BancorpSouth Inc (NYSE:BXS)
Q4 2015 Earnings Conference Call
January 26, 2016, 11:00 AM ET
Will Fisackerly - Senior Vice President and Director of Corporate Finance
Dan Rollins - Chairman of the Board and Chief Executive Officer
Chris Bagley - President and Chief Operating Officer
William Prater - Senior Executive Vice President and Chief Financial Officer
Ronald Hodges - Senior Executive Vice President and Chief Credit Officer
James Threadgill - Senior Executive Vice President and Chief Business Development Officer
Catherine Mealor - KBW
Jennifer Demba - SunTrust
Michael Rose - Raymond James
Kevin Fitzsimmons - Hovde Group
Emlen Harmon - Jefferies
Jon Arfstrom - RBC Capital Markets
Matt Olney - Stephens
Welcome to the BancorpSouth fourth quarter 2015 earnings conference call and webcast. [Operator Instructions] I would now like to turn the conference over to Will Fisackerly, Senior Vice President and Director of Corporate Finance. Mr. Fisackerly, please go ahead.
Good morning and thank you for being with us. I'll begin by introducing the members of the senior management team participating today. We have Chairman and CEO, Dan Rollins; Chris Bagley, President and Chief Operating Officer; Bill Prater, Senior Executive Vice President and Chief Financial Officer; Ron Hodges, Senior Executive Vice President and Chief Credit Officer; and James Threadgill, Senior Executive Vice President and Chief Business Development Officer.
Before the discussion begins, I'll remind you of certain forward-looking statements that may be made regarding the company's future results or future financial performance. Actual results could differ materially from those indicated in these forward-looking statements due to a variety of factors and/or risks. Information concerning certain of these factors can be found in BancorpSouth's 2014 Annual Report on Form 10-K.
Also during the call, certain non-GAAP financial measures may be discussed regarding the company's performance. If so, you can find a reconciliation of these measures in the company's Q4 2015 earnings release.
Our speakers will be referring to prepared slides during the discussion. You can find these slides by going to bancorpsouth.com and clicking on our Investor Relations page, where you'll find them on the link to our webcast or you can view them at the exhibit to the 8-K that we filed earlier this morning.
And now, I'll turn to Dan Rollins for his comments on the quarter.
Thank you, Will. Good morning. Thank you for joining us today for BancorpSouth 2015 yearend conference call. I will begin by making a few brief comments regarding the highlights from the quarter, Bill will discuss the financial results in more detail, Chris will talk about our business development activities in the bank, James will provide some comments on our business development activities in the mortgage and insurance, and finally Ron will discuss highlights regarding credit quality. After we conclude our prepared comments, our executive management team will be happy to answer any questions.
Let's turn to the slide presentation. Slide 2 contains our customary Safe Harbor statement with respect to certain forward-looking information in the presentation.
Slide 3 covers the highlights for the quarter, beginning with the financial highlights. Net income for the quarter, $21.2 million or $0.22 per diluted share. Net operating income, which excludes merger-related and other non-operating expenses, was $31.4 million or $0.33 per diluted share. We had one material item in the quarter that we consider to be non-operating in nature.
As we disclosed in an 8-K earlier this month, we settled the class action suit filed in 2010 related to overdraft fees. This settlement resulted in a pre-tax charge of $16.5 million in our fourth quarter results. While this settlement does have an adverse impact on fourth quarter earnings, we are pleased to have this matter behind us.
We continue to generate steady loan growth, producing $153 million of net loan growth this quarter or 5.9% on an annualized basis. We also produced nice deposit growth this quarter totaling $189 million or 6.7% annualized after two quarters of relatively flat deposit balances. Chris will provide some highlights on our loan and deposit efforts in a moment, including some color on specific teams and geographies.
Our net interest margin continues to be very stable. The net interest margin for the fourth quarter was 3.58% compared to 3.59% for the third quarter of 2015. Bill will cover the components of our margin in more detail in his remarks. Our credit quality remain stable as well, as we had no recorded provision for credit losses for the quarter. Ron will spend some time discussing the factors that impacted our provision in a moment.
During the quarter we were able to dispose three of our five largest ORE properties. These dispositions resulted in elevated foreclosed property expense for the quarter. However, we believe this significant decline in ORE will benefit our efforts to control expenses going forward.
