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Independent Bank Group Inc
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Good day ladies and gentlemen and welcome to the Independent Bank Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded.
I would now like to turn the conference over to Mark Haynie, Executive Vice President, General Counsel. You may begin.
Good morning everyone. I am Mark Haynie, Executive Vice President, General Counsel for Independent Bank Group and I would like to welcome you to the Independent Bank Group second 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 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 be only a statement of managements' 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 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.
Thank you, Mark. Good morning. We appreciate all of you joining us for today's call. As always, I will briefly touch on some highlights for the quarter, then Michelle will cover the operating results, and Dan is here to cover loan portfolio. I will be back at the end with closing remarks and to open it up for questions.
Profitability trends continue to improve through the first half of 2018. Second quarter adjusted net income was $32.2 million, which is a 10.3% increase from first quarter of 2018 and a 41.7% increase from second quarter of 2017.
Adjusted return on assets and adjusted return on tangible equity reached new levels at 1.41% and 17.94% respectively. At 18.5%, annualized loan growth for the quarter was very strong. We do expect organic loan growth to moderate in the second half of the year.
Asset Quality is foundation of our company and remains strong. Despite the outsized loan growth, credit metrics continue to be at historically low levels and our strong underwriting standards remain in place.
Funding sources and pricing of deposits have become more challenging as the Fed continues to increase short-term rates. We've been successful increasing our loan in investment yields, but not at the same pace as the funding cost.
We continue to actively manage liability side of the balance sheet to minimize these costs. But if the deposit betas continue to accelerate, this will be a challenge for the balance of the year.
Now, I'll turn it over to Michelle to provide more details on the operating results for the quarter. Michelle?
Thank you, David. Good morning everyone. Please note that slide five of the presentation includes selected financial data for the quarter. Our second quarter adjusted net income was $32.2 million or a $1.11 per diluted share compared to $22.7 million or $0.82 per diluted share for the second quarter of last year and $29.2 million or $1.03 per diluted share for the linked quarter.
As you can see on slide seven, net interest income increased to $78.9 million in the second quarter from $69.5 million in the second quarter 2017 and from $74 million for the first quarter 2018.
The net interest margin declined to 3.97% for the quarter, down three basis points from the previous quarter at 4%. The adjusted margin net of acquired loan accretion was 3.93% compared to 3.96% in the first quarter, a decrease of three basis points.
Average loan yields for the quarter net of accretion income was 5.18% and benefited from increases in the target loan rates as well as increases in variable loan rates following the Federal Reserve rate increases. Earning asset yields also benefited from a 32 basis point increase in yield on taxable securities compared to the linked quarter.
Total non-interest income decreased to $10.1 million compared to $11 million in the second quarter last year, an increase from $9.5 million in the previous quarter. The decrease from last year is primarily due to decreased service charge and mortgage income. The $678,000 increase from prior quarter is related to seasonal mortgage activity and a larger earnings credit on our correspondent account.
Total non-interest expense decreased $2.2 million from the second quarter last year and increased $4.2 million from the linked quarter. The decreases from prior year are primarily related to a decrease in acquisition expense of $2.2 million, FDIC insurance at $489,000, offset by an increase in deposit account related costs of $628,000.
The net increase in the linked quarter is primarily due to increased acquisition expenses of $2.9 million, salaries and benefits of $1.6 million, and occupancy expense of $354,000.
Acquisition expenses are related to both the Integrity and the Guaranty acquisitions. Increased salaries and occupancy expense are primarily related to the acquisition of Integrity as of June 1st.
The provision for loan losses of $2.7 million for the quarter, an increase of $258,000 from the second quarter 2017 and the same as the linked quarter. Generally, provision expense correlates with net loan growth and the level of charge-offs for specific reserves during the quarter. Slide 14 in the deck illustrates our provision expense and charge-offs in each reported period. Total charge-offs for the quarter increased, but continue to be minimal.
