Texas Capital Bancshares, Inc. (TCBI) Q4 2016 Earnings Report, Transcript and Summary

Welcome to Texas Capital Bancshares, Inc. Fourth Quarter 2016 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Heather Worley, Director of Investor Relations. Please go ahead.

Thank you, Nichole. Welcome to the Texas Capital Bancshares fourth quarter and full year 2016 earnings conference call. I'm Heather Worley, Director of Investor Relations. Should you have any follow-up question, please call me at 214-932-6646. Before we begin our discussion, I would like remind you that our call will include forward-looking statements that are based on our current expectations and 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. Any forward-looking statements made today are as of the date of this call and Texas Capital Bancshares, do not obtain any obligation to update or revise any such forward-looking statement. Statements made on this call should be considered together with cautionary statements risk factors and other information contained in today’s earnings release, our most recent Annual Report Form on 10-K and in subsequent filings with the SEC. 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 on the 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, and welcome everyone. As Heather mentioned, I’m Keith Cargill, President and CEO of Texas Capital Bancshares. After showing my comments on the quarter and year, Peter Bartholow will offer his perspective and then I will close before we open the call for Q&A. Let’s get started, the fourth quarter showed a surge of LHI growth in December, while full year loan growth came in consistent with guidance. Our hope is that the December bump in LHI growth is an early indicator of our business in private client shifting to the more pro-growth mindset postelection, but it is too early to tell. And I just completed a statewide tour of each of our five key markets and holding elections with approximately 50 of our business CEO and private clients. There was a noticeably positive shift in additive as they overwhelming were bullish on their prospects for growth in 2017. When and if their attitudes translate in the increasing loan demand is not yet loan, but certainly the signs are encouraging. Fourth quarter was very strong for our MCA or Mortgage Correspondent Aggregation business despite seasonal headwinds. In fact, the MCA business delivered sufficient increasing profits in the third and fourth quarter to post the profit for the year and positioned us for a strong profit contribution from MCA for the coming year. The strong MCA growth expected to continue in 2017 is an especially capital efficient contribution earnings, requiring risk based capital in the 40% to 50% range. Importantly, we posted another solid quarter and average DDAs and other deposits as well. Not only as our growth in traditional LHI and overall mortgage finance, driving solid net revenue growth, but they also are improving our fee income to total income mix. Having largely completed phase 1 staffing from the rebuild and expansion of Private Wealth Advisors undertaken in 2015 and 2016, PWA should begin to contribute to improving our fee income mix, the total income over the next several years also. Improving fee income is one of our key revenue metrics for our strategic focus to lift the ROE run rate over the years ahead. Equally significant for our delivering higher sustainable ROE is the operating leverage and efficiency ratio improvement. We believe we will achieve over the next three plus years. In both instances, operating leverage improved and we've reduced our efficiency ratio consistent with guidance. Credit metrics remain acceptable as we experience a reduced need for provision from prior quarters in 2016. The provision of $9 million reflects significant improvement in criticized side loan balances during the fourth quarter. The third quarter required about $22 million provision well above the $9 million in the fourth quarter. Net charge-offs were 29 basis points of total loans or 38 basis points to only traditional LHI loans for 2016 with 36 million related to energy. Combined loan loss reserves to traditional LHI equaled 1.38% at 12/31/16 as compared to 1.28% one year ago. Net income increased 13% on a linked quarter basis and increased 39% from the fourth quarter of 2015. EPS increased 10% on a linked quarter and increased 37% from the fourth quarter of 2015. Year-over-year net income was up 7% and EPS was likewise up 7%. With the heavy long last provisions focus largely on energy and the substantial built out expenses incurred with six expanded in new businesses. 2016 net income and EPS was solid and set to set for improving earnings in 2017. On Slide 4, we operate energy update. Energy loans now represent 5% of total loans, dropping below $1 billion from Q3 to Q4. We believe that our $57 million in energy loan loss reserves is more than adequate after realizing 36 million in charge-off in 2016. Energy non-accruals declined by 29 million linked to quarter. We are initiating new energy loans with new and existing clients, but advances under those new credit facilities have not overcome the pace of continued pay downs. Permian Basin assets have become increasingly valuable, and we see strong sales prices on production as well as proven undeveloped properties causing outsized pay downs of debt. The deleveraging assets stabilized borrowing basis. The spring 2016 redeterminations contracted borrowing basis in the mid 20% range, while the recent fall 2016 borrowing basis came in the low single digit plus or minus range. Slide 5 updates our Houston market risk real estate. As you will note credit quality remain solid on this portfolio with no deterioration and criticized or classified loans. Slide 6 shows our geographic diversification. While it appears our national businesses have overtaken our Texas regions in fact the Texas loan business is slightly larger than national business clients lending outside of Texas, when you adjust for the 20% of national business clients based in Texas. Peter?

