Q4 2019 Earnings Call

capability to draw strong risk appropriate

Returns while we continue repositioning the balance sheet for more sustainable long-term earnings generation, despite the fact that our men decreased on a link quarter basis. It's important to understand that money is related to the earning assets shift specifically an increased level of liquidity as we continue to see growth in average deposits. We continue to believe now is not the best metrics to Thursday is relative profitability our future Revenue generation in this low-rate environment and net revenue and more specifically that interested in is more relevant traditional down and the impact is more significant than the decline in lower for the quarter which is reflective of the catch up from prime rate decreases in September and October .

No fees were basically flat in the fourth quarter as compared to the third quarter mortgage deals were down on a linked quarter basis and volume incentives continue to be part of the lower. He'll he'll he'll continue to be pressured which was expected as compared to actual mortgage rates Additionally the timing of sales of higher rate loans, and the rebuild of balances at lower rates can adversely affect the average yield.

Continue to have growth in.

Average deposits with growth in interfering and slightly more in non-interest-bearing overall probably cost decreased by 22 basis points from 121 basis points in the third quarter page ninety-nine basis points in the fourth quarter the decrease resulted from continued growth and dda's as well as meaningful decreases in interest-bearing deposit costs interest-bearing deposit cost is 31 basis points from the third quarter and we expect to see further decline in this with a full quarter of the October 8th moon.

Continue to have a solid deposit Top Line and Keith mention the launch of what we believe will be the most impactful deposit vertical dots Bank occurred late in the fourth quarter within National launch down for next week. How old was continued strong deposit growth in our core businesses these new verticals will begin to lessen the sensitivity of our funding stats changes in Market rates.

We experienced a decrease in average traditional l a charger in the quarter is we continue to actively managed Productions in our leverage and energy to Leah's traditional average balance is down 1% from the third quarter and basically flat from this time last year the level of overall payoffs continues to be high primarily in cre we're we're continuing to replace run off with fundings on existing commitments and some new originations in contrast to the Sienna leverage runoff is not being backfilled and often CNN leverage for the year. We're in life is what we planned and we expect another ten to twenty percent reduction in twenty-twenty as we focus on right-sizing our risk profile in this.

with energy

The overall level is coming down, but we are certainly still in the business and are selectively adding relationships. If they fit within our defined risk opposite again in a strong average total Mortgage Bank balances for the quarter driven by continued. Our mortgage rate average balances are up from this time last year by 61%

continue to experience good growth and linked Porter average total deposits with a mix of interest-bearing as well as non-interference. We normally see some seasonality in deposits in later fourth quarter and first quarter, but so far that has been more muted primarily as a result of our mortgage clients continuing to have strong originations, which drives escrow balances. We continue to see improvements in two thousand with some country music contribution from articles as well as from existing clients, including mortgage-finance escrow accounts, we expect that to continue with significantly more meaningful Improvement in twenty20s verticals particularly bass bank and our commercial escrow business get more traction as we've discussed. The goal is to deliver a more granular less rate-sensitive funding stack will serve as well through all great cycles. And while we're optimistic about what we'll accomplish in 2020. We're building this for the long term.

Actual interest equivalent cost of bass Bank compared favorably to other sources with a lower through cycle beta and significantly more granularity than our index deposit. Certainly. There are their mom and promotional expenses.

I'll discuss like our focus on deepening existing relationships through our treasury management offerings will continue to provide meaningful deposit improvements in 2020 interest-bearing deposit down on 31 basis-point linked quarter. Only part of this Improvement translated to overall deposits cause at 40% of our deposit for foglio's in DDA, the 22 basis drug treatment and tell the deposit cost and 22 basis points Improvement in total funding cost as we mentioned index deposit, same time or percent beta while all other interest-bearing is assumed he closer to 50%

What appears it rains will be stable for the near-term our playbook for stepping where he's down remains in place and we're constantly evaluating ways to optimize but the most effective tool we have is to continue to deepen existing relationships with treasury services that drive overall deposit costs down and we believe post-merger the existence of more Texas Capital Bank branches will be extremely beneficial for Brokers deposit. We increase the overall level slightly to 2.3 billion with favorable pricing The Selective use of brokered CDs has been an option to supplement the funding stack as we reply from higher-cost deposits and gain Traction in Newport Folk.

Linda non-interest expand we continue to see positive Trends in core operating expense category typically focusing on changes in salaries and employee benefits expense which represents over 15% of total nie 2019 salaries and employee benefit expense is 8% higher than 18 while that is slightly higher than the mid single-digits expense. We originally projected took some investments in backstabbing and a mark-to-market on deferred compensation of 3.6 million that's directly tied to stock market performance. We continue to be deliberate in adding a very hard and attracting exceptional Talent our story continues to be extremely compelling and we have only seen that interest pickup post-merger announcement.

We experienced on Oracle of the MSR impairment in the fourth quarter approximately two point six million off sending a portion of the over eight million of impairment occurred through the third quarter.

