Ladies and gentlemen, thank you for standing by. Welcome to today's conference call to discuss the Texas Capital Bancshares and Independent Bank Group Merger of Equals. At this time, all participants have been placed in a listen only mode. The call will be open for your questions following the presentation. As a reminder, this conference call is being recorded and the press release and slide presentation regarding today's announcement are available on the Investor Relations section of each company's website.
The archived replay can be accessed on both company's websites following the call. I would now like to turn the call over to Paul Langdale, Vice President of Investor Relations of Independent Bank. Please go ahead.
Good morning, everyone, and thank you for joining us today. I'm Paul Wang Dale, Vice President and Investor Relations Officer for Independent Bank Group. Before we begin, please be aware that this call will include forward looking statements 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 press release and our most recent and subsequent filings with the SEC. An investor presentation to accompany today's call can be found along with the press release in the Investor Relations section of our respective websites. With me on the call this morning is Keith Cargill, President and CEO of Texas Capital Bancshares David Brooks, Chairman, CEO and President of Independent Bank Group Julie Anderson, CFO of Texas Capital Bancshares and Michelle Hickox, Executive Vice President and CFO of Independent Bank Group. At the conclusion of our prepared remarks, we will open the call to questions. I will now turn the call over to Keith Cargill.
Thank you, Paul, and good morning, everyone. I'm pleased to be here this morning with David Brooks to announce this merger of equals between our 2 great companies. We have complementary lines of business and deep benches of talent that will enable us to create the premier Texas based super regional bank with the enhanced scale and resources to serve clients throughout Texas, Colorado and our national clients coast to coast. This transaction is a win for our shareholders, our clients, our communities and our colleagues. David?
Thanks, and good morning,
everyone. I'm excited also to be here with Keith and talking about really a transformational opportunity we have to create a $48,000,000,000 Texas based franchise. We'll be the largest company in Texas by Texas Deposits. There's real strength to this. We'll talk about in detail later.
But the complementary business lines for each client base will be added. It diversifies our client and business line concentration risk. And the enhanced scale then will continue to allow us to invest in technology and better manage our risk going forward. I think you can see on the left hand side of Slide 5 that the shareholder value creation is significant with this. But just know as we talk through this, that this is a result of a shared vision we have around our communities, around our people, around our clients and the opportunity to serve them well.
And we believe this company together allows us to do that. Keith?
On Slide 6, let's just walk through a couple of these structure components. This is structured as an all stock transaction and was unanimously approved by the Board of Directors of both companies. TCBI shareholders will own 55% and IBTX shareholders will own 45% of the combined company. TCBI shareholders will receive 1.0315 shares of IBTx for each TCBI share they own. And the combined company expects to offer an annual dividend on its common stock of $1 per share.
Importantly, the structure of the transaction, both mechanically and organizationally demonstrates the extensive collaboration we underwent to develop an outcome that would truly represent a merger of 2 equals. We are proud of this result, and I believe firmly that David is the absolute best leader to carry this vision forward.
I'm excited to lead the company going forward as Chairman and CEO. Keith will work with me as a special advisor in the days ahead as we put together these two strong companies. We've also assembled a really good leadership team. Julie Anderson will join as CFO, and we'll have a combination of talented executives from both sides, as you see there. The holding company will be Independent Bank Group.
We will use the brand name Texas Capital Bank in Texas and continue to operate as Independent Financial in Colorado. Obviously, the deal is subject to approval standard approval from our shareholders and regulatory bodies, and we anticipate will close in mid-twenty 20. Slide 7 again shows the power of combination. The largest Texas headquartered bank will be the 20th largest bank in the United States as a combined company. If you look there to the left side, performance and ability to scale and perform in the future is a big part of this.
I might note that those are the 2021 numbers, and we've only projected 75% of the cost saves in those numbers. So the performance is likely to have potential upside for 2022 from there. At the end of the day, we're committed to running a high performance company, a high performance Texas based bank in the future. The earnings per share numbers, the TBV accretion on day 1 are outstanding and we're excited about that for our shareholders.
On Slide 9, let me cover this for you on the layout. But first, let me just share with you. Since the founding of Texas Capital, I've always been steadfast in my commitment to our colleagues and our clients. It's been the privilege of a lifetime to be part of Texas Capital and serve as its CEO alongside our exceptional people. And while this decision was not taken lightly, it was taken knowing we've become a partner in Independent Financial, which shares our commitment to preserving both companies' strong cultures of collaboration and deep client relationships.
David and his team respect people and that's core to how we've been able to successfully build our business. In MOEs, the most difficult challenge is integration and becoming one team and one culture. David and I, along with our respective boards, felt strongly about checking our egos at the door, coming together and recognizing the deep benefits each of our companies would bring to this collective table. I'm looking forward to working with David for years to come and supporting all of our colleagues in the combined organization as we embark on this next chapter. I think you can see by Slide 9 that we've put together a balanced true MOE in the way that the leadership is structured and also the way the Board is structured.
And it's really a powerhouse combination in not just financial terms, which are impressive numbers to say the least, but also in the way we've constructed the way the company is going to merge into 1 team, 1 culture and be the most effective integration is our game plan and our aspiration that's been accomplished.
I too am excited about the leadership team we've been able to bring together. You can see there the names and titles and positions of the leadership of this pro form a company. I've had a chance over the last few weeks to get to know the folks on the Texas capital side, excited about working with them. We have been developing a shared and common vision for how we go forward. Integration, by the way, will be critical to this as it always is in a partnership and
a merger.
And I think the group listed there on Page 9, on Slide 9, has an understanding of the work ahead. We've been planning already what this will look like. Our company has a successful track record history of mergers and acquisitions and understand what it takes to bring the cultures together. And just a reminder here that these two companies are extremely complementary. Texas Capital brings its own unique strengths, including strong corporate banking practice, powerful technology and compliance infrastructure.