Thank you, Keith. As Keith mentioned, the record profitability in Q4 and for 2016 came despite the built out expense incurred over the year and elevated provisions related primarily to energy. PPNR notably was very strong, and we believe demonstrates the earnings power of the corporation. It increased 15% from 2015 to a level of 318 million. The Q4 comparison was up 26% from the prior year. This performance has been driven by net revenue growth of 16% for the full year and 24% from the year ago quarter, consistent as Keith mentioned with our long-term objectives, we experienced significant growth in non-interest income, principally from MCA activity and its gains and fees. Those are reflected primarily in other income, but the smaller portion included in brokered loan fees. Income in MCA significantly outpaced the seasonal reduction in brokered loan fees that originate from the warehouse. Also noteworthy is improvements in core levels of ROE and ROA in the last half of 2016. And as Keith as addressed, we saw a significant reduction in the provision linked quarter but a meaningful increase year-over-year. Slide 7 for the NIM review, as adjusted for growth in liquidity assets, NIM increased by 4 basis points from Q3 and the same 4 basis points between 2015 and 2016. The yields on traditional held for investment loans increased 5 basis points from Q3 and 18 basis points from a year ago. Those improvements result from the impact of the rate increased in December 2015, benefit of a better fee pricing and a minor benefit from the increase in fed funds rate last month. For the mix shift between warehouse and held for sale, the yields for total mortgage finance produced no meaningful impact on NIM for the quarter. They represented smaller similar share earnings assets at yields below the traditional LHI with the minor impact on overall NIM. They are producing however a major benefit to net interest income and to fee income. For the effect and liquidity assets, NIM was an adjusted 3.69% compared to 3.68% in Q3. The growth and liquidity asset has been driven obviously by strong deposit growth with the significant impact on NIM and ROA. Liquidity assets represented just under 19% of earnings assets for Q4, a small increase for Q3 and level with Q4 of 2015. As Keith noted, loan growth was very and consistent with guidance on a given previously for 2016. Traditional held for investment growth balances grew by 11% on average balances for the year. The growth in average balances for the fourth quarter was a little more limited due to historically high levels of pay-offs occurring early in the quarter. Growth at the end of the quarter was strong producing held for investment balance of $300 million above the quarterly average. At the end of Q4, we realized significant contribution from the 2016 business initiatives that was designed to replace the planned reductions and the rate of growth in CRE and energy. In total mortgage finance, net includes MCA and the warehouse. We are managing a large and industry leading business with the high risk adjusted return, strong fee income and improved capital efficiency. It also provides superior funding profile in both deposits and excess to additional liquidity. We achieve meaningful improvement in market position in 2016. In contrast to industry trends, total mortgage finance grew substantially during the year. Growth from Q4 2.2 billion, 54% to 6.3 billion in 2016 fourth quarter, grew 330 million or 6% from Q3. The expansion of MCA more than became the seasonal reduction in the average warehouse balances. And in Q4, MCA represented 18% of total mortgage loans, compared to 8% in Q3, and we expect that ratio to increase in 2017 with a commensurate benefit to capital efficiency. Successful warehouse participation program had an average balance in Q4 of just under $1 billion, compared to $880 million in Q3 and $392 million in the year ago quarter. Program to reduce participation balances has begun, providing the ability to offset a push of the seasonal and rate grown contraction expected in Q1 of this year. On Slide 9, the trend of strong deposit growth was sustained throughout 2016. Demand deposit average basis up 26% from the prior year total deposits increase in 17%. In the fourth quarter, DDA balances exceeded $9 billion for the first half, an increase of 3% from the third quarter and an increase of $2.4 billion or 35% from the year ago quarter. Change in composition of balances will be most beneficial with the effect of rate increase last month and any others which could comment future quarters. With the growth in traditional held for investment loans, the growth in balances and mortgage finance and the growth in DDA balances, dollar impact of asset sensitivity increased again in 2016 fourth quarter. On a soft hand, non-interest expense discussion is warranted. The NIE trends for quarter were influenced primarily performance representing half of the total. The linked quarter increased in stock priced drove over $3.3 million then fairly typically we have yearend adjustments to incentives for line up business performance that exceeded plan, a true of based on actual performance over the year. Continued built out in 2015 and 2016 initiatives has also been a major effect throughout the year. We anticipated the increase to Q4 due to the ramp of the new and expanded businesses. SBA, ABL franchise in public finance, and despite increases in expenses all of the lines of businesses were profitable for the last part of the fourth quarter. As expected the efficiency ratio rose again in Q4, and was 54.6% for the year and was consistent with guidance and improved except fully effect of the stock price increase in Q4. I'll comment later on our outlook for improvement in operating leverage in our discussion on guidance. I think the quarterly and annual highlights speak for themselves again with strong PT, PP and PNR strong growth in the fourth quarter and for the year demonstrating again what we believe for the very strong earnings power of the business model. In ROA and ROE, we saw the impact to develop a provision was a principal factor for a decline from 2015. And as anticipated, the benefit of growth in net revenue and better NIE productivity generated much better results in the last half of the year, exceeding 10% ROE and a much more respectable ROA. Commented earlier the impacting liquidity build has had a pronounced impact on both NIM and ROA again that we believe are not reflective of core performance. We believe our results illustrate the opportunity for significant improvement in coming quarters. Turning to Slide 13 and outlook for 2017, our outlook for traditional held for investment growth is actually consistent with the trend that we noted in 2016 high-single, low-double digit before the possible impact of the strength in the economy. The equity raise in Q4 provides a capacity to support additional growth after risk weighted loan growth 2016 exceeded ROE for the year. On the strength of MCA, we expect to have strong growth in year-over-year average balances for total mortgage finance low-double digit growth with seasonable weakness in the warehouse in Q1 combined with the impact of a rate increase for flat year-over-year average balance. Reduction in participations sold will mitigate the reduction and balances for volumes build again in late Q1 and over Q2 and 3. MCA growth to $1 billion average balance of 2017 compared to $400 million in 2015. We expect some market share expansion from new and current customers in both components of that business. Total deposit, we expect low-to mid-teens growth with continued improvement in the DDA composition, obviously beneficial as rates to continue to increase. We also think that average balances for liquidity assets will grow more modestly in the coming year. The outlook for core NIM has increased, reflecting that the year-to-date performance has exceeded guidance and that we will benefit from a December 2016 increase. Before the impact of liquidity, we’ve increased 10 basis points and out of 370 to 380, and also increasing guidance for reported NIM with a new range of 320 to 330. The outlook for net revenue NIE and efficiency ratio have also improved. Modest improvement in 2017 due to mid December change in the fed funds rate, but we anticipate or include in our guidance, no additional changes in the interest rates. Full year contribution from key initiatives in ’15 and ’16 will include with strong activity and MCA after the first full year contribution in 2016. New initiatives extend will extend profits with balances already achieved in late Q4 after the small losses incur over 2016. We expect a low 50% efficiency ratio and recall that conditions in Q1 will generally results in an increase in the efficiency ratio fewer days for net interest income, FICA expense reductions offsetting that in quarterly incentive and expect the reduction or no growth in 123R expense and moving to the normal levels. We expect seasonal weakness in the warehouse activity partially offset by strengthen MCA, and we see improved operating results for the expanded business lines. For the core bank before the effect of MCA and the other initiatives, bank has performed extremely well and should continue improvement. We have general growth plus opportunistic recruitments of RMs. we have today no major new business initiatives in the works. We always anticipate rising regulatory cost hopefully declining as a percentage of net revenue. Provision range we gave is necessarily wide. We do see opportunity for improvement and we will provide updates as the year progresses. It's just too difficult to predict with precision this earlier in the year. Our guidance is based on general stability in the energy sector, but no meaningful improvement in the economic outlook. Some part there is always some possibility of weakening in the economy, if pro-growth agenda of the new administration cannot be realized. Keith?

