IMAGE SOURCE: THE MOTLEY FOOL.
Texas Capital Bancshares Inc (NASDAQ:TCBI)
Q1 2019 Earnings Call
April 17, 2019, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon, everyone, and welcome to the TCBI Q1 2019 Earnings Conference Call. All participants will be in a listen-only mode during the presentation. And please note that this event is being recorded. (Operator Instructions)
And I would now like to turn the call over to Heather Worley, Director of Investor Relations. Please go ahead.
Heather Worley -- Director, Investor Relations
Good afternoon, and thank you for joining us for the TCBI first quarter 2019 earnings conference call. I'm Heather Worley, Director of Investor Relations.
Before we begin, please be aware this call will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them. Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release, our most recent annual report on Form 10-K and in subsequent filings with the SEC.
Our speakers for the call today are Keith Cargill, President and CEO; and Julie Anderson, CFO. At the conclusion of our prepared remarks, our operator, William, will facilitate a question-and-answer session.
And now I will turn the call over to Keith to begin on Slide 3 of the webcast. Keith?
C. Keith Cargill -- President & Chief Executive Officer
Thank you, Heather. I will offer opening comments, then Julie Anderson, our CFO, will share her review of Q1. I will then close and open the call for Q&A.
On Slide 3, we lead off with the key operating results for Q1. Earnings per share totaled $1.60 in Q1 '19 versus a $1.38 in Q1 2018. ROE of 13.58% is higher than the ROE of 13.39% in Q1, '18. Net interest income increased 12% from a year ago as well. Driving the higher EPS and ROE were the net revenue increase of 15% from Q1 '18.
Non-interest expense increased 11% from Q1 2018, but the core NIE expense related to salaries and benefits increased at a lower rate. Julie will speak to this a little later in the call. Net charge-offs were 0.09% of LHI as compared to 0.11% in Q1 2018. Non-accrual loans to total LHI were 0.57% compared to 0.60% in Q1 '18.
Slide 4 highlights our energy loans and C&I leveraged loans. Energy loans equal 7% of total loans as was the case in Q1 2018. Non-accrual energy loans increase to $76.7 million from $50.4 million one year earlier. Allocated reserves equal 3% of energy loans or $48,600,000. C&I leveraged loans equal 5% of total loans or $1.2 billion versus 6% of total loans or $1.2 billion at Q1 '18. Non-accrual leveraged loans were $30.6 million at Q1 2019 versus $54.4 million at Q1 2018. Criticized loans increase from a $138 million in Q1 '18 to $219 million in Q1 2019. Allocated reserves for C&I leveraged lending totaled 6% or $68.9 million. We have no significant concentration in a particular industry in this portfolio. Over the balance of 2019, we estimate runoff of approximately 30% of the leveraged lending loan portfolio.
Let's now move to Slide 5. We strongly believe, we have built over 15 years, an exceptionally valuable business for our shareholders in mortgage finance. This slide highlights core strengths in the mortgage LHI component of mortgage finance, and hopefully better informs our constituents as to the low risk, high return qualities of this business. We did not build mortgage finance, LHI or mortgage warehousing as we once called it, to simply be a transaction loan business. We chose to invest higher and grow the business in 2009, 2010, and since then, to be a strategic solution business for our mortgage banking clients. During the 2008-2009 Great Recession, the number of competitor banks in this business dropped from 82 to 11. We were not entangled in the subprime mortgage problems and decided to exploit the opportunity, our top national talent and take quality client market share.
We made the largest investment in our history in a specialized line of business technology platform, offering the independent mortgage banking companies coast to coast, the finest expert bankers and best-of-class technology. We hired top treasury management talents and developed customized treasury management products for their industry. And importantly, we provided much needed capital when they needed a strong bank the most.
Since 2009 through 2011, we've continued to invest in technology and talent in the mortgage finance business, launching the mortgage correspondent aggregation business, three and one half years ago. While this slide focuses on the core business of mortgage finance, LHI, our MCA business is growing and delivering strong earnings growth as well.
I want to point out that the earnings and combined yield bar chart shows strong earnings and yield that does not include the strong deposits we've grown and the additional profitability the deposits generate in this business. We have a long history of growing market share and earnings in mortgage finance, despite headwinds affecting mortgage origination volumes, because we are able to outperform competitors and take market share to offset origination slowdowns. We have a truly amazing team of mortgage finance professionals and best-of-class clients. It is a great business for us.
Julie?
Julie L. Anderson -- Chief Financial Officer
Thanks, Keith. My comments will cover Slide 6 through 13. Our reported NIM decrease 5 basis points from the fourth quarter with about 2 basis points related to additional liquidity.
Our traditional LHI yields were up 10 basis points from the fourth quarter, which included catch-up from the late LIBOR moves in fourth quarter as well as the slight decline in February, but was offset by a lower level of fees this quarter. Traditional LHI betas continue to be as expected, but we could see pressure on spreads as competition remains robust. These were lower in the first quarter as compared to the fourth quarter, which accounts for about 11 basis points. So basically our core LHI yields were up 21 basis points.
Our anticipated mix of loan growth for the remainder of the year will likely result in lower fee levels than we've experienced in the past. Mortgage finance yields were up 9 basis points on a linked quarter basis, and these yields are stable at this point. Additionally, with long-term rates dropping, we're seeing additional volumes first evidenced in March. While MCA will also benefit from additional volumes with long-term rates dropping, it's important to remember that those loans are tied to the actual mortgage rates which will have a lower coupon unlike the warehouse loans that are tied to LIBOR.
We had a linked quarter increase in average interest bearing deposits, and overall deposit costs increased by 16 basis points from 117 basis points in the fourth quarter to 133 basis points in Q1. The increase was expected as Q4 numbers only included a few days of the December Fed funds rate move on the index deposit. We saw the full catch-up in January, and trends in February and March have been positive with minimal movement. With the Fed pause, we expect more gradual increases in deposit pricing that's reflective of net growth coming from interest bearing.
