Independent Bank Group Inc (IBTX) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Independent Bank Group fourth-quarter 2017 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to hand the floor over to James Tippit, head of corporate responsibility. Please go ahead, sir.

Good morning, everyone. I am James Tippit, head of corporate responsibility for Independent Bank Group. And I would like to welcome you to the Independent Bank Group fourth-quarter 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.

Before we get started, I would like to remind you that remarks made today may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and expected results to differ. We intend such statements to be covered by safe harbor provisions for forward-looking statements.

Please see page 5 of the text in the release or page 2 of the slide presentation for our safe harbor statement. All comments made during today's call are subject to that safe harbor statement. Please note that if we give guidance about future results, that guidance will be only a statement of management's beliefs at the time 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 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. And Dan is with us again this morning to provide color on the loan portfolio.

2017 was a good year for the bank. We reported record annual earnings and profitability, with ROA trending to 1.15% for the fourth quarter. Fourth-quarter adjusted net income was $25.3 million and represents a 63% increase in adjusted earnings from the fourth quarter 2016. A quarterly earnings and annual trend chart is on page 6 of the slide deck.

Organic loan growth returned to anticipated levels for the quarter. And overall, we had another solid year of loan growth at 12.2% of year-end 2016 loan balances.

We successfully closed and converted the Carlile acquisition, which expanded our footprint into Fort Worth and into the Colorado Front Range markets. We continue to see improvement in our efficiency ratio as integration continues.

The announced acquisition of Integrity Bancshares is another step forward for our Company. This transaction expands our footprint in the Houston market and is expected to be accretive to earnings with minimal dilution to tangible book value. Houston has been a key contributor to our growth over the past year and increasing our branch and employee network there is a big positive.

Finally, we completed a successful primary secondary equity offering and a subordinated debt issuance following that. The proceeds from these offerings have enhanced our capital levels, both on a consolidated basis and at the bank. This additional capital will support future growth and improves our CRE concentration levels.

Now let me turn it over to Michelle to provide details on the operating results for the quarter.

Thank you, David, and good morning, everyone. Please note that slide 5 of the presentation includes selected financial data for the quarter. Our fourth-quarter adjusted net income was $25.3 million or $0.90 per diluted share compared to $15.5 million or $0.83 per diluted share for the fourth quarter of last year and $24.8 million or $0.89 per diluted share for the linked quarter.

As you can see on slide 7, net interest income increased to $75.3 million in the fourth quarter from $46.5 million in the fourth quarter of 2016 and from $72.9 million for the third quarter 2017. The net interest margin improved to 3.97% for the quarter, up 12 basis points from the previous quarter, which was 3.85%.

The adjusted margin, net of acquired loan accretion, was 3.84% compared to 3.8% in the third quarter. Accretion from acquired loans was approximately $2.5 million this quarter compared to $905,000 in the linked quarter.

There were several unexpected payouts of acquired loans during the quarter. Average loan yields for the quarter, net of accretion income, were 4.95%, which is consistent with the third-quarter yields.

Total noninterest income increased to $13.6 million compared to $5.2 million in the fourth quarter last year and $12.1 million in the previous quarter. The increase from last year is primarily due to increased service charge income, mortgage income, and earnings from the mortgage warehouse purchase program, which was acquired in the Carlile acquisition.

In addition, during fourth quarter 2017, we recognized a gain on the sale of the 9 Colorado branches of approximately $3 million as well as a gain on the sale of repossessed assets of approximately $1 million, which also partially explains the linked-quarter increase.

These increases were offset by lower recoveries of previously charged-off loans, which was only $65,000 compared to $994,000 in the third quarter 2017. As well as retail mortgage income being approximately $870,000 less than the third quarter of 2017. We also had approximately $172,000 less of service charge and fee income compared to the third quarter related to changes in products, services, and waivers after the core conversion in early October.