Thank you, Peter. On Slide 14, we provided a snapshot of asset quality for 2016. Despite net charge-offs of 0.38% of traditional LHI, we increased our loan loss reserve to 1.38% at year end 2016, as compared to 1.28% in 2015. The majority of our charge-offs related to energy loans. We believe our energy reserve to be more than adequate for expected future losses during this cycle. Peter mentioned earlier for our close that our hope is that rising regulatory cost will increase at a pace slower than that revenue, but it's going to be close and when we each know that. Before we actually see any effect from potential lessening of regulation, de-regulation, we really think we have got some important continued work to do. To be sure, we are always regarded highly by our regulators. So, it will be touch and go whether that rate increasing regulatory cost will in fact exceed in that revenue. But importantly, the gap is still a very positive gap and widening gap, relative to non-interest expenses in '17. So, we are very pleased with that progress overall. In closing, we delivered a strong core earnings year despite continued high provisions mostly related to energy. Further the significant built out expenses related to MCA asset-based lending, SBA, franchise finance, private wealth and public finance was slow in pace during 2017 with the higher expense run rates pressuring Q1 and Q2 year-over-year comparisons, with improving year-over-year expense comparisons in Q3 and Q4 '17. Of course what's driving that is the pace of hiring and built out that took place in third and fourth quarter of '16. And so for full year run rate impact, you are going to see that pressure on the front end. The strong surge in LHI growth at the end of Q4 2016 is hopefully a positive indicator of our business private clients, shifting attitudes more pro-growth in the recent past years. And its too early to know when and if this were positive attitude will be sustained and result in more loan demand. Recent client feedback is never less encouraging. Energy portfolio is well reserved for remaining losses and we believe the new energy loans are of excellent quality. Overall, we showed significant improvement linked quarter and criticized loan balances, resulting in a markedly lower provision in the first three quarters of 2016. The combined outstanding of mortgage finance loans and MCA resulted in strong balances with the seasonally weak fourth quarter. MCA in particular has shown strong growth in outstanding and profits and should provide a meaningful profit contribution in 2017. Finally, we are gratified to see our strategic focus gain traction on improving ROE to a higher sustainable run rate. This focus on lifting ROE includes initiatives to improve efficiency and existing businesses and support functions, improve non-interest income from new and existing lines of business and optimize growth in our highest risk adjusted return businesses, we are optimistic about the year ahead and confident that our organic growth model will deliver strong results. Heather.