Finally, while it's not shown on this slide, we disclosed in our press release that we have begun settlement discussions with the Consumer Financial Protection Bureau and the U.S. Department of Justice regarding their joint investigation of our fair lending practices. At this time, it is too early to speculate on the potential timing or outcome of this investigation or its impact on our two pending mergers.
We are currently unable to estimate any potential liability associated with this matter. Should this matter be settled prior to our 2015 Annual Report on Form 10-K being filed, accounting rules require us to revise our 2015 financial information to reflect this event. We are pleased to have open communications with these agencies and we hope to resolve this issue as timely as possible.
I will now turn to Bill and allow him to discuss our financial results in more detail. Bill?
Thanks, Dan. If you'll turn to Slide 4, you'll see our summary income statement. Net income was $21.2 million or $0.22 per diluted share for the fourth quarter. The only material non-operating item impacting the three quarters presented was the $16.5 million legal settlement charge during the quarter that Dan mentioned earlier.
You'll also notice on this slide, the trends in our net interest revenue. Net interest revenue was $111.2 million for the fourth quarter compared to $111.1 million for the third quarter of 2015 and $106.4 million for the fourth quarter of 2014. Our net interest margin was 3.58% for the quarter compared to 3.59% for the third quarter of 2015 and 3.6% for the fourth quarter of 2014. The components of net interest margin were relatively stable quarter-over-quarter.
We did see some compression in average loan yield, but we picked up some benefit in our securities yields as well as deposit cost. The yield on loans was 4.15% for the quarter compared to 4.22% for the third quarter of 2015, and the cost of deposits was 21 basis points compared to 22 basis points for the third quarter of 2015.
Moving on to the provision. We had no recorded provision for credit losses during the quarter compared to negative provision of $3.0 million for the third quarter of 2015 and no recorded provision for the fourth quarter of 2014. Ron will discuss that in more detail in a moment.
The following two slides break our non-interest revenue and expenses into further detail. If you'll turn to Slide 5, you'll see the detail of our non-interest revenue streams. Total non-interest revenue was $67.4 million for the quarter compared to $63 million for the third quarter of 2015 and $63.5 million for the fourth quarter of 2014.
Mortgage lending revenue was $10.5 million for the quarter compared to $2.3 million for the third quarter of 2015 and $3.3 million for the fourth quarter of 2014. The increase in mortgage lending revenue is largely attributable to the fluctuation of the mortgage servicing right asset valuation. Production and servicing revenue was essentially flat compared to the third quarter at just over $7.6 million. Our pipeline for the quarter was stable as well, resulting in a more normalized mortgage margin compared to the third quarter.
Insurance commission revenue totaled $25.3 million for the quarter compared to $28.6 million for the third quarter of 2015 and $25.4 million for the fourth quarter of 2014. Fourth quarter is always light on insurance revenue, as a result of the seasonality in the renewal cycle in our book of business. In addition, we continue to see softening of premiums in the insurance market. James will give more color on both our mortgage and insurance businesses in a moment.
Slide 6 presents the detailed non-interest expense. Total non-interest expense for the quarter was $148.4 million compared to $126.5 million for the third quarter of 2015 and $130 million for the fourth quarter of 2014. The schedule at the bottom of the slide shows the aggregate impact of non-operating items incurred in each of these quarters.
As you can see now, with significant non-operating item impacting the three quarters shown here is the $16.5 million legal settlement occurred in the fourth quarter related to the overdraft case. Have we not had this charge, the efficiency ratio for the quarter would have been 72.5% compared to 71.6% for the third quarter and 75.3% for the fourth quarter of 2014.
I'd like to make a few comments about certain of the line items included in non-interest expense. Salaries and benefits totaled $80.2 million for the quarter compared to $81.4 million in the third quarter and $76.8 million for the fourth quarter of 2014. If you recall, pension assumptions, including the mortality tables were updated at the beginning of 2015, resulting in incremental pension expense of approximately $2 million per quarter compared to 2014.
Foreclosed property expense increased $2.2 million compared to the third quarter of 2015, primarily as a result of the disposition of several large parcels of ORE, as Dan mentioned earlier. We've now worked our ORE balance down below $15 million at yearend, which should help us reduce this line and going forward. All other expense items shown here that I've not addressed specifically were relatively stable in the periods presented.