Income tax expense was $7.5 million for second quarter 2018, which is an effective tax rate of 20.2% compared to $8.6 million and an effective tax rate of 32.1% for second quarter 2017 and $6.8 million for the first quarter, an effective tax rate of 19%. The Q2 2018 effective tax rate was negatively impacted by non-deductible acquisition-related expenses.
Deposit composition and costs are illustrated on slide 16. Deposits increased to $7.5 billion at June 30, 2018 compared to $6.8 billion at March 31, 2018. $593 million of the increase was the Integrity deposits. Public funds have decreased to 10.2% of total deposits from 11.5% in total deposits at March 31st.
Non-interest bearing accounts make up 28.8% of the deposit mix at June 30. The average cost of interest bearing deposits has increased to 102 basis points, up from 58 basis points at June 30, 2017 and up from 82 basis points for first quarter 2018.
Deposit pricing has become more challenging in the second quarter as we have experienced higher betas than in previous quarters since the Fed rate hikes began. We still have generally not increased our stated rate on deposit products. However, we continue to monitor our rates relative to competitors in our markets and have added some additional promotional time deposit products with increased rates in addition to exceptional pricing for relationships with large balances. We also have experienced increases in rates on corporate deposits that are indexed to Fed funds.
That concludes my comments this morning. So, I'm going to hand it over to Dan to discuss credit metrics and give some color on the loan portfolio. Dan?
Thanks Michelle. Good morning everyone. Organic loan growth was strong again this quarter with loans held for investment not including mortgage warehouse growing $301 million or 18.5% annualized. It is important to note that this growth has been across our markets and structures and underwriting standards remain consistent with our historically high credit standards.
Loan growth for the first half 2018 was above our expectations. We believe that loan growth will moderate over the remainder of the year due to seasonality and some expected payoffs. Slide 10 illustrates annual loan growth comparisons.
Slide 11 shows the composition of our loan portfolio and our commercial real estate portfolio. As of June 30, 2018 commercial real estate makes up 51% of total loans. As represented in the graph, CRE continues to be well diversified and 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 increased to 398% at June 30, 2018 from 382% at March 31, 2018 primarily due to significant loan growth during the quarter.
We have a mature credit review and monitoring process which we believe helps mitigate the risk inherent with this level of CRE lending. Mortgage warehouse purchase loans averaged $124 million during the quarter since ended June 30, 2018 compared to $114 million for the quarter ended March 31, 2018. This small increase is primarily due to seasonality of the mortgage business.
Credit quality metrics continue to be strong. Total non-performing assets were down again slightly to 0.17% at June 30, 2018 from 0.23 March 31st, 2018. This decrease is due to the partial charge-off and pay-off of a commercial real estate loan and three commercial loans totaling $3.5 million as well as the disposition of $1.2 million in ORE during the quarter.
Two loans totaling a $1 million were placed on non-accrual during the quarter. Charge-offs increased this quarter but continue to be low at 0.08% annualized for the quarter. Charge-offs were related to one commercial real estate loan and three commercial loans.
The allowance for loan losses decreased to 58 basis points from 64 basis points of total loans last quarter. We continue to record provision expense for the net loan growth. However, this decrease is due to the Integrity loan portfolio being recorded at fair market value without a related allowance.
As of June 30, 2018, we have recorded discount for the acquired loan portfolios of approximately $32.9 million. The recorded allowance for loan loss plus the remaining fair market value discount on loans acquired is approximately 1.02% of total loans held-for-investment as of June 30.
That concludes my discussion of loans this morning. So, I'll hand it back over to David to conclude call.
Thanks Dan. We're very pleased with our financial results for the first half of 2018. Our loan growth and profitability measures for the first two quarters sets us up for a good strong second half of the year. We completed the Integrity acquisition in June and we are happy to welcome the Integrity employees to our team.
We are working hard towards a successful operational conversion which is planned for the beginning of August. We are also making good headway on the Guaranty acquisition we announced in May. Regulatory applications have been filed and our teams from both sides are spending time together to make sure that we get great execution through close and integration. We feel really good about our position in the Colorado market with the combined banks.
