Texas Capital Bancshares Inc (TCBI) 2016 Q3 法說會逐字稿

Good day, everyone and welcome to the TCBI third quarter 2016 earnings conference call. All participants will be in listen-only mode.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Heather Worley, Director of Investor Relations. Please go ahead.

Thank you for joining us for the Texas Capital Bancshares third quarter 2016 earnings conference call. I'm Heather Worley, Director of Investor Relations. Before we get started, please remember 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 obtain 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 subsequent filings with the SEC.

With me on the call today are Keith Cargill, President and CEO; and Peter Bartholow, CFO and COO. After a few prepared remarks, our operator William will facilitate a Q&A session. At this time will turn the call over to Keith, who will begin on slide 3 of the webcast.

Thank you, Heather. My name is Keith Cargill, President and CEO of Texas Capital Bancshares. After my opening comments on our quarterly results, Peter Bartholow will offer his view of our performance and I will close before opening the call for Q&A. Let's get started, as Heather said, with slide 3.

Q3 2016 was a powerful earnings quarter, indeed. Despite our decision to provide a higher than planned provision of $22 million, our outstanding earnings power overcame the provision, and delivered a strong 12% linked quarter entries in earnings per share, and lifted ROE to 10.2% from the second quarter ROE of 9.65%.

The provision of $22 million was approximately $6 million higher than the second quarter provision, primarily due to just under $6 million in new provision we judged necessary after receiving the SNC exam results in early October. Despite the SNC results coming in October, we chose to include the $6 million in additional provision in our third quarter financials.

Most of the $6 million of incremental provision came from an unanticipated interpretation of the revised energy loan classification guidelines by the OCC. The significant lift in linked quarter earnings for Q3 primarily came from solid growth in average LHI loans, traditional, and mortgage finance loans, MCA growth consistent with guidance, and related non-interest income from mortgage finance and syndications.

Also, non- interest expense growth in the quarter was only 1% from Q2, even though we continue building out MCA and Private Wealth Advisors. Also the significant business ramp in 2016 of SBA, franchise finance, and asset-based lending continues. Finally, the third quarter launch of a new business, public finance, will further contribute to lifting ROE and diversifying our revenue stream, and C&I loan portfolio.

On slide 4, we provide an update on our energy portfolio. Outstanding energy loans remained static at $1.1 billion in Q3 versus Q2. The allocated loan loss reserve to the energy portfolio at $65 million, or approximately 6% of energy loans. Increased by $6.5 million, net of the $1.7 million in charge-offs during Q3.

Non-accruals reached $150 million for a $25 million increase from Q2. Criticized energy loans moved to 25% versus 22% since Q2, remaining the lowest among peer energy banks today. We do remain conservative in choosing to add the energy reserves net of charge-offs in the third quarter.

And believe it is too early to declare an end to this long down-cycle until we see energy prices stabilize at recent higher prices. We're optimistic there will come a time to back off on maintaining a stronger reserve as we have today. We hope our conservatism proves to be just that, and if so, we will enjoy more relief than others on lower provisions of the future.

Slide 5 summarizes are Houston market risk real estate for Q3. While multi-family outstandings declined, overall CRE fundings on early 2015 and 2014 commitments increased. Importantly, the portfolio remains high quality with only $8.5 million of the over $800 million in special mention and $159,000 in substandard loans with no NPAs.

Slide 6, the picks are most recent Q3 geographic diversification by total loans and deposits. As you can see, both loans and deposits are greater in our national businesses than our Texas market. When adjusting for Texas clients within our national businesses, our loans and deposits are closer to a 50/50 Texas versus national geographic mix.

We also show in the upper right-hand quadrant, the most recent July unemployment rates for our five cities for four MSAs where we operate. Despite the challenges Houston has encountered with the down-cycle and energy prices, each of the remaining urban markets in which we operate in Texas remain quite strong in economic growth and modest unemployment. Now, I will hand the baton to Peter for his review.

Thank you, Keith. Keith noted the Company produced record net income of $42.7 million, and EPS of $0.87. Reflecting an EPS of 11.5% and 16%, respectively, compared to Q2 2016 and Q3 2015. Net revenue increased by 7.3% linked quarter and 20% from the year-ago quarter.

