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Independent Bank Group Inc
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Greetings. Welcome to Independent Bank Group Fourth Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.
I will now turn the conference over to your host, Paul Langdale, Vice President, Investor Relations. Thank you. You may begin.
Good morning, everyone. I'm Paul Langdale, Senior Vice President and Director of Corporate Development for Independent Bank Group, and I would like to welcome you to the Independent Bank Group fourth quarter 2019 earnings call. We appreciate you joining us. The related earnings press release and a slide presentation can be accessed on our website at ibtx.com.
I would like to remind you that remarks made today may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and expected results to differ. We intend such statements to be covered by Safe Harbor provisions for forward-looking statements. Please see page 5 of the text in the release or page 2 of the slide presentation for our Safe Harbor statement. All comments made during today's call are subject to that statement.
Please note that if we give guidance about future results that guidance will only be a statement of management's beliefs at the time the statement is made, and we do not publicly update guidance. In this call, we will discuss a number of financial measures considered to be non-GAAP under the SEC's rules. Reconciliations of these financial measures to the most directly comparable GAAP financial measures are included in our release.
I'm joined this morning by David Brooks, our Chairman, CEO and President; Dan Brooks our Vice Chairman and Chief Risk Officer; and Michelle Hickox, Executive Vice President and CFO. At the end of their remarks, David will open the call to questions.
With that, I will turn it over to David.
Thank you, Paul. Good morning, everyone, and thank you for joining us today. As always, I will touch on some highlights for the quarter, Michelle will then cover the operating results, and Dan is here to cover the loan portfolio. I will be back at the end with closing remarks and to open it up for questions.
2019 was another solid year of continued growth and financial performance for Independent Bank Group. We had a strong finish to the year with fourth quarter adjusted earnings per share of $1.32, adjusted return on average assets of 1.49%, and adjusted return on tangible equity of 18.32%.
Throughout 2019, we executed on our strategy of disciplined healthy growth. We organically grew our deposits by 10.4% for the year, which is reflective of our commitment to maintain a granular funding base and continue to minimize the pressure on our net interest margin.
Organic loan growth was 4.8% for 2019, which was impacted by elevated payoffs in the fourth quarter as investors sold CRE assets to take advantage of low cap rates. Despite this headwind, the amount of total new loans funded in the fourth quarter was 11.7% higher than the linked quarter. This shows that across our footprint, our teams continue to source quality credits, while maintaining the same conservative underwriting standards that we have -- that have served us well over these last three decades.
I'll now turn the call over to Michelle for more details on operating results for the quarter.
Thank you, David. Good morning, everyone. Please note that slide 6 of the presentation includes selected financial data for the quarter. Our fourth quarter adjusted net income was $56.8 million or $1.32 per diluted share compared with $34.1 million or $1.12 per diluted share for the fourth quarter last year, and $57.8 million or $1.35 per diluted share for the linked quarter.
As you can see on slide 8, net interest income was $128.1 million in the fourth quarter, up from $87.1 million in the fourth quarter of 2018 and up from $125.4 million in linked quarter. The net interest margin was 3.81% for the fourth quarter compared to 3.84% for the linked quarter, and 3.98% in the fourth quarter last year.
The NIM excluding all purchase loan accretion decreased 5 basis points from 3.54% in the linked quarter to 3.49%, primarily due to continued pressure on loan yields driven by competition and the continued depression of longer-term index rates.
Total non-interest income was $18.3 million compared to $9.9 million in the fourth quarter of 2018, and $27.3 million in the linked quarter. Recall that we sold two loan pools in a branch in July that generated gains of $8.3 million in Q3 and insulated non-interest income. The remaining decrease is primarily related to mortgage banking income with an offset for a gain of $1.3 million on the sale of our trust business.
Total non-interest expense was $80.3 million for the fourth quarter, an increase of $3.4 million from the linked quarter. This increase is due to higher FDIC insurance of $3.1 million, $4.5 million in salaries and benefits, and $1.1 million in legal and professional fees. The increases were offset by a decrease in acquisition-related expense of $4.2 million and impairments of $1.2 million.
Salaries and benefit expenses were elevated due to separation costs of an executive team member of $3 million and incentive compensation related to deposit growth of approximately $700,000. Legal expense for the Bank of Houston lawsuit we are defending accelerated to $1.2 million this quarter.
