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

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Independent Bank Group's Third Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions].

I would now like to turn the conference over to your host, Mr. Paul Langdale, Vice President, Investor Relations for Independent Bank Group. Thank you. You may begin.

Paul Langdale -- Vice President, Investor Relations Officer

Good morning, everyone. I'm Paul Langdale, Vice President and Investor Relations Officer for Independent Bank Group. And I would like to welcome you to the Independent Bank Group third quarter 2019 earnings call. We appreciate you joining us. The related earnings press release and a slide presentation can be accessed on our website at ibtx.com.

I would like to remind you that remarks made today may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and expected results to differ. We intend such statements to be covered by Safe Harbor provisions for forward-looking statements. Please see page five of the text in the release or page two 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 only be a statement of management's beliefs at the time the statement is made and we do not publicly update guidance.

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

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

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

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

Thanks, Paul. Good morning everyone, and thank you for joining today's call. I will briefly cover some of the third quarter highlights, Michelle will provide detail on operating results and Dan will discuss the loan portfolio. And I will be back at the end with closing remarks and to open it up for questions.

Independent Bank Group had another solid quarter with adjusted earnings per share of $1.35 and adjusted return on average assets of 1.56% for the quarter. Our consistent earnings growth reflects that we operate with a focused presence in the all the best markets in the country.

Organic loan growth was 5.6% for the quarter and 6.5% annualized year-to-date. Our disciplined approach to growth demonstrates a continued commitment to the conservative credit culture that has served us well for over three decades. Asset quality metrics remain at historically strong levels with total non-performing assets representing just 12 basis points of total assets at quarter end. Additionally, our deposit growth effort continues to show results with organic deposit growth of 7.7% annualized for the quarter.

I'll turn -- I'll now turn it over to Michelle, who will provide additional details on operating results for the quarter.

Michelle S. Hickox -- Executive Vice President and Chief Financial Officer

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

As you can see on slide seven, net interest income was $125.4 million in the third quarter, up from $86.3 million in the third quarter 2018 and down from $129.6 million in the linked quarter. The net interest margin was 3.84% for the third quarter, compared to 4.11% for the linked quarter and 3.94% third quarter last year.

Total accretion income decreased $6.4 million from the second quarter of 2019, which explains most of the decrease in NIM and net interest income. The NIM ex all purchased loan accretion decreased 6 basis points from the linked quarter, primarily due to lower yielding assets related to pricing competition on loans.

Total non-interest income was $27.3 million, compared to $12.7 million in the third quarter of 2018 and $16.2 million in the linked quarter. The $14.6 million increased compared to the linked quarter includes $6.8 million in gains on the sale of consumer and residential mortgage loan pools which were acquired in the Guaranty deal. As well as $1.5 million gain from the sale of a branch.

Mortgage banking revenue also increased by $1.1 million from the linked quarter, reflecting increased demand, partly driven by refinance activity due to the interest rate environment. Additional increases for the linked quarter were related to mortgage warehouse, swap fee income and other miscellaneous fees.

Total non-interest expense was $76.9 million for the third quarter, a decrease of $1 million from the linked quarter. Acquisition expense increased by $5.7 million and includes a $6.9 million charge for Guaranty's debit card provider contract, which was terminated after the operational conversion in July.

In addition, we recorded impairments on a right of use asset for a closed branch and CRA investment funds totaling $1.2 million during the quarter. These increases were offset about $2 million -- $2.9 million decrease in salaries and benefits and a frequent $1 million decrease in FDIC insurance expense for the Small Bank Assessment Credit, as well as a $1.5 million decrease in operational losses from the second quarter.

Slide 17 shows our deposit composition and cost. Total deposits were $11.7 billion at the September 30, 2019. Organic deposit growth was $225 million or 7.7% annualized for the quarter and was partially offset by $27.7 million transferred in connection with the branch sale in July. The average cost of interest bearing deposits was 156 basis points, up 30 basis points in the third quarter of 2018 and at 3 basis points from the linked quarter. While deposit cost peaked in July, they started trending down a few basis points each month in August and September. We are actively monitoring deposit products and cost and have lowered rates on certain account swaps and promotional products.

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

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

Thanks, Michelle. Good morning. Organic loan growth was $152.9 million or 5.6% annualized for the quarter. Overall loans held for investment, not including mortgage warehouse purchase loans grew to $10.9 billion at September 30, 2019, compared to $10.8 billion at June 30, 2019.