That concludes our review of the financials. And I'll turn it over to Chris for his comments on our frontline banking efforts.
Thank you, Bill. Slide 7 reflects our funding mix as of December 31 compared to both the third quarter of 2015 and fourth quarter of 2014. We experienced deposit and customer repo growth of $170 million for the quarter or 5.8% annualized. This contributed total funding growth of $376 million or 3.3% for the year ended December 31, 2015.
Our growth for the year was spread evenly across our footprint with four of our five regions producing deposit growth for the year. And looking at both the quarter-over-quarter and year-over-year comparisons, we continue to see the same trends in deposit that we've talked about for several quarters. Time deposits continue to trend down, while other lower-cost demand and savings deposits are growing.
Moving to Slide 8 you will see our loan portfolio as of December 31 compared to both the third quarter of 2015 and fourth quarter of 2014. We reported net loan growth for the fourth quarter of $153 million or 5.9% annualized. Our net loan growth for the year totaled $660 million or 6.8%.
Consistent with our community bank model, we saw growth across most loan types during the quarter. Geographically, all five of our community bank regions produced net loan growth for the quarter, led by our newest Central Texas region. For the other four regions, we had four divisional lending teams producing annualized loan growth of over 10% for the quarter. These teams included Tennessee Metro division, the Central Arkansas division, the West/South Arkansas division and the Northwest Louisiana division.
In addition, our corporate lending team, which handles our larger commercial credits, produced annualized growth of over 15% for the quarter. Finally, I'd like to recognize our Gulf Coast division and the leadership of Jim Ray for an exceptional year of 13% year-over-year loan growth. They are the only legacy market to achieve this level of year-over-year growth and we're very proud of the Gulf Coast team. As we move into 2016, we are optimistic about our current loan pipeline and our ability to continue to grow loans.
Finally, I would like to provide a bit of color on oil and gas exposure. At yearend we had approximately $170 million in direct oil and gas commitments, with approximately $86 million outstanding or less than 1% of our loan portfolio. While our direct exposure is relatively low, we are very aware that it's not just the direct credit exposure that can be impacted. So we've implemented elevated monitoring processes, especially around commercial real-estate from a geographic perspective.
I will now turn it over to James to discuss our business development results in mortgage and insurance. James?
Thanks, Chris. The tables on Slide 9 provide a five-quarter look at both mortgage and insurance. Our mortgage lending operation produced origination volume for the quarter, totaling $310 million. Of that, $225 million or 72% represented home-purchase money, which is a 16% increase in purchase money volume over the fourth quarter of '14. We believe comparable quarter comparisons are more relevant, given the seasonality in the business.
Increases in volumes have been partially attributable to increases in our production team. We increased originators from 122 at December 31, 2014 to 140 at December 31, 2015. As we expand our team, we are adding seasoned originators, who know how to be successful in a purchase money environment.
Deliveries in the quarter were $290 million compared to $397 million in the third quarter of '15 and $230 million in the fourth quarter of '14. Mortgage lending revenue totaled $10.5 million for the quarter, which included a positive MSR valuation adjustment of $2.9 million. This compares to revenue of $2.3 million during the third quarter of '15, which included a negative MSR valuation adjustment of $5.3 million.
The margin was 1.68% for the quarter, representing an increase from 1.3% in the third quarter of '15. We indicated last quarter that we expected margin to be in the 1.6% to 1.7% range, if the pipeline was stable. That's what we saw in the fourth quarter, as the pipeline was relatively stable at $249 million at December 31, 2015 compared to $269 million as of September 30, 2015.
Moving on to insurance. Total commission revenue for the quarter was $25.3 million compared to $28.6 million in the third quarter of '15 and $25.4 million in the fourth quarter of '14. All five quarters presented here fully reflect all our agency acquisitions. As Bill mentioned earlier, fourth quarter is always our lowest quarter of commissioned revenue, as a result of the seasonality in our renewal cycle.
While the downturn in the energy sector and the slowing economy are having a negative impact on revenue, we are continuing to see some slight organic growth as a result of our efforts to write new accounts. 2016 will be challenging year, but we will continue working hard for new business, while continuing to stress operating efficiency.
Now, I'll turn it over to Ron for his comments on credit quality.