Thanks for joining us today and we will now call for questions. Operator?
Thank you. [Operator Instructions]
Our first question comes from the line of John Pancari from Evercore. Your line is now open.
Yes. This is Rahul Patil on behalf of John. Just a question around loan growth. Excluding the deal this quarter, organic loan growth came in around 12% which is probably the high end of your 10% to 12% guidance. And you talked about little bit of moderation in the second half. Maybe you could just provide some color around the drivers of that moderation in second half? And then looking beyond second half, do we expect loan growth to kind of go back in the low double-digit range outside -- in 2019?
Yes. Good morning. We had 18% growth in the second quarter but continued to expect that's going to moderate in the second half of the year. The drivers of that would be simply that we were expecting some pay-downs in the second quarter that did not occur that have occurred now in the third quarter. So, there'll be a little bit of payoff headwind. And then also our pipeline is -- has moderated back to more normal.
I think we had said in the first quarter and the second quarter there are pipeline which was just more robust than it usually is in the first half of the year and we realized that and saw that in the numbers but expect that -- our pipeline still looks good and normal for this time of year. But with the pay-off headwind I still think a 12% loan growth for the second half of 2018 is a reasonable expectation.
And then we do expect that with the new lenders and lending team we've hired across our markets that we can grow even with the Guaranty acquisition pro forma at a 12% or low double-digit loan growth we think is still appropriate for 2019.
Okay. All right. And then just a question around the CRE portfolio, quite a number of banks have been somewhat cautious on this front given competitive pressures on pricing and underwriting standards. Now, could you talk about what you're currently seeing in this space today? Where you are seeing opportunity to lean in more aggressively to grab market share as peers pull back?
Let me give you a couple of high-level comments. I'll let Dan maybe fill in some details of that. The one thing about our CRE portfolio we've continued to say and has been true for a number of cycles is that we tend to do smaller loans. A big component, as an example, are our neighborhood shopping centers that tend to be $2 million, $3 million, $5 million, $6 million, $7 million loans. So we don't have a lot of larger credits. So, it continues to be a lot of smaller deals that's driving our growth. Because of that and because of our underwriting standards, we continue to feel comfortable with that.
And the growth that we experienced even at 18% in the second quarter was really in the same proportion that we have had on our balance sheet today. So, roughly 80% of it is secured by some kind of real estate. That's not all CRE but secured by some kind of real estate and then the other 20% C&I. As we've said, we're trying to move that over time to a little more C&I, but less real estate. But we haven't changed anything to achieve that kind of growth. And Dan can speak to the types of credits we're seeing, but -- or any concerns he's got or areas we're avoiding at this point.
Yes. This is Dan. I would say the competitive pressures that we're seeing out there have gone up some. There's always been pressure on the pricing side that remains in there. I think -- we think there is some pressure on structure. In those cases, we passed on those as other banks perhaps are as well.
But I do think to echo David's comments, very diversified in the types of assets we do and also geographically across our entire footprint. So, we just are in strong markets. As we have said before, if you look at Houston, Austin, the Dallas-Fort Worth and the Colorado Front Range Corridor, we are seeing great opportunities in there that have not really changed from what we've done historically. I think that's provided the growth that we've seen this past quarter. And frankly, we'll support continued growth at the moderate levels David spoke about for the second half of the year.
All right. Thank you.
Hey thanks.
Thank you. Our next question comes from the line of Brady Gailey of KBW. Your line is now open.
Hey good morning. It's Mike Belmes on for Brady.
Good morning Mike.
Hey, so I know you talked a little bit about deposit dynamics and kind of how we've seen a little higher beta this quarter. Can you maybe provide some color, maybe how much is driven by these indexed deposits? And then may be kind of what you're anticipating for the remainder of the year?
Sure. Michelle?
I think for Q2, because our loan growth was so high at 18.5%, we did have to reach in and pay a little higher on some deposits. In my comments, we still are -- we still haven’t for the most part, changed our sheet rates. But we are making exception pricing still for larger customers, customers that have relationships with us.