We’ll go and open up the Q&A now please.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Ebrahim Poonawala of Bank of America Merrill Lynch. Please go ahead.

The first question I do have on deposits and I’m sorry, if I missed this in your opening remarks. There was a significant sort of decline at period end balances in deposits. I was wondering if you could give some color on what was going on there, and as we looking to ’17 to the extent you can, what other key drivers of deposit growth? And how do you think about sort of cost of these deposits particularly if you get multiple rate hikes?

Most of the deposits Ebrahim are demand deposits. It doesn’t obviously preclude our ability or willingness to pay interest, if rates rise far enough to justify that. So, the ability to pay interest on demand deposits in some quarters is viewed as negative in our business because of the lag and the spreads that we can garner is actually a net positive. As you know, we provide significant treasury management services and that’s been the source of most of our deposit growth and will be again in 2017. That also directed against mortgage finance industry. I mentioned that we get good deposits out of MCA, and we certainly having the traditional warehouse. We are deposit rich in escrow balances that are both in monthly terms for principal and interest and annually on a different seasonal basis for tax and insurance. So, Q4 tends to be a time when you get significant reductions in deposits from tax and insurance escrow payments. There is no change in the actual trend that comes about from that dip at quarter end.

With the rate balance, Ebrahim, I might to add, there could be a little pressure on treasury fees, but it only further solidifies this big base of DAAs to mitigate fee charges. So, we feel very good about how solid our DDA base is and it will only become even more solid as we see rate bumps, and I think we’ll see increases in treasury fees, but not at the same pace we might have seen the last year too.

Got it. That’s helpful. And just ticking with rates and if you get, if I heard you correctly Peter, I think you mentioned, you don’t have any rate hikes embedded in your forecast on Slide 13. It could be helpful you can provide the sensitivity to the NIM assuming we get multiple rate hikes or what the NIM change we should anticipate for 25 basis points move into fed fund?

Ebrahim, all we have been able to say as it's represented last year about $4.5 million a quarter in net interest income. We believe because we are larger and because we are more assets sensitive and we have reduced the fact of loans that have floors, but that number could be a little larger in 2017.

So 25 basis points impact would be 4.5 to NII or higher of this industry because of lower loans of course got it?

That’s 4.5 million per quarter.

The 4.5 million per quarter, yes, understood. Just one last question on provisioning, I wanted to understand what your assumptions were around charge-offs and incremental reserving account are against loan growth to come up with that $60 million to $70 million number?

Low 60s to mid 70s and the range we set is necessarily wide because we just don’t have enough confidence about the thing it could improve that. Keith commented, we have a very large reserve against what we think is our net new energy exposure. We've been growth in the past as resulted in about 95 basis points to 100 basis points of incremental reserves. Then, the rest of that is just built around uncertainty could we experience weakening the economy that would expose some sector of our business. There is nothing that we know about it would require a level of provision today.

But as we see changes put in place with administration, net-net, it should be beneficial to growth, but we are uncertain yet what kind of affect it could have on industry here there that we bank. And that’s our caution and being bankers, we want to be cautious, we are overall optimistic, but we are going to have to see how some of these issues on the table that are encouraging your business owners have those actually play out as oppose to changes in regulation, it could be actually disrupted on new agreements with NAFTA and so on. So, that’s where we are coming from on such a wide range.

Our next question comes from Brad Milsap of Sandler O'Neill. Please go ahead.

