Texas Capital Bancshares, Inc. (TCBI) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Texas Capital BancShares, Inc. Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Myrna Vance, Director of Investor Relations. You may proceed.

Great, thank you very much, Frances, and thank you all for joining us today for our Third Quarter Earnings Conference Call. Before we get into our discussion today, let me read the following statement. Certain matters discussed on this call may contain forward-looking statements, which are subject to risks and uncertainties and are based on Texas Capital's current estimates or expectations of future events or future results. Texas Capital is under no obligation and expressly disclaims such obligation to update, alter or revise forward-looking statements, whether as a result of new information, future events or otherwise. 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 such forward-looking statement. These risks and uncertainties include the risk of adverse impacts from general economic conditions, 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 can be found in the prospectus supplement, relating to our recent offering and the annual report on Form 10-K and other filings made by Texas Capital with the Securities and Exchange Commission. Now let's begin. With me on the call today are George Jones, our CEO; and Peter Bartholow, our CFO. And after a few prepared remarks, our operator, Frances, will facilitate our Q&A session. At this time, let me turn the call over to George.

Thank you, Myrna. Good afternoon, everyone, and welcome to our Third Quarter Earnings Call. We are pleased to announce outstanding results for the third quarter of 2012. As you know, we've successfully completed our offering of equity and debt capital this quarter. We've leveraged this new capital effectively with strong growth in loans and have produced record earnings and excellent returns. We believe that we are demonstrating the value of our business model, a model that's been in place since inception of the bank. Including our mortgage warehouse line of business, average total loans grew 9% linked quarter and 36% year-over-year. Deposits grew 7% linked quarter and 27% year-over-year. We're especially pleased with our demand deposit growth of 8% linked quarter and 32% year-over-year. Return on equity and return on assets, returns of 17.3% and 1.4%, again, outpaced the peer group. We've continued improvement in overall credit quality, and I'll discuss that more in detail in a few moments. Our growth in loans held for investment has been very good at 6% linked quarter and 21% year-over-year. Our pipeline remains exceptionally strong, and we believe that this growth is sustainable. Loans held for sale levels remained high, averaging $2.4 billion in Q3 and we expect demand for that product will remain strong, keeping our average outstandings in the $2.5 billion range certainly for the balance of this year. We raised $87 million of equity capital and a $111 million of debt capital to support future growth of the company. We believe that we'll be able to leverage that capital in a reasonable amount of time. Let me turn it over to Peter, and I will return to discuss credit and add some closing comments to our presentation. Peter?