Slide 10 illustrates annual loan growth comparisons. Slide 11 shows the composition of our loan portfolio and our commercial real estate portfolio. As of September 30, 2019 commercial real estate mix was 51% of loans versus decline from 51.4% in the linked quarter. CRE continues to be well diversified in types of collateral with the largest segments in office and retail. Slide 12 further breaks down the retail CRE portfolio by property type.

Mortgage warehouse purchase loans averaged $434.1 million for the quarter ending September 30, 2019, compared to $295.9 million for the quarter ending June 30, 2019, representing an increase of approximately $138.2 million or 46.7% for the quarter. Which partly reflect seasonality and the impact of lower mortgage risks (ph) during the quarter, as well as our focus on growing this line of business this year.

Credit quality metrics remained strong with total nonperforming assets decreasing to $18.4 million or 0.12% of total assets at September 30, 2019, compared to $28.0 million or 0.19% of total assets at June 30, 2019. The decrease in non-performing assets is primarily due to $4.5 million in OREO sales and $5.6 million of charge-offs on two commercial credits, which were partially reserved in prior periods.

Despite these two specific charge-offs, overall charge-offs remain lower at 0.21% annualized for the third quarter, compared to 0.01% annualized in the linked quarter and 0.14% annualized in the third quarter of 2018. Provision for loan loss expense was $5.2 million for the third quarter, an increase of $494,000 over the linked quarter. Provision expense is primarily reflective of the growth in our loan portfolio, as well as charge-offs and specific reserves taken during the respective period. Provision expense was elevated this quarter due to two commercial credits which were charged-off in excess of the specific reserves placed on them in the previous periods. One of these loans is a same loan that was partially reserved in the linked quarter with the other being an energy loan that has been in workout for several quarters.

These are all the comments I had related to the loan portfolio this morning. So, with that, I'll turn it back over to David.

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

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

While we carry out this infrastructure initiative, we continue to have strategic conversations with little (ph) banks in attractive markets. We will -- we take the long view with regard to our company and believe that continuously building strong lasting relationships with customers, employees and potential partners will best serve our shareholders' interest.

As we embark on the next chapter of our company's history, we will continuously strive to maintain the discipline, focus in forward banking mentality that we believe will continue to create sustainable long-term value for all of our shareholders.

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

Questions and Answers:

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Brett Rabatin with Piper Jaffray. Please proceed with your question.

Brett Rabatin -- Piper Jaffray -- Analyst

Hey, good morning, everyone.

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

Good morning, Brett.

Brett Rabatin -- Piper Jaffray -- Analyst

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

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

Good morning, Brett. This is Dan, I'll answer that question. Well, there is two charge-offs we had during the quarter are really a continuation of the two that we've had previously reserved and identified as substandard nonperforming loans. We had them substantially reserved and just recognized those this quarter. I would say, in this particular energy loan, this is the last of the ones that had some hair on it from the previous downturn as we work through that. As it relates to the rest of the energy portfolio, as you know, we've been in the process of continuing to look at good opportunities and built some book, so we added a team in January of this year and have had a really good run there.

As you know, the energy portfolio is less than 2% of our book at this point and we've been very selective, ensuring picking the best of class companies that we've added at this point with a management team that have proven ability to manage through the downturn. The leverage of those types of new credits being added is less than two times those low advance rates, so -- which were very good about their book.

Brett Rabatin -- Piper Jaffray -- Analyst

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

Michelle S. Hickox -- Executive Vice President and Chief Financial Officer

Yeah. There is lots of moving parts. And I would say, this year has been a challenge related to margin. As you are saying that we are going to get a benefit from being able to lower our cost of funds. We already have seen a trend, it's a short trend drive in October, but we have lowered deposit rate significantly, we've been aggressive working with our relationship managers trying to get those exception rates that we made is right for going up, lowered -- we've lowered our promotional product rates.

So, I anticipate that cost of deposits could go down as much as 10 basis points this quarter, just based on the trend I'm seeing right now. The other side of that though is, loan yields, which is really where -- what put the most pressure on our margin this quarter. I will tell you, it doesn't look like we're seeing the same at least thus far, again, it's a short time-frame, yields billing on at the rates that they were at the end of the last quarter. And so if we can hold that up and if we get -- as we continue to see the yield curve go up, I think we'll be able to -- I'm guessing that our margin this quarter will be stable to maybe down a couple of basis points. I don't think it's going to contract as much as it did in Q3. And, again, I'm talking what I call core margin ex all of our accretion, which was down 6 basis points this quarter.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. And then if I can sneak in one last one. I'm sorry.

