James Tippit – Head-Corporate Responsibility David Brooks – Chairman and Chief Executive Officer Michelle Hickox – Chief Financial Officer Dan Brooks – Vice Chairman and Chief Risk Officer.

Matt Olney – Stephens Michael Rose – Raymond James Brady Gailey – KBW Brad Milsaps – Sandler O'Neill Michael Young – SunTrust Brett Rabatin – Piper Jaffray.

Good day, ladies and gentlemen, and welcome to the Independent Bank Third Quarter 2017 Earnings Result Conference Call. [Operator Instructions] And I would now like to introduce your host for today’s call James Tippit, Head of Corporate Responsibility. You may begin..

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

Before we get started, I would like to remind you that the 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 Safe Harbor statement.

Please note, if we give guidance about future results, that guidance will be only 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 and CEO; Dan Brooks our Vice Chairman and Chief Risk Officer and Michelle Hickox our CFO. At the end of their remarks, we will open the call to questions.

With that, I will turn it over to David..

Thanks James. Good morning everyone and thank you for joining us today. As usual, I will briefly touch on some highlights for the quarter, then Michelle will cover the operating results. We also have Dan Brooks, our Vice Chairman Chief Risk Officer with us this morning, to provide color on loan portfolio.

Independent Bank Group continues to perform well in the second half of 2017, reporting another quarter of record net income. As noted in the release, adjusted net income was $24.8 million, representing a 68% increase in adjusted net income from third quarter of 2016. A quarterly earnings and annual trend chart is on Page 6 of the slide deck.

Although loan activity was impacted by Hurricane Harvey, particularly in Houston, we are pleased to report 6.9% annualized growth for the quarter and 11% annualized growth year-to-date. Asset quality remains strong and trends are favorable. Our integration of the Carlile franchise is continuing and going well.

We are seeing improvement in our efficiency ratio and making progress on our strategy in Colorado. I will now turn over to Michelle to provide details on the operating results for the quarter.

Michelle?.

Thank you, David. Good morning, everyone. Please note that Slide 5 of the presentation includes selected financial data for the quarter.

Our third quarter adjusted net income was $24.8 million, or $0.89 per diluted share, compared to $14.8 million, or $0.80 per diluted share, for the third quarter of last year and to $22.7 million, or $0.82 per diluted share, for the linked quarter.

As you can see on Slide 7, net interest income increased to $72.9 million in the third quarter from $69.5 million in the second quarter 2017. The net interest margin improved to 3.85% for the quarter, up four basis points from the previous quarter, which is 3.81%.

The adjusted margin, net of acquired loan accretion, was 3.80% compared to 3.78% in the second quarter. In addition, we’ve recovered $458,000 of non-accrual interest during the quarter, which added two basis points to the margin.

Total non-interest income increased to $12.1 million compared to $4.9 million in the third quarter last year and to $11 million in the previous quarter. The increase from last year is primarily due to increased service charge income, mortgage income and increased earnings on BOLI policies, primarily driven by the Carlile acquisition.

The increase from the linked quarter is related, primarily, to $871,000 of recoveries of loans that had been charged off prior to acquisition. Total non-interest expense increased $21 million from the third quarter last year and decreased $3.4 million from the prior quarter.

We recognized $7.3 million of acquisition expense during the second quarter 2017, including $1.6 million of salaries and benefits compared to $384,000 in the prior year and $3 million in the third quarter.

The remaining increases in salaries and benefit, occupancy, data processing and other line items from the prior year is primarily related to Carlile acquisition, including a $917,000 increase in core deposit and tangible amortization.

The provision for loan loss expense was $1.9 million for the quarter, which decreased from $2.5 million for the linked quarter and $2.1 million from the prior year. Generally, provision expense correlates with net loan growth and level of charge-offs for specific reserves during the quarter.

Slide 14 in the slide deck illustrates our provision expense and charge-off in each reported period. Deposit composition and costs are illustrated on Slide 16. Deposits increased $203 million or 12.1% annualized to $6.9 billion at September 30, 2017, compared to $6.7 billion at June, 30.

Non-interest bearing accounts make up 28.2% of the deposit mix at September 30, 2017. In addition, interest-bearing public funds have decreased to 11.1% in 2017 compared to around 17% prior to the Carlile transaction.

The average cost of interest-bearing deposits at 66 basis points was up from the second quarter and up 15 basis points from 51 basis points in the third quarter, prior year.