Peter just wanted to talk for a second on MCA business to get to the 1 billion of average outstanding for the year in 2017. What should we think about in terms of how many loans in dollars where we passing through in any given quarter? And then secondary, what was curious your comment on maybe the fees or gains you're receiving in percentage wise on stuff you are moving through? Just trying to get a sense of how best to think about fee income as a part of that business going forward?

For the first time I guess beginning the last part of Q3 and over Q4, we finally saw things that are meaningful in terms of net fees. So we are collecting two categories or three categories actually fees. One is a file fee that shows up in brokered loan fees. Another category is gain on sales where we did have some. We are not ready to disclose it yet, but it is a meaningful contributor to the profitability for the fourth quarter that gave us profit for the year. And then we do get mortgage servicing fees, on the other side of that we have hedging costs, the net of all that is a positive. We are running 7 or 8 even at lower levels, $7 billion or $8 billion of month through the warehouse of time on balance sheet as you recall is less -- excuse me greater for the MCA. We are seeing more than 50% of the new business is coming from customers that are not warehouse customers. And we see 25,000 to 35,000 loans and each year.

Okay. And just in terms of the MCA business. Can you pause us and if they, but how much did you done in the fourth quarter, it sounds like you didn’t sales much of that you would have to kind of keep it, you get the balance is up, but just kind of curious any color around that will be great?

We did not. We went through a normal pattern and actually sold a little bit down in year end. I don’t have that detail, and at this point we would provide at any one.

Our next question comes from Brady Gailey of KBW. Please go ahead.

You've made some cash strategic hire in 2016 with the kind of better economic backdrop, it sounds like your customers are growing their business at a faster based. Did you think that the hiring in 2017 will be greater than 2016 or will it be more kind of status quo?

It is never a status quo as you know, Brady. If we have disruption in a given market or an industry niche or better yet consolidation of a competitor with the merger that would cause us to likely do some outside hiring. However, we think we’re well positioned the pick up some really top eight players in our C&I business. We feel good about where we are on staffing, our new and expanded business. So, those the pace of that hiring should actually diminish some over the course of ’17. But we do think, we’re in a next position to pick-up some strong people in the C&I banker category, and we expect to do so. It wouldn’t be on a kind of counter pace that would remind you of 2013 when it was a record hiring quarter-after-quarter. At least at this point, we don’t believe that we have. If we see the first team, I'll start show up. We’re going to execute on it and hire.

And then post the election, you guys mentioned your loan growth be in December heavy now were kind of through the majority of the month of January. But would you consider the election to be a game changer for the outlook for your loan growth in that state that we recall?

We believe that as Peter mentioned, our loan growth have picked up enough in the last the last half of '16 that we were pushing beyond the ROE. And with the election, it caused us to really think carefully about what that could mean. You may remember we've said for sometime over the last several years that we have had our clients tell us, our business owners, mostly privately on companies tell us they've been hesitant with all the businesses. They felt like they had really a disadvantage and not even playing field than the risk reward just simply wasn't there. The big companies they can beat against thing often big multinationals, could push in, came around the world and effectively have a much lower tax rate than our clients, and that was a huge advantage. And further, regulation increasing in all these industries clients of ours, not just banking, they felt like it had an outside as to negative effect on NIM where the biggest companies could small armies to manage and manage regulation much better. And so, I do think some of the things on the table portend the possibility and maybe even likely, we will see our clients once they grow their businesses more strongly. And the true idea visiting the right CEOs around the state this last week was incredibly bullish, but that was a count 50 instead of 1000s of clients. But it was a very, very bullish feedback as we went around the table. Me not leading the witness at all, which is hard for me but I didn’t. And virtually every CEO and business owner and private client said, they were very encouraged and they would be growing their business most likely faster than the last few years. We just don’t showing up instantly. We think it's going to take some actual legislative drafts toward tax reform thing that would really change the risk reward for our clients in a meaningful way. Before we will see a big pick up in loan demand, but the end of the year was encouraging. It's just too early at this point, but I need to say it's in motion on the loan demand.

The yearend growth really came about from things underway long before the election.

That’s usually how they worked.

The initiatives that we have been working on throughout year produced a significant part of that total growth.

We have the capital to grow with the clients, if they do, kick it up by a couple of notches.

And then last question for me is snick balances were about 2.1 billion last quarter. Did that change much in 4Q?

No, nothing significant.

Our next question comes from Geoffrey Elliott of Autonomous Research. Please go ahead.

Deposit costs increased over the quarter, if I look at non-interest bearing deposits, they were up almost as much as loan yield. So could you talk a bit about what happened there? And then how you expect deposit cost to move as we go through the cycle of rate rises?

Jeff, I missed the first part of your question I apologize.