Michelle S. Hickox -- Executive Vice President and Chief Financial Officer

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

Brett Rabatin -- Piper Jaffray -- Analyst

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

Michelle S. Hickox -- Executive Vice President and Chief Financial Officer

Yeah. So if you add back the FDIC credit that we got this quarter. I have that -- what I would call our adjusted expenses of right about $68 million. We did have some lag in cost saves on the data processing side related to the Guaranty. We're having to continue some of their systems for a little longer than what we expected. We got their conversion really well, but just having access to some information, so that we weren't able to get some of that out. That's probably $0.5 million a quarter.

Legal actually was higher than what I expected it to be and then we had some more branding cost. So that's why kind of the expenses were a little higher than what I guided to last quarter. We are starting to make some investments in infrastructure, particularly risk management, those types of things. So I think going forward $67 million is probably a good number for this quarter. Going into '20, first quarter is always a bit hard because of comp adjustments and those types of things, probably a 3% to 5% increase through '20 is a good number to give.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. Great. I appreciate all the color.

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

Hey, thanks, Brett.

Michelle S. Hickox -- Executive Vice President and Chief Financial Officer

Thanks, Brett.

Operator

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

Woody Lay -- KBW -- Analyst

Good morning, guys.

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

Hey, good morning, Woody.

Woody Lay -- KBW -- Analyst

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

Michelle S. Hickox -- Executive Vice President and Chief Financial Officer

Yeah. That's it. So going forward, these will return to our regular run rate, which is little over $1 million a quarter.

Woody Lay -- KBW -- Analyst

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

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

I think it'll be a combination of those things. Woody, we've been able to really hold down our rates, as Michelle said, we've lowered all our promotional rates as rates have come down. And we're seeing renewals on some of our promotional CDs in the 60%, 70% range, thereby we are running -- those who aren't willing to roll are leaving. And so, to that extent, I guess, you could consider that -- that's running off some higher yielding deposits or higher cost deposits.

And then as rates continue to come down, we were able to adjust and continue adjust. So we're actually, as Michelle said earlier, encouraged about our ability so far being pretty aggressive on driving those costs down. We saw some good pickups in the last half of last quarter and seems to be doing even better now to get the full benefit of that here in October.

Woody Lay -- KBW -- Analyst

Got it. That's helpful. And last from me. So the energy portfolio did see some modest growth. What's the sort of target you'll have for that portfolio in terms of the -- to represent the loan -- total loans? So I think you said it's 2% right now, do you hope to get to 5% in maybe a couple of years?

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

Yeah. As I speak, our view generally is, as we try to grow these other verticals that are non-CRE mortgage warehouse and energy and C&I and equipment finance, and those other line. We (inaudible) around 5% each ultimately is our bucket. So I think energy in the 4% to 5% of total loans, it's at 2% now. So -- but we think that's going to take some time, that's not going to be next quarter. We have, as you know, we hired a team from another bank in the Fort Worth area last year, they've had a lot of good early success here, moving some relationships and doing, as Dan said, some deals that we consider to be some of the best credits we booked in the seven years now that we've been in the energy lending business. The stuff we're booking now is better structured, more conservatively structured with better coverage. So we feel good about that.

I think ultimately though, we peaked out in 2014, so to say, history at about between 7% and 8% of our loan portfolio, we did not expect it to go back to that level, at least in the near-term future. We will be targeting around 5% over time. Same thing with mortgage warehouse, around 5% of average outstanding balances of our loan portfolio. It feels about right to us.

Woody Lay -- KBW -- Analyst

Great. Thanks, guys.

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

Hey, thanks.

Operator

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

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Hey, good morning, everyone.

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

Good morning, Michael.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

I wanted to ask, just on the total loan growth side. What is the level of pay-offs and pay-downs this quarter? It wasn't called out. So I don't know if it was higher given kind of the backup in rates. Did you guys saw elevated levels of that?

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

No, it's really pretty much the way we've been seeing it run all year, nothing extraordinary, normal amount and payoffs and refinances. And so, consequently our 5.5% loan growth wasn't at the pace that we had expected going into the quarter or going into the year. We've just seen, as we've talked about previously, over a number of our peers talking about this. The competition got really difficult out there, there's been some competition on pricing and structure that we are not comfortable with. And so we passed on some deals and let some deals refinance or pay off that we could have kept that, while we're willing to do things that are out of our normal credit policy and credit character.