The continued solid deposit pipeline with verticals getting traction, we would expect to have more to discuss related to some of the verticals in the second half of the year. In addition, the front line is focused on targeted calling efforts. During the first quarter, we replaced approximately $500 million of traditional brokered CDs that were maturing at a 25 basis points increase in cost which was more favorable than some of our higher cost deposits, still about $1.5 billion in total. While verticals ramp up, we're very comfortable increasing the level of brokered CDs as needed when pricing is more favorable than some of our higher cost funding.
As of the end of March, 75% of our floating rate loans are tied to LIBOR and over 80% of that tied to 30-day LIBOR. The percentage of LIBOR loans in our portfolio continues to increase.
We had growth in average traditional LHI during the quarter consistent with our expectations. Traditional LHI average balances grew 1% from the fourth quarter and up 9% from the first quarter of last year. The level of payoff continues to be higher, primarily in CRE, and some C&I leveraged. We would expect payoff and C&I leverage to pick up during the remainder of the year.
Continued strong average total mortgage finance balances, including MCA, benefited from stronger-than-expected first quarter, which is seasonally weaker. Balances are up from first quarter last year about 33%. With the drop in long-term rates, we expect Q2 volumes to be quite strong. We did see some pickup in linked quarter average deposits with all of the growth in interest bearing, primarily interest bearing deposits in the pipeline, but we continue to be vigilant on maintaining and growing core existing relationships.
Betas on interest bearing deposits declined slightly in the first quarter. We expect more gradual increases in deposit pricing with the Fed pause. Additionally, slower core loan growth will be beneficial to our marginal cost of funding. We would expect to start to see improvements in funding mix in the second half of the year with more meaningful improvement evident in 2020.
Moving to non-interest expense, first quarter expenses have some noise, but overall, we're pleased with the trends of our core operating cost, specifically looking at the changes in salary expenses. First quarter salaries and employee benefits are up about 7% from the first quarter in 2018. We're managing in a much lower level of FTE additions.
Seasonal items of $4 million offset by the normal lower level of incentive approval in the first quarter as that ramps throughout the year. Fluctuation in FAS 123R expense in the first quarter compared to Q4, primarily related to a sizable drop in stock price that occurred at the end of the year and has rebounded slightly in the first quarter.
A deferred comp plan that was started a couple of years ago, now have a sizable enough balance that there can be some meaningful mark-to-market fluctuations, and that's generally consistent with moves in the stock market. $2.5 million flux from fourth quarter to first quarter. However, that's offset in non-interest income, so net neutral impact on net income, but rather just a growth up in income and expense.
A portion of the marketing category continues to be variable in nature and is tied to growth in deposit balances and is expected to continue to increase throughout the year. Literally increase in that category could range from $1 million to $2.5 million per quarter depending on volumes. Efficiency ratio for the first quarter was 52.8% compared to 55.1% in the first quarter of last year. We expect continued improvement for the remainder of the year.
Now moving to asset quality. We continue to be positive about overall credit quality with lower level of charge-offs and provisioning in the first quarter. Non-accrual levels increased but still at a relatively low of 0.57% of total LHI. The increase is primarily related to three energy deals, two of which had been criticized for some time. While each of these credits have unique characteristics, poor development results were common along with other challenges unique to each and not indicative of the remainder of the energy book. We believe each are adequately reserved at this time.
Additionally, we experience an uptick in total criticized levels in the first quarter, predominantly driven by leveraged deal. More than 50% of that was in the special mentioned category and is not surprising as a result of a continued focus on the leverage portfolio or any loans that may be viewed as weaker if we move into a slowdown. Total criticized as a percentage of total LHI remains low at 2.6%, and we have rigorous action plans for problem loans.
As you know from our history, we're always focused on being proactive with grading and especially late cycle, which can drop higher provisioning and classifications early. The $20 million in first quarter provision is related to the migration that I've discussed and is in line with our annual guidance. As we've mentioned, we would expect a larger portion of provision in the first half of the year, so Q2 provision could be higher than the Q1 levels. Generally that would be the result of any additional migration.
Our team is staying very close to all criticized loan situations, but this is the time of year that clients are finishing their audits. And if those audits revealed deterioration that internal financials are our ongoing dialogue with clients had not previously indicated, some additional downgrades could be possible. We wouldn't expect that to be significant and believe it is adequately covered in our guidance for the year. $4.6 million or 9 basis points of charge-offs in Q1, all of which was previously reserved.
We continue to see strength in our linked quarter net revenue, core loan growth in the first quarter as well as better-than-expected volumes in mortgage finance. The first quarter non-interest income includes an $8.5 million legal settlement, which is obviously non-recurring. We're continuing to improve run rate on our core operating expense items, specifically salaries and a focus on improving efficiency while enhancing client experience.
Year-over-year 11% increased in non-interest expense compared to prior year Q1, and it's 8% excluding the MSR writedown and compared to 15% net revenue growth, or 12%, if you exclude the non-recurring legal settlement.
On a PPNR basis, the earnings power continues to improve as we evaluate our year-over-year comparison. ROE and ROI levels were improved in Q1 as a result of lower provision level. We could see some lift in ROE levels later in the year if provision levels come in lower than guidance.
Now, we'll move on to our -- to the remainder of our outlook for the year. We're decreasing our guidance for average traditional LHI growth slightly to mid to high single-digit percent growth from high single-digit. That doesn't represent much change in our outlook but rather fine tuning what we expect to see from a paydown perspective. We've experienced good growth in the first quarter, but expect higher runoff in areas that we're focused on running off.
We're increasing our guidance for average mortgage finance growth to high teens from low single-digit percent growth, additional growth as a result of lower long-term rates. While we assume this is a short-term opportunity with lower rates, we will be opportunistic as it's very positive on earnings and it makes sense from a risk perspective while we work on the appropriate runoff in other areas. We're also increasing our MCA guidance to $2.5 billion from $1.9 billion for average outstandings for 2019. While we continue to see pickup in market share in this space, MCA will also benefit from additional volumes from the drop in rates.