The specialty treasury group of deposits is right around $1 billion and 75% of that is indexed to Fed funds or LIBORs, some type of index. So, those are impacted when rates increase. We did put a 13-month CD special out right at the end of the quarter, I think, in the middle of June that ended up bringing in about $150 million in deposits and before we actually cut it off and reduced it back to $225 million the first week in July.
But if our loan growth moderates, we'll have more flexibility on our deposit cost going forward. So, I don't anticipate the cost to go up as significantly as they did in Q2 for the remainder of the year assuming that loan growth moderates. So, I would anticipate our NIM compressed about three basis points this quarter. It could compress four to six basis points through the remainder of the year, but maybe not that much if deposit costs moderate a bit.
Appreciate. So, the potential, I guess, maybe NIM compression it's really going to be driven by the funding side as opposed to kind of getting better yields on the loan side?
Well, we are working hard and the market is allowing increases on the loans side. We just saw when the beta has really turned up here in Texas, particularly early in the second quarter, it accelerated a little faster than we had expected. And loans tend to be in pipeline for longer. So, it just takes two or three months when you put, say, hey guys, we're going to change our target pricing and try to drive higher rates on the loan side. It just takes two or three months to get that through the pipeline. You can't take a loan that you told someone two months ago that you would do it at 5.35% fixed for four years and flip it to, okay, now we want 5.65% right before you close the loans.
So, anyway, it just takes a little while, but we're adjusting and have adjusted and the market’s allowed that. And so we're seeing, as Dan said, always competition on the pricing front. But reasonable pricing we're seeing on the loans. And so we do expect that in the second half to carry some of the burden.
And consequently as Michelle has looked at it and modeled it, and we've talked about it and what we're seeing on the ground down in the loan and deposit markets. It appears to us that a two to three basis points a quarter decline in NIM for the next two quarters is kind of down the middle of the fairway of what we see today.
Got you. Appreciate the color. Thanks.
Sure. Thanks Mike.
Thank you. Our next question comes from the line of Brad Milsaps of Sandler O'Neill. Your line is now open.
Hey, good morning.
Hey good morning Brad.
David or Michelle, your -- I think your core expenses were maybe right around $45 million this quarter with one month of Integrity. Would you expect that number to go maybe closer to $48 million in the third quarter? I mean and then you start to see some cost saves. I know you got a lot of moving parts. But just kind of curious with the investments you've made. And plus with some cost saves coming out kind of what your thoughts on expense trajectory were?
I think $48 million is probably a good number for Q3, Brad. And in that we will get some cost saves. We're doing the Integrity conversion in August. But there are some things that we're going to keep through the end of the year. So, we really won't get all of those cost saves out until Q1 of next year.
We're also making some investments and adding some risk management people on those types of things. But I don't really expect our run rate to go down in Q4. It'll probably be $48 million to $48.5 million is what I would expect for the rest of this year.
For quarter.
For quarter, yes.
Got it. Okay, that's helpful. And just a follow up on the margin discussion. I can appreciate the kind of two to three basis points of guidance. But do you think at some point that begins to kind of level out? I'm just kind of curious kind of what you're thinking as you get into 2019, and assuming the Fed continues to do what it's going to do kind of for -- the shape of the curve, et cetera. Would you think that -- you kind of level out somewhere in the kind of mid-3.80%s or something like that or is that too low or too high?
I think it's hard. I think that's hard to predict, with the yield curve as flat as it is, with really not knowing what going to happen. I do think once we close on Guaranty that will benefit us because they have a lower cost of fund than what we do. So, I think that's a reasonable expectation, 3.85% to 3.90% longer term. But again, that's really just an educated guess at this point.
Got it. That's helpful. I appreciate it. Thank you.
Hey, thanks Brad.
Thank you. Our next question comes from the line of Michael Rose of Raymond James. Your line is now open.
