LegacyTexas Financial Group's (LTXB) CEO Kevin Hanigan on Q4 2015 Results - Earnings Call Transcript

| About: LegacyTexas Financial (LTXB)

LegacyTexas Financial Group Inc. (NASDAQ:LTXB)

Q4 2015 Earnings Conference Call

January 27, 2016 09:00 AM ET

Executives

Scott Almy - EVP, COO, Chief Risk Officer & General Counsel

Kevin Hanigan - President and CEO

Mays Davenport - EVP and CFO

Analysts

Bob Ramsey - FBR Capital Markets & Co.

Brad Milsaps - Sandler O'Neill & Partners LP

Michael Yang - SunTrust Robinson Humphrey

Brett Rabatin - Piper Jaffray

Matt Olney – Stephens Inc.

Brady Gailey - Keefe Bruyette & Woods Inc.

Michael Ross - Raymond James

Operator

Good morning and welcome to the LegacyTexas Financial Group Fourth Quarter 2015 Earnings Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mr. Scott Almy, Executive Vice President and Chief Operations Officer. Please go ahead sir.

Scott Almy

Thanks, and good morning everyone. Welcome to the LegacyTexas Financial Group fourth quarter 2015 earnings call. Before getting started, I would like to remind you that today’s presentation may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to publicly revise any forward-looking statement. At this time, if you’re logged into our webcast, please refer to the slide presentation available online, including our Safe Harbor statement on slide two. For those of you joined by phone, please note that the Safe Harbor statement and presentation are available on our website at legacytexasfinancialgroup.com. All comments made during today’s call are subject to that Safe Harbor statement.

I’m joined this morning by LegacyTexas President and CEO, Kevin Hanigan and Chief Financial Officer, Mays Davenport. After the presentation we’ll be happy to address questions that you may have as time permits.

And with that I’ll turn it over to Kevin.

Kevin Hanigan

Thanks, Scott and thank you all for joining us today. I will cover some highlights for the year and a couple of the slides on the slide deck before opening up the call for questions. Let me set energy lending aside for the moment and reflect on some of our major accomplishments for the year. Naturally, closing the highly accretive transformational Legacy merger on January 1, tops our list of accomplishments for the year.

We grew our loans over $1 billion or 25% for the year. In the fourth quarter alone loans excluding warehouse loans grew $378 million or 8.1% on a linked quarter basis and deposits grew $457 million or fully 9.6% on link quarter basis. Importantly for the year we improved our key operating metrics. In the fourth quarter we issued $75 million in subordinated debt to bolster our equity ratios and provide low cost capital to fund future growth.

For the quarter we reported net income of $16.4 million or $0.36 per share, while adding $7.1 million or about $0.10 after tax to our energy provisions, which now stands at 2.3% of total energy loans. For the year we reported core net income of $71.9 million in core EPS of $1.57.

On the credit quality front we improved our non-performing loan total in Q4 by selling a $24.2 million non-accrual energy loan, a sale that was execute at par plus. At this point we have not seen any contagion in any of our portfolios. Our fourth quarter net charge-offs were less than $500,000 down from slightly elevated levels in Q3. I was recently looking at our yearend list of our loans over $100,000 that were pass due, and the rest is assured as I can remember in quite some time.

All-in-all outside the persistent concerns about oil and gas we had a really outstanding year. Now here is where our call today breaks with our tradition. We are going to skip the slides and talk about what a robust diversified economy DFW is and about our remarkable market share statistics. Instead we will get right to the issues at hand; our limited Houston real estate portfolio and oil and gas. These two categories count for about 12% of our total footings.

So with that let’s turn our attention to slide 10, the first of three slides on energy. Slide 10 characterizes our portfolio, which is 53% gas and 47% oil a point that will be important to remember as we talk about hedging in just a moment. Of our 40 oil and gas customers only 3 are oil only and only 2 are gas only with the remaining 35 having a mix of both oil and gas in their reserve base.

We are almost exclusively a first lien lender with only one $5 million second lien loan to a strong borrower where we are also a first lien lender. And importantly we only have $4.7 million of drilling related oil field service loans. This is a space we have purposely avoided. As you can see 75% of our oil heavy clients have its hedges in place for 2016 at weighted average prices of $68.94 and 52% of these clients have hedges in place for 2017 at prices of $63.79, 77% of our gas clients have hedge in place for 2016 and 70% have hedges in place for 2017.

Now, let me talk about something important that is not in slide deck. That is how much of our engineered crude producing volumes have hedges. When looking at our gas only portfolio or our gas portfolio fully 90% of our engineered PDP volumes have hedges in 2016 at prices of $3.41, 92% of our PDP volumes in 2017 have hedges in places at $3.40 and 60% of our volumes in 2018 have hedges in place at $3.24. So this is a very significant level of hedging for our gas portfolio. On the oil reserves 48% of our PDP volumes are hedged for 2016, 34% for 2017 and 9% for 2018.