While we have still not increased our stated rates on deposit products, municipal deposits generally have high betas, and certain products tied to the Fed Funds rate have increased. Federal home loan bank borrowings, which are used for liquidity and interest rate risk, increased by $100 million during the third quarter.

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..

Thanks, Michelle. Good morning, everyone. Organic loan growth during the quarter was impacted by the disruption caused by Hurricane Harvey, with loans held for investment, not including mortgage warehouse, growing 1.8% from June 30, 2017 or 6.9% on an annualized basis. Slide 10 illustrates annual loan growth comparisons.

Slide 11 shows the composition of our loan portfolio and specifically, our commercial real estate portfolio. As of September 30, 2017, commercial real estate makes up 51% of total loans. As represented in the graph, CRE is 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, with 58% in small strip centers and only 6% in big box stores. The average retail loan size is about $1.4 million, with only 33 loans that are over $5 million in this portfolio.

This portfolio is well diversified across our footprint with the weighted average debt service coverage ratio of 1.69 times and an LTV of 59%. Slide 12, also shows the trend of CRE concentrations to capital. Total CRE to Tier 1 capital was 393% as of September 30, 2017.

The Carlile loan portfolio included a mortgage warehouse purchase program, which totaled $139 million as of September 30, 2017, and was up about $18 million, since June 30, 2017. Credit quality metrics remained strong. Total non-performing assets were down slightly to 0.28% at September 30, 2017 from 0.30% of total assets at June 30, 2017.

We’ve been successful at selling some of the other real estate acquired in the Carlile deal. Charge-offs remained low at less than 0.01% annualized for the quarter as well as year-to-date. The allowance for loan loss increased to 61 basis points from 59 basis points of total loans last quarter and decreased from 68 basis points in the prior year.

This decrease is due to the accounting treatment for acquired loans, whereby they are recorded at fair value and do not carry over the acquired bank's allowance for loan losses. As of September 30, 2017, we have recorded a discount for the acquired portfolio of approximately $27.4 million.

The recorded allowance for loan loss, plus the remaining fair market value discount on loans acquired, is approximately 1.04% of total loans held for investment as of September 30, 2017. Our Houston market was impacted by the hurricane at the end of August, but we do not expect significant potential losses in the loan portfolio.

Only a few properties that service collateral for loans were flooded or damaged. We're working with customers and have made some minor modifications on loans and waived some fees, but it appears the effect on asset quality will be minimal. And we are beginning to see a return to more normal loan demand as the Houston market recovers.

That concludes my discussion on loans. I will hand it back over to David to conclude the call..

Thanks, Dan. Positive trends and profitability, capital efficiency and loan growth have continued into the second half of 2017. Thanks to the hard work of our team members, earlier this month, we completed the core system conversion for Carlile acquisition as well as the sale of nine Colorado branches.

We believe that the completion of these important steps will improve our efficiency and allow us to realize additional benefits from the full integration of the Northstar Bank's operations by the first quarter of 2018. M&A remains a significant part of our strategy and M&A conversations are ongoing.

I remain optimistic about finding good banks to partner with, in the markets where we want to be. As always, we are focused on consistent strong earnings performance and enhancing shareholder value, and we think our results continue to demonstrate our commitment to those goals.

Thank you for joining us today, and we will now open the call to questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Matt Olney of Stephens. Your line is now open..

Hey thanks, good morning guys..

Good morning Matt..

Want to start on the operating expenses. David, you just noted that you guys just completed the system's conversion of Carlile. I'm curious on the timing of the remaining cost saves and the dollar amount of the remaining cost saves. And it sounds like you expect a good clean run rate by the first quarter.

Did I get that correctly?.

Yes. I’ll let Michelle give you some details, Matt, but we did have a good successful conversion right on schedule, first weekend in October. And that is consistent with what we've been communicating that we’ll get the rest of the cost saves here in the fourth quarter. Michelle, you might talk to the run rate effect..

Yes. So Matt I think we – I’m estimating we have about $2 million of redundant expense that has been in Q2 and now again, in Q3, primarily related to people and us having to run two core systems through this day. Most of the people are here through this month, and then there is a handful that will stay through the end of the year.

So really, what David said is right, we should get a good clean run rate in the first quarter with all of our cost saves out. And then taking into account, first quarter, we always have some additional expenses related to payroll bonuses, those type of things.

But related to the Carlile acquisition, those costs should be pretty much gone by that point..

Okay, I got it, thank you, Michelle. That was helpful. And then switching gears over to the loan growth, David, I'm curious about the loan growth in the third quarter.