So, as we look forward, I really think probably a 6% given where the economy is now, given the way some non-bank insurance company, non-bank lenders, as well as some banks or their approach that people who are taking is leading us to believe that in our markets we're still seeing -- good growth is nice, not as (inaudible) was year and a half or two years ago, but it's still very strong, good pipeline of economic activity out there, but we're being cautious given where we are in this cycle. And so, yeah, we are -- so I'll pass up a little bit. This year over last year, they've been really pretty level over last quarter.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

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

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

Yeah. I think, we feel like -- and again, we're just trying to tell you what we see on the ground. I'm an optimist. As you probably remember, Michael and I -- I always tend to think we can grow at 8% and the markets right now grown at 6%. And so, I certainly think we can -- we have a team that's built to grow the bank more quickly, grow our loan portfolio more quickly, but we just haven't seen those opportunities get through the pipeline, get through our credit process and get on books as quickly as we thought they would going into the year and it's a matter of all the things we've talked about already. So I think going forward, 6% is a better target for us.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Okay. And then just on (inaudible), Michelle, I don't know if you had any early thoughts around that and what that might mean in terms of one-time true up in the first quarter on the reserve or higher provisioning levels, potentially in 2020?

Michelle S. Hickox -- Executive Vice President and Chief Financial Officer

Yeah. We are still not at a position where we can disclose the number at this point. I would -- I mean, that thought process around, we don't believe it's going to be a significant number or impact capital at this point. Especially on, what I would call, our originated portfolio, we don't think that number is going to be significant. We will have to take a (inaudible) reserve against the acquired loan portfolios, which at this point is primarily just Guaranty. But, again, we don't think that number will have a significant impact on capital at this point.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Okay. Thanks.

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

Hey, thanks, Michael.

Operator

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

Matt Olney -- Stephens Inc. -- Analyst

Hey, thanks. Good morning, everybody.

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

Hey, good morning, Matt.

Matt Olney -- Stephens Inc. -- Analyst

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

Michelle S. Hickox -- Executive Vice President and Chief Financial Officer

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

Matt Olney -- Stephens Inc. -- Analyst

Okay. And then...

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

Go ahead, Matt.

Matt Olney -- Stephens Inc. -- Analyst

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

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

Now I really think that, as Michelle said, I think further drops by the Fed will allows us a chance to lower our deposit rates and loan rate seem to fit the deck pretty early in the downturn here. And so, while rates -- certainly the floating rates will -- could continue to go down -- would continue to go down by and large given the balance in our portfolio, lower rate environment going forward just allows us to catch up in this kind of whiplash we had in the second and third quarter. And that's why I think, as Michelle said, we think the worst NIM compression, worse the third quarter for us. It's better in the fourth quarter and eventually we should level out. That's certainly what our model tells us. And we just got surprised, I think, like a lot of banks did this quarter with the loan pricing pressure. So we've been very happy with the success we've had getting deposit rates down and we think that will continue, but the loan rates, they're already extremely competitive. And I don't think, other than the floating-rate loans, that loan -- the fixed rate core three to five year fixed rate are going to go down lower than where they already are.

Matt Olney -- Stephens Inc. -- Analyst

Okay. That's great. And then on the fee side, it was another great quarter of fees in 3Q. Even if I take out some of the items that you call out, the branch sale, the loan sale, it looks like it was still a really good quarter of fees. Anything else that you'd call out that was particularly heavy in the third quarter? Just trying to get a run rate for the fees going into the fourth quarter. And specifically, I think in the past in the mortgage line, you've had some hedging volatility within that. Anything to call out within the mortgage space?

Michelle S. Hickox -- Executive Vice President and Chief Financial Officer

Yeah. I think the hedging on the mortgage is finally stabilized. So it's really not impacting. Mortgage had a really good quarter like most banks with the rate environment. They're are doing really well. I think that they're probably going to be -- it looks like about the same in the fourth quarter. And it might be down just a bit as from seasonality. We did have some good swap fee income, probably $300,000 to $400,000 more than normal. And then, we sold the trust department. That's about $0.5 million in fee income, but -- so I would say, maybe down $700,000 or $800,000 from where it was this quarter, Matt, is probably a good run rate.

Matt Olney -- Stephens Inc. -- Analyst

Okay. That's all from me. Thanks, guys.

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

Hey, thanks, Matt.