Total noninterest expense increased $22 million from the fourth quarter last year and increased $1.6 million from the prior quarter. The increases from prior year were due to increases in salaries and benefits, occupancy, data processing, acquisition-related expenses, and other line items related to the Carlile acquisition.

The increase in the linked quarter is primarily due to additional acquisition expenses related to the core system conversion, termination of branch leases, as well as severance and retention payments made to the former Carlile employees that terminated after the core conversion.

The provision for loan losses expense was $1.9 million for the quarter, which is consistent with the linked quarter and down from $2.2 million from the prior year. Generally, provision expense correlates with net loan growth and the level of charge-offs or specific reserves during the quarter. Slide 14 in the slide deck illustrates our provision expense and charge-offs in each reported period. Total charge-offs were less than $500,000 for all of 2017.

Income tax expense was $18.2 million for the fourth quarter, an effective tax rate of 48.7%. The increase in effective rate is primarily due to the $5.5 million remeasurement of the deferred tax asset due to the enactment of the Tax Cuts and Jobs Act.

Absent this remeasurement adjustment, our effective tax rate would have been 33.9% for the fourth quarter and 32.6% for 2017. We anticipate an effective rate of about 20.5% in 2018, given the new 21% corporate rate.

Deposit composition and costs are illustrated on slide 16. Deposits decreased $240 million to $6.6 billion at December 31, 2017, compared to $6.9 billion at September 30, 2017, primarily due to $165 million of deposits transferred in the Colorado branch sale as well as a decrease of approximately $90 million in public funding corporate deposits.

Public funds have decreased to 11.9% of total deposits in 2017 compared to around 18% prior to the Carlile transaction. Non-interest-bearing accounts make up 28.8% of the deposit mix at December 31.

The average cost of interest-bearing deposits is 70 basis points, up from 66 basis points in the third quarter and up 17 basis points from 53 basis points in the fourth quarter last year. While betas on most retail deposit products have continued to be low, deposit pricing continues to be more challenging with each Fed rate increase.

We have not increased our stated rates on deposit products. However, we continue to monitor our rates relative to competitors in our markets and are evaluating new products to attract and retain depositors. In addition, we have experienced increases in rates on corporate deposits that are indexed to the Fed funds rate.

As David mentioned, we raised net proceeds of $26.8 million in an equity offering and $29.6 million in a subordinated debt offering. This new capital boosted our regulatory capital ratios, as noted on slide 17, and improved our CRE concentration levels, as noted on slide 12.

Finally, you should note that total assets decreased approximately $200 million to $8.7 billion at December 31, 2017, compared to $8.9 billion at the end of third quarter, generally due to the transfer of deposits and assets in the Colorado branch sale as well as a decrease in corporate and public fund deposits mentioned earlier. As Dan will discuss, organic loan growth was solid for the quarter, but was funded with existing liquidity rather than balance sheet growth.

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 was back to expected levels during the quarter, with loans held for investment, not including mortgage warehouse, growing $182 million or 11.6% on an annualized basis for the fourth quarter, excluding the $98.9 million of loans sold with the Colorado branches. Organic growth for the year was 12.2% since December 31, 2016. Slide 10 illustrates annual loan growth comparisons.

Slide 11 shows the composition of our loan portfolio and our commercial real estate portfolio. As of December 31, 2017, commercial real estate makes up 52% of total loans. As represented in the graph, CRE is well diversified with types of collateral, with the largest segments in office and retail.

Slide 12 further breaks down the retail CRE portfolio by property type, with 61% in small strip centers and only 7% in big-box stores. The average retail loan size is about $1.4 million, with only 33 loans over $5 million in this portfolio. This portfolio is well diversified across our footprint, with a weighted average debt service coverage ratio of 1.64 and an LTV of 63%.

Slide 12 also shows the trend of CRE concentrations to capital. Total CRE to the bank's regulatory capital was 374% at December 31, 2017, down from 393% at September 30, 2017. Proceeds from the common stock offering and sub-debt issuance, which were pushed to the bank, positively impact these concentrations.