Reflecting $9.7 million increase or 6% growth in net interest income, and a 20% growth in non-interest income, again, as Keith mentioned, principally on the strength of mortgage operations, including MCA. Keith has addressed provision increased from $16 million in Q2 to $22 million in Q3. This did represent a change from previous guidance due primarily to the result of the SNC exam results received in October.

Growth in traditional LHI and total mortgage financed balances, including MCA, represented meaningful improvements in market position relative to peers. MCA made a positive contribution in Q3 and is on track and building average balances provided in previous guidance. Main deposits on an average basis grew 14%, and total deposits increased 6%. Growth in deposits contributed to the 12% growth in liquidity assets.

As Keith mentioned, loan growth was very good and consistent with guidance in Q3, compared to Q2. Traditional LHI balances grew 2.6% in Q2 or 11% year over year. Total mortgage finance activity, warehouse and MCA, combine to grow a total of $520 million.

Slide 7, the NIM review, as adjusted for growth in liquidity assets. NIM increased by 2 bps. The yield in traditional health and investment remain very good, with no significant change from benefit in fees. Yields in mortgage finance were flat and represented a larger portion of total loans at yields below traditional LHI balances.

Strong growth in liquidity assets to 17% of earning assets reduced NIM by six Bps, with a minor benefit to net interest income. Now, the total impact of over 50 basis points to NIM without an adverse (inaudible) impact on net interest income. Yield trends have actually remain favorably, especially given the magnitude of growth, the change in portfolio composition and mortgage finance and the competitive environment that still is active in our state.

On slide 8, as noted we experienced growth of 3% in average DHLI balances, representing very solid growth and consistent with guidance. TCB maintains a very strong position on mortgage finance businesses. This [patience] sold in this quarter increased to $1 billion at quarter-end, and averaged $880 million for the quarter.

Outstanding commitment of $1.5 billion at the end of the quarter, compared to $1.2 billion. It's important to note that we are effectively managing much larger mortgage finance portfolios. Over $6 billion in total loans while limiting concentration on the balance sheet and improving our capital efficiency.

Growth and deposits, on slide 9, was again exceptional during the quarter with over $1 billion increase in average DDA balances. [Funding] costs in terms of rate were down slightly due to the growth in DDA, and the aggregate cost of deposits with low branch strategy provides very favorable spreads even without an increase in short-term rates. The growth in traditional held for investment, mortgage finance loans, and DDA balances, the degree of asset sensitivity increased in Q3.

Slide 10 puts respect to comments Keith made about non-interest expense. We grew less than 1%. [Trends] improved especially with [Core Bank], excluding the impact of MCA and the expansion of other businesses since 2015, expense trends are more favorable, actually, than the 1% linked quarter growth shown.

We experienced meaningful improvements in operating leverage, with the rate of growth in net revenue exceeding that of the growth in non-interest expense. All this produced an efficiency ratio of just under 52%, build-out expense relates to the expansion of key business initiatives will be more significant in Q4.

We also expect the MCA contribution to increase, and we could benefit from strength in Q4 activity from traditional health and investment lending, offset potentially by seasonal weaknesses in warehouse lending activities.

Slide 11, we saw an improvement in both ROA and ROE, better non-interest expense trends, even with substantial increase in the provision. We believe our continued -- continue to believe our results demonstrate the opportunity for significant improvement in coming quarters.

Turning to slide 12, our outlook for the remainder of 2016. Traditional held for investment loans is unchanged. We saw limited growth going into Q4 from Q3, which in Q3 does demonstrate historically some seasonal weakness.

Before what can be strength over the course of Q4, continuation of relatively high level of general paydown activity experienced in 2016. Growth in mortgage finance loan balances in Q3 is consistent with expectation. Seasonal trends confirms previous guidance. We were successful in managing portfolio concentration.

MCA will be a bigger contributor in Q4 with average balances expected to exceed $300 million for the year, compared to a year-to-date average of $237 million. There is no way reliably to predict the extent to which the MCA growth could offset any weakness in warehouse lending activity in the fourth quarter. We have no change in the guidance on total deposits, but the continued improvement in DDA composition is obviously beneficial.