We expect comparable costs in Q1 and that it will trend lower in the remainder of 2020. In addition, we incurred consulting expenses related to the compliance project of $300,000 in the fourth quarter. That project should be completed first quarter with expected remaining costs of approximately $600,000.
Slide 18, shows our deposit composition and cost. Total deposits were $11.9 billion as of December 31, 2019. Organic deposit growth was $213.5 million or 7.2% annualized for the quarter and $1.1 billion or 10.4% for the year-over-year period.
The average cost of interest-bearing deposits was 141 basis points, down 5 basis points from the fourth quarter of 2018, and down 15 basis points from the linked quarter. We continued to evaluate pricing on our deposit products and have lowered rates strategically.
Market rates have flattened a bit since November, but we continue to get benefit from maturities of higher cost special products renewing at lower rates. That concludes my comments.
I will now turn it over to Dan to discuss credit metrics and give some color on the loan portfolio.
Thanks, Michelle. Good morning. Organic loan growth was $505.3 million or 4.8% for the year ended December 31, 2019. Overall, loans held for investment not including mortgage warehouse purchase loans were $10.9 billion at December 31, 2019, compared to $7.7 billion at December 31, 2018.
Slide 11 illustrates annual loan growth comparisons. Slide 12, shows the composition of our loan portfolio and our commercial real estate portfolio. As of December 31, 2019, commercial real estate makes up 50.4% of loans, which has declined from 51.0% in the linked quarter.
CRE continues to be well-diversified in types of collateral with largest segments in office and retail.
Slide 13 further breaks down the retail CRE portfolio by property type. Mortgage warehouse purchase loans averaged $575.0 million for the quarter ended December 31, 2019 compared to $434.1 million for the quarter ending September 30, 2019, representing an increase of approximately $140.8 million or 32.4% for the quarter.
This growth partly reflects seasonality and the impact of lower mortgage loan rates during the quarter as well as our focus on growing this line of business this year. Asset quality metrics remain strong. Total nonperforming assets were $31.5 million or 0.21% of total assets at December 31, 2019.
This is a slight increase compared to the total nonperforming assets of $18.4 million or 0.12% of total assets at September 30, 2019, which is primarily due to a $14.5 million commercial energy loan that has matured and is pending workout, offset by partial write-down and subsequent sale of $1.5 million of OREO that was a former branch.
Overall charge-offs remain low at 0.02% annualized for the fourth quarter, compared to 0.21% annualized in the linked quarter. And 0.01% annualized in the fourth quarter of 2018.
Provision for loan loss expense was $1.6 million for the fourth quarter, a decrease of $3.6 million over the linked quarter due to continued strong asset quality, as well as more moderated loan growth.
These are all the comments I had related to the loan portfolio this morning. So with that I'll turn it back over to David.
Thanks, Dan. We began 2019 by closing, on the acquisition of Guaranty Bancorp. We had a successful integration and conversion. And our Colorado market has proven to be every bit as strong in terms of growth and quality, as our Texas markets.
We ended 2019 by announcing a transformational merger of equals with Texas Capital Bancshares. And we've begun the hard work of planning for the integration of our two highly complementary franchises.
We're excited for the opportunities this merger brings for our shareholders, customers, employees and communities. Slides 20 and 21 will provide you an update, on the progress that has been made to-date as well as some milestones for the deal, as our teams continue to work toward a mid-year close.
Meanwhile, we haven't taken our eye off the ball. Throughout 2019, we continued to organically grow our balance sheet, without compromising on our commitment to credit quality.
This disciplined execution of our strategy and focus on performance, allowed us to enhance shareholder value last year, through operating, through reporting a strong ROA and ROE disciplined share repurchases, and an increased dividend.
As we begin 2020, we are focused on planning our merger of equals with Texas Capital, while continuing to execute in our four great markets across Texas and Colorado.
We're grateful to our customers, employees and communities, who made 2019 another great year for Independent Bank Group and we look forward to carrying that momentum into 2020 as we embark on a new chapter of our company's history.
With that, we'll open the call to questions.
Question-and-Answer Session
Thank you. [Operator Instructions] Our first question is from Brad Milsaps from Piper Sandler. Please proceed.
Hi. Good morning.
Hi. Good morning, Brad.
Hi, Brad.