The Carlile loan portfolio includes a mortgage warehouse purchase program, which totaled $165 million as of December 31, 2017, an increase of about $26 million since September 30, 2017. The warehouse purchase program has increased approximately $65 million since we closed on the Carlile deal April 1.

Credit quality metrics remain strong. Total nonperforming assets were down slightly to 0.26% at December 31, 2017, from 0.28% of total assets at September 30, 2017.

We've been successful at selling other real estate acquired in the Carlile deal, which resulted in a $3.1 million decrease in total other real estate owned during the fourth quarter. Charge-offs continue to be at historical lows, at 0.02% annualized for the quarter and 0.01% for all of 2017.

The allowance for loan losses increased slightly by 1 basis point to 62 basis points from 61 basis points of total loans last quarter and decreased from 69 basis points in the prior year. This decrease in percentage from the prior year is due to 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 December 31, 2017, we have recorded a discount for the acquired portfolio of approximately $24.6 million. The recorded allowance for loan loss plus the remaining fair market value discount on loans acquired is approximately 1.01% of total loans held for investment as of December 31, 2017.

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

Thanks, Dan. The fundamentals of our Company remained strong in 2017. We experienced positive trends in profitability, loan growth, capital, and efficiency. These trends were in spite of reduction in the size of our balance sheet for the quarter in order to sharpen that footprint and improve our operating efficiency.

These operating results enhanced shareholder value in 2017. Tangible book value increased, return on tangible equity remained strong, and we continue to pay a significant dividend. We remain committed to increasing the value of our shareholders' investment in the Company.

We are excited about the pending merger with Integrity Bancshares. Teams from both banks are working together for a smooth transition and regulatory applications have all been filed. We are also pleased to have successfully completed the equity and debt offerings, which provide the capital to support the Integrity acquisition and future growth of the Company.

As Michelle mentioned, we do expect a significant tax savings in 2018 with the change in the corporate rate to 21%. We intend to reinvest a portion of that savings into some human resource initiatives to help with attraction and retention of employees.

We are also monitoring competition on loan and deposit pricing for indications that the market will pass some amount possibly along to the customers. Our best guess right now is that about 70% of the tax benefit will fall through to our bottom line.

As always, we continue to be focused on consistent, strong earnings performance and enhancing shareholder value. And we believe our 2017 results demonstrate our commitment to those goals and position us for a strong, successful 2018.

Thank you for joining us today. And we will now open the call to questions. Operator?

(Operator Instructions) Brady Gailey, KBW.

I know last quarter we talked about energy and how you all might start to see a little growth in energy just with the strength of energy pricing now at $65 a barrel. As you think about your loan growth guidance, I think we've talked about 10% to 12% before. Do you think with energy growth now coming back online, you can see loan growth above that level?

No, Brady, I still think that's a good -- low-double digits is still a good guideline for us. We do see some nice opportunities on the energy side right now. We just are in the process of booking the biggest credit we've booked since the downturn right now. And so we do expect to see some positive growth there.

It's just our base has gone so much bigger, as you know. And we are also -- we've had a little more headwind in some of the markets, Carlile markets, than we had expected. So we've had a few more paydowns there.

And so it certainly could -- if everything were to hit right, it could be better than that. But I think in terms of our expectations and our budgetings and the way we're thinking about it, low-double digits is still a good number.

Okay. And then maybe just an update on Colorado. Now that you have rightsized the branch count there; I know you've hired some new people. Maybe just an update on how you're thinking about the organic growth potential in Colorado. And are you still interested in looking on the M&A side for some smaller banks out there?

Yes, so we are very encouraged with the team that we have in Colorado that we've added to, as you mentioned. And so we think the organic growth is going to be very good there, again albeit on a small base, right, there. But I think we're going to see 20%-plus, maybe 25% organic growth there this year in Colorado.