Anything you can provide as far as what you're seeing by market and by loan type?.

Yes, Matt, we can and – our Houston market, to give you an example, was growing 18% through June 30 on annualized basis, was pace for 18%. And the third quarter is basically flat, up 1%. So we saw an almost 20% growth engine in our system go, because of the hurricane, to basically flat for the third quarter.

And then other areas that continued on strong. Our North Texas group grew at almost 20% for the quarter, really, in terms of segment or sector, very consistent with what we've got on the books today. We did see, maybe a little bit unexpected paydown in our energy portfolio by $17 million in the third quarter.

That was a little additional headwind in the slower loan growth. But we – as we look forward, and I was speaking with our Chief Lending Officer earlier this morning, getting kind of up-to-the-minute feel of where we are, and the pipeline looks very good, our run rate looks good for the fourth quarter. We're seeing it across all the markets right now.

The other thing that we continue to watch, of course is we added Carlile, April 1, getting $1.5 billion or so of loans integrated into the system and those customers converted over and then getting all the lenders up to speed on our structure and our credit function. And how we like to do loans and get them through loan committees and et cetera.

It just takes a while, it's a normal thing. And then you have some normal attrition that happens. So again, a little bit of headwind there, I think, the second half of the year here and just a bigger base. But all those things, we still expect a – our typical annualized growth here in the fourth quarter of 10%, 12%.

And based upon a couple of other things, I'll give you a couple of other points, I think that are important around our loan growth going forward. One is, we've really been active here in the third quarter, hiring new lenders.

And that's – we hadn't done a whole lot of that net new lenders the last couple of years, given the energy price crunch and just observing the market and watching to see what opportunities there were. But we hired five new lenders in Colorado in the third quarter, including a team of five in Denver and one up in Northern Colorado.

And then we hired an equipment lender, someone over to head up and start up our new equipment lending division in the third quarter. That gentleman will be headquartered in Houston – housed in Houston, and we'll build out our equipment lending function from Houston.

And then we added another couple of lenders across the Texas footprint, I'm talking about net new lenders, not replacement hires. So and I think we see that trend continuing here into the fourth quarter. So we're adding a lot of capacity right now, both in Colorado and in Texas.

And I think that bodes well, Matt, as we think forward to 2018 and beyond that we still see ourselves as low double-digit earnings – or I'm sorry, loan growth company. Hopefully, earnings growing faster than that. But loan growth, yes..

Okay, David. That’s a great color. Thank you. I will hop back in the queue..

Okay, thanks..

Thank you. Our next question comes from the line of Michael Rose of Raymond James. Your line is now open..

Hey, good morning, guys.

How are you?.

Good morning, Michael..

Hey, just a follow-up on the loan growth question here. You mentioned that Houston was flat this quarter.

How quickly would you expect Houston to recover after a storm like this? And I know, clearly, Houston is a big city, so different parts of it were impacted more than others, but can you just maybe speak to the pipelines there and maybe some hiring plans there?.

Well, people continue to recover in the certain neighborhoods that were most ill affected there and we're continuing to observe and try to help in those situations.

That said, most of the market really appears to be back, hitting on almost all cylinders, the loan growth, the amount of the economic activity draws on lines of credit, operating lines of credit, things like that appeared to be normal and customary here for the fourth quarter.

We haven't seen any big inflow of deposits or any extraordinary or unusual loan request as a result of the storm. We do expect, we're looking at – Country Club, is an example that had significant damage, wanting to rebuild their clubhouse, et cetera. So there will be a few requests like that that we think will be net additional to our normal volume.

But right now, we're expecting them to be back in that 15%, 20% growth range for the quarter and at all signals in that direction..

Okay. So it seems like – so the pipeline is basically remains the same.

It's just the delay in the fundings, given the storm?.

Exactly, yes. We saw a few of those deals close right toward the end of the quarter. And then, I think the things that got pushed from the third will close in the fourth, some in the first quarter.

And then net I really believe – we still continue to think that by March 31 of 2018 our loan – gross loan portfolio held for investment should be about where we had projected it to be prior to the hurricane..

Okay, that’s helpful. And then maybe just switching to margins, Michelle, you mentioned some unit deposits. Can you just quantify that book, and I know Carlile was a little bit more asset sensitive to you. So can you just speak to what you would expect on that from a potential rate hike, if we get one in December? Thanks..

