Good day, ladies and gentlemen, and welcome to the Independent Bank Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to turn the conference over to Mr.

James Tippit. You may begin, sir..

Good morning, everyone. I am James Tippit, Executive Vice President Corporate Responsibility for Independent Bank Group. And I would like to welcome you to the Independent Bank Group fourth quarter 2018 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 be only a statement of managements' beliefs at the time the statement is made, and we do not publicly update guidance. In this call, we will discuss a number of financial measures considered to be non-GAAP under the SEC's rules.

Reconciliations of these financial measures to the most directly comparable GAAP financial measures are included in our release. I am joined this morning by David Brooks, our Chairman, 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..

(Audit Start 2:00)Thank you, James. Good morning. We appreciate all of you joining us for today's call. I will briefly touch on some of the highlights for the quarter, Michelle will cover the operating results, and Dan is here to cover the loan portfolio. Then I'll be back at the end with closing remarks and to open it up for questions.

2018 was good year for our company. We reported another year of strong earnings with adjusted net income of $132.2 million for the year representing a 48.7% increase over 2017. Annual adjusted return on average assets of 1.39% and adjusted return on tangible equity of 17.58% also represent significant increases over last year.

We completed the Guaranty acquisition as scheduled on January 1, 2019. Despite extreme market volatility, we were pleased to be able to complete the transaction on the terms originally announced.

We spent significant time and effort during the fourth quarter on integration process, positioning ourselves to execute on the cost saves, while leveraging Guaranty's personnel, technology, and systems. Loan growth for the fourth quarter was 8.6% annualized.

Organic growth of 12% for the full year 2018 illustrates the continued strength of our core markets. Asset quality metrics also remained strong, and our ability to source quality credits and maintain conservative underwriting standards remains intact. Now Michelle will provide more details on the operating results for the quarter..

Thank you, David. Good morning, everyone. Please note that Slide 5 of the presentation includes selected financial data for the quarter.

Our fourth quarter adjusted net income was $34.1 million or $1.12 per diluted share compared to $25.3 million or $0.90 per diluted share for the fourth quarter of last year and $36.6 million or $1.20 per diluted share for the linked quarter.

As you can see on Slide 7, net interest income increased to $87.1 million from $75.3 million in the fourth quarter of 2017 and $86.3 million in the linked quarter. The net interest margin improved to 3.98% for the quarter, up 4 basis points from the previous quarter at 3.94%.

Average loan yield for the quarter net of accretion income was 5.41% and benefited from a continued uptick in the Bank's target loan rates as well as increases in variable rate loans. Total non-interest income was $9.9 million compared to $13.6 million in the fourth quarter last year and $12.7 million last quarter.

Recall that we recognized $3 million in gains from the sale of nine Colorado branches last year. As it relates to the decrease from linked quarter, we implemented a hedging strategy on our mortgage loan portfolio in July of this year which generated income of $1.6 million in the third quarter compared to $394,000 in the fourth quarter.

In addition, we had reduced merchant fee income and loan swap dealer income of approximately $309,000 compared to third quarter 2018. Total non-interest expense increased $2.3 million from the fourth quarter last year and decreased $807,000 from the prior quarter.

The increase from the prior year is primarily related to increases in salary and benefits, occupancy and other expense due to the Integrity acquisition and organic growth. Acquisition expenses were elevated in the third quarter, due primarily to the Integrity conversion and decreased $1.2 million to approximately $486,000 for the fourth quarter.

We anticipated a larger decrease in salaries and benefits expense in the fourth quarter, but recognized approximately $500,000 of expenses related to health insurance and recruiting fees that were not anticipated. Deposit composition and costs are illustrated on Slide 16.

As of December 31, 2018, we had $7.7 billion in total deposits, an increase of $1.1 billion or 16.7% over the prior year. Total deposits decreased $45.1 million from the linked quarter, due to our strategy to maintain the balance sheet below $10 billion as of year-end.