We're increasing our guidance for average total deposits to high single-digit from mid to high single-digit percent growth, still with an expectation that net growth will be interest bearing. We expect some traction with initiatives, but weighted toward the second half of the year. We also expect to continue to see growth in core clients, which may result in some upside on non-interest bearing deposit trends. We are comfortable using well-priced brokered CDs as we gain traction in other areas.
We're decreasing our guidance for NIM to 3.6% to 3.7% from the previous 3.75% to 3.85%. The decrease is primarily related to an earning asset shift as we now expect more meaningful growth in total mortgage finance which is lower earning asset. While slightly punitive to NIM, the added growth is very positive to net revenue and net income. The guidance continues to assume no Fed changes in rates for the remainder of 2019.
Our guidance for net revenue remains at high single-digit percent growth, but at the higher end of that high single percent range with the additional revenue expected from mortgage finance. Our guidance for provision expense remains at mid to high $80 million level, while our first quarter provision might indicate slightly lower than annual guidance, it's too early in the year to warrant any adjustment. Guidance for our non-interest expense remains at mid single-digit percent growth. We continue to feel good about the slowing of our core operating expenses, primarily related to our very targeted growth in headcount. Guidance for efficiency ratio remains in the low 50s.
Lastly, I'd just like to reiterate our long-term outlook which is on Slide 13, and as part of our three-year planning horizon with no changes to the view we shared last quarter. Keith?
C. Keith Cargill -- President & Chief Executive Officer
Thank you, Julie. We continue to make the necessary changes in our business to better align our organization structure with full solution product delivery at a strategic level with our clients. We have long been known as a high touch client service company, but we're committed to further differentiate our reputation by becoming the premier client experience bank, against all key competitors. This undertaking includes the three-year rebuild we launched in 2016, to rebuild our technology infrastructure. We're roughly a year away from essentially completing that rebuild.
The up-to-date technology grid positions us for better agility for the ever evolving client preferences for mobile access and ease of use banking products and services. It also assist us in gaining better insights into our clients emerging needs.
Regarding LHI growth, it was solid in Q1 2019, despite our deliberate efforts to allow runoff in leverage lending and be evermore thorough in booking only high quality new loans across all lines of business in this hyper competitive environment. We want to grow up modestly not rapidly in this later stage of the recovery. Asset prices are continuing to escalate. We know late cycle loans create higher through cycle risk unless we exert strong discipline and carefully manage down higher risk loan categories. We are fortunate to have the outstanding mortgage finance business to deliver higher growth in earnings with very high credit quality as we optimize our loan mix while still driving earnings in ROE.
Our deposit initiatives continue to roll-out and grow. The growth in our new deposit verticals will allow us to runoff higher cost deposits over time. This will help us show net deposit growth at improved costs in more granular levels. We believe we have a very clear view of our loan portfolio after much drill down and review last quarter. While criticized loans grew, we expect that to plateau. Finally, the targeted approach to slowing non-interest expense is showing good results. More disciplined hiring, organizational changes, new technology and process refinement are all contributing to delivering a more premier client experience and more efficient bank.
At this time, I'll turn it over to William to open the lines for Q&A.
Questions and Answers:
Operator
Thank you. (Operator Instructions) And the first questioner today will be Ebrahim Poonawala with Bank of America Merrill Lynch. Please go ahead.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
Hey, guys, good afternoon.
C. Keith Cargill -- President & Chief Executive Officer
Hello, Ebrahim.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
I just wanted to touch up on criticized loans and credit, Keith. Just trying to understand where we are in terms of putting this behind us? And so, I think, you mentioned in the prepared remarks, Julie or you were regarding expecting a little more potential for migration in the second quarter. Can you give us a sense of like when like three months from now when we're on the call, do you think this will be well addressed absent any deterioration in the economy or is this kind of a moving target, because I feel like there's been a lot of impact to the stock and just concern on the stock around credit and things kind of slipping negatively, so I would love to get some color around that?
C. Keith Cargill -- President & Chief Executive Officer
Sure. Well, as we've been describing at each quarter, the last couple of quarters, Ebrahim, we've taken a very deep dive not just in leverage lending but really through our entire loan portfolio. And we think that was prudent, having seen some of the leverage lending deals begin to pop-up second quarter last year and then they continued in the third, and we wanted to be sure as I mentioned last quarter that we had not had any kind of leakage into having any kind of breakdown of credit underwriting and problems in other parts of the portfolio. We feel very good about that. But by taking such a deep dive, we're naturally going to identify more watch credits and special mention and we should. We've really spent a lot of time in energy to get our arms around this early and before the downturn, whenever that might come.
And our experience, Ebrahim, has always been if we're proactive and early on addressing things as soon as we see them, then they are tools of capital that are willing to sometimes accept high returns for what they perceive to be still a reasonable risk in their world and they have different objectives in necessarily regulated banks. So, we have the opportunity to recover our loan capital and our interest often on credits that if we weighted all the way into the cycle in the downturn, that wouldn't be the case.
So, while it is a little better to take medicine early, we really believe it's always been in the best interest of our shareholder, and we don't see this as a continuing upward trend on the criticized volumes. We think we're approaching a plateauing on that and also we expect quite a few of these to refinance in the special mention as well as in some of those that are what we'd call you classified light. We're being conservative on how we're looking at our credits. And so while we're not, you know, overstepping our methodology, our approach, we're definitely being conservative in how we're grading these credits, and that's how you really get action and you get progress made on upgrading the entire portfolio. So, that's a lot of editorial, but I hope I am answering your question, then I think we're just seeing what we expected we would see with this deep dive and we think we're nearing a crest on criticized.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
Understood. So, I guess, takeaway as we spend a year digging through this, I appreciate getting ahead of the curve given where we are in the cycle. It sounds like the likelihood of you being surprised in any meaningful way from your own on credit should be relatively low.
