Texas Capital Bancshares, Inc. (TCBI) Q4 2015 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Texas Capital Bancshares, Inc. Fourth Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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. If you have any follow-up questions, please call me at 214-932-6646. Before we get into our discussion today, I’d like to read the following statements. 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 deterioration of the credit quality of our loan portfolio, the effects of continued low oil and gas prices on our customers, increased defaults 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 and other factors that could cause results to differ materially from those described in the forward-looking statements, as well as a 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 in 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’ll 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, and 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 non-performing 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 slower. 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 these 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 a 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’ve reduced credit exposure outside of the 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’re 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 to you 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 totaled $121 million in new commitments and $99 million outstanding. Now, let’s talk a minute about the details on our energy performing and non-performing credits. Energy non-accruals have increased to $120.4 million. Criticized and classified, energy loans totaled 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 and 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. Currently, we have no Houston market risk CRE in non-accrual status. While Houston CRE remains under close oversight, we’re 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, homebuilders 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 lost 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 have also been busy eliminating technology bugs we missed in the pre-launch testing. All in all we’re 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 cost. 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 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 linked quarter change. Obviously, the level of liquidity assets has had a big impact on ROA. Adjusted for the growth in liquidity assets, we've reported 90 basis points in 2015. And that's despite 140% increase in the provision for long 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 health 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 – reduced – 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 for 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 Q3 [ph] 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 cost remains highly favorable and we believe the duration will continue to increase with producing a relatively low deposit data because of deposit composition. The 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 cost. Components of growth in net 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 $0.10 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 ramp, it was first full quarter of ramped expense for MCA with little income contribution. Efficiency ratio increased to 56.7% in the fourth quarter. But 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 123 art cost compared to 2015 third quarter, actually increased, because the benefit was less than $800,000 benefit in 2015 third quarter. On Slides 12 and 13, you see the quarterly financial highlight in ROE and ROI. Obviously they're both reduced by the very effective, a very high increase in provision cost. ROE is specially 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 health and investment growth is based on the view of market conditions in all our lines of business. With planned reductions in the growth rates for CRE, we anticipate a contraction in the energy portfolio. We expect the 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 continue to update as the year progresses. We will say customer acceptance levels are high. Impact of TRID will decline over the course of the year. We will have as Keith mentioned broader product opportunity. And 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 cost and higher beta. The growth rate will be comparable to loans. The larger base of deposits suggest 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. Year-over-year comparisons obviously aided by contributions from MCA or 2015 was negligible. We will see – we expect to see added benefit from swap income and syndication fees over the course of the year. And the latter category those may be reflected in margin improvements. We do see an improvement in NIM. So the 350 to 360 level, again net of the change in liquidity. That's 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 and 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. Loss in MCA benefit will last through the first half and we believe will return to 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 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 NPA is primarily in the commercial category. Of the $138.7 million of commercial NPA's, $120.4 million is energy. In fact, $12.5 million of the $19 million in real estate NPAs is arranged taken as collateral loan, 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 reserves and are approaching the overall reserve level of 2011 at present. In closing, we achieve traditional LHI growth of 2015 in line with guidance. While 2016 loan growth guidance is more modest in 2015. We believe it remains a strong growth target in the environment we expect with our special focus on discipline, slower growth at 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 in balance it 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 of Deutsche Bank.

Hey, good afternoon guys.

How are you doing Dave.

Good, good on your credit guidance, what are you guys assuming for energy prices. In that provision guide is it just the pricing you gave in your pricing deck color the 40 to 50 in forward strip or is it using the oil price curve at quarter end.

Along the lines about 35 so a little below the sensitivity that we used in the last three determinations.

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 clearly inexact and can be misleading.

That’s it. Appreciate that. And 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, but our clients will be able to extend some hedges. So just looking at a point in time when you look at a full year, it’s even more inexact but 2017, I mean 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 this Houston area credit outside of energy, appreciate the color on the commercial real estate migration you talked on the slide, has there been any spill over into C&I credit in that market I think, you got a may be a $1 billion or so, in outstanding 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 the mid to upper teens guidance? I would imagine you’re still building out the wealth management group, but are you also hiring RNs, 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 initiating others.

Okay, any thoughts, that’s maybe slowing down the RN hires at least in 2016, just given the headwinds 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 that pretty well the last year and a half. When we see an opportunity that’s a clear – best-in-class capable talented person with a track record, we’re always going to try to move on that. And you know we’re perpetually recruiting and keeping our pipeline of recruits familiar with the company and how we’re doing. And if it comes to 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 with 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 price, we would be hiring more RMs. So to a large extent, I think it would 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 is that fourth quarter for 2016…

That was for the year.