Non-interest bearing accounts remained stable and made up approximately 28% of the deposit mix at year end. The average cost of interest-bearing deposits has increased to 146 basis points up from 70 basis points at December 31, 2017, and up from 126 basis points from the third quarter.

Deposit pricing and competition continues to be a challenge especially in the Texas market. There does seem to be some moderation in increased costs of brokered funding and specialty deposits with the recent changes in outlook for expected Fed Funds rate increases in 2019.

That concludes my comments, so I'm going to hand it over to Dan to discuss credit metrics and give some color on the loan portfolio..

Thanks Michelle, and good morning, everyone. Organic loan growth was healthy in the fourth quarter with loans held for investment not including mortgage warehouse growing $163.4 million or 8.6% annualized. Loan growth of 12% during 2018 was right at our expectations for the year. Slide 10 illustrates annual loan growth comparisons.

Slide 11 shows the composition of our loan portfolio and our commercial real estate portfolio. As of December 31, 2018, commercial real estate makes up 52.3% of total loans and has remained consistent in 2018. As represented in the graph, CRE continues to be well diversified in types of collateral with the largest segments in office and retail.

Slide 12 further breaks down the retail CRE portfolio by property type. Slide 12 also shows the trend of CRE concentrations to capital. Total CRE to the Bank's regulatory capital decreased to 380% at December 31, 2018 from 385% at September 30, 2018.

Mortgage warehouse purchase loans averaged $120.9 million during the quarter ended December 31, 2018 compared to $136.1 million for the quarter ended September 30, 2018. Credit quality metrics continued to be strong with total non-performing assets at 0.17% at December 31, 2018.

Charge-offs continued to be low at 0.01% annualized for the quarter and 0.06% for the year. Provision for loan loss expense was $2.9 million for the quarter, an increase of $1 million from the fourth quarter 2017 and $1.4 million from the linked quarter.

Generally, the provision correlates to loan growth, which accelerated in the fourth quarter compared to the third. Slide 14 illustrates our provision expense and charge-offs in each reported period. As of December 31, 2018, we have reported a discount for the acquired loan portfolios of approximately $25.2 million.

The recorded allowance for loan loss plus the remaining fair market value discount on loans acquired is approximately 0.91% of total loans held for investment as of December 31, 2018. Those are all the comments I have related to loans this morning, so I'll turn it back over to David..

Thanks Dan. We believe the hard work done in 2018 positions our company for successful 2019. We remain optimistic about our ability to continue to grow our loan portfolio at 8% to 10%, manage our expenses and maintain our strong credit culture. Please take a look at Slide 13.

Our company's ability to grow our loans in the best markets in Texas and Colorado, while having superior credit performance is illustrated with our performance through great recession.

Our non-owner occupied CRE ratio was approximately 550% in 2008 going into the downturn and we experienced minimal non-performing assets and charge-offs compared to our peers both in Texas and nationally. We have had the same credit team leadership and philosophy since 1988 and have experienced similar results in every downturn.

We are mindful that it may be late in this economic cycle and we continue to underwrite and monitor our loans accordingly. We have an organic strategy reviewed by our board that will bring our non-owner occupied CRE down to 300% and below over the next three or four years. M&A activity could accelerate that.

We are going to continue to run our company the way we have the last six years as a public company and 25 years before that as a private company. We're going to grow our company organically and for the best markets in the country, while maintaining our credit standards and philosophies that have served us well for 31 years.

We are excited to welcome the Guaranty customers and employees on board and we are focused on ensuring that the integration of people and systems goes well. As the market allows, we will also continue to look for sure strategic accretive M&A targets.

As always our priority is to enhance our shareholder value and we reestablished a $75 million share repurchase program during the fourth quarter. This program provides an ability to invest in our company at attractive prices when the market opportunities arise.

We also intend to increase our quarterly dividend to $0.25 per share in the first quarter 2019 with the intent to continue to pay a dividend of approximately 20% to 25% of earnings in future quarters. Thank you again for joining us today and we will now open the call to questions.