And average balances from liquidity assets have grown substantially and are likely to continue at least a modest pace of growth from here. The outlook for core NIM has increased, reflecting the fact the year-to-date performance has exceeded the guidance previously given. So, before the impact of liquidity assets, we are now at $3.60 to $3.70 and Q3 we were at $3.68 and flat with Q2.

We did see a minor benefit of the increase in LIBOR, offsetting the growth and the effect of mortgage finance portfolios. Most of that benefit occurred in the last half of the third quarter. Reconfirming guidance for reported NIM with a range of 3% to 3.2% remains wide due to the high variability in the level of liquidity assets. The outlook for net revenue NIE efficiency ratio are reconfirmed.

The ratio just under 52% increased -- excuse me, in Q3. The reversal of the MCA loss and a reduction of expense growth improved operating leverage, as previously noted. Core Bank before the effect of MCA and other initiatives was performing extremely well. The first full quarter of other new business initiatives will have an impact on Q4 in noninterest income.

Even with some increase in Q4 efficiency ratio, the guidance of low to mid 50s should hold. Provision in Q3 reflects the effect of the SNC exam as Keith mentioned. Received in early October has been the principal difference in the increase in guidance to the mid- 80s range. Keith?

Thank you, Peter. Please turn to slide 13. Asset quality remains sound, despite the continuing challenge of NPAs largely concentrated in energy loans. Of the total non performing assets of $188 million, $150 million are energy loans, up $25 million since Q2.

Our hope and expectation is that we will resolve overall energy NPAs more favorably than the currently reserved position. But in the meantime, we accept the more conservative move to reserve for the new SNC results. Net charge-offs in Q3 were $7.4 million compared to $12 million in Q2, and $2.3 million in Q3 2015. Nonperforming loan ratio is at a manageable 0.96%.

I will close with slide 14. The primary story in Q3, for my view, is about the core earning power Texas Capital is building. Even with the SNC exam news and related incremental provision, growth in average loans, demand deposits and non-interest income were extraordinary, while non interest expense growth was much lower, resulting in the 12% linked quarter entries in earnings per share.

The success we have achieved in increasing our participations in mortgage finance moderated the surge we always experience in month-end fundings. But the offsetting high growth in our MCA fundings continues to improve our risk-based capital efficiency, and lifted the MCA profit run rate each month in Q3.

It remains possible, although challenging, that the trajectory and profit run rate in MCA might offset all, or certainly most, of the start-up loss we experienced in this new business for the first half of 2016. The usual seasonal headwinds from mortgage finance in Q4 will present a challenge but we believe the offsetting growth in MCA will help us continue to deliver healthy core earnings ahead.

We expect the energy loan migration to diminish in Q4, and believe we are well reserved for losses as they materialize. Due to the up-tick in provision this quarter, we are changing guidance for full-year 2016 to the mid $80 million level from the mid $70 million level, as Peter mentioned. We also are increasing our guidance on net interest margin to $3.60 to $3.70 excluding the effect of liquidity assets, a positive move.

Each of the four new lines of business are progressing through their earlier rampup stage with staff ads, technology, and prospecting. We're pleased with the progress we're making in lifting ROE from existing businesses, with efficiency initiatives and technology integration.

The improved non-interest income contributions from the four new lines of business, as well as MCA and Private Wealth Advisors, offer higher ROE risk adjusted returns than most of our existing businesses. They will help us drive a higher sustainable ROE, overall, as these businesses developed through 2017 and beyond. I will now ask William to open up our call for Q&A.

Thank you, sir. We will now begin the question and answer session.

(Operator Instructions)

Brad Milsaps, Sandler O'Neill

Good afternoon, guys.

Hello, how are you?

Good. Peter, curious if you could expand a little bit more on the deposit growth this quarter, particularly the DDA growth? Kind of curious if you could talk a little bit more, maybe some of the origins of that? How much of it could be just related to the mortgage business, or is it more diversified?

Just trying to get a sense of where the liquidity can go particularly in that area?