Yes, so I think our margin was stable, if you pull out the nonaccrual interest recovery that we had from last quarter, which actually, I was happy to see, given that the yield curve flattened a little earlier a couple of months ago. Anecdotally, I have not seen as much pressure on deposits. I get – we haven't raised our deposit rates.

But I do get the exception requests. They come – at least come through my e-mail I see them, and I have not seen as many of those over the last couple of weeks. We have what – our public fund, some of those go. We have not been bidding aggressively on those because we've had the liquidity that we got from Carlile.

And then we've been able to get deposits through our specialty treasury group that are a little less expensive than the public funds are right now. So we're working hard to try to keep our deposit costs down. I think that's really the big question with the net. We do have some deposits like correspondent accounts that are really tied to Fed funds.

So we'll get an increase in those. But for this quarter, that's just going to be the last half of December, most likely, if there's a rate hike then. So I would say our margin – yes, margin is probably is going to be – I would say its going to be stable over the next couple of quarters, is my estimate..

And that's with the 3.81% in the second quarter, correct?.

Well, the core margin in Q3 is, I would say is 3.78% once you pull out that nonaccrual interest..

Got it. Okay, understood. And then just finally, David, just wanted to get your updated thoughts on the Colorado franchise. Obviously, you guys sold the branches, but it looks like you hired some more lenders. So maybe, there's a longer term commitment there.

Any updated thoughts just on what you want to be in Colorado over the next couple of years?.

Sure. We did have a successful closing with Triumph on those nine branches. We have currently about $0.5 billion of assets there, down from 650, 700 when we acquired the Carlile franchise. So that again is consistent with the sale of those branches.

We are quite pleased with our early momentum there, the loan opportunities we're seeing, the opportunity to hire really talented people and continue to expand there. We are actively looking at smaller banks, generally there for the possibility of a fit or any kind of an add-on that we might be able to do.

And then other than that, we really see it as an organic growth opportunity, and we have really good leadership there.

And so we – our intention at this point is, and we're six months in, but our intention is to continue to try to build it toward $1 billion, whether we'll get to $1 billion by the one year anniversary or probably, it's going to take a little longer than that, as you alluded to, Michael, it might be more 18 to 24 months.

But I do believe we'll get it to scale in a reasonable time period. Our board has been looking at that quarterly and giving them up-to-the-minute updates on our progress there.

And we're encouraged so I think our vision at this point is we're moving forward in Colorado, hiring talented people and looking for any banks that we can partner with or acquire there, and we're going to build it and stay..

Great, thanks for taking my questions..

Thanks Michael. Have a good day..

Thank you. Our next question comes from the line of Brady Gailey of KBW. Your line is now open..

Hey, good morning, guys..

Good morning, Brady..

So David, you're at, basically $9 billion in assets now. So you got one to go until you hit the threshold.

Can you just update us on when you think you'll cross that? Will that be in 2018? And then any sort of updated thoughts about the preference, would you like to just cross it organically? Would you like to cross it with the deal? Are you open to both? And then, maybe an update on how M&A conversations are going over the last couple of months?.

Sure. Yes, we do intend to continue to grow and execute our strategy, Brady, so we're not going to slow down in any way, shape or fashion. We're going to grow organically.

And so if you put M&A to the side for a moment, we've – our forecast and growth that we just continue to growth in the low-double digits will put us right on $10 billion or slightly through $10 billion by the end of the year. And I think there's even a first quarter the following year look back.

So it's highly likely that even organically, we'll get through $10 billion in 2018 in that timeframe. And then, obviously, our hope is – well, my first preference would be to buy $20 billion bank, go straight to $30 billion. But candidates are limited on those. I'm not getting any calls from the $20 billion banks wanting to be acquired.

So we're continuing to work on that. I think we will make acquisitions in 2018 and to go put us through. Everyone talks about wanting to go through and get to 12 to 15 as quickly as possible. And we'd like to do that too.

But you have to have willing partners and in that vein, the pricing expectations are still very full pricing expectations on the part of sellers today. We've been fortunate to have good performance in our stocks, so it makes it possible for us to look at banks that have big price tags on them.

But we continue to say that any deal we make has to be good for the seller and the buyer and has to be good for our shareholders. Most of the – the good news is, most of the sellers really understand that they're taking our stock, that it's important that there's a good announcement.

And if their – if they have to take 98% or 97% of what their target price was, we'll be understanding that a good announcement will probably get them where they're trying to get to. We're having good and productive conversations on that vein. So I'm encouraged, optimistic that over the next few quarters, we'll have some action or activity here..