On the other hand, Independent Bank Group brings an enviable branch network, small business market leadership and solid deposit funding model. Once combined, we will have a powerful platform that will continue to allow us to have a track record of growth. We've done extensive due diligence on both sides of this transaction. I'm sure we'll get questions about that as the morning goes along, but we believe that this pathway is the best pathway for each of our companies individually to join in this partnership. And from today on, we'll be working to help our teams, 3,200 strong across 2 states and over 100 locations to understand the vision and the power of what we're doing as they get an opportunity to share our excitement about this and we will continue to execute on the combined plan.
To further highlight some of the benefits to all our different constituents, you might flip to Slide 10. We are committed to preserving the collaboration and entrepreneurial spirit that are at the heart of each of our companies. In fact, this new size and scale will provide the combined company with even greater potential to help facilitate the dreams and goals of entrepreneurs by delivering personalized financial services. This size will help us in many ways, but in no way do we intend for size to change our ability to be agile and really connected to each other internally and externally to our clients. It's a special relationship we've each developed with entrepreneurs and all of our clients that are loyal to our companies.
And we intend to take that connection to a different level and even offer considerably better service, even more premier service than ever we've been able to do before. This change in identity to being a larger company also includes our commitment to maintaining the important community relationships that we've built over decades, each of our companies and our people, along with our investments to local programs and communities. We neither one has been companies that would just write a check and get a photo. We've always believed that partnership needs something internally with clients and it also means something in community engagement. Importantly, both of our companies have long focused on recruiting and fostering top tier talent within our organizations.
Not only do we expect this to continue, but we believe the company we're creating will be one of the most powerful companies to attract talent in America.
I agree with everything Keith said. And really on Slide 10, you see the beginnings of the discussion. A lot of people will ask us in the days ahead, how does this come together? How did were you guys thinking about it? The numbers look really terrific.
You should know that these issues, how it affects our clients, our communities and our employees were the core of the first number of discussions as Keith and I got together to think and dream about the possibilities here long before any financial models were put together to look at the possible economics of it. We really had to confirm that our cores, our core beliefs in respecting and how we treat our employees and customers and ultimately how that drives shareholder value. But shareholder value being driven is a result of doing these things right in our view.
On
Slide 11, you'll see that the deposit market share is a big part of this because we believe in scale, but I've been telling people as other mergers of equals have been announced this year and people have asked, I know Keith and I both, what are your plans? What are you thinking about? And how do you think about scale? And the answer to that is, I believe deeply in scale and as does our Board, but the right kind of scale in the right markets. And that's what we're creating here.
If you look, we will pro form a be the largest Texas banking company with approximately $32,000,000,000 of Texas deposits and then we have another several $1,000,000,000 in Colorado as you know. Most importantly, again, scale and quality markets, if you look to the right side of that slide, you'll see that pro form a, we are in 5 of the best markets in the country, 5 of the 10 top markets in the country and 4 of the top 6 fastest growing markets in the country. So putting together a super regional platform in these markets was essential to how we thought about the deal.
We've always been about delivering the most premier and differentiated service to our clients possible, and this will help us take it to the next level, not only with the additional brand power that we'll have by having Texas Capital Bank throughout Texas with a much stronger network of branches and physical presence, but also with the combined power of, as David mentioned, leveraging all these talented people to do even more. We have talent that could be running or leading at $100,000,000,000 $200,000,000,000 company in many cases. And now it's time for us to be able to really all step up and do even more than we had before.
Slide 12 has some more details on markets we're in. If you go to Slide 13, you'll notice that we're
looking at
our deposit basis here. And from a high level, we're going to get the best of both worlds, a highly optimized suburban growth market and branch network, along with Texas Capital's branch light, more urban, central business district located footprint. And between those 2, we're going to be able to optimize our growth here in the days ahead.
On Slide 13, we give you a presentation on what a positive outcome we have by combining our 2 companies from a core deposit franchise standpoint. It's a bit of the best of both worlds. In David's case, they've driven somewhat more diversified deposit base, slightly lower cost. And we've been very much innovators of how to drive deposits through strategic initiatives that are in some cases just beginning to gain traction and blossom. We think there'll be a regular momentum as we continue to roll out our national strategic initiatives on deposits.
And also we have developed quite a strong deposit base with a branch lab model that will only get better now that we'll have a stronger physical presence and stronger brand. At Texas Capital, we spent on Slide 14, we spent 20 years building out our key lines of business to serve middle market clients as well as the mortgage industry. This merger allows us to accentuate our presence in several of those areas, including wealth management. We're particularly excited about the Denver market as we believe our corporate banking capabilities will be very well received there too.
We think on Slide 15, you can see what this does in terms of diversifying our loan and lease portfolio. We've got a synergistic comprehensive coverage, retail, small business, middle market and large corporations as you look across the combined capabilities. High asset quality has always been tradition and continues to be as we focus on the future. This does have some benefits as we talked about of rightsizing concentrations in mortgage finance on the Texas capital side and commercial real estate on the independent side and also neutralizes or stabilizes our asset sensitivity on a combined basis. We took a look at both sides.
And so I know in anticipation of a possible question later, we did deep diligence. We hired KPMG as our partner to look at both sides as we did diligence on each other. They dug deep into the portfolios of both companies and made the recommendations to the Board and we are going to implement those recommendations in terms of marks and reserves. And we feel really good about the credit risk of the combined company and we'll be happy to get more details on that later.
Each of our key credit teams really dug in with the independent KPMG, the 2 separate independent KPMG teams as David suggested. So we have a much deeper understanding than I think in many cases we've come out of the due diligence.