David, it sounds like you had really good loan production in the quarter. However, you got hit by some big payoffs. Just curious if you could give us a little more color on sort of the dollar amount of the payoffs? And how that makes you feel about sort of your loan growth prospects for 2020?
Yes. Brad thanks. Good question. We -- our loan generation production was 10% up for the quarter, for the fourth quarter versus the third quarter in terms of new loans we booked, but our payoffs were $120 million in excess of what they were in the third quarter. So, our -- we put on $50 million more loans in the fourth quarter than we did in the third, but we had $120 million more payoffs. So, a net of minus $70 million because of the excess payoffs.
So, all that to say, our loan officers are hustling, and they're doing a great job of building customer relationships, expanding customer relationships, and we're encouraged. We've been around -- Dan and I have been around to all the markets already this quarter, and speaking with people not only talking about the merger, but talking about the need to continue to do strong business here in this interim period and our loan officers and our leadership across all of our markets are very positive, optimistic about where we are.
There's -- a lot of those payoffs, Brad, were related to sale of assets. I'm kind of looking at how the payoffs picked up in the second half of the year. I don't have any data, but my hunch is that when rates turned back down unexpectedly and that pushed cap rates back down on some of these investor -- some of the investment in real estate, that owners, investors, some families decided that gosh, at these cap rates, we better think again about whether we want to sell some of these assets and so we saw a lot of asset sales.
There is a little bit of refinance going on a couple of national banks deciding to add market share in attractive markets and doing so by competing with rates that we don't consider to be market rates and things like that. But mostly, it was just asset sales, Brad.
Got it. You're still comfortable though with that mid-single-digit type growth?
Yes. I think 5%, 6% as we've been talking to our folks here, the last few weeks just looking at the pipeline, looking at deals that we've got in -- under consideration and already approved ready to close. We think 5%, 6% is still a really good number for this year.
Okay, great. And then Michelle just to follow-up on the margin, obviously a couple of moving parts. Your accretion was just under $11 million this quarter, also a bigger warehouse quarter for you guys which can hurt the NIM a little bit, but accretive to dollars. I'm kind of curious with all those kind of moving parts kind of how you're thinking about the core and reported NIM over the next couple of quarters?
Yes. I'm still -- my outlook is from the normal accretion that's coming in. I'm still saying it's going to be about $7 million. Again, that differential comes from payoffs, and we can't always predict that. So, obviously it could be higher than that again, but I don't expect that at this point.
We've done a really good job of bringing down deposit rates. You saw those came down significantly. But really since November, those have flattened a bit. We are still getting some benefit from re-pricing of some of those specials that we put out there last year, and that's a significant reduction in cost on those.
But I would tell you that our deposit costs, at least since November have not trended down at the same rate that they did in October and November. Loan pricing is competitive. But after looking at the January yields, those have not come down as significantly as they did in the fourth quarter. So, kind of saying all that, I would call for stable to maybe down a few basis points NIM at least in the near term.
Okay, great. I’ll hop back in the queue. Thank you, guys.
Great. Thanks, Brad.
Our next question is from Michael Young with SunTrust Robinson Humphrey. Please proceed.
Hey. Thanks. Good morning.
Good morning, Michael.
Wanted to just ask a quick follow-up on the paydowns. You kind of mentioned, particularly some money center banks getting involved, but could you maybe just characterize it geographically if there's been any more concentrations of payoffs or paydowns in certain markets?
I think the payoffs have been really across the entire footprint Michael. We've not seen any specific state or market that we serve. We have seen just from a high level, this interest of some of the bigger companies expanding their market price, and they've been public about it wanting to increase their market share in these markets that are growing, and that's something we face for 31, 32 years now that we happen to be in great markets and continue to increase our presence in great markets, and no surprise that's where the people want to be in. And so we're going to continue to see that, and we think the demographic trends, the growth trends favor Dallas-Fort Worth, Austin, Houston, San Antonio and Denver, and so, we're going to continue to see that no surprise.
Okay. And maybe just switching over to expenses. Michelle there was a little bit of noise in the expense base in this quarter related to some of the merger pieces and some other moving parts, but just on a core basis going forward, should we expect the expense base maybe to be a little higher in preparation ahead of the Texas Capital deal if you guys are getting anything done on your side? Or should we really think of the expense base kind of with normal growth historically or tracking at 47% efficiency ratio or kind of whatever the bogie is we should use there?