C. Keith Cargill -- President & Chief Executive Officer
No, we really haven't been surprised. Of course, we've learned a few things, but we really haven't been surprised. You know, again, if you look at our growth, the last five years, we have almost tripled the company. And so it was very, very important for us to start this tipping down of the growth rate which we did over a year ago to be sure we were all about quality and having building the strongest balance sheet possible for the next down cycle. We really believe we earned the right to be a high growth bank as we go through each economic cycle. We don't just inherently have that right to be a high growth bank. So, it's entirely appropriate and based on our history and experience, when you get into the late cycle, whether the economy lasts another year or three years, where we're later in the cycle than we are early. We're seeing a lot of signs of asset values really, really peaking have a lot of clients selling assets, which often is an indicator to that we're nearing the late into the cycle, sellers generally have a better feel for the kind of value they want to realize, than big pools of capital that want to be deployed and acquire assets.
So we're very thoughtful and watch our client asset sales that's contributed to some more pay downs not just in real estate but overall in C&I too. But rather than chase that and try to overcome those pay downs by booking even more loans and pushing growth, it's a mistake in our view, because through cycle, it will just cost us a lot of credit write-offs. So we feel very solid about where we sit. We think we have the best visibility on our portfolio we've had in three or four years, and we think we're headed in the right direction.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
Understood. And if I may just on a separate topic, Julie, just if you could talk about the three loan buckets when you think about the yields today with the Fed on the sidelines? What's the expectation on those three in terms of should they be relatively flat, just lower or just any expectations, do you expect any of the fees that kind of went away this quarter to come back?
Julie L. Anderson -- Chief Financial Officer
So, yes, we will start with traditional or core LHI. As I have said in my prepared remarks, we do think that lower fees is going to be something that we're going to have for the rest of the year. I don't think it's going to be lower than what we saw this quarter, so there could be some rebound from that. But I'm not going to say it's going to be significant. So, I think, the levels that we're at right now on core should be flat. It can fluctuate up or down a couple of basis points, but it should be pretty, pretty flat.
On mortgage finance, the warehouse piece, we felt that those yields are stable right now and we would expect that to continue. And then on MCA, that's going to be tied to note rates, so as what's on our books now is that sales and we put on new it will be tied to the note rate, which could be -- which will be lower.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
Got it. Thank you.
Operator
And our next questioner today will be Jon Arfstrom with RBC. Please go ahead.
Jon Arfstrom -- RBC -- Analyst
Thanks. Good afternoon.
C. Keith Cargill -- President & Chief Executive Officer
Hello, Jon.
Julie L. Anderson -- Chief Financial Officer
Hey, Jon.
Jon Arfstrom -- RBC -- Analyst
Hey, just maybe the other side of Ebrahim's question on deposit costs. Julie talked about a little bit of abatement, slight minor but give us an idea of what you're seeing in terms of less pressure in deposit costs and then also the second part you talked a little bit about a better deposit mix shift later in the year, and I'm just curious what kind of magnitude you're signaling in terms of easing deposit pricing pressure?
Julie L. Anderson -- Chief Financial Officer
Yes, I think, we're being. I don't think we're signaling to anything, anything specific at this point. We'll talk about that as we get more traction in the -- with the different verticals. But we view things for now, you know, because we had such a big -- we have such a big $5.5 billion in index deposits. We're getting some relief from the Fed pause from that. So we saw all that reprice in the first quarter. And then as I said with all that reprice in January, February and March, our overall costs were pretty stable. We do think there will be some gradual increase just because everything, the net growth is coming in interest bearing, but it shouldn't be anything compared to what we've seen in the past.
C. Keith Cargill -- President & Chief Executive Officer
And Jon, we seasonally have a softer first quarter in DDA. That's typical because of some of the large commercial accounts we have in a couple of different industries. So that is going to be rebuilding in the second quarter and should hold up better for the next couple of quarters.
Jon Arfstrom -- RBC -- Analyst
Okay. And Julie the 15 basis points you talked about, you're basically saying that a lot of that pressure has gone away at this point?
Julie L. Anderson -- Chief Financial Officer
Right, because a lot of that was from the repricing, the complete -- a full quarter of the Fed repricing on the index deposits.
Jon Arfstrom -- RBC -- Analyst
Okay. Okay. And then back on the provision, two parts of it. You talked about potential for an increase in Q2. Curious if you're willing to talk about potential magnitude? And then on the other side of it, you talked about the potential for maybe beating or coming in lower on provision for the full year. Maybe give us an idea of what you're thinking there.
C. Keith Cargill -- President & Chief Executive Officer
Let us tell you what we can, Jon. We can't drill down too specifically because we're working with a couple of clients that are -- that's important. But two of the eight credits that we've referred to before, we have them graded conservatively today, but that's because of the sponsors and the businesses. The sponsors are acting responsibly, the businesses are improving. If those things continue to play out on those two deals in particular, I think, we have a good chance to come in with better provisioning in the second quarter and perhaps for the year. But we don't know yet, we're going to have to see another couple of quarters and again how the sponsor and the underlying business performance.
Jon Arfstrom -- RBC -- Analyst
Okay. And that's the driver of the potential for coming in below for the full year is what you're saying?
C. Keith Cargill -- President & Chief Executive Officer
Below or coming in with a higher provision in the next quarter.
Julie L. Anderson -- Chief Financial Officer
Yes. And the same thing, Jon, you know, when we talk about migration, it doesn't mean that we think there's going to be a lot more that moved us to criticize. But within that criticized bucket, if we have something that moved from special mention to substandard, then obviously that cost more provision dollars.
C. Keith Cargill -- President & Chief Executive Officer
And we feel very solid about our annual guidance still on provision.
Julie L. Anderson -- Chief Financial Officer
Absolutely.
C. Keith Cargill -- President & Chief Executive Officer
We just think there's a chance we could beat it, but we're another quarter or two away on these two deals.
Jon Arfstrom -- RBC -- Analyst
Yes. Okay. All right. Thank you.
