Texas Capital Bancshares, Inc. (TCBI) Q2 2016 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Texas Capital Bancshares, Inc. Second Quarter 2016 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. At this time I will turn the call over to Heather Worley, Director of Investor Relations.

Thank you for joining us for the Texas Capital Bancshares, Inc.'s second quarter 2016 earnings conference call. I'm Heather Worley, Director of Investor Relations. Before we get started, please remember that this call will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the date of this call and we do not assume any obligation to update or revise them. Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release, our most recent annual report on Form 10-K and its subsequent filings with the SEC. With me on the call today are Keith Cargill, President and CEO, and Peter Bartholow, CFO and COO. After a few prepared remarks, our operator Laura [ph] will facilitate a Q&A session. At this time I will turn the call over to Keith who will begin on Slide 3 of the webcast. Keith?

Thank you, Heather. We welcome you to our second quarter earnings call. I'm Keith Cargill, President and CEO of Texas Capital Bancshares. We will lead with my opening remarks, followed by comments from Peter Bartholow, CFO and Chief Operating Officer. Then I will close, and Laura [ph], our operator, will open the call for Q&A. The second quarter of 2016 showed continued strong growth in loans and deposits. Average core LHI growth equaled 3% linked quarter. Year over year, core LHI grew 12%. Average growth in mortgage finance amounted to 18% linked quarter, with the seasonally strong second quarter volumes. Year over year, mortgage finance increased 2%, netting out the increase in participation sold. Our newest [ph] mortgage business, mortgage correspondent aggregation, or MCA, grew 25% on average from Q1 to Q2. We look forward to a first time profit contribution from the MCA business in the third quarter, preceding its one year anniversary since we launched MCA at the end of September 2015. Demand deposits increased on average 15% linked quarter and 14% year over year. Let's move to credit. First, we were able to record a significantly reduced provision for loan losses of $16 million, versus the $30 million in Q1. Despite higher charge-offs, the reserve for our energy portfolio remained at 5%. We ended the second quarter with an overall loan loss reserve of 1.41% against LHI net of mortgage finance. Non-accrual loans for LHI decreased 0.93% - to 0.93% from 1.02% linked quarter. Non-accruals were 0.77% at Q2 2015. Net charge-offs were $12 million or 39 basis points, versus 25 basis points in Q1. In Q2 2015, net charge-offs were 14 basis points. Clearly the pace has increased of realizing the loan losses in energy, for which we have been providing over the past 18 months. This trend is expected to continue in the normal cycle of loss recognition. We expect continued but slowing grade migration in energy portfolio for a few more quarters as well. Our decision to modestly increase the range in our guidance for full year provision was based on the presumption we will see energy prices lower for longer and the overall concern we have regarding the U.S. economy. Our clients across many industries are reluctant to invest and expand their businesses as they view the future as increasingly unpredictable and the economy volatile. Continued regulatory demands on our clients cause disruption and distract their attention from growing revenues and profits. Thankfully, the Texas economy continues to perform well in the five urban markets in which we operate, despite the transitions Houston is undergoing. The health of our state economy overcomes some of the headwinds I mentioned, but generally our clients and therefore we, collectively, remain conservative in running our businesses. This conservatism impacts the pace at which we are willing to grow and the expectation of increasing credit risk across the economy, not simply in energy. Next, turn to Slide 4 for our energy update. Despite the ongoing pay-downs on our energy loans, we have had success in winning a sufficient number of energy relationships to overcome the pay-downs. Thus, outstanding energy loans were flat at $1.1 billion from Q1 to Q2. As mentioned earlier, we have loan loss reserves of $58.6 million or 5% set aside for the energy portfolio. The mix of business is essentially the same at 60% oil and 40% gas. Energy non-accruals decreased from Q1 and criticized energy loans increased slightly from 21% in Q1 to 22% in Q2. Finally, the market for new energy loans has improved with many fewer competitors. Loan structures and hedging requirements are again solid. Even with additional new energy relationships acquired through the remainder of 2016, we expect little if any net growth by yearend in the total energy portfolio. On Slide 5 we show the Houston market - Houston market risk real estate, excluding builder finance. With total outstandings of $814 million in Houston CRE, we have only $8.6 million in special mention and no substandard. Slide 6 describes our geographic diversification in loans and deposits. In the upper right quadrant, please note the unemployment rate data on the Texas urban markets in which we operate. Peter?