George, thank you. If you'll turn to Slides 4 and 5 for the financial review. We had a very strong linked quarter and year-over-year growth in net revenue, net income and in earnings per share reflecting, we think, a very favorable performance building off the very strong balances at the end of Q2, with an exceptionally strong finish this quarter, which is traditionally, for us, the third quarter, seasonally weak. George has mentioned our equity and debt capital offerings. These were designed to support our growth in loans to be effective in our capital management. We were successful in offering 2.3 million shares for net proceeds of $87 million. We did reduce earnings per share in the third quarter by $0.03 per share, was included in diluted shares for 2 of the 3 months. We issued $111 million of 30-year 6.5% sub-debt, which qualifies for Tier 2 capital. We viewed that as a complement to the equity offering to reduce the company's cost of capital, to enhance shareholder returns for the long term. For earnings power and net interest margin, we're strong. We saw a growth of loans of $732 million linked quarter, 50% of which was held for investment and the other half held for sale. This resulted in a very strong performance and superior operating leverage. We've maintained a very strong solid NIM, where the minor 13 basis point reduction was strictly related to growth in the held for sale and held for investment portfolios. In terms of expense management, we produced the lowest efficiency ratio in the company's history, and this results from the operating leverage I mentioned and, obviously, the success of the warehouse lending division. The growth in non-interest expense related to business expansion into higher level of performance. Problem asset and recovery cost have come down, and we've seen a reduction in the ORE valuation charge. Incentive compensation expense has increased due strictly to our performance. Terms of loan growth held for investment growth occurred in a number of lines of business and regions, reaching $6.6 billion at quarter end, both up 5% from a very strong Q2 level. We start Q4 with the balance, $236 million or 4% above the third quarter average. And we expect Q4 to be, as always, or normally, a strong seasonal growth month -- quarter. Held for sale average balances remained very high, averaging $2.4 billion for the quarter. As stated, our approach is designed to build the business on managing balance sheet concentration with the participation program. We see continued opportunity to expand our customer base in this business, and we saw quarter-end balance reaching $2.8 billion, net of $320 million in participation sold, an increase from $245 million participation sold at the end of Q2. In terms of funding and deposit growth for Q3, we saw continued improvement at our funding profile. The change in funding mix was very important with DDA growth of 8% from Q2, 32% year-over-year, again, reflecting the success of our treasury management focus. For the first quarter in the company's history, we saw an average balance in DDA of over $2 billion and the quarter-end balance, 5% above the Q3 average. On an average basis, we saw total deposits grow more than held for investment loans, where DDA represented 40% of total LHI growth. Particularly important when eventually, we expect rates to rise. Growth in held for sale portfolio was supported with borrowed funds. We enjoy now our new facility with the Federal Home Loan Bank that provides a great opportunity to expand our held for sale business, with the net reduction in funding cost. Credit quality and cost, obviously, remained very positive in terms of trends. Credit cost, down 26% from the second quarter and 65% from the year ago. In improved credit metrics, we saw a provision of $3 million driven by the growth in the held for investment portfolio. And we saw a significant improvement in nonperforming and net charge-off ratios. Slide 6 is the quarterly income statement, again, showing quarterly progression and year-over-year growth in net revenue, net income and EPS. And the EPS growing from $0.56 to $0.80 in 5 quarters, even with a $0.03 dilution from the offering. We now have a CAGR, 5-year CAGR approaching 20%. Obviously, the performance is driven by loan growth, a substantial reduction in provisions, and we produced, as George mentioned, the highest -- we matched the highest level of ROA in the company's history at 1.4%, and we saw ROE above 17% even after getting effect to an $87 million increase in common equity. Slide 7, average balances, yields and rates. We saw loan growth in the funding profile of -- still drivers of a high NIM and strong growth in net interest income. Business model has produced for us a nearly ideal balance sheet for a low-rate environment. We are highly asset sensitive. Loan growth has had a major impact in maintaining a high yield on earning assets with just under 4.6%. The earning asset yield has come down a little, with reduction in mortgage loan yields, but has produced very strong spreads and very high levels of net interest income. Effective use of the growth in the DDA and total deposits, coupled with our growth in the borrowed funds to support held for sale loans has, as I mentioned, produced great spreads. Held for investment loans grew $1.1 billion from Q2 of 2011 with yield maintained just under 5%. Yields on held for sale loans, as I mentioned, have come down but the result of the reduction in rates have been very strong growth in loans and contribution to net interest income. The offering of Tier 2 debt capital, as I mentioned was completed in September with a very favorable impact on total cost to shareholders and no impact on earning asset spreads, but it will produce a reduction in NIM in the fourth quarter of about 5 basis points. Not much to say on Slide 8 and 9 about average and quarter end balances. The results are obviously strong. We see held for investment growth, 24% above the year ago, obviously, reflecting a continued improvement in market share. Held for sale balances at the end of Q3 were very high, reflecting again, expansion market share and refinancing activity. And our market opportunity remained strong. We've seen very solid growth in both total deposits and obviously, DDA. On Slides 10, 11 and 12, we see CAGRs and net revenue and income are exceptionally high, at 22% and 32%, respectively, reflecting operating leverage that's produced tremendous growth in EPS, shown on Slide 11. Again, with a CAGR approaching 20%. The growth is especially strong compared to the industry. Again, demonstrating market share gains. And with that, I'll turn it back to George.