And then, also, on the M&A front, from a geographic point of view, I mean, clearly, you want to be bigger in Colorado.

I mean, is the priority to do a Colorado deal right now or is the priority still your home state of Texas?.

I think, our – likely, the bigger transactions here in the very short-term will probably be in Texas. And then anything we do on Colorado, likely, would be smaller, and that's just, as much as anything, the nature of the market up there. There's some very, very attractive and well-run banks that are $3 billion-plus.

And then there are some nice community banks, sub-$500 million. And there are a few in between but not a lot. And so you're really looking in Colorado, now that we have been there, looking hard and getting to know the market for a year, you're really looking at $3 billion-plus and $500 billion and down, kind of, opportunities.

And so I think it's more likely, in the short-term, that we would do something under $500 billion there. And then, any, the larger $1 billion to $3 billion banks would likely be in Texas..

Got you. Thanks David..

Perfect. Thanks Brady..

Thank you. [Operator Instructions] Our next question comes from the line of Brad Milsaps of Sandler O'Neill. Your line is now open..

Hey. Good morning..

Good morning, Brad..

Michelle, wanted to follow-up on the expense commentary. It sounds like, a couple of million bucks could fall out over the next quarters or so.

Can you just remind us, kind of, what your expectations around the P&L impact of the branch there? I think you have, in the past, talked about it being pretty neutral, but just curious, if there's any change to that. And any more guidance, kind of, around the expense or loan growth numbers for the quarter..

No, Brad, that hasn't changed. I think you saw, we – the loans in those branches, when we sold them on October 6, was $99 million and deposits were around $166 million. So our outlook on the impact on P&L has not changed. It's virtually a no effect.

And I – as my comments earlier, the $2 million out of our run rate for redundant expenses I think is still appropriate. And again, you'll see that in the first quarter. But keep in mind, first quarter we do always have additional expenses related to payroll taxes and such that will offset that sum, just normal growth..

Got it. And then just a follow-up on the NIM discussion. It looked, unless there was a reclass that you had a lot of growth and interest-bearing checking which could be the many deposits you discussed. And then money market was down, the higher costs of money markets were down quite a bit.

Can you talk about, is there a certain strategy around shifting from the money market to the interest checking? Obviously, it's cheaper.

But curious, kind of, what might be driving that and, kind of, how you're approaching sort of those higher cost deposit categories?.

They're actually worse than reclasses. Because when we mapped over some of Northstar’s accounts, they actually mapped into interest-bearing versus money market. So I think that's where most of that came from.

There hasn't really been a specific strategy at point other than, as we talked about earlier, that our specialty treasury group, which has been growing. 1031 Exchange, C3 broker, dealer deposits, corresponding bank accounts, that's really where a significant part of our deposit growth has come from this quarter..

Great. Very helpful. Thank you..

Thanks, Brad..

Thank you. Our next question comes from the line of Michael Young of SunTrust. Your line is now open..

Thanks. Good morning..

Good morning..

Wanted to start maybe just on the fee income outlook.

Were there any impacts for this quarter from either fee waivers related to Harvey or even some lingering ones from the Carlile acquisition that we should think of as kind of normalizing going forward?.

Service charge fee income related to Harvey really was not significant. We did waive fees down there for a couple of weeks after the hurricane. But I think the impact of that was maybe around $50,000. So really not significant..

Anything on the loan side, Dan? Just few extensions and things, but no – not a lot of fee impact that you saw..

No, I would say there was none, none fee impacts..

So, no, I think what you see is pretty normalized for the third quarter, Michael..

Okay. Great. And then maybe just switching over to couple of the C&I loan book items. And you had the energy paydown, and you called out on those, little unexpected.

But should we generally think about that book as growing, maybe, slowly from here? And then, similarly, on the mortgage warehouse side, some growth there this quarter, is that just higher volumes – industry volumes, or were you able to add net new clients there?.

So I’ll start with energy. I think we do and have planned to grow that energy book of business. We have approved some opportunities over the last few weeks. And so I – we're hopeful that we'll see that begin to increase here in the fourth quarter. But it's not going to be doubling or anything in the next quarter or two.

Even though it's a small base, it'll take us a while to rebuild that. And again, a part of that is just the market, there’s sluggishness of the oil prices themselves, the commodity – underlying commodity prices really haven't been favorable for just an awful lot of growth and expansion and fields and those kinds of things.