We remain interested in M&A really across Texas and Colorado. But yes, now that we've gotten our footprint to where we want to be in the Front Range there and have strengthened up our team, I think we're in a great position.

That market is really good and we have had a chance to look at a full deal flow now and a full pipeline there. Pricing is competitive in that market, but it's competitive everywhere. But yes, we are encouraged. We really like what we see in that market and we like the opportunity there to grow organically and hope to do some merger acquisition work there as well.

All right. And then finally for me, I know in the past you guys have talked about a 1.20% to 1.25% ROA. Now that you have Integrity about to be in the Company and you have a lower tax rate, I'm guessing that ROA range is higher now?

Yes, just adjusted for the tax rate, I think that puts that up in the 1.50% to 1.60% range if you just do the math.

All right, great. Thanks, guys.

John Pancari, Evercore ISI.

This is Sam Ross on for John this morning. My first question actually is about the 30% of the tax savings that you don't expect to fall to the bottom line. I'm just wondering if maybe you can provide a little color on that, maybe a breakdown of how much of that is for reinvestment and maybe some of the other areas you anticipate that going to.

Sure. Good question, Sam. We are, as I mentioned in my earlier comments, planning to do a few initiatives here on the human resource side, investing in our people. We think the market is getting more competitive for talent and so we're trying to position ourselves, both all our benefit plans and our compensation.

And we did a recent study in terms of market ranges and comps for all of our jobs across the Company, which we hadn't done since we -- we did it when we went public five years ago and just redid that work. We monitor it year to year, but we did a comprehensive study, I guess is the way to say that, recently.

So we are going to direct -- we are guessing -- it looks like right now somewhere in the 10% to 14%, 12% to 14% or so of the tax savings will go toward those human resource initiatives. And then the balance, 15%, maybe as high as 20% we are assuming could get competed away in that number.

And we have no -- we are all guessing and speculating right now as to what the market -- how the market might do that. And then you've got the flat yield curve and other things I think that will affect how people behave with this additional income that's coming in as a result of the tax reform bill.

So those are on our assumptions: 12% to 14% toward human resource initiatives. And the balance of that 30% we're putting in our model is going to result in -- because of lower pricing on loans or deposit betas going up faster than we think or faster than our model says.

Got it. And then just a quick one on deposits. I know that you had a couple moving parts in the quarter, but if I back out the public funds decline and the Colorado branch sale, it seems that deposit growth was actually flat in the quarter.

I'm just wondering if there's anything unusual, given that that's the first quarter in some time that you guys haven't seen sizable growth. And I'm just wondering maybe if you can give us a little color on what your expectations are going forward on this.

Yes, as it relates to deposits, it seemed to be a lot of liquidity was moving around right at the end of the year. In fact, the last couple of days of the year we had a couple of our bigger corporate deposits, some of the new specialty treasury groups that moved some deposits out. But then they moved it right back in after year-end.

So I'm not really sure what's going on there but it probably shrunk our balance sheet by $75 million just in the last 2 days. So the other thing we have is with our -- the title companies. We have so many of those that our deposits on some days could go down $50 million to $60 million just from their activity.

So that's a little bit lumpy. I think deposit growth is going to be a challenge, but we are optimistic because we do have this specialty treasury group that has been really successful. And as we get larger, they have more opportunities to bring in larger deposits.

Great, thanks for taking the questions.

Matt Olney, Stephens.

I want to go to expenses. And if there are any more incremental cost saves from Carlile we should be expecting. Just trying to get a better idea of the core run rate from here.

That's a little bit complicated, Matt. I think we will get the full benefit of the Carlile cost saves in Q1, like we've been talking about. But I don't want to -- actually, our core expense run rate in Q4 was a little lower than what I expected it to be.

So I don't anticipate in Q1 that you're going to see that go down anymore. And that's primarily because we've also talked about in Q1 we have additional expenses related to salaries, payroll taxes. Those go up. So I wouldn't anticipate that you're going to see that run rate go down really in Q1.