Turning to slide 11, we show that our non-performing energy totals improved by $24 million, while we had a slide uptick of $6.5 million in our substandard loans. We also show four recent market transactions in which problem loans were resolved at values well in access of our senior bank debt levels. We choose to highlight at what multiples PDP value reserves where value at in the resolution process. As you can see in the worst case resolutions were achieved at 2.26 times PDP values. This is not to suggest buyers or equity sources are valuing PDPs at these multiples, but rather a way to show how much additional value can be achieved when borrowers have significant levels of PUDs or proven undeveloped reserves and to a lesser extent leases.

The final energy slide is on page 12 and shows our reserve build from 1.1% at the end of Q3 to 2.3% at year end. We do recognize that some vendors have announced higher reserves, but would add that as of yearend we had no reserve built necessary for impairments. Our portfolio is very heavily weighted towards reserve base lending with very nominal second lien and oil field service exposure. We have significant levels of client hedging at very attractive prices for 2016 and 2017 and we have been successful at several problem loan resolutions at pricing metrics well above our loan amounts.

Now let’s look at our Houston real estate exposure on page 13. Let me note that our core CRE product dating back to the prior viewpoint portfolio is a low LTV, non-recourse financing of multitenant commercial properties, generally of B or B minus quality. This is further demonstrated by a $99 per square foot office portfolio in the energy corridor. Whereas new construction in Houston of Class A buildings might run anywhere from $200 to $250 per square foot.

You can see that we have $75 million of office exposure in the energy corridor and another $363 million in other areas of the Houston SMSA. Our LTVs are low at 65% for the entire portfolio and 70% when we look at the energy corridor only. Debt service coverage ratios are high quite strong at 1.6 in the energy corridor and 1.9 for the rest of the Houston portfolio. Our CRE portfolio in Houston is pretty well balanced between office, retail and multifamily. I should probably remind everybody, we don’t do much construction lending and we have no commercial construction loans in Houston.

Finally, our cumulative losses on our CRE book in Houston since 2003 is a staggeringly low $34,000. So we have covered at this point with greater granularity the energy and Houston CRE portfolios and I think we are ready to open up the line for questions.

Question-And-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions]. And our first question will come from Bob Ramsey from FBR. Please go ahead.

Bob Ramsey

Hey, good morning guys. Thanks for the color on the energy book. I was curious if you could talk about what the underlying oil price assumption is in the current level of reserve and if oil did stay at $30 a barrel indefinitely what that would mean in terms of additional reserve requirements?

Kevin Hanigan

We haven’t disclosed and don’t disclose for competitive reasons our price stack, but I will say we’re below the NYMEX strip for all years that we engineer for. So yes we’re below the strip. $30 oil indefinitely it’s kind of a ridiculous I think assumption, but clearly if we stay at $34 in the extended period of time loss will occur in bank portfolios in general, these portfolios have been underwritten to handle extreme stress, but not for extreme periods of time.

So indefinitely or forever with great levels of loss and when you think about loss, I know some people have put numbers out there because I’ve listen to the other conference calls. A lot of things you got to work your way through and run your head around. Asset classes actually matter, okay. Reserve basis different from second lien and second lien is different from oilfield services in terms of loss exposure. So if somebody hasn’t disclosed that level of information it’s hard to evaluate their reserve values.

Rock and geology matters, where do you have your exposures? We’ve avoided the Bakken. If somebody has big exposures on the Bakken, do they may have second lien exposures in the Bakken, do they may have oilfield service exposure in the Bakken, I don’t know I know we don’t. Hedging matters and I don’t know that anyone from all the calls I have listened to has disclosed the amount of production that is hedged, Okay. And we’ve got gas which is 53% of our portfolio, 90% hedged at really good prices for this year, 92% hedged for next year and significant hedges in to 2018.

So those cash flows up for those borrowers when gas was at $1.75 and is now a litter lower $2 and they are collecting $3.41, $3.42 for the next couple of years. We don’t foresee real big cash flow problems with those borrowers. We are underwriting at levels below that and we got hedges covered us. So hedging matters, sponsorship matters and we’ve got a lot of deals by big and private equity firms and so far they’ve been supportive of their deals. The open flow of capital and liquidity matters in terms of problem resolution as long as it’s helping you can resolve problems. We’ve seen that we have resolved problems.

How many problems do you resolve before that time period elapsed is where losses start to occur, well then unless you know how many are going to resolve between now and then and to the extent the capital markets are open, I promised you will resolve some more. I’m going to go on records and we’ll have at least one more resolved on the next call we have. And resolutions between now and then actually matter.

So if you resolve some of your problems they are not going to be the losses that would occur if they are off of your book. So I think people said 3.5% across portfolios that are populated with all kinds of different things. We’ve never lost money in this space 3.5% might seem reasonable depends on whether you’ve got heavy oilfield service exposure and whether you have got heavy second lien exposure. So I know we want to paint with this broad brush, but 5% reserve, and somebody announced 5% reserve we should all have 5% reserve that’s not how this works.