Thank you, Keith. Keith mentioned that we had great performance in the second quarter. The Company produced net income of $39 million and EPS of $0.78. Keith has addressed that provision increased from $30 million in Q1 to $16 million in Q2. This was consistent with the previous guidance and obviously a key factor in the improvement in operating results. But we also experienced strong growth in net revenue. The growth in traditional held-for-investment loans and total MFL balances, including MCA, represented meaningful improvements in market share position relative to peers. MCA is on track to building average balances provided in previous guidance. Increases in net interest income and net revenue from Q1 were 8.5% and 9.6%, respectively, driven by both loan growth and an expansion in NIM by 5 basis points. Demand deposits on an average basis grew 15%, and total deposits increased 8%. Deposit growth returned to more normal trends after the Q1 seasonal weaknesses that we discussed in April. The DDA balance growth in Q2 on average basis was equal to total loan growth, including mortgage finance balances. Loan growth was very good and consistent with guidance that we gave in Q2, earlier in Q2, and compared to Q1. Traditional LHI grew by 3%. Mortgage finance, warehouse and MCA combined grew a total of $750 million. And as planned, year-over-year growth in total LHI has moderated 7.6%. Importantly and as expected, year-over-year growth and total LHI was less than ROE levels and the percentage growth in common equity. Net interest margin -- net interest margin we experienced improved yields on traditional held-for-investment loans and strong growth in mortgage finance contribution. We saw improvement in yields by 10 basis points, that was a benefit of loan fees, including syndication fees, return to more normal levels, overcoming the contraction in yield resulting from the growth in the portfolio. Improved spread and loan yields to funding cost produced both the increase in reported NIM and in our NIM adjusted for liquidity assets. Growth in liquidity assets to 16% of running assets did reduce NIM by 3 basis points, with a minor benefit to net interest income. Total impacted NIM of liquidity asset growth is now 50 basis points, again with no adverse effect on net interest income. Yield trends have actually remained quite favorable, especially given the magnitude of growth and the competitive environment in which we operate. On Slide 8, as noticed - as noted, we experienced growth of 3% in average balances from Q1 to Q2 and 12% year over year in traditional held-for-investment loans, representing very solid growth consistent, as I said, with our guidance, and reflecting also a high level of pay-down activity and declining contributions in growth rates from both CRE and energy. Total energy related loans, as Keith mentioned, were flat at quarter-end. And for the last half of 2016 we expect further reductions in the rate of growth in the contribution from CRE which grew only slightly in Q2. Texas Capital maintains a very strong position in the mortgage finance business. Loan balances grew 18%, after the increases in participation sold. We increased participation sold to $840 million at quarter-end at an average balance of $650 million, on total commitments now of $1.2 billion. Mortgage finance loans represented 26% of average total loans, up slightly from Q1. We think it's important to note that we are effectively managing a much larger mortgage finance business, close to $6 billion in total loans, while limiting concentration on the balance sheet. Average MCA balances grew slightly to -- good percentage-wise, but in dollar terms, slightly to $158 million. It is consistent with guidance and on a path to the substantially higher average balances in coming quarters. And also mortgage finance as significant business continues to generate good deposit levels. On Slide 9, again deposit growth was exceptionally good in the second quarter. We saw a reversal of the trend -- seasonal trend we experienced in Q1, and produced a meaningful, although just a few basis points, in the context of our funding profile, a good reduction in funding costs. Growth in June 30 is actually net of $300 million and a single deposit product in which operating costs were too high in the low rate environment we endure. We will see some expense benefit in the second half resulting from the elimination of that product set. Funding cost in terms of rate