Texas Capital Bancshares Inc (TCBIO) 2015 Q4 法說會逐字稿

Good afternoon and welcome to the Texas Capital Bancshares, Inc. fourth-quarter 2015 earnings conference call.

(Operator Instructions)

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

Welcome to the Texas Capital Bancshares fourth-quarter and year-end earnings conference call. I'm Heather Worley, Director of Investor Relations. Should you have any follow-up questions, please call me at 214-932-6646.

Before we get into our discussion today, I would like to read the following statement. Certain matters discussed within or in connection with these materials may contain forward-looking statements as defined in federal securities laws, which are subject to risks and uncertainties and are based on Texas Capital's current estimates or expectations of future events or future results. These statements are not historical in nature and can generally be identified by such words as believe, expect, estimate, anticipate, plan, may, will, intend, and similar expressions.

A number of factors, many of which are beyond Texas Capital's control, could cause actual results to differ materially from future results expressed or implied by our forward-looking statements. These risks and uncertainties include, but are not limited to, the generation of the credit quality of our loan portfolio, the effects of continued low oil and gas prices on our customers, increased default and loan losses, the risk of adverse impacts from general economic conditions, volatility in the mortgage industry, competition, interest rate sensitivity, and exposure to regulatory and legislative changes. These other factors that could cause results to differ materially from those described in the forward-looking statements, as well as the discussion of the risks and uncertainties that may affect Texas Capital's business, can be found in our annual report on Form 10-K and other filings made by Texas Capital with the Securities and Exchange Commission.

Forward-looking statements speak only as of the date of this presentation. Texas Capital is under no obligation and expressly disclaims any obligation to update, alter, or revise its forward-looking statements, whether as a result of new information, future events, or otherwise.

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

Thank you, Heather. Good afternoon. We welcome you to our fourth-quarter 2015 earnings call. After my initial comments, Peter Bartholow will share his review, and I will close our presentation before opening the call for Q&A.

Let's begin with slide 3. We delivered healthy traditional LHI growth, with a 3.5% linked quarter increase, an 18% increase from Q4 2014. Although expected, the seasonally soft fourth quarter in mortgage finance showed a decline in average loans, largely offsetting the solid growth in non-mortgage financed LHI.

Demand deposits were up 2% from Q3 and increased 34% from Q4 2014. The Texas Capital organic growth model remains strong. While earnings for Q4 were good, the continued build-out expenses of mortgage correspondent aggregation and private wealth advisors weighed on the quarterly earnings, along with the soft quarter in the traditional mortgage finance. Also, the increase in nonperforming loans, primarily from our energy portfolio, added to the earnings headwinds.

Despite these challenges, we showed quarterly earnings per share of $0.70, down slightly from $0.75 in the third quarter, when mortgage finance is seasonally much stronger, and NPAs much lower. Underlying core earnings power continues to grow as we deal with energy and build-out costs.

For Q4 and the year, we recorded net charge-offs of 7 basis points and 10 basis points respectively. We believe Texas Capital continues to build on our reputation as a top-performing credit quality bank, as evidenced by modest loan losses in 2015. We remain dedicated to disciplined underwriting, even when faced with overly aggressive market competition and insist on diligent portfolio management, requiring early identification of problems and prompt, thoughtful action to mitigate losses.

On that note, let's move to our energy update on slide 4. I will begin by noting that of the 10 basis points in loan losses in 2015, we had no losses in energy. The discipline our energy and credit teams demonstrated in 2013 and 2014 resulted in Texas Capital making relatively few new energy loans during the two years preceding the oil price decline. Essentially, our dollars outstanding of energy loans were flat for three successive years.

The competition for energy loans in 2013 and 2014 appeared irrational to our bankers and credit officers. In hindsight, this proved to be true. While we continue to see energy loans migrate to classified and nonaccrual status, thus far our energy clients have worked very hard to reduce costs and pay down their loans with us. Because we also chose to avoid loans to energy service companies that are closely involved in drilling and completion activities, we have reduced credit exposure outside of E&P reserve-based clients.

Thus far, we have experienced no charge-offs. Our E&P clients are better protected from the price decline because 73% of our oil clients have accretive hedges in place throughout 2016. Also, our E&P clients were selected by us, in part due to their oil production, exhibiting on average a long half life of over six years.

A long time horizon on their oil production provides a reduced risk of price decline cycles. We have a direct client relationship with the majority of our energy portfolio clients, as opposed to SNC loans. Our clients are experienced operators and understand the importance of hedging, developing long life production, and moving quickly to reduce costs in a price decline cycle.

By working with our bankers, the energy clients have not avoided the problems from this precipitous price decline, but have thus far remained cooperative and diligent in navigating the challenging environment, resulting again in no charge-offs to date for Texas Capital.

To update you on recent developments with our E&P clients, we are now seeing operating cost declines show up across the portfolio. Recently, these lower operating expenses have offset to a degree the impact of lower revenues from price declines.

It takes months for these costs to be lowered and evidenced in the income statement so that we are able to give value to the cost reductions. Through the most recent redetermination analysis, relatively little credit for cost reduction was allowed, but it should have a significantly more positive impact on borrowing base values in the upcoming spring redeterminations.

Let me give you a quick update, too, on what's transpired with our energy commitments and outstandings since the redeterminations. Commitments have dropped $180 million, or 14%. Outstandings have declined by $137 million, or 15%. We have found new opportunities that are excellent and underwritten to today's environment that total $121 million in new commitments, and $99 million outstanding.

Now let's talk a minute about the details on our energy performing and nonperforming credits. Energy non-accruals have increased to $120.4 million. Criticized and classified, energy loans total 17% with 11% classified. Risk grade migration is expected to continue.

We believe the reserve for loan losses at above 3% of our loans directly exposed to commodity price risk is an appropriate and adequate reserve at present. As you will see in our 2016 guidance, we plan to continue building our reserve at an elevated level of provisioning.

Now please refer to slide 6, titled Houston Market Risk Real Estate. Two activities caused a $65-million increase from Q3 to Q4. First, we financed a multifamily project for $37 million that was completed and had reached stabilized lease-up. This loan will likely be sold or refinanced and paid off during 2016.

Second, the balance of the $65 million increase was simply continuing advances on CRE projects under construction. You will note that we have had $9.2 million in Houston CRE move to pass -- from pass, rather, to special mention, and $281,000 downgraded to substandard. Apparently, we have no Houston market risk CRE in nonaccrual status.