But we are seeing some moderate level of activity and to the extent oil prices stay in the 50s here, that's probably encouraging for some assets changing hands. And when assets change hand, we often get an opportunity to look at financing math. So generally, should be up from here, broad trend over the next year or two, Michael, on the energy side.

In terms of the mortgage warehouse piece, when we acquired Carlile, our strategy was to take that very small line of business and grow it slowly and methodically.

And I think we're starting to see the result of that here in the third quarter of maybe adding – trying to add some customers who are a little bit larger and little less focused on the mom and pop, one-off mortgage shops, which I think was the bread and butter of the Carlile mortgage warehouse and just beginning to look at a little bit larger players in that.

Again, I think they'd be considered very small, if you look across our peers and competitors. But yes, we're going to build that line out. We did see some progress this quarter, encouraged about that. And I think it's over and above just market fluctuation. We actually picked up net customers..

Okay. Great. And if I could sneak one last and maybe just on the $10 billion asset threshold, following up on Brady's question.

Just the timing of expenses related to, kind of, preparation there, I know there's probably already sum in the run rate, but how much of a ramp should we expect next year, related to that, Michelle?.

So we're in the process of actually going through that process right now of getting a time line and a roadmap to be prepared for a DFAST as well as Stifel, really, we're doing those concurrently.

It's probably going to cost us $2 million to get between now and when we do our first submission, which based on when David thinks will go over $10 billion, and when we're estimating will to go over $10 billion, will be 2020. And so I think the majority of that expense is probably going to come second half of next year and then first half of 2019..

Okay. Great. Thanks for the color..

Again, that’s – but if you think about it, Michael, that's $2 million of pre-tax expenses over the next 30 months between now and the middle of 2020. And with – as Michelle said, the bulk of coming now we’re 12 months between June of 2018 and June of 2019. But again, you're talking about a few cents spread over time.

So we don't expect it to be material to run rate. We will, I think, by end of the year, first quarter of next year, be able to give you even more specifics. Once – as Michelle said, we have our exact game plan and strategy of which parts of it we're going to do and which quarters.

And then we'll bring that down and try to provide a little more color, if there's anything that changes the run rate. But again, I think our – I think the Street has – our earnings growing fairly rapidly over the next couple of years, and we don't expect that to be a material headwind, really..

Thank you. And our next question comes from the line of Brett Rabatin of Piper Jaffray. Your line is now open..

Hey. Good morning, David and Michelle..

Good morning, Brett..

Wanted to ask, just on your profitability is going to improve as you get to lower expenses on the expense phase, in the next two quarters.

I'm just curious, as management and the board think about profitability, do you have goals for the next couple of years? And then just, as you think about what you want to achieve from an EPS growth perspective, I guess, I'm just curious to hear your comments on general level goals that management has for the bank and opposes transactions?.

Let me give you – good question, Brett. Let me give you kind of my high level thoughts and I'll let Michelle weigh in with probably some more specific numbers that will be more interesting to you as you think about modeling. We do believe we’ll continue to see efficiency ratio come down and OREOs grow up as we get the economies of scale.

We always felt that in the $7 billion to $10 billion range should be a sweet spot for us, given our structure and our infrastructure cost, if you will.

But we're seeing it yield now, OREOs getting into the 1.10% plus range, and we – as we look out over the next couple of years, I think we’ll see them in the 1.20%s as our efficiency ratio continues to come down.

And Michelle may have more specific color or timing, but obviously, we're just going to continue to grow the bank and be as profitable as we can be. But Michelle, you have any idea or thoughts on….

No. I think David's comments are consistent with what I think. Our efficiency ratio is back down to below 52% on an adjusted basis this quarter. And I think that's reasonable for us and I think it will go down some. Some of that – sometimes for us it’s lumpy.

As David talked about, bringing on new lending teams, so it depends on how quickly those become profitable. So there still could be some lumpiness. But I think of over the next couple of years, it's going to trend down to below 50%..

Which should yield OREO in the $120 million..

$120 million to $125 million. Yes..

Okay. Great. I appreciate the color..

Thank you. And I'm showing no further questions at this time. I'd like to hand the call over to David Brooks for his closing remarks..

We appreciate you joining our earnings call here for the third quarter. We're encouraged about the days ahead and appreciate your interest. Feel free to call us with other major questions any time. Hopefully, everyone has a great day. Thanks..

Thank you. Ladies and gentlemen, that does conclude our program today. You may all disconnect. Everyone, have a great day..