We know the last quarter classifications of several of the items as well as the marketing fees related to deposits have been punitive to our efficiency ratio. So you'll see the squad but we started reporting efficiency ratio on an adjusted basis, which we believe is more representative of what is actually happening.

Show for the fourth quarter was elevated with a few discrete items which included one point three million of merger related expenses. Additionally, we encourage six million in other professional expect that represent upfront investment related to new Sienna verticals will be another two and half million in the first quarter, but nothing recurring subsequent to that in 2026 has provided or refinement of our go-to-market strategy and includes targeting industries that meet our desired return profiles which generally means Industries with higher levels of self-funding. It also included in improvements of capabilities required to launch and deliver these verticals. We've already launched two and both will be break even during 2020 and we have others that will be evaluating the future rollout. But even if we don't let launch any others are eight and a half million dollar investment would be recaptured over a 2-year period you also believe that other lines of business will benefit from some of the enhanced wage.

abilities of this investment

Lastly 2019 includes a little over nine million dollars of expense related to both Bank was almost six million of that in the fourth quarter and we noticed last as we noted last month or we believe in more representative measure to focus on evaluating or not interested friend is not interest expense to average earning assets, which has improved from 2.15% in 2018 and 1.96% in 2019, and that includes the outside Investments that I mentioned.

Moving to asset-quality we continue to be vigilant in managing credit and are pleased that are full full your provision of $75 is less than we originally and represent some improvements off the 2018 level additionally, we experienced an improvement in charge offs from 37 basis points in 2018 31 basis points in 2019. While still higher wages are are proactive approach in dealing with the handful of leveraged and energy deals will position us favorably as we know that certain of these loans won't perform. Well during the next credit cycle non-approved increase from the third quarter and the increase is made up entirely of negative maturation of previously identified loans again, an energy and leveraged net charge-offs for the quarter are primarily related to energy and leveraged may experience a slight increase in total criticized levels in the fourth quarter with some of the expected resolution slipping to you once the net increase wage.

Is really related to one energy.

That was downgraded to special mention liquidity and access to capital r key themes for these Legacy energy and leverage credits and we're Vigilant in a directing strategies to resolve that quickly as possible while minimizing degradation in value little group size as a percentage of total storming slow at 2.4% up from Q3 level up 2.2% but still down from the second quarter level of 2.6 which we believe was the peak early year. We expected a larger portion of provision in the first half of the years and our actions translated into achieving that we will continue to see resolutions to existing credits and there could be migration within the criticized book, but we believe there are enough office in those forecasts of recovery the provision for us to provide for a lower Vision expense guidance in 2020, which I'll discuss shortly.

We continue to be focused on Christmas management of the problem credit from the early and leveraged and energy to minimize downside impacts and are actively monitoring all portfolios in life macroeconomic factors at work accomplished during the year to proactively do you risk? Our portfolio will serve as well for the future.

Look at some of the quarterly and annual highlights. We continue to see straight continue to have strength in your over a year net revenue by the punishing rate environment. Obviously, the strong values in mortgage has contributed in a meaningful way to the increase while we proactively reduce leverage and energy exposure institutional LHI, 2019 non-interest income had 15 million related to Legal settlement, which will not be recurring in 2020. We continued to improve run-rate Encore operating expense items year-over-year 12% increase in total nie compared to 2018 when includes almost six million in mortgage-servicing impairments related to raise one point three million in merger related expenses and fifty million related to back and the new initiatives I mentioned earlier.

Early in our levels are lower in 2019 and reflective of the lower rate environment. Roa levels will continue to be negatively impacted by the higher mortgage finance and liquidity balance off over my mom's provision a 2019 helped offset some of the negative impact from the lower rate last alternative twenty-twenty Outlook or outlook for average traditional life is mid single-digit percent growth. This is reflective of continued reduction in energy and leverage that includes growth and Coursey ni including new verticals as well as grown. Now, I'm adding someone to four family loans to the portfolio. Those are expected to be more heavily weighted to the second half of 2012. Our outlooks are average mortgage finance office is a reduction of High Teens percent. It's important to remember that we have about seven hundred million in sub participation will shift more rows to NCAA in 2020, which is a higher-yielding a dead.

For NCAA is low three billion dollars per average outstandings MCA will continue to benefit from additional volumes with lower rates and we'll have an increased percentage of the total Mortgage Firm which will be positive from that interest income. We're focused on repositioning to our higher yielding lower risk-weighted asset classes over the next few quarters, which also involves moving some of the month purchase loans to our portfolio as noted earlier.

For Outlook for average total deposits is flat as we as we focus on repositioning our funding mix including approximately a billion in deposits from back expected by June 2020 while back have been part of our go forward strategy. We believe is even more important with the pending merger. The combined company will continue to be growth-oriented and having more granular source of funding will be critical outlook for Nim is 3.05% to 3.15% that's reflective of the lower rate environment. And of course, this could be impacted. It's mortgage-finance levels differ from our guidance.

I'll look for

Avenue is low single-digit percent decrease which is reflective of a full year of lower rates from three Great Cuts as well as continued slower growth and core LHI and an overall level of mortgage than a.m.