Yes. If you look at Q4 sort of what I would call the adjusted expense base was around $70 million, and that included some additional expenses related to that, the lawsuits that we've been talking about this year. Those really accelerated. We know we thought those expenses will be about $0.5 million [indiscernible], they were $1.2 million this quarter. And based on what we know they will be about that in Q1. And then, we also have that BSA project that we're using some consultants to help us with, was about $300,000 in the fourth quarter and it will be about $600,000 this quarter. So I think our expenses will be about the same in Q1. It could be up even just a bit from that just from normal payroll tax expenses and those sort of things always come in higher in the first quarter. And then the $70 million run rate is probably good for Q2.
Okay. So more stable not expecting an inflation kind of off that number?
No. I don't think so.
All right. Thanks. I will step back.
Thanks, Michael.
Our next question is from Brady Gailey with KBW. Please proceed.
Yeah. Thanks. Good morning, guys.
Good morning, Brady.
Going back to the loan growth in the 5%, 6% once TCBI is in the mix, did you think that that loan growth level will stay about the same or will it change from that level?
Well, I think for the regional banking franchise, which is kind of the terminology we're using for the legacy your independent franchise the IBTX regional banking model, I think it's going to – that we're safe there. And in fact, we intend to expand and add new teams and we're going to be going to San Antonio via this merger and so we're encouraged actually that we can hire teams and step-up that growth in post-merger for the regional bank. But the other – the middle market and corporate and some of the business lines and verticals at Texas Capital, we believe are very encouraged about their growth prospects as well.
In terms of the overall corporation Brady, a lot of that's going to come down to what the final business mix is, and how we put together the go-forward business model, and so that will inform a little bit what that growth rate is. But from a high level, we're going to be a growth company, Brady. That's one of the things as we – one of the objectives as we're building out this go-forward business model is that we're in great markets. We should be able to grow. We are going to grow. Whether it's 5%, 6% or 8%, 10% or what those numbers are we'll be able to get more clarity once we have the – once we can paint the road map to exactly where we're going over the next two years, then I think we can give better guidance or not guidance. If the lawyers are listening, I didn't say guidance, but we'll be able to give a clear picture of what we think about the growth prospects of the pro forma company once we get a little more clarity around exactly what that looks like.
All right. That's helpful. And then David, I have your year-end 2020 tangible book value with TCBI at about $40 that puts your stock at 1.3 times tangible, which doesn't seem right for a company that's doing a high-teens return on tangible common equity. So my question is on the buyback. Your stock is notably inexpensive. I know that buyback can be tough, when you have a deal pending, but is there the opportunity for you guys to buyback stock before the TCBI deal closes? And if not if the stock stays as cheap post closing do you think you'll be active on the buyback front?
Well, I will agree with you Brady that we think the stock price is dislocated. But I don't have a PhD and whatever you have to have to figure that out. So I'm not going to speculate on exactly why that is. We remain extremely confident in our model, extremely confident in what we've told the market regarding this merger and what the performance of our company is going to be in the short and midterm. That said, yes, we have a policy as you know of taking excess capital and returning it to the shareholders via dividends and a buyback program. And so that's a part of this whole equation Brady as we think about the go-forward company.
Depending on what the pro forma size is of the company, once we close on the transaction and get everything adjusted the way we want it to over the next 6 months to 18 months, I do expect that there's going to be some significant cash flow coming off the combined organization that can be used for stock buybacks. And to the extent that our balance sheet is slightly smaller, that would also free up capital. And as you allude to at these kinds of prices, we've never seen our stock trade at these kinds of prospective multiples and we'll be very aggressive in acquiring back our stock. And so, I don't think, right now during the interim period Brady, while we've got our regulatory applications have all been filed, we're working with SEC on those regulatory filings and I don't -- I think, it would be disruptive if we tried to do a lot of stock buybacks that would affect our pro forma capital ratios right now that we've put into the models and into the applications.
So, I don't expect we're going to be real aggressive between now and June in buying back our stock. But gosh, I mean there are scenarios where we would have to take a look at that. But right now, I think the market will sort all this out. We're very confident in that. And look, what we can do, when we talk about this internally Brady is, we can build the model, people are excited about the pro forma company and we can perform.