were down slightly, again due to the growth of DEA [ph]. The aggregate cost of deposits with very low-cost branch strategy provide very favorable spreads even without increase in short-term rates. For the reasons mentioned of loan growth and deposit structure, the degree of asset sensitivity increased again in the second quarter. Non-interest expense trends improved modestly and we experienced a small improvement in operating leverage, with the rate of growth in net revenue greater than the rate of growth in core and IE. Even with the linked quarter increase in 123R expense of $2.8 million, we experienced a small reduction in the efficiency ratio. Non-interest expense includes a quarterly operating loss of $1.6 million from MCA; that's $1.2 million in operating losses before an MSR charge of $400,000. That compares to the loss in Q1 of $2.5 million. As noted earlier, the trends in core NIE are modestly improved from previous guidance. Slide 11, core operating results were good, obviously. The return on assets and return on equity improved, from -- obviously from the reduction in provision, along with the growth in net revenue and the much smaller loss in MCA. We believe the results demonstrate the opportunity for significant improvement over the remainder of 2016. Turning to Slide 12 and the 2016 outlook. We have no change in our outlook for traditional held for investments. Reflects the planned reduction, as mentioned, in growth rates for CRE and the probable net contraction of the energy portfolio. We also expect the continuation of relatively high levels of general pay-down activity in the last half. Growth in MFLs in Q2, coupled with an improved industry outlook, resulted in a minor change in guidance, eliminating the possibility that loans could actually be flat for the year. We are continuing to manage the portfolio concentration and expect participation balances to increase over the remainder of the year. MCA is still expected to be profitable for all of 2016, with average balances in excess of $300 million for the year. We are increasing the guidance for growth in total deposits to low to mid teens. The stronger growth in Q2 overcame the effect of planned reductions that I mentioned earlier. Growth as a percent of -- growth as a percent and dollars will again exceed the growth in total LHI by more than had been indicated in prior quarters, thereby increasing the average balance of liquidity assets. The outlook for core NIM is generally unchanged, though the performance in Q2 exceeded our guidance. Before the impact of liquidity assets, again 3.5% to 3.6%. And for reported NIM, the range of 3% to 3.2% is wider due to the high variability in the level of liquidity assets. The outlook for growth in net revenue and net -- non-interest expense both changed slightly, shows low to mid-teens growth, primarily related to better information about MCA activity, again without changing our view that MCA should be profitable for the full year. The efficiency ratio, we now expect low to mid 50s, so, slight improvement from prior guidance, from mid-50s, that we provided in April. The ratio is actually about 54% in Q2 before the impact of 123R expense from the change in stock price. Reversal of the MCA loss will improve operating leverage. Our guidance is related to core NIE not including any impact of changes in 123R expense that are tied to stock price movement. Provisioning expense in Q2, as Keith mentioned, is reflective of our view that the full-year provision could still fall within guidance. Given some continuing uncertainty on the pace of economic growth generally and some additional exposure to energy credit migration, we think it's appropriate to show a wider range of mid-60s to mid-70s million dollars. While we believe that the increased allowance already allocated to energy is sufficient to address exposure to actual loss, the timing of charge-offs can be difficult to predict. As you know, we had a slightly larger charge-off ratio in Q2. In the natural progression, as Keith mentioned, of events following the downturn in this industry, we may find it appropriate to reflect write-downs in a way that could affect the net charge-off ratio without implying a change in our view of total loss exposure. Charge-offs related to energy represent a substantial majority of the total charge-offs year to date, which means that even minor charges in other categories could cause the ratio to exceed 25 basis points. Keith?