Are out looking for provision expenses low to high $60 million, which is an improvement from 2019 level of $75 million, but also assumes continued resolution of existing problem loans primarily in leveraged and energy our guidance for non-interest extent is mid single-digit percent growth and is reflective of our investment in fast bank, which is approximately 44 million for the year with over fifty percent of those costs being variables. We expect that the expenses could be more front-loaded to the first half of the year as we push forward to gain market share is very important to understand how this money for baskets being invested and then it's not an endless pool of dollars, but rather very targeted spending to learn what works in this space what works is now in fairly quickly and spam can be adjusted accordingly as we gain scale the overall impact of these variable costs will diminish and that's why it's essential that we get out of the gate strong this month. We have built a digital platform that can be leveraged.

more time with different value propositions

as well as different targeted customer bases including

Gardens for efficiency ratio is the high fifties as we focus on some critical Investments, which will position as favorably as it relates to a more predictable granular funding mix which will serve us long time like to Julie drip. I review a 2019. I'd like to highlight a few key points first. We are optimistic that the launch of our two new C & Islands our business office technology Banking and education nonprofit and Healthcare will help us back fill the deliberate loan run off and leveraged lending and energy Banking and produce meaningful new deposits as a sourcing single family mortgages from r m c a business will add additional High credit quality loan growth and traditional LHI the combination of launching our digital Bank bank bank and the growth in our new escrow deposit business will further support the repositioning of our deposit base with granular Diversified funding at lower cost loan loss provision was lower in mm.

19 2018

And we forecast provision to be lower yet. Again in 2020 problem loan resolution is a key Focus for our bankers and credit team and I am confident in our ability to execute off finally. Let me close by sharing our excitement regarding our merger of equals with independent Financial which we announced on December 9th. As I've said before this is a truly compelling transaction page together. We will become the premier Super Regional texas-based Bank with a meaningful presence in Colorado and the scale and resources to serve clients Coast to Coast.

In addition to strengthening our position with business and wealth management clients. We believe this merger will allow us to regain a strong and growing Market positions with the small business entrepreneurs who are Foundation of our client base during the first decade of Texas Capital Bank who are investment in Talent technology and new deposit verticals over the past seven years. We had our balance sheet from $10 billion to $33 billion in assets and have gained market share and the corporate C. And I mortgage Finance Builder Finance Premium Finance and Commercial Real Estate segments. However, during that time we operated under a branch lad model with only twelve branches Statewide as a result our commercial cni business focus on small businesses did not grow.

providing extraordinary

Listen products to small businesses is at the heart of who we are and we recognize that are smaller Revenue see an eye clients require more convenience than our current Branch footprint offers. So by expanding our Branch network from 12:00 to approximately seventy locations and using the Texas Capital Bank branding for those in Texas. We expect them bigger radar Market penetration in this important segment another benefit to Growing the smaller C. And I sector is the fact that this client segment produces more deposits than loans further delivery more granular cost-effective funding along with our new deposit verticals and basket Bank.

As a texas-based bank of nearly fifty billion dollars in assets. We will have the opportunity to become the bankrupt choice for small and mid-sized businesses larger companies special interests. He's real estate banking c-level Executives in our entrepreneur business owners post-merger. We will also be better able to utilize our technology and digital franchise capabilities to serve clients across business lines while gaining scale Advantage. For instance. We will leverage bass Bank to improve our funding mix and appeal to the mass affluent Black Market overtime further fueling organic growth in our private wealth client business.

Overall, we have complimentary lines.

This and defense is of talent. We are confident that together. We will deliver greater benefits for our shareholders our clients our communities and our colleagues as we highlighted when we announced just transaction. We have always been focused on delivering the most premier and differentiated service to our clients possible. And the new company will take it to the next level while there is still a lot of work to do we're excited about the transaction and the benefits it will deliver. We have started integration planning and remain on track to close the transaction in mid 2020 subject the receipt of customary regulatory approvals and approval by the shareholders of each company.

We've used 2020 as a year of great opportunity at Texas Capital Bank will be adding new capabilities and become the $50 Powerhouse Bank in Texas. We know that entrepreneurs perhaps in public companies private wealth clients a special industry businesses want a bank made up of can do bankers who understand and embrace growth and prosperity for all our constituents month special connection and Premier Service. Our clients expect remains foremost in our daily work and we are determined to not disappoint despite the added work. We must deliver off for a great merger together with independent Financial. We are thrilled to be embarking on a new chapter as a company and are as focused as ever on driving enhanced value for our clients and share home. There's like a month.

I want to thank you all again for participate.

On today's call. I'll now in the call back to the operator will open the line for Q&A at this time to ask a question. You can press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question. You can press * then two.

Our first question will come from Brady gaily with KBW.

Hey, thanks. Good afternoon, guys.

As we look at the NPA increase, I think they increase the little over a hundred million dollars on a link order basis roughly 60 million from energy $45 million from leveraging any additional color. You can give us on you know, why those criticized assets moved over into the bucket?