Good, thanks, Peter. I'll pick up on Slide 13. Our loan portfolio stats, shown by collateral types, are on the left side of the page and nonperforming assets on the right. Peter mentioned total average loans increased $732 million or 9% on a linked quarter basis led by the warehouse lending group at $373 million; BankDirect, our premium finance business, a $104 million; and energy, $80 million. Market risk real estate is now only 23% of the loan book. Nonperforming assets continue to decline. And now they represent only 1.16% of loans held for investment and ORE, down from 1.35% in Q2 and 1.92% in Q3 2011. Real estate continues to be in the major nonperforming asset category with $59 million of the $76 million total shown there. As mentioned before, credit quality, again, has improved over the past 3 months. Total credit costs are down by $1 million. We saw $9 million of ORE without further write-down in the quarter, leaving only $19 million in that category today. We also believe that, that number will continue to decline in Q4 because a number of these properties have contracts of sale in place. If you move to Slide 15, that graphs our net charge-offs to average loans over the past 4 years and year-to-date 2012. This should be our best year for charge-offs since before the recession, and the nonperforming asset ratio is as low as it's been in over 5 years. Our reserve coverage ratio to non-accruals is strong at 1.3x. In closing, I want to leave you with the following comments. Texas Capital has strong core earnings and growth that will continue in 2012. It's important to emphasize that our strong growth contributed 3x more income than the small margin compression of just 13 basis points took away, with net interest income growing net $6 million in Q3. We've successfully completed an equity and a debt offering that supports our business model and our ability to really continue to produce industry leading results. Credit cost improvements, exceptional as you have seen, and we have a strong loans held for investment pipeline that presents opportunity for growth potential. Fundings that should take place over the next 30 days are as strong as we have seen them in recent years. Loans held for sale balances could grow modestly with increased market share and benefits from our participation program. We're taking advantage of the unique opportunities to grow and upgrade the quality of our portfolio. Thanks, again, for your participation in this call. We'll now go back to Myrna for our Q&A session.

Operator, if you could poll for us and have our first question.

[Operator Instructions] Our first question is from the line of Dave Rochester from Deutsche Bank.

The terms of warehouse book, what's the mix of purchase versus refi now?

It's about 60% refi.

Okay. And you talked about getting the participations up to maybe $700 million-or-so by year end. What does that mean for the trend in fee income into 4Q? Should we expect $1 million or $2 million increase in that line from 3Q?

Well, if you look at that line today for Q3, you could see that's up, and I think that balances should remain similar in Q4 to Q3. We will continue to charge fees as it relates to the files that we process in the -- in that particular business and remember the participations carry a servicing fee. So as we begin to increase those participations, the additional fees will show up.

So I guess, you're still expecting that line to grow. And in terms of magnitude from 3Q into 4Q, as those average participations grow with $500,000 to $1 million be out of the realm of possibility?

It's really hard to predict, but I think the comment that it should grow slightly is probably accurate.

Okay. And just switching to loan pricing real quick. In the traditional C&I business, are you still, generally, pricing credits in the upper 4s range? I think, you mentioned you're seeing floors in that $475 million to $480 million range last quarter.

It's very competitive, probably a little bit lower than that at this point in time. You've seen our overall yield on the loans held for investment portfolio go down slightly. Some of that is because we're not getting floors on 75% of the new loans that are put on the books. So that somewhat materially will change the overall number. It hasn't really shown up dramatically in the margin. But again, the thing that we do that you don't see in the marketplace as much as we perform is growth. We overcome that compression and did this third quarter pretty dramatically with growth. Now obviously, we would like to slow margin compression. But as long as we can keep the growth where it is today, we feel pretty comfortable that, that top line is going to continue to increase.

Yes, understood. Sounds good. And one last one, if I could, just switching to expenses. I was just wondering if you're looking for a decent decline in that legal and professional expenses line next quarter, if you think that will normalize around that $3 million to $3.5 million range.

Dave, this is Peter. It's been very variable, and it relates to litigation, as well as to the collection cost. The collection cost component is clearly coming down, but that number can move around a lot.

Your next question is from the line of John Pancari from Evercore Partners.

Can you talk about the outlook for the mortgage warehouse? Give us a little more color around what you're expecting there. I know you'd indicated the expected -- it could be up modestly with share gains. But the MBA just increased their forecast now for mortgage production for the industry. And so I just want to try to get a better view on the magnitude of the increase. Do you still expect out of the warehouse just given the industry is still seeing a good amount of appetite?

I'll answer that really in 2 ways. One, yes. I think we're going to continue to see demand. We have a number of approved lines sitting on our desk, ready to go that aren't in the queue today, simply because we're managing the balance sheet. We have really good upside, but we're very selective in terms of what we do. So that business could grow fairly dramatically on our balance sheet if we would let it, but we managed that, as we've said before, with the participation program. So around that 30% number of percentage of loans is where we'll keep those totals and we'll use the participation program to manage that. If you look at where that is today, we're up fairly dramatically in the participation side from where we were at June 30. Committed, we're up to $437 million from $322 million. Outstanding, we're up to $320 million from $245 million. And we have commitments now in excess of that $437 million number. So the program is working quite well. We're managing our outstandings, and I believe that we're servicing the customers quite well.