Okay, that's helpful, Michelle. And then I believe, David, you mentioned elevated paydowns from Carlile in the fourth quarter. Can you just talk more about this? Is it a timing issue where they pay down sooner than you expected? Or is this a result of more attrition than you expected?

A little more attrition than we expected in a couple of markets, Matt. And again, nothing -- we've been watching that closely. And any time you acquire another company and you roll them in, you've got that risk. And we just -- we felt like, given that we kept all of the key producers and everything, we felt like we wouldn't have quite that amount.

And some of it was just asset sales and things, because we don't know that customer base as well as we know our own customer base. So we were a little surprised by that. And again, nothing -- we haven't lost any teams or any key producers or anything like that that would be a bigger red flag.

But just a little more headwind. We just had a little more paydown and so we didn't get really net growth for the balance of the year once we acquired North Star, Carlile. So that was just a little more headwind on the loan growth side in the second half of 2017 than we expected.

Although we feel good, as I said, about Colorado markets. We are trying to build out our team and our footprint in Fort Worth, as an example. And Denton County, west of where we are headquartered here, is also a market we expect to get that turned around and get them growing at a more historic pace. But we have had a little bit of a challenge there and it's been related to unexpected paydowns.

David, what about the mortgage warehouse? That seems to be one area that has seen quite a bit of growth since the closing of Carlile. Are you adding new customers there or just allowing the existing customer to have larger balances? Just trying to understand if we could see continued growth in 2018 or do you think it was a little bit elevated towards the end of 2017.

No, I think it's on track. We have been intentional. As I said prior to the Carlile acquisition, we see that as kind of a starter kit and it was averaging $100 million, $125 million. I believe it was $160 million at the end of the year.

So we did see on a percentage basis some growth there and I think we expect that to continue, Matt. Our target over the next 2, 3 years is to get that to $500 million. And I just expect it will clip along slowly in that direction.

In terms of where that growth is coming from, it has been a combination of adding new customers as well as with our bigger balance sheet and bigger capital levels being comfortable letting a handful of their customers expand their borrowing lines. So it's probably a good blend of both new customers and growth of our existing customers.

Okay, that's helpful. Thank you, guys. And I will see you in Dallas on Thursday.

Michael Rose, Raymond James.

Just wanted to dig into the margin a little bit. So obviously there's some purchase accounting benefit this quarter. And I think if I did the math right, you got about $61 million left from previous deals.

Michelle, can you talk about the scheduled accretion this year? And then if you can just remind us what you would expect in terms of, with the marks, what Integrity would add. And then if you bake in their scheduled accretion, what should we kind of expect as we move through the year, at least in terms of scheduled accretion?

Yes, in Q4, the accretion number was significantly higher than we expected because we had some positive resolve of some loans that we acquired. Generally, we don't anticipate that accretion to impact our margin by more than 2 basis points or 3 basis points, just because we're pretty conservative when we mark the loans. But for the most part, the conservative marks are nonaccretable.

So that's the guidance we have given since we went public and that continues to be the case. When we get a payoff -- an unexpected payoff or resolve of a loan, if you look at our history over the quarters since we went public, that tends to be somewhat lumpy.

So generally, I would just say on an ongoing basis, I think what you are calling the expected accretion I'd say is about 2 basis points to 3 basis points in our margin.

Okay, that's helpful. And then can you give us a sense for what you would expect the benefit to be for the core margin with the December rate hike? And maybe if you could give some color around your expectations for deposit betas and rate hikes through the year as we think about the core margin? Thanks.

I think I'm going to give the same guidance I've been giving for the last few quarters. Our asset liability sensitivity is still pretty neutral and so I anticipate our margin to stay fairly stable.

Some of that will depend on what David referenced earlier, depending on how competition for loan pricing is. That would impact our margin, right along with competition on deposit pricing. But given everything I know right now, I would say I anticipate the margin -- the core margin to be stable this year.