I was talking about the increase in non-interest bearing deposit cost. I think there of 4 basis points sequentially and compares with 5 basis points sequentially for loan yields. And then what was behind that? How do you expect deposit costs to behave as we move through the rate rise cycle?

We had one deposit category that moves in lockstep with the rate increase. That deposits that come from downstream corresponded banks that show up in our call report as money market savings account. That’s not what it is. It’s subject to fed funds where we agree to pay a small premium over the fed funds rate in return for their making those balances extremely sticky. No contractual obligation for them to do so, it's just what we’ve done basically for many, many years and improve the cycle. That is the only significant category that moves in lockstep and its 1.6 billion or 1.7 billion. We have just depending on who comes in when, it can have the impact that you see. We are not hosting significantly higher rates as a result of what’s happen in the marketplace. We are not experiencing unusual competition for funding that will move rates higher significantly. We expect the significant lag between further rate moves and the impact of rates in with the total cost deposits. We don’t have a hard beta that we can point too, but again we don’t believe we’re exposed to loss of deposits in the event that rates rise. And if rates don’t rise very much, we not only, we’ll not lose deposits. We will not pay much lower than we are now for those.

Our next question comes from Michael Rose of Raymond James. Please go ahead.

Just wanted to ask, so you guys announced, you guys hiring are some folks in the public finance business. Just wanted to talk about that built out and maybe more holistic talk about where you spent in the built out in costs for the six other businesses that you’ve talk about over the past few quarters and then where that stands? Thanks.

Absolutely, we’re pleased to report all six businesses are profitable including the mortgage, excuse me, the public finance business and that business came in existence with us sometime in the mid-third quarter. So that is a record turn from start-up the profitability of any business we’ve launch in 18 years. So, we’re very pleased with our team and market opportunity seems quite good and the credit quality excellent. And therefore the risk adjusted return we're very, very pleased with. We also expect the business to grow at a very nice pace this next year. And as we get ultimately some tax perform hopefully that yield just accordingly. And since we’re only beginning the business, we think that’s going to be a positive momentum for us on overall yield over the next three to four years as it grows.

And then just where you stand in the expense built out in terms of other businesses, are they pretty much complete excluding opportunity hires?

Except for the incremental with MCA, but the growth rate in revenue profit is much faster than the incremental growth that we require on additional FDEs, and we are in excellent condition on our technology. As you know, we've spent a lot of money a lot of time to get it right, it's been very well accepted in the market. With respect to the SBA business, we have a bit more built out for this there, although it is profitable that’s very positive. It will be one of the six businesses required some more built out as in the other five over the course of 2017, but again extremely pleased with the prospects of returns on that SBA business. And we now have SBA bankers in each of our five cities and we are off with that business up to the rises I hope.

Okay maybe a follow-up I mean it’s appear, if there is tax reform, I mean is that one for one or is there any sort of DDA, anything thing like that some other banks who talked about in terms of there was a change in the corporate tax rate? Thanks.

We are among the few banks it's basically a full margin and effective tax rate, federal tax rate at 35%. We've had a little bit cost above that for a few of our activities there out of state, but we don’t have any -- as you can see we don’t have -- we are down the less and I think 5 million in municipal securities. We don’t do any leverage leasing or anything else than generates unusual fees, so for changes in rates will be a direct benefit to net income.

And importantly most of our clients as well mark will being privately own companies. They like us are sitting right at the top of the tax rate today.

Many banks have rate at above 35, we got to go to the tax footnote to see how that source out with the effective federal tax rate.

Our next question comes from Casey Haire of Jefferies. Please go ahead.

I had a question about the expenses specifically the salary related to the stock price changes. What -- if we assume, I mean does the expense in low teens, does that assume the stock hold stable? Or is there any variability around any volatility in the stock price?

We would not include anything in that estimate for volatility up or down around stock price. It does include fear that there will be additional brands as maybe subject to that price feature. But nothing about changes in stock price going forward.

Should we expect that 3.6 to come out of the run rate going forward or is that hold?

No, that’s an increase over Q2 that will not-- at today's stock price that will have no effects on Q1. Now our Q1 will be down significantly from Q4.

And then looking at the efficiency ratio for the full year in the low 50s, I think you guys have talked about previously that some of the line of business is built out on the new ones that some of those investments would taper in the back half of the year. Just wondering could we exit the year below 50 on the efficiency ratio in the back half?

It’s too hard to say at this time Casey. That would probably be dependent on a meaningful change in interest rates.

We've built not that end of course.

Okay. And then just last one for me switching to credit. Another quarter with pretty stable energy prices, I think I guys said last quarter that you encourage by what you see, but remaining cautious. Just wondering, if we do see energy price is stable throughout the year. Could there be upside to that provision guide in the form of reserve release?

