Texas Capital Bancshares Inc (TCBIO) 2017 Q4 法說會逐字稿

Good afternoon, and welcome to the Texas Capital Bancshares Full Year 2017 Earnings Conference Call.

(Operator Instructions) Please note that this event is being recorded.

(Operator Instructions)

I would now like to turn the call over to Heather Worley, Director of Investor Relations.

Please go ahead.

Thank you for joining us for the TCBI Fourth Quarter and Full Year 2017 Earnings Conference Call.

I'm Heather Worley, Director of Investor Relations.

Before we begin our call, please remember it will include forward-looking statements that are based on our current expectations of future results or events.

Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements.

Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them.

Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release and our most recent annual report on Form 10-K and its subsequent filings with SEC.

Our speakers for the call today are Keith Cargill, President and CEO; and Julie Anderson, CFO.

At the conclusion of our prepared remarks, phone operator, William, will facilitate a question-and-answer session.

And now I will turn the call over to Keith, who will begin on Slide 3 of the webcast.

Keith?

Thank you, Heather.

Julie will offer her comments on our fourth quarter after my opening.

I will wrap up the presentation, and Julie and I will open the call for Q&A.

Slide 3 highlights the fourth quarter results.

Traditional LHI growth was strong at 4% linked-quarter growth and 18% growth year-over-year on average.

Mortgage finance loans, including MCA, increased on average by 7% from the third quarter and increased 17% year-over-year.

Annual average total deposits grew 7% year-over-year, overcoming the outsized decrease in Q1 2017.

Average demand deposits increased 4% linked quarter from the third quarter.

Net revenue growth increased 3% linked quarter and 21% year-over-year.

ROE was a strong 11.58% in Q4 excluding the DTA write-off.

The ROE of 11.58% increased from 11.2% in Q3.

Credit costs were much reduced from Q3 at $8.1 million, comprised of $2 million in provision and $6.1 million in OREO write-off.

On Slide 4, we highlight the hurricane issues, energy exposure and retail, CRE and commercial exposures.

To summarize, we remain optimistic and see no near-term signs of deterioration in any of these 3 exposures at the present time.

On Slide 5, we provide an update on our geographic diversification.

All major Texas Metro markets in which we operate remain healthy and continue to grow jobs and population.

Julie?

Thanks, Keith.

My comments will cover Slides 6 through 13.

We'll start with the NIM review.

Our reported NIM decreased by 12 basis points from the third quarter.

The increase of $628 million in average liquidity assets since the third quarter accounted for 9 of the 12 basis point decline.

Traditional LHI yields were down 3 basis points from the third quarter, primarily related to fees.

The impact from fees on traditional LHI yields has been pretty consistent for several quarters, but the fee component decreased by 4 basis points from Q3 to Q4, which accounts for more than a decrease in the LHI yield.

Some impact from the December rate move in the -- is in the numbers, but not a full impact, as the 30-day LIBOR move started in mid-November and LIBOR pricing can happen with up to a 30-day lag, as individual loans reprice at different times.

We would expect to see additional yield pickup reflected in the first quarter numbers.

Additionally, with significant loan growth in the third and fourth quarter, a slight drop in yield was not surprising, as new loans are not being put on at the same effective rate as the overall portfolio yield.

Yield on mortgage finance loans remained flat from third quarter levels.

The continued increased percentage of loans in mortgage finance and MCA has a negative impact on NIM but very favorable to our net interest income.

Fourth quarter seasonality impact was less than expected for mortgage finance, which was very positive for earnings.

We continue to see growth in deposits from the third quarter, primarily in interest-bearing but also some modest growth in DDAs.

Our overall deposit cost increased by 6 basis points from 47 basis points in the third quarter to 53 basis points in the fourth quarter.

The increase was expected, as we've discussed that most of the deposit growth would be in interest-bearing, and we started to see that in the fourth quarter.

We're still not changing posted rates but expect 2018 deposit growth to be weighted towards interest-bearing deposits with some migration based on overall relationships.

We expect we could see more pickup in the magnitude of rate change request with a prospect of additional rate moves in 2018.

We continue to have a good deposit pipeline.

But as we've said in the past, it can involve a long sales cycle so it's difficult to forecast exact timing and it can be lumpy in how it comes on.

Change in loans with floors shifted a little bit with the rate change in December.

That's now around $565 million, down from $800 million at the end of September, but there's really no significant difference in the rates on floored versus unfloored loans.

As a reminder, approximately 70% of our floating rate loans are tied to LIBOR and about 80% of that tied to 30-day LIBOR.

As Keith commented earlier, we had continued good traditional LHI growth in the quarter, consistent with the third quarter levels and in line with our full year guidance.

Traditional LHI average balances grew 4% from the third quarter and up 18% from the fourth quarter last year.

Strong growth later in the quarter, with ending balances above average by over $350 million, providing a good start for 2018.

The level of payoffs remained high in the fourth quarter and there's no sign that, that will slow in 2018.

Total mortgage finance continued to be strong with average balances increasing 7% from the third quarter and 17% from last year this time.

