levels, all time (technical difficulty) and that's not a great data point. The good news is, as I look at that, the banking sectors proportion of that is actually way less than it was in 2006. The category that's grown tremendously and I've got numbers on this, if anybody wants to call, I'll get them to you, is the non-bank lender and the public markets, the people have issued public debt. Is that a worrisome data point? It is a data point. It's probably less worrisome to me than it was in 2006, because the nature of the debt today is different, A, it's not on bank balance sheets largely; and B, its longer term. People have taken the opportunity to push out maturities. So if we built a maturity wall of the debt today versus 2006, it looks materially different. So the pressure it puts on cash and cash flows for corporate America is nowhere near what it was in 2006.
So, we're looking at all data. Not all the data points are great. Dallas is great; Texas is great. We're going to continue to do well. There are some opposing data points out in the marketplace like that one. That can be scary until you look behind it. And while there's a good reason not to be as scared, it is a 2006 level. So, just something to be, in our minds, cautious about.
Charles W. Griege -- Blue Lion Capital -- Analyst
All right. Thanks a lot.
Kevin J. Hanigan -- President & CEO
You bet.
J. Mays Davenport -- Executive VP & Chief Financial Officer
Chuck.
Operator
This concludes today's question-and-answer session. I would now like to turn the conference back over to Kevin Hanigan for any closing remarks.
Kevin J. Hanigan -- President & CEO
Great. Thank you all for participating (technical difficulty) really, really great quarter for us. We think we're going to continue to get even better, as I mentioned, on credit, at least in the near term, and look forward to being out on the road here for the next couple of months talking to you all face to face. See you then.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.
Duration: 62 minutes
Call participants:
Scott A. Almy -- Executive VP, Chief Operating Officer, Chief Risk Officer & General Counsel
Kevin J. Hanigan -- President & CEO
J. Mays Davenport -- Executive VP & Chief Financial Officer
Michael Rose -- Raymond James Financial Inc. -- Analyst
Brady Gailey -- Keefe Bruyette & Woods Inc. -- Analyst
Brad Milsaps -- Sandler O'Neill & Partners LP -- Analyst
Brett Rabatin -- Piper Jaffray -- Analyst
Matt Olney -- Stephens Inc. -- Analyst
Gary Tenner -- D.A. Davidson & Co. -- Analyst
Michael Young -- SunTrust Robinson Humphrey -- Analyst
Charles W. Griege -- Blue Lion Capital -- Analyst
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