While Houston CRE remains under close oversight, we are pleased with the current health of the portfolio at present. Overall market intelligence indicates industrial and retail CRE remains strong in Houston. Office and multifamily appear to be softening.

Single-family housing remains strong at an inventory of only three months' supply. However, home builders are being cautious moving into 2016 and anticipate softening demand and less new home construction. Net new job growth in Houston of over 21,000 during 2015 is expected to continue at a similar pace in 2016.

Turning to slide 7, we'll give you an update on our first 90-plus days since launching the mortgage correspondent aggregation business, or MCA. We launched this new business as we entered the seasonally soft fourth quarter for our mortgage banking clients.

Always enjoying a new challenge, we also encountered the rollout of the new federal mortgage regulation known as TRID. Essentially, TRID put in place new disclosure requirements for consumers closing on a mortgage. As anticipated, the new TRID requirements created a significant slowdown in mortgage volume and an increase in mortgage defects, both contributing to a slower volume build in our new MCA business.

As with all new business launches, we've also been busy eliminating technology bugs we missed in the pre-launch testing. All in all, we are very pleased with the quality of the mortgages we are purchasing and the steady improvements and efficiency we are achieving. Having focused during the initial launch phase on mandatory mortgage products, we are now targeting later this quarter to initiate buying best efforts mortgage volume. The new best efforts mortgages should offer more attractive profit margins than solely buying mandatory product.

Finally, we expect to reach a profitable run rate in MCA late in the second quarter or early in the third quarter of this year, with a net earnings contribution in the last half of the year. Not only will MCA improve the overall capital efficiency of the combined mortgage finance business, it is expected to be highly profitable, as we improve its operating efficiency and volume. Peter?

Thank you, Keith. As we mentioned, the Company produced record net income of $145 million in 2015. It was driven by strong growth in traditional held for investment loans and strong volumes in mortgage finance activity, more than offsetting the impact of the $31-million increase in the loan loss provision.

We saw an improvement in operating leverage, despite the continued build-out of MCA and wealth advisors, along with the increased regulatory costs. EPS increased slightly after the full effect of the 6% dilution from stock offerings completed in 2014.

As Keith mentioned, in Q4 we earned $35 million, or $0.70 per share. We saw growth in total loans of just 1% linked quarter and 15% year over year. We experienced slightly more growth in traditional held for investment volumes than the reduction experienced in mortgage finance. We saw in mortgage finance a seasonal reduction compounded by the impact of change in regulation; it created backup in volumes until late Q4.

In Q 2015 and in Q4, we experienced very strong performance, clearly outperforming the competition during the year. The slow build in MCA balances that Keith mentioned results from delayed startup and the impact of changing regulation.

Year over year, we experienced an increase of more than 16% in both net interest income and net revenue. Net interest income and net revenue were flat with the third quarter of 2015 and up 11% from the year-ago quarter. We had a loss of $2.7 million in MCA and a more significant impact in Q4 than we had anticipated.

Deposit growth and improved composition will provide significant benefits during 2016. Asset sensitivity increased with meaningful future benefit from the rate increase in December of 2015.

Liquidity assets increased from an average balance of $444 million in 2014 to over $2.7 billion in 2015. That had an impact of 45 basis points on NIM, with a minor increase in net interest income. Up more than 20% were liquidity assets from the third quarter of 2015, reaching $3.5 billion average balance. That had a quarterly impact of 10 basis points in net interest margin, representing substantially all of the link quarter change.

Obviously, the level of liquidity assets has had a big impact on ROA. Adjusted for the growth in liquidity assets, we reported 90 basis points in 2015. That's despite 140% increase in the provision for loan losses year over year.

Year-over-year growth in DEA was $2.3 billion, or 54%. That level of dollars exceeded the growth in traditional held for investment loans by more than 20%, and it matched growth in liquidity assets.

Looking at net interest margin, we saw a very minor weakening of yield in traditional held for investment loans, and that reduced NIM by 2 basis points. We did see a minor benefit in the fourth quarter of the fed rate increase. The December NIM was higher than November and higher than the level of Q4. We expect that to be a favorable trend, but it is too early to predict what the stabilized level will be.

The mix shift from mortgage finance loans to traditional held for investment loans also offset the yield reduction in total loans. Yield trends have actually remained quite favorable, especially given the magnitude of growth, the low rate environment, and the level of competition we experienced in all our markets.

As noted, we experienced growth of 3% in average traditional held for investment loan balances from Q3 of 2015, and 18% in the year-over-year quarter. That's solid growth, despite the high level of pay-down activity and the declining contributions to growth from CRE and energy. In 2016, we expect a further reduction in the rate of growth coming from CRE, builder finance included in CRE, and energy. Excluding contributions from those three components, the year-over-year growth was actually about 11%.

Mortgage finance business clearly benefits from our reputation in the marketplace. We are a major factor in this business, completing more than $85 billion of financing during 2015. Average balances of $3.7 billion in Q4 were down from $4 billion in Q (inaudible) -- compared to the full-year average in 2015.

We saw a ramp-up in participations, with an average in 2015 of $410 million compared to just $129 million in 2014. They reached $455 million with the spike in year-end balances and were $393 million average during the fourth quarter. We have obviously no meaningful contribution to loan growth from MCA.

Funding costs remain highly favorable and we believe the duration will continue to improve -- increase with producing a relatively low deposit data because of deposit composition. Liquidity assets have all been subject to the December rate increase. Again, it's too early to have a stabilized level of total funding costs. Some categories do move with rates, but those are offset by the balances in liquidity assets. As always, the primary focus should be on the total loan yield versus the total deposit costs.

Components of growth in net interest -- non-interest expense are shown on slide 12. The MCA loss of $2.7 million was $0.04 per share in the fourth quarter, and $7.4 million, or (inaudible) per share for all of 2015. We saw growth in total non-interest expense of $5.4 million, or 6.6% for the reasons depicted. I will note that the first quarter of -- it was the first full quarter of the ramped expense for MCA with little income contribution.

The efficiency ratio increased to 56.7% in the fourth quarter, with the elevated expense and reduction in mortgage finance contribution. The MCA impact to loan on efficiency ratio was just under 200 basis points in the fourth quarter, so core excluding MCA was just under 55%. Full-year efficiency ratio was consistent with guidance at 54%, representing some improvement from the prior year.