Thank you, Peter. Slide 13 provides a summary on credit quality. My earlier comments and Peter's comments covered the highlights on this slide. In closing, we showed strong LHI growth again in the second quarter, in line with full year guidance. Deposit growth has been sufficiently strong, to cause us to modestly raise our guidance for the year. The energy portfolio showed a slight increase in criticized in from 21% in Q1 to 22% in Q2. As expected, we are realizing more of the energy losses quarter by quarter after building reserves for the past 18 months. Expectations of oil prices remaining lower for longer and broad economic and regulatory concerns expressed by our clients across our C&I portfolio and national footprint influenced our decision to modestly increase the range in full year guidance for loan loss provision. The seasonal strength in mortgage finance drove higher volumes and profit contribution. Fees increased on both mortgage finance and other fee sources across the bank following the abnormally low fee income in Q1. Our strategic focus on improving ROE to higher sustainable levels continues as we build our existing and new businesses. MCA is an example of a new business we believe will begin contributing next quarter to profits and demonstrate a rising top quartile ROE over the next several quarters. Thank you for joining our call. I will now call on Laura [ph] to open us for Q&A.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Ebrahim Poonawala of Bank of America Merrill Lynch.

Good afternoon guys.

Hello, Ebrahim.

So, Keith, just going back to sort of your comments around provisioning and concerns around the U.S. economy, I think in general it seems like we're getting a mixed picture from the banks this season so far around the outlook on credit. I'd love to get your thoughts in terms of, is there anything that's going on underlying in the economy that makes you a little more cautious today, be it in the Texas portfolio or any of the national businesses, which leads to this, or is it just given where we are in the cycle, you think this is the right -- more prudent thing?

It's more related to the cycle, Ebrahim, and just statistically, you know, the odds moving more toward a slowdown certainly at this stage of the economic cycle. And the attitudes of our clients. We found over the years, you know, we find that our clients -- staying engaged with our clients really help us in many ways. It helps us run a better business by paying attention to the steps they're taking to improve their efficiency cost structure, how they run their business, how they stay agile to compete against the biggest companies in their industry they go up against. And we really listen carefully on economic temperature that our clients, you know, communicate with us. And they have increasing anxiety, you know, about regulatory disruption as much as anything, as well as economic cycle. Our view would be around this slight, very modest increase in the range on provisioning, is more the macro, but we are listening to our clients too and they have concerns, which we pay attention to.

Understood.

…industry per se. We're seeing this regulatory creep and the disruption it can cause, really a multitude of industries that we're buying [ph].

Understood. And I guess just taking it one step sort of into Houston market real estate, we are close to two years since we had the big first selloff in oil. I think, have you assessed the Houston real estate market today? Is it safe to say that it's held up much better than expected or is it a little bit too soon in the cycle of a low oil price environment before we actually start seeing issues?

Well, I've been concerned for every bit of this full period since the oil slide and I've been wrong and overly conservative, so I remain concerned that I hope I remain wrong. It has definitely held up better than I would have thought. But we continue to see the transition of the employment in Houston really move much better than we had anticipated. It's bigger than just the diversification that's occurred the last 20 years, Ebrahim, in the overall economy in Houston. It's also just good fortune in the timing of some of the significant build-out that's going on on the CapEx side with all the petrochemical build-out, $50 billion plus, with the next phase being an order of magnitude comparable to that $50 billion. And that should last as long as another six years. And so that's been very helpful. You add to that the port expansion in Houston, and I think Houston is transitioning even better because you've had those uplifts to offset some of the employment challenges on the energy side.

Got it. And just one last question for Peter, if I can. Peter, if you can help us sort of remind us in terms of capital ratios when we look at the leverage ratio at 8.7, CET1 at 7.4, what sort of the binding constraint as we think about capital requirements?

In terms of capital requirements, Ebrahim, as usual we specify or focus on what's happening to the average balances, especially in the warehouse given the historical spike that occurs at every month-end, at every quarter-end. So, back out $840 million spike between quarter-end balances and month-end balances and you're back above 8%, and that feels just right. So I commented we're dedicated to growing the total 100% risk weight portfolio at a rate below our ROE or growth rate in common equity. And that seems to be holding.

Understood. Thanks for taking my questions.

Your next question comes from David Rochester of Deutsche Bank.

Hey. Good afternoon guys.

Hello, Dave.

On the revenue guide, did I hear you correctly that your outlook on MCA was the reason you lowered your guidance, was that right?

I would describe it, Dave, as kind of true-up. We start that in Q1 on any kind of meaningful ramp and we've just got it higher on expenses than it's working out. We also acknowledge obviously there's still competition and the value of gain on sale, and all of those things taken together make us feel good about the total profitability for the year. It's just fine-tuning those two numbers.

So you still think that you hit profitability in 3Q in that business?

Yes.

Yes.