Fourth quarter can be seasonally weaker for volumes, but fourth quarter volumes were better than expected as seasonal strength from the third quarter lasted longer, extending into October and early November.

A little more discussion on deposits.

We experienced linked-quarter growth in total deposits including DDAs.

While always targeting the most cost-efficient deposit sources, we've expected growth to be heavily -- more heavily weighted toward interest-bearing, which is what we started to see in the fourth quarter.

We expect most of the 2018 growth to come from interest-bearing categories, but still at very reasonable overall effective costs.

Again, with the rising rates, no change in our stated rates through 5 increases, but some migration to interest-bearing from DDA balances still reacting to specific customer situations and evaluating on a total relationship basis.

Still only 2 major categories that are moving in tandem with the Fed rates that's now approximately $4.5 billion to $5 billion in balances.

The increase of 6 basis points in average cost of deposits from the third quarter due to the mix of deposit growth experienced in the fourth quarter was almost 80% of our growth coming from interest-bearing deposits.

Now I will talk a little bit about noninterest expenses.

The increase in the linked-quarter noninterest expense included a lot of noise, most of which is not part of a normal core run rate expected in 2018, so I'll try to explain, give a little more detail on that.

They include $1 million of non-LTI incentives related to special incentives paid as part of the tax reform announced in December.

For FAS 123R expense, we had additional fluctuation in the fourth quarter compared to the third because of the continued increase in stock price.

An additional $1 million change in the fourth quarter increasing our 2017 total 123R expense to almost $22 million, up from the $21 million we estimated in the third quarter, and that's compared to an actual level of about $14 million in 2016.

Our fourth quarter FAS 123R expense was $7.1 million, up from Q3 of $6.1 million, as the stock price continued to increase.

And the actual stock price impact was $1.4 million but was partially offset by some other items.

Legal and other professional was abnormally high in the fourth quarter with some nonrecurring expenses and not considered a new run rate.

Q3 levels were lower than normal, exacerbating the fluctuation on a linked-quarter basis.

The ongoing run rate is closer to first quarter and second quarter levels for this category.

For the -- we had a $2.8 million MSR impairment taken as part of fourth quarter servicing expenses.

$2.3 million of the total is related to an expected sale of the majority of our Ginnie book.

We believe the Ginnie book is higher risk and not as liquid as the conventional book and have made the decision to sell that portion first.

We expect that sale to close in the first or second quarter.

The remaining $500,000 impairment is related to some normal market movements and not expected to be permanent.

Additionally, we expect we could have some additional sales of portions of the conventional book sometime in '18, and pricing is expected to be at or above the current capitalized levels.

With the $6.1 million OREO write-down that's included in noninterest expense per GAAP, but obviously, we look at that more as a credit cost and I'll mention it further in that section.

Lastly, the other expense category had some catch-up expenses that have the fourth quarter numbers elevated by a little over $1 million.

All the new and expanding lines of business continued to be profitable during the fourth quarter and for the full year of '17 and continued to contribute to loan growth.

The new lines of business are continuing to provide meaningful contribution on a pretax, preprovisioned basis.

We have no outsized buildout plan for 2018.

And just a few reminders about the more variable parts of our noninterest expense.

As we've previously noted, servicing-related expenses are directly related to servicing revenue, which provided profit contribution for the year, net of the MSR impairment charges.

Other categories, including occupancy, technology and marketing all directly related to growth, including growth in deposits.

A portion of the marketing category is more variable in nature and is related to growth in deposit balances as well as increases in rate.

The strong warehouse balances and contribution of new and expanded LOBs net revenue increased linked quarter, while the efficiency ratio was higher at 55% in the fourth quarter and 55% for the full year.

2007 (sic) [2017] efficiency ratio includes some items worthy of mention.

The MSR impairment related to the sale that we just discussed as well as the software write-off in the second quarter.

We had $4 million of increase in FAS 123R related to stock price.

And while a continued strong stock price will drive higher FAS 123R expense in '18, that's been taken into consideration in the guidance we'll give shortly.

Also important to remember for the 2018 noninterest expense run rate is the outsized payroll-related expenses in the first quarter of every year.

For 2017, that was a $3 million fluctuation from the fourth quarter 2016 levels.

Asset quality continues to be good and very strong net of the energy NPAs, which we believe have been properly reserved.

Our nonaccrual levels are still at an acceptable level of 0.49% of total loans, with more than 64% comprised of energy loans where we are continuing to see progress in their resolution.

Provision of $2 million for the fourth quarter compared to $20 million in the third quarter and $9 million in the fourth quarter of last year.

Additionally, $6.1 million of OREO write-down was taken in the fourth quarter, bringing the total credit cost for the fourth quarter to $8.1 million.

Charge-offs for the quarter totaled less than $1 million and included $175,000 related to energy.

Our quarterly net charge-offs represented 3 basis points of traditional LHI and 21 basis points for 2017, of which about 60% related to energy.

Our net revenue.