We don’t technically release reserves, what happens if your scenario, if it’s clear that we do not need that level of preserves. Those basically get position be allocating to the risk of the portfolio.

And at the pace we go Casey, there are always reserve positioning we’ll require to be just on the price of our growth too. So yes, there is a possibility that provision range could be on the low-end or even perhaps a little better, if we see energy to energy cycle play out with stable prices which slightly up prices. But that presumes that the other disruption with changes going on with the new administration, and I don’t create C&I program, we don’t anticipate to that.

Or CRE?

Or CRE, which is just wonderful today, we will have to see as time plays out hee.

Our next question comes from Jennifer Demba of SunTrust. Please go ahead.

Hi, Keith, with the energy pay down in ’16 versus ’15 and what are you expecting this year assuming relatively stable?

We’re going to see, it’s roughly 200-ish million this year. The prior year is closer to 150-140, those are estimates improve, but it certainly accelerated I’ll pay that and a lot of that. It’s been just a last couple of quarters with the rebound and prices, sales prices in the Permian Basin. And price of ours in the Permian and that is the largest play that we have decline involved in is the Permian, we have had clients that had no credit or virtually no credit in their borrowing basis for the proven non-producing properties that have sold for very high prices again. And so that is further accelerated pay down, the bad news is those were good loans, we didn’t want to really lose. The good news is we’re finding some of those that are getting purchased on the other side to backfill, but the advances are not as fast on those new commitments to overcome to pay down pace. What we’re going to see in ’17 is best we can estimate is, we’re going to have a decline in average loans and energy in the first half of the year and then a pick up that lower cancel these pay downs we believe that will begin the back half of the year. So, at the end of the day roughly a flat outcome to slightly down over the course of year is what we see today.

And just second question for Peter, on expense you've guided to kind of a low-teens expenses for this year. In terms of the first quarter, I mean, are you looking at sort of a flattish number with this seasonally higher personal cost offsetting the stock rate compensation that has paid its expenses this quarter?

Q4 was the first full quarter of a number of things either ramping up or the things that Keith mentioned in this year. Some of may have started in third quarter or even in the second quarter but those are meaningful ramp in the four that we discussed in the third quarter call. We should see a net reduction in the incentive and 123, our expenses in Q1. But we will have as you know every year that uptick comes from FICA. I think staffing cost will be -- total staffing cost will likely to be down a little bit from Q4.

Our next question comes from Brett Roberston of Piper Jaffray. Please go ahead.

I wanted to ask, just thinking the expense guidance you mentioned Keith can you just you are not sure to get about the regulatory environment. That’s the guidance for '17 have any build in that for additional regulatory cost? Or how should we think about what you are thinking about from that perspective.

We have talked about this for the last two or three years Brett and all I am saying is, there is a lot of talk about the deregulation of course. It's going to take some time, the CRF plays out what it even means whether be any legislative change or will be any regulatory modification, will be a change of tone, and how the rigs allows you enforce. But until we actually see that happened, what I am saying is we expect another higher expense growth rate as we have had for the last three years in regulatory because it requires it to meet this mid size bank hurdle that we must need typically the way we grow. And that’s been the case since we crossed 10 billion and I just am not willing to say for sure that growth and expense and regulatory is going to be less than that revenue growth and see how things play out later in the year.

And then the other question I had was just around thinking about different loan categories, and you guys have been conservative on categories like multifamily. And I was just curious in given more optimism generally speaking, do any of the categories that you guys are little bit worried about? Does that change? Do you get more aggressive or potential look at adding some wrong segments that you previously were more concerned about?

I think we were conservative and things look somewhat better. We thought we might in fact see over session midyear this year six months ago. And post election we are beginning to hopefully not just by all the euphoria, but we are beginning talking with our clients and looking at the new possibilities. We’re beginning to think, yes, we may have legs for another year and a half, three years on this recovery. So in that sense, yes we are some more positive. We’re still being very thoughtful what we do category-by-category multi-family, office et cetera and also on our builder finance group. But it is holding up exceedingly well. We think we have the best advantage we have ever experience in our 35 plus years. John Hudgens, Vince Ackerson and then myself in lending. So, we will have to see what opportunities continue to present themselves, but we’re open for business.

Our next question comes from Scott Valentine of Compass Point Research & Trading. Please go ahead.

On the MCA business, I mean I know at some point you guys talked about breaking it out. Is there any timeline on that where you might be able to see more color on the revenues and expenses around that business?