Okay, that's helpful. Maybe one last one for me, just back to the deposit question. Obviously, you guys are running a little towards the 100% level. Can you talk about -- and I'm sorry if I missed this earlier -- can you talk about some of the initiatives that you have in place to actively grow deposits and keep that number below 100%? And I guess longer term, what will your target be for the loan to deposit ratio? Thanks.

Yes, as I mentioned earlier, I think we still have quite a bit of ability to grow deposits in our specialty treasury group. As the bank gets larger, especially as the bank gets over $10 billion, there are opportunities for us to bring in larger accounts and larger -- those types of entities that are willing to put larger deposits with a larger bank.

So I think we don't really have a lot of concern on being able to fund our loans given that. So I'd say that's probably the biggest area that we have the ability to grow deposits.

We are looking at adding some new retail products to grow deposits and give our branches opportunities to increase their deposits as well. So it's just like all of our competitors: deposit growth right now is a challenge and we're trying to manage it every way that we can.

I would also add to that, Michael, that we did institute our treasury folks working with our Chief Lending Officer have come up with an incentive plan for this year that they are rolling out now across the branch footprint to incent, as Michelle said, a combination of coming up with a couple of new products that they can sell. And then incenting those relationship officers across our footprint to really focus on deposits this year as well as the loan growth and then putting some money behind that.

So we are being proactive, as Michelle said. And we did make an intentional -- the balance sheet could have been $100 million bigger at the end of the year if we wanted it to be that. But we really -- Michelle and her team did a great job of managing down, keeping the deposit costs down, letting some of the federal home loan advances roll off, letting some of the public funds go if the deposit beta was too high on those.

And so we were intentional -- we had a lot of other noises, as has been pointed out this morning, between acquisition accounting and the deferred tax asset and unusual accretion and sale of branches. We just have a lot of noise. We accelerated a few expenses into the first quarter as well -- sorry, into the fourth quarter as well. So given all of that noise, they were hyper-focused on making sure to rightsize the liability side of the balance sheet, keep the costs down.

But going forward, as we will guide into 2018, we to believe we can grow deposits. We do, as Michelle said, believe that whether two rate hikes, three rate hikes, that we're going to be in good shape on the margin.

All right, guys. Thanks for taking my questions.

Brett Rabatin, Piper Jaffray.

Wanted to ask, just going back to this part of the tax benefit being competed away, can you talk maybe just about -- is that something that you are already seeing in terms of loan pricing? And if so, in what categories? Or is that just something that you think might occur just given the tax cut?

Competition has been -- continued to be strong across both the Texas markets and the Colorado market. And it's too early to tell right now, Brett, so it's really more just speculation on our part.

We have noticed a little stickiness on some of the three- to five-year fixed rates. And again, that may have more to do with the steepness of the yield curve than it does with competition, quote unquote.

But we are always cautious around human behavior. We've seen it before, and we're just trying to build in a little margin expectations at our Board and others about this $25 million all showing up at the bottom line.

Obviously, we're hyper-focused on continuing to get our efficiency ratio down. We guided to 50% in the fourth quarter. We do believe -- continue to believe it goes down from here. We do believe our ROAs will be, ex the tax cut, in that 1.20%, 1.25%-plus range here going forward. And then you tax effect that. Those are big ROAs in terms of -- if you look historically. But we still are confident of those things but trying to allow some elbow room in case it is more competitive than we think.

Okay. And then the other thing I wanted just to ask about: the human resource spending. Can you talk maybe about just the lending platform and if you're planning on adding additional people producers this year? And what excess capacity you think you might have with the current team and platform relative to maybe last year?

Yes, we hired -- I'd mentioned in the third quarter we hired a five-person team in Colorado. And then in the fourth quarter of this year just ended, we hired (technical difficulty) five people really across the footprint. I believe it was two in Colorado and three across Texas. And those were net new ads.

So we are going to continue to expand that. And that is part of I think what Michelle was talking about, the reason that we don't expect our employee cost run rate to go down dramatically in the first quarter because we are continuing to bring on these teams.