C. Keith Cargill -- President & Chief Executive Officer
You're welcome.
Operator
And our next questioner today will be Steven Alexopoulos with J.P. Morgan. Please go ahead.
Steven Alexopoulos -- J.P. Morgan -- Analyst
Hi, everybody.
C. Keith Cargill -- President & Chief Executive Officer
Hello, Steven.
Julie L. Anderson -- Chief Financial Officer
Hello.
Steven Alexopoulos -- J.P. Morgan -- Analyst
To start on credit, Keith, I appreciate the deeper dive into the loan book, but you could -- could you all be parsed through the increase in classifying loans this quarter, and how much was tied to you just having a more conservative view versus actual deterioration, right, if we look at leveraged C&I up $68 million quarter-over-quarter, if I look at outside of C&I leverage and energy that was up $74 million. Can you help me parse out what's actual credit deterioration in those numbers?
C. Keith Cargill -- President & Chief Executive Officer
Well, I think, actually that's what we're telling you. I think most banks though would rotate over the course of four quarters as you well appreciate and maybe cover 60%, 65% of their portfolio in a credit review. We do that as well, but we've accelerated that over the last four months, actually the last five months, to do a much deeper dive Steve, and not just on the leverage lending portfolio which we initially focused on, but more broadly across our entire loan portfolio. So what I would tell you is, it is what we're presenting, but I think we're giving you a more real time update than most banks could give you, if that makes sense.
Steven Alexopoulos -- J.P. Morgan -- Analyst
Okay. And then -- that's helpful. On the provision guidance, which I guess implies a 2Q is one of the largest provision for the year, this is first half loaded, what specifically is happening in 2Q that you'll see the most provision, are you accelerating loan disposition or something that quarter?
C. Keith Cargill -- President & Chief Executive Officer
And it really relates to these two credits I mentioned, how the sponsors continue to act and they've been responsible in supporting the businesses of late and the businesses are improving. Of course, as you well appreciate, it helps the sponsor be responsible when the business is improving. And so we need to see another quarter or two of in fact that continuing, and we're encouraged, but we're not ready to declare victory on either of those until we get another quarter or two a performance under our belt, but that's the biggest unknown about next quarter and whether we're going to have this initially projected front end loaded, namely a bigger provision next quarter than this. We're hopeful that we could come in if those two credits and sponsors keep performing as they are that we could come in more modestly, but we just don't know at this point.
Steven Alexopoulos -- J.P. Morgan -- Analyst
Okay. And then sorry to beat a dead horse on credit. But if we look at the NPAs and the increase there, I know, a lot are using energy, it's not a particular point where we're seeing other banks have an increase in NPAs on energy. Can you give more color on why you're seeing an increase there?
C. Keith Cargill -- President & Chief Executive Officer
Those three are kind of older vintage deals that we really didn't see early on any major issues with, but that's changed. And then -- and the type of deals they are, are very out of the fairway, unusual relative to our overall book. As a matter of fact, one of those two is a coal methane deal. And because of the costs involved in developing that particular asset and reserves, there was a miss. What the cost run rates we're going to be and the process haven't helped either on the gas. So that's the type of thing -- well, when Julie said, two of the three are more vintage deals, only one is something that we booked really in the last 2.5 or 3 years, one of those three, and that's a different issue. It's not something that we see as any kind of systemic problems to even the energy book, but nevertheless another lesson on you know don't do things that are not in your fairway.
Steven Alexopoulos -- J.P. Morgan -- Analyst
Right. Okay. And finally, I won't take up any more time. Is this more thorough review now completed of the loan portfolio? Is that a way of confidence we won't see criticized increase further?
C. Keith Cargill -- President & Chief Executive Officer
Well, again, that's why I mentioned that I think we're plateauing on the increase in criticized and that's what I expect and my team expects. And so I think we're about there, and we should again start to see some of these deals payoff, some refinanced. And over the course of the next couple of quarters, we're optimistic hopeful that these two larger deals that are properly provisioned or reserved today are going to play out better than we're estimating. But we still want to stay with our annual guidance on provision at this point till we have another quarter or two.
Steven Alexopoulos -- J.P. Morgan -- Analyst
Okay. Terrific. Thanks for answering my questions.
C. Keith Cargill -- President & Chief Executive Officer
You are welcome.
Operator
And the next questioner today will be Brady Gailey with KBW. Please go ahead.
Brady Gailey -- KBW -- Analyst
Hey, good afternoon, guys.
C. Keith Cargill -- President & Chief Executive Officer
Hello, Brady.
Julie L. Anderson -- Chief Financial Officer
Hey, Brady.
Brady Gailey -- KBW -- Analyst
So if you can, can you give us just a little more color on the two credits that you're -- you know, that could potentially drive a higher 2Q provisioning at another levered lending and then what sector are these two credits out of?
C. Keith Cargill -- President & Chief Executive Officer
I can tell you this. They're two completely different sectors and we have no concentration in the portfolio in either of these two industries. I can't give you more than that Brady, because again, we're involved in some pretty important discussions and work with these two borrowers and the sponsors.
Brady Gailey -- KBW -- Analyst
All right. And then Julie, you know, you told us a couple of times on the call today that we should expect the MCA yield to decrease from here, I know it has been going up, you know, 10, 10-ish basis points a quarter for the last year or so, but I think with the yield curve that obviously come down, any idea to the magnitude we could see that MCA yield decrease from here?
Julie L. Anderson -- Chief Financial Officer
The MCA yield is going to follow mortgage rates. So, as we churn what's on the books now and have new purchases, it's going to be based on that, so it's going to follow mortgage rates.
Brady Gailey -- KBW -- Analyst
And what's the delay on that? Like I know you'll keep sobbing the new seller, so it's not -- it doesn't happen immediately, but by -- when we're talking 90 days from now, should the new yield curve be fully reflective in that MCA yield?
C. Keith Cargill -- President & Chief Executive Officer
That's very close.