We saw growth in linked-quarter net revenue with good loan growth, both in traditional LHI and total mortgage finance, despite what was expected to be a quarter more heavily impacted by seasonality.

Additionally, growth in net income from the third quarter, excluding the impact from the DTA write-off, positive impact going into 2018 with strong earning asset base and favorable composition.

On an annual basis, net revenue growth was 19% and net income growth of 27%, excluding the impact of the DTA write-off.

ROE and ROA levels much improved in 2017 following the impact of elevated provisions in results for most of 2016.

Our full year ROE for '17, excluding the DTA write-off, was back over 10% related to higher net revenue and lower provision levels and despite the impact of the equity raised in the fourth quarter of 2016.

Additionally, lower provision levels this quarter was very favorable to ROE, which was over 11.5% excluding the impact from the DTA write-off.

Strong mortgage finance contribution had positive impacts on the ROE levels in the second quarter through the fourth quarter, which could be diminished somewhat in the first quarter with expected seasonal weakness.

Finally well move on to the 2018 outlook, and the '18 numbers -- the outlook is compared to our 2017 actuals.

Our outlook for traditional LHI for '18 is low to mid-double-digit percent growth.

That's consistent with the 2017 growth level.

We expect average balances for mortgage finance loans to be flat to low single-digit growth for the year, with some seasonal decline expected in the first quarter of 2018, but not as dramatic as what we experienced in the first quarter of 2017.

The MCA guidance at $1 billion for average outstandings for 2018.

We're still taking market share, but with mortgage industry volumes expected to be down in '18, we expect averages will remain flat and are focused on continuing to prove profit margins with the flat average levels.

For our total deposits, we think growth will keep pace with traditional LHI growth of low to mid-teens percent growth.

We expect to see more growth in interest-bearing categories and some shift from noninterest-bearing to interest-bearing.

The deposit growth can be lumpy, which can mean that liquidity levels could vary some from quarter to quarter.

Our outlook for NIM, core NIM, is 3.35% to 3.45%.

Our guidance takes into account the December rate increase but assumes no additional rate increases in 2018.

With expected LHI growth levels and more of our deposit growth coming in interest-bearing deposits, it's reasonable that full year NIM would be slightly compressed from the 2017 level, assuming no additional rate increases.

Our outlook for net revenue is low to mid-teens percent growth.

That's down slightly from growth rates in '17 and primarily related to our assumption that deposit costs will be higher in 2018.

Provision guidance is mid-$50 million to mid-$60 million level.

As in prior years, we're starting with a wider range on provision guidance, and we'll tighten it as we go through the year.

There's too much uncertainty at this point regarding economic growth outlook.

Our guidance for noninterest expense is high single-digit to low-teens percent growth, and that is compared to our reported amount excluding the OREO write-off.

So basically, that's compared to the $459 million for 2017.

There were quite a few outsized items in 2017 that we don't expect to see in '18, including the software write-off and the MSR impairment related to the Ginnie sale.

Additionally, FAS 123R expense was elevated in '17 related to stock price, but our guidance assumes that current levels of stock price are maintained, which adds additional expense run rate for '18.

Based on the net revenue assumptions and our noninterest expense assumptions we've described, guidance for efficiency ratio is set at low to mid-50s.

Lastly, with the new tax reform, we felt it necessary to give some guidance on our new effective rate, which we estimate to be 22%.

Keith?

Thank you, Julie.

Texas Capital recorded record earnings for 2017 and continues to show progress in the third and fourth quarters on elevating ROE, a key strategic push we've made the last 2 years.

We expect strong traditional LHI growth to continue in 2018, with deposit growth more in line with loan growth.

Due to our strong asset sensitivity, the expected shift in deposit composition as rates rise should still allow us to demonstrate a positive spread on future rate moves.

Credit metrics are improving.

The focus on increasing ROE is occurring as the profit contribution increases from our new or expanded businesses and while we continue to grow our core businesses alongside.

NIE growth is slowing, operating leverage is increasing, and the new corporate tax rate at 22% is a meaningful improvement from our previous 34-plus percent rate.

We're optimistic that 2018 will be yet another excellent year for Texas Capital.

This concludes our comments.

Operator, we're ready to open it for Q&A.

(Operator Instructions) And our first questioner today will be Ebrahim H. Poonawala with Bank of America Merrill Lynch.

I just wanted to make sure I heard Julie correctly.

Did you say that the NIE guidance is off of $459 million base for 2017?

Right.

So it's the reported amount less the OREO expense because we consider that more of a credit cost.

Understood.

And 2 things on the expense guidance.

One, the high single digits to low teens seems like a fairly wide sort of range.

Keith -- if you can help us understand like what brings you to the lower end versus the higher end of that range, assuming growth plays out consistent with your growth forecast.

We're really not building in any interest rate increases, Ebrahim.

And what -- that's going to have some impact on efficiency ratio too if we do, in fact, see some of that pick up.

But we really expect, after a significant additional technology integration that'll happen about midyear for us with a new loan core system, that we'll begin to realize some efficiencies out of that conversion, as we've begun to realize some out of our mobile banking conversion, that was the big one this past year, but that won't occur until the back half of the year.