It seems like you have so much mortgage volume coming in, right? You've got your average participation at $650 million, the average warehouse is up 18% quarter over quarter. It just seems like you could really fill up MCA quickly if you wanted to price at the market. Is that -- am I looking at that the wrong way? And what are some of the dynamics that you're seeing that prevent that from happening?

It's a very, very important facet of any startup business and that's certainly true with MCA, that you focus almost obsessively on the quality of what you're building as a foundation for that new business. You have the challenge of all the regulatory change, TRIAT [ph], et cetera, and the importance of generating some new client base, at the same time we're having crossover existing client activity, and there's just a lot of dynamics that mean you really need to do it right and put growth second. So, yes, we could have added more growth, but we would have had some paper that we would have bought here and there that might have had a trend [ph] defect. We don't believe we have any of that in the portfolio. And that's the reason we designed the system, invested the money, and most importantly, invested in the top talent that runs that business for us, is to ensure that we don't create quality problems. Those can translate not only into buyback risk but these days the bigger challenge is regulatory CFPB issues too. So we want to be sure that we build this business with quality first, and our team is doing a great job.

And are you guys --

-- comment further.

Go ahead.

The change in guidance isn't just solely related to MCA. We're making other improvements on the expense side and then we have a different view still of the level of growth in CRE. And when you have a declining rate of CRE growth, there's a fee component that represents some missed opportunity. So, all of those things are factored in, not just the change in MCA.

Got you. Great. Thanks for that. And then just switching to loan growth, can you just talk about how the loan pipeline looks heading into 3Q versus how it looks heading into 2Q? You had some nice growth here in the second quarter. I was just hoping the pipeline could shed some light on 3Q.

It's as solid as going into 2Q, which is somewhat surprising. Seasonally we normally have a stronger pipeline for each of our quarters going into 2Q, but because we've added some really talented capabilities, RMs and people that ramp up a couple of our verticals, we're building incremental new pipelines that are C&I pipelines but they're in these verticals. So that has further contributed to having pipeline that's strong going into 3Q as we did 2Q. And then you made a comment about expected pay-downs, and I know that's probably impacting the construction portfolio, but can you talk about what pay-down activity was like in the second quarter and maybe what your outlook is for 3Q there?

Always hard to predict, but it was very high in Q2, maybe just short of a record.

Wow. Okay. And then just on expenses, on your Slide 10, you noted some one-time items there in the other expense line. Can you just sum up how much of that increase in that line was more one-time expense?

Well, obviously the 123R fluctuates. Legal and other professional can always fluctuate.

That other expense line that -- so, separate from that, the cash incentive plan, that just bumped up a little bit, so, just wondered if there's anything one-time that we can pull out of that.

No, nothing meaningful. Meaning that there will always be variability in that line. There's nothing that's cropped up that's unusual or likely to persist in a way that's not consistent with our general business.

Got you. And then your comment on eliminating the deposit product and that -- kind of freeing up some expense. Any way you could put some numbers around that?

It's a little too early, but it's -- it's not a game-changer, but it's a nice attribute of being able, frankly, to have the liquidity available to start taking those steps.

Yeah. And just one last one if I could, on your lower for longer oil price assumption, what price level are you actually using in your provision guidance there? I think earlier in the year you talked about a mid-30s price for oil. Is that still the level you're expecting and does that go through 2017 now?

It is a mid-30s on our sensitivity case, Dave, and we just stretch it out with a slower escalation.

Great. All right. Thanks guys.

You're welcome.

The next question will come from Michael Rose of Raymond James.

Hey, good afternoon guys, how are you doing?

Hello, Michael. Doing well.

Hey. Just wanted to talk about your experience through this quarter's borrowing base redeterminations, kind of what you saw on average. Obviously the migration in the criticized was pretty modest and I think will compare favorably to peers again. Is part of the increase provision guidance maybe because you might expect oil prices remain near these levels in the back half of the year, that you could have maybe some incremental migration, or just how should we think about the upcoming fall borrowing base redetermination? Thanks.