Now let me tell you how we can get to 5%, I guess we could, I could call somebody and say hey I would like to do a swap today and sell you $150 million worth reserve base loans and take my total energy portfolio down by $150 million from that perspective, and I like the swap could you give me back $100 million of oilfield services and $50 million as second lien. So maybe I have a portfolio that might look like something like that and then I’d have to put up probably 10% reserves or something like that on that kind of portfolio at $150 million that would probably get us with 2.3% on the reserve base portfolio to 5% and if I announce 5% today and everybody would be happy that I announce 5%, do you think I would feel better with $100 million in oilfield service loans and $50 million second lien loans. If you all need that to feel better I can promise you don’t hold your breath waiting for it to happen.

Bob Ramsey

That’s fair. I do appreciate the differences there and it is helpful for you all to give that color. Could you maybe give a little bit more detail around the non-performing loan sale that did take place this quarter?

Kevin Hanigan

Yeah, it was the credit that we’ve been talking about for most of the year that we thought we had resolved or through the sale of the assets a couple of times and once again we thought we had it resolved through the sale of the asset for a reason not various reasons, for a reason that deal selling the asset actually fell apart on Christmas day didn’t make for a great Christmas in my household since I thought we had it pretty well resolved and two days later I guess it was 27th the operating outfit it wasn’t a private equity firm, it’s somebody that’s got reserves in the same field right across the fence line who is going to buy the assets called us and said we’d like to buy the note and we thought they were going to be talking about a big discount and they were not. They brought it greater than par and we ran like crazy frankly to get it off the books at year end between the due diligence they needing to do on our documentation and other things it was a rush and we ended up posing the deal late on the 31st.

Bob Ramsey

Okay, great. Well I’m sure it’s good to have that one done and behind you. The interest recovery on that loan the $923,000, does that run through margin and so is it fair to think about net interest margin next quarter starting call it 6 basis points lower?

Kevin Hanigan

That’s fair, that’s exactly what happened.

Bob Ramsey

Okay. And that....

Kevin Hanigan

But you will to a certainly extent have that $25 million loan now we’ll be generating interest income, which it wasn’t other than the recognition of the non-accrual interest. So it won’t be 100% offset in the first quarter, but maybe half of it.

Bob Ramsey

Okay, that’s helps. And then how are you thinking about the net interest margin sort of trajectory from that sort of adjusted starting point?

Kevin Hanigan

I think we’ve been kind of even if you look we were 394 for the quarter with 10 basis points of accretion if you pull that out what we’ve been kind of calling core is 384 and we’ve got to be saying we are going to be in the mid-380s on NIM we don’t necessarily see any change to that going forward. We did kind of run some numbers for the 15 days in December then we had a rate increase really no impact. I think we made a comment in other call that we were somewhat liabilities sensitive, but when the rate came along we didn’t have to pass that along we haven’t adjusted our deposit rates. Some of the rates like Federal home loan bank overnight to support the warehouse business and our financial institution correspondent business, which we said would have 100% beta. We’ve passed that along, but we don’t see really any impact at this quarter basis point change in the first quarter. So I think we’re pretty much in line with what we think we don’t see any major change there.

Bob Ramsey

Okay, thank you for taking the questions.

Operator

Our next question will come from Brad Milsaps from Sandler O'Neill. Please go ahead.

Brad Milsaps

Hey, good morning guys.

Kevin Hanigan

Hey, Brad.

Mays Davenport

Hi, Brad.

Brad Milsaps

Kevin, can you talk about the some of the characteristics maybe of some of the loans that went to substandard and special mention this quarter obviously the substandard you talked about with the MPA clearing up, but some of the others it sounds like based on your comments, I’d assume that none of those loans are gas related because you’re hedged really at almost all of them and then about half of your production in oil is hedged. So does that really represent kind of the piece of the book that you’re most worried about sort of that $120 million or so that’s not hedged?

Kevin Hanigan

Brad, just going back to our January call a year ago when I said this cycle may last longer and if it does, we could have up to $65 million of our portfolio bleed in the substandard I think we peaked out at about $58 million and then we had some resolutions they got us down to $44 million. This would have been the last of a list that we originally had one more credit that was on that original list the $65 million bled in there and I should note that the problem loan resolution we left at a substandard it came back that is non-accrual there is I will tell you they have put up a six month interest reserve and their own reserves behind the loan and a very substantial guarantor, but they don’t have the cash flows associated with the underlying asset yet, they can file for division orders which has cash flow sent to them. But who knows how that gets resolved until we feel comfortable that they all own those cash flows.

We left the credit there because we do understand they may have to go through a battle to get to some of the additional cash flows. So that deal remained in there and then we had just one small deal Brad bleed in on top of that.

Brad Milsaps

So Kevin the 52% that is not hedged for this year and speaking specifically oil piece what are you asking to those borrowers to do? Can you kind of comment on the health of those guys, I mean it seems like if you’re hedged at $70 a barrel on 48% those you can kind of set aside it’s the other piece that you got to focus on. So any additional color on that part would be great.