Operator?.

[Operator Instructions]. Our first question comes from Rahul Patil with Evercore ISI..

Thanks for taking my questions. I know last quarter, I think you tempered your long growth expectation to around 10% linked quarter annualized in 2019 versus your prior guidance of 11% to 13%, and I believe this morning I think you were talking about 8% to 10%.

I am just curious you know in terms of what you're seeing in your markets in terms of pay down activity or pipeline, and what's driving this lowered loan growth expectation?.

Good morning. Thanks. Generally, our view is the markets are not as robust as they were 12 to 18 months ago, but Houston, Austin, Dallas/Fort Worth, and Denver are all still really doing well, and so we're still seeing good activity.

Asset prices have held up well, so there continues to be sales and repositioning and prepayments a little higher in the fourth quarter than we had expected but in line with just our customers continuing to look at opportunities and opportunistic for sales and refinances.

And just our general sense that while our pipeline is good, our lenders are busy, I spoke a little bit this morning in my comments about our desire to begin to shift our portfolio to a more of a commercial focus and a little bit less on non-owner occupied CRE, and that's a process.

And so, as we begin that process and equipment finance and the other strategies, energy and other strategies that we have, those businesses may not grow as quickly as our real estate business had grown in the past. So there's three or four factors in answer to your question, but overall we see that being more of an 8% to 10% growth.

And it's also informed by the last six months of '18, while we had a huge growth in the first half of '18, it was much more moderate in the second half. We think the long term '19 outlook is kind of a blend between those two and 8% to 10% seems like the right expectation for us for '19..

And then in terms of the CRE portfolio, I know you mentioned the target to get the non-owner occupied portfolio to 300% or below.

Is that driven by anything in particular that you're seeing that's making you a bit cautious and making you pull back in the space right now?.

No, not at all. And as I indicated in my comments this morning, we have a long and very good history in real estate.

The regulators have recognized that over the years if you look at the Slide 13 in the deck that I mentioned this morning, you'll see that in the great recession, we had a stronger performance than our peers and the national banks as well.

But that said as we now - that seems to us to be more the profile of a little bit smaller community bank; and while we still keep our culture moving forward, we're a $14 billion asset bank now with the Guaranty acquisition, our organic growth at 8% to 10%, and we think that while the market is difficult right now for M&A given bank stock prices that over the three to five year period -- that there will be good opportunities to continue to make acquisitions in Texas.

And as such, if we're headed to be in a $20 billion or $25 billion bank three to five years from now, it would just be better if we had a more diversified portfolio with owner-occupied CRE at 300 or below. That's a big reduction. And our trend has been in the right direction on that anyway. We were 400% at the end of the last second quarter of '18.

We're down to 380% at the end of the year that will come down another 10 bps or so with the Guaranty merger which is not in the year end numbers but will be in the March numbers.

So we have a very intentional structured plan where we'll continue to make real estate loans, we're a very good real estate lender, but we will continue to focus our new hires and our growth strategy over the next three or four years to just change our mix enough to bring that down to a more -- a number that would be more in line with some of our peers..

Got it. And then just one last question on the NIM. The core NIM came in better than your expectation actually. It was partly driven by a nice pickup in loan yields.

Anything one timer there? And then just as a follow-up, could you discuss in parts on the trajectory of the NIM in 2019 if there are no more rate hikes and the ten-year kind of remains in this 270, 280 range?.

Yes, the NIM did do a little better than I expected it to and what I had guided to. I think most of it was related to the fact that we managed our balance sheet below $10 billion, so deposit costs were probably not up as much as they would have been had we been growing like we had been. And really we used our liquidity and invested it in loans.

So I think that's the primary driver, it probably would have been maybe flat if we hadn't done that.

I think a thing to note for 2019 is because interest rates have moved since we announced that deal, I expect we're still finalizing the valuations on their loan portfolio, but I expect that the interest rate mark on that portfolio is going to be a lot more significant than it has on previous acquisitions.