You know, it's just general uncertainty. We expect some volatility around this price. The long curve has not tipped down a great deal but it's tipped down some. It's - the short price, the spot price that's backed off a little bit, and of course that put some added strain on liquidity near term. And we know some of our clients are stretched on liquidity. On the redeterminations, Michael, we came in right at about what we thought and I guess forecast in our call first quarter, and that's mid-20s. We're about 25% constriction on the unfunded commitments out of the redetermination. So we continue to have relatively modest unfunded compared to others in the energy business. I think it's right around 30% or a little less than 30% unfunded after this netted out. But generally we just are cautious about how oil ultimately plays out the next six months. If we get back north of 50 and we see it stable there for a few months, then our outlook gets a little more favorable. But now that it's playing down in the mid-40s, it gives us some pause. There's a little uncertainty.

Okay, that's helpful. And then just as a follow-up, it seems like your MCA guidance of $300 million [inaudible] the back half of the year, is that still the right way to think about it, you guys are expecting pretty good volume as we move into the back half of the year in that business?

We do. In fact, the trajectory really tipped up the last -- the back half of June and thus far into July. It's growing nicely. And it just takes getting to a certain place where you've got all the systems fine-tuned and have this additional client acquisition that's picking up momentum. So we do still feel comfortable with the guidance.

Great. That's all my question. Thanks.

You're welcome.

And the next question comes from Jennifer Demba of SunTrust.

Thank you. Did you hire any new revenue producers during the second quarter?

We did. We hired five new RMs, most of those with C&I. We actually had some that left the company and we're very, very pleased with how we're conducting our management of talent, and I think we're developing great talent. And very importantly, Jennifer, we continue to find each class of new hires the last several years. It seems to be increasingly stronger and stronger talent overall. There's a couple of others we're kidding each other the other day, we're not sure we made the cut today. We're glad we founded the business, got in early. We have some incredibly talented people and we're real pleased with the five that joined us.

What markets were those in, Keith?

Two of those were in the Dallas market. The other three were, my recollection was one in Houston -- two in Houston and one in San Antonio, I believe, yes.

Jennifer, we can follow up with you on that after the call today.

Thank you.

You're welcome.

And the next question is from Emlen Harmon of Jefferies.

Hey, good evening guys.

Hello, Emlen.

Just a quick follow-up on MCA. Was that business profitable in the month of June? I know that was your expectation earlier on in the quarter.

You know, we took the mortgage servicing mark-to-market. We just, as everybody enjoyed that's in this business, I think the very bottom of the market price on -- actually hit on the 30th of June. So we went ahead to take that write-down. On a run rate basis, we're comfortable that -- where we are today, we're running at a profitable run rate, so that for the quarter we're very confident we'll be profitable.

And then you guys removed the charge-off guidance as opposed to taking off, just given what's going on in the energy environment. Is it just too difficult to predict, and I guess why are you more comfortable with keeping the provision guidance not the charge-offs?

It's the timing on the charge-offs and the volatility of the timing. You know, we've been building the reserves for 18 months. The charge-offs get realized in a tighter cycle typically, is how these losses in an industry sector usually play out. They don't play out over as long a runway as you begin to build the reserve and provide. And so as we get into the last -- the next few quarters, we just have a hard time saying over two-quarters yet to go, whether it be two quarters or three or four, where we take much of the charge-off or loss we're going to realize on this energy portfolio. So that's why we just thought we ought to talk about that and let you know that we're less confident being able to give you any kind of precise number around charge-offs for the balance of the year. It's not that we see any major new losses per se coming. It's timing.

Okay. Thanks, Keith. Thanks, Heather. That's all my questions.

And next we have a question from Steve Moss of Evercore ISI.

Good afternoon.

Hello, Steve.

With regard to commercial real estate balances, it sounds like they could start to decline going forward. Just wondering if that's fair characterization and where do you expect the pay-downs to come from?