Julie L. Anderson -- Chief Financial Officer
Yes, that would be correct. As opposed to the warehouse and the core which all -- all of which is more times a lot more.
Brady Gailey -- KBW -- Analyst
All right. And then finally for me just an update, I know we've been talking a lot about these new deposit verticals coming on, maybe just an update on kind of where you stand on the two or three that are launched and what the balances are there and kind of how you're thinking about the rest of the year?
C. Keith Cargill -- President & Chief Executive Officer
They continue to grow, Brady. We're encouraged. We are still in the process of just launching some new ones, and the one that could be a needle mover, really won't be get fully launched until sometime in the third quarter, maybe early fourth, but we're very excited about that business, the teams with us, they're working with our technology team to build out the technology that we think will give us best of class nationally in this niche. But the others are continuing to grow, and we're optimistic, you know, that we're going to have at least four or five lenders, out of those eight, and -- but it's early, it's just so early that I can't tell you a lot more than the two that we launched last year continue to grow.
Brady Gailey -- KBW -- Analyst
All right. Great. Thanks.
C. Keith Cargill -- President & Chief Executive Officer
You're welcome.
Operator
The next questioner today will be Michael Rose with Raymond James. Please go ahead.
Michael Rose -- Raymond James -- Analyst
Hey, guys, maybe I'll move away from credit and talk about the long-term outlook, which incorporates a 3.5% Fed funds target. The Futures Curve is telling us we're not going to get there. Just wanted to see what the goals look like, should our rates remain at current levels or perhaps fall a couple of times over the next year or two? Thanks.
Julie L. Anderson -- Chief Financial Officer
The financial goals are based on no rate increase. What we had given was if rates went up, so the over 1.3% ROA, the over 15% ROCE and efficiency ratio of under 50%, that's all in the existing rate environment.
Michael Rose -- Raymond James -- Analyst
Okay. So what if rates actually decline 50 basis points or 100 basis points over the next three years? (Multiple Speakers) trying to get at?
C. Keith Cargill -- President & Chief Executive Officer
We definitely have Plan B on how we'll address efficiencies and org structure. It's not what is optimum, but it is something that we're looking at in a slower growth environment. We're not going to ramp up growth this late in the cycle, just to generate more revenue growth than we're looking at now. I mean already you know we're on target to grow net interest income around 9% this year which is, I think, quite healthy, and we're growing it with the best high quality credit mix, I think of any bank out there by having this great engine of mortgage finance. So certainly, Michael we are committed to continuing to get more efficient even with the rate scenario changing perhaps and we have plans to make that happen.
Michael Rose -- Raymond James -- Analyst
So just following up on that, what are some of the expense levers that you have, because clearly the plans you've put into place to kind of change and optimize the expense structure are kind of already in expectation. So, I guess, I'm trying to ask what are the incremental levers that you can pull? Should the deposit or should the growth rate environment and the interest rate environment go against you? Thanks.
C. Keith Cargill -- President & Chief Executive Officer
We do more faster. It's -- I'm not trying to be flippant at all. I'm trying to really answer your question. But the things that we have planned and the technology that we're able to deploy over the next year, I think, are going to give us opportunities to enable us to hire fewer and fewer new people and use the people we have with the new technology. Our existing colleagues are going to be able to create more value be more efficient in how we deliver productivity and deliver even more premier client experience.
So it's not a situation where we have a company that has lots of brick-and-mortar. We've got to go address how are we going to close a lot of this. It's not going to be a big contributor. We don't have that scenario. We have been investing proactively as you well know for three years plus to get our technology grid really in top condition. We're well down the path on that, and I think, we're going to be able to really leverage our people and continue to drive more efficient net interest expense growth, and we can accelerate that. We have that capability.
I'd rather go on the pace we're planning because there is more training and development that's important to accomplish. So if we move faster, we may kid ourself on how much more true productivity we pick up and it might compromise a little bit as further differentiating premier client experience. And that's really important that we not just do this to optimize our efficiency that we do it to improve the client experience too, but that would be the trade-off model.
Julie L. Anderson -- Chief Financial Officer
And Michael, also when you look at our -- at the current mix of our funding, obviously we have a significant amount that index deposits, so the rates start coming down. Those would come down if we hadn't onboarded some of these lower costs. So those would start to come down immediately as rates come down, and then the variable -- the variable components in non-interest expense related to deposits that I talk about, those would come down significantly also.
Michael Rose -- Raymond James -- Analyst
Okay, that's helpful. Thanks for taking my questions.
C. Keith Cargill -- President & Chief Executive Officer
You're very welcome.
Operator
The next questioner today will be Jennifer Demba with SunTrust. Please go ahead.
Jennifer Demba -- SunTrust -- Analyst
Good evening. Two questions. Were any of the downgrades in the first quarter prompted by the Shared National Credit exam (Multiple Speakers)?
C. Keith Cargill -- President & Chief Executive Officer
We didn't have any -- we didn't have any SNC downgrades, Jennifer.
Jennifer Demba -- SunTrust -- Analyst
Okay. And any interest in buybacks. I know you were asked about that in the last quarterly earnings call. Just wonder if the interest level has changed at all there?
C. Keith Cargill -- President & Chief Executive Officer
You know, again, we won't rule it out, but that is not something we're considering anytime in the near future. I mean it's not something we plan to act on anytime in the near future. We really want to be in the right position on having plenty of equity, but not get to a point where it's putting too much drag on ROE, so that's the balancing act. We still think we're fine. We're going to have a very strong second quarter with mortgage finance. And so I think you're going to see a really nice ROE.
Jennifer Demba -- SunTrust -- Analyst
Thank you.
C. Keith Cargill -- President & Chief Executive Officer
You're welcome.
Operator
And the next questioner today will be Dave Rochester with Deutsche Bank. Please go ahead.
Dave Rochester -- Deutsche Bank. -- Analyst
Hey, good afternoon, guys.
C. Keith Cargill -- President & Chief Executive Officer
Hello, Dave.