Hey good morning guys. Just one more question on the margin. Hey, how are you doing? Yes, so the -- most of the borrowings were up this quarter. If loan growth moderates, would that have any sort of impact? And what would be -- now that Integrity is in the picture, do you guys have an outlook for the quarterly accretion at least on an expected basis?
FHLB borrowings were up. And then we've actually had some that have runoff this month. Integrity had, I think, $60 million in borrowings. And we use borrowings only to fund our mortgage warehouse line and that was up a bit.
You saw -- so I anticipate our borrowings at FHLB will come down by the end of the year. We use them for liquidity. And because we had such high loan growth in Q2, we probably had more than we would normally have.
And as it relates to accretion, I don't really anticipate that to change much. We are pretty conservative when we mark those loans. There's a large part of that. Right now, those numbers are still provisional. We're still doing the final evaluations for the Integrity loans, but a large percentage of that will be non-accretable.
Okay. So, somewhere in the million plus or minus a quarter is a fair run rate?
That may even be a little high. I would say $800,000 to $1 million a quarter.
Okay. And then, David, you talked about growing the mortgage warehouse business up to around $500 million. Clearly, the pricing dynamics have gotten pretty competitive there. Is that kind of still the intermediate term goal? And what's the outlook for the business?
Yes. So, we're continuing to build around that and build that. Michael, it's going more slowly given the market dynamics and competitive pressure and things that we're seeing. So, yes, our objective is still to grow that to average outstandings of $500 million from $130 million, $135 million today.
And -- but I think that's going to take a little longer than we originally thought it would. We're going to make progress on that in the second half of the year. But if we could even get it to $200 million by the end of this year, and then continue to work towards the $500 million over the next year or two would be where we're going.
Okay, that's helpful. And maybe one last one from me. Obviously, nice core efficiency improvement. It sounds like there's going to be a lot of noise here in the next couple of quarters with deals closing. You guys -- with everything baked in, I would expect still positive operating leverage. Do you have any sort of intermediate to longer term targets for where you think the efficiency ratio can go, at least on an aspirational basis? Thanks.
I expect it will probably bump up just a little bit this quarter, Michael; just we're having Integrity for a full quarter. That's just always happens when we have two -- when we're running two systems. I expect in Q4, it will -- could go back down below 50 the way we calculate it.
And then I think for next year, there's going to be a lot of noise as well with Guaranty. But I think longer term, it will go trend below 50. Low 40s is not really realistic for us. It's growing -- the banks -- the way we grow. But 47, 48 longer term is probably more realistic.
Okay guys. Thanks for taking my questions.
Hey thanks Mike.
Thank you. Our next question comes from the line of Michael Young of SunTrust. Your line is now open.
Hey, good morning.
Good morning Mike.
Dave, going back to your initial comments on kind of the [Indiscernible] growth I understand. Pipelines are maybe coming down. But the longer term outlook, is that more just driven by where the deposit funding is relative to loan pricing. And if that dynamic became less pressure on the overall NIM, could you see a reacceleration in growth? Or is it more just kind of that's what the market is giving you at this point from a growth perspective?
Yes, I think that's in the market we're in -- Michael, it's a good question. In the markets we're in, we just continue to see the fundamental growth of the market. The amount of market share that we're able to get us adding teams. And so I think part of what drove the first half this year is that we added so many lenders. And when we talked about that in 2017 -- especially second half of 2017, we added a number of lenders, new and net additional lenders in each of our markets. And I think we saw that here in the first half as everybody's business started kicking in.
But again, as we look out what's in the pipeline, look at the growth in our markets. And then, as Dan mentioned earlier, just -- we do think we're late in this growth cycle, in this economic cycle and so we're underwriting even a bit more cautiously these days in certain asset classes to make sure that we're factoring in -- if you're starting a new construction project that doesn't have a lot of pre-leasing and it's going to come to market in the middle of your late 2019 or middle of 2020. Where we're going to be in the economic cycle then? And what's the likelihood of being able to get tenants at there -- in their base model of rent assumptions and all that.