It was relatively few but large ones Brady. They were just migrating through the process and it just so happened that that several hit in the same quarter. These were all identified. But but again this migration is part of the process. We we reserve accordingly and therefore as you saw we had a within guidance provision and and feel comfortable with where we took it on a reserve but timing-wise we did have some of those actually moved to non-accrual some large ones in the same quarter.

all right, and then

You know as we approach the closing of the merger with ibtx, you know mid this year. Is there any in a sense of urgency to kind of expedite the disposition of these days before the deal closes?

You know, we we've had a sense of urgency for a year and half and that continues and it's extremely important to us to address these, you know, very proactively and I think we usually on top of it and will push them out and bring them the resolution as as quickly as reasonably good we can but I can assure you we have the resources that smart teams and good cooperation and collaboration to accomplish this and and so I think we'll we'll see good results the next two quarters and then then finally for me just with bass Bangkok. It's a little unique you're not paying interest but I guess you're buying the miles the airline miles to to give to these customers regardless of how the mechanics work. I'm just wondering you know, what what do you expect to be kind of the average cost of deposits with a vertical like that?

debris the

You know what? There is an interest piece. Yes, it's miles, but there will be it will be an equivalent piece. That is I mean, it's it's favorable to I would say it's it's available to them as one's rate. Then there's some additional some of the Promotional and marketing which is going to be higher at the start until we until we gain some traction, but that will become a smaller know becomes more than Minister other time. So yes in the first year the all-in cost is a little higher but you know, I guess we we've compared to alternate strategies of acquiring granular deposits like this and feel like this is this is the most viable method and it gives us a platform to do different things wage going forward. The miles is the first value proposition that we're going out with but certainly we could do other value prop fluid forward and could even do something in the small business.

Okay. Got it. Thanks for the call guys. Welcome.

Our next question comes from Michael rose with Raymond James.

Hey, good afternoon, guys, how are you? Just wanted to go back to the bank. I'm sorry got a little bit late, but I think you guys mentioned some additional cost for data coming forward from this initiative and you just kind of outline what those are and maybe as relates to deposit growth over the next let's call it six months to a year. Do you have any initial set of expectations for how much in deposits you can drive through this initiative? Thanks.

We're we're targeting this year by the end of the year to have somewhere in the neighborhood of a billion dollars, you know deposits that it will generate with bass Bank some of the costs we mentioned if you came late on the car, we had six million of costs related to bask in the fourth quarter. That's why when you look at some other costs we had on on getting our our new vertical club and I've articles launched he was a total of twelve million. If you had the two together bass bank at 6, and some of these related professional costs the gear up our new C and I verticals and another six months and then you know, we'll have some this acquisition cost. There won't be a lot of other professional costs in the first quarter. I think it's less than 3 million. The little actually came into the the first quarter, but it'll be more around client acquisition costs. That'll be driven by, you know, social media marketing things of this sort that we we view as much wage.

For acquisition cost is Julie alluded.

To them building a new Branch. I mean that's that's enormous acquisition cost as you wrap that up relative to what we're going to expand to grab these clients online. So

Okay, that's helpful. And then maybe speaking with expenses, you know just related to some of these t&i verticals. Where do you stand in the hiring process with with folks that are going to help Drive the growth and you know, where do we stand in relation to the expense build from from that initiative and and some of the other initiatives? Thanks.

Well, we have our our lead to run the technology banking team and and really he has his team hard and and on board. So we're out of the gate on that wage. We also have our our lead line of business manager for our education nonprofit and Healthcare banking group. And so he's in the process of building his team. We think each of those will be profitable by the end of the year and we're very encouraged with with the feedback. We've gotten already particularly on the technology team since they've they've all come together, but I'm very excited about what we're going to be able to do with also our education nonprofit and health care business as well. So it'll be a slight drag it won't be alarmed and it'll be profitable and by the end of 2021 we will have recouped all our cost, you know, so a great private Equity counter return Michael is what we forecast on these to log

business, okay, that's

For maybe one final one for me Keith just looking at the S4 that came out. I believe it was yesterday, you know looks like you and David have been talking since July but it mentioned that you'd also explored and have been looking around for a. Beyond that did prior negotiations ever get serious. I mean, I'm just trying to engage you know, how long you guys have been looking to team up with them just give them a competitive environment rate environment things. You know Michael it was my job. When I took over as CEO of the bank 6 and 1/2 years ago you explore all possibilities on strategic alternatives for the good of the shareholders and stuff. I've been involved in a appropriate way, you know getting to know CEOs of all sizes of banks, you know for the last 6 and 1/2 years and then each year. I will have different investment Banks just as part of my preparation for my strategic board meeting each year. I'll ask different investment game.

Thanks a couple at least if not three to run there.