Dave Rochester -- Deutsche Bank. -- Analyst
Hey, just real quick on the deeper dive that you did in the loans outside the leverage lending and energy. Any industries pop up more frequently within those credits that when criticized this quarter or any geographic areas?
C. Keith Cargill -- President & Chief Executive Officer
No, there really haven't been. I mean we've sliced and diced it every way we could possibly think of to see if there were niches or particular industries that were you know causing more of the credit issue because of an industry, margin squeeze or something systemically we just haven't found it. I think what we have found is we've grown really, really fast. We've hired a lot of bankers. We've hired a lot of credit underwriters, we've hired a lot of credit approval people, and it was important that we really, really do what we've been doing the last year and a half day and slow the pace of growth appropriately late in cycle and dig deeper and manage more carefully, what we have on the books and then learn lessons from having grown so fast. So that through cycle, we'll have the strongest balance sheet and the lowest credit costs of other peers. And we really believe, we're doing the right things on that.
Dave Rochester -- Deutsche Bank. -- Analyst
Great. And then just switching to the new deposit verticals, I know, you mentioned more coming in the second half of the year, but I was just wondering, how much lower those costs on those deposits are expected to come in overall versus the book costs at this point? How much of an advantage does that give you?
C. Keith Cargill -- President & Chief Executive Officer
The big advantage is going to come from the third major vertical. That again, as I mentioned earlier, is going to have a much richer mix of demand deposit and also treasury fees. The first two we launched those are the primary ones we're running and growing currently. Those are largely tied to money market, right. So those are not coming in materially lower, but they're very efficient and they're marginally lower than our top marginal cost of funds. So that's encouraging, and it's creating more granularity and diversity in the funding as well.
So the big needle mover potentially is this -- this one that will really launch late third quarter. We are getting off the ground another four of these, but again these are very -- these are brand new businesses. And so until we've been out there and had a few quarters to expose the capability of our products and our teams that we're hiring to go sell these on a national brand basis, it's just too early to predict. We are highly confident with all the analysis we've done on these eight, that we'll have four or five of these, that blended are going to deliver a very nice improvement in cost of funds and certainly quite a lot more granularity.
Dave Rochester -- Deutsche Bank. -- Analyst
Yes. Great. And then I guess just on the NIM guidance I would assume you're probably not including too much in the way of deposit growth from the new verticals at this point, so probably not whole lot of DDA growth at this point?
C. Keith Cargill -- President & Chief Executive Officer
We're including almost none, because again they're just at very early stage. Now we're optimistic that by the end of the year, we'll be over $1 billion from 2018, having lost our first one early '18, our second one mid '18, and then our third major one we will launch late in the third quarter. These other four that we're just beginning to ask to get off the ground are going to be slower growth, but again lower cost and add more granularity. And we feel really good, if we create over $1 billion staggering three major new businesses over two years with no new brick and mortar, and very marginal incremental cost. We think we're doing all the right thing strategically to improve our deposit mix and our cost. But it's just early. I wish I had this third one. I wish we had all our ducks lined up a year earlier because we'd really be crowing about how nice the deposit costs were coming in, and it'd be incrementally bigger numbers along with those first two that are more money market.
Dave Rochester -- Deutsche Bank. -- Analyst
Yes. And I appreciate all the color. I guess, just one last one real quick. Are you up to your warehouse growth expectations? MCA makes a lot of sense. I was just wondering just given the increase that you have in your deposit growth expectations, is that going to be enough to fund that extra growth and just bigger picture do you think you can fund all your loan growth to deposit growth this year, is that what you guys are assuming at this point?
C. Keith Cargill -- President & Chief Executive Officer
We do. We think we can.
Dave Rochester -- Deutsche Bank. -- Analyst
Right.
C. Keith Cargill -- President & Chief Executive Officer
We feel good about our deposit growth guidance, we feel good about our net revenue guidance, we're really still solid on our non-interest expense guidance. We made a couple of adjustments sum-up, one modestly down, and we're still hopeful on the provision, but we just have to get another quarter or two on these two credits I referring to.
Dave Rochester -- Deutsche Bank. -- Analyst
All right. Sounds good. Thanks, guys.
C. Keith Cargill -- President & Chief Executive Officer
You're welcome.
Julie L. Anderson -- Chief Financial Officer
Thanks, Dave.
Operator
And today's next questioner will be Peter Winter with Wedbush Securities. Please go ahead.
Peter Winter -- Wedbush Securities -- Analyst
Good afternoon. I have a question on asset sensitivity. I was just wondering with the Fed turning more dovish, can you talk about some of the steps maybe you're taking to reduce some of the asset sensitivity?
C. Keith Cargill -- President & Chief Executive Officer
We have the advantage of this MCA business that we did not really have a meaningful business in back when we had you know the rate decline environment a few years ago. And that actually is helpful to us. It doesn't set us up for five and 10 year types of duration, but I don't think we'd be convinced yet -- we're just not convinced yet that we should be taking that kind of duration risk anyway. If we had a lot of excess liquidity and desire to start, investing in longer term assets, I think we'd be very careful. But incrementally, because of the volume growth, we've seen, Peter, in MCA, it does help us some and we also are seeing some opportunities that have developed with just owner occupied real estate.
We're not going out and aggressively seeking merchant long-term CRE debt today. We think that's a real opportunity when the market adjusts, but we think the values of real estate that we'd have to loan against the price values today, they look a little rich to us to go out and do much of a play there. But on owner occupied, we feel much more comfortable, with the underlying business generating the cash flow to pay the debt and that's not having to look quite as carefully at the fair market value the real estate, but there is not a material change in our approach to growing our asset base, but those are a couple of things that actually will help us a bit.
Peter Winter -- Wedbush Securities -- Analyst
So, no plans to put on any types of like swaps or hedges?
C. Keith Cargill -- President & Chief Executive Officer
No. We really don't want to complicate our balance sheet. I think we -- they are potential positives, but we've learned enough horror stories of those that thought they would become derivative experts on their balance sheet and we just don't think that's a complexity. We think sort of this well at this point at least.