We have enjoyed really good growth in the mortgage finance organizations deposit contribution. MCA is now beginning to contribute in a more meaningful way. It is broader than that.

We have very effective Treasury management focus on a whole range of kinds of customers, and for competitive reasons, we are not prepared to isolate the individual components more than that.

Okay. And maybe one follow up. Keith, just on the loan growth this quarter, I appreciate all of the guidance. Just curious, what you saw this quarter in terms of the -- I know you talked some about paydowns, curious to how much you guys were pulling back versus demand in the market?

Any additions color you have around what you saw with what loan growth, maybe being not quite as strong as you'd seen in previous quarters, but still very healthy?

It was some natural paydowns that are occurring with some of our energy book, Brad. Some of these PUDs, these proven undeveloped leases that our clients have that we gave virtually no value to in our loans have become quite valuable again, if they are Permian Basin, especially. We actually saw a very couple of very large payoffs as energy book from the sale of those PUDs.

We also had a couple of private equity clients that we had financed portfolio companies for and they sold those companies. I don't see anything systemic going on, except, perhaps, the PUD sales. We got a plus side to it too in that the values are coming back in the market. And we did pick up a couple of very nice new energy credits.

It is really well structured and, again, the market is different today, certainly, that it's been in two or three years. We are very pleased with some of the new opportunities we are picking up, but they were quite as large as the paydowns that occurred from the PUD sales.

Great, thank you, guys.

You are welcome.

Our next question or today is the Ebrahim Poonawala, Bank of America.

Good afternoon, guys.

Hello, Ebrahim.

A follow-up in terms of, you mentioned the seasonal spend in traditional NHI going into the fourth quarter? I'm wondering if you could remind us, what bucket that seasonal spend we should expect in? Also, Keith, last quarter you talked about business as being a little bit cautious, sort of looking into the back-half of the year?

What is the sentiment like in terms of borrower demand? Are we already seeing signs of that maybe picking up, going into year-end into 1Q 2017?

It's almost like our clients in the last 30, 45 days, have really gone quiet with initiatives that would be outside the normal, Ebrahim, working capital borrowing that they do, third through fourth quarter. And I don't know if this election is having any effect, but it may be. There's just a lot of angst about what to do next.

I do think some of this will kick back in, perhaps, in the fourth quarter, but we are not seeing a big build in pipeline that we normally would on C&I right at the end of the third quarter. The good news, though, that I think will really help us quite a bit but it's early, are these new businesses that we launched in 2016, and the new initiatives.

Public finance is a brand-new initiative -- brand-new business. We picked up a great team of three people. And that literally just launched during the third quarter, and we're excited about what that might do for us.

And that would take some period of time before they get the bookings and are actually on a profitable run rate, but all indications are is that will be profitable, and a very, very quick payback on the negative cash flow to start that business up. We think that might happen within a couple of quarters, if not even sooner.

So, we are very excited about that new business we just launched in the third quarter and that might give us some outstandings we haven't had in the past. And of course, as you know, SBA, franchise finance and also our asset-based lending are major ramp ups, much smaller, more modest businesses that we've had. We have a nice book of business with franchise finance but we brought in some additional real outstanding talent to lead an effort so that we can drive this throughout all of our five cities, this opportunity in this niche.

And also over time, take it nationwide, as a nationwide footprint business. Similarly with asset-based lending, we picked up that fabulous team back late in the first quarter, that we brought over from JPM. They are just doing a great job, and they've got everything synced up, teed up, on updated policies, technology and so on. So, we see some fundings that are going to happen here this fourth quarter in aggregate.

So, all in all, we don't have the pipeline that we might have in some years because of some of this angst with the client base and a couple of these odd portfolio payoffs, and certainly, as I mentioned, some of the energy paydowns that are occurring. But we feel pretty optimistic that it's going to come on later in the quarter.

Understood. And just, I think separately moving to, as you mentioned some of the businesses? When you think about sort of the operating leverage bit from the investments we've made in 2016 and even some of them in 2015, should we expect that the efficiency ratio that has been in that 54%, 55% range, is that sort of steadily going lower, even if we don't get the lift from higher interest rates because of the kind of mix of growth going forward? Or is that taking it a bit to far?