And as we did in the fourth quarter as we'll do in the first quarter as we'll do in the second quarter, we're going to continue to perform. And as we execute and perform and show investors and our customers and our employees, what everything is going to look like as a combined company then, I believe people will understand and see the value of the transaction.
All right. And then finally for me is just a question on TCBI's credit quality. IBTX has been a very clean story for years. I think one of the concerns that investors have with the merger is just the credit quality of Texas Capital. We saw NPAs there increased a decent amount when they reported earnings last week. So, can you just again talk to us about, how you got comfortable with TCBI's credit and anything that you -- any additional work or things that you've learned in the last month or two post deal announcement?
Let me give a high-level view of that Brady and then I'm going to let Dan speak to some specifics around the due diligence process. But we -- the numbers that you saw that were in the announcement were numbers -- those increases are September 30 to December 31. We were doing our due diligence in November and early December on that portfolio. So, we have a really good handle on where they were and what they had marked and what they were experiencing to the extent that we were seeing that information as part of the diligence. So we were not surprised I guess to start with that. We were not surprised that there was a pickup in some of those categories, but we feel like, we've got a good handle on what that exposure is and where it's going and I'll let Dan give some color -- commentary on that. But --
Yes. Not a lot to add to that David. I would say, the due diligence process that we went through certainly confirm that they are working hard to assess their portfolio constantly that they understand what their risks are and are appropriately grading those. And so, I don't think -- as David said, I don't think there was any surprise in that and I think they're managing that accordingly.
Yes. And they're going to continue to manage. We have a lot of confidence in their leadership there. They're going to continue to manage their credit appropriately between now and the merger and we believe, we've got a handle at high level on what the overall exposure and risk of both our portfolio and their portfolio is. And we are very confident in looking at CECL reserves and looking at the mark on the portfolios going forward that at the merger, there will be plenty of reserve there or will be an appropriate reserve there for the amount of risk in the combined portfolio.
All right. Got it. Thanks for the color guys.
Okay. Thanks, Brady.
Our next question is from Michael Rose with Raymond James. Please proceed.
Hey, good morning. Just wanted to touch on deposits. Michelle, I think you mentioned that deposit costs have been relatively flat here, but you have some CDs that are kind of coming due. Can you remind us the amounts that is coming due over the next couple of quarters and maybe what the cost is? Thanks.
I don't have the exact number of those dollars, Michael. But if you remember, we had some specials that we went out last year first quarter that we're paying $265 million to $270 million. And if those renew our current rate on those is like $150 million. So it's a significant drop in costs relative to where they are. And we are still strategically looking at some of our money market index funds and trying to strategically lower some of those costs where we are.
It's just market with the Fed not lowering rate or the outlook is that they're not going to lower rates. And some of our competitors have put some more significant rates out there again. Not across the board, but in certain markets, we have gotten some feedback that people have been trying to gather deposits. So, it's just been a little more challenging, lowering the rates at the significance that we were able to in October and November. But I still expect that our cost of funds is going to come down a bit this quarter.
Okay. That's helpful. And maybe as a follow-up TCBI rolled out a new online deposit platform last week, are you guys going to participate in that before the deal closes? Is there any plans to do that? Or is it just going to happen naturally once the acquisition closes?
Yes. Correct, Michael. We're -- they rolled out their Best Bank project where -- but there's no crossover, no ability for us to participate in that in this interim period. And then we're excited about having a digital platform for account opening and really all the possibilities of that across small business and account opening and how that plays with our branch banks. Our branch network is a part of what we're in discussions now talking about how we can utilize that across our 94 branches that we're bringing to the merger. And -- but I think the technology is good and some of that will be valuable to us in the days ahead.
Okay. And maybe one final one for me. Can you just give a little bit more color on the energy credit? And I know it's a small piece of the portfolio at this point but as you at the level of like what the classified and criticized are in that book and would you expect any more issues over the next couple of quarters? Thanks.
Yes. Michael, this credit has been a long-time classified credit was part of the credit books some five, six years ago and it's been effectively in a longer-term workout situation for a couple of years now. So no surprise on that actually continuing to collect payments on it, but the note was matured at the end of the quarter. We chose to leave it that way as the borrower continues to pursue sale of the assets, which is currently what they're doing or potential mezz refi either of which would take care of the debt, but no surprise in that.