Okay, all right, that's helpful. And then on the right side of the balance sheet, can you talk a little bit about the funding side here? I mean, your deposit growth on an end-of-period basis was much lower this quarter, up modestly, but your borrowings on a period-end basis were up a lot. So can you talk about what's going on there.

That's by design. Again, as Peter mentioned, we have a new facility -- the Federal Home Loan Bank has granted facility borrowing related to the mortgage warehouse business. We in the past have not been able to use those assets in a borrowing capacity. We do now, and they advanced a fairly significant amount. So we've been moving the funding of those particular assets to that facility and as we grow that business, that's why the borrowings have gone up. On the other side, we've had great success. Yes, and by the way, that is at a lower cost, too. We got a tranche of that money at 5 basis points. So that's really hard to turn down. But on the other side of the balance sheet, we've had real success with our treasury deposit generation and DDA generation. We've had a lot of DDA coming in the door through the mortgage warehouse business, through our treasury management process. So we're just changing our funding mix slightly to reflect the Federal Home Loan Bank facility.

Okay, all right. Now that's helpful. Sorry if I missed Peter's comments on that. And then lastly, just around the margin. As you think about it here with -- given the compression that you saw in both held for investment loan yields and the warehouse as well, fair to assume similar margin compression here to the magnitude you saw this quarter over the next couple of quarters, or you think it's going to be somewhat later than that?

I think we're going to see the benefit of the growth. But obviously -- and it kind of responds to a question that came from Dave earlier. You're not growing the portfolio at 4.5% plus. You got a held for investment portfolio that's earning a very high level because of the floors on the renewed portfolio, but the growth is coming in a level of sort of prime plus a half. So you figure out the growth is split, as I said, evenly between held for sale and held for investment. And held for investment is coming in at sort of prime plus. The held for sale, as you see in our portfolio, there's a 4% yield that's come down with national mortgage rates. We can't really do anything about that, but we also know that the first thing -- the first pop we'll get improvement in yields will be when we see the mortgage yields come back, come back at a level we think that will not have a significant impact on volumes. Really just math at this point.

Your next question is from the line of Brady Gailey from KBW.

My question is on the sustainability of loan growth x the warehouse. Have you been looking year-to-date, you're growing 20%, 25%. It sounds like that's going to stick around in the near term. But when you look out to mid-2013 and into 2014, do you think you can still sustain a 20% to 25% growth rate? And are you continuing to hire new teams to be able to continue to steal market share like you've done in the past?

Two questions, try to answer both of them. Hopefully, we'll have a little bit better economy in 2013, which will certainly help some of the organic growth within the company as opposed to having the majority of the growth come from that takeaway business. But yes, I think I mentioned in my comments, maybe not strongly enough, that the pipeline we see for loans held for investment today is as good as we have seen it in recent years. The fundings we anticipate in the next 30 to 60 days are really quite good. We don't see anything that should pull that back. We believe that, that should continue. We hired -- continued to hire groups. We hired 10 RMs in Q3. We had a net 9 addition to the company. So we are continuing to look for and find, attract, hire RMs to support the ability to continue to grow. So we feel pretty darn good. We really do. So we're optimistic.

Okay. And then George, your company has, if I had to guess, next quarter will cross over the $10 billion in asset mark. So there'll be some new -- you'll be subject to some new regulations and costs. What are your thoughts on that? And have you all quantified any additional cost that will come around for being over that $10 billion in asset mark?

Well, there will be some additional cost, stress testing, those kinds of things that we're already preparing the company for. But remember, our model -- we are not a consumer model, so that we're not subject to a lot of the issues that will be surfaced by the Consumer Protection Bureau. So we believe that our cost, while somewhat elevated, at the $10 billion level will be less than most of our peer group.

And you do have to remember that you have to have that at quarter end for 4 sequential quarters, so that will be some time from now. And the level of participation activity and the level of held for sale lending activity, the warehouse activity, can move that number around quite a bit even to the downside.