And as you know, we have a significant amount of opportunity to not only pick up business but also pick up talent after bonuses are paid.

So sometimes that happens in the first half of the year, but we don't expect an outsized push.

We're just continuing to ratchet up the caliber of talent that's required before we bring on new people.

Got it.

So with high-single digits, low teens, a 10% expense growth number is fair from our standpoint, give or take, when add something to your guidance?

And...

Reasonable.

I think that's reasonable.

Understood.

And you mentioned the efficiency ratio, Keith.

I think that's been a big sort of emphasis over the last year, if I'm thinking about it correctly.

One, should we expect, maybe some markets implying 3 rate hikes over the next [2 or] 3 quarters, is it fair to say that the efficiency ratio could potentially be closer to 50% or actually dip below 50% this year?

I think we could have a run rate close to that by the fourth quarter if we get these interest rate increases, but that's just something we don't like to build into guidance.

And certainly not -- and certainly, that's not a full year run rate.

No, understood.

So if we get 3 rate hikes, the efficiency ratio could end 2018 close to 50% or lower?

We have a shot at it.

We do.

Understood.

And just on a separate topic very quickly, so I get the point about deposit growth should be coming from interest-bearing.

Could you remind us in terms of as we think about each Fed rate hike from here on, what's the level offer of margin sensitivity we should expect?

Julie, you want to take that?

Yes.

What we've talked about is that for every -- we're 5 rate increases into it.

And so for everyone, it's going to continue to be very positive to net interest revenue, but it becomes thinner.

The margin for each becomes more as deposit costs catch up.

And I think we don't know if there'll be a big rush for deposit cost to catch up after this one or after the next one, but there will be a -- more catch-up.

But based on what's going on, on the asset side of our balance sheet, that's still going to continue to be a very favorable spread for us as rates increase.

And our next questioner today will be Dave Rochester with Deutsche Bank.

Just back on the NIM guide.

Sorry if I missed this, but are you baking in any more liquidity build into that as well?

It seems like, with the deposit growth guide, maybe you are to a certain extent.

Just any color there would be great.

No, nothing -- no, not really.

There may be some -- there could be some quarter-to-quarter fluctuations based on how deposit inflows come in, but the guidance for deposit growth is consistent with traditional LHI growth.

So we're not anticipating anything significant in a liquidity build.

So is the trajectory guys you're looking at is margin up in the first quarter, and then it steps down through the year because you don't have any more rate hikes in there, but you've got deposit cost moving up.

Is that the general gist of it?

No, you have to remember, in the first quarter, we would expect to see a more seasonal impact from mortgage finance.

So to the extent those balances are down, liquidity could be slightly elevated in the first quarter related to that.

So there's still -- there's a -- there's other dynamics that go on with the NIM in the first quarter.

Even though we had an outsized benefit on seasonality coming late in the fourth quarter, we're seeing it really begin to affect first quarter, as we always see it.

So it would be about earning asset shift in the first quarter that could contract NIM.

Got it.

That makes sense.

Understood.

And then just on the expense guide real quick.

I think you may have already hinted at this, but is there any kind of sensitivity to -- from rate hikes, I guess?

If we have a bunch of rate hikes, will that actually ultimately increase the dollar amount of expenses through the year?

I know that, that would potentially push the efficiency ratio lower because revenues are growing, but would the dollar amount of expenses increase and maybe hit the top end of the range from that?

It's not outsized, but as I' mentioned in the commentary, the -- a portion of the marketing expense, there's a portion of that, that's tied to both deposit growth and rate move so there could be some additional expense there.

And not a good thing.

It's -- no, it's not.

Yes.

I think we've accounted for that in our guidance.

And to the extent we get several more rate moves where that would adjust, we would certainly let you know that.

It might be a small fraction, but as Julie says, it would move some of marketing.

Got you.

So that makes sense.

And then just one last one on the deposit side.

The growth guide is good to see.

I was just wondering what you think the biggest drivers will be, whether it's industries.

And then, I guess, bigger picture.

It sounds like the DDA, you're anticipating, will ultimately end up -- at least a portion of it, will end up shifting to interest-bearing, is that the general gist of it?

Yes.

I mean, we saw that trend really kick in, in the third and fourth quarter, as you can tell by our numbers even this year.

Now we expect more of the same this next year, where virtually all of our deposit growth likely will be time-based.

But then the question is just at what rate on the time-based.

And we've talked about that and while we're giving the guidance we are on NIM today without rate increases, giving us some extra advantage there.

But on the loan side, Dave, we expect very broad C&I opportunity.

We are not having clients call us yet to talk about major new CapEx projects.

We know they're contemplating doing more, though.

I mean, that definitely is on their agenda but they're trying to really size up what the true effect of these tax changes might be on them, particularly so many of our clients that are pass-through entities, LLCs, as opposed to C Corps.

And -- but we do expect some positive influence from that as we get further into the year and they evaluate just what kind of payback they'll get on some of those CapEx expenditures in particular.