For the year?

Yes.

Okay, and I guess, 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 that you worked out the bugs. And then people will figure out the paperwork or what is stopping you from growing that faster, than achieving $300 million on average for the year. Seems like you had a big ramp…

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. They’re willing to do some of that and the reason we’ve built this sophisticated and highly integrated system is to have the best due diligence filter in the business. It mitigates the risk, it put back risk, but also this 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. 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 in client base.

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

Well, we have filters in 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 in the first two years, in terms of quality. that’s not to say we take her out of quality in year three. But each of our bankers that run these businesses understand that quality is just paramount. So that we’ve built such a high degree of confidence with regulators with our sales, with our management team, with our board, with our shareholders that what we're creating is not just running fast and creating volume. We want to be sure we are creating really high quality business.

Great. All right. Thanks for the call guys. I appreciate it.

Welcome.

Thank you. Our next question is from Ebrahim Poonawala with Bank of America Merrill Lynch.

Hey guys.

Ebrahim.

It looks like Dave covered a lot of questions for us, thanks. But just going back on the energy provisioning issue, Keith, I think the issue for sort of folks looking at the stock is energy reserves are a 3% lower end of where we've seen other banks, CFR just preannounced higher reserves for the fourth quarter. So how do – sort of how should we from the outside and I appreciate you not wanting to disclose all the mechanics that go in 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 of guidance?

We feel like it’s quite adequate where we are today, with where we can see it today. We would like to have the latitude, Ebrahim. I think most bankers would. They put additional reserves up if you could justify. 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 would have put on non-accrual. And 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 if 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 our drilling and completion and what little bit of service we do as existing production type service. Things like salt water disposal, compression on existing wells that are going to pump in some cases 20, 30 years. So for those reasons and the longtime 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’ve mentioned that in my comment. And I think that’s a typical. I think a lot of the, 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 is 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 downcycle 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 total 65% of our portfolio.

Understood and just the last point in that if I take it given sort of how the markets 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 cent of the dollars may not change at the next $5 drop or is that not the right way to think about it?

We believe the provision that we’ve given as guidance covers that kind of eventuality. Where there 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&L’s 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 a 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 might see. So that is another big plus of having the kind of experienced operators that were closely with our bankers that were 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 place 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 is 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 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 long period that number could turn 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 given in guidance in over planning to have the – even further elevated provisioning as we go forward. So I think we’re in the right place for the time being with what we see with our portfolio.

Understood. Thanks 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 criticize of a little under $200 million. Are those subsets of each other or to ask differently energy classifieds plus criticize, is that the some of those two numbers to around $330 million.

It’s classified as within the total that the subset of the 199.

Okay. All right, great. And then the $32 million of the energy reserves, you will talk about that be in a little over 3%. If you simply divided 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 stayed away from the energy service it’s close to that the drilling in the completion side. You really have to look at a lot of the run rates and income statement issues related to much more a modest volatility businesses if you are 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 SNCs – I realize you all agent, some of that. But if you look at the percentage of NPAs that are SNCs $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 teams of the companies. So we’re not the agent but we have relationships. And I think we selected some good operators and good companies in the SNCs portfolio, we’re just not a paper buyer.

All right and then, lastly, the overall SNCs portfolio both energy and non-energy was $1.7 billion at the end of September did that change much in 4Q.

No.

All right, great. Thank you guys.

Welcome Brady.

Your next question is from Michael Rose of Raymond James.

Hey, good afternoon guys. How are you?

Michael doing well.

Sorry to ask another energy question. Maybe if you can kind of talk about, looks like the energy balance should actually grew about I think you mentioned on the prepared remarks. What do you seeing from competitors in the space and if they’re starting to flee, I mean 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 that’s – it’s not a competitive environment. It’s driven by what underwriting we’re willing to put in place. And that means very expensive long-term hedges three to four years typically. And very strong equity players that are coming in and picking up or even 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 in book will probably 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 kind of a short to intermediate term, you would expect kind of the percentage of energy loans continue to decline, correct?

We think flat to decline. As a percentage of loans, yes, decline in the near-term. Yes.

Okay. All right, and then one follow-up from me. Just think the capital levels looks like your total risk base about 11.1% into the quarter. Can you give us kind of your updated thoughts on capital planning? All 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 then kind of what levers would you maybe look to pull should you need additional capital? Thanks.

The guidance in the expected growth rate in ROE in 2016, we’re not expecting to have to do anything.

And with a 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 there a couple of years that we’re looking for a potential capital or?