I think these are going to be very attractive businesses. There just still in the early stage to get the revenue built up. But they're not going to have any meaningful significant incremental costs.

So the operating leverage should be excellent in each of these, and it's not a situation at all like MCA, as an example, where it's quarter-after-quarter to really ramp the staff, the technology and so on. These are much quicker starts and should be much quicker payback.

Now, we could see in fourth quarter and first quarter, some of that build-out, again, cause a little bit of a lift in that efficiency ratio from where it was this quarter. I think Peter alluded to that. But I think as we get into 2017, we're going to get a nice pick-up in efficiency and overall productivity and profits because of these businesses.

Understood. Thanks for taking my questions.

Goodbye.

Michael Rose, Raymond James.

Good afternoon, guys. How are you?

Good, Michael.

Circling back to energy, I understand the SNC exam results, but as I look at your portfolio its mostly production based, obviously oil has jumped out over $50. If it stays near this level, you guys have a pretty healthy energy reserve given how low your classifying levels are at this point? Could we expect to see if oil stays near these levels, much lower level of provisioning next year?

Certainly would be the case on energy portfolio. We don't see any major clouds on the horizon otherwise, but we are just conservative, as you know. The way we approach credit has always been, be careful on quality, but also be awfully cautious when it comes to unknowns.

In this election, but also the fact we are into our eighth year of a recovery, I know we've been early, relative to other banks talking about things like pulling back on CRE early and multi-family even earlier than that. And then also our concerns about when a recession comes.

Statistically, each quarter that goes by we get a little bit closer to that 10-year economic recovery wall, if you will. Maybe this will be the first time ever we will have a recovery longer than 10 years, but we are not betting on it. We are going to go with the baseball statistics and we think we win more doing that.

And what we be conservative on growth in these areas and also in our reserving and provisioning. But I do think your point is right on and we believe we are very, very reserved on energy. And we aren't seeing the same migration challenges as we move into the fourth quarter. So, all other things holding up well, I think, we will tell you more in January about our guidance on provisioning next year.

It just seems the reserve is 141, 140 basis points to LHI; that's where it was back in 2002, 2003. I know its a long time ago, you're a different bank now: much bigger -- it seems like if general credit holds, there could be room for some fungibility in the provision as we move forward?

Michael, relative to other banks, we think you are right. We just don't want to be more specific than that.

Fair enough. And as a follow up, seems like obviously on a PRN basis, the MCA business did really well. As we think about the MCA business into 2017, could this be -- I know its early and you may not want to give guidance, but could this be a billion plus on average balance business in the next couple of years?

As I mentioned, in January, we're going to keep you in suspense until January, but we believe it should potentially be that kind of business.

Obviously, Michael, the pace of growth is improving. We are signing a lot of new customers in order to get to the $300 million plus for the full-year, it certainly implies very strong level of activity in Q4.

Without getting specific -- it's also important that at quarter-end it reached just under 12% of total mortgage finance loans, and that's with the minor surge, the managed minor surge that happened in the warehouse. So, it is demonstrating already the capital efficiency that we talked about, and that will increase in 2017.

It should be better than $1 billion on average, we just don't want to get too specific until we have more visibility. It's such an early high-growth business, and I do think we can give you much better guidance in January, Michael.

Understood, and one final one for me just on the expense line-item salaries. Obviously stock was up prematurely for the quarter? What kind of impact did that have on compensation costs? As it had historically, if you could remind us of the sensitivity? Thanks.

That by itself was several hundred thousand dollars, but there were some offsets. We have to estimate at the end of every quarter, where we are, relative to performance metrics that fund. The net of that was actually a very small benefit.

Our incentives are driven more by our profits and ROE relative to our plans, and we want to be really aligned on incentive comp with what shareholders want -- profits and ROE.

Great, thanks for taking my questions, guys.

You are welcome.

Brady Gailey from KBW.

Hi guys.

What's up, Brady?

Keith, maybe you could expand a little bit on the extra $6 million provision related to the SNC exam? I think I heard you say something about unanticipated interpretation of the SNC exam? Was the $6 million related to your typical SNC results? Or was there something special going on here?