Is there any kind of expectation built in to your deposit growth guidance for companies, businesses using deposits to fund expansion at all?

We think some of that's been going on, anyway.

In Texas, it's been a very robust economy for quite some time.

And I don't think we'll see as much effect of that.

As the tax rates are improving, their cash flows are improving.

So their balances, I think, in many ways are going to offset the use of some of that money, and they're going to want to have some liquidity.

But I think we've seen already a bit of that.

We don't expect it to be a drastic shift this next year.

And the next questioner today will be Brady Gailey with KBW.

When you look at the new tax rate guidance and the benefit you'll get from the tax rate, is the plan for -- at least for 2018 to see most of that tax rate benefit drop to the bottom line?

Or did you maybe put in the assumptions of little more expense growth just because you had the tax benefit coming in?

I'm just trying to figure out how much of that benefit, if not all of it, will drop to the bottom line this year.

No, we've been expecting -- we've been investing last year, and again this coming year, more to a degree in technology.

We've talked some about that and even did the one piece of technology write-off last year as we did some of that technology investment.

So we're not doing an outsized incremental portion in '18.

It's just a commitment we made a couple of years ago that we want to be sure we reset our technology to be as current as possible and pick up efficiencies as we make these conversions happen.

So that will continue to be the case in '18 and '19, but not in an outsized way.

And so to answer your question, we expect most of that to go to the bottom line.

All right.

And then when you look at held-for-investment loan yields, they're around $490 million.

I think, in your prepared comments, you talked about how you were still booking loans at a rate lower than that, and that was driving some of the loan yield down.

What is your new production loan yield?

What's the differential between that and the $490 million?

Well, we would just not be able to tell you that, Brady.

There might be a competitor listening right now.

But it is certainly more aggressive overall than that, and it does vary by category, as you would expect.

So the mix of business does matter.

Frankly, the core C&I business is probably the most competitive other than mortgage warehouse, and those are 2 categories everyone wants and -- for the risk reward and the diversification.

But we grow -- this last year, we grew at 18%.

You look at our competitors, some of them grew at 3% to 7% in loans.

So that incremental amount of growth is at that lower-price, more aggressive current pricing than the average in our portfolio, and we're projecting again low to mid-teens this next year.

So we'll see that continue to be the case.

The good news is we drive a lot more net interest income, and we're taking good-quality market share.

Got it.

And then, finally for me, just embedded in the -- on the expense growth guidance, how many RMs are you looking to add at TCBI this year?

We really never know for sure.

We have a range that we would target.

We would like to add if -- we can find the starting lineup of the all-star team, and that's who we look for, we'd like to add RMs in each of the C&I areas and then selectively in some of our specialty businesses.

Some of our new and rebuilt businesses are growing faster than even our core business, so there'll be select needs there.

But honestly, we develop a pipeline for every line of business, and we feel really good that we've got a good, deep pipeline.

But we're also very careful now, as we have been the last couple of years, managing the pace at which we add talent so that we're getting productivity as we add talent and don't do outsized hiring to add capacity.

We really try to manage always having sufficient capacity now and not getting behind as we did a couple of years ago, which caused us to need that outsized hiring.

So my best guesstimate this year would be we would hire anywhere from 12 to 16 or 18 RMs.

But it'll be across the board in all the different businesses.

And the next questioner today will be Jennifer Demba with SunTrust.

Question on the hurricane provision.

Have you had any hurricane problem loans to date?

And when do you anticipate you might reverse that provision and kind of have a good idea of what your losses are going to be on that front?

We really haven't had any hurricane issues.

We had, I think, 2 C&I credits that it weren't moved from fully passed to watch.

I mean, that's -- we have had no credits move in the classified categories and no losses yet.

Over the course of the next couple of quarters, at the pace we grow, I expect we will use what we set aside.

And that'll be factored into the provisioning as we go according to our methodology.

So we don't expect a "reversal" in a given quarter, but thus far, that money is -- we've not had to tap that reserve.

The next questioner today will be Michael Rose with Raymond James.

Just wanted to dig in a little bit to the deposit increase in costs.

And just you guys have done a really, really good job over the past 6, 7, 8, 9, 10 years building up a DDA base.

Can you just talk about some of those efforts and where they stand?

And I know you guys have, I think, between $4.5 billion and $5 billion in brokered deposits, which have pretty high betas.

What's the -- as we think -- as we go forward, how should we think about the rising deposit costs juxtaposed with a lower loan or deposit ratio and just framing that into the margin guidance?

Sure.

I know that, technically, we have to categorize those as brokered deposits.

A portion.

But in fact, they really are relational brokered deposits.

I just want to clarify that.

And that's only a portion of that index to map to.

Yes.

That is about, what, half of it, roughly?

Yes, half or less than half, yes.

So -- but as you suggest, those are high betas.

Both those categories are -- make up about $4.5 billion.

We really believe that, over the course of the next 3 or 4 years, all banks are going to begin to see their DDA mix shift some.

