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Independent Bank Group Inc  (NASDAQ:IBTX)
Q4 2018 Earnings Conference Call
Jan. 29, 2019, 8:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Good day ladies and gentlemen, welcome to the Independent Bank Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. (Operator Instructions) I would now like to introduce your host for this conference call, Mr. James Tippit. You may begin, sir.

James Tippit -- Executive Vice President Head of Corporate Responsibility

Good morning everyone. I'm James Tippit, Executive Vice President, Corporate Responsibility for Independent Bank Group. And I would like to welcome you to the Independent Bank Group Fourth Quarter 2018 Earnings Call. We appreciate you joining us. The related earnings press release and a slide presentation can be accessed on our website at ibtx.com.

I would like to remind you that remarks made today may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and expected results to differ. We intend such statements to be covered by safe harbor provisions for forward-looking statements. Please see Page 5 of the text in the release or Page 2 of the slide presentation for our safe harbor statement.

All comments made during today's call are subject to that statement. Please note that if we give guidance about future results, that guidance will be only a statement of management's beliefs at the time of statement is made, and we do not publicly update guidance. In this call, we will discuss a number of financial measures considered to be non-GAAP under the SEC's rules. Reconciliations of these financial measures to the most directly comparable GAAP financial measures are included in our release. I am joined this morning by David Brooks, our Chairman, CEO and President; Dan Brooks, our Vice Chairman and Chief Risk Officer; and Michelle Hickox, Executive Vice President and CFO. At the end of their remarks, David will open the call to questions.

With that I will turn it over to David.

David Brooks -- Chairman, President and Chief Executive Officer

Thank you, James. Good morning. We appreciate all of you joining us for today's call. I will briefly touch on some of the highlights for the quarter, Michelle will cover the operating results and Dan is here to cover the loan portfolio. And I'll be back at the end with closing remarks and to open it up for questions. 2018 was a good year for our company. We reported another year of strong earnings with adjusted net income of $132.2 million for the year representing a 48.7% increase over 2017.

Annual adjusted return on average assets of 1.39% and adjusted return on tangible equity of 17.58% also represent significant increases over last year. We completed the Guaranty acquisition as scheduled on January 1, 2019. Despite extreme market volatility, we were pleased to be able to complete the transaction on the terms originally announced. We spent significant time and effort during the fourth quarter on integration process, positioning ourselves to execute on the cost saves while leveraging Guaranty's personnel technology and systems.

Loan growth of fourth quarter was 8.6% annualized. Organic growth of 12% for the full year 2018 illustrates the continued strength of our core markets. Asset quality metrics also remained strong and our ability to source quality credits and maintain conservative underwriting standards remains intact.

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

Michelle Hickox -- Executive Vice President and Chief Financial Officer

Thank you, David. Good morning, everyone. Please note that Slide 5 of the presentation includes selected financial data for the quarter. Our fourth quarter adjusted net income was $34.1 million or $1.12 per diluted share compared to $25.3 million or $0.90 per diluted share for the fourth quarter of last year and $36.6 million or $1.20 per diluted share for the linked quarter. As you can see on Slide 7, net interest income increased to $87.1 million from $75.3 million in the fourth quarter of 2017 and $86.3 million in the linked quarter. The net interest margin improved to 3.98% for the quarter, up 4 basis points from the previous quarter at 3.94%.

Average loan yields for the quarter net of accretion income was 5.41% and benefited from a continued uptick in the bank's target loan rights as well as increases in variable rate loans. Total non-interest income was $9.9 million compared to $13.6 million in the fourth quarter last year and $12.7 million last quarter. Recall that we recognized $3 million in gains from the sale of nine Colorado branches last year. As it relates to the decrease from linked quarter, we implemented a hedging strategy on our mortgage loan portfolio in July of this year which generated income of $1.6 million in the third quarter compared to $394,000 in the fourth quarter.

In addition, we had reduced merchant fee income and loan swap dealer income of approximately $309,000 compared to third quarter of 2018. Total non-interest expense increased $2.3 million from the fourth quarter of last year and decreased $807,000 from the prior quarter. The increase from the prior year is primarily related to increases in salary and benefits, occupancy and other expense due to the Integrity acquisition and organic growth. Acquisition expenses were elevated in the third quarter due primarily to the Integrity conversion and decreased $1.2 million to approximately $486,000 for the fourth quarter.