As you guys know, we typically don't get a lot of benefit from accretion on the loan portfolios that we acquire. But I do think -- my estimate at this point is it's probably going to be a 10 to 12 point basis point increase in our NIM just related to accretion next year.

I think the core NIM for next year ex-accretion * is still going to be in the mid-380s range and we're still fairly neutral on our asset liability sensitivity. So the rate hikes don't really impact us that much. So I'm -- right now, our budget calls for kind of a stable NIM for 2019..

Perfect. Thank you..

Thank you..

Our next question comes from Michael Young with SunTrust..

Hey, good morning..

Hey, good morning..

David, I wanted to maybe just clarify a little bit more on the capital return and, particularly, the buyback this quarter. Obviously, good to see the increase in both.

But given kind of the view to try to reduce CRE as a percentage of capital, is that kind of a gating factor on capital returns? Or is it more just a function of where the stock price is and just being opportunistic there? Any other factors we should kind of think about as you're deploying that capital over time?.

Thanks, Michael. It was – clearly, our board's view that our stock is trading at levels below where we think the value is. And so it's really a much more opportunistic strategy. But we are, for the first time, in a position where we are – our capital ratios are – we're comfortable with where they are even – given where we are in the economic cycle.

And we're going to generate some $70 million, $80 million of excess capital over and above our organic growth needs and the dividend level we were paying previously. So the board's been intentional about studying, looking at our options. And we would have been active – we had not purchased any of our stock back in the fourth quarter, Michael.

But that was really more related to we were just in the midst of the Guaranty acquisition, and we had pending regulatory approvals. And as you may know, the Fed has taken the position that they need to approve or at least not object to banks buying back their own stock, and they need that ahead of time. So we've got that process working as well.

But in any event, we expect to be active. Depending on how the markets behave or react, we intend to be active here in the first quarter in acquiring back our stock..

Okay, perfect. And I wanted to just kind of follow up on your comments on deposit costs. You're still seeing some pressure there it sounded like from your comments that, at least in Texas. You obviously have a little more presence in Colorado market.

I was just curious if you're seeing better opportunities potentially there to raise deposits? And given kind of where the deposit costs are at the end of the year, do you expect sort of a decelerating pace of increase if that makes sense going forward?.

I'm not sure that I'm in a position to predict that they're going to – that it's going to decelerate significantly at this point. The deposit costs in Colorado are currently less than half of what ours are in Texas. I would say, because their loan-to-deposit ratio, while not quite as high as ours, was still mid-90s.

And so the incremental funding for them is probably 100 basis points higher than what their current cost of funds is, so – which is probably 100 basis points lower than what ours is in Texas. So it is better, and we are focusing our efforts there.

I think my comments earlier really are related to where we're seeing costs on our specialty treasury, the larger funds that we negotiate as well as brokered deposits. The rates on those has come back just a bit in the last 45 days or so.

So it's really giving us an opportunity to evaluate when we're pricing in our markets, kind of selecting where we get our funding from..

Okay. And one last one. Just on the mortgage hedging, that was kind of the big drop in fee income quarter-over-quarter.

Any onetime impact this quarter from the change in the 10-year? And any outlook to what that might look like next year?.

I think I had mentioned last quarter that we had done an initial – when we started that program, we recorded, I think, an initial amount of about $1.7 million to mark the loans to fair value and to record the hedge. Ongoing, we expect that income to be $400,000 to $500,000 a quarter, which I think is about what it was in Q4.

There were several things going on with our mortgage group in the fourth quarter. They have been actively trying to build an infrastructure in Colorado to make sure we're ready to go in that market. So they've added a significant number of lenders there.

So while their revenue was down in Q4, I would say their expenses were probably up $200,000, which is unusual for them. I think their top line is good. They've added lenders. Q1 is usually a seasonally low for them, but I would expect they're going to start getting traction in the second quarter of this year..