I think some are going to have that shift occur a little earlier than others, but everyone is going to see the mix begin to shift some as these rates increase.

And -- so we are just being a little more conservative, I think, in how we're looking at those possibilities.

And because we're more wholesale-funded than we are retail-funded, we think that's appropriate.

We feel very good about where we sit relative to our competitors and on the mix of relationships, which often include some DDA as well as time money.

And -- but if we have outsized DDA in a given relationship, Michael, we are seeing and have been seeing the last couple of quarters and will continue in '18 to see some of that money shift to time, too.

So we will continue to generate new DDAs.

We're doing a good job with treasury, creating new accounts, new relationships, new demand deposits.

But also some of the relationships we've had for some time have had an outsized amount in DDA that's beginning to shift some, and we're trying to build that into our guidance.

Okay, that's helpful.

And just as a follow-up on a separate topic, just talking about your energy portfolio.

Obviously, that's been somewhat of a headwind, but how do you guys think about that portfolio as you move forward?

A couple of your peers talked about growing that portfolio.

And how does that relate to your guidance?

Well, it was one of our 3 top growing segments this past quarter; we're really pleased to see that.

Our Houston market, again, kind of set the pace of overall growth, followed by our public finance business and then energy.

So we are seeing some very good opportunities and those fundings are overcoming some of the pay-downs that still continue on some of the credits, some of the ones that we want to see pay-downs on, of course.

And so we feel quite good about where we stand today.

Candidly, I hope the price does not go too fast -- north too fast because, today, we have good opportunities, and the market is reasonably competitive already.

But if the prices escalate much more, we could see just some challenges in the oilfield with some cost pressures and things that haven't become a big issue yet.

But we're optimistic about the long-term portfolio and opportunity to take quality business write-down in energy.

And the next questioner today will be Emlen Harmon with JMP Securities.

Keith, what kind of economic environment are you anticipating in your guidance, just both in terms of loan growth and credit?

We think we'll have a good economy in '18.

We're just never going to put in guidance that we're going to bet the farm that we wouldn't potentially have some softening if disappointments occur.

There's a big midterm election coming up in the fall.

There'll be a number of things that we'll have to take a look at collectively, all the business owners that we deal with over the course of the next quarter or 2, as we see what the tax effect really does in terms of demand and costs and prices on some of the things that they'll be investing in as well.

So we are optimistic.

We think '18 will be a good, solid year.

But we don't know -- we don't have the same visibility or sense of optimism about how strong it'll finish going into '19.

And we hope, as each quarter goes by, we become increasingly more bullish.

But at this point, we feel good about '18.

We're just not, again, going to bet that it's going to be a blazing finish yet.

Got it.

And then on the deposit growth, mid-teens would be a bit of an acceleration for you guys versus last year.

And I know -- I think it was first quarter, we had kind of a tougher quarter on, I think, particularly the DDA.

Are there any kind of new initiatives that you would highlight as kind of contributing to that deposit growth?

Or is it just a matter of kind of blocking and tackling with new RMs and that kind of thing?

It's primarily better blocking and tackling.

Our RMs have just done a fabulous job and are working more closely with our treasury team members.

It's a great partnership, and that's just how our people react.

If we have something off a quarter, you can just count on our team to just rally and figure out how to get better and more competitive.

And we've done that the right way, not just trying to buy business on the loan side or on the deposit side, but really doing a more thorough job working together as teams.

I will tell you, though, there are constantly new initiatives at this company around deposits and funding, and we have a number of them that are underway.

And not that we're ready to tell the market all those new initiatives and talk about them until they become financially significant and material, and that we will need to talk about them at some point.

But -- it's a combination of the 2, but primarily, it's our team really rallying and working more closely with our clients and prospects with the treasury talent we have.

The next questioner today will be Brett Rabatin and with Piper Jaffray.

I wanted to ask, I guess, first, the central lines of business or national lines of business, the growth this quarter was muted by the warehouse.

Can you talk about those just generally in terms of prospects for the coming year?

And then, wealth management, and you don't give specific guidance around fee income, but I was just curious about how you were thinking about the outlook for that as well.

Well, our overall traditional LHI grew 4% linked quarter and 18% for the year.

But on a national basis, if you're looking at those charts, warehouse actually grew -- unexpectedly grew into the fourth quarter, on an average basis, I believe, about 7%, Julie, if you include mortgage correspondent lending.

Right.

So the combination of the 2 and the continued strong success in public finance as well as builder finance and also premium finance, I think they all did really quite well for the finish for the year, the last half of the year.

We're very optimistic that all those businesses will do well this next year.

Public finance has some headwinds with the change in the tax law, but they have some great new strategies and tactical plans on how to attack the market, and we're still very optimistic that public finance will show nice growth this next year.

Okay.

And then on fee income, just any thoughts on prospects for continued growth in that line as well?

Well, we're very encouraged with the progress we're making with our private wealth team.

They're just doing a phenomenal job, and the connection and relationships they've built across our bank with the relationship managers and our core clients are really creating a lot of new momentum as well as the success they're having with direct solicitation and marketing themselves.