Despite the stock price reduction that occurred during December, the 123R costs compared to 2015 third quarter actually increased, because the benefit was less than the $800,000 benefit in 2015 third quarter. On slides 12 and 13, you see the quarterly and annual highlights in ROE and ROA. Obviously, they are both reduced by the very effective -- a very high increase in vision costs. ROE especially affected by the increase in liquidity assets. Provision, MCA, wealth advisory build-out and the increased regulatory costs were obviously a major factor in both.

Turning now to 2016 outlook on slide 14, the outlook for traditional held for investment growth is based on a view of market conditions in all our lines of business. We've planned reductions in the growth rates for CRE and we anticipate a contraction in the energy portfolio.

We expect a continuation of relatively high pay-down activity over the course of 2016. The expected growth in mortgage finance loan balances, excluding MCA, is modest. It's too difficult today to estimate the potential benefit from the flattening yield curve, and the forecast for national mortgage originations is weaker than what we experienced in 2015. We believe MCA average balances for 2016 will exceed $300 million. By how much, we obviously cannot know at this point. We'll continue to update as the year progresses.

We will say customer acceptance levels are high. The impact of TRID will decline over the course of the year. We will have, as Keith mentioned, broader product opportunity factored into -- we have factored that into the guidance for net revenue and non-interest expense growth.

Deposit growth will continue but at a slower pace than we had in 2015. We're rationalizing liquidity balance, with the ability to shed deposits that have higher yield, or higher costs, and higher beta. The growth rate will be comparable to loans, but the larger base of deposits suggests much less growth in liquidity assets.

Net revenue, we expect mid to high teens growth based on the ramp in MCA, with good growth in loans and a benefit from the rate increase that we saw in December. The year-over-year comparison is obviously aided by contributions from MCA for 2015 was negligible.

We will see -- we expect to see added benefit from swap income and syndication fees over the course of the year; in the latter category those may be reflected in margin improvements. We do see an improvement in NIM to the 3.50% to 3.60% level, again, net of the change in liquidity, related to the fed rate increase in December, with no additional anticipated increase for the remainder of 2016. We see reduced impact to the growth in liquidity assets. We do still see competition affecting pricing in all loan categories.

Guidance for the efficiency ratio is mid-50s and comparable to 2015. The loss in MCA benefit will last through the first half, and we believe will return to a profit contribution for the year in the last half of 2016. We see no benefit, as I said, from additional rate increases.

Year-over-year non-interest expense growth will be mid to high teens, with the first full year of MCA driving much of that. We expect that to be considered more effectively with the annualized -- compared to the annualized level in Q4, where we expect to be mid to high single digits.

We anticipate a provision increase to the mid-$60-million range, still with net charge-offs less than 25 basis points. That anticipates the current and continued uncertainty and outlook for energy prices and any follow-on exposure. Otherwise, there are no other changes in our outlook. Keith?

Thank you, Peter. On slide 15, you can see that NPAs are primarily in the commercial category. Of the $138.7 million of commercial NPAs, $120.4 million is energy. In fact, $12.5 million of the $19 million in real estate NPAs is [a range] taken as collateral on an energy loan. We refer you to our net charge-offs and loan loss reserve history at the top right quadrant. You can see we have been building our loan loss reserve and are approaching the overall reserve level of 2011 at present.

In closing, we achieved traditional LHI growth in 2015, in line with guidance. While 2016 loan growth guidance is more modest than 2015, we believe it remains a strong growth target in the environment we expect, with our special focus on disciplined, slower growth in CRE, builder finance, and uncertain outstandings in energy, depending on the quality of new opportunities and the accompanying strict underwriting required.

We clearly will remain focused on credit quality and effectively managing NPAs. Our mortgage finance business is off to a good start, with the year-end balance at healthy levels, despite the expected lower average in the fourth quarter.

We will build and manage the cost of liquidity in 2016. Our balance sheet remains highly asset-sensitive, with 84% of our loans at floating or near-floating rates. MCA is well positioned for improved efficiency, volume, and providing a meaningful income contribution in the last half of 2016.

Heather, I think we're ready for Q&A.

(Operator Instructions)

Our first question is from Dave Rochester with Deutsche Bank.

Hi, good afternoon, guys.

How are you doing, Dave?

Good, good. On your credit guidance, what are you assuming for energy prices in that provision guide? Is it just the pricing you gave in your pricing deck color, the $42.50 in the forward strip? Or is it using the oil price curve at quarter end?

Along the lines of about $35, so a little below the sensitivity that we used in the last redeterminations.

So that's $35 through the end of 2016, is that right?

Yes.

Okay, great. Any sensitivities around that, just given that oil is below $30, any sense for how much higher that provision would be if, say, the price were $30 through year end?

That's really not something we want to get into, Dave. It's just going to be so difficult because it's so volume-driven deal by deal. And that's why the redetermination process is so much more accurate, because you're looking at a point in time with what the properties sit at. And if you try to just extrapolate, it's very inexact and can be misleading.

Appreciate that. Then I guess that it was good to see the hedging picture for 2016 updated there. Was just wondering what that looks like for 2017 at this point. And then if you have the utilization on your energy commitments at the end of the quarter that would be great, just a percentage there

It drops off significantly in 2017 on the hedges. Now, that doesn't take into account that we might have a bump here and there throughout 2016 where our clients will be able to extend some hedges. So just looking at a point in time when you look out a full year, it's even more inexact. But 2017 -- 2016 rather, we have over 72% of our clients with hedges in place that are accretive, which means $50-plus in place.

And then what is that, the 73% drop to in 2017?

We really don't have a number on that, but it's a meaningful decline.

Okay. And then just switching to Houston area credit outside of energy, appreciate any color on the commercial real estate migration you talked about in the slide. Has there been any spill-over into C&I credit in that market? I think you had maybe $1 billion or so in outstandings there.

Very little.

Great. And then just switching to expenses, can you just talk about the other drivers there for the growth outside of MCA that you talked about in that mid to upper teens guidance? I would imagine you're still building out the wealth management group, but are you also hiring RMs, or is the rest of that regulatory or compliance spending driven at all? Just some color there would be great.

Dave, it's all of that. It is continued recruiting. It is regulatory. We have projects underway at all times that can move that number around just as in the fourth quarter we saw professional fees. That was not legal; that was all wrap-up of projects underway for MCA and others.

Okay. Any thought to maybe slowing down the RM hires at least in 2016, just given the headwinds that you've got in energy and your focus on the MCA business? Any thoughts of maybe slowing that down a little bit to defend profitability?

I think we've managed it pretty well the last year-and-a-half. When we see an opportunity that's a clear best-of-class capable, talented person with a track record, we're always going to try to move on that. And we're perpetually recruiting and keeping our pipeline of recruits familiar with the Company and how we're doing.