Agreed. Slide 15 just shows this announcement compared to some of the recent MOE deals that have been announced. The full year of earnings accretions of 26% 14%, respectively, along with the immediate accretion of 27% of tangible book value. And we've assumed approximately we'll talk about that here on the next slide over on Page 17. But the cost saves we've estimated, we think are very much in line at $100,000,000 of pre tax cost saves.
This is really one of the good parts of the story. Texas Capital, as you will know, has been a larger company for longer than independent has. And Texas Capital for the last 5 or 6 years as they went through $10,000,000,000 and have grown to $33,000,000,000 to $35,000,000,000 have invested a lot of money in infrastructure and technology, building out risk enterprise risk management and internal audit and BSA and AML and all the systems and technology related to that. In addition to the national business lines, the verticals they've built for loans and deposits over the years, We are facing that ahead of us here as we've grown rapidly. And so this combination is perfect timing as Texas Capital has made these investments and built a world class infrastructure that's really construed and built for a $50,000,000,000 to $100,000,000,000 company.
And this we add the scale to take advantage and optimize that and you'll see that here in the cost saves as we go forward. Slide 17. Slide 17. Yes, that was we were just talking about that and those cost saves do create a lot of shareholder value is the point that I missed. Thank you, Keith.
David, so let's get focused, Keith. No, no, no. No, I'm teasing. That's coming from Shannon Weary over here. I know that a little bit.
Okay. Let me cover with you Slide 18. I can't reiterate enough how our complementary two cultures are going to be an even better one team, one culture. Employee spirit to enhance the legacy of these 2 proud companies is core to how we're going to make this truly not just a significant company in size, but the most powerful company as a regional champion. Together, we have the opportunity to further expand our services to better serve our clients.
We've each been about this, but putting our complementary capabilities together enables us to really offer significantly more to our clients and re energize each of our franchises. We all continue to focus on long term relationships and are driven with the need to innovate and improve. And that's always been at the heart of who we are. With each strong organic innovators, David brings, he and his team, an M and A capability that's proven to be so effective, not just on finding great companies to combine with over the years, but importantly, integrating those companies in a way where he's had great success, retaining the talent, retaining the good clients. And this is something that we've needed and just not had over the years at Texas Capital.
We've been a really fine organic growth company, but I think what David and his team have been able to accomplish after these acquisitions is really impressive and that they've organically grown the businesses after acquisition too. So this is something we each have in common to innovate, create and really grow organically through client retention and importantly, client referrals to bring us our new clients. Again, we wouldn't let egos interfere and with the greater opportunity before us. One team and one culture from the 1st day of closing is how David and I believe this is going to be a most successful integration. David is absolutely the right leader to take us to the next phase.
I'm looking forward to being his biggest supporter and his advisor.
Thank you, Keith. As we wrap up, I think you can sense the enthusiasm that Keith and I have, and I can assure you our senior team share that enthusiasm. At the same time, we also realize that this is the start line, not the finish line. This is the beginning of a great partnership and a great journey. There's going to be a lot of heavy lifting to do here.
Both sides, I believe, are committed to that as we integrate these two companies. As I've long told our teams, as we found partners and made acquisitions over the years, that your ability to do the next one is contingent on being successful with this one. So we have to do a great job putting this company together. We're committed to that. But as we get out 2 or 3 years, as Keith said, and we've integrated and achieved the financial results that we expect to achieve, then we'll have this terrific platform with which to build and continue to build on this company.
And the key to that is the talent we've got. We've got tremendous talent on both sides of the organization and we will bring together in my job as Chairman and CEO, which I'm committed to, will be to bring these boards together into a team of 1, to bring these 3,200 employees across 2 states into one new company. One of the things Keith and I talked about was the great culture and historical culture at Texas Capital and the great historical culture at Independent. 2 different business models that now come together in a complementary way, but it won't be the Texas capital culture or the independent culture. It's going to be the new culture that we create around this opportunity, and I'm committed to that.
I'm going to lead that forward with Keith's assistance, and I'm grateful to Keith and just with that, operator, we'll be happy to take some questions.
Thank you. The floor is now open for questions. Our first question comes from the line of Brady Gailey of KBW.
Hey, good morning guys. Hello, Brady. Good morning, Brady.
Why don't we just start with the credit due diligence? I know TCBI has seen a little bit of noise in their levered lending book, in restaurant, on franchise finance and healthcare, and then in energy. So maybe just talk about the credit due diligence that was done specific to those portfolios. And then it was interesting to see IVTX be the legal acquirer, but TCBI is the accounting acquirer. Can you just talk through kind of how that decision was made?
Yes. I'll take the first stab at that Keith, if that's okay. Our longtime Chief Risk Officer, Chief Credit Officer headed up our team on the diligence on the credit and asset quality side, Brady, and he worked with the dedicated team at KPMG who worked with us to look at and do the diligence on the Texas Capital portfolio. Obviously, given where the risk has been and is, we took a deep dive into the energy book and deep dive a deeper dive into the leverage lending book and to see how that those books were performing. Across the board, I believe they looked at some 20% to 25% of all the credits at the bank, certainly all of the any loans that had any concern, watch or classified loans were looked at.
Any loans that had specific reserves against them were looked at deeply. But inside that leverage lending book, they drilled down to about 45% penetration in that book. And we feel very comfortable with the work they've done, the ability to mark those loans and the ability as they've done to properly reserve, they've been bringing that exposure down. I'll let Heath speak to that in a moment. But at the end of the day, as we look at CECL coming here next month, and I don't think either side is prepared to discuss CECL results today.