Run their scenarios on potential inquisitors m o e candidates and then candidates that we might consider acquiring and then identify characteristics wage. You know, that might make the culture or the match to TJ Klee one that we should consider. And so this has been an ongoing process for quite a long time and I I have developed some good relationship with the number of CEOs. One of the challenging parts of looking at Alternatives is we have one of the most amazing talented pools of Bankers in the country, you know, and and there's primarily sitting in Dallas Fort Worth Austin Houston to San Antonio and so doing an m o e with someone located on the West Coast or something significant, you know a distance in in other parts of the country gave me pause and and sometimes them because this Talent, you know is is I Thursday.

good a team that could run a hundred plus billion dollar company and

So we want to be really awful in in any kind of fit as I've alluded to over the years, you know, it kind of has to be that really just special very dead set that we were looking for and so we found that out here with David Brooks and independent Financial we knew over the last year or two that even with the success we've had with our different deposit verticals and and mortgage finance and treasury business over all that footprint of twelve branches the same footprint we've had for well over ten years was not Optimum and so we're we're not we are looking for a footprint that would take us to a fifty Billion Dollar Bank with four hundred branches. But we think this combination where we'll end up with approximately seventy plus or minus in Texas and thirty or so in Colorado is kind of an ideal addition to what we have to offer wage.

Are great talented teams. And so

It's it's been a long process and I didn't know when that might happen. It kind of presented itself, you know a couple of years earlier than I might change daily of thought but when the opportunity was so compelling. I know this is the right thing for the future of the company and it really sets us up to be you know, that that really dominant life that really dominant Bank in Texas and I'm excited about our future with with the combination.

Okay. Thanks for all the the color. Appreciate it.

Our next question comes from Ibrahim poonawala with Bank of America Merrill Lynch.

Definitely just wanted to follow up on that. So you mean you use the word like potentially creating a dominant franchise with the independent deal. Would love to get your thoughts around why you think the stock has done so poorly since the deal announcement because just talking to a lot of long-term shareholders when you look at the stock price today, I close to tanjung book relative to kind of division that you've talked about. Where do you think there is the disconnect between shareholders and what you view as the new bank that's going to come out of this module. Would love to get your thoughts around that.

Yeah, it's it's been a bit.

You know, we had a nice pop really nice upside and and in the announcement and all the analysis that was done by the different investment Banks. As you saw I'm sure on our announcement the the financials look perhaps is compelling is any combination in the last five years, you know, mid-sized Banks or bigger. And so I I don't know the answer to that. I I dunno David mentioned that he I got some calls because he was moving out of the Russell 2000 to the Russell 1000. So there was some dislocation temporary going on there. I don't know how long that takes before it kind of resets or rebalances, but I don't know the answer to your question. I believe it's it's going to be a one of the best banks in the country to work for and and be part of and I think our clients are going to have products and service levels that are second to none.

Go ahead and I guess just in terms of the deposit initiatives like you I think you mentioned billion dollars from bass Bank by the end of the year. Can we talk a little bit off the escrow team that you hired? I think you mentioned that in the release just in terms of the overall magnitude of churn that you expect in deposits as twenty-twenty progresses and how much lower can we see the cost of those deposits come relative to where we ended in the fourth quarter.

Well, we've we've

You want to take legitly? Yeah, so as far as I mean, we think that one is going to be the the cost of that is going to be I don't know fifty percent of fed funds wage and we're starting to get Traction in that the the full the full system capabilities that we need will be online but sometime in the first quarter and so in our in our numbers, we're projecting and we'll have about a half a day and then deposit.

No.

Well over a billion from back and having being from Pittsburgh.

Half a million from Houston. I think that we're seeing we're seeing good traction treasury selling more treasury into our existing clients, which is our existing clients need any more to them. That's our lowest Vader lowest-cost deposit and we've seen some good traction with that. We also expect to still have good good deposits and some with our mortgage deposits because of what's going on with raids.

And Abraham, I think you realistically we really believe we could take those same kinds of numbers and do as well or better, you know in twenty Twenty-One. So, you know potentially a couple of billion Basque and a billion and escrow. These are high-growth, you know potential areas for us and as we get past acquisition cost on Basque, I think it's going to be really favorable on overall cost a month. Again. It's the beginning to of a build out of a digital platform and we'll be able to add some other capabilities on that platform for other clients as well over time and just come back.

is they just have a much lower beta and

Some of the other the other deposit categories that we've been so highly invested in the past. They they're going to look more like our our core Market treasury costs much lower basis, but even some of those

and and I think Julie you mentioned that it's going to be a national launch starting next month. I'm just wondering is it just going to be promoted by or you going to have the airline jump off then? Are we going to see some promotion from that end as well? They just if you can talk to about what's the strategy in terms of the marketing campaign?

Will be some co-marketing and that starts next week. I think all of the national launch starts next week's are we the marketing and then some of it that is in partnership with the airlines?

But or thanks for taking my questions welcome.

Our next question comes from Jennifer Demba with SunTrust.

Good evening, Jennifer. Hi just he's could you just talk about your confidence in the provision guidance month for 2020 and it ended up, you know, you've got quite a few new npas here and criticize loans continue to be high. So what gets you confident that this is provision estimate is is close to correct.