Okay. Perfect. Thanks..

Hey, thanks, Michael..

Our next question comes from Brad Milsaps from Sandler O’Neill..

Hi. Good morning..

Good morning, Brad..

Michelle, I wanted to see if we could maybe spend a little time on expenses. You did mention there was about $0.5 million of recruiting costs in the quarter or maybe health care costs. Maybe I was expecting a little bigger drop on a linked quarter basis.

Can you talk a little bit about how you're thinking about 2019, and maybe even more specifically, kind of how Guaranty will impact the numbers as it flows through when you work through the conversion?.

Sure. Thanks, Brad. Yes, our health care costs for our health insurance, we're self-insured. That cost was up about $350,000 for the quarter. And like you, I really expected that – I thought that number was outsized in Q3, and I expected it to go down. So if you ask me, I would say our expenses were about $700,000 higher just related to that.

We also had some comp expense related to recruiting some lenders during the quarter. That was probably $200,000 to $250,000 that I would say is unusual for us as well. If I'm looking out to '19 now that we have Guaranty, I think our run rate on noninterest expense is going to be $69 million, probably the first and second quarters.

And then once we get our – all of our cost saves, that conversion is still planned for early June, most of those people that are staying with us through the conversion will be gone at the end of the second quarter. The branch closures that we plan will all be done before that.

So really, I think at that point, the run rate on noninterest expense should drop to the $65.5 million range for the second half of the year..

That's helpful.

And that's inclusive of CDI and the adjustments you've had to make there?.

Yeah. And that was another thing I wanted to point out to you guys. I think the CDI number may be bigger than what was expected. I think it's going to add about $1.5 million of amortization per quarter..

Okay. I thought, with the $1.5 million, you already have..

Right. That’s right..

Okay. Okay. Got it.

And then in terms of thinking about efficiency, you guys have kind of talked about maybe mid- to high-40s, is that still kind of the area you, ultimately, think you can sort of run the bank at over a longer period of time?.

I think what we're looking at, I think we still expect that efficiency ratio by the end of this year to get down to about 46%..

Okay. Thank you very much..

Hey, thanks, Brad..

Thanks, Brad.

Our next question comes from Brett Rabatin from Piper Jaffray..

Hey, good morning..

Good morning. Brett..

David, I wanted to ask, we have seen some of the banks have a pretty strong quarter in energy loan growth. And I know you've got a goal of moving that portfolio back up.

Can you just maybe talk about what you're seeing in energy? And just is that one of the segments that's going to have stronger growth in '19? And then just maybe any thoughts on 4Q?.

Yeah. We hired, Brett, a team in the fourth quarter. We've got them onboarded. Michelle, making some of the costs. But we've got them onboarded, and they are, I think, off to a good start. I'll let Dan comment a little bit about what we're seeing. We have been booking some loans but just continuing to see market paydowns and things as well.

But Dan, you might talk about what you're seeing in committee on the oil or energy loan front..

Thank you, David. We're certainly continuing to see quality looks. As David mentioned, the team that we hired in – were hired started in December. So they're really just getting going at this point. But we'd expect with their relationships, there will be an opportunity to move that needle in 2019.

Whereas in 2018, it was up some, I think we'll see more traction there in 2019..

Okay. And then I just wanted to talk about Guaranty and Denver for a minute. And just as you're getting the deal closed, what the outlook might be? And I know you wanted to kind of improve their loan growth path this year, maybe relative to what they've done in '18.

I was just curious what you're seeing in terms of opportunities and just as you've started to take – get more color around what they do, how you feel about their growth..

This is Dan. Again, they have an extremely talented team. I should say, we have an extremely talented team in Colorado through the Guaranty group. They have been able to grow and continue to book some significant relationships there that will pay off over time in terms of continued growth.

The ability to do larger sizes of deals and to grow some of the relationships they've had based on hold limits will give us additional run room there. And then as David said, that market continues to be really strong, so I think there's just an organic opportunity to grow that portfolio based on the people we have on the ground there..