And if it comes to a C&I banker, we're going to be even more inclined to make that happen. So it's -- with our plan and our strategy to really tamp down the growth in CRE and builder finance and also just what we expect to go on in the energy space, that takes out a lot of the recruiting pipeline. And in better times where we want to grow those categories at a higher pace, we would be hiring more RMs. So to a large extent, I think it will be self-governing and mostly focused on C&I bankers.

Okay, and then just on the last topic, MCA, was that $300 million the average expected for the year, or was that fourth quarter for 2016?

Average for the year.

For the year, okay.

Year, right.

And just bigger picture question, given you guys have so much flow quarterly from your legacy mortgage business, it seems like you've got a decent amount of control over how quickly you can have those balances grow. So as the year progresses, it sounds like you worked out the bugs. And then people will figure out the paperwork.

What's stopping you from growing that faster than achieving that $300 million on average for the year? Seems like you had a bigger ramp-up there.

Really one of the keys is just going to be quality of the paper. We're just not willing to accept any paper with defect issues. There are some that are in the business that are willing to do some of that.

And the reason we built this sophisticated and highly integrated system is to have the best due-diligence filter in the business to mitigates the risk and put back risk, but also to serve as a value to our clients to catch the defects so that they can repair the mortgage before we buy it.

But it also is in their best interest, because they are the first line that gets hit with putback. And so it's going to be a function of quality of the volume, as well as the pull-through that you suggest. We should have an advantage in pull-through with our good reputation and client base.

Are your checks kicking paper out of the legacy business first? Or is it just coming through the legacy business and getting kicked out of the MCA business? Because I know you've got that extra risk layer on the MCA piece.

Well, we have filters at both ends, but because of the actual purchase of the whole loan at the MCA level, and because every new initiative where we launch or create a special line of business is going to grow faster than overall loans in the Company. We absolutely insist that we build a rock solid foundation the first two years in terms of quality.

Now that's not to say we take our eye off quality in year three. But each of our bankers that run these businesses understand that quality is just paramount so that we build such a high degree of confidence with regulators, with ourselves as a management team, with our Board, with our shareholders. What we're creating is not just running fast and creating volume. We want to be sure we're creating really high quality business.

Great. All right. Thanks for all the color, guys. Appreciate it.

Welcome.

Thank you.

Next question is from Ebrahim Poonawala, Bank of America Merrill Lynch.

Hi, guys.

Hi, Ebrahim.

Looks like Dave covered a lot of questions for us, so thanks. But just going back on the energy provisioning issue, Keith, I think the issue for the folks looking at the stock is energy reserves [under 3%] lower end of where we've seen other banks. CFR just pre-announced higher results for the fourth quarter.

So how do -- how should we from the outside, and I appreciate you not wanting to disclose all the mechanics that go into the reserving process. But if things get worse and we stay in this kind of an oil price, which is sub-$30 for the next 12 months, what's the downside risk to that provisioning and net charge-off guidance?

We feel like it's quite adequate where we are today, with what we can see today. We would like to have the latitude, Ebrahim. I think most bankers would, to put additional reserves up, if you could justify it. We just can't. We have a very solid portfolio.

And I think we've been very conservative by all but $10 million of that $120 million that's in criticized -- I mean classified in our energy book, $110 million of that $120 million, we went ahead and put on nonaccrual. In those cases, we have a very specific analysis we do of the reserve adequacy on each of those loans.

So this is not something where we're taking our best guess at a high level. We've very thoroughly analyzed these credits. I think a lot of it has to do with the mix of business and that we were very disciplined and have avoided areas that are going to create, we think, the biggest outsized losses. And that's energy service businesses that are close to drilling and production and -- or drilling and completion.

And what little bit of service we do is existing production-type service, things like saltwater disposal, compression on existing wells that are going to pump, in some cases, 20, 30 years. So for those reasons and the long time we collectively have done this kind of business, the management team and our head of energy banking business, his lieutenants, and our bankers and underwriters, we think we got the right reserve.

We also have a very long half life. I mentioned that in my comments, and I think that's atypical. I think a lot of the banks are going to have well below a greater than six-year half life on the production. That really helps.

So when you get the protection we're going to have with 72% of the clients that are E&P oil clients with hedges throughout 2016, but then you also have a very extended revenue run rate with that long-lived production, it really takes some of the near-term down-cycle risk on a price drop out of the equation. So that helps us quite a lot as well.

Ebrahim, I would add when we look across the industry and we know what other people have and what they do, and we differentiate what we have and how we approach credit, Keith mentioned the lack of exposure to services. He mentioned the lack of exposure to highly leveraged shared national credits, where there are significant stresses that come from subordinated debt classes. And we've also, more than any bank that we can identify, control a bigger percentage of our portfolio because we are either the sole creditor, or we are the lead in the shared national credit, and that totals 65% of our portfolio.

Understood. And just the last point on that, if I take it, given how the market's been reacting, if we have another 5% to 8% drop in oil prices, does that necessarily not mean anything in terms of provisioning guidance that you've given today? Because the underlying [send] of the borrowers may not change at the next $5 drop, or is that not the right way to think about it?

We believe the provision we've given as guidance covers that kind of eventuality, whether it would be much more drastic than that, we don't foresee today, but that's the way we approached it.

And as I mentioned in my comments, too, Ebrahim, we're finally seeing some very significant lifting costs work their way through the P&Ls on our borrowers, and we really haven't been given credit for that. Because you want to see it not just show up for a month or so; you want to see it sustainable and dropping.

And in this next upcoming spring redetermination, that's going to offset a lot of the future price decline, if any, that we may see. So that is another big plus of having the kind of experienced operators that work closely with our bankers that we're selecting.

It isn't random who you choose for your client base. It shouldn't be in this kind of business. You've got to have a strategy and ours just happened to be to stay close to the long-lived, long-time operators, and I think we've done an excellent job of that.

We avoided some of the other temptations, like a lot of the growth that happened in MLP financing, which we just stayed away from it. And we'll see how it plays out. We think we're in the right position with our reserve as of today.

Our best guesstimate, just to give you a feel for the next 12 months, our best estimate for losses in energy, it's not going to be the $300,000. I wish it were. That is the total cumulative losses we've had since we launched the Company. But because this is a tough, long price decline we're experiencing. But we think it will be in the $10 million to $15 million range over the next 12 months.