Well, I'm confident it'll come in on the low end of that guidance. But my team is a little wiser and always counsels me. So we ended up with up to the high sixties. It is never a precise process Jennifer but I will call out that you know this, you know, this is the second year in a row. We've been down on provision despite, you know aggressive like moving a lot of risk off the balance sheet, you know are leveraged loans declined 30% year-over-year this year. They'll be down another 10% off this quarter. And so while that gives us give us a little Challenge on backfield to show significant traditional LHI growth. It's definitely the right off the right move to make because you know, we're not taking discounts. These are getting paid off somebody's taking us out refinancing or where they're getting paid off is portfolio companies who sold and so on Thursday,

so I think we

You really have our arms around those that our problems we're not doing this is very important. We haven't been booking late vintage deals. And those are the ones that at my experience has been those are the one that bite you a year-and-a-half two years later and it might present issues on less predictability on provision and and reserving so it never has precise but I am confident that we're ahead of the game. It hadn't been fun. But we're taking our medicine early and I think that's going to be best for the shareholders to have the kind of strong balance sheet will have when others, perhaps or dealing with it after doing some of this light cycle business and and so we haven't been

Okay, do you like could you talk about the Cecil adjustment and what we should expect?

Can I was waiting for that question? So are de One impact is just going to it's going to be a slight increase of about 5 to 6% think that's consistent with the fact that our portfolio is a chef and commercially Focus. You know, the go forward we feel like the Gulf War provision is not going to be that the the 60 the 60 the guidance that we give in the low to high sixties bath includes our estimate as a whole adoption and any impact it would have and we really don't think that the this go forward provision vary significantly from from the incurred method choice. I would continue to remind people about the volatility that Cecil can have on the on provisioning because of the economic forecasts that you have to incorporate whatever point we start to see our our two years out are are the variables change you will see some uptick in provision, but that's not that's not that's not unique to Texas capital.

Okay, one last question the technology Bankers just curious what their level of experience is where they came from et cetera.

Very very deep and experience. I've been interviewing with our credit Senior Team and Carrie Hall our regional president Jacob in Austin for over twelve years to find a technology banking team that we had very very high confidence in on the target market Jennifer Thursday. They would go after and the the risk profile of of the kind of clients that they would Target and I'm extremely excited about Doug that Mangum he's going to head this up who is heading this up for us and his team and and Doug spent period of time of Silicon Valley Bank after that. He's this was Wells Fargo for chef and ran this business for them. So we're just very fortunate that Austin attracts a lot of talented people and and we we we set that business up in Austin.

Thank you.

You're welcome.

Our next question comes from Steven alexopoulos with JPMorgan everybody off 295 in the fourth quarter or the guidance is 3:05 to 3:15. What's the road map to get from where the name wasn't for Q2 this fairly material increase in 2028.

We assume some some shift in assets. We you know, we assume that warehouse is going to be down some and then we ship into more to MCA and then we'll start to see some seeing a grown now. So it's it's turning out that shift will also we've got some we you know liquidity we've had some higher levels of liquidity. We still expect to have a higher level in quiddity. But as we start to as we start to replace some of the higher cost deposits was more granular deposits you could you could potentially see some of our some of our liquidity kind of overall liquidity comes out a little bit but it's more about the shift in Lone mix

Okay, and do you think you can get into this range before the mo-ee closes?

I think it'll be back in loaded Steve. I mean, I think we'll begin to show that trajectory. But what do you think the second month. First quarter the other thing Stevens that deposit calls that we had a pretty meaningful down-ticket. They're still the ending spot rate is lower. Like on the entrance. It's less than what we saw the fourth quarter. So there will be something that's helpful. And then on the deposit growth, which was really strong in the quarter. Your average savings are up almost eight hundred million wage some color. It doesn't sound like bass was a contributor in the fourth quarter. We're just getting some of these verticals we've developed the last few years kicking in but our core treasury, including our our specialized treasury group that works with mortgage Finance. Those were all really hitting on all cylinders. So we are in fact picking up some of those Gap relationships where we had wage.

Not been as as thorough the last three or four years as we grew loans to pick up the treasury business too. And so it's really helped.

As we've you know doubled down on our our focus by the relationship managers teaming up with our treasury team Steve and and it's it's really producing good results. But piece of that is just the seasonality of the mortgage Finance escrow business and we had very strong numbers on both sides of the balance sheet with that group to okay and then final question on credit. We look at the increase in nanak rules on The Leverage book. Which segments. Did you see the increase in nanak rules?

I don't remember. I don't remember. It wasn't any I don't remember which is the something does not really relevant. There's there's not really been a trend any kind of industry Trend in leverage. So

in our case, we we just haven't seen that The Verge. Okay. All right. Thanks for taking my questions. You're welcome.

Our next question comes from Brock vandervliet with UBS.

Oh great.

Thanks for taking the question just to follow up on that deposit question the mortgage-finance link deposits off sticky or are those in just a tremendous increase this quarter? Is that seasonal to some of those flow back out or is that you know more likely to stick around?