But I believe as we've looked at it in the context of what we expect from CECL here at the 1st of the year and then looked at where any potential weakness was and making sure that we put plenty of reserve and plenty of margin against those, We feel very comfortable with where we are. Regarding the legal and accounting acquirer, the legal acquirer really is driven more by relative stock values and stock prices, where they are at any given point in time. And as we watch that over the last few weeks, it was apparent that we better for Independent Bank Group to be the legal acquirer. The accounting acquirer is different question and more nuanced around the kind of the general rule of thumb of Brady is that the company is going to end up with the most stock post the merger, which in this case is Texas Capital shareholders, owning about 55% of the company. They then the bias was toward them from the accounting firms to be the accounting acquirer and then and that's not something you can just choose.
It's the accountants decide who the accounting acquirer is going to be. And in this case, it is Texas Capital.
We had a beat that look because independent has had such, such low issues credit charge offs and issues over the last several years, We frankly had to go do something that with the accounting firm, KPMG doing the diligence that pulled in data from peers in Texas and other size peers to look at how we might mark the book. And I think we've come up with the right answer. And it wouldn't have been the mark we ended up with, it would have been much more modest had we only looked at the results that Independence delivered for the last several years. But like in the stress testing drills, Brady, the regulators want you to pull in other data from peers and so on. And that was part of the process for us to arrive at the mark on independence book.
So we feel very good about that.
All right. That's helpful. And then my second question, on the slide deck, you guys lay out the 1.3% ROA, the 15% ROTCE and the 49% efficiency ratio. But that's not assuming full cost saves. And when you look longer term, as you get all those cost saves, are there financial metrics that you're looking at that are above and beyond these laid out on Slide 7?
Yes, Brady. We believe when we get all this fully integrated, those are the 2021 numbers with 75%, as I mentioned, cost saves in them. As we look out at 2022 and 2023, obviously, there are lots and lots of unknowns. So these beliefs come with lots of caveats about not being to predict the future, none of us can. But our view is that this company will be even in 2021, we believe a top quartile performer for our peer group, both kind of $30,000,000,000 to $75,000,000,000 banks.
And then with a move toward becoming a top decile. So as we think about that, Brady, how I think about a top decile performing company would be a company with a 140 plus return on average assets, an efficiency ratio in the mid-40s and a return on tangible equity in the upper teens, I think that would put us in the top decile of this super regional bank category that we're going to be in. And I believe as we've looked at it, studied behind the curtains, all the business lines, all the potential mechanisms we have to get there, we're confident that that's where we're going to end up.
I might just add too, Brady, for us to achieve that in a purely organic growth model like we've had for 21 years, those numbers are going to get that kind of level of performance was going to get pushed out 2 or 3 or 4 years beyond what David just described. So instead of by 2021, 2022, 2023, we're fully integrating the cost saves and the companies being able to aspire for those kinds of metrics, a purely organic growth company just can't do it. We have to invest so heavily and we have in the past. Now it's time to really better leverage all that investment and leapfrog into that kind of performance capability.
Great. Well, thanks for the color and congrats on this deal. Very compelling both financially and strategically.
Thank you.
Our next question comes from the line of Mao May of Stephens.
Hey, thanks. Good morning, guys.
Hey. Good morning.
Good morning, Matt.
Just want to go back and look at some of the financial projections you provided. Can you just confirm that that 27% accretion to tangent book value per share assumption, does that include everything from the one time expenses to the loan mark and any kind of seasonal impact?
Julie, you want to?
Yes. Matt, it does. That includes all of it. What we've assumed for the restructuring cost is for this model, we've assumed that's taken day 1. Obviously, that wouldn't look like that.
But for this calculation, we've assumed that that's taken day 1.
Okay, perfect. And then
I guess the other question would be for David. It seems like David, almost all your previous acquisitions were very well received by the investment community. The only outlier I can think of was the most recent deal with the Guaranty Bank in Colorado. That deal hasn't been as well received by the investment community. Are there any lessons or feedback you can take from that guarantee deal as you think about integrating this MOE with Texas Capital over the next few years?
That's a good question, Matt. I think we remain very pleased and very excited with that Guaranty acquisition. As you know, spring of 2018 was a little bit of a different time. Stocks were trading at their highest values, both and the acquired in this case. Our stock was trading at 3.5 times tangible and Guaranty's was trading at 3 times tangible.
So when we paid them 3 times tangible book value for their company, it appeared to be a big price and it was certainly a full price for the company. I think that was part of the challenge with that deal. We feel really good about the integration, the cost saves we projected we've achieved and it's just obviously it's a bit of a different economic environment. Certainly, the stocks haven't done as well since the late spring, early summer of 2018 through today. But in terms of that deal itself, we feel good about the strategy.
Some folks commented about it being out of state acquisition. And so we understand that concern as well, but managing Denver and the Front Range Colorado has been certainly easy enough. Our organic growth has also there in Colorado, I think is indicative of the great kind of transition we've made. It's been one of our best growing markets in 2019. So we feel good about that, Matt, and obviously this is a merger of partners and it has a different feel and we think about it differently.
But I still believe deeply in partnering with high quality companies and we believe we've got a high quality partner here.
Okay. Congrats, Madhu.
Thanks, Matt. Thank you.
Our next question comes from the line of Ebrahim Tonawala of Bank of America.
Good morning, guys.
Hello, Ebrahim.
Hi, Keith. So just a quick question in terms of and I apologize, I'm not that familiar with independent, but as we think about the Texas Capital as a branch like model driven off of relationship managers that you hired over the years. I think one of the things that folks are going to think about is the retention of these people, how that sort of combines with the new entity. If you can just speak to that in terms of how you think about that, how you handicap any risk from attrition? And will the nature, the size of the mortgage business be any different as part of the combined entity, larger, smaller?