Thanks, James. Slide 10 presents some highlights of credit quality for the fourth quarter. As Dan mentioned we had no recorded provision for credit losses for the fourth quarter compared with a negative provision of $3 million for the third quarter of 2015 and no provision for the fourth quarter of 2014.
Net charge-offs were $6.6 million for the quarter compared with net charge-offs of $2.3 million for the third quarter of 2015 and net charge-offs of $1.5 million for the fourth quarter of last year. Net charge-offs for the quarter totaled only 0.25% annualized as a percentage of average loans. In addition, the level of adversely classified assets in our loan portfolio continues to trend downward. The ALLL was 1.22% of net loans and leases as of December 31, 2015.
Non-performing loan and non-performing asset balances were relatively flat compared to September 30, 2015, with total NPLs increasing about $4.7 million, while total NPAs decreased by $4.3 million. Within NPLs there was a shift between restructured and accruing loans and non-accrual loans as a result of one $9 million commercial real estate project that we discussed last quarter that was restructured as a result of the loss of a major tenant. This loan was moved into non-accrual status during the fourth quarter.
As we have said in previous quarters, the level of non-performing loans has decreased to a level that we may see fluctuations such as these in each quarter in the normal course of business. We saw a significant decline in ORE, as a total balance declined $8.9 million or 37.7% compared to September 30, 2015. As Dan mentioned earlier, we had the opportunity this quarter to dispose off three of our five largest parcels of property, ORE at December 31, 2015 was under $15 million.
The final bullet on this slide relates to near-term delinquencies, which continue to remain at low levels representing only 0.24% of net loans and leases at December 31, 2015. Slide 11 provides a visual of the trends in NPLs, ORE and total NPAs over the past several quarters. You can clearly see where these levels have stabilized.
With that I will now turn back to Dan for his concluding remarks.
Thanks Ron. We are pleased with the accomplishments and progress that our team made in 2015. We had another solid year of loan growth. Our bankers produced net loan growth of $660 million or 6.8% for the year. This followed our company's record loan growth of $755 million in 2014.
We also produced growth on the deposit side of the balance sheet, following several consecutive years of stagnant deposit balances. Total deposits increased $358 million or 3.3% during 2015. This balance sheet growth combined with relatively stable net interest margin allowed us to grow net interest income for the year by $19 million or approximately 5% compared to 2014.
We also had some significant accomplishments in our fee lines of business as well. Our mortgage team increased total volume by 37% and purchase money volume by 25%, which resulted in year-over-year growth of $7.6 million or 26% in mortgage lending income excluding the MSR impact. Also, our insurance per diem produced revenue growth as well for the year despite the industry pricing headwinds that James discussed earlier.
Finally, we work through some other issues that have been a drag on our time and energy as well as our earnings. We were able to put a class-action suit from 2010 behind us. We also made significant progress in disposing a foreclosed property, some of which was leftover from the prior credit cycle, as ORE declined from $34 million at the beginning of the year to under $15 million.
We produced this growth and accomplishments that I've discussed, while holding our expenses essentially flat when you exclude the class action legal settlement. As we move into 2016, our goals are the same, continue to grow and continue to challenge every dollar we spend. We are confident the work that's been done will allow us to continue to improve our operating performance.
With that, I will conclude our prepared remarks. And operator, we'd now be happy to answer any questions.
[Operator Instructions] The first question comes from Catherine Mealor with KBW.
Let's just start with the provision. How should we think about a level of provisioning going into next year? I mean, clearly, you've enjoyed a negative-to-zero provision for the past couple of years and the reserve-to-one ratio is now down to 122, should at least a lower level of recoveries push the provision higher next year or do you think that you can still maintain the provision at the near-zero level for another couple of quarters?
I think I'll take a stab at that, and Ron can join if he wants to. That's a crystal ball question. Clearly, we would like to continue to grow our balance sheet. We would like to grow our deposits. We would like to grow our loans.
If we continue to grow our loans, at some point we're going to have to provision for those loans, because we've kind of come through the completion of the prior cycle that allowed us to lead back out the provisioning that we had in there that was not necessary. I think that where we expect to be, Catherine, is that we expect to see loan growth. And with that loan growth is going to come normal levels of provisions.
I agree. Catherine, at some point in time, the loan growth is going to require, in addition to the loan loss reserve, but it's going to be pure speculation as to when that quarter is going to be, but sometime in the foreseeable future it will happen.