Kevin Hanigan

Yeah, so here is what I think we should all think about this. Remember 35 of our clients have both oil and gas. So if you got gas even if you’re in oil heavy client, they’re in that 90% of our total production out of the 40 names is hedged in gas, 90% of the production with gas. So, even an oil heavy client that has some gas is selling their gas at something in the magnitude of $3.42 that’s the average price some higher or some lower but $3.42.

And then they’ve got for the oil heavy clients they’ve got 50 whatever percent that mid 50s hedged and this is of production. So you got to think about that guy as they’re selling a little more than half of their production that’s something close weighted average price again is close to $70 and they are selling the other half at $30. So they are basically collecting on average $50 on oil and they are basically collecting $3.42 on the gas portfolio. So, their cash flows are not all that terrible when the prices are this low. Do I wish it was more hedged? Boy when I ran the number it was 54% of production I was hoping for a bigger number, of course I was. So the guy who bleeds into that is one of the guys who is on the lower end, who is an oil heavy client, it’s about a $6 million borrower I think. Oil heavy client who has less than his fair share of those hedges, that’s the kind of guy who bleeds into the category.

Brad Milsaps

Are you asking that guy is he on a monthly credit line reduction or what are you doing to bring those numbers down I guess?

Kevin Hanigan

Yeah, I think I don’t think we’re any different from any other bank that’s dealing with the persistently long low price of oil and gas. Everyday we’re trying to resolve what we think is the next issue, right, the next most likely issue. So we are working diligently and we have been he was an OEM credit before he blood in the substandard. So it didn’t creep up on us we watch they creep from pass the OEM to substandard, we’ve been working on it knowing this was going to be if we stayed low our next problem. So we are working it’s pretty good reserves let me just add I’m hopeful that we all have an industry buyer that will want the reserves at a price that is substantially above our loan value.

Mays Davenport

Yeah, Brad, those that don’t have the substantial hedges in place have a lot of what Kevin has called the [indiscernible]. There is a lot of value out there that somebody is willing to pay for so you got private equity behind it that’s not, they are going to step up to the plate or they are going to have a transaction to recognize that. As I was going through a credit myself and Kevin's the oil guy I was looking through him to get myself comfortable, that was the thing I found as those we didn’t require to have hedges had a lot of that romance back there that we were able to rely on.

Kevin Hanigan

Yeah and that romance was kind of what the point, I don’t know what I guess it was chart to 11 maybe where we have the problem loan resolutions. Nobody paid us 2.26 times the crude producing value, but we only got 4 data point. So it was really hard to break out and plus the buyer doesn’t necessarily tell us hey, we paid extra we are producing this for the PUDs and this for the romance of the leases that might have something that we haven’t figured out yet. But in a way we put it in there it was more to demonstrate there is value beyond the crude producing side of this thing and rock matters. If you’ve got plans to have lots of proven undeveloped stuff that people go in and drill that is either economic now or will be economic at some point that’s what people are paying for and that’s why these things are getting resolved so far at prices well in excess of bank debt.

Brad Milsaps

That’s great. Just final follow up and I’ll hub back in the queue. Can you comment on the growth in the E&P in the quarter? And then specifically also the growth I guess in the midstream book that occurred over the last 90 days?

Kevin Hanigan

Yeah, sure and it’s not easy to get an oil and gas deal done in this environment and I’m sure a lot of folks are shaking their heads thinking what are they doing they grew their oil and gas portfolio. So let me talk about we did actually three oil and gas deals Brad, reserve based deals in the quarter. The first one we took a $20 million piece out of $175 million senior secured syndicated deal by a well-known major bank. The deal was backed by private equity. So it was $175 million of the senior secured that was the commitment not what they have borrowed they want. Private equity put in front of us $226 million of real equity, not second lien debt, not a combination of equity and second lien debt real cashed equity and it’s again a very well-known private equity firm. And the deal was 100% hedged, 100% of their producing reserves are PW9 valued of reserves is hedged through 2019, 100%.

So going in the deal has got about a 55% advance rate against PW9 and even under our minimum price deck where we take a pretty caustic look at the world it’s an 80% advance rate under the minimum price deck and it’s in a field is well known to be a quality field quality rock. I don’t want to disclose the field, I probably disclosed too much was a private company. The second deal was really unique it’s another syndicated deal, we took $20 million out of an $80 million deal, so all senior secured. A deal I’ll tell you in advance there is not a single hedge on this deal and now you really scratching your head, a very, very, very well known, very substantial sponsor put in $1.1 billion of equity in front of the Bank Group and asked for an $80 million senior secured loan and that was cashed through equity not a combination of junior lien capital and equity.