Your next question is from the line of Michael Rose from Raymond James.

Just on the -- I think you mentioned you hired 9 new additional RMs in the quarter. Can you give us a sense for kind of what your typical RM hire looks like today versus maybe a couple of years ago? I mean, are you hiring lenders with bigger books relative to what you did earlier in your history, because it's -- become easier to attract the talent in some of those people? And can you maybe discuss the potential pipeline or books that you brought on this year? I think you hired a total of 19 year-to-date.

A little bit of a tough question. I don't see a lot of difference in the RMs that we're hiring today than what we did 3 or 4 or 5 years ago. We're trying to get a little bit more specialty in the hires that we take. We're looking through to get health care expertise and some of those kinds of things rather than just simply a generalist in all cases. But we're hiring a lot of generalists also. So we are looking -- continue to look for RMs with books of business, particularly important in a weak economy when you're not getting a lot of organic growth from your existing portfolio. And we've been fortunate in our hires that we've been able to get that kind of flow-through in terms of takeaway business from the competition. But we spend a lot of time, Michael, as we've told all of you before, in terms of how we look for people, how we find them, how we interview them, how -- the plans that we ask them to put together before we hire them. So it is a very detailed process, and we missed on a few, but not too many. And we've had just exceptionally good flow-through from the RMs that we've hired. We've now got probably about 80 lending RMs. We've got other RMs in the company that provide sales and other support vehicles to the lending group. But anyway, we're pleased with our cadre of folks.

Okay. And as a follow-up, what percentage of this quarter's loan growth on the held for investment side was participations? And how did that compare to last quarter?

Participations in -- see, that we have bought, so to speak, is that what you mean?

Correct.

Syndication-type credits? Our syndications have gone up, primarily it leans toward the energy portfolio. We found that we have better credit quality when we go up the scale a little bit. And a lot of times, that means syndication. We have increased our agency participations that we actually agent the credit. Lay out approximately $100 million of the increase in our SNIC [ph] portfolio, and we're involved directly in another $200 million. So it's been a reasonable part of the increase, but certainly not the majority of the increase. And again, I'd tell you it's about 60% energy.

Okay. So $100 million of this quarter's growth roughly was syndications or SNICs [ph]?

That's a hard number. What I was talking about is that we led about $100 million.

Your next question is from the line of Jennifer Demba from SunTrust Robinson Humphrey.

Question, George, I think you mentioned earlier in the call that a lot of the loan growth this quarter besides mortgage warehouse have been premium finance and energy?

Yes.

Can you give us the outstandings in both those areas if you have them?

We really don't give specific divisional totals, Jennifer. But we've said that BankDirect, the premium finance, has around $700 million. But we really don't break the rest of the portfolio out. It's probably in the -- it's about 10% or 11% of the overall portfolio for energy.

Of the held for investment.

Of the held for investment portfolio. BankDirect is probably a little bit less than that, around the $700 million mark.

Your next question is from the line of that Brett Rabatin from Sterne Agee.

I wanted to ask 2 questions. One is just you mentioned earlier refi was about 60% of the volume for the held for sale portfolio this quarter. Can you talk about how much HARP impacted that was the question -- I'll let you answer that one first.

Yes, not a great deal, around 3% or 4%.

Okay. Isn't it...

But it's -- we expected to see more and maybe we will see more later on, but it's not a big number for us right now.

Okay. And then secondly, George, I was curious, you mentioned early in the conference call, your thought on deploying capital. Can you talk about if you would think your capital ratios would decline with the growth you're expecting from here, can you give us some thoughts around relative capital ratios post the capital raise and the debt offering last quarter?

Obviously, we -- with $730 million of growth this quarter, linked quarter, we got that pretty well deployed. We are growing loans at a rate faster than we're growing capital internally, albeit, growing at 17%, 18% growth rate in common equity. We're not leveraging up net very much, but we are incrementally expecting that to occur over next year. And that's perilously close to a model-building question.

Well, I mean, I guess, my question really is just around with the -- whether whatever ratio you want to use with tangible capital, would you be comfortable having that move back down towards the second quarter level and it sounds like the answer is yes if I understood it...

Absolutely. We felt comfortable where it was. It's going to take a while to get there because capital -- the internal capital generation rate is so high.

Your next question is from the line of Jason O'Donnell from Marion [ph] Research.