It’s as long as, as we see an opportunity. That’s sustainable and outsized if you go to deploy a new capital. And that’s always the way we looked at capital is, is don’t go draw down capital unless we could deploy it in a really high quality in outsized opportunity. And it’s not on the horizon at this point, 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.

The next question comes from Emlen Harmon with Jefferies.

Hi, good evening.

Hi, Emlen.

One last quick question on credit, how much of the specific reserve for energy is described to specific non-accrual loans and how much is it 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.

Fair enough. I will maybe moving on from there. What’s 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 particular in the last five years, because there is some amount of contagion with psychology with non-energy business owners. You know they’re going to tend to play a little closer to the West you may make sure that 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 have such a diversified economy, that we have a small market share and each of the key cities we focus on. Our attitude is that’s going to be quite a good year. We’re just going to be very careful about some of these areas it in to – have the deeper cyclicality and loss that accompanies that, Emlen. And we’re the only [indiscernible] – I’ve heard on calls talking about the prospect of 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 – that could be an issue out there for the national economy in the next year or two. And so for all those reasons, as we said early last year we just think it’s much more important to be extremely disciplined and 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 and then last one from me. Peter, on the NIM you gave us the guide, ex-liquidity is 350 to 360. What is the starting point for that like – what do you consider the ex-liquidity NIM to be in the fourth quarter?

About 360.

That makes it easy, right? So you’re calling for effectively a flat NIM in…

The flat with the effect of growth.

Okay. So flat NIM, the balance sheet growing, NII grows.

Normally growth might cause five to 10 basis points per quarter of reduction and we’re saying effectively we can offset that.

Okay. All right, thank you.

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 I’d love this the way you do the guidance Peter on the margin. The actual liquidity assets we 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. Just 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 in building the sources of deposits and as long as that can continue although we expect in 2016 at a much reduced pace that we’re prepared to do it.

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

That’s a more function of just lower percentage of the total with less growth in 2016. So from that we acknowledged, we will get some benefit to the NIM.

Got it. Okay. One quick follow-up from 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 and 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're taking a different view and treating all banks the same and we’ll 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. A year ago, I was a little more anxious about that. They did 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 sometimes. But I'm extremely impressed with the intellect, the effort, the attitude that we've seen but it’s still doesn’t eliminate that risk.

Okay, thanks guys.

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

Hi good evening.

Hello, Brad.

You guys addressed my question the margin but just more housekeeping on deposits. This quarter do you think that was just kind of more of a blip, I'm sorry if I missed at 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 kind of 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 a 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.

Welcome.

Well, I don’t think we lost any of the deposits we may have. But whatever it was, it was insignificant.

The next question…

Because mainly just cycle of 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 $33 million that 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.

And the next questioner is Steve Moss at Evercore ISI.

Good afternoon guys.

Hello, Steve.

[Indiscernible] 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?

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

Okay. And I guess the other thing is if it’s a $14 million in specific reserves on existing non-performing assets, it’s about a little over 10% in terms of potential loss rate, shouldn’t we be thinking 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 mitt Gannett, and allows us to make those adjustments. We do have very strong hedges in place and I think that's important. Perhaps not all banks have clients quite like ours. We think every portfolio is quite different and we like our portfolio. We understand the tendency. The tendency is wanting everybody to be at 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 higher provisioning next year.

Okay. And you mentioned operating costs are down for the oil producers. Kind of 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 you know 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 couple of dollars of pickup. But if you're looking at an operator on the higher end at 25 or 30, you're looking at 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 kind of situation. And you couple that with our hedge position with our clients we think were 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. Kind of 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’s step in and pick up great management teams and excellent properties and have one of the lowest levered, best opportunities we’ll see in ten years. If we get enough of that deal flow, we can offset more of this paydown. If we don’t, we’ll see the pay down and it could be, I mentioned to you that 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. That’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 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.

Builder finance, you got that.

It's right at $800 million or $900 million, closer to may be $1 billion.

And how much of that is in Houston?

About 50% of that is – 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 see our builders in Houston tamp down their volume this next year. But they have sold – they built as many houses in 2015. As I did the preceding year and I 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 is weathered in many respects as transitioned 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 multi-family and the office. Industrial retail looked really strong. Single-family still looks quite strong.

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

Welcome.

The next question is from Matt Olney of Stephens.

Hi guys good evening.

Hello, Matt.

Within the outlook for the MCA business, I believe the prepared remarks had some commentary on fees. Can you give us anymore details on your assumptions on MCA piece in 2006?

The only thing we can say is the market remains extremely competitive for people that are building MSR portfolios. When we opened 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 a good detail. Thank you for that.