When it gets to be big enough to break out of the other income line, that’s when you will see it and we will provide color around it. So this is the first time we’ve seen meaningful fees or mortgage servicing fees. Again on sales of mortgage servicing fees and we have not yet sold any mortgage servicing lines.

It’s been 15 months of business for us Scott. So it’s just going up, it’s going the right way and we’re encouraged you to the profit pick-up and volume pick-up, but we’ll look at as toward progress.

And the market is not so difficult to understand early days when it was zero or even negative gain on sales to finally having a positive.

And done a great job, my team has done marvelous job.

And then Peter final comment on the MSR, I mean I assume your goal about building again MSR portfolio be selling occasionally?

Sure. We'll build into economic units and sell when the market is right.

Okay. And so, is it up to 20.5 million I guess where the service rights have marked. And how big do you think it has to get before becomes economic to monetize it?

It’s on market conditions and structure of sales.

Okay. And just on final question. New loan originations relative to portfolio, I assume they are accretive now as they come into the portfolio on average. I know it various by loan type, but just wondering kind of an aggregate or loan yields, new loan yields coming in at accretive levels to the existing portfolio?

Coming in at accretive to the portfolio flat, but not to the NIM, not to the liquidity adjusted NIM.

Okay. That’s because into the funding side or?

No, it just because -- when you’re talking about loan growth, you’re not going to get prior plus significant type around the loan growth, I mean today the yields on our traditional held for investment portfolio was 439. You’re not getting 439 incrementally on the majority of which is looking.

Our next question comes from John Moran of Macquarie. Please go ahead.

Peter just wanted to just go back on the brokered loan fees and other which is where the MCA stuff is showing off right. Did I hear you correctly that as the participations using traditional warehouse are pulled in the expectation is that the ramp in MCA is overall is going to keep that line item flatter than might otherwise be expected? And then the balances the other income that popped in this fourth quarter is that’s primarily the MCA contribution correct?

The other income category, the growth is primarily in MCA. The broker loan fees have a small component of MCA. Most of that are the warehouse fees and those are down linked quarter because a reduced activity in the warehouse. When we said a MCA growth will offset some of the softness in mortgage warehouse activities seasonally and rate driven. That’s just a function of where we are in the ramp up in MCA and all we can say today with certainly is, the reduction in the participation program will mitigate some of the reduction that we see in the seasonal characteristics.

Okay. Understood. That's helpful. The other one I had…

The program is worked just away you'd hope it would. It mitigates the exposure capital and otherwise balance sheet composition as volumes rise and it permits a buffer as volumes come down. Most critical thing now is we have got to be in the top tier of the service providers to garner more than our share of total volumes as rates rise.

John, this first quarter of '17, I just want to point you to the latest MBA forecast, and they are looking for about a 25% decline in volumes in '17. But the first quarter I think will have an outsized decline relative to the last two years in the first quarter. Simply because re-fis were such a big mess in Q1 of '15 and Q1 of '16, and re-fis are going to be much more diminished this year with the rate bumps that we have seen in the mortgage product, so it will be seasonal. This will look like a more typical season first quarter than the last two years in the first quarter. And that’s one reason we are taking back some of our participation loans as Peter said that help mitigate that more accentuated seasonality we expect.

Understood, right. And then I am sorry, if I missed it in the further remarks that you came up already, but the purchase for us re-fi mix in the business for you guys. What was that running at?

Well, we always run a lower mix of re-fi relative to the industry, but the industry overall and therefore our client to a degree has had an outsized mix of re-fi. Last year it was about 50% of all the volume. So, out of a 1.9 trillion of volume roughly half of that was re-fi, that’s going to come down ruggedly in the first quarter with the rate moves that we saw over the course of fourth quarter. And you just need to be aware of that MBA is getting some of that information. I just wanted to point you there too.

And I have got for Peter probably a philosophical question. I remember this might have been years ago now. I think years ago, we have brought up as any part of security and something like five, six, seven years. So that’s even longer now with the changing rates in a building liquidity. Is there any kind of philosophical change to your stands there? Would you guys consider kind of building some form of security look at some point?

No. It’s hard today the face of what people think or rising rate still to make that step. So, we’ll be watching it, we feel really fortunate to have missed the OCI adjustment that the industry is experiencing right now.

[Operator Instructions] We have no other questions at this time. So, this concludes our question-and-answer session. I would like to turn the conference back over to Keith Cargill, President and CEO for any closing remarks.

We appreciate you joining us for our fourth quarter call and look forward to updating you as 2017 progresses. We are encouraged and optimistic this could be a very good year for Texas Capital Bank. Thank you again.

This concludes our call today. Should you have any follow-up questions, please call Heather Worley at 214-932-6646 or e-mail at heather.worley@texascapitalbank.com.