We anticipated a larger decrease in salaries and benefits expense in the fourth quarter but recognized approximately $500,000 of expenses related to health insurance and recruiting fees that were not anticipated. Deposit composition and costs are illustrated on Slide 16. As of December 31, 2018 we had $7.7 billion in total deposits, an increase of $1.1 billion or 16.7% over the prior year. Total deposits decreased $45.1 million from the linked quarter due to our strategy to maintain the balance sheet below $10 billion as of year-end.

Non-interest bearing accounts remain stable and made up approximately 28% of the deposit mix at year-end. The average cost of interest-bearing deposits has increased to 146 basis points, up from 70 basis points at December 31, 2017 and up from 126 basis points from the third quarter. Deposit pricing and competition continues to be a challenge especially in the Texas market. There does seem to be some moderation of increased costs of brokerage funding and specialty deposits with the recent changes in outlook for expected Fed Funds rate increases in 2019.

That concludes my comments. So I'm going to hand it over to Dan to discuss credit metrics and give some color on the loan portfolio.

Daniel Brooks -- Vice Chairman, Chief Risk Officer and Director

Thanks, Michelle, and good morning everyone. Organic loan growth was healthy in the fourth quarter with loans held for investment, not including mortgage warehouse growing $163.4 million or 8.6% annualized. Loan growth of 12% during 2018 was right at our expectations for the year. Slide 10 illustrates annual loan growth comparisons.

Slide 11 shows the composition of our loan portfolio and our commercial real estate portfolio. As of December 31, 2018, commercial real estate makes up 52.3% of total loans and has remained consistent in 2018. As represented in the graph, 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. Slide 12 also shows the trend of CRE concentrations to capital. Total CRE to the bank's regulatory capital decreased to 380% at December 31, 2018 from 385% at September 30, 2018. Mortgage warehouse purchase loans averaged $120.9 million during the quarter ended December 31, 2018 compared to $136.1 million for the quarter ended September 30, 2018.

Credit quality metrics continued to be strong with total nonperforming assets at 0.17% at December 31, 2018. Charge-offs continued to be low at 0.01% annualized for the quarter and 0.06% for the year. Provision for loan loss expense was $2.9 million for the quarter, an increase of $1 million from the fourth quarter of 2017 and $1.4 million from the linked quarter. Generally, the provision correlates to loan growth which accelerated in the fourth quarter compared to the third.

Slide 14 illustrates our provision expense and charge-offs in each reported period. As of December 31, 2018 we have recorded a discount for the acquired loan portfolios of approximately $25.2 million. The recorded allowance for loan loss plus the remaining fair market value discount on loans acquired is approximately 0.91% of total loans held for investment as of December 31, 2018.

Those are all the comments I have related to loans this morning, so I will turn it back over to David.

David Brooks -- Chairman, President and Chief Executive Officer

Thanks, Dan. We believe the hard work done in 2018 positions our company for a successful 2019. We remained optimistic about our ability to continue to grow our loan portfolio at 8% to 10%, manage our expenses and maintain our strong credit culture.

Please take a look at Slide 13. Our Company's ability to grow our loans in the best markets in Texas and Colorado, while having superior credit performance is illustrated with our performance due to the Great Recession. Our non-owner occupied CRE ratio was approximately 550% in 2008, going into the downturn and we experienced minimal nonperforming assets and charge-offs compared to our peers both in Texas and nationally.

We have had the same credit team leadership and philosophy since 1988 and have experienced similar results in every downturn. We are mindful that it maybe late in this economic cycle and we continued to underwrite and monitor our loans accordingly. We have an organic strategy reviewed by our Board that will bring our non-owner occupied CRE down to 300% and below over the next 3 to 4 years. M&A activity could accelerate that.

We are going to continue to run our company the way we have over the last six years as a public company and 25 years before that as a private company. We're going to grow our company organically, in four of the best markets in the country while maintaining our credit standards and philosophies that have served us well for 31 years. We're excited to welcome the Guaranty customers and employees onboard and we are focused on ensuring that the integration of people and systems goes well.