Actually we hope that they begin to plateau and the trajectory flattens some, not that they decline. But that is a tricky proposition, because as you slow the pace of new commitments, again those take several months, typically a two-year build-out horizon on a C&D loan for a development, whether it's multifamily or office or whatever, it often can take two years. So as you begin to slow those commitments, you're trying to assess, and we do this regularly with our team and our credit team as well, we try to predict when those properties are going to finish, when they'll be refinanced or sold, and then look at our pipeline of what we might be comfortable bringing in as new product. So if we do this as well as we're trying to orchestrate it, then it wouldn't go down but it would certainly taper off. And our goal would be for CRE to still grow but grow at a pace at or below the overall C&I growth of the company. And the reason for that is we're so quality-focused getting this far end of the economic cycle, knowing that typically CRE has more of a cyclical credit loss risk to it when you run the cycle and enter a national recession. So we certainly can't predict when, we just know we need to start early on working on improving quality and slowing the pace of growth, not actually decreasing the balances.

Okay. Got you. And then just wondering if you could quantify the dollar amount of new energy origination this quarter and maybe give a little more detail as to the structures and hedging levels you are seeing.

I can broadly talk about it. You know, we're seeing now clients be open as they were for years up until really the year preceding the downturn. It was about a year-and-a-half period, 18 months before the oil price slide, where the market just got so aggressive, clients were not as open to putting hedges in place. And we were insistent on doing some hedging on their production, so it made us less competitive. That's -- we really didn't grow the energy book the two years preceding the downturn. And that actually helped us by not chasing the market, as it got overheated, it helped us reduce our concentrations of energy loans from 10% of our loan portfolio to 7%. And now as you know, today we're at 6%. But to get back to your main question, we are seeing clients very willing to put hedges in place. You know, they want it for their benefit, not just for ours. Of course we've always tried to align interest to a degree with our clients, that will make a higher advance in our borrowing base on hedged production than we will on unhedged. And they get that, the importance of liquidity, after what they've seen on price slides, they're much more attuned to the importance of hedging and getting that added liquidity capability and their borrowing base. Also we're seeing private equity money come into the market and acquire some of these properties and put great management teams in place to run these new E&P companies. So this is the time in the cycle, if you do this business well and you've done it a long time as we have, and have a great team, most importantly, both engineers and production RMs, that can do the right assessment of management, not just property sets, then you have a chance to book the very finest credit quality it will book in the next probably decade in the space. You just have to be really, really disciplined and get the right amount of hedging and also extend it out now in some cases three years. So we feel good about structures today, they make sense again, and it's not an area that we're going to be so aggressive though that we find credit that is just a little above average. We want credits that are going to be top decile, certainly top quartile credit quality credits, so that any new business we bring on that offsets pay-downs improves the overall credit mix and credit risk of our energy portfolio. And that's what we're about doing.

Okay. Lastly, on capital, I hear you guys about growing loans at a slower rate relative to returns, but total capital did come in a bit in this quarter, and I realize some of that's driven by mortgage finance this quarter. But do you have any thoughts about increasing your capital buffers?

Not really. We're comfortable where we are. We saw ROE approaching 10%. And the level of total 100% risk-weight assets grow at just over 7%. Again no one logically would fund with capital the surge that comes in the last four days of a month and then dissipates in the next week after the end of a month. I mean at an 8% TCE or CET1, notion that you put $70 million, $80 million for two weeks doesn't seem logical, especially given the profile -- the risk profile of that asset class.

Okay. Thank you very much.

You're welcome. Thank you.

And next we have a question from John Moran of Macquarie.

Hey guys. Just a couple of quick follow-ups. Sorry if I missed it, but did you guys disclose the purchased refi split in both MCA and I guess, sorry, MF, rather, mortgage finance?

It was about 63/37.

Purchased.

Purchased, right?

Skewed towards purchased. Okay. And as we kind of went through the quarter and rates did what they did, did refi jumped up a bunch and is that kind of heavier in there for going into the 3Q?

Surprisingly, while it blipped some, it's tailed back off, and it's looking more in balance.

Okay.

It was a short-lived bump.

Okay, that's helpful. And then the other kind of tiki-tak one that I had was just the shared national credit balances. Was there much movement in that versus where we ended 1Q?

Yes, we had a little movement. And more importantly, we had a meaningful shift in the level of those loans that we agent. So the loans went up a little less than 100 and the amount that we agent went up almost $170 million or so.

The percentage mix moved from like 19% agented to 26%. So we're making headway. As you know, that's a long-term goal of ours, is to move our agented mix up.