Peter Winter -- Wedbush Securities -- Analyst
All right. And then just one more question on credit, and I'm sorry if you talked about it. But the increase in non-performing assets of $53 million, half came from energy, and I'm just wondering what if you've mentioned what the other drivers to the increase in NPAs were?
Julie L. Anderson -- Chief Financial Officer
Yes. It was -- I think, I'd said and it was predominantly energy, and there were three deals, two of which had been criticized for some time.
Peter Winter -- Wedbush Securities -- Analyst
Well, if I'm right, energy was $26 million, right, of the increase -- of the $53 million increase?
Julie L. Anderson -- Chief Financial Officer
Yes, and the rest of it was some small things, so that the bulk of it, the bulk of the bigger deals were energy.
Peter Winter -- Wedbush Securities -- Analyst
Right. But it's still another $25 million?
Julie L. Anderson -- Chief Financial Officer
Yes. Nothing else -- nothing else meaningful. Couple a smaller deals. Nothing to call out, I guess, that's what I'm talking about.
C. Keith Cargill -- President & Chief Executive Officer
You're saying $3 million to $5 million. He's trying to get a feel for where are the leverage lending?
Julie L. Anderson -- Chief Financial Officer
They were just -- it was just kind of a mixture of much smaller deals.
Peter Winter -- Wedbush Securities -- Analyst
Okay. And then...
C. Keith Cargill -- President & Chief Executive Officer
We took a deep dive on the portfolio, so we don't have as much color on that, but there aren't any big $20 million test deals that make up the balance, Peter. We don't see an industry issue with those, Julie. We thought we don't have any industry concentration and flavor to the smaller deals.
Julie L. Anderson -- Chief Financial Officer
Energy went at $40 million. Yes. There is just nothing, nothing else to call out. The three energy deals, which was I think it's $40 million total with the bulk of it.
C. Keith Cargill -- President & Chief Executive Officer
So, instead of $26 million, it was $40 million.
Julie L. Anderson -- Chief Financial Officer
Yes. Because where they went from, yes, energy non-accruals are $77 million and they were $37 million at the end of the year. The $50 million, hey -- Peter, the $50 million you're talking about was last year at this time, non-accrual for energy are $77 million and they were $37 at the end of the year.
Peter Winter -- Wedbush Securities -- Analyst
Got it. Okay, got it. Thank you. And then just one last housekeeping item. The net revenue forecasts of high single-digit. I'm assuming that excludes the $8.5 million legal settlement claim. Is that right?
Julie L. Anderson -- Chief Financial Officer
For the year, it includes it.
Peter Winter -- Wedbush Securities -- Analyst
It does include it.
Julie L. Anderson -- Chief Financial Officer
Yes, for the year.
Peter Winter -- Wedbush Securities -- Analyst
Got it. Okay. Thanks very much.
C. Keith Cargill -- President & Chief Executive Officer
You're welcome. By the way, it also includes the mortgage servicing rights adjustment that went negative. Yes, so it's offset a chunk of it but anyway.
Operator
And our next questioner today will be Brian Foran with Autonomous Research. Please go ahead.
Brian Foran -- Autonomous Research -- Analyst
Oh, hi. I just wanted to make. -- I just wanted to make sure I kind of was piecing together the long-term deposit vertical opportunity correctly. I think last year, you said eight planned verticals, each could be a $500 million or $2 billion opportunity, and it would take three to four years to kind of get there.
And then if I heard you right, this time you said you've got two live got a big one coming on soon. You feel good that at least four or five, if not more, will kind of really become meaningful over time and you'll be around $1 billion by year end. So I mean, if I put that on a blender, it's kind of the punch line that over four years there could be four to eight really successful verticals, and you know obviously the proof will be in the putting, but maybe this could be like a $10 billion total deposit opportunity.
C. Keith Cargill -- President & Chief Executive Officer
I think it's more like four to six. I mean it would be a real -- a really great outcome if we did north of six. I think it's possible, but I'm just not counting on Brian you know all eight of these hitting the median, $1 billion and that's roughly what you're looking at I think is a $1 billion to $1.5 billion on maybe all eight. We've done enough organic growth and innovative new businesses over the last 20 years where we're a little bit conservative and we just don't know brand new businesses, how well they did, how well they'll do. I think four or five of these could well hit the median of $1 billion to $1.5 billion. So to me it's more like a $4 billion to $6 billion incremental increase over the next three to four years.
Brian Foran -- Autonomous Research -- Analyst
Got it. And then, you know, your mortgage growth, your mortgage warehouse has been better than peers. There's always a quarter-to-quarter volatility. They've been better than peers clearly for a long time. When I think from the outside, looking and it's always hard to really -- whether it's Comerica, our customers or BB&T or Wells like they all feel kind of homogenous when you look from the outside. So, I mean, if you're a client or if I'm a client of your business, if I'm a mortgage lender, like what tangibly would I see quicker turnaround time, better advance rates, with the technology be better, with my relationship officer be better like, what do you think are the two or three kind of real special sources that enable you to consistently gain share over time?
C. Keith Cargill -- President & Chief Executive Officer
It really is delivering on all those key pieces that you mentioned, especially the banker talent, especially the technology, that it's not just outstanding for us here and creating scalability, but importantly, that it creates a much more user friendly, more productive and efficient technology interface on the client's desk. So that their front-line people love working with us, and we would prefer to put all their new mortgage finance notes with Texas Capital, and similarly I love working with our treasury team, they'd much rather work with our treasury people on managing their deposits than another competitor. Almost all of our clients have five or six banks involved in their mortgage finance business. So, our goal is to be sure that we give them the best client experience all the way across.
And that we also are, Brian, being innovative listening to our clients about new products as the business evolves and we've been a leader in innovating and creating new products over the last 10 years as well that our clients give us insights to and help us craft and then others tend to follow. But I think we view it as more of a strategic business partner than just purely a bank. And that's why we're