The advance rate on that loan is ridiculously low. It’s just it is and the company is swimming in liquidity and these are really serious people who wanted to get in to the field they entered again I don’t want to say what field that’s in and that has even though there is $80 million at closing I think they borrowed more between closing and the end of the year. But at closing I think they borrowed $2 million of the $80 million. And the last one is smaller deal that we took it’s either $11 million or $12 million Brad, I think we took $12 million and it is the again backed by a private equity firm and doesn’t have hedges through 2019, but it’s got 80% of volume hedged through 2017. So two years 80% of the volume hedged through ‘17.

And the midstream deals that we do have all been pipeline deals, so you just you got to get to your product whether it’s solar or gas from the well head to somewhere to get it sold and that’s usually is transported through a pipeline. You only usually have one big pipeline running through major field and the pipeline deals we have done in the quarter they were all underwritten looking at their reserves behind the pipe, okay. So we understand the field, we kind of understand some of the clients in the field with ones we’ve done. And we may have -- we may have been banking their most substantial clients in those fields that is well hedged for a very long periods of time.

So in other words, we feel really comfortable with the throughput which is -- this is a feed generating business you just it’s like the total of you’re collecting a total every time something moves through your total. And so when you look behind these deals and I think through good underwriting you look behind these deals to understand the reserves behind them. And then the cases we’ve done not only that we understand the reserves we understand some of the really big clients.

Brad Milsaps

Great, thanks Kevin.

Operator

Our next question will come from Michael Yang from Suntrust Robinson Humphrey. Please go ahead.

Michael Yang

Hey, guys how are you going?

Kevin Hanigan

Good Michael, thanks.

Michael Yang

Wanted to approach this from a non-energy perspective and just ask about your growth expectations for next year just kind of what you’re seeing in the portfolio, what seem sustainable et cetera?

Kevin Hanigan

Yeah don’t look for us to do 25% as I looked at this year it kind of kept ramping up so much people may think well, look how far does this ramp up. I think in the first quarter of this year we did or last year we did $163 million then $196 million then $294 million then $377 million. I really do think we’re a mid-teens grower this year. And whether that’s 14%, 15% or 16% I don’t know yet. I will tell you the pipeline is not as full as it was starting the fourth quarter, of course we pulled through so much of that pipeline. We were in pipeline building mode throughout most of the January. But I would kind of look for as to be a $200 million to $225 million maybe $250 million per quarter run rate. Still haven’t seen much of a slowdown in town. And even if I think we could do those kind of volumes I think we’re going to probably construct deals in terms of where we play at pricing and a few other matters and structure and manage that growth to more of a mid-teens level.

Michael Yang

Okay, great. And I guess does tailing off of that on the capital side the sub-debt raised this quarter, obviously the stocks had a lower valuation now. Are share buyback is going to be in the picture in 2016 or how are you thinking about some capital deployment?

Kevin Hanigan

Yeah I would say in terms of capital deployment, organic growth always comes first for this company. Managing good quality organic growth is number one, obviously where the currency is maybe our second favorite thing to do would be accretive M&A probably not going to happen anytime soon at these prices. So I would say the share buyback becomes a conversation and it is a conversation. Just an update on that we having about a -- with the 5% original authorization from a couple of years ago we still have a little over 1.5 million shares to available to be purchased under that plan.

So it’s all the matter of opportunities we see now versus opportunities we see later. And the last way just to tell you how Kevin is thinking about it and this is a Board related decision not a Kevin doesn’t wave along and we don’t just go buy shares. We have a lot of governance around how we do it and at what prices.

I think we can probably make sense of the returns right, and we have to just way the how much capital you want to direct towards a buyback versus organic growth. But for those who are he thinking well why don’t they just jump in and prop up the price. If we’re going to trade in high [indiscernible] to oil and we temporally get in and throw a temporary floor into the price and then we toggle the buyback off because either we spend enough capital on it or we see another opportunity for the capital and we are going to trade with oil and we’re going to trade right back down if oil hasn’t rebounded yet and I am not looking for oil to rebound until maybe at the earliest this summer. So, it’s more of a financial return IRR calculation in my mind than it is let’s get in and support the price because if you stop the prices going right back down to where oil is. Until we decouple I don’t think that’s changes.

Michael Yang

Okay, great, thanks.

Operator

Our next question will come from Brett Rabatin from Piper Jaffray. Please go ahead.

Brett Rabatin

Hey, good morning Kevin.

Kevin Hanigan

Good morning Brett, how are you?

Brett Rabatin

Good, thanks. You addressed a lot of stuff, wanted to ask you on commercial real estate linked quarter loan portfolio yield in that category was a little lighter and I guess it jumped up in 3Q, but any thoughts on origination rates, was anything changed from a competitive landscape perspective especially kind of given what…?

Kevin Hanigan

It is little more competitive on the pricing side, right. Again we compete with life companies in the CMBS market there, we usually beat them by 25 to 50 basis points and usually 50 basis points. So we try to remain competitive with that kind of spread between where they are and where we are. And the other thing we did is that portfolio is a five year kind of fixed rate portfolio that turns over every three years prepayments run out after three years, so there is no prepayment.