And so we are building capacity. And as I mentioned earlier, the amount you have to do -- 10%, 12% on a $7 billion portfolio, you have got to generate close to $1 billion of net growth per year. And so we are building that -- continuing to build that capacity.

I mentioned previously that we hired an individual to come in and start up an equipment lending finance division. And we are going to see the first bookings from that new team here in the first quarter. So we do expect, again, some tailwind there.

We feel good about our ability to continue to grow at the rate we have been. And a strong economy and all those things are good tailwinds for us. We will see if that materializes into any better opportunity than a low-double-digit growth.

Okay, great. I appreciate all the color.

Brad Milsaps, Sandler O'Neill.

Just wanted to quickly ask about capital. At least on a percentage basis, probably one of the highest levels you have had in a while. I know you used a bit of that for the Integrity deal, but just kind of curious with your low-double-digit loan growth guide versus your 1.50%, 1.60% ROA, looks like you'll be running at a high teen, almost 20% ROTE.

Are the plans for the extra capital that you'll be generating really earmarked for M&A? Or I know you've never been one to sit on a lot of excess. Just curious how you're thinking about the capital plan as it relates to your M&A activity for the year.

Yes, good question, Brad. We are at strong capital ratios; strongest we've been at since the IPO five years ago. We did that intentionally, as you mentioned, partly for Integrity, but also to put some capital in place for the M&A market and M&A activities that we expect in 2018 and 2019.

We are, as you mentioned, with our profitability at this point and low-double-digit growth, we are capital accretive, if you will, from an earnings standpoint. So we do plan to use that.

We want to put ourselves in the best position as we cross through $10 billion to continue to get the good treatment that we've gotten from the regulators in terms of historically getting our deals approved quickly. And just trying to keep all those factors in place as we go through $10 billion, which we expect I believe third quarter of this year, of 2018, once we post the acquisition of Integrity with our organic growth.

The M&A market, Brad, as you have heard some of my colleagues say, lots of discussions, lots of conversations going on. And I think a lot of it is just optimism around the economy and where we are in the cycle. And I think also just the mathematics around stock prices trading at these levels, which are higher than they've traded since the economic difficulties of 2008 to 2012.

We see a lot of people looking at -- at these prices, everything's possible. So I think you are seeing companies that are interested in selling or interested in finding a partner. They got a tax cut, too, so we talk about it. You see it in the stock prices in the publicly traded companies. But a lot of the privately held companies across the state and across Colorado are also getting that benefit.

And I think those people are looking at it and looking at the stock prices of the potential acquirers out there and going this is the best time in maybe the last 10 years to find a partner if you're planning to do that with your company, if you've got succession issues or just your investment strategy is timed out.

So I expect it to be an interesting year on the M&A front. And the deal sizes could be bigger this year. But it always takes two willing parties to enter in and so -- and all deals are hard to make work. But certainly the conditions are right and the stock prices have never been more favorable. And so I'm fairly encouraged about 2018 and 2019 from an M&A standpoint.

That's great color. But you still feel comfortable in a TCE ratio around 8, maybe slightly less depending upon what's going on?

Yes, exactly. Yes, I think if we did an acquisition -- a large acquisition and our TCE ratio went down in the mid-7s but we had a pathway back up, that would be great.

And just one more follow-up, Michelle, on expenses, just to make sure I understood correctly. You talked about flattish expenses near term. Maybe cost saves in the first quarter replaced by some of the payroll -- seasonal payroll and other issues you talked about related to tax reform. Is that about right?

Yes, I think you got it.

Okay, great. Thank you.

(Operator Instructions) Michael Young, SunTrust.

David, wanted to follow up on the M&A comments you just made. Would you be more willing to entertain a larger transaction that's more of an MOE-type transaction at this point? Or are you still wanting to buy things in the $1 billion to $5 billion asset range?