Now, if prices continue to drift down and stay down in the $20s for a prolonged period, that number could turn into, instead of $10 million to $15 million, $20 million to $30 million. But we have $30 million in reserves set aside today, and as we've given in guidance, we're planning to have even further elevated provisioning as we go forward. So I think we're in the right place for the time being and with what we see with our portfolio.

Understood. Thank you for taking my questions.

You're welcome.

Our next question is from Brady Gailey at KBW.

Hey, guys.

Hi, Brady.

Just a question. So the energy classifieds of $130 million and the energy criticized of a little under $200 million, are those subsets of each other? Or to ask differently, energy classifieds plus criticized, is that the sum of those two numbers? So around $330 million?

No price -- The (inaudible) is within the total, so it's a subset of the $199 million.

Okay. Great. Then the $32 million of the energy reserves, you all talk about that being a little over 3%. If you simply divide it by the $1.2 billion, it's around 2.7%. So I'm just wondering, that $32 million, is that the reserves just on the E&P book?

Yes. It's on the E&P book that has the direct price exposure. We really see, again, because we've stayed away from the energy service that's close to the drilling and the completion side, you really have to look at a lot of the run rates and income statement issues related to much more modest volatility businesses, if you're looking at saltwater disposal or compression and things of that sort. So it wouldn't be appropriate to set aside that much reserve against those categories. Those have to be looked at individually.

Okay. And then so you have 41% of energy that is SNC; I realize you all age some of that. But if you look at the percentage of NPAs that are SNC, like that $120 million, is that roughly the same percentage, or is there a higher percentage of SNCs embedded in your NPAs?

It's very comparable. I think we've made good choices on the SNCs and typically know the management of the companies. So we're not the agent, but we have relationships. I think we've selected some good operators and good companies in the SNC portfolio. We're just not a paper buyer.

Lastly, the overall SNC portfolio, both energy and non-energy, was $1.7 billion at the end of September. Did that change much in 4Q?

No.

It didn't. All right, great. Thank you, guys.

You're welcome, Brady.

Your next question is from Michael Rose at Raymond James.

Hi, good afternoon, guys. How are you?

Michael, doing well.

Sorry to ask another energy question. Maybe if you can talk about it, it looks like the energy balance actually grew a little bit. I think you mentioned that in the prepared remarks. What are you seeing from competitors in the space? And if they are starting to flee, is there a real opportunity to add good clients and maybe grow the percentage over time, should this last longer?

We're seeing just what you need to see to book energy today, and it's not a competitive environment. It's driven by what underwriting we're willing to put in place, and that means very extensive long-term hedges, three to four years typically. And very strong equity players that are coming in and picking up proven assets that we can get our arms around.

So it's really great quality. You've got to be very disciplined, but what we're going to underwrite and book will probably be some of the best energy that we put on the books in the next 10 years. We just don't know how much of that we're going to see to meet our very elevated underwriting standards that you have to have in this environment.

But in the short to intermediate term, you would expect the percentage of energy loans to continue to decline, correct?

We think flat to decline. Oh, as a percentage of loans, yes, decline in the near term.

Okay. And then one follow-up for me. Capital levels, looks like your total risk base is about 11.1% at the end of the quarter. Can you give us your updated thoughts on capital planning? I know the MCA business is ramping up a little bit slower and that's a positive contributor to the capital over time. But how should we, given the growth plans you've laid out and the guidance, how should we think about capital levels and what levers would you maybe should look to pull should you need additional capital? Thanks.

Given the guidance and the expected growth rate and ROE in 2016, we're not expecting to have to do anything.

And with the more efficient capital in the highest growing category, MCA, that helps too, Michael.

Okay. So how far do you -- how long do you think the existing capital could continue your growth plan? Is it a couple years that we're looking for potential capital, or--

It's as long as we see an opportunity that's sustainable and outsized if you go deploy new capital. That's always the way we've looked at capital, is don't go draw down capital unless we can deploy it in a really high-quality outsized opportunity.

And it's not on the horizon at this point, but we're constantly looking. And we think when there's disruption like we're seeing some in the economy, that there are those opportunities that we've had good experience exploiting, finding and exploiting. But until that occurs, it doesn't really make sense in the foreseeable future, at least for the next few quarters.

Perfect. Thanks for taking my questions.

You're welcome.

Next question comes from Emlen Harmon at Jefferies.

Hey, good evening.

Hi, Emlen.

One last quick question on credit. How much of the specific reserve for energy is ascribed to specific nonaccrual loans? And how much is just more of a general reserve for the broader energy portfolio?

I don't think we have all of that detail, or maybe I should say we don't want to share that much in the weeds.

Okay. Fair enough. I will -- maybe moving on from there, what does your loan growth guide assume just in terms of the general economic environment in Texas as we look into 2016?

We think Texas is going to have a pretty good environment. It's not going to be what we've enjoyed in the last decade, quite at that pace, or particularly the last five years, because there is some amount of contagion with just psychology with non-energy business owners. They are going to tend to play it a little closer to the vest until they are sure that their regional or national client base is going to be buying.

And so I really think we're going to have some good opportunity in C&I. We have -- are very consistently growing C&I year in and year out, but it's such a broad category and Texas has such a diversified economy that we have small market share in each of the key cities we focus on.

Our attitude is it's going to be a quite good year. We're just going to be very careful about some of these areas that tend to have the deeper cyclicality and loss that accompanies that, Emlen.

We're the only bank, I guess, I've heard on calls talking about the prospect of a recession in the next couple or three years. And I think we've gotten a little company with some of the media and journalists speculating on that could be an issue out there for the national economy in the next year or two.

And so for all of those reasons, as we've said early last year, we just think it's much more important to be extremely disciplined and mod -- ands be more modest on our growth and CRE builder finance, in those areas in particular. So C&I ought to be quite good we think.

Got it. Thank you. Then last one for me. Peter, on the NIM, you gave us the guide ex-liquidity is 3.50% to 3.60%. What is the starting point for that? What do you consider the ex-liquidity NIM to be in the fourth quarter?

About 3.60%.

That makes it easy, right? So you're calling for effectively a flat NIM from the current level to this year?

The flat with the effect of growth.

Okay. So flat NIM, but balance sheet growing, [NAI growth].

Right, normally, growth might cause 5 to 10 basis points per quarter of reduction. And we're saying effectively we can offset that.

Okay. All right. Thank you.

You're welcome.

The next question is from Kevin Fitzsimmons at Hovde Group.

Good evening, guys.

Hello, Kevin.