So, we're factoring all that into our belief that over the next couple of years, we can continue to grow this even on the bigger asset base with post the Guaranty merger, at a 11%, 12% rate is a good rate for us and we think it's a sustainable rate.
If the economy is stronger than we think and things go really well, could that be a little faster? Sure. But it could also -- the economy can turn down. It could be a little bit slower than that, too. So, we're just kind of giving our mid-case assumptions on our side of continued reasonable economy and great markets for us when we get that Denver Guaranty acquisition done towards the end of the year. I think that really gives us another terrific, well-diversified market in a different geography of the country to grow in. And we like what that does for our overall when we look at our whole footprint.
And just -- we continue to be affirmed as we spend time in Colorado and what a dynamic market that is, and what a great fit that bank is with us on a cultural basis. And we're building -- working hard to build those relationships and -- on both sides and plan and look for strategic opportunities where there may be some synergies on growth and other areas. So, anyway, that really relates to how we feel about the loan growth.
Okay. Thanks for that. And I guess just looking at the capital picture and CECL coming in the frame kind of 2019 to 2020. Michelle, any updated thoughts there on any areas that you might need to bolster? Or do you feel pretty good about kind of where you guys are at this point, even being kind of later in the cycle?
I think our capital levels are fine right now, with our retained earnings, with the reduced tax rate, we're going to create capital. And so I don't see a need for us to raise capital anytime soon, borrowing some sort of transaction or something like that.
CECL, we're still in the process of evaluating that. We're not ready to disclose that impact. But I will say I don't think it's going to be as significant as maybe what some people thought when that got -- first came out a couple of years ago. So, I don't anticipate that being an issue as it relates to capital.
Okay. And you don't think that would impact, I guess, maybe there's a bigger picture question. But just the M&A outlook and attractiveness of future M&A deals based on that implication for you guys.
I don't think so.
Yes, I don't -- as we thought about that, Michael, we don't see that issue being anything that's going to impact our ability to continue to execute our strategy of finding good strategic partners.
Okay. Thanks.
Hey, thank you.
Thank you. Our next question comes from the line of Matt Olney of Stephens. Your line is now open.
Hey, thanks. Good morning guys.
Hey, good morning Matt.
I want to go back to the deposit cost discussion. And it sounds like some of the Texas banks got more aggressive on deposit pricing back in April, May timeframe in order to get ahead of the June Fed funds increase. And we're definitely seeing that now with 2Q results for several Texas banks.
So, if I understand, do you think -- is the market now starting to assume another Fed increase in September and looking to get ahead of that one? I'm just trying to understand if the incremental deposit pricing pressure remains very intense or has it somewhat softened since back April-May timeframe?
Matt, at this point, I really only have anecdotal evidence. But it doesn't seem to me that we're having the same, like request, for exceptions and those types of things right now that we had if you go back to last quarter. We did have several of our relationship managers last quarter calling the treasurer and saying, hey, our competition, it looks like they're pricing their deposits, getting ready for the next -- already pricing in the next increase.
Now, it may be too soon at this point. Maybe they haven't got ready to do that. Yes, we may see it next month. But I would say right now, we have not seen that. I have not heard that happened yet this quarter.
Okay, that's helpful. And then going back to credits. It sounds like there were a few additions on non-accruals and a few net charge-offs. Obviously, overall credit trends remained excellent. Some of your Texas peers did step their toe in 2Q. I'm just trying to understand what you're saying on the ground floor in terms of terms and conditions on some of your newer growth. And within CRE specifically, what are you seeing within that market?
Matt, this is Dan. We're seeing that the terms would be similar to where they have been. So, I don't think there's been a big shift. There is some pressure. Some of it not from banks. Frankly, they're coming from the insurance companies, which ultimately become competitors typically at this point in the cycle. And they certainly are advancing higher loan to values and less restrictive covenant terms than the banks would do.
So, I think that's where the pressure would come as it relates to a specific deal that coming in. Overall, I think the market continues to behave pretty well. And I think the banks, in particular, have been. So, I think that would be the guidance I'd give you on that side.