That's a good follow-on question, Michael. I think I've been consistent in saying the last five years that being an organic growth company and an acquirer that part of our strategy historically, really for 30 years now, has been to take what the market allows you to have. And to be opportunistic around where the best situations are to create shareholder value. Meaning create accretion to earnings, create tangible book value growth for our Company long term.

That said, a wise person once told me you should always be talking to three or four or five banks that are much bigger than you are that you have good relationships with. You should be talking with three or four banks your size and you should be talking to everyone smaller than you that is in an attractive market that you would be interested in.

So I do think that these stock prices are going to cause all those conversations to be in place and to be taking place. And so our Board has consistently said we want to do whatever is best for creation of shareholder value. And I'm out working hard to execute that strategy. Nothing's off the table I guess would be the right way to answer that, too.

Okay, thank you. And Michelle, maybe just going back to your comments on the fee waivers this quarter. Could you size that up how much those were? What kind of run rate you would expect us to be at maybe going into the first quarter as those die down?

Are you referencing service charge income?

Yes.

Is that your question? So there was about -- I think it was about $175,000 of income related to the conversion. Some of that was fees that were waived just for customers having to go through that process. So we waived some of their fees.

Some of it has to do with the change in products from what they were on the North Star platform to what they are on our platform. So right now, about half of that will be ongoing, about half of the $175,000 will be a reduction in the run rate on service charge income.

And in addition to that, the nine branches that we sold, the total service charge income on those is about $100,000 as well. Now, the positive there is they also had about $900,000 of expense that went away. But if you're just looking at service charge and fee income, you need to consider that as well.

Okay. And David, maybe just on the mortgage business. Last year was a hard year for the mortgage business. Obviously, you guys picked up that division. But what's the outlook for this year? Is there still a lot of opportunity to pick up market share there? Maybe you could just provide some color there.

Well, it has been soft. The refinance business is -- most of the homes that wanted to refinance have been refinanced at this point. So it is a slug it out for new volume out there market.

We've got a terrific team on the mortgage side. And our strategy to offset that softness has been to continue to try to hire new producers. And we've got a robust plan for 2018 to continue to add to that platform and try to mitigate mortgage. But at best, we expect it to be kind of flattish this year is the way we're thinking about the mortgage business going forward.

Flattish year-over-year?

Correct.

And Michelle, if I can just --

I was just going to add, I think the anticipation for Q1 mortgage run rate is probably about the same as it was in Q4.

Right. And then if I could just sneak in one last one on the acquisition expenses related to compensation. It was about $1.8 million this quarter. How much of that will stick around versus how much of that is kind of change in control one-time payment?

The majority of that was retention and severance that was paid to their employees. So there really shouldn't be any of it that sticks around.

Okay, thank you.

Brian Zabora, The Hovde Group.

Just a question on Houston. Any comments around credit post Harvey. Doesn't look like -- credit looks great, but just any credit downgrades post the storm? And just how has demand bounced back?

Brian, this is Dan. We indicated at 9/30 on the call that we expected no material impact from Hurricane Harvey and that conclusion has held. We indicated we would see over the next 90 days from that point how it would look. And I would say it's been right on what we thought when we did our deep dive back then, that there has been minimal impact from the hurricane. And frankly, some really nice activity in the Houston area.

In terms of the overall credit quality of that portfolio, that portion of our portfolio, as we've said in previous calls, it continues to be some of the best in metrics that we have in the Company. And that remains to be the same. So we expect it to continue to be good in 2018.

Great, thanks for taking my question.

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to our hosts for any closing comments.

Thanks for joining today. We had a good year in 2017, as I said. And I think you can tell from our comments this morning that we are excited about 2018 and 2019 and the opportunities we have.

We continue to just have a lot of terrific people agree to join up and be a part of what we are doing at Independent Bank. And the future is the people. So we are excited about 2018 and 2019. Appreciate everybody dialing in. Hope you have a great rest of the day. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a great day.