So, the other thing we did during the quarter we reached out the people who had maturities coming up soon or coming out of prepayment periods and tried to lend and extend a higher rate down into a lower rate. And then we did do one bigger deal, really a big deal for us is $25 million and a single asset deal, and that deal I think was done at 4.25 so that kind of pulled down the overall weighted average coupon, that’s pretty difficult of us I don’t know that we have any other deals we’ve done 4.25 since I have been here.

Brett Rabatin

Okay. And then you talked earlier about mid-teens growth this year as oppose to rapid pace you had in 2015, are you still going to be kind of out there looking for talent can you talk maybe about the expense side of the equation, given maybe a year where things are little slower than they were in 2015 in terms of absolute?

Kevin Hanigan

Good question, I think we’re always looking for really good talent we may not have it with the volume we did last year, we added 8 people last year off a base of 50. So that 16% growth rate in your lending pool is a pretty substantial growth rate for us for a year and it doesn’t just add the expense of eight lenders you got to have back office support to make sure that you’ve got the governance, the funding mechanisms around there, the tracking mechanism so that that can be support people, that can be loan ask people. So, we think we have a model that tells us based upon how many lenders we hire, how many other support people we got to hire in concert with that. So it does affect our efficiency ratio. I think the hiring will probably slow down, you may see us slow down oil and gas deals because now that we’re all putting up bigger reserves on these things, believe it or not pricing has improved buy not enough.

So, when I say we’re going to focus on coupons on deals, only gas is going to have to prove a long way from where it is today to attract capital if you’re only going to grow at $225 million or $250 million a quarter, attract capital from the loan committee who parses out capital, that’s I am sorry it’s just got to get -- the risk return is got to get better to play.

Brett Rabatin

Okay. And then just lastly around debit card, you guys have done a card for life and the ATM card it was actually a better linked quarter, any thoughts on…

Kevin Hanigan

It’s the ongoing problem for the industry and unfortunately I think it’s accelerating. I think on average we probably bring in $850 a month as debit card fee income and we probably give 200 grant a month back in terms of fraud losses and we’ve been hit really hard in Houston and you try to manage that through your systems, we and a few other banks have manage it maybe even more of a harsh way more recently. I found that’s the hard way, I was in Houston, and I went to Starbucks and tried to use my debit card and it was rejected I am like oh my god am I possible overdrawn. So I called the head of retail he said if you leave Dallas and go to Houston we toggle you off you have to call and tell us you’re there and how long you’re going to be there and we will toggle you want them for the exact number of hours you’re going to be there and if you're going to be there longer you got call us back it’s caused some client disruption, and longer term this probably gets fixed by this EMV technology, which I don’t think we’ll have fully installed until September rolled out to all of our clients because there is a schedule as to when cards come up and we’re beta testing with the executive team and some internal members now.

And that’s actually going to push the fraud loss to the lowest common denominator of technology. So if a merchant doesn’t have a reader they’re going to need it. So I don’t really look forward to abate much unfortunately Brett until we get EMV technology fully rolled up. I think we’re going to battle it for the next eight months.

Brett Rabatin

Okay, great. Thanks for all the color, Kevin.

Operator

Our next question comes from Matt Olney of Stephens. Please go ahead.

Matt Olney

Hi, thanks good morning, guys.

Kevin Hanigan

Hey, Matt.

Matt Olney

As far as the loan growth outlook, Kevin it sounds like the pipeline is really nice for 2016. So I’m curious because I mean obviously you’re an experienced banker that went through the 80s in Texas. How do you reconcile a really nice loan pipeline in a robust market in Dallas? We still have some dark clouds that seem to be linking around with the low energy prices that have historically driven a big part of the economy in Texas.

Kevin Hanigan

Yeah and again we haven’t seen it here and we’re not much of an oil and gas economy here I’d be more worried in Houston which is why I put stuff in there on the Houston real estate portfolio. And I’m not particularly worried about that portfolio while the world watching it really closely. The town is still pretty robust pipeline is while where we started off the quarter lower than we have in the last two it’s built pretty well.

The slowdown that should occur in town that probably will occur in town that persistent with oil prices. It is probably I think I’ve talked about this once before, while started home and move up hoes are going fast. You can put a home on new market and sell it and probably by 5 O’clock today at the right price range. But you get up to $4 million $5 million $6 million houses. The days on market have a really extending there. And I think that’s the first wave of slowdowns that are occurring probably because you have people who rely on is either a supplemental income or their only source income in this town royalty checks that come in the mail and their royalty checks are what they used to be. So that could slow down some consumer spending and some historically wealthy people not buying bigger products it could slowdown resell a little bit.

So I think that will be the first signs of the contagion that’s likely to occur and slow us down a little bit. We’ll see how that plays out, but I think that’s what’s probably going on in the earliest forms really here in the last four or so months where we’ve been watching for signs of the slowdown. I’d be more worried if I had a big portfolio in Houston and I know we’ve talked about the real estate down there, but let me remind make one other point on that since it was casually brought up. We’re in our buildings down there on average at $99 a foot. And the new stuff coming on the ground I said probably $200, $250 it’s actually $250 to $300. We’re aware of one of the Class A buildings 450,000 square feet. The budgeted cost for that without the land is $260, $262 a square foot. We’ve got that from the horse’s mouth.