And I think, Matt, if you look at some of the credit challenges that some of the banks have had, not just in Texas but across the country. They've been in some of the larger credits. I'm making a broad statement here but have generally been in some larger credits, syndicated national-type credits. Although some admittedly originated here in Texas. That's where the challenges have been. And because that just hasn't been a focus of ours in our growth, we've been fortunate not to have been in those credits at this time. But we're always cautious and understand that when making large loans, whether they're part of a shared national credit or not, there's just more risk in a big loan then there is in a small loan generally so.
Sure. Okay. And then lastly from me. Any update on the timing of the Guaranty Bank closing and the innovation of the core systems?
Yes, great question. We have, as we mentioned in our release, in my comments, we have filed the regulatory applications. We've had preliminary meetings with all of the regulators to understand the landscape, given the nature of this transaction. And broad comment is we think that it will take a month or two longer than we had originally hoped when we announced the deal. And so as oppose to maybe early fourth quarter closing, we would expect that it appears now in our discussions with regulators just -- and the way that they're processing the applications that it's going to be more a late fourth quarter kind of acquisition close. And so that's we're planning for now.
We have a meeting later this week to discuss the timing of -- given that, then what would the timing be of our data conversion. And I don't have a forecast yet. We historically though, Matt, we've taken a slower approach on the larger deal. So, when we did the Carlile deal a year ago, we waited, I believe, it was six months post close before we converted the computers. I suspect that it will be something like that this go-round. I wouldn't expect the computer conversion if we were to close just picking a time here at year-end on Guaranty, year-end 2018, that it would be late spring or early summer of 2019 before we convert it.
So, we wouldn't see -- I think from a modeling standpoint, Matt, I wouldn't be modeling in. We're not modeling in at this point any income or anything from the Guaranty merger in the fourth quarter. And then so if you said, gosh, we started that at the end of the year and go forward with it, then it would be the second quarter some time and possibly even late second quarter of 2019 before we get the conversion done. And then -- so we'll begin to see the real benefit of that acquisition, the second half of 2019 is the way we're thinking about it now.
And above all, Matt, I want to say we know and understand that this is a $4 billion company. We're a $10 billion company buying a $4 billion company pro forma $14 billion at year-end. We're putting a lot of time and a lot of effort and a lot of focus on making sure we get this one right. And we have a lot of other things going on and people have mentioned CECL. And we are going through $10 billion. And even though that -- it doesn't have the same implication it did before the Dodd-Frank relief bill here recently, it still has implications.
And so if we think through all of that, just know that when we -- when our Executives sit down every week and we talk about what's on the plate and what we're focused on and what our teams are focused on, it has everything to do with making sure that we finish up the Integrity acquisition well here, and that we get their people. And we're now -- our people integrated in well.
And then that we focus on making sure that we get the next one right. And we understand that our ability to execute our plan, which is still ever plan, Matt; we grow organically, and make good strategic acquisitions, grow earnings per share, and grow our tangible book values. That's what we've done in the last five years as public companies. What we're going to do in the next five years is public company.
And I think our opportunity set now is as good as it's ever been the next few years to continue to execute that. But it's only -- our ability to continue to do that is only as good as making sure that each acquisition is executed well when we get the benefits of the acquisition that we communicate to the market we're going to get and that will give us then the opportunity to do the next one.
Okay. Thanks for the commentary.
Yes, thanks Matt.
Thank you. Our next question comes from the line of Brett Rabatin of Piper Jaffray. Your line is now open.
Hey, good morning Dave and Michelle.
Hey, good morning Brett.
I wanted to ask, just following up on Guaranty. They had a pretty strong second quarter. And I was just curious if you looked at what they're -- how their trending. Is that maybe gives you some confidence for 2019 from a EPS perspective accretion.
And just maybe any update you've talked about that integration quite a bit. But maybe just any update on kind of how you see them performing and then just thinking about the Denver market and what your thoughts are in the growth of that franchise over the next year?