So that's one key area of growth.

We think MCA is going to continue to grow fee income, and we're very optimistic about what that can do for us in '18.

And again, even with headwinds and mortgage finance, it's a great fee income generator for us, and we expect it'll grow some this next year despite those headwinds.

We seem to find a way to overcome headwinds.

And the next questioner will be Brad Milsaps with Sandler O'Neill.

Julie, I just wanted to follow up on the margin.

It looks like your NIM was up about 35 basis points last year, maybe 19 excluding liquidity.

I appreciate the guidance in terms of it being without any future increases from the Fed.

But if the Fed were to follow kind of a similar path in '18 as it did in '17, would you, except your -- expect kind of a similar amount of expansion?

Or maybe based on your comments around deposits and loan pricing, might it be less?

Yes.

I think based on the outlook right now and for how -- where we would grow deposits, I think it would be something less than that.

There would still be expansion -- it would be very positive to net revenue -- net interest income.

But yes, we would expect, at this point, it would be something a little bit less than that based on what -- where we think the growth is going to come on the liability side.

If we had to give you a range, we don't have to but we might, Julie's frowning, I would say somewhere -- if we got 3 rate hikes, we might see a collective 15 to 20 basis points, not the 30 or 30-plus.

That's just a ballpark estimate because, again, we expect more of this shift on the deposit side.

So we'll pick up some net benefit, but not at the same pace.

Yes.

Got it.

No, that's helpful.

And then just to follow up on expenses, just in round numbers, it looks like you grew the expense base almost $80 million last year.

The midpoint of your guidance for '18 would imply about $45 million in growth.

Is the swing or the difference there just really kind of buildout expenses?

I know you called out a few things, but just kind of curious kind of what the -- kind of what's changing the dollar guidance, I guess, the most year-over-year.

Yes, I pulled out several things that were outsized this year that we just don't expect to happen next year.

And then, there's just a real focus on where and how we're growing noninterest expense.

So we've spent a lot of time on this, there's been a lot of detailed work to come up with these numbers, so I think we feel good about them.

We have real buy-in from our leaders across the company that we're going to be very focused on getting -- enriching the client experience, always getting better at client experience, but not continuing to spend money at the same pace we have in the past, be really wise how we invest and, certainly in terms of talent but also in technology and so on.

Brad, if you backed out some of those things that we'd talked about, that I talked about for '17, you would have ended up with a year-over-year increase closer to the mid-teens versus where it came in.

So I think that's kind of if you look at where kind of what a normalized run rate was for 2017 to what we're giving guidance for in '18, it makes a little more sense.

And the next questioner today will be Peter Winter with Wedbush Securities.

A question on the provision expense guidance.

When I look at your credit quality trends, they've really improved quite a bit throughout the year, excluding the OREO write-down.

And the thought is, with the tax reform, it's going to extend this credit cycle.

So I'm just curious what goes into a forecast with the -- that increase in provision expense.

Is it more reserve...

One of the keys that's different for us than many of our competitors, Peter, is simply our pace of growth.

And for instance, in that guidance, there's over $20 million that's simply pass growth, pass-rated new business.

And I think many of our competitors would be a small fraction of that.

So that is a real key component of what we have to deal with.

And I'm glad we have it to deal with, but we've always believed it's important to be conservative on the front end when you grow like we do.

And we put aside a significant amount of money on each new loan.

Is there a range on net charge-offs that you're thinking about for this year?

There is a range, but not one that we feel strongly enough about that we want to telegraph it today.

But certainly, that has been baked in to the guidance range that we've given you.

We think it should be very competitive relative to our peers.

We always come in, it seems, better than peers, and we don't expect an outsized change at all.

But when we start the year and we have this many uncertainties about some new things that appear to be positive but haven't hatched yet, we're going to start the year with a pretty conservative provision range.

Just a wider range.

And as Julie mentioned, we'll ratchet that and...

We'll tighten it up there.

Tighten it up as we get quarter-by-quarter further into the year.

And the next questioner today will be Matthew Keating with Barclays.

So you mentioned earlier that the net revenue outlook would -- could be considerably better if we do see multiple rate hikes this year.

I guess, if we look back to the 2017 outlook at this time last year, the company was calling for mid- to high-teens percent net revenue growth; it did about 20% with the benefit of 3 rate hikes.

And so do you think that's still the same like level of improvement you'd expect from multiple rate hikes this year?

Yes, we should because our expense run rate on NIE should be better.

And even though we won't benefit quite as much from the rate hikes on margin, the combination should be comparable.

Okay.

And then, I guess, given the focus, Keith, on improving, I have a guess, ROE, et cetera, at the bank becoming more efficient, are you surprised at all that the efficiency guidance this year is a bit higher than it was at the start of last year?

So I think you're calling for a low to mid-50s efficiency ratio in '18, and as you think back to last year, the company was calling for a low-50s efficiency ratio.

And so what's driving that?

Well, go ahead, Julie.