It really relates to -- and I don't want to get into to much detail, Brady -- the new energy guidance that we were given on how energy credits were going to be classified going forward, and there are certain aspects to that guidance that we believe were intended, initially, to be not any one that was trigger, any one of those bullets under the guidelines that would be triggered would automatically cause a new classification issue. And we happened to have a credit, meaningful credit and some others, as well that were syndication SNC credits where it appears to us that we tripped one of those bullets, and that, globally, as you look at the credit, as was suggested in the guidance, there are some very strong mitigants that would cause it to not have required a downgrade.

Namely, very low advance rates on net present values on the reserves, very extensive long hedging in place, et cetera. But it appears that is evolving on how they're going to interpret those new guidelines, and we're just going to have to get up to speed and have some conversation and better understand that. But we really didn't have time to go down that path before earnings and we thought it better to be conservative and go ahead and address an incremental reserve.

Okay, I got you. You've taken the $6 million provision to get ahead of it? Were those classified actually -- are those potential classifieds moved to classifieds in 3Q? Or that's a little up in the air and you will figure it out later?

It's a mixed bag. We really do think it's better to recognize it now and not wait until fourth quarter. Since we got the news early enough, we hadn't closed out our books as some banks may have, that reported earlier. We decided it better to address it in third quarter.

All right, and then, Peter, LIBOR was up a little above one-month and three-month were up a little bit. I know you guys are heavily tied, especially one month LIBOR. Did that have any impact on the margin in 3Q?

Yes it did, but most of it happened as I mentioned in the last half of the quarter. The cycle through didn't really hit as much until September. So the run rate through the end of the quarter was better than the quarterly average.

Okay. And then lastly, can you update us, where are you guys on CRE to capital? What's the ratio?

It's well under the 300% guideline, Brady.

Great, great. Thanks, guys.

You are welcome.

Jennifer Demba, SunTrust.

Thank you, good afternoon.

Hello, Jennifer.

Peter, can you talk about what you are expecting from mortgage finance? You kind of said you think the MCA is going to offset some of the seasonal decline in the mortgage warehouse? Can you give us a little more color on that and what you are expecting in terms of --

We are having trouble hearing you --

Jennifer, we just always expect seasonal weakness in the warehouse. Rates remained low, so we can't -- there's enough activity. As I said, we've laid off $1 billion in loan and participations.

As volumes come down, they come down in that component, as well, so we get a little bit of a buffer, but it's just too early to predict what the average will be over the course of the fourth quarter. On MCA, that volume is still building. What we don't know is whether the linked quarter changed there will be sufficient to cover the linked quarter reduction in the warehouse.

Fourth quarter will always going to have that reduction, Jennifer, as you know, in normal years, unless there's an outsized refi bubble which we've had a year or two. But last year, it became more traditional seasonality, and even though it affects to some degree the MCA business, it's so modest because of our ramp. It's an early-stage growth business.

We are confident MCA will grow nicely in the fourth despite the seasonality, but we just never know on mortgage finance how much of an effect -- I will tell you the tick up recently toward the end of the third quarter on rates is not helping applications.

We know there's going to be a little headwind there too, not just seasonality on purchases, but also rates ticking up just a bit. That takes some of the more modest refi we have relative to other banks, but it takes some of that volume out of the equation as well.

We also always have pending applications and commitments to new customers that reflect further changes in market share. It's just too early to predict how those will affect the quarter's volume.

But we do have a very nice pipeline, as Peter suggested, new clients that want to onboard with us.

In both categories.

In both categories. Of which we could be more (inaudible - multiple speakers).

Separate question, how does the hiring pipeline look these days relative to say, six months, nine months ago?

The hiring pipeline looks very, very good. We've added some outstanding talent. We don't have as much need that we see visibility-wise as we had the first half of the year through the third quarter. We added several people in the third quarter.

In fact, we added, I guess, nine RMs and two regional execs when we brought on our new regional Chairman and Regional President in our Fort Worth market. We are very excited about them joining us. But, we also had a couple of exits, so net I guess we had about six RMs added and then the two new regional execs, as well. Going forward, the pipeline looks great.