Sure. Everything that we've seen and everything we've come to know about Guaranty Bank is confirmed. What we said at the announcement a couple of months ago that they're an outstanding franchise.
As you point out, Brett, they had a really good second quarter. That was no surprise to us. They've got just really an outstanding leadership team there and great lending teams and wealth management business across the Board.
So, we remain confident in the model that we did at the acquisition announcement and that we're going to be able to execute and that we're going to see the accretion that we announced. The cost saves, as we're getting further into it, we were very confident on the level of cost saves that we announced for this acquisition.
And so -- but again we had a strong model going in and then we haven't seen anything that changes that, Brett, I guess would be the answer to the down where they're up, I guess, just outstanding bank, performing well. We assume that's in our model and so that's built in.
The opportunity set that we think we have there, I believe we have there are a few. We talked about their wealth management platform. I was in Denver last week and spent some time with the leadership with that Guaranty really, really strong leadership there. And we do believe that scalable into Texas, both organically and then with potential acquisitions over time. And then vice versa on the other side of the house, on the mortgage side, we've began to really plan our strategy for how to roll our retail mortgage business out across Colorado and the Front Range and we think there's a real opportunity set there.
And then the energy business, which energy loan growth has been a little bit slower to come our way than we expected. And but we do believe there's an opportunity set there. Guaranty has a really strong customer base. A lot of wealthy families that are in the energy business that due to depository business would Guaranty, but due to their loan business off with other entities because Guaranty has not been in that business. And we really believe over the next six to 12 months, we'll be able to meet those folks, build those relationships, getting their trust and move the loan parts of their business over as well now.
When we get all that done, it's not going to happen January 1st, but we do think over the course of next year, we will see a little tailwind in 2019 from growth in their energy business in the Front Range of Colorado, both their existing customers and being able to market out there with the local presence. So, we're very bullish on the transaction and very bullish on overall just the company Guaranty Bank and look forward to be in partnership with them.
Okay, great. Appreciate the color.
Okay. Thanks Brett.
Thank you. [Operator Instructions]
Our next question comes from the line of Brian Zabora of Hovde Group. Your line is now open.
Thanks. Good morning.
Hey, good morning Brian.
Just a question on the deposit side. It sounded like you saw that maybe deposit -- you can take down some of the borrowings it implies that maybe deposit growth kind of keeps pace with loan growth and maybe exceed. So, I just want to kind of confirm that and what your thoughts around maybe the mix, if it will be slight more towards some of the promotional activities that you have or what's the right kind of potential flow from existing customers?
I think -- I don't know. It depends on what loan growth is, right? It's how much we can grow our deposits and we need to allow an FHLB advances. But as I said before, I think our FHLB advances will come down in the second half of the year.
And the mix, we have a lot of opportunities to grow deposits in the specialty treasury group if we need to, especially now that we ended the quarter at over $10 billion. I think there's more opportunities there to grow deposits, as well as now that we have Integrity's bankruptcy trustee deposits. We have the ability to grow those some as well.
So, I think that's where that growth is going to come from. It's going to come from the specialty treasury group. We do have one promotional CD out there right now, as I mentioned earlier, it's paying 2.25 that we have had some success with. It's not nearly the success we had with the one that was paying 2.7. So, I think our mix will probably be rounded out among those groups.
Great. That's all I had. Thanks for taking my question.
Hey, thanks Brian.
Thank you. And I'm showing no further questions at this time.
Okay. I appreciate everyone being on the call this morning. As I alluded to, we're continuing to focus on execution of the recently completed Integrity deal and the Guaranty deal that we have on the horizon. Our core earnings and core ability to grow the company and create value to what we have is intact. We feel great about it. We're in very encouraged and optimistic about what the second half of 2018 is going to allow. And we have a lot of hard work to do as we get ready for the partnership with Guaranty. And beyond that, we appreciate everyone's support and appreciate your interest in the Independent Bank story. We're going to keep executing. Hope you have a great day.
Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Everyone, have a great day.