As the market allows we will also continue to look for strategic accretive M&A targets. As always our priority is to enhance our shareholder value. In this (ph) regard, we have reestablished a $75 million share repurchase program during the fourth quarter. This program provides an ability to invest in our company at attractive -- to invest in our company at attractive prices when the market opportunities arise. We also intend to increase our quarterly dividend to $0.25 per share in the first quarter 2019, with the intent to continue to pay a dividend of approximately 20% to 25% of earnings in future quarters.

I thank you again for joining us today and we will now open the call to questions. Operator?

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from Rahul Patil of Evercore ISI.

Rahul Patil -- Evercore ISI -- Analyst

Thanks for taking my questions. I know, last quarter, I think, you tempered loan growth expectation to around 10% linked quarter. Annualized in 2019, was is your prior guidance of 11% to 13%? And I believe this morning, I think you were talking about 8% to 10%. I'm just curious in terms of what you're seeing in your markets in terms of pay down activity of pipeline, and what's driving this lowered loan-growth expectation?

David Brooks -- Chairman, President and Chief Executive Officer

Good morning. Thanks. We've -- generally our view is, the markets are not as robust as they were 12 to 18 months ago, but Houston, Austin, Dallas/Fort Worth and Denver are all still really doing well. And as we're still seeing good activity, asset prices have held up well, so there is continues to be sales and repositioning and prepayments a little higher in the fourth quarter than we had expected but in line with -- just our customers continue to look at opportunities and opportunistic sales and refinances. And just our general sense that while our pipeline is good, our -- lenders are busy.

I spoke a little bit this morning in my comments about our desire to begin to shift our portfolio to a more of a commercial focus and a little bit less on non-owner occupied CRE. And that's a process, and so as we begin that process and equipment finance and the other strategies energy and other strategy that we have, those businesses may not grow as quickly as our real estate business have grown in the past. So there is three or four factors in answer to your question, but overall we see that being more of an 8% to 10% growth. And it is also informed by the last six months of 2018 while we had a huge growth in the first half of 2018, it was much more moderate in the second half. We think the long-term or 2019 outlook is kind of a blend between those two and 8% to 10% seems like the right expectation for us for 2019.

Rahul Patil -- Evercore ISI -- Analyst

And then in terms of the CRE portfolio, I know you mentioned the target to get the non-owner occupied portfolio to 300% or below. Is that driven by anything in particular that you're seeing, that's making it bit cautious and making you pull back in the space right now?

David Brooks -- Chairman, President and Chief Executive Officer

No, not at all, and as I indicated in my comments this morning, we have a long and very good history in real estate. The regulators have recognized that over the years, if you look at Slide 13 in the deck that I mentioned this morning, you'll see that in the Great Recession we had a stronger performance than our peers and the national banks as well. But that said as we now, that seems to us, to be more of the profile -- a little bit smaller community bank and while we still keep our culture moving forward we're a $14 billion asset bank now with the Guaranty acquisition.

Our organic growth at 8% to 10%, we think that while the market is difficult right now for M&A, given bank stock prices over the 3- to 5-year period that there will be good opportunities continue to make acquisitions in Texas. And as such, if we're headed to be in a $20 billion or $25 billion bank, 3 to 5 years from now, it would just be better if we had a more diversified portfolio with own or occupied CRE at 300 or below. That's a big reduction. And our trend has been in the right direction on that anyway.

We have 400% at the end of the last second quarter of 2018, we're down to 380% at the end of the year. That will come down another 10 bps or so with the Guaranty merger which is not in the year-end numbers but will be in the March numbers. So we have a very intentional structured plan where we'll continue to make real estate loans, we're very good real estate lender but we will continue to focus our new hires and our growth strategy over the next 3 or 4 years to just change our mix, enough to bring that down to a more -- a number that would be more in line with some of our peers.

Rahul Patil -- Evercore ISI -- Analyst

Got it. And then just one last question on the NIM. The core NIM came in better than your expectation actually. It was partly driven by a nice pick up in loan yields. Anything one timer there? And then just as a follow up, could you discuss your thoughts on the trajectory of the NIM in 2019? If there are no more rate hikes and the 10-year kind of sort of remains in this 270, 280 range?