There are always people that are just so outstanding, Jennifer, we are willing to find a way, but we don't have the need even in the new businesses quite the level or pace. We got a lot of the positions filled out in Private Wealth Advisors. Several of those hit in the third quarter.

One of the reasons Peter mentioned this build-out continues and that we will have a full quarter of run rate on some of the build-out is Private Wealth Advisors, some of the people we added here. We're so pleased with the talent we are bringing on. And of course, as I mentioned earlier, all three of our public finance, our new business, all three of our public finance professionals joined us in the third quarter.

And it wasn't at the very beginning, so that would be a full impact in the fourth. Yes, the talent pipeline, which is so critical to our organic growth model has never been better.

Thanks so much.

You are welcome.

Scott Valentin from Compass Point.

Thank you for taking my question. With regard to capital levels, you've finished the quarter 7.5% TC ratio? Just wondering, obviously it reflects the mortgage finance business, but wondering how you think about capital going forward?

Scott, we're feeling very good about it. We've been very successful as commented on the improvement in the surge in the quarter-end levels of mortgage assets. The shift that's coming in MCA is a net positive. We have an improved ROE.

We built a very strong reserve position relative to what we think is the actual exposure to loss. We just feel like things are properly structured. Much of the lower ratios that we have in some others might reflects the fact that we don't have securities. We have a mortgage finance warehouse portfolio that demonstrates an arguably much better risk characteristics. And profitability characteristics in a portfolio. So, adjusting for the effect of the 100% risk rate in that asset class, were actually much stronger in an operating sense, and a way that protects shareholders in the event of economic weaknesses.

Scott, I might add too, our new SBA ramp-up, as well as our public finance business. And then, finally, the ramp-up of our private wealth advisor mortgage business, all of those have much lower risk-based capital requirements than our typical C&I or traditional mortgage warehouse. So it's not only MCA that's growing very strongly with a much more efficient capital structure, but these new businesses and ramped businesses. Also, most of them offer an advantage in risk-based capital.

Thanks. One follow-up question just on credit quality -- based on the presentation of $166 million of nonaccrual loans, $150 million roughly is energy-related?

That's right.

Ex energy, then, credit is very strong?

It really is. I mean, if you look at us with the kind of reserve we have against energy, with the classified criticized number at only 25% relative to other banks in the energy category, and again, a 6% reserve allocated to energy, that's solid, so we've got great solid balance sheet relative to energy.

And then you look at our nonperforming ex energy, we are in very good shape.

We also have an unfunded commitment level that is low, especially with respect to the amount to which we would be exposed to a criticized if funded against the unfunded commitments. That remains less than $10 million at the end of the quarter, and has actually not changed in three quarters.

Okay, thanks very much.

You are welcome.

John Moran with Macquarie.

Peter, the $10 million you just referenced, that's classified, right?

No, that's the amount that would be criticized if drawn under unfunded commitments. Much of the exposure in the industry is actually to the unfunded commitments and ours are lower than industry standards or averages. And the amount that we'd be required to fund our agreements where there's not a default that would actually be criticized when funded is less than $10 million.

Okay, I got it. Thank you for that. Two other ticky-tack ones for you. One is just on the warehouse.

If I plug it into the guidance, I've got to really sort of drill the average balances in 4Q, much worse than what you guys would see in terms of normal seasonality. And I know it's running high because of refi, we're into a little bit of a refi boom or whatever and things are slowing down here early in the quarter? Could you remind us what was purchased versus refi? And is it really going to come down that hard? Perhaps down 20% in 4Q?

Yes. The purchase was over 60%, and the refi was in the high 30%s.

Average during the quarter.

RIght.

Okay and then is my math right? It has to come down almost 20% to hit the low single-digit percent growth and is that based on what you are seeing so far out? I know it's early on.

We haven't re-tested that number the way you describe it, but remember the volumes were quite low in the first quarter. We are talking about full-year average to full-year average.

Okay. Got it. And the only other kind of housekeeping one for me was, just if you had [handy in a sub the Q just hit], but if had the SNC balances and what you guys' agent did versus non-agent?