I'm going to ask somewhat a related question. As much as I love the way you do the guidance, Peter, on the margin, the ex-liquidity assets, we've -- I think it's been about four quarters now we've been way out of that range and on a reported basis and the liquidity assets are just a real part of that measure.

How should we think of the reported margin in terms of where this goes from here? Is it something where theoretically, it's just going to expand as liquidity assets come down and are put to work in higher yielding assets and eventually gets back up to this range? How should we think of it over a few years?

I think over a few years, we do expect it to be deployed into something other than deposits at The Federal Reserve Bank of Dallas. It's just the only place you can go where we would eliminate duration risk is there.

We're not willing to shut it off. We've done a really great job strategically of building these sources of deposits. And as long as that can continue, although we expect in 2016 at a much reduced pace, we're prepared to do it.

But with one Fed hike, are we at a point where it's going to be noticeable in terms of putting that to work? So not just a slowing growth rate in liquidity assets, but where we'll actually see them start to come down?

No, that's more a function of just lower percentage of the total with less growth in 2016. So from that, we acknowledge we will get some benefit to the NIM.

Got it. Okay. One quick follow-up for me. Just the subject got brought up earlier about regulators. I'm just curious what you all have seen in terms of any changing behavior or methodology in how the regulators are looking at and dealing with energy. Because it seems like you all have a very good handle on your portfolio and you have a very deliberate process.

But that's always the risk with us from the outside, that someone comes in and now they are taking a different view and treating all banks the same and will look at -- and not want to necessarily listen to reason, but look at one bank's reserve and say, well, you're out of whack. You have to be up here. So just curious what you've seen on that front.

Kevin, there's always that risk, of course, as you well know, in the banking business. I will say, though, while we've had a couple of anxious moments over the last year, I would give very high marks to the regulators for really working to understand what we do, how we underwrite it, how we assess risk, how we set aside reserves, and I think I feel better than I do a year ago. Now, a year ago, I was a little more anxious about that.

They do not have as much legacy institutional knowledge as they might have had 10 or 15 years ago, because we haven't had a prolonged deep down cycle quite like this for some time. But I'm extremely impressed with the intellect, the effort, the attitude that we've seen. But it still doesn't eliminate that risk.

Okay. Thanks, guys.

You're welcome.

The next question is from Brad Milsaps with Sandler O'Neill.

Hey, good evening.

Hello, Brad.

You guys addressed my question on the margin. But just more housekeeping, on deposits this quarter, do you think that was more of a blip? Sorry if I missed it in your prepared remarks, but maybe the growth wasn't as strong.

You had good DDA growth, but I saw the foreign deposits went away. Anything in particular there? Or anything you're seeing on from some of your corporate treasurers, moving money around or anything, just curious, any color there would be helpful?

We alluded to the fact that we are shedding or moving deposit categories that cost a little more. The rules changed and that category had never been foreign deposits. It's from our customers, our domestic customers that allowed us to put it basically in book entry form into the Cayman branch.

And for that and their willingness to leave it for longer period of times, we paid them a little bit more. Now the FDIC assesses that differently, and we cause those balances to be moved back into other interest-bearing categories.

And that's one of the advantages of us having built, Brad, this liquidity, is we now can go back in and more surgically look at what is the optimum liquidity in terms of costs, longevity, things of that sort. So we're going to be doing that as we continue to really build through our treasury capabilities, demand deposits, and so on.

Great. Thank you, guys.

You're welcome.

I don't think we lost any of the deposits. We may have, but whatever it was, it was insignificant.

The next question is from --

It was mainly just the cycle time on escrow deposits and the mortgage warehouse client base. By the way, if Emlen is still on the line, I got the information on your question about the amount of the 3% reserves, the $32 million, that's specific set-aside loan by loan versus overall. And it's about $14 million of the $32 million.

We decided to get in the weeds with you. We're trying to be a little more transparent about energy, so I wanted to offer that.

Are you ready for the next questioner?

Yes.

Okay. The next questioner is Steve Moss at Evercore ISI.

Good afternoon, guys.

Hello, Steve.

I wanted to touch base, going back to energy here, based on your provisioning for 2016, what are you implying or thinking about for the overall energy reserve by year-end 2016?

That the reserve as we know it today is fine, but we are allowing for contingent exposures that would come from much more depressed energy prices.

Okay, and the other thing is if it's a $14 million of specific reserves on existing nonperforming assets, that's about a little over 10% in terms of a potential loss rate. Shouldn't we be thinking that that reserve should head materially higher in 2016 if we keep oil down here?

We don't believe so. As I said, it could be double that if we see the price continue to drift and it stays in the $20s for a prolonged period. History indicates usually you'll hit a capitulation point, a bottom, and it doesn't just slowly return to a better price level.

Now, this time there's some unique aspects of shale production, where there's been quite a lot of drilled and not completed, and that's a little bit of an unknown, certainly. But overall, we think that $35 that we used most recently, is realistic today. And even based on a lower number, the $10 million to $15 million expected losses over the next 12 months might double to $20 million to $30 million.

But if things change, we've got a provisioning plan in place that we think is a mitigant and allows us to make those adjustments. We do have very strong hedges in place and I think that's very important. Perhaps not all banks have clients quite like ours. We think every portfolio is quite different and we like our portfolio.

But we understand the tendency. The tendency is to want everybody to be at the highest number. We can't justify it. We think this is the right number because it's -- we've done deep analysis and we believe it's where we should be for now. But we are making allowance for a higher provisioning next year.

Okay, and you mentioned operating costs are down for the oil producers. Wondering, what is your sense of the marginal cost to produce a barrel of oil today for your customers?

It's a very wide range, but we are seeing some meaningful drops that can be as much as 20%, 30% drops in costs. And so pick a really efficient operator that may have $10 lifting costs, you're still looking at several dollars of pickup, or a $2 of pickup. But if you're looking at an operator on the higher end at 25 or 30, you're looking at a very significant per barrel cost saving.

And it really does mitigate some of this price decline, particularly on an average look-forward basis, because this is more sustainable. It's not a spot-cost situation. You couple that with our hedge position with our clients, we think we're very adequately reserved.

Okay, and with regard to the overall energy portfolio, you indicated earlier that you expect the contraction in the overall energy book. Wondering, where do you think the energy book settles out?

Well, it's, as we mentioned in my comments, it's just very uncertain. And the uncertainty hinges around how the price ends up developing over the next few months as we go into the spring redetermination, reset the kind of sensitivity we think is appropriate to run those valuations at, what cost improvements do we have to mitigate some of that difference in the price on the revenue side with the cost savings.