You know, it it it does have some relationship to the volume of the overall industry. So if you're seeing mortgage-finance on the assets, I'd really be high. You're going to see some higher deposits. Also there is flow in and out but it rebuilds rapidly when there are those payments on taxes and and things of those sort that occur through those accounts brought but there is some relationship too and just the sheer volume of mortgage, you know, origination switch was quite strong brought, you know, I think I mentioned that it's

Who am I calling? Terri that that we didn't sometimes you will see a little.

downward pressure from seasonality on the deposit side and the escrow deposit in the fourth quarter and starting in the first quarter, but a lot of that's been overcome with just lower rates and then origination lines are still originating they're masking those those flows out for taxes, but just knew origination of lungs and do

Okay, and I a couple of people have taken shots at this but you know as you look at the the trend and the increase in in non-performers and criticize and what what do you see behind the curtain that gives you the confidence with that that provision guide? You know, I I honestly thought you were going to have a a very large Cecil adjustment am not it just seems you know, pretty bullish guide unprovisioned given, you know where some of the problem asset levels are seem to be headed.

again, we

We properly Reserve Brock if if you had these not on the radar and not being reserved along the way then certainly that would be a bigger problem. We did have some touch-up and overall criticize classified but it's Julie said that entire, you know changed to the positive quarter-over-quarter was one energy deal to move to special mention. It was a large energy deal. But but that was that was more than than the difference between third quarter, you know, criticize classified and fourth quarter. So we don't see that as headed Thursday significant downward trajectory, you know, if we have an energy deal of our general deal that back to Jennifer's early earlier question in years that we don't have on The Radars that could change our life. But again, we feel like we've really gone to school on Leverage for a year and half deep Dives frequent reviews, you know much more wage.

Federal monitoring by the line and

Also the credit teams and energy beginning first quarter. So we're not quite as deep into the energy portfolio as far as the the, you know, the frequency and and a year and half of review like we are leveraged but that would be the one of the two that I would think we we might see something that pop up a week. We just don't have it on the radar at this point. We feel like we've got a good handle on anything that showing weakness things could change but at this point, you know, you would only be a guess that it would be worse off right now. This is our best estimate and for all of those profits those identified problem loans, especially, you know in a dark room in the not approve that they've been marked to their impairment value based on what the information that we have is when all those cases where it's a problem loan. There's a there's a defined strategy that the team is working on certainly all of that information informs the decision.

About how to how to estimate guidance and we have three or four good-sized loans this quarter that ship.

Pay off that are in that that classified category as well. So we alluded to that earlier to Brock. You know, we're going to see some recovery of Reserve you will helps mitigate net provisioning for 2020 also.

Okay, appreciate the color.

Our next question comes from Brad Millsaps with Piper Sandler.

Hey, good evening. Just wanted to maybe touch on loan growth your guidance for Mid single-digit Average Joe's in 2020 is pretty much equal to what you grew in 2019. However, you know, the average balance is have been kind of flattish for most of the year and just up slightly from the fourth quarter of nineteen to the fourth eighteen understand you got had to pay offs. But your. Imbalances are are below the average for the court or just what give you confidence you can kind of re accelerate things. Is it just the payoffs and and running slowing down or something else that you see out there?

well, you know you

You touched on it, but these pay Downs on leveraged and I know an energy total about $550 million. So going in and that's been accumulating of course throughout the year. So going in the Run rate for this next year. We have to overcome more than a half billion of averaged out average outstandings and traditional but we do have these two New Jersey and I businesses now, they're not going to be you know out of the gate, you know, booking hundreds of millions, you know the first year, but we're going to see a nice contribution to helping back off and give us also businesses that we like the the risk appetite and also the self-funding components of these T C and I businesses we also are we've really am working hard on a new strategy and and tactical plan on our prospecting on General see and I and we're very very encouraged by the pipeline dead.

That are bikers are created.

And you know, I don't know if that is going to have a Major Impact until maybe the middle of the year because it does take time of course for some of those to hatch but we we've been working on this for a year now and I feel very good about discipline and focus as we pivoted away from leveraged and and focus more on the general these new C and our businesses. We're launching. So I feel like it's very achievable. Hey Brad, the other thing that I mentioned is that we're planning to

Folio some of the NCAA one to four family loans later in the year and and those come on at a little better rate than usually mention than the warehouse loans and also a better risk way to Capital assessment.

Great, that's helpful on just one more follow-up. You know when you guys announced the m o e I think you had an asterik sort of, you know next to your the 2021 numbers that the street had for you at the same time that you might accelerate, you know some expenses. I'm curious if you know kind of what you talked about today sort of encompasses that you know acceleration or there's kind of more to come in that regard I think about you know, the combined earning power of the two companies.

Talked about was that in coming up with the the cost say the percentage of the cost basis the percentage of the combined nie that we had tried to use and that was for 20. We had to use the street estimates except on our side. We had some additional cost and really rad those were related to back things. So we talked about those today your perfect. Probably just want to clear them kind of what like with that bass bank tonight.

Great. Thank you very much. You're welcome.

Our next question comes from Gary dinner with a d a Davidson.