I mean, one of the things that -- again, some of the noninterest expense items that we talked about, things we had through the year, the software write-off, things like that, if you backed those out, we would have been at a mid-50%.

It would've been, I don't know, 53%, 54%.

So -- and then, I think, one of the things that's really driving our guidance for '18 is that we are trying to build in the higher deposit costs, which affect the top part of efficiency.

But we think that's going to affect net revenue, and so that's part of efficiency.

I think the trickiest part on our efficiency ratio is we're pretty conservative, Matt.

We're not building in any rate increases, but we are being very conservative about our mix of business and our cost of funding.

So maybe we're being overly conservative to a slight degree and that's having some effect on that efficiency guidance.

And the next questioner will be Gary Tenner with D.A. Davidson.

It's been a little bit of a mixed bag this earnings season in terms of how bank management teams are sort of indicating they've gotten responses from their clients post tax cut, some saying there has been a huge increase in activity, some saying it's too early to tell.

Where do you guys sort of shake out on what you've seen the last month or so?

Our clients are telling us they're considering making some new investments, particularly CapEx, but they just don't have a grip yet on the new tax law and ramifications on them.

Now these are primarily clients that, again, are pass-through entities, LLCs and the like, unlike maybe some larger banks that have virtually all C Corps.

I'm not sure if that has that big a difference in the feedback you're getting.

But with our clients, more of them are privately-owned companies.

Not all of them are C Corps; many of them are LLCs and S Corps.

So that's a bit more complicated for them to sort through it.

They do clearly see an advantage in this full write-off capability, this full tax amortization component, and that's why they're talking about looking at additional CapEx.

So we do believe, and that's partly why we've got some good strong overall traditional LHI growth in our guidance, that we will see some pickup this year in demand.

And it's going to come to help offset some of the things like public finance that got affected the other way with the tax law change.

So as you think of your guidance for the year and maybe the timing of some of your customers sort of settling on how they're going to approach things on a go-forward basis, do you think that some more of your growth is weighted towards the back half of the year as some of those decisions are made?

Or do you think it's ratable?

I think it's certainly the last 3 quarters.

I think it'll be relatively slow this first quarter.

And the next question will be a follow-up from Ebrahim H. Poonawala, Bank of America Merrill Lynch.

So I'm sorry for asking another expense question on the call, but Keith, if I just take a step back, when we look at sort of the -- Julie mentioned, if you adjust for one-off item, the efficiency ratio would have been in the 52%, 53% range last year.

Given sort of where the focus has been and you being quite vocal in terms of wanting to flex down and improve the efficiency, right now, the guidance, absent any rate hike, and I get you're being conservative on the revenue side and deposit betas, implies no material improvement in the efficiency ratio, right?

At the midpoint of sort of your guidance in the low to mid-50s, is that, again, being overly conservative in terms of the expense outlook?

Or -- especially given that you're not making any major investment.

I'm just trying to understand the thought process.

I think we're just going to have to see how fast this cost of funds moves, Ebrahim.

Because that just really has a big effect.

And we are conservative and we've been talking about this all throughout the year.

Particularly after we got through the first couple of rate hikes, we expected that we would see movement faster than we've seen it.

We began to see more of it in the fourth quarter.

It's still not come at the pace we've really expected.

So that is a way that we look at earnings this next year is we're highly sensitized to be sure that we're not betting on outsized NIM carrying us.

And I think we're going to see a much stronger overall expense management from the company, as we saw in '17 versus '16.

So I think we have a good chance at finishing the year, as I mentioned earlier, in the range of close to a 50% efficiency ratio if we get the rate hikes and if we don't see a more significant shift, faster accelerated shift from DDA to time than what we've already built in.

I think we've been reasonably conservative, but we'll just have to see.

And would that 50%, if we get there by the end of the year, be something that could be sustainable on a full year basis into '19?

Or -- because I know there's fair amount of seasonality.

Like do you feel comfortable that -- let's assume DDA migration goes as expected, more or less, and we get to a 50% number by the end of the year, would you say that would be something that's sustainable, given all the actions you've taken to improve the efficiency?

I can tell you, everything we've been working on at the company the last 2.5 years has been about improving sustainably higher ROEs and improving efficiency.

So I think we're building a strong foundation under these improvements, and it's not something that's just going to dissipate once rates peak, but it's going to be really critically important we continue to drive the higher fee income from these businesses that we have built and rebuilt the last few years, and also existing businesses where we're having higher success on driving more fee income.

That's really an important component to get us where we need to be on ROE and also help us with the efficiency ratio.

And this will conclude the question-and-answer session.

I would now like to turn the conference back over to President and CEO, Keith Cargill, for his closing remarks.

We appreciate you joining us for our wrap-up for '17, and we're excited about '18 and look forward to talking with you about really good results as the year progresses.

Thanks so much.

Thank you for your participation in TCBI's full year 2017 Earnings Conference Call.

Please direct any request for follow-up questions to Heather Worley at (214) 932 6646 or heather.worley@texascapitalbank.com.

You may now disconnect.