And ultimately, it's going to be how many quality deals typically from private equity or significant equity players that step in and pick up great management teams and excellent properties and have one of the lowest levered, best opportunities we'll see in 10 years. If we get enough of that deal flow, we can offset more of this paydown. If we don't, we'll see the paydown, and it could be -- I mentioned to you the pace we saw over the last redeterminations, and that could continue, that level of paydown.

But I also mentioned to you that we picked up over $100 million in new commitments and right at $100 million in outstandings of this very, very high quality, up-to-date underwritten new opportunities. So it's deal flow really that's going to determine that.

Okay.

I think we'll get more than our share, but we just don't know what that looks like.

Great. That's fair. And then in terms of one last question here, wondering what the current balance of your (inaudible) portfolio is and where you think that plays out over the course of the year.

The current balance of the overall energy portfolio?

The builder finance portfolio.

Oh, the builder finance. You got that?

It's right at $800 million or $900 million. Closer to maybe $1 billion.

And how much of that is in Houston?

About 50% of that is--

No.

35%, I'm sorry. I needed some help on that one. 35% is Houston. Right now, Houston is solid on low inventory as any of the markets we're in. But prospectively, we're going to see our builders in Houston tamp down their volume this next year.

But they have sold -- they built as many houses in 2015 as they did the preceding year, and they sold that number of houses. So there was -- it was almost a mirror image of the three-month inventory and the volume of new housing that was constructed last year to the year preceding, which is remarkable.

And even though they only generated a little less than 22,000 new jobs, Houston has weathered, in many respects, this transition far better than many thought, including me. I give Houston a lot of credit. They are quite resilient, but you're going to see some soft pockets.

And as I mentioned, we're seeing those begin to develop more in the product lines of the multifamily and the office. Industrial retail looked really strong. Single-family still looks quite strong.

Okay. All right. That's helpful. Thank you very much.

You're welcome.

The next question is from Matt Olney at Stephens.

Hi, guys. Good evening.

Hello, Matt.

Hi, Matt.

Within the outlook for the MCA business, I believe the prepared remarks had some commentary on fees. Can you give us any more details on your assumptions on MCA fees in [2016]?

The only thing we can say is the market remains extremely competitive for people that are building MSR portfolios. When we open up the other channels that Keith alluded to, we will see better profits in those categories. We are continuing to build the MSR volumes on the level of activity that we've already had, and we are finding that those have higher values than our model would have predicted.

So Peter, would you say the competition for that business hasn't really changed much over the last three months?

Not for the mandatory, Matt. That's why it's so important that we be able to now add a complimentary product that we'll be buying, and that's the best efforts.

And what -- how are the fees different for those two? Can you size up the magnitude of that?

Because you don't have absolute certainty of close on the best efforts, you get paid more all the way around. It's just a more attractive product. But you don't have the same absolute certainty of that loan having closed, that mortgage having closed. There's a meaningful difference in pricing.

Okay, okay.

A larger gain on sale and more fees come along with best efforts product. But we really didn't want to get too complicated out of the box, and we just stayed with vanilla and wanted to work out the kinks in the technology and be sure we were getting the service level and efficiency and the quality of the paper that we wanted before we then branched into going for the little larger profit margin business. We think we can handle both now beginning later this quarter.

Okay. That's good detail. Thank you for that. Then going back to energy question, on the fall redeterminations, I'm curious, how did you attempt to capture the risk of the -- of falling oil prices throughout the fall, which means some of the borrowing bases may not reflect the current spot price? Could you attempt to quantify or rectify that risk somehow?

We were constantly adjusting as we worked through that redetermination. And that's what I mentioned. We ended up around 35 on that fall redetermination.

Okay. Thank you.

You're welcome.

The next question is from Peter Winter, Sterne Agee.

Thanks for taking my question.

You're welcome.

I was wondering if you could give a little color on the impact of that TRID and then maybe what it means for the first quarter.

TRID is getting better. The volumes are beginning to flow better, but the defect rate is still higher than normal. So I would say it's better than what we saw, even though December got quite a bit better on volume certainly than October-November. The defects are kicking back a lot -- we're kicking back a lot of product still.

So I think we're talking about a really meaningful 25%, 30% difference in actually execution all the way through until this gets worked out. But it's not that unlike QM, and we experienced some of this when the new QM went into effect, and it takes you 90 days or so, being a mortgage bank, actually originating this product, to really work the kinks out and get more consistent on delivering the product without defects. So it's improving. It's just going to take a little longer.

Peter, it had a meaningful effect on the mortgage warehouse balances. It was a significant lag until the end of the quarter when those kinks, in terms of the warehouse activity, seemed to get worked out. And that's why we had the surge at quarter end.

In October, it had a 50%, 60% impact, but I was suggesting as we got through the end of the year, it was -- it winnowed down to maybe a 25%, 30% defect slowdown. But the volumes are coming better each week.

Okay. That's very helpful. And then I'm just wondering, just given the fallout of lower energy prices, can you just talk about what you're seeing in terms of competitors on the overall lending environment? Are you seeing them pull back? And is it also leading to better pricing, and so maybe as you build the balance sheet growth, it's less than that 5-basis point negative impact from the growth that you mentioned earlier, Peter?

It's mixed, Peter. Generally, though, it is still very competitive. The quality credit business that we're after, everybody's after. So I think Texas is still viewed as a very attractive place to do business and grow your franchise. Whatever bank you are, if you have boots on the ground here and really understand what's happening in Texas, the economy's still quite good. In fact, North Texas is really, really strong at this point.

But we have not yet seen the pullback that years ago we might have seen from time to time by out-of-state-based companies and banks that would knee-jerk in an environment like this. We've not seen that reaction in this cycle. It's still more competitive than I would have expected.

Great. And just my last question, just housekeeping. The tax rate was lower this quarter. I'm just wondering what that was and how much of an impact it was. It's a true-up that happens every quarter end, or excuse me, every year end. And we've been accruing a little too much over the course of the year.

And how much was that in dollars?

1 percentage. Not quite a whole percentage point, I think.

Got it. Thanks for taking my questions.

You're welcome.

The next question is from John Moran at Macquarie.

Thank you for taking the question, guys. So I wanted to circle back just on the classified and criticized that you guys disclosed on the energy book. Is that also just against the pure reserve energy piece of it? Or is that the entire 7% of loans outstanding, that criticized of $199.2 million?

It's the whole 7%.