Most of my questions have been answered, but I do have one. With respect to the builder finance group and your construction portfolio more generally, it looks like you've generated some nice growth out of that group over the last, say, several quarters. Can you just give us some sense of how much of that portfolio at this point is situated sort of outside of your core markets within the 5 MSAs?

Today, almost all of it is in Texas. Probably close to, well less than 5%, 3% is probably outside of our core 5 markets today. Most all of that production has been in Texas.

Your next question comes from the line of Matt Olney from Stephens.

Most of my questions have been addressed, but I want to circle back on the warehouse yield. You mentioned it was 4% previously. Can you give us any color on the direction of this during the quarter, and what you've seen in recent weeks?

We don't generally comment on monthly trends, but this level has been quite stable over the course of the third quarter. But that doesn't mean it can't vary a few up or down, but it appears to us that the portfolio yield may have stabilized.

Your next question comes from the line of Scott Valentin from FBR Capital Markets.

Just with regard to the mortgage warehouse, can you talk about maybe concentrations? I know you've been trying get larger customers and kind of higher-quality customers. I was wondering if you had any changing concentration, maybe what the average size of a line is with a mortgage broker?

It really is pretty stable. We -- I think, we've said in the past, for the last 5 years or so, we have really worked hard to move into that larger regional mortgage originator category, the ones that need lines of credit from $10 million to $50 million. And that's been pretty stable for the last 5 years. Now we continue to try and find better quality originators and have over the last 2 or 3 years. But that level of growth, that level of originator has been about the same.

Okay. And then just addressing a concern maybe for 2013, if the mortgage market slows down. I know you've said in the past that you think market share increases can offset some of the slowdown in the overall mortgage market. But do you have any sense of where your market share is now, and where it's -- maybe over the last 2 years, where it's kind of range?

I don't know specifically what the percentage is. I do know that we are processing a lot of business on a monthly and quarterly basis in the billions. So it's -- it won't be as big on our balance sheet as some of the larger companies, but I do know our processing, what we touch is quite large. I can't give you a percentage, I just don't know. The market is so big, so huge, I don't think we're going to hurt anybody particularly.

Okay. And then just the final question, apologies if I missed this earlier. In terms of the size of the -- on balance sheet AFS portfolio, how big? I mean, I thought we'd -- in the past I recall, something like a $2 billion number, $2.1 billion number. Now it's growing a little bit. I understand that the overall balance sheet has grown, so it makes sense. Is it more sensible to think about it from a percent of loans, total loan mix?

Yes, and that's what we do. We've said in the past that the warehouse business should be about 30% of our outstandings on our balance sheet. And that's where we used the participation to try and manage that concentration, and it will move a little bit.

We're in the range of 25%.

25% to 30%, but we're comfortable at the 30%.

Your next question is from the line of Gary Tenner from D.A. Davidson.

Just a question, again, on the warehouse. Can you tell us what the average participations were for the second and third quarter?

Yes, we can. For the quarter, let me see. September 30, $255 million.

And for the second quarter, do you have that?

Second quarter, $106 million.

And did you say that the -- at September 30, there was $437 million of participation commitments and has gone up since then? Is that...

Yes, and it has -- and the commitments have gone up slightly from that point.

Okay. Could you give any sort of guidance or talk about the average fee that you get on these participations?

We've said before it -- within a range, and it's competitive. So we really don't like to talk too much about it at this point in time. But it is a servicing fee. It's not going to move the needle a lot. It's within a range of 50-or-so basis points, but it's -- it will range in the 40 to 50 basis point range.

[Operator Instructions] Our next question is from the line of John Moran from Macquarie Capital.

So just back on the warehouse, again, and sorry to keep coming back to it. You said that today 60%-or-so is refi. How does that compare to earlier this year? And is there more of a purchase book kind of building as we progress through the year here?

That percentage has floated up and down kind of on a monthly basis as some of these rates have gone up a little bit or down a little bit. But in that 50% to 60%, 65% range is kind of where it's been recently. What we have been doing for the last year or so is selecting customers that are not significant refi shops. In other words, there are people out there that believe like we do, that the refi business is going to slow down dramatically at some point, and you better have a book or a company that can attract purchase mortgages. And so we have been looking for those type companies and that's the one we've been giving lines to. So if you look at the normal warehouse bank, I think you'd see probably 75% refi business, where we're maybe in the 60% range. And I think it's because of that. The refi business has increased because of HARP. We haven't seen it dramatically affect our numbers, but it has increased it. But it is a guided effort to look for purchase financing companies because they'll be here when the refi business slows down.