And people say won’t your occupancy be hurt by whatever happens in those buildings as they go pre-ramp or something else. And I think that’s never happened in the 35 years I’ve done where a B minus tenant ends up in ace for a couple of reasons. So you think about that our buildings are kind of be enough to beat in path and our typical tenant takes 3,500 or 5,000 square feet. I mean they are just not big companies. If you’re coming out of the ground with a 450,000 square foot building at that kind of cost you’re pressing $40 rent as oppose to our guys who are at $18 and go a whole lot lower and still service debt, you’re not going to go the chase 3,000 square foot tenant, you need to be elephant hunting, you need somebody to take a couple of floors and your minimum tenant is probably 50,000 square feet.

So this whole concept of who these people migrate into that space, I just don’t think so even if they got a year’s worth of free rent. The next year they are paying $40 versus the $18, good luck with that if you -- if you can wrap your head around it. But the guy who is leasing that building up is not going to go run after that and last point I’ll make for it today at least on commercial real estate. We went back and looked at this and we’ve been in this business in this structured product at view point only going back to 2003 when the architect of the program joined us and they’re still here and he and his team have done an outstanding job and here is a great number for you, we have originated about $3.6 billion of commercial real estate stuff under that program since 2003 and our cumulative losses over 13 years, cumulative net loss between $2.3 million and $2.4 million on $3.5 billion or $3.6 billion that’s just unbelievably low and that includes a pretty rough period of time when energy was really down in 2008 and 2009 and a lot other things were going wrong in 2008 and 2009.

So we’ve come through some pretty severe cycles in that portfolio with really low loss given defaults. Frankly the $34,000 loss in Houston wasn’t a real estate loss it was the building burn down we were the loss payee and the insurance company sent the money to the owners of building not to us. So that loss started off as close to a $600,000 loss until we kind of work things out with the insurance company that paid us all the $34,000. So it was really a fire loss, not anything was wrong, well something there was something wrong with the building the fire department save the slap and that was about it. So look it’s really -- generally speaking we are just dealing in very low loss given default asset classes.

Matt Olney

Okay, that’s helpful Kevin. Thank you for that. And then on back to the energy lending as far as shared national [ph] credits, any change in the performance of the energy book within SNIC versus non-SNIC [ph] so far?

Kevin Hanigan

No. I would say that, let me -- no, not really. And I think look the sneak examine in the fall where we really thought it would be awful and we didn’t see much credit plead I don’t know that anyway else has reported a whole lot of bad credit plead out of that exam. It wasn’t nearly as bad as people thought and it probably wasn’t nearly as bad as the spring. I think the whole rig -- this whole interagency thing where they are kind of try to come up with harder test for impairment on this I think they’ve -- I’m hearing they’ve made lot of progress on that and perhaps they end up in a far better place than they started a year ago at this time a little over a year ago this time. But I think we all wait for that to come out and see how the whole industry is going to get kind of right sized if you will as to how we all test for impairment.

Matt Olney

Okay, great. Thank you.

Operator

Our next question will come from Brady Gailey from KBW. Please go ahead.

Brady Gailey

Hey, good morning guys.

Kevin Hanigan

Good morning, Brady.

Brady Gailey

So the energy growth that happened in the quarter, it sounds like that was all new credits or was there also some draw down of existing lines?

Kevin Hanigan

No, I think the existing portfolio probably had net paydowns in it, so it was all from new credits.

Brady Gailey

And Kevin, I know over the years you’ve talked about kind of bigger picture growing this company to around $8 billion in assets and then trying to figure out what you want to do, you are at $7.7 billion now so you are knocking on the door of $8 million I know the Bank economic back drop in Texas and your stock price isn’t what you thought. But how do you think about the company going forward, are you going to start gearing up to cross over the $10 billion mark now?

Kevin Hanigan

We started gearing up for that well over a year and half ago. I mean you always prepare to execute any end of your strategy that you’ve thrown out there and I think I’ve talked about the three buckets of M&A smaller deals locally merger of equaled kind of deals the buzz through TAM and then finally if somebody the size of the franchise is worth a whole lot of money and wants to get to Texas, you always have to consider that as a third bucket.

So we are trying to execute on all three of those buckets that does mean at these prices it’s hard to make any of that make sense to us, right? But this oil thing will pass and when it does maybe the correlation goes the other way and prices recover. And at some point maybe we decouple again with oil and that brings M&A from all three of those buckets probably back into play.