And then can you give any color around the $86 million of direct energy exposure you disclosed? Any color around what type of energy credits these are probably mostly servicing. Any color there would be helpful?
No, I wouldn't go to mostly servicing. I think when you look at that $86 million, the majority of its going to be in the exploration and production class, that's a combination of both. It's all direct energy exposure servicing and exploration in production. It's probably well over half in the E&P side, not in the servicing side. And we also talked about we're looking at that the same as many of our peers are. We think our numbers at yearend we had 3.75% reserved against that at yearend within our reserve.
The next question comes from Jennifer Demba with SunTrust.
Follow-up on the energy question, any criticized or classified credits within that small owned gas portfolio at this point?
Sure, we've got classified credits in everything that we've got. $86 million out of $10.4 billion is so small for us, it's going to be really hard for us to have an real meaningful statistical analysis on such a small piece, but just like everybody else, the energy credits out there are stressed.
And you said you're more closely monitoring commercial real estate and other loans. Can you just kind of give us some more color on where you see the most vulnerability there? Are we talking about Houston credits or are we talking about Louisiana, both. Can you just kind of give us some color there?
Sure. Again, I think we're relatively new in Houston. We don't have lots of loans in Houston today. We have loans in Houston. We've been there for couple of years now, but out of our $10.4 billion, I don't have the numbers for that. But again, it's a relatively small and relatively new production facility. So I don't envision that that's where we're going to see the first pieces of the puzzle fall for us.
I think what we're going to see energy exposure would be in the markets that we've been in for sometime and not necessarily the major markets. We cover pretty good swap of East Texas, we cover a pretty good path across Louisiana and we've been in those markets for sometime.
And if the real estate markets begin to feel any pressure in those areas, we want to be prepared in front of that. So I don't think today we're seeing or feeling any of that, but what you heard or say was we're looking at those credits to make sure that we're stressing them to be able to identify potential weaknesses before we get there.
So now, we want to stress the credits to see what happens when income contracts, what happens when property values contract, what happen if rental rates contract. So we're stressing those credits today, so that we can identify ones that we want to work with. And today, I don't think we're seeing a whole lot of issues.
Bill, you said that OREO expenses would be going down as a result of the disposals you made during the fourth quarter, so would you see them at less than $1 million going forward per quarter or can you give us any idea of what we're talking about?
No, Jenny, I can't give any guidance on that. As Dan mentioned, we sold three of our five largest, and a couple of those -- I guess, all three of them really were very old properties, have been in inventory for considerable period of time and we had the opportunity to move them. And we do have some other properties that have some age on them. We don't have a single piece or single parcel at this point that's over $1 million.
So I wouldn't expect as we move -- that's why my expectation is as we continue to move some of those properties out I wouldn't expect to see the large losses associated with it that we had here, if any. We think we got it fairly valued, and we just had -- we did make a just kind of a strategic decision to go ahead and bite the bullet on a couple of those old larger ones.
Don't we breakout carrying cost versus write down cost?
So the write down cost is what you can look at, Jenny, when you're looking at your numbers. The write down cost that's on there is, we wrote those down to move them out. So the carrying cost to go forward piece that ought to come down also when we look forward.
The next question comes from Michael Rose with Raymond James.
Just wanted to kind of circle back on the expenses. Obviously, pretty good expense control outside of some one-time-ish type issues. But wanted to get your sense, Dan, on the efficiency ratio? I know you've said previously that about 70% is unacceptable. As we kind of look at next year with maybe a less robust rate outlook, what kind of levers do you have to pull on the expense side to bring that ratio down?
Yes, I think we're in the same boat this year that we were in last year. Our goal last year coming end of the year, in fact on this call a year ago, somebody may have been -- you, Michael, ask what we could do with our expenses and whether or not we could hold 2014 expenses flat into 2015.
And I told you that certainly that's what we're going to work to do. That we were looking to find ways to eliminate cost, so that we could pay for the naturally rising parts of our business, and are going to costs us more money to do lots of things every year, and we got to pay for those increases. We wanted to pay for those increases by building more efficiency and finding ways to save in other areas, so that we could improve the company and hold expenses flat.