Let me take the last question first, Ebrahim. Just the combination of the companies gives us diversification on the mortgage finance business relative to the overall balance sheet and so on. Just as David mentioned on the CRE book on the independent side. But no, we intend to continue to exploit our market position. David likes the business and that's a great scale business, but it's one that we'll continue to work to constantly improve the value proposition and realize the kind of returns that we want to realize.
But it's just such a great, safe place to invest credit at this stage of the cycle, whatever stage we might be in. It seems like this is going on forever and that would be okay with us as bankers that we don't necessarily expect that. So it's a great vehicle for us. Now let's back up to your question about we've been a branch light model. Our bankers have really owned that.
Our bankers are going to be thrilled to have more brand recognition, to have a network across Texas of approximately 70 branches branded Texas Capital Bank. Some of the challenges we've had as we've grown as rapidly as we have is that as we've been able to take care better and better care of larger mid market corporate banking clients, we haven't been as good at continuing to really do a great job for our small business clients. And having this branch network is going to help us take better care of those small businesses, which are still at the heart of who we were, who we are going forward as a company. It's all about entrepreneurs. And those companies, the small to midsized companies, private companies we've always catered to, we believe we'll be able to better serve than ever before with this combination.
Got it. And just separately, I know you went through in terms of the due diligence process around credit. Any just in terms of when we think about the excess capital issues around the leverage lending energy book, Keith, safe to say that you're feeling continue to feel better about the outlook for the credit profile of these books consistent with how you felt during the Q3 earnings call or has that changed?
We're doing what we've been doing as you're well aware for the last year and a half and that's pushing and really being proactive. We by the end of the year, it should be down close to mid-20s to a little over mid-20s percent on the leverage lending book from this time a year ago. We're going to continue to, again, selectively reduce the outstandings there. It's not because most of the loans in that portfolio aren't good loans. We just want at this late in the cycle to have less concentration risk and also address any of those that are showing any signs of weakness.
So we're making good progress on those as we are on the energy business. Energy is something we've done for many, many years. I've been at this for almost 40 years in the energy business. And then since we lost the company, we became an energy bank within a year. So that's 20 years that we've had institutional experience at this.
It is a tricky time. The capital markets are not as liquid as normal. And we have great people and we have great clients we're working through this cycle with and we think we're on top of it.
Got it. Thanks for taking my questions and congratulations, Khorsair.
Thank you. Thank you, Graham.
Our next question comes from the line of Michael Rose of Raymond James.
Hey, good morning guys. How are you?
Yes, Michael. Thank you. Good morning, Michael.
Hey, So David, I know one
of the big initiatives that you've talked about really over the past year has been to diversify the balance sheet away from CRE into C and I. This clearly does it. As we think about some of the national businesses that TCBI is in and maybe some of the businesses that you're in, Through the diligence process, are there any businesses you'd want to kind of deemphasize from here? I know it's early days, but maybe you want to
I think, Michael, as we've looked at it and the way I'm beginning to coalesce around the vision
for how to
put this together in the future is that as Keith mentioned, as they've grown, they've just done a phenomenal job of building a platform that serves middle market and large corporations really well and the families that own those corporations, their private client business is very strong. And what is a challenge, obviously, in the branch like model when you're focused on those things is that you may not have the focus you had historically on small businesses, entrepreneurs, dental practices, medical practices, those kinds of things that are a little more granular. And that's as you know, what we've specialized in, what we've built our company on. We believe we can reinvigorate that across Texas, continue the good work in Colorado, but across Texas, we invigorate that. And so that there would be this platform, if you will, of just good communities down the fairway community banking model, small regional, however you want to define that really brings together the 2 companies at the foundation level.
And then upon that foundation, the businesses as we have a few niches and some deposit businesses, title companies and things like that will combine with the great work that Keith and his team have done with technology and building out some of these national businesses. We do like that. The great news I think here from a future performance standpoint is that a lot of the investment you're going to see in here, Keith and his team roll out some new strategies, some new strategic initiatives here early in the next this coming year. And a lot of that investment has been done. And that is, as Keith said, the difficulty in running a high performance company when you are investing in those kinds of businesses.
But we're very comfortable that a lot of that those expenditures have been put in place. We're all collectively going to be the beneficiary of this great platform going forward. We are going to we haven't had a chance, Michael, as you might expect these things happen quickly as we try to get the boards up to speed and give them the information they need and do this diligence. So we have not, I haven't met the heads of some of these business lines. We haven't spent time analyzing all of this.
I do agree with what Keith said. We've said as we've kind of been growing our tiny mortgage warehouse book that we like that business. We think it's a nice piece of diversified asset balance sheet asset side of the balance sheet. But I do think and Keith agrees with this, one of the nice things about this transition is or transaction is that on a combined basis, even these, what I would call, elevated levels of mortgage finance where they are now look a lot more modest on a $50,000,000,000 balance sheet than they do on a $30,000,000,000 to $35,000,000,000 balance sheet. And also we think that this is a seasonal high.
I spoke with Vince Ackerson about this yesterday, who oversees that business from Texas Capital side will be coming over and overseeing it for us on a combined basis. And they're expecting a significant move down over the next 12 months just because this refi boom, these oil rates will have worked through the system and that as you know all the companies that are large participants in the mortgage warehouse business are saying these are kind of seasonal highs that that number is going to come back to a more modest number. And then Keith and I and Vince and their teams will sit down and think about and talk about what the right level of this is. It is a they are the national leader. Their technology and relationships are number 1 in that business.
And so we don't want to squander that opportunity. We also want it to be right sized for the new balance sheet. And as we grow to $60,000,000,000 $70,000,000,000 in the future, we will continue to do that. And it does allow us to continue to do what we do really well, make great real estate loans. And so we really like the combined business, Michael.