That's helpful. And then just kind of shifting gears real quick. On fee income development, I know in the past you guys had talked about wealth management trust and kind of a preference to build versus buy. Any sort of updated thoughts around sort of strategic opportunities that you might see to kind of develop fees a little bit?

Yes, we think there is a real opportunity to develop fees in the wealth management business. We're still in the process of restructuring our group. I think we've mentioned that in the past that we're making some fairly significant moves with software and with people. And we're not there yet. We're continuing to do that. So it will take probably to, at least, until the end of the year, maybe a little bit longer than that to get to area where we needed to be in terms of competitiveness, software, sales, et cetera. But we do think there's a real opportunity there. We're pursuing it. We think it is a good opportunity to increase fee income for a company like ours. And we are actively working toward that end.

Your next question comes from the line as a follow-up from Brady Gailey from KBW.

To ask the question a little differently about the SNIC [ph] portfolio. What was the end-of-period balance? I think it was $987 million as of the end of June. When you look at September, what was the balance there?

Well, the math, it was -- as we mentioned to you, we've seen quite a bit of energy lending in the last quarter. So it's about $1.2 billion at this point. Again, but we've moved our agency participation up probably 10%, 15% of our outstandings, more of our outstandings that we agent than before. Again, 60%-or-so of the increase that you see from Q2 was energy-related.

Okay. And then on OREO cost. So you've been running about $3.5 million in Q1 and Q2. It dropped $0.5 million in the third quarter, which kind of makes sense because your OREO is coming in at decent amount. But when you look at that OREO line in expenses, do you think the run rate is kind of sub $1 million from here on out?

Yes. Remember, most of that number in previous quarters was the valuation charge. In this quarter, it was only $64,000. So you're getting to a core of the maintenance taxes and so forth that's sharply lowered.

Okay. And you think the third quarter is a good proxy for rough run rate going forward? It is just a lot lower than what we've seen year-to-date.

It's a lot lower and expected to stay that way.

Your next question is from the line of Matthew Keating from Barclays.

Previously, as it relates to the mortgage warehouse participation program, you thought $600 million to $700 million might be a realistic year-end objective. I appreciate the color on the commitments as of quarter end. Do you still think that kind of number is a realistic goal?

We're probably looking at $700 million plus if we continue to build our opportunities, which we continue to see. I think, I mentioned earlier in the call that we have a fairly significant number of approved lines that we just have not booked yet because we're managing the concentration. So I think there's a good opportunity to get a number of those on the books and increase our participation, so that it will manage our concentration to that 25% to 30% number I mentioned earlier. So around $700 million. but more maybe.

My final question will just be -- you mentioned how Q4 has traditionally seasonally strong quarter for Texas Capital. Can you just refresh us on why that's the case? We know with the fiscal cliff concerns and other uncertainties, a lot of banks have been saying that they're concerned about potential slowdown in the fourth quarter. So maybe you could just update us on why that's seasonally strong to you.

The pipeline is very strong and historically, we've seen just terrific difference between third and fourth quarter in the way that the commercial business flows. We have strong quarters typically of Q2 and Q4. We know our customer base is -- there's significant trepidation about the fiscal cliff and so forth. But again, most of our market -- most of our growth is coming from market share movement, not the organic growth from the portfolio. So that has less of an impact.

And at this time, there are no other questions in the queue. I'd like to turn the call back over to Myrna Vance, for closing remarks.

Before I turn it over to George, let me remind you that I'm available to take any questions that you might have. And you can reach me at (214) 932-6646. And with that, I'm going to turn it to George.

Thanks, Myrna. I just want to thank everyone for your continued interest in Texas Capital. We appreciate your questions today. And as Myrna said, if you have additional questions or comments, please call her. And I assure you, we'll address all those questions as quickly as possible. Again, we will work hard for your interests, and we appreciate your interest. Thank you very much.

And ladies and gentlemen, this concludes your presentation. You may now disconnect. Enjoy the rest of your day.