But we need the clearing process of supply and demand and oil and gas to take place. And I know there was probably a lot of panic faces and panic people when oil hit 27 or broke 27. I actually thought that was a really good day I was telling, but I think is great because low prices now we’re going to have people start shutting in wells and bringing in supply more quickly than we originally thought. And that’s a good thing, look it may be painful in the short run for some borrowers and what not, but we got to get to a point where production reels itself in enough that prices recover. And that’s what’s happened in every other cycle it’s just taking longer this time because it’s clearly on the U.S.’s shoulders to reel in production OPEC is not going to do it we can’t count on them and we can’t count on geopolitical events doing it. So we need the whole prices to reel it in I was actually kind of happy when we were at 27.

Brady Gailey

And then lastly on M&A, I know in the past you’ve talked about a few banks you booked at maybe in Fort Worth are you even having M&A conversations right now at all or is that kind of all come to a hold?

Kevin Hanigan

No you don’t stop again if your strategy is eventually get into the bucket you don’t turn that off and then just turn it back on. This is not -- there are a lot of banks in DFW, but it’s not that big of a community we all know each other fairly well. So calling somebody and catching up with them because you haven’t cough up doing for six months for lunch and seeing how they feel about things and what they’re thinking and are they planning the exit or how are they thinking about their future. I’m still doing that, I’m probably not doing as much as I am helping the guys and help them, you are leaving the guys in the oil and gas team and the problem resolution is there it’s taken more of my time than it’s ever taking in the past, but that’s -- it’s a pretty important thing to spend time on.

Brady Gailey

Okay, great. Thanks, Kevin.

Operator

[Operator Instructions]. Our next question will come from Michael Ross from Raymond James. Please go ahead.

Michael Ross

Hey, good morning guys how are you?

Kevin Hanigan

Good morning.

Michael Ross

Hopefully I’m the last one on the call, but I thought I ask just one more energy question. As I think about the reserves and I really appreciate all the color on the hedging because I think that really gets to the core of how of the production is actually hedged versus how many customers are actually hedged. As I think about further negative migration from here, and I think about that reserve, which is all qualitative how should we -- I mean is there a point where you get to if oil stays at these levels I mean that you just don’t even build the qualitative portion of the reserve anymore. If you don’t really expect any charge-offs or charge downs on specifics or anything like that, I mean are we at a level where we’re not going to see that that percent increase?

Kevin Hanigan

I really can’t say that, who knows where this goes, we look at it obviously every quarter, but we really look at it every month. So if prices break lower or if we see some other stress in the system A; you could bring impairments into play. I wouldn’t rule out impairments and that will drive things more than anything really. And if the need arises because of some disruptions of where we were at yearend and where we are at the end of the first quarter requires more few factors reserves, we’ll take them, you just got to watch it every day. So I wish I could tell you that’s not going to happen again, Mike. Frankly I never would be able to tell you that, stuff does happen and what we can do is watch it and act appropriately at the time.

Michael Ross

Okay, thanks guys.

Operator

Before conclude our question-and-answer session. I would like to turn the conference back over to Ms. Hanigan for any closing remarks.

Kevin Hanigan

Great, thanks again for you all for joining us. I know many of you will be out on the road here in February and I think some of you are coming in the Dallas here in next week and look forward to seeing you then. I just leave with this thought right. We run a Bank that is historically been in very low loss given default businesses either because of the way we underwrite or because of the asset classes. We got the warehouse business and that’s just kind of the zero loss given default outside of fraud, which we haven’t seen really much in the industry since the late 90s because we’ve got better fraud detection and by the way that’s a great business there is a natural hedge against lower rates and rates not rising the warehouse business will be higher and we’ll make money off of it.

Our structures CRE I got to tell you what our loss given default over the last 13 years up against anybody. Historically oil and gas 35 years they’re end in losses. I do say we stay low enough long enough that could change for us and for the whole industry I like our hedging position though. And our consumer portfolio back to our credit union routes is largely single family mortgages in our own backyard and this is the home stud state. So you can’t leverage up your house too much here.

And we stay away from land and construction for most part since the legacy merger we do have some of that oilfield service, restaurants all the thing that are high loss given default we try to steer ourselves clear up. And since we are in the construction business I won’t even think about talking about this, but we have $270 million of what’s considered land in construction on the balance sheet. So it’s a smaller portfolio than the Houston real estate by a pretty wide margin.

Out of that $270 million we got $169 million, let’s call it $170 million of that is residential. That’s homebuilders building not big homes we’re building kind of a starter move up kind of homes call as a $200,000 or $400,000, $500,000 or $600,000 homes in really good areas of the town that’s been the really robust stuff thereby moving here. And the remaining $100 million is commercial construction on that that’s centered here in DFW and that’s usually pretty well underwritten with preleasing and some other things, but that’s a are really low for a nearly an $8 billion Bank to have a $100 million in commercial real estate construction.

Again I don’t know that you got many banks that report that kind of number. That’s a high loss given default business we just avoided. So I don’t know that I can drive the point home enough reserves are based upon the asset classes you financed. And we’re in loan loss given default asset classes, hence we get away with a lower reserve than many other people need. And with that I’ll close it up and see you all when we’re on the road. Thank you.

Operator

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

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