When you exclude the extraordinary item that's in there on the legal settlement, I think you can see that we were able to do that. I think our goal coming into 2016 is very similar. We think we can continue to find ways to eliminate waste, reduce cost across our footprint to support the growth of our company without increasing our total expense level.
And then just as my follow-up question. Can you talk about the environment for maybe non-bank acquisitions? Obviously, you guys have done a couple of insurance deals. The market is softening a little bit in terms of pricing. Does that create more opportunities for you, and is kind of that where your focus is near-term on the M&A front?
I wouldn't say that we've got any extraordinary focus on one place or another. I think we want to continue to be opportunistic as we've been in the past. I think in today's insurance environment, you're right, it's a tough market out there, pricing makes it tough.
You're trying to sell something when prices are down when you want top of the dollar price is little bit difficult if you are a seller. If you are a buyer, prices clearly are down, so you don't want to over pay for something, when the market is tight. So I don't know whether that leads to more insurance M&A or less insurance M&A in the coming year.
I can tell you that the team is focused on building the relationships that we have across our footprint with our peers and our competitors, so that if somebody does want to talk, we're a choice, and hopefully we are the choice, where we would start those discussions for potential partnership to bring people together.
The same thing would apply into the other non-banking spots out there. We've got $7 billion-plus in assets under management, our wealth management team, and there could be opportunities to expand that book of business for us. We're organically growing our mortgage team, and I think Scott and his team have done a great job. And then as you know, we're kind of -- we're not kind of, we are, we're still on stop with the primary regulators on the two bank acquisitions, waiting to see if we can resolve the issues before the CFPB and the DoJ.
The next question comes from Kevin Fitzsimmons with Hovde Group.
Just one more question on expenses here. So I recognize that if you pull the legal settlement and merger costs and things like that out, it's a cleaner comparison, but it seems like it did still tick up. And what I'm interested in are the tick up we saw in legal x the settlement and other. Are those kind of lumpy or seasonal in nature? Just trying to get a sense for how we should think about that run rate going forward x the big legal settlement?
Let's talk about legal for a minute, and our General Counsel is sitting in the room here with us, so he's looking at me carefully. When you look at how we record expenses on the legal side, the settlements, we clearly had some money set aside for the class action suit that we had set aside in prior periods. We settled that case and that settlement amount runs through the settlement number that you saw.
The ongoing litigation cost around that case and many others continues to fall in any quarter, wherever there is activity around that. That particular, the settlement, the class action case that we settled, we had multiple millions of dollars in total legal cost into that case in addition to the settlement. So that clearly goes away. And then we've got other legal expenses that are natural and ongoing. We had BSA expenses in the past on the legal side. We have CFPB, DoJ legal expenses that we incur as they are presented to us.
So your word was lumpy, I think I'd follow that and say, yes, you're going to see those expenses flow through the income statement as they are incurred depending upon the level of activity on any of those cases. We went through most of last year with virtually no activity and the biggest ticket that we've got running, which is trying to resolve the fair lending inquiry.
And then you had mentioned earlier down the two pending deals. Can you just give us any update you can provide on how things are proceeding with them in terms of just how they're doing fundamentally and what the nature of the dialog is between you all, because the way I understand it is we've gone past the amended merger expiration date and so we still have an agreement in place, but the parties could walk away if they wanted to without any penalty at this point, correct?
Not exactly. Let me walk you through that. So you're right, we had extended the exclusivity period within both merger agreement through December 31, 2015. After December 31, 2015, either party and either of the two agreements can terminate the merger agreement with notice to the other parties. So it's a simple one sentence, I want to terminate, and that terminates the agreements.
Where we are today, we're outside of original dates to close, so if either party terminates ether of these agreements today, we owe, we being BancorpSouth owe the termination fees to the other parties. So either other party today can say, I want to terminate, and we're going to pay them the termination fee, which is a couple of million bucks I think in total. Bill, I don't remember off the top of my head.
So you would owe, but they won't owe anything, right?
That's correct, this is a one-sided. That's correct. So your question was really I think on, how is our relationship with them, and what are they thinking. And I don't want to speak for them, but I think our thought process was we don't know where we are today. We're certainly happier that we're a lot -- we know that by talking we're closer than we were than when we weren't talking. So that's a positive in our mind, is that just over the last two weeks or last three weeks, we've had conversations that mean that we can potentially add a solution to this and be able to move forward.