Okay. Maybe one follow-up for me. A lot of these MOEs that we've seen, the management teams have highlighted technology as one of the drivers. Can you just talk about what role that played? Maybe discuss how much of the one time costs or maybe to finance investments in technology, whether it be core operating systems or the like?
And if there would be any incremental cost outside of that $180,000,000 beyond when the deal closes that would need to be invested for the much larger balance sheet? Thanks.
Julie, would you ask?
Michael, that's definitely something that was very important in the decision for this transaction is that we talked about it for the last couple of years. We've done a lot of what I would call maybe outsized investments in technology. And Keith and I talked quite a bit about that. So we feel like that's a really positive part of this transaction is that now independent will be able to leverage some of the things that we've already done. We've done most of the core conversions, and so we feel good.
We feel really good with the technology that we have. And so I think what you'll see us working through during the transition and then as a new organization is just maximizing how we use that technology.
Congratulations and thanks for taking
the question. How I think about it, which is, look, there has to be a focus, the technology investment and the platform is critical. But as Julie just alluded to, it's how does that enhance our ability to meet our customers' needs, to go attract new customers, to cut down on the friction, the customer experience is critical. And we believe that Texas Capital has already invested the capital necessary to build that platform. And now Julie said, this platform will serve our $50,000,000,000 company and still be scalable into the future.
Great. Thanks guys.
You're welcome.
Our next question comes from the line of Brett Rabatin of Piper Jaffray.
Hey, good morning, everyone.
Good morning, Brett. Good morning, Brett.
I wanted to just first just a housekeeping issue to some degree. On Slide 20, you've got the earnings estimates and the TCBI projections based on Wall Street consensus estimates adjusted for strategic initiatives. Can you just walk us through that comment and the numbers there?
Sure. So that's so we it's based on basically the Wall Street estimates for non interest expense for both of us, with just kind of one additional fact, and that's some investing that we're doing with some strategic initiatives. Some of those we kind of talked about, Brett, some will talk a little bit more as we move into January and talk more about 2020. So that's just most of it's deposit related, the strategic initiatives that we've been talking about.
And most of it will be front end loaded in 2020. Yes, 2020.
Okay. So that's obviously an increase on the expense base and probably just kind of a function of you guys continuing to invest maybe a little more heavily into businesses than what consensus presently has?
Correct.
Okay. And then obviously a very financially compelling transaction. When I think about these two banks historically, you've got one bank that's typically made some larger loans and one bank that's typically more of a community bank and got a really granular commercial real estate portfolio. David and Keith, as we think about the combined company, how do we not end up with the Texas capital piece being the more emphasized growth driver, given that it takes a lot of loans to drive some of the more smaller community type transactions. I guess I'm just trying to figure out like how the culture plays out from here with the 2 banks and their historical versus pro form a combination?
Well, one of the things is we've gotten to where we are, Brad, and have been thinking about and trying to be thoughtful around the future of our company as we were planning to organically grow to $25,000,000,000 or $30,000,000,000 on our own the next few years. The idea that you can continue your point is well made. The idea that you can drive the kind of growth we've historically had making our sweet spot loans of $3,000,000 to $7,000,000 to small businesses and real estate and wealthy families investing in real estate,
that that
model that got us to where we are would not be able to continue to drive great growth and that a good $30,000,000,000 or $50,000,000,000 regional company is going to have some other lines of business, not just small CRD that we've kind of driven our bank on over the years. And again, we love that portfolio, we love that business line. And one of the things we like about it is we can kind of reinvigorate that. What I'm saying is the fairway piece of this. So it's going to be the best of both, Brett, and that's going to be the work, right?
The job is to build the culture so that no one on coming over from independent believes that we're going to create a $50,000,000,000 company that looks like what independent does today, but also understanding that these national business lines and the focus and the really successful things that Texas Capital has done will continue to be invested in and continue to grow and that on a combined basis it will be a much more balanced company. And that's really the strength of what Keith and I saw when we first sat down was the ability to take the really strong things they've done in this investment infrastructure and technology, lay over that $15,000,000,000 strong community regional presence. We'll grow both going forward is the answer, Brett.
Okay, great. Appreciate all the color. Thanks.
Our next question comes from the line of Steven Alexopoulos of JPMorgan.
Hey, good morning, everybody.
Good morning, Steve. Good morning.
I wanted to start, so Keith,
you're giving up the CEO role. What were your thoughts on going the MOE route versus selling to a larger bank outright?
I have been thinking about this for many years really, and that is as a founder of the company, how do we how do I help and we as a company and board set up my teammates, my colleagues and our clients and our communities to realize all the potential that we've been working so hard on for the 1st 21 years. I feel like we've reached a place that's been a really, really successful 21 years, but the potential is so much greater over the next 20 years if we had the right kind of leader to take the baton and really think strategically, is a great operator, has a founder mentality. That's hard to have unless you've been a founder. And of course, David has been for 32 years as he's led this company and built this company with his team. And then finally, how do I find someone that has genuine deep respect for people?
That's kind of at the core of how we've been able to attract and then importantly retain and not just retain, but engage and have excitement when we all show up together each day to build our company together. And this kind of engagement and respect enables us, Steve, to have a different client relationship. These entrepreneurs that we cater to and try to lift clients, they don't think of us as just a transaction bank. They think of us more as like them. That we're building something special that we learned from them as we collaborate with our clients.
They learn some from us. And David brings that to the table. And I'd love to be David's age, but I'm immature in some ways, but just not biologically. And so I think to have someone like David, where we agree so deeply on these most important values and also on the strategy of how to become a very significant most premier bank in America below the mega banks, we want to be the best and be the best even with the mega banks in our target market with privately owned companies, entrepreneurs, small business owners and private clients. And I think what I saw in David and his company and his culture and his team is finally the 5th that I really wanted so that our legacy could really be realized.