So there's no migration in that credit in that sense other than it was just over 90 days at the end of the quarter. As it relates to the rest of the portfolio, it continues to be really good. As we spoke to before the group out of Fort Worth, the energy team that we hired in over a year ago had a really nice year in 2019. We really were able to cherry-pick some of the best energy credits out there and we sure like the way those look even in today's environment. So no continued deterioration or migration expected in the portfolio.
All right. Thanks for taking my questions.
Thanks, Michael.
Thanks, Michael.
Our next question is from Matt Olney with Stephens. Please proceed.
Hey, thanks. Good morning, guys.
Good morning, Matt.
Hi, Matt.
I want to go back to the discussion around the stock buyback and thinking more longer term. David, what do you view as the minimum capital threshold for a bank that's closing in on $50 billion of assets? And specifically, which capital ratio would the bank be most focused on over the next few years? Thanks.
Matt, I think, we'll continue to look greater at tangible equity capital from just a base level and then on a risk-adjusted -- total capital risk-adjusted as the other kind of lever that we look at most of the time and I hate to put a floor or anything on it at this point Matt. A lot of that just depends on what the business model looks like and what we perceive the risk to be and the volatility. Our objective is to put together a high-performing strong efficiency ratio, strong return on tangible equity company that's growing, but growing with strong risk parameters as we have at Independent over the years. So that's the go-forward model.
And what that capital ratio looks like we'll determine, but 8.5% is what we've been saying on a tangible equity here over the last year or two is kind of what we feel comfortable with as a target long-term and 11.5%, 12% on the total risk base. And so I don't see anything at this point that would change my mind about those numbers, but I reserve the -- I strongly reserve the right to change that up or down depending on what the pro forma business model is flushed out finally to be.
But we will be Matt to your point -- let me just reemphasize this to your point, we're going to be -- we intend to continue that dividend even though I know TCBI has not historically paid a dividend. We're going to continue that dividend. Our Board will always be looking and be inclined to try to increase that dividend over time based upon the earnings of the company, and then -- and to be aggressive. And so in case I wasn't clear in my previous answer we will be very aggressive within the constraints of capital and earnings on buying back our stock especially when it's trading at these kind of prices.
Okay, understood. And then David, you've mentioned a few times you're putting together the go forward business model and you're going to come to the market with that at some point. Is there a time line of expectations you want to provide today as far as when the investment community will hear more about this go-forward plan?
No. I think, we've said Matt we'll do absolutely as quickly as we can. We're working hard on it. As you might imagine, our employees – both companies are anxious to know what that model looks like and how it affects everyone and then obviously investors as well. And so it's as absolutely quickly as we can just too early to say what – any specific time lines on that. So we're working on it and we will be very communicative as quickly as we can be.
Okay. Thanks, guys.
Thanks, Matt.
Thanks, Matt.
[Operator Instructions] Our next question is from Rahul Patil with Evercore ISI. Please proceed.
Hi. Thanks. So your NIM was around 3.81% Texas Capital's NIM of 2.95% this quarter. So, just using sort of a weighted average to get a combined NIM of 3.20%. Going from there, you started – you stated your NIM will be down – stable to down a few bps Texas Capital's 2020 NIM outlook of 3.05%, 3.15% implies some improvement from the fourth quarter level. So you have that dynamic going on. And then post the deal close you will eliminate the accretion that's tied to Guaranty Bancorp, but you will have additional accretion from the $195 million related to non-PCD and the $37 million loan rate mark. And let's assume that's accreted over five years so that's around $11 million $12 million of quarterly accretion. That's 10 bps of per quarter accretion. So I'm just trying to get a sense for the first full quarter post the deal close is it fair to think about the NIM starting point of around 3.25%. Is that a fair assessment?
I think it's way too early honestly for us to be able to give an indication on that. A lot of that depends of course part of which – what I believe Texas Capital pointed to in the fourth quarter was the size and the growth in that mortgage business, which was partly to push down the NIM. And again, all these things as we look forward what the relative size of that mortgage business, which Texas Capital I believe has indicated they expect just a normal attrition of that down to a more normal level. And a lot of it depends on, what that normal level is and then what other businesses we choose to focus on and which ones we deemphasize. And so I just don't --- I don't think we could give any clear color and I wouldn't feel comfortable. Michelle, I don't know if you –
Yeah. I mean, I think the way you're thinking about it all the parts that make it up that does make sense. But there is too many unknowns at this point to give a prediction on what the NIM would be at that point. I didn't hear – there's a credit adjustment in CECL that will come back into income. So we do expect that there will also be a rate mark that will come back into income that will replace our current rate mark. And I didn't hear you say that. So that might be something else you need to think about.