Okay. I know in 3Q you disclosed the nonaccruals. Did you -- was that criticized number disclosed in 3Q, or would you disclose it to just give a sense to how things migrated?

We had not disclosed criticized and classified at the end of Q3.

Or the reserve.

Nor the reserve.

So those are new disclosures.

Okay. Is it -- could you disclose the criticized from Q3 or then as a follow-up to that, is it unreasonable to think that the migration was as rapid as the nonaccruals migrated?

It would be more like the nonaccruals.

Okay. Fair enough. And then the only other one that I had left, actually just one more on the criticized, I'm sorry. Where did that peak? I know that you guys weren't in the business a huge, long time ago, but you've been in the business for 15 years. Where is the peak in terms of criticized? Or are we at the peak?

In energy? We're way beyond any historical level.

Okay. All right.

The dip in 2009, we had no nonaccrual energy loans.

No nonaccrual and criticized was meaningfully below the $16.50 that it is today?

I don't know, but yes.

Yes.

Okay, okay. Then the only other one that I had was just on the Houston CRE piece, and thanks for the additional breakout there and the detail, how much is left in terms of unfunded commitments or draws that you guys would expect? And is most of that in multi-fam and how would you expect that to play out over the next couple quarters?

It is mostly multifamily, but that is also the category that we're seeing a lot of the sales and payoffs in and refis. That's the tricky part, is the velocity of the churn. And we're still seeing and our people tell us that are in the market on the ground, there's still a very strong interest and strong activity level on companies wanting to refi long-term Houston CRE and multifamily and also buyers, REITs, and so on. So that has not dropped way off. It's still strong.

Okay. Fair enough. Appreciate it, guys.

You're welcome.

The next question is from Brett Rabatin at Piper Jaffray.

Hi, good afternoon.

Hello, Brett.

Wanted to just go back, I appreciate the increased guidance around energy. Just wanted to go back to the guidance around, or your discussion around charge-off potential in energy. You talked about $10 million to $15 million, and if energy stayed low, $20 million to $30 million.

Is that based on looking at the NPAs in criticized that you currently have? Maybe you can talk a little bit more about how you come up with those specific type numbers?

It's a global estimate and it is not precise science. I think it is a good estimate in light of how well we think we are reserved and positioned today, and what we would expect even in a continuing slippage on energy prices on average. But if we see something really outsized and more prolonged at very low prices, that's why we're elevating the quarterly provisioning.

Okay. Some flexibility there.

Because even on the doubling of the $10 million to $15 million we expect today and taking it to $20 million to $30 million, we've already, as of year end, got $32 million set aside. So with the continued provisioning at even a higher level, we feel pretty comfortable with what we're doing.

Okay. Then wanted to get a sense for thinking about your portfolio versus peers. Your numbers are tighter correlated, criticized in NPAs. And you talked about being conservative and what you had moved to nonperforming already.

Can you talk maybe about what you've moved to nonaccrual and what got it there? Was it covenants? Was it deficiencies? What -- are there any trends in what you've moved in nonaccrual versus what might be criticized?

We weren't comfortable with the amortization level. We still believe, even in -- as an example, one of the credits we moved is in the process of being purchased. And it's being -- it's going to be purchased at over 20% above what our debt level is at.

But we still reserve 10% against it, because there is that uncertainty and we weren't pleased with the amortization capacity they had longer term. So that might give you one example of how we look at it and why we think we're conservative.

Okay.

Borrower's liquidity is really one of the keys, along with this amortization cash flow level, and it's not a collateral shortage that we're worried about. It's just borrower liquidity and cash flow.

Okay, and then in the service book, you're primarily production as opposed to exploration. How -- can you give any numbers around that or where you are service production versus closer to the drill bit, so to speak?

I think it's around $130 million, something like that, $130 million-ish. We have a similar amount that's secured -- that's energy purpose, but it's secured by liquid bonds, stocks, things of that sort. So while we put it in the energy total of 7%, it's not really dependent on energy prices and so on.

Wait. I'm sorry. The $130 million is the total is what's production in service, or that's--

No, that's not -- I'm sorry. I confused you. Other than the core E&P production-based lending, we have another 1% as part of that 7% besides the production service -- energy service business that's secured by liquid collateral, things other than energy assets.

No, I understand. I'm just trying to go back to the service that you have. It's not cash secure guaranteed or secured with additional assets. The service that you have, it's primarily--

That's the $130 million-ish that we have.

Okay.

And that's going to be the saltwater disposal, the compression, things of that sort.

Okay. What--

We don't have drillings, we don't have fracking companies. We don't, again, take that risk and it's so risky on that side in our view because it's so capital expenditure dependent and cash flow dependent. So when you get in a down cycle on price with the commodity, those categories of energy service have significant softness in rental run rates and can really drop off on cash flows and go negative, whereas ours are just much less volatile, the type of service we do.

And so you don't have anything in those oriented fields?

We have -- didn't we end up with $3 million that's classified in that category? That's it.

Okay. And then just lastly, wanted to go back to--

Just let me mention one other thing. The only nonaccrual we have is like a $200,000 nonaccrual.

Okay.

And of the nonperforming assets in energy, substantially all are current.

Okay.

They're paying. We're just not comfortable that they have enough cash flow and liquidity to sustain principle and interest payments throughout the term.

So cash will be applied to principle until the loans are returned to full accrual.

Okay, appreciate that color. Then just the last thing I was curious about was just going back to the margin and thinking about -- your loan portfolio is much more tied to LIBOR than most of your peers. But it sounds like you're not extremely bullish on passing all of that through, if I'm reading that correctly. Is there anything that's preventing those LIBOR-tied loans from getting the full benefit of repricing with what we've had for the curve?

Only the effect of floors, which begins to abate serially at each 25-basis-point increase from here.

Okay. Of the 65% that's LIBOR-tied?

There's -- well, for LIBOR and prime. It's just too much -- there's too much uncertainty until we see things stabilize, what happens with deposit categories. We don't believe we'll have significant deposit pricing exposure in the core portfolio for some period of time. But we just don't know, so we're being, we believe, conservative on that.

Okay. Great. Thanks for all the color.

You're welcome.

This concludes our question-and-answer session. I would like to turn the conference back over to Keith Cargill for closing remarks.

We thank each of you for your interest in Texas Capital Bancshares. We are working hard to continue to drive core earning power and build out these new businesses that we think have a great upside for all of us. In the meantime, we're very focused on working on credit quality, as we always are. That's one of our hallmarks and one we intend to only further embellish as we drive the Company through this cycle. Thank you for your time.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.