Thanks. Good afternoon, a couple of questions that first Julie. I think if I understood your commentary correct around the yet to be launched verticals you mentioned there were six additional articles where you can invest it around eight and a half million dollars. If I heard that correctly. I don't recall hearing that kind of commentary before and and kind of the ramifications. If you didn't roll them out wage, if there's any change in the kind of philosophy or view of the viability of those businesses, you know with pending transaction.

yeah, I know that eight and a half was just

Actually related to the seeing a vertical and so we've launched two in the 8 and 1/2 was related to to the evaluation of multiple articles. We've launched two months and we will evaluate some others going forward. But but what we said is those two those two are going to be Break Even this year and within years, they will recoup the eight and a half million that we've invested money if we don't do any additional fee of a vertical

I see. Okay that was related to the right right and and then secondly on your commentary on the efficiency ratio where you talk about, you know, the the adjusted number excluding the marketing fee component for deposit scheme tip help me understand the rationale for for for excluding that expense and we don't in the in the account adjusted. We don't really exclude it. We just move it up into net revenue. We move it up as a component of margin the the way the the fee works is it needs to be classified as non interest expense but really it's a it's a it's a margin component. And so all we do in that adjusted efficiency is move it to the place move it move it to the top of the bath of the Tom. Okay, so you're not totally excluding it from the efficiency calculation. Okay. It's just it's just geography it's moving but but it's to illustrate how punitive it can be just on Thursday.

This is the ratio just because of the way it has to be categorized.

All right, very good. Thank you. Well.

Our next question comes from Brian Fran with autonomous research.

Hi, I guess it sounds like a lot of people are maybe struggling the same thing on the deposits, you know the growth was so strong in the back half of the year. The the numbers attached to Bass Bank the the commercial escrow and some other initiatives are pretty big but then you've got the flat average guide and that's down a little bit from. End, you know, is it possible, you know you reference deposits that maybe weren't sticking in the fourth quarter or seasonally elevated. Is it possible to put a kind of a number, you know on how much of the existing fourth-quarter deposits you'd expect to to go away in the first quarter off and then when you talk about the pool of high costs deposits that you want to optimize whatever the word was, you know, is is there a total number that you have earmarked? Like, you know, you're not here deposit base and there's x billion that you'd love to take out over the next two years and swap into these other initiatives.

The flat the flat deposit guidance that is about the repositioning.

That's about the repositioning and there are some higher cost of deposits that we would expect to replace with some of the new verticals and then same thing we will have you know, we have some brokered CDs which package does have varying maturities over the next year and depending on how the verticals are how fast the bank is is tracking we would replace those. So it's really the flat deposit growth is really about optimizing the liability side of the balance sheet and that helps certainly I'm some to that was an earlier question about our Nim and again as we you know reposition the cost of funds and our funding it will keep us on the on them as well.

Okay, and it may be I don't know how it works with the merger pending. But you know, it's maybe a little unusual to see this many kind of new initiatives and and changes in this pending. I mean, there are all the kind of strategies the best bank initiative the the funding. I mean is it all kind of something that's aligned and part of the the new entities combine strategic plan.

This is no surprise, you know as far as the diligence that we each conducted. So certainly these are not new ideas or something brand new too independent. I think they see us as offering, you know, some real strategic Innovative capabilities that for fifty Billion Dollar Bank or or kind of table Stakes, you know, really important and certainly we we've always thought of ourselves. Brian is a company that played up and would be a fifty Billion Dollar Bank someday so long, I think it's it's good for our organic stand-alone company and it will be even better for the combined company and you know, there's no surprises relative to the Expectations by Charles David Brooks and the independent team

Okay. Thank you.

Welcome.

Our next question comes from John Armstrong with RBC Capital markets a good afternoon. Hello, John just a quick one on bass wage. We had a prior relationship with American through bank direct but I'm curious if if Basque has some kind of an exclusive with American almost like a card loyalty program or something like that or Thursday is how you defend against competition in the product.

Agility, it's it's there is not an exclusive that is something that of course we would have liked to have had but had we done that and that excludes us to from pursuing other other potential Affiliates. So it ended up being you know, we we don't have an exclusive John but we do have a running start and I think in this business you always have to be, you know, running expecting the Wolves to be right behind you and therefore always looking for ways to innovate and had new capabilities new Affiliates new product and we're we're all about that. So that's that's our situation with American. We're very excited about it and Americans seem to be as well. Okay, and and safe to say it's a likely template for for other products that you're thinking about is it is and and again, it's not just a vanilla only wage.

Forever, but we want to nail this.

So we're not going to get distracted talking about all the other things will be able to do with this digital platform. But we have many other ideas relative to serving other clients business as well as consumer. Okay? Okay. Thanks a lot. Welcome.

This concludes our question-and-answer session. I would like to turn the conference back over to president and CEO for any closing remarks.

I just want to thank everyone for joining our call and we look forward to a great quarter this quarter and focused every day on taking better care of clients than we ever have before despite the fact Margie work that's ongoing. Have a good evening. Thank you.

Thank you for your participation and T cbi's Q4 2019 earnings conference call. Please direct requests for follow-up questions to do Julie Anderson paak you may now disconnect.