But frankly, the agreements are in place today. They're in full force and effect. And I don't speak for the other folks, but I think we are very committed to completing these merger transactions. And I think today, they're committed to completing these merger transactions, we just like to have some clarity on where we are.
The next question comes from Emlen Harmon with Jefferies.
You guys talked about seeing normal provisions if loan growth continues, I mean, again, be kind of a more normal environment. Could you remind me kind of what your normalized provision levels are over the longer term?
I don't know that we have normalized -- remember, I'm three years in here and I don't know that I would call it normal in the first three years that I have been here. So I think we'd have to go way back, and I'm not sure in today's world with the accounting rules and the processes and the models and the stress tests and the validations and the more and more and more, we're spending more time, more effort and more dollars on validating and managing our ALLL loan loss modeling than we've ever had as a company before.
And I would tell you, I think that's the industry, the industry is spending a ton of money on validating all of these models that are out there today that three years ago we weren't doing. Nobody was doing it three years ago, it wasn't required. So I don't know that there is a normal.
I think I would want to come back at it and say, the statistical work that our team does is very good and it looks that the credit cycles and it looks that the probabilities, and we're looking at our portfolio and we're looking at real-time data, so as the loan gets updated, financial statement, and that gets loaded into the system, net fees right into the model that could potentially change a loan grade.
Going back to somebody else's question earlier, I think Jenny was asking about energy closer. As financial data is updated, so if we get updated financial data that feeds into the computer system, the computer system will automatically re-run rates and spit-out things for us. It's working off prior data.
So what we're trying to do, we look at the stresses that we're putting on there and we're projecting some stresses. What would happen if we stressed this factor, what would happen if we stressed the rate, what would happen if we stressed whatever else? We can run those stresses within there just to be forward looking.
But from a provision standpoint, we've got to work off the factual data that we're looking at from the past. And I think the model is going to tell us where we are. I don't know what normal is. But I think from a number-wise, it feels like we're not far off from a percentage of portfolio.
And so a true follow-on question here. What is the reserve you set aside for each dollar of loan growth? Is it pretty representative of where that allowance to loans is toady? Would that be a fair way to think about it?
No, not at all, because new credits don't typically, that's not where you're going to put loan loss reserve. We're making loans today, where we shouldn't have to have a reserve. But that's good loan the day you make it, you don't need a lot of reserve. The loan loss reserve comes from the analysis on the portfolio that you have in place.
Clearly, loans migrate, that once you've got some history on the loan, you can have a better handle on the statistics behind it. There is no easy way to answer your question. It's not -- 1.22% is the number. If it was that simple, that'd be great. We would be saving millions of dollars a year on the dollars that we're spending running a model if we could just say it's 1.22%.
And one last quick one. I guess, you guys have relatively small energy exposure today. Central Community being a Texas-based bank, if that deal were to come to close, do you have a sense of how that adds to your energy exposure?
Close to zero. Where they are is not energy. Central Texas, they run the Central Texas corridor. And I can confirm that that all of our conversations show virtually zero direct energy exposure.
The next question comes from Jon Arfstrom with RBC Capital Markets.
Couple of things here. The language you used in the release on the opening of settlement talks, you say there is no guarantee that the terms would permit pending mergers to move forward. What does that mean, Dan? Is it just a precautionary statement or are you trying to do some messaging here?
I think that's the lawyer's words for let us have a big enough hole to fly a 747 through. We need all the world room that we can get. I think the real direct answer, Jon, is this we don't know. As we look out at the possibilities, we could find ourselves in a position, where whatever it is that's ongoing is so onerous on us that we would not want or that we would not be allowed to move forward with the merger transactions.
We could find ourselves in a position where we are able to move forward the merger transaction. So I think we want to just be very blunt, and say, while we're committee to doing these transactions, we want to do these transactions. I can't tell you here today with certainty that we're going to be able to do these transactions.
And then Dan, Chris or Ron, I guess, in terms of the lending, do you see any softening in the demand or the opportunities that you have or does this feel like a pretty sustainable loan growth pace for the company?
I think we have really seen a tremendous amount of softening, and I think this is as close as we can get to a sustainable growth. We've grown approximately $600 million to $700 million in the last couple of years in some challenging times inside our bank, and I don't see a big seachange of that going forward.