I appreciate that candid response. I'll admit the one thing I'm very surprised is that you're not taking the Chairman role, given this is an MOE, you're one of the founders of Texas Capital. What was your thought there behind becoming a strategic advisor? And will you be on the Board of Directors?
We had those discussions, David and me. And at the end of the day, when we we've mentioned a couple of times in our presentation, we tried to leave the egos at the door, Steve. It's not easy because if you're CEOs of companies, you have some ego. So we did the best we could though and checked those at the door and trying to focus on with the 2 different business models, but similarities in culture and quality of people and engagement with communities, etcetera. How do we truly bring these together as 1 team, 1 culture?
And to have 2 leaders for some temporary period of time, in our case, not necessarily in every case, but in our case with somewhat different business models, we thought it was going to be far best for our teams, our people to see one key leader. And again, I'm not going away. This is a company I've poured 21 years of my life into, actually 22 because we had to beg for the equity and get it founded and started. And the last thing I intend to do is not give my very, very best and be helpful. But as a CEO, David and I both know, there are times when having a sounding board, somebody you can really trust that thinks similar to you, but you have a dilemma, you want to have an advisor.
I think I can help. And then I've always loved people and attracting and retaining our talent, helping develop our talent, attracting and retaining these great clients. It's my true love. I mean, it's one of the greatest blessings in the world. I've gotten to deal with these entrepreneurs, these American entrepreneurs for all these years, even before Texas Capital.
And it's a special connection I have with entrepreneurs. So I think it's going to be a really great outcome. Most importantly, for my team, my colleagues, David's team and his colleagues and then our clients, We won't have any divided sense of loyalty.
Yes, Steve, this is David. I might also just add in there that the driving force behind the structure at the leadership of the company is exactly what Keith said is we sat down and looked at what are the risks. If we really try to take this big strategic move here, what are the risks? The risks are and several people have asked about already, but about the integration, how do you put these 2 companies together? How do you make sure that the culture you have is a new culture?
It's a high performance, culture driven around our values and around assembling these 2 business models. So I think the more diverse your business models are, the more risk it becomes in us versus them. If you got 2 people sitting at the head of the table, then everyone else sitting around the table is going well, is it going to go our way or their way? And our job here is to turn this into 1 high performing company. And the conclusion Keith and I came to was as best if there's one face, one voice, one spokesperson who leads the charge and cast the vision and that's the way we decided to go.
And so he was younger, more fit and smarter. So I better just respectfully concede that one.
David, maybe if I could just ask you one question. So you mentioned earlier your goal is to be a top decile performer long term. And as the CEO of this new company, how do you think about growth potential? Is this a mid single digit company now that you're almost $50,000,000,000 can you grow double digit? How do you think about growth potential of this company?
Thanks. I think we will we're absolutely committed to growth. The DNA of both of our companies is strong organic growth, Steve, and we will continue to be a strong grower. I want to be we want to be smart about that and we want to be we will be thoughtful around it. You have to watch the economic cycles.
There's a risk issue here. You don't want to be growing 15%, 17% going into an economic downturn. So but as we look at the platform, I do believe we will continue to be a well above peer growth company. And look, we should be. If you look back at the slides, we're in the best markets in America.
And even I was asked a question out on the road a few weeks ago by an investor, Stephen, and the question was, gosh, what if we become like Japan? I mean, and just the whole country is not growing and we're at 0 interest rates for a prolonged period of time. And how do you think about that? And I said, well, how I think about that is I hope that's not the case. We don't believe that's going to be the case.
But if it is, if it were to become the case, where would you want to be in the country? There's going to be part of this country even in a 0 net growth that will grow and it will be the stronger, more attractive markets, where the business environment is friendly, where the taxes reduce tax rates are conducive both corporate and personally toward growth and moving people, we continue to see massive inflow of jobs and companies relocating from the West Coast and the East Coast and Northeast and the Upper Midwest down to these markets we're in, I think you're going to continue to see that, Steve. That's going to allow us to be on a well above peer growth company. I think in the good times and we're going to have to be thoughtful here as we put this all together the next few months. I think I'll be able to better answer that with some more kind of specific guidance, Steve, on our Q1 earnings call or something as we continue to communicate, but it's going to be a well above peer and the growth on even a $50,000,000,000 company will be very impressive.
Okay. I really appreciate the color. Thank you. Thanks.
Our next question comes from the line of Jennifer Demba of SunTrust.
Thank you. Good morning.
Good morning,
Jennifer. Can you just talk about the strategy for client and talent retention as you go forward? There's a fair amount of deals going on in the world right now and a lot of noise and a lot of companies that are very energized that see opportunity when 2 companies come together. So can you just talk about your strategy for talent specifically for talent retention over the near term? Thanks.
Absolutely. This is Keith. And you will know having followed us Jennifer from the get go, when we went first went public, this is core to how we've been able to achieve what success we've achieved is attracting great talent, retaining great talent and having them excited about the upside and development opportunity with our company. And I just want to say, when this company comes together, in my maybe not so humble, but I think realistic opinion, I don't believe there will be a stronger bank in America for talented people to want to come be part of. And I think that's only going to energize and help us with our existing talent, because they'll be able to do even more for their clients, have more opportunity to grow and develop and help us scale their experience, their abilities in an even a bigger way.
Now we're not going to take that for granted. David mentioned this earlier. We never take for granted or put on cruise control. We're very good at talent attraction and retention. That would be absolutely the death knell over time if you begin to think that you have this absolute competitive advantage forever.