Operator

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

Brett Rabatin -- Piper Jaffray -- Analyst

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

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

Sure. Yeah. And a big part of our story last six years -- gone seven years now Brett is, has been the M&A piece. And so we continue -- I continue to work diligently on that, both staying in close touch with the banks here in Texas that we're interested in, and given the volatility in the markets, it seems like there have been some smaller deals this year, and then, of course, the legacy prosperity deal that, what I would call, the ones in between that $1 billion to $5 billion, which is a lot of the banks that we are looking at and talking to. This doesn't seem to be a rush right now of sellers to sell in this environment. So I think that's going to continue to be slow for the next few quarters in my view, depending what happens with the markets and the election.

And then, obviously, having other discussions. Let me, I guess, finish on that topic. First to say, it's not our intention to go outside of Texas and Colorado with any other, what I will call, downstream M&A. And so we're not going to go buy a $2 billion bank in Arizona or Arkansas or Louisiana as a market expansion. And then there is -- there continues to be a lot of conversation as all companies, ours and the others are looking at a lot of headwind in the next year or two in terms of NIM compression and fee income, and how are you going to drive shareholder returns. And so, there're a lot of other discussions going on, Brett. But we continue to have discussions, we continue to be approached by people to talk about various kinds of partnerships and -- but as I've continue to say and we'll be finished with this that, we very much like the hand that we've got, we are in Dallas, Fort Worth, Austin, Houston and Denver, four of the best markets in the country and we like that a lot. And we think any move materially outside of our current footprint has the risk kind of diluting our growth story and diluting our future in some ways, and so we're being cautious around that.

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. That's good color. And then I wanted to go back to the comments you made around growth. David, it sounds like you were surprised by some of the rationality in the market, but you're expecting it to be more normalized. When thinking about the growth over the next year, are you expecting some level of payoffs in the loan portfolio, or can you give us some color on kind of how you're thinking about originations versus the existing book and kind of the challenge that banks have had with the payoff activity?

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

Let me take the last part of that first, Brett. I do not expect heightened levels of pay off. But I don't think we're going to go down either. I think we just continue as we look ahead to expect the same kind of payoff level we've had. And in the face of that we think we can grow around 6% our organic loan growth. To the irrational pricing you mentioned, I don't think it's going to become less irrational. But I just don't think it's going to become much more irrational, I guess, is my message there. We expect to continue that with same kind of behavior in the market. But in the face of that, we believe we can grow 6%. If there we are going to be less irrational, if that's proper grammar, then I think we can grow faster, but right now given kind of the difficulty and -- there have been some rates with -- in upper three, six or five, seven and 10 years out there and we just are chosen not to do that, but I expect that to continue as long as -- long into the curve is where it is. I just don't think it's going to get worse. So that was the point I was trying to make, Brett. We think the loans that have been booked in the last quarter and that were booked into this quarter. That's about as low as we think rates are going to go generally. And then, if we can press our deposit rates down at least we think we got some stability or protection there on the NIM.

Brett Rabatin -- Piper Jaffray -- Analyst

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

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

Yeah. We -- we're going to continue to make progress on that. I think we did see CRE begin to come down this quarter for the first time. I think it would have been down last quarter, but we are doing stock buybacks and our capital ratio was going down, at the same time, we are diversifying. But I think we're going to see it, I think, I believe a steady drop. There may be a blip here and there a quarter depending on what we do on stock buybacks and all that. But I mean, generally you'll see a trend down. We've mentioned mortgage warehouse, we have some success there. We're having success in the energy side. Equipment finance is kind of slow but steady, we always -- that would be a longer build out. And then our C&I team in Colorado continues to do a great job. We're looking for ways to port that to Texas. And we think, again, none of these things are going to move the needle and our CRE rate is going to drop by 50 or 75 bps in any one quarter. But if we can just chip away at it 5 bps, 10 bps, 15 bps a quarter in three, four years we'll get where we want to be, which is then guiding to (inaudible).

Brett Rabatin -- Piper Jaffray -- Analyst

Okay. Great. I appreciate all additional color.

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

Hey, thanks a lot, Brett.

Operator

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

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

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

Operator

[Operator Closing Remarks]

Duration: 36 minutes

Call participants:

Paul Langdale -- Vice President, Investor Relations Officer

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

Michelle S. Hickox -- Executive Vice President and Chief Financial Officer

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

Brett Rabatin -- Piper Jaffray -- Analyst

Woody Lay -- KBW -- Analyst

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Matt Olney -- Stephens Inc. -- Analyst

More IBCP analysis

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