IBERIABANK Corp. (NASDAQ:IBKC)
Q4 2015 Earnings Conference Call
January 28, 2015 9:30 AM ET
John Davis – Senior Executive Vice President, Director of Financial Strategy
Daryl Byrd – President and Chief Executive Officer
Anthony Restel – Senior Executive Vice President, Chief Financial Officer and Treasurer
Randy Bryan – Executive Vice President, Chief Risk Officer
Michael Brown – Vice Chairman, Chief Operating Officer
Bob Kottler – Executive Vice President, Director of Retail, Small Business and Mortgage
Stephen Scouten – Sandler O’Neill
Ebrahim Poonawala – Bank of America Merrill Lynch
Michael Rose – Raymond James
Emlen Harmon – Jefferies
Catherine Mealor – KBW
Matt Olney – Stephens Inc.
Peyton Green – Piper Jaffray
Welcome to the IBERIABANK Corporation Earnings Conference Call. 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 John Davis, Senior Executive Vice President. Please go ahead, sir.
Good morning, and thanks for joining us today for this conference call. Joining me the call this morning is Daryl Byrd, our President and CEO, who will cover the majority of the prepared remarks. Anthony Restel, our Chief Financial Officer; and Randy Bryan, our Chief Risk