I do believe putting these together gives us even a greater competitive advantage on talent. Perhaps there's another bank somewhere in the U. S. Where maybe on the East Coast or West Coast perhaps that could offer a person here and there, a talented person, a comparable opportunity or maybe something that is even more interesting to them. But I think it won't be easy to find a more exciting place to be and grow with than a $50,000,000,000 regional champion based in Texas and having the capabilities coast to coast that we're going to have.
But again, not in one single second, and I'm going to tell you, this is a lot. We're going to be working as soon as I finish here and as soon as Dave's attention is here, we're all about being out with our people, communicating with them, being sure any questions they have. If we can't answer them today on day 1, that we're very responsive and we're going to do everything we always have done and then some to be sure our talent is in fact excited about this future together.
Jennifer, this is David. My only addition to that would be that we understand disruption is real and disruption is an opportunity for other smaller banks to try to pick off and acquire great talent. And we understand that, Keith and I are sober that concern. We understand the risk. And as Keith said, as soon as we're off this call today, the hard the beginning of the hard work and heavy lifting I referenced earlier will be to communicate as much as we face to face and voice to voice with the key leaders across these two companies to talk to them and help them understand the opportunity here.
And we'll have plenty of time. We anticipate 5, 6 months here to approval. And so we'll have plenty of time to do that, although it's our first priority and we start today.
Thanks so much.
Thank you, Jim.
And we only have time for one more question. Our last question will come from the line of Peter Winter of Wedbush Securities.
Good morning.
Good morning, Peter. Good morning, Peter.
I was just wondering, can you talk about the biggest opportunities for revenue synergies and then maybe just give a range of potential synergies on the dollar terms? And I realize it's not part of the deal metrics, but just trying to get an idea of potential upside.
Well, this is Keith, and I'll speak to it and then David may have something he'd want to add. But if you look at some of the businesses that we've each been growing and are really excited, especially excited about, Peter, we think combining these companies, it just gives us so much more capability to attract more clients, to get more brand recognition. One example is our private wealth business. We've been able to organically grow a private wealth business and really after rebuilding it 5 years ago, thanks to our leader, Alan Miller and his team, we have found the special talent and ability to go be a true premier boutique private wealth company. Well, David, with his team in Colorado, had just a phenomenal private wealth capability.
And if you look at putting these together, suddenly we're not each $1,000,000,000 something, we're approaching $3,000,000,000 plus And so that is a really high potential opportunity as we each look at how we grow that business going forward. Then as you look at some of our C and I specialty industry businesses, again, David's team is unbelievably talented and they would like to have other capabilities and product capabilities to serve other corporations that have some more need than what he's been able to offer today. And some of these areas that I'm alluding to include asset based lending, energy banking. It includes things like our some of our new corporate verticals that we are just putting together and launching, our technology banking team that we have just had success recruiting and getting those guys on the ground out of Austin. We'll be able to leverage this across our footprint and even coast to coast.
And again, the new C and I businesses that we are in the process of launching as part of our overall initiatives, not just deposit initiatives, each of these new C and I businesses should be virtually self funding. So that was the kind of the new criteria for us as we've been looking at new C and I to further diversify our capabilities and also be sure we're looking at funding and the importance of getting the deposit piece right too. So as we've had some of the leverage lending bleed down for the reasons I mentioned to be the strongest balance sheet possible whenever we have the next downturn, We've been building up and creating some new businesses. Leveraged lending never created many deposits. This new technology banking team will create significant deposits and maybe more than fully funded over time.
And by the way, our technology banking team is going to finance only cash flow positive technology. It's taken me years to find the right leader and team because that's kind of an important criteria that David and I both buy into. So we think that this will be a great ability to offer through our combined distribution networks significantly more solutions for our clients.
Yes. Peter, my only add to that is, I mentioned earlier how strong our transition has been in Denver and the Colorado front range. There's an incredible amount of number of successful large privately owned corporations there. And that, as you know, has been a sweet spot of what Texas Capital has done. So we'll be able to roll that out across Colorado.
Some of the energy lending, that's a big energy market. We've been looking for a lender or team there for a while. And I think the ability of the power of these 2 will allow us to do that. We don't have a specific number at this point. Peter.
As you mentioned, we don't have any revenue synergies in the model. At this point, we do believe they will happen and develop quickly. And I think we'll be able to give more color on it too as this coming year rolls out and we talk about some of the new initiatives and strategies that the 2 companies have developed.
And I want to emphasize too, this small business market that we absolutely have loved since we launched the company, it's been harder for us to serve in recent years as we've launched all these corporate verticals. And our team is going to be thrilled to be able to again reenergize our small business capabilities. We have a great SBA team, that's a coast to coast SBA capability. Again, I think we're going to be able to leverage that as well.
That's great. Thanks. Congratulations on the deal.
Thanks, Peter. Thanks a lot, Peter.
And that was our final question.
Thank you. Appreciate everyone being on the call today. It's an exciting day for us here. We're, as I mentioned earlier, sober around the responsibility we have to make sure this is a very good integration and that we keep the talent and the customers that we have and while creating great shareholder value. I'm confident in that.
I'm confident in my ability with Keith's help and advice to lead forward on this company of superstars 3,200 deep across approximately, we think, 100 locations once we put it all together. And it's going to be an opportunity to build that premier Texas based super regional franchise and we're excited about the opportunity.
I'll just add a quick note. I just sent a video out or we're sending one out this morning that I did late here recently. I don't even remember which night. Mine kind of just run together. But I want to emphasize to you, I closed my video by reminding everyone, I will continue to be their CEO for the next several months.
And by golly, we would need to deliver the best performance and results we ever had we've ever had so that we have the sales full of wind when this combination happens.
Thank you. Thank you so much for joining today.
Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.