Okay. And then just on the expense base. So the fourth quarter expense came in a little higher than what you were expecting and even what you had guided to. So just annualizing that $70 million get to 280 number, the deal closes midyear so you have 50% of Texas Capital's annual base of around let's say 50% of that is like 320-ish number. So you're starting from a 600-ish level for the full year $50 million of cost saves realized in second half of this year. So is it reasonable to think about the full year 2020 expense base of around $550 million?
I don't – I can't really answer that right now either. I think the projection – the model included $25 million of cost saves this year for the second half of the year.
Okay. All right. Thank you.
And we do have one final follow-up question from Michael Young with SunTrust. Please proceed.
Hey. I just wanted to ask maybe one big picture question on just the overall kind of pro forma company. You were pretty explicit in the pro forma EPS accretion and tangible book value accretion as well as the balance sheet size but then you've kind of talked about some fluctuations in some of the business lines et cetera. So is there anything that you could give that would provide a little more confidence in some of those initial projections? Or should we think about some volatility in both the businesses and really just stay focused on the profitability level of the pro forma company? Just trying to gauge that?
Yeah, great question Michael. We – the tangible book value accretion is a mathematical certainty. When we close, and we do the stock exchange that will create that tangible book value that we've talked about. So I think if you start there. And so if there's concern about whether that's going to materialize or not I'm not really sure I understand that. In terms of how we get the earnings accretion partially related to the cost saves which again we have a great deal of confidence in being able to achieve those, what we've announced. And then the business models we've been talking about this morning go forward, and I think that's really what you're talking about Michael is at what point can we give some confidence in around, what the earnings and the growth and the margins are going to be on this go-forward merge balance sheet. And I will tell you, I'm extremely pleased when we look at the go-forward leadership team has been hard at work now for five weeks meeting and talking and everyone is focused about. And I've been very impressed that the leadership of the two teams starting at the board level to the executive level and then down from there, the team we put together in this integration management office are all focused almost exclusively on this go-forward entity.
And to be able to rally two pretty different companies in terms of business model to come together so quickly focused on what are all the great things we can accomplish by putting these two together and the go-forward model, I think it's going to turn out to be pretty unique when we look back at this over time. So, that's the confidence that you're hearing us express and we feel really good about where we are. It's early and there's some work to do and a lot of tough decisions to make.
But as we said all along, we're willing to make the hard decisions. There are no sacred cows if you will. I hate to always pick on cows, but there are no assumptions from our previous business model other than we're going to keep serving the customers of Texas and Colorado in five of the seven to 10 best markets in the country and we're going to do it in a way that's safe and sound.
You mentioned the volatility, that's one of the objectives in the go-forward business model we've talked about, which is to bring down the volatility of earnings and NIM and all of that into a stable and that's one of the real positives of this because as we've talked about it, it's the mortgage business on the PCI side, the commercial real estate on the Independent Bank side, all that merges together into a much better looking combined balance sheet.
And so we continue to be very encouraged. And that really goes back to the very earlier question of when can we paint that picture of exactly what is going to look like, just absolutely as soon as the lawyers will let me tell you.
And I guess as a follow-up, is there any expectation on timing of when the lawyers might lift that to that end and should we expect that in kind of the quarterly earnings conference call scenario? Or would that be a separate event? Any -- just any color on that.
Yes that's a great question. And clearly by the April -- April first quarter earnings call by the end of April that's another three months from now, we should begin to be able to have more color around that. By then whether we would do a separate call or a separate filing or anything between now and then, I don't know. I know we're going to be -- we and the Texas Capital leadership are going to be out and about [audio gap] our ability to do it.
Okay, David. Thank you for all the color. I appreciate it.
Thanks Mike.
We have reached the end of our question-and-answer session. I would like to turn the call back over to David for closing remarks.
Thank you very much. I really appreciate everyone being on this morning. It's an exciting time for us. And I appreciate your patience and I look forward to seeing the investors and analysts on our travels here this spring. Thanks for your interest in the -- in Independent Bank and in our proposed combination with another great company in Texas Capital. So, have a great day. Thanks.
Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.