And they'll be energy opportunities, Brett, as well as – I mean, that's a strong energy market. And it was one of our thoughts in bringing on this new team in energy. It was to exploit the relationships into – strengthen the relationships, the historical relationships that Guaranty has had with energy investors.

Also, in addition to Dan's comments about increasing wallet share, if you will, with some of their larger customers, we've been able to continue to grow those relationships. And then we have been in Texas in the real estate construction area. It's an area that they had not emphasized at Guaranty Bank.

It's an area where we've been conservative but active. And I think they'll see some opportunities to do some loans in that area that they didn't have before. So we're encouraged.

Again, I don't think anyone is going to be growing 15%, 20% this year, but I think we feel good about their ability to grow in line with what our expectation is for the company, which is 8% to 10%..

Okay. Great. Maybe just one last housekeeping follow-up. You guys have really good asset quality. Outside of the energy book, I'm just making sure there's no SNCs or anything that looks like nonoriginated pieces. You guys are usually kind of an in-house growth company. .

Right. Yes. We have a long history, Brett, as you know, of kind of eating our own cooking generally. So we book our loans, and we keep them on our books. That said, Guaranty was in – had a small presence in leveraged lending. And so they do have a book where we had not been active in that market.

They have an experienced team there that does a great job in that market. And so we are picking up a piece of that in the Guaranty acquisition. Their track record had been really good. And at the end of the day, it's less than 1% of our total loan portfolio..

Okay. Great. I appreciate all the color. .

Yeah, thanks, Brett..

Our next question comes from Brady Gailey with KBW..

Hi, good morning, guys..

Hi, good morning, Brad..

So just to make sure we're thinking about Durbin right. I think in the past, you all said it would be roughly a $5.5 million number annually, and I know that'll start in 3Q 2020.

Is that still the right way to think about the Durbin impact?.

Yes. I think $5.5 million to $6 million.

Michelle?.

Yes. That hasn't really – our estimate on that hasn't really changed. But we're glad to have it pushed out another year..

Yeah, definitely. Well – and then David, just on the M&A imminent. I think I remember in the past you've said, hey, once we get Guaranty done, we'll – you will really focus your M&A efforts back on your home state in Texas.

Is that still the right way to think about M&A for you guys? And do you think you'll be active in 2019?.

Well, we consider Colorado to be a home state now, too. But that said, yes. We think the opportunities, Brady, are going to be in Texas. The opportunities in Colorado have largely been acted upon.

And there are a number of smaller banks there, very good smaller community banks but kind of below our threshold of – we want to be in that $1 billion to $3 billion. It's what we think would be our sweet here over the next 3 to 5 years. There are 10 or 12 banks in that range in Texas in the major markets where we want to acquire.

And while I think our focus is here in the first 6 months, Michelle has been clear on it, Dan has been clear on it, I think we've been clear on it as a team that executing in an outstanding way on Guaranty is our #1 focus and priority. And then as time – second half of this year and into 2020, we'll look for opportunities.

But yes, in Texas, 10 to 12 companies that we have relationships with that we're continuing to just build our relationships with them and look for an opportunity where the markets are favorable and where those sellers are interested in moving forward..

Okay, got it. Thanks, guys..

Anything else? Thanks, Brady..

Our next question comes from Michael Rose of Raymond James..

Hey, guys, good morning.

How are you?.

Good morning, Mike.

A little cold in Chicago?.

Yeah, brutal, getting it worse. I need to get down to Texas soon. So I just wanted to circle back to fee income. I know Guaranty had a trust business, and you guys are in the earlier stages, obviously, of integrating that.

But I wanted to see maybe mid- to long term what the outlook is for that business and growing it? And I know you've talked about building out SBA. There's clearly some near-term issues. But any updates on those businesses? And what they could mean to the combined franchise as we move forward? Thanks..

Yes. I think that the trust business does generate good fee income.