We are right at $2 billion on our SNC portfolio. We agented it at about $500 million plus, very close to the 25%. That was up a little for the mix of agent.

Perfect. Thanks very much.

You are welcome, John.

(Operator Instructions)

Peter Winter, Wedbush Securities.

Good afternoon.

Hello, Peter.

If I look at the reserve to loan ratio, given that it is at a good level and the credit outlook is pretty good with the stability in energy, I'm just wondering, going forward, would you let that ratio trend a little bit lower? Or is it the idea to think about that ratio commensurate with loan growth?

We're going to always be providing against loan growth and because we are a much higher growth company than our peers, you do have that provision that comes with our business model and our ability to grow, Peter. But, that ratio is just going to be a function of how we resolve these energy credits to a degree.

And we are confident and hopeful that we will be able to resolve them at levels, hopefully, not only below but well below what we have reserved today. But the uncertainty about a commodity price stability issue is such to us that we want to see that the price is in the $50s and in the range of $3 on gas stay there for a period of time before we begin to get more confident than we think we should this early into the process being elevated.

So, we want to get past November, and see a few more months of stable prices in the $50s on oil and around $3 on gas before we're going to think much about adjusting reserves for other than just offsetting losses that are going to be realized, and again, losses that we think will be more modest than reserves we have set aside at this time.

I'm not sure I can help you a lot with your analytics on that, but it's a timing thing. With most of our issues in the energy portfolio, that dynamic is going to have to play out over the next two or three quarters before you have as much visibility on reserve level as maybe your trying to accomplish there.

Okay, that's helpful.

Just a follow up, the fee income came in much better than what I was expecting, and, obviously, there's volatility between quarters. I'm just wondering, is some of this level a good run rate going forward? Like for example, the service charges on deposit have been having nice growth, and the brokered loan fees as you expand the mortgage business. I'm just wondering if this is a good level to use going forward?

Yes, we think it's a building and growing category for us. And that's been a strategic emphasis the last year and a half, is as we build-out these businesses, the new ones, and the ones that we are really ramping, that they be businesses, Peter, that offer a higher ROE than our average overall of our existing businesses.

And that's certainly true in MCA, as was the case with the income component in traditional mortgage finance. But now MCA is even more capital efficient than traditional mortgage finance. We also are seeing a pickup as we begin to bring on board some of the Private Wealth Advisors. That's going to be more modest.

But again over the next two or three years, that's going to be an increasing lift, and we are optimistic that our Treasury fee income is going to continue to be an increasing number as well.

My last question, just, can you remind us with the December rate increase last year, how much that benefited the margin in the first quarter, and if we do get the December rate hike, what the benefit could be for the first quarter margin in 2017?

Peter, just over $4 million.

And would you expect kind of a similar level with this December rate hike? If we got it?

Similar, but possibly a little larger. It's a little uncertain and so much depends on timing of where we are and what moves and how far LIBOR moves either in tandem or ahead. We have had some of that move already and may not give a full additional move in LIBOR.

We do have lower floors.

We have a lower level of loans that are still subject to floors. That number has fallen from a year ago about $3 billion to $2 billion today, a little over $2 billion. That's down about $300 million since June 30.

Great. Congrats. Very solid quarter.

Thank you, very much. We are pleased.

This will conclude our question-and-answer session. I would now like to turn the conference back over to Keith Cargill, President and CEO, for any closing remarks.

I want to thank each of you for your time and interest in our Company. We are very pleased about the strong effort so many of our people have made across the Company, and I want to recognize all of them. So many of our people that make it happen internally for our client-facing personnel, and the expertise they bring to bear really enables us to deliver special value to the market, and continues to build our reputation, enabling us to attract better and better clients, and also increasingly better talent.

I just want to thank all of our people for their contribution they make. They are each very important to our success, and we thank each of you for listening in and following our Company.

This concludes our call today. Should you have any follow-up questions, please call Heather Worley at (214) 932-6646, or e-mail her at heather.worley@texascapitalbank.com. Thank you all for attending today's presentation. You may now disconnect your lines.