Okay. Perfect. And then the last one I had, I just wanted to circle back on MCA again. So it's kind of a $0.02 drag this quarter, $0.03 drag in 1Q, expected to kind of reach some profitability in 3Q. As that kind of fully ramps, where do you think that drives or do you have kind of a targeted return on equity for that business and what it means on a consolidated basis?

Really good is what we're projecting. We believe this business will be a top decile business. In other words, out of our 20 various businesses, particles if you will, and lines of business, we think this will be a top two business on ROE. It will take, you know, several quarters, as I mentioned in my comments, this isn't going to happen overnight. But we think the trajectory is going to be steep. And by the end of the year, as we talk about how we finish on run rate in January for the ending year 2016, I think we can give you much better metrics. Again this is a business just nine months old. It's a startup business, one that we've really worked carefully in and thoroughly with to get it fine-tuned on the technology, get the quality to be superb, even with all the TRID [ph] issues and rejects that came with that. I think you'll see us start to hit our stride, we believe we will, by the end of this year. And we'll give you a much better idea. Today I can just tell you we still believe we'll be profitable for the year, and it will hit the guidance we've talked about all year on $300 million or better on average.

Okay. Thanks very much guys.

You're welcome.

The next question comes from Brett Rabatin of Piper Jaffray.

Hi, good afternoon.

Hello, Brett.

Thanks for taking my question. With some of the uncertainty that you mentioned, Keith, it looks like interest rates are going to be -- continue to be lower for longer, and that's obviously affecting what would be above peer profitability for you guys. So I guess I was just curious, thinking about how you're running the business, what kind of operating leverage can you guys drive to reach a certain ROE? Or do you think about it that way? And are you considering, you haven't in the past, but are you considering reducing your asset sensitivity to any degree?

You know, Brett, we've been working for some time, a year and a half at least, on our strategy that, as we grow, that we be much more thoughtful and deliberate about where we grow and the pace at which we grow. We want all our businesses that we're in to be healthy and successful and growing. But the pace at which we grow our different businesses, we want to align well with risk-adjusted returns, so that over time we'll be able to lift ROE and sustain that higher ROE run rate even in a rate environment with no increases. Now it's very challenging. But we ramped up this MCA business, again a pure startup, we've spent a lot of money for two years, you know, investing in the business pre-startup and then a run rate of course in any new business that's a negative run rate that we've been reducing each quarter. And now we'll finally see it emerge as a profitable business next quarter or in the third quarter. So we have other businesses that we believe have similar capabilities on incremental ROE, not just ROE that they may run out today, but our strategy around that business to drive a higher ROE over the longer run and ramp it and leverage some of the operating opportunities in that business with technology and more refined targets of client base. And along with the MCA business, we've also, as you know, been rebuilding our private wealth advisory business. We were successful hiring some of the private bankers earlier and then more recently had been able to hire some really outstanding wealth advisor talent that's just joining us and will be joining us over the next few weeks. And we believe that all of the signs are pointing in the right direction. The private banking side is growing extremely well over the last six months, showing a really nice growth trajectory, very high credit quality, nice deposit growth, fee income. And now with the wealth advisory business, the blend of the high-quality credit on the private side with the wealth advisory fee income, we think again that's going to be a great business over the next few years and lift our ROE too. So, yes, we're definitely facing headwinds. We made these assumptions a year and a half, two years ago when we really refined our strategy, worked hard on our strategy in the company. And the whole purpose is to overcome these headwinds. However long the low-rate environment lasts, we have to find ways to grow risk-adjusted with better returns to offset the erosion of NIM. And we think we're on track to do that the next few years.

Okay, great. Thanks for the color.

You're welcome.

[Operator Instructions] And showing no additional questions, this will conclude the question-and-answer session. I would like to turn the conference back over to Keith Cargill, President and CEO, for any closing remarks.

We thank each of you for your interest and your time today. And please follow up with Heather if you have further questions and need assistance. Thanks so much.

Please contact Heather Worley by phone 214-932-6646 or email heather.worley@texascapitalbank.com with any follow-up questions. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.