The businesses we've talked about, really focusing our growth efforts on are in the wealth management business where Guaranty, under their PCM, Private Capital Management, brand have done an outstanding job of growing a real wealth management platform that's competitive with anybody in the country. Our plan is to integrate that, bring that to Texas.

And then likewise, we've had a very robust retail mortgage operation here in Texas that the Guaranty folks had not engaged in. We've been about the business.

I think that was also part of the expenses in the fourth quarter that ran ahead of our original projection was, we've already about the business of hiring retail and building the retail mortgage presence in Colorado. And so some of those expenses showed up on our books here in the fourth quarter, but we're encouraged about the opportunity there.

So taking that wealth management platform to Texas and taking the mortgage platform to Colorado are key to our thoughts about how we can experience some revenue synergies out of this and especially on the fee income side as you say..

So longer term, you guys have been historically kind of a high single- to low double-digit fees to total revenue.

As you get bigger and as you diversify the loan book away from CRE, bring that concentration down, is there any aspirations to grow that percentage higher longer term? And do you have sort of an intermediate- to longer-term target?.

There is, I would say, from a high level, Michael, there is a desire to – as we diversify our balance sheet to grow our fee income. We have not because we haven't – we think we need to have some success executing on growing the wealth management and growing the mortgage business and looking at other opportunities before we set specific targets.

So I would say, it's not going to be something you're going to see show up dramatically in '19 and maybe even '20. It's just going to be something over the next 3, 4 years that we're going to have to build out. So we don't have any specific targets or guidance on that..

Okay, helpful. And then maybe just one last follow-up for Michelle, just a quick one. The tax rate, any expectations for the tax rate for this year? Thanks..

I think the tax rate, I really can't think of any reason it would be different than it was in '18. It's typically a little higher in the first half of the year because of the stock grants that vest and the way that works out on our tax rate.

But I think it was a little – it was sub-20% in the fourth quarter, but it should average 20% probably for the year..

Okay. Great. Thanks for taking my questions. .

Great, thanks. Mike..

Our question comes from Matt Olney with Stephens Inc..

Hey, good morning, guys..

Good morning, Matt. .

In the prepared remarks, you mentioned that the balance sheet was a little bit smaller. You're trying to manage below the $10 billion asset threshold.

Do you plan to re-lever up the balance sheet from these levels? Or will the Guaranty deal essentially do that to your balance sheet on its own?.

I think we were below $10 billion for about 2 days, Matt. The strategies that our treasury used was we moved some deposits off our books using the seeder's program. We ran off some FHLB advances, really moved our liquidity kind of below our targets just for right at the end of the year.

But we were kind of back to normal levels by the first week in January..

Got it. Okay. And then going back to credit. You mentioned the 2 single-family construction loans are nonaccrual.

Any just general commentary on the single-family housing market in Texas you can share with us?.

Matt, this is Dan. Outside that market continues to be very strong in each of the markets that we serve, in Austin, Houston and Dallas. That one particular loan, there was a loan that was about $3.5 million that was put on nonaccrual in December, pending resolution of it. It was sold the first week in January. So it has since paid off.

Just a good indication that the market continues to be active, prices continue to hold and the sales periods continue to be reasonable. So we watch that closely, but we've not seen any deterioration in that in Texas..

Or Denver?.

Or Denver, right..

Okay. That’s helpful. Thank you, guys..

Hey, thanks, Matt..

And I’m not showing any further questions at this time. .

Well, that will conclude our earnings call. I appreciate everyone's interest. And we're very positive about our view of 2019. Fourth quarter was not quite as strong as we had hoped it would be or planned for it to be.

But we – our views about 2019, the power of the merger and the acquisition with Guaranty are intact, and we plan to execute well on that in the first half. And then we'll be able to deliver those results in the third and fourth quarters as Michelle alluded to. I appreciate everyone's interest and look forward to seeing you out on the road this year.

Thanks..

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day..