Welcome.

And going back to energy question, on the fall redetermination, 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 work through that redetermination. And that’s what I mentioned we ended up around 35% on that fall redetermination.

Okay. Thank you, Keith.

You’re welcome.

The next question is from Peter Winter with Sterne Agee.

Thanks for taking my question.

You’re welcome.

Just, I was wondering if you give a little color on the impact of that trade and then maybe what it means for the first quarter?

Sure, it is getting better. The volumes are beginning to flow better, but the defect rate is still are the 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 of product – 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 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 25%, 30% defect slowdown. The volumes are coming better each week.

Okay. That’s very helpful. And then, I’m just wondering just given the fall out of lower energy prices, can you just talk about what you’re seeing in terms of competitors on the overall lending environment. I mean, are you seeing them pull back and is it also leading for better pricing and so maybe as you build the balance sheet growth, it’s less than that 5 basis point negative impact from the gross, 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 is 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 is still quite good. In fact, North Texas is really, really strong at this point. But we have not yet seen the pullback years ago, we might have seen from time-to-time time by out-of-state-based companies and banks that would sort of knee-jerk in an environment like this. We've not seen that kind of 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, 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%. It’s 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 with Macquarie.

Hey, thanks 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 Federal Reserve kind of energy piece of it? Or is it that the entire 7% of loans outstanding, criticized the $199.2 million?

It's the whole 7%.

Okay. And I know in 3Q you disclosed the non-accruals. Did you get – was that criticized number disclosed in 3Q? Or would you disclose it to just give a sense of kind of how things kind of migrated?

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

Or the reserve.

Nor the reserve.

Those are new disclosures.

Okay. Is it – I mean I guess, could you disclose the criticized from Q3 or then as a follow-up to that, is it unreasonable to think that the migration was sort of as rapid as the non-accruals sort of migrated?

They’re more like the non-accruals.

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 in 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?

Energy? We’re way beyond any historical level.

Okay. All right. Then again…

The dip in 2009, we had no non-accrual energy loss.

No non-accrual and criticized was meaningfully below the 16.5 that it is today?

On that level, yes.

Yes.

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

It is mostly multi-family, but that is also the category that we’re seeing a lot of the sales and playoffs we’re in and refis. So 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 multi-family and also buyers REITs and so on. So that’s not dropped way off, it’s still strong.

Okay, fair enough. Okay, I appreciate it guys.

You’re welcome.

Our next question is from Brett Robertson, Piper Jaffray.

Hi. Good afternoon.

Hello, Brett.

I wanted to just go back – I appreciate the increased guidance around energy. Just want to go back to the guidance around or your discussion around charge-offs potential in energy and 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 and criticized that you currently have? Or maybe you can talk a little bit more about how you come up with some 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’re reserved in position today. And what we would expect even in a continuing slippage on energy prices on average. But if we see something really outside and more prolonged at very low prices that’s why we’re elevating the quarterly provisioning.

Okay, some flexibility there. And then…

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. And I want to get a sense for thinking about your portfolio versus peers your numbers are tighter correlated, criticized and NPAs and you kind of talk about being conservative and what you would move to non-performing already. Can you talk maybe about what you've moved to non-accrual and what got it there? Was it covenants? Was it efficiencies? Is there any trends in what you've moved in non-accrual versus what might be criticized?

We weren’t comfortable with 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 we weren’t pleased with the kind of 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. And then…

Borrower's liquidity is really one of the keys, along with this amortization cash flow level and it’s not a collateral shortage they were worried about, it 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. And we have a similar amount that’s secured – that’s energy purpose, but it’s secured by liquid bond stocks, things of that sort. So while we put it in the energy total of 7%, it is 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 base 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 guess I’m just trying to go back to the service that you have. It's not cash secured guaranteed or secured with additional assets. The service that you have, it’s primarily…

Yes, that’s the $130 million-ish that we have saltwater disposal, compression, things of that sort.

Okay.

We don’t have fracking companies. We don’t – again, take that risk and it so risky on that side in our view, because it’s so capital expenditure dependent, cash flow dependent. When you get into down cycle and price of 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 did.

And so you don’t have anything in that – 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, I want to go back to…

The further thing – the only non-accrual we have is like $200,000 non-accrual.

Okay.

And of the non-performing 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.

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

Okay. Appreciate that color. And 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 55% 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 will 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 the color.

You’re welcome.

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

We thank you gentlemen for your interest in Texas Capital Bancshares. We’re working hard to continue to drive core earning power and build out these 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 the cycle. Thanks for your time.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.