Michelle Hickox -- Executive Vice President and Chief Financial Officer

Yeah, the NIM did do a little bit better than I expected to and what I have guided to. I think most of it was related to the fact that we manage our balance sheet below $10 billion. So deposit costs were probably not as much as they would have been -- had we've been growing like we had been, and really we use our liquidity and invested it in loan. So that, I think that's the primary driver, probably would have been maybe flat if we hadn't done that.

I think to note for 2019 is because interest rates have moved since we announced that deal. I expect we are still finalizing the valuations on their loan portfolio, but I expect that the interest rate mark on that portfolio is going to be a lot more significant than it has on previous acquisitions. As you guys know, we typically don't get a lot of benefit from accretion on the loan portfolios that we acquire, but I do think, my estimate at this point is, it's probably going to be a 10- to 12-basis-point increase in our NIM, just related to accretion next year.

I think the core NIM for next year ex (ph) accretion is still going to be in the mid-380s range. And we're still fairly neutral on our asset liability sensitivity, so the rate hikes don't really impact us that much. So I'm right now, our budget calls for kind of a stable NIM for 2019.

Rahul Patil -- Evercore ISI -- Analyst

Perfect. Thank you.

David Brooks -- Chairman, President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Michael Young with SunTrust.

Michael Young -- SunTrust -- Analyst

Hey, good morning.

David Brooks -- Chairman, President and Chief Executive Officer

Hey, good morning.

Michael Young -- SunTrust -- Analyst

David want to maybe just clarify a little bit more on the capital return and particularly the buyback this quarter. Obviously good to see the increase in both. But given kind of the view to try to reduce CRE as a percentage of capital, is that kind of a guiding (ph) factor on capital returns? Or is it more just a function of where the stock price is, and just being opportunistic there? Any other factors which kind of think about as you're deploying that capital over time?

David Brooks -- Chairman, President and Chief Executive Officer

Thanks, Michael. It was clearly our boards view that our stock is trading at levels below where we think the value is. And so it's really a much more opportunistic strategy. But we are for the first time in a position where we are -- our capital ratios were comfortable with where they are, even -- given where we are in the economic cycle. And we're going to generate some $70 million, $80 million of excess capital over and above our organic growth needs and the dividend level we were paying previously. So the Board is been intentional about studying, looking at our options. And we would have been active -- we had not purchased any of our stock back in the fourth quarter, Michael. But that was really more related to -- we were just in the midst of the Guaranty acquisition, yet pending regulatory approvals.

And as you may know the Fed has taken the position that they need to approve or at least not object to bank's buying back their own stock and they need that ahead of time. So we've got that process working as well. But in any of that, we expect to be active depending on how the markets behave or react. We intend to be active here in the first quarter in acquiring back our stock.

Michael Young -- SunTrust -- Analyst

Okay, perfect. And wanted to just kind of follow up on your comments on deposit costs. You're still seeing some pressure there. It sounded like from your comments that Houston, Texas obviously have a little more presence in Colorado market. But just curious if you're seeing better opportunities potentially there to raise deposits? And given kind of where the deposit costs are at the end of the year, do you expect sort of a decelerating pace of increase? Does that make sense going forward?

Michelle Hickox -- Executive Vice President and Chief Financial Officer

I'm not sure that I'm in a position to predict that they're going to -- that's going to decelerate significantly at this point. The deposit cost in Colorado are currently less than half of what ours are in Texas. I would say, because their loan-to-deposit ratio will not quantifies ours -- but still mid-90s. And so, the incremental funding for them is probably 100 basis points higher than what their current cost of funds is. So which is probably 100 basis points lower than what ours is in Texas. So it is better and we are focusing our efforts there.

I think my comments earlier really are related to what we're seeing costs on our -- like specialty treasury, the larger funds that we negotiate as well as broker deposits. The rights on those come back just a bit in the last 45 days or so. So it's really given us an opportunity to evaluate when we're pricing in our markets kind of selecting where we get our funding from.

Michael Young -- SunTrust -- Analyst

Okay. And one last one. Just on the mortgage hedging that was kind of the big drop in fee income quarter-over-quarter. Any onetime impact this quarter from the change in the 10-year? And any outlook to what that might look like next year?