Chris, you had the geographies, we were talking about. But I think the geographies you mentioned were some in Arkansas, some in Louisiana, some in Mississippi, Alabama and Florida. Am I missing -- and Tennessee Metro. I think you named some parts of almost our entire footprint.
Don't forget, Gulf Coast.
The Gulf Coast, Mississippi, Alabama, Florida. I got the Gulf Coast group.
I think part of it is I think why I feel good about our loan growth pipeline is, we're so small in Texas and it's relationship-driven transactions for us over there. I feel good about that and a good pipeline. And the rest of our footprint I think, maybe with the exception of Louisiana, is benefiting maybe from the lower gas prices. So with some uncertainty and like you have to have and all these kind of predictions, we feel good about our pipeline.
And then, James, just one for you. In your prepared comments, you talked about the mortgage banking margin being relatively consistent as long as the pipeline is consistent. Do you feel like you can hold this kind of mortgage banking margin in the next quarter?
Well, it's kind of hard to say. This depends on the pipeline. I will say that the last few weeks we've seen increase in the pipeline with the grades being low. We've seen people that are coming in and making applications. So we've had a slight increase since first of the year, but I really can't predict what it will be going forward.
Let me ask that in a different way. If the pipeline were to stay stable again, are we still confident in the 1.6% to 1.7% that we've been talking about?
Yes we are.
I'm not sure what your direct question was, Jon, but I think the 160 to 170 with a stable pipeline, I think we feel pretty confident, and that's where we're pricing to today.
The next question comes from Matt Olney with Stephens.
I want to go back to Jon's question on the loan growth, and within the C&I bucket, it looks like there was some pretty decent growth in the fourth quarter. But if you look at the entire year of '15, it looks like C&I balances were relatively flat. If I compare that to '14, I believe C&I balances were the primary driver of growth. So any commentary on why the C&I slowdown in '15 versus '14 and what's the outlook within this category for '16?
I think the challenge with the C&I bucket is a lot of that is revolving our asset-based type loan agreements out there. So sometimes when you see, they're going to be a little bit lumpy and depending on the quarter, and we see a drawdown in some of their lines or an increase in some of their lines. I think that's what you're seeing in those differences in the numbers. But overall, I think there is good pipeline and good loan production in there. Does that help?
I think I would tag on to that Matt, and just as a reminder of our operating condition here, we don't have a large C&I department that's out chasing C&I, we don't have a big CRE department that's out chasing CRE, we don't have the big construction department out chasing construction, where we can manage those individual types of credits with the clarity that you're asking. We are operating as a community bank in the markets we serve, our lenders, loans are us.
If it's a C&I credit, they want it. If it's a one-to-four family, they want it. If it's a commercial real estate, they want it. We want whatever types of loans we can find within the markets that we're in. We certainly have some folks in those markets that specialize in one type of credit or another. But managing it the way you just described, I think it's easier to look backward and tell you what the results were than it is to look forward and tell you where we're going to go in any one type of credit.
And then probably a question for Bill on the margin. It looks like the pressure on the loan yields returned in the fourth quarter. But as you've mentioned, Bill, it was offset by improved securities yields. Any more color you can give us on these two items in the fourth quarter and then the outlook?
Yes, fourth quarter we put some loans on non-accrual during the quarter. And of course, when you do that, you reverse the accrued interest. That was responsible for some portion of the decrease in the yield.
We did have some good C&I growth, as you pointed out during the quarter. The C&I loans are more thinly priced typically than most of the other credit. So that put a little bit of yield pressure around investments. We gave up, I guess -- and if you look at the 7 basis points of yield translate into about 6 basis points of pressure on the margin from that alone, but we picked up 3 in the margin on investment yields and picked up 1 basis point on funding also.
Any color, Bill, for security yields? Any new purchases, any new activity there, on your behalf?
No. We just kind of typically run the latter.
And the portfolio is so small today.
It is. It's only $2 billion. Average-on-average basis, it's down about $100 million. From last quarter we still have ample collateral, and that's kind of one of the measures we kind of measure that too. We would rather lend it and invest in securities.
And we're certainly not trying to stretch out on a term today.
No. We typically run a latter of agencies and some SCMs.
This concludes our question-and-answer session. I would like to turn the conference back over to Dan Rollins for any closing remark.
End of Q&A
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