Michelle Hickox -- Executive Vice President and Chief Financial Officer

I think I had mentioned last quarter, that we had done that initial -- when we started that program, we recorded, I think, an initial amount of about $1.7 million to mark the loans to fair value and to record the hedge. Ongoing, we expect that income to be $400,000 to $500,000 a quarter which I think it's about what it was in Q4. There were several things going on with our mortgage group in the fourth quarter. They have been actively trying to build an infrastructure in Colorado to make sure we're ready to go in that market, so they've added a significant number of lenders there.

So while their revenue was down in Q4, I would say their expenses were probably up $200,000 which is unusual for them. I think their top line is good. They've added lenders, Q1 is usually a seasonally low for them but I would expect they're going to start getting traction in the second quarter of this year.

Michael Young -- SunTrust -- Analyst

Okay. Perfect. Thanks.

David Brooks -- Chairman, President and Chief Executive Officer

Okay. Thanks, Micheal.

Operator

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

Brad Milsaps -- Sandler O'Neill -- Analyst

Hey, good morning.

David Brooks -- Chairman, President and Chief Executive Officer

Good morning, Brad.

Brad Milsaps -- Sandler O'Neill -- Analyst

Michelle, I want to see if we could maybe spend a little of time on expenses. You did mention there was about $0.5 million of recruiting -- cost in the quarter or maybe healthcare costs. Maybe I was expecting a little bigger drop on a linked quarter basis. Can you talk a little bit about how you're thinking about 2019 and maybe even more specifically kind of how Guaranty will impact the numbers as it flows through when you work through the conversion?

Michelle Hickox -- Executive Vice President and Chief Financial Officer

Sure. Thanks Brad. Yeah, our healthcare costs for our health insurance were self-insured. That cost was up about $350,000 for the quarter. And like you, I really expected that -- I thought that number was outsized in Q3 and I expect it to go down. So if you ask me, I would say, our expenses were about $700,000 higher just related to that. We also had some comp expense related to recruiting some lenders during the quarter, that was probably $200,000 and $250,000, that I would say is unusual for us as well.

If I'm looking out to 2019, now that we have Guaranty, I think our run rate on a non-interest expense is going to be $69 million probably the first and second quarters. And then once we get our -- all of our cost saves that conversion is still planned for early June, most of those people that are staying with us through conversion will be gone at the end of the second quarter. The branch closures that we plan will all be done before that. So really I think at that point, the run rate on non-interest expense should drop to the $65.5 million range for the second half of the year.

Brad Milsaps -- Sandler O'Neill -- Analyst

That's helpful. And that's inclusive of CDI and the adjustments you had to make there?

Michelle Hickox -- Executive Vice President and Chief Financial Officer

Yeah. And that was another thing I wanted to point out to you guys, I think the CDI number maybe bigger than what was expected. I think it's going to add about $1.5 million of amortization per quarter.

Brad Milsaps -- Sandler O'Neill -- Analyst

Okay. On top (ph) of the $1.5 million you already have?

Michelle Hickox -- Executive Vice President and Chief Financial Officer

Right. That's right.

Brad Milsaps -- Sandler O'Neill -- Analyst

Okay. Got it. And then in terms of thinking about efficiency, you guys have kind of talked about maybe mid- high- 40s, is that still kind of the area -- ultimately, I think you can sort of run the bank at over a longer period of time?

Michelle Hickox -- Executive Vice President and Chief Financial Officer

I think, what we're looking at, I think we still expect that efficiency ratio by the end of this year to get down to about 46%.

Brad Milsaps -- Sandler O'Neill -- Analyst

Okay. Thank you very much.

David Brooks -- Chairman, President and Chief Executive Officer

Great. Thanks Brad.

Michelle Hickox -- Executive Vice President and Chief Financial Officer

Thanks Brad.

Operator

Our next question comes from Brett Rabatin with Piper Jaffray.

Brett Rabatin -- Piper Jaffray -- Analyst

Hey, good morning.

David Brooks -- Chairman, President and Chief Executive Officer

Good morning, Brett.

Brett Rabatin -- Piper Jaffray -- Analyst

David I wanted to ask, we've seen some of the banks have a pretty strong quarter in energy loan growth. And I know, you got a goal of moving that portfolio back up. Can you just maybe talk about what you're seeing in energy? And just is that one of the segments that's going to have stronger growth in 2019? And just maybe any thoughts on 4Q?

David Brooks -- Chairman, President and Chief Executive Officer

Yeah. We hired Brett a team in the fourth quarter, we got them on boarded. Michelle, making some of the costs but we've got them on boarded and they are, I think off to a good start. I'll let Dan comment a little bit about what we're seeing. We have been booking some loans but just continuing to see market pay downs and things as well. But Dan, you might talk about what you're seeing in committee on the oil, energy, loan front?

Daniel Brooks -- Vice Chairman, Chief Risk Officer and Director

Yeah, thank you David. We're certainly continuing to see quality looks. As David mentioned, the team that we hired in, we're hired, started in December, so they really just getting going at this point. But would expect with their relationships there will be an opportunity to move that needle in 2019, whereas in 2018 it was up some, I think we'll see more attraction there in 2019.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. And then just wanted to talk about Guaranty and Denver for a minute. And just as you've gotten the deal closed, what the outlook might be? And I know you wanted to kind of improve their loan growth path this year, maybe relative to what they've done in 2018. Was just curious what you're seeing in terms of opportunities? And just as you've started to get more color around what they do and how you feel about their growth?

Daniel Brooks -- Vice Chairman, Chief Risk Officer and Director

This is Dan. Again they have an extremely talented team. I should say we have an extremely talented team in Colorado through the Guaranty Group. They have been able to grow and continue to book some significant relationships there, that will pay off over time in terms of continuing growth. The ability to do a larger sizes of deals and to grow some of the relationships they've had, based on whole limits will give us additional run room there. And then as David said, that market continues to be really strong, so I think there is just an organic opportunity to grow that portfolio, based on the people we have on the ground there.

David Brooks -- Chairman, President and Chief Executive Officer

And there will be energy opportunities, Brad, as well -- I mean that's a strong energy market, and it was one of our thoughts in bringing on this new team, in energy, was to exploit the relationships -- strengthen the relationships, historical relationships that Guaranty had, with energy investors. Also in addition to Dan's comments about increasing wallet share if you will, with some of their -- your larger customers been able to continue to grow those relationships.

And then we have been in Texas in the real estate construction area, is an area that they have not emphasized that Guaranty Bank, is an area where we've been conservative but active. And I think they'll see some opportunities to do some loans in that area that they didn't have before. So we were encouraged. Again, I don't think anyone is going to be growing 15%, 20% this year, but I think we feel good about their ability to grow in line with what our expectation is for the company which is 8% to 10%.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay, great. Maybe just one last housekeeping follow-up. You guys had really good asset quality outside of the energy book, just making sure there is no snitch or anything that looks like non-originated, because as you guys are usually kind of in-house growth company.

David Brooks -- Chairman, President and Chief Executive Officer

Yeah, we have a long history, Brad as you know of, kind of eating our own cooking generally. So we book our loans and we keep them on our books. That said, Guaranty was in -- had a small presence in leverage lending. And so they do have a book where we had not been active in that market. They have an experienced team there, that does a great job in that market. And so we are picking up a piece of that in the Guaranty acquisition. Their track record have been really good. And at the end of the day it's less than 1% of our total loan portfolio.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. Great. Thanks for all the color.

David Brooks -- Chairman, President and Chief Executive Officer

Yeah. Thanks Brett.

Operator

Our next question comes from Brady Gailey with KBW.

Brady Gailey -- Keefe, Bruyette & Woods, Inc. -- Analyst

Hey, good morning guys.

David Brooks -- Chairman, President and Chief Executive Officer

Hey, good morning, Brad.

Brady Gailey -- Keefe, Bruyette & Woods, Inc. -- Analyst

So just to make sure we're thinking about Durbin right. I think in the past, you all said it would be roughly a $5.5 million number annually. And I now, that I'll start in 3Q, 2020, is that still the right way to think about the Durbin impact?

David Brooks -- Chairman, President and Chief Executive Officer

Yeah. I think $5.5 million to $6 million. Michelle?

Michelle Hickox -- Executive Vice President and Chief Financial Officer

Yes, that hasn't really, our estimate on that hadn't really changed. But we're glad to have it, we're glad to have it pushed out another year.

Brady Gailey -- Keefe, Bruyette & Woods, Inc. -- Analyst

Yeah. Definitely. And then David, just on the M&A imminent. I think I remember in the past, you've said, hey, once we get Guaranty done, well -- would you will really focus your M&A efforts back on your home state in Texas? Is that still the right way to think about M&A for your guys? Do you think you'll be active in 2019?

David Brooks -- Chairman, President and Chief Executive Officer

Well, we consider Colorado be our home state now too, but that said, yes, we think the opportunity is, Brad, you're going to be in Texas. The opportunities in Colorado have largely been acted upon and there are a number of smaller banks there, very good smaller community banks, but kind of below our threshold of -- we want to be in that $1 billion to $3 billion, what we think would be our sweet spot here over the next 3 to 5 years. There are 10 to 12 banks in that range in Texas and the major markets where we want to acquire. And while, I think our focus here are the first six months, Michelle has been clear on it, Dan has been clear on it. I think we've been clear on as a team, that executing in an outstanding way on Guaranty is our Number 1 focus and priority.

And then as time, second half of this year and into 2020 we'll look for opportunities. But, yes, in Texas 10 to 12 companies that we have relationships with, that we're continuing to just build our relationships with them and look for an opportunity where the markets are favorable and where those sellers are interested in moving forward.

Brady Gailey -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. Got it. Thanks guys.

David Brooks -- Chairman, President and Chief Executive Officer

Anything else?

James Tippit -- Executive Vice President Head of Corporate Responsibility

Thanks, Brady.

Operator

Our next question comes from Michael Rose of Raymond James.

Michael Rose -- Raymond James -- Analyst

Hey guys, good morning. How are you?

David Brooks -- Chairman, President and Chief Executive Officer

Good morning, Michael, it's a little bit cold in Chicago.

Michael Rose -- Raymond James -- Analyst

Yeah, brutal. Going to get worse. Need to get down to Texas, soon.

David Brooks -- Chairman, President and Chief Executive Officer

Yeah.

Michael Rose -- Raymond James -- Analyst

So just wanted to circle back to fee income. I know Guaranty had a trust business and you guys are in the earlier stages obviously of integrating that. But wanted to see maybe mid- to long-term what the outlook is for that business in growing it? I know you talked about building out SBA, there is clearly some near-term issues but any updates on those businesses? And what they could mean to the combined franchise as we move forward? Thanks.

David Brooks -- Chairman, President and Chief Executive Officer

Yeah. I think that the trust business, they'll generate good fee income. The businesses we've talked about really focusing our growth efforts on are in the wealth management business where Guaranty under their PCM, Private Capital Management brand have done an outstanding job of growing a real wealth management platform as compared with anybody in the country.

Our plan is to integrate that, bring that to Texas and then likewise we've had a very robust retail mortgage operation here in Texas, that Guaranty folks had not engaged in. We've been about the business, I think that was also part of the expenses in the fourth quarter, that ran ahead of our original projection was. We've already about the business of hiring retail and building the retail mortgage presence in Colorado. And so some of those expenses showed up on our books here in the fourth quarter but we're encouraged about the opportunity there. So taking that wealth management platform to Texas and taking the mortgage platform to Colorado are key to our thoughts about how we can experience some revenue synergies out of this and especially on the fee income side as you say.

Michael Rose -- Raymond James -- Analyst

So longer-term, you guys have been historically kind of a high single to low double-digit fees to total revenue. As you get bigger and as you diversify the loan book away from CRE, bring that concentration down, is there any aspirations to grow that percentage higher longer-term? And do you have sort of an intermediate to longer-term target?

David Brooks -- Chairman, President and Chief Executive Officer

There is, I would say from a high-level, Michael, there is a desire to as we diversify our balance sheet to grow our fee income. We have not -- because we haven't. We think we need to have some success executing on growing the wealth management and growing the mortgage business and looking at other opportunities before we set specific targets. So I would say it's not going to be something you're going to see, show up dramatically in 2019 and maybe even 2020. It's just going to be something over the next three, four years that we're going to have to build out. So we don't have any specific targets or guidance on that.

Michael Rose -- Raymond James -- Analyst

Okay, helpful. And then maybe just one last follow-up from Michelle, just quick one. On the tax rate, any expectations for the tax rate for this year? Thanks.

Michelle Hickox -- Executive Vice President and Chief Financial Officer

I think the tax rate there, I really can't make any reason it would be different than it was in 2018. It's typically a little higher the first half of the year because of the stock grant, the vest and the way that works out in our tax rate, but I think it was a little, it was up 20% in the fourth quarter but it should average 20% for the year.

Michael Rose -- Raymond James -- Analyst

Okay. Great. Thanks for taking my questions.

David Brooks -- Chairman, President and Chief Executive Officer

Great. Thanks Mike.

Operator

Our next question comes from Matt Olney with Stephens Inc.

Matthew Olney -- Stephens Inc. -- Analyst

Hey, good morning guys.

David Brooks -- Chairman, President and Chief Executive Officer

Hey, good morning, Matt.

Matthew Olney -- Stephens Inc. -- Analyst

In the prepared remarks, you mentioned that the balance sheet was a little bit smaller trying to manage below the $10 billion asset threshold. Do you plan to relever up the balance sheet from these levels? Or will the Guaranty deal essentially do that to your balance sheet on its own?

Michelle Hickox -- Executive Vice President and Chief Financial Officer

I think we were below $10 billion for about two days, Matt. The strategies that our treasury used was -- we moved some deposits off our books using the seeder's program. We ran off some FHLB advances, really moved our liquidity kind of below our targets, just for right at the end of the year. But we were kind of back to normal levels by the first week in January.

Matthew Olney -- Stephens Inc. -- Analyst

Got it. Okay. And then going back to credit, you mentioned the two single-family construction loans are non-accrual. Any just general commentary on the single-family housing market in Texas you can share with us?

Daniel Brooks -- Vice Chairman, Chief Risk Officer and Director

Matt, this is Dan. Yeah, I would say, that market continues to be very strong in each of the markets that we serve in Austin, Houston and Dallas. That one particular loan, there was a loan that was about $3.5 million that was put on non-accrual in December, pending resolution of it. It was sold, the first week in January, so it since paid-off just a good indication that the market continues to be active. Prices continued to hold and sales periods continued to be reasonable. So we watched that closely but we've not seen any deterioration in that, in Texas.

David Brooks -- Chairman, President and Chief Executive Officer

Or Denver.

Daniel Brooks -- Vice Chairman, Chief Risk Officer and Director

Or Denver, right.

Matthew Olney -- Stephens Inc. -- Analyst

Okay. That's helpful. Thank you guys.

David Brooks -- Chairman, President and Chief Executive Officer

Okay. Thanks, Matt.

Michelle Hickox -- Executive Vice President and Chief Financial Officer

Thanks, Matt.

Operator

And I'm not showing any further questions at this time.

David Brooks -- Chairman, President and Chief Executive Officer

Well that will conclude our earnings call. Appreciate everyone's interests. And we're very positive about our view of 2019. Fourth quarter was not quite as strong as we had hoped it would be or planned for it to be. But we -- our views about 2019, the power of the merger and the acquisition with Guaranty are intact, and we plan to executive well in that first half, and then we'll be able to deliver those results in the third and fourth quarters as Michelle alluded to. Appreciate everyone's interest and look forward to seeing you out on the road this year. Thanks.

Operator

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

Duration: 42 minutes

Call participants:

James Tippit -- Executive Vice President Head of Corporate Responsibility

David Brooks -- Chairman, President and Chief Executive Officer

Michelle Hickox -- Executive Vice President and Chief Financial Officer

Daniel Brooks -- Vice Chairman, Chief Risk Officer and Director

Rahul Patil -- Evercore ISI -- Analyst

Michael Young -- SunTrust -- Analyst

Brad Milsaps -- Sandler O'Neill -- Analyst

Brett Rabatin -- Piper Jaffray -- Analyst

Brady Gailey -- Keefe, Bruyette & Woods, Inc. -- Analyst

Michael Rose -- Raymond James -- Analyst

Matthew Olney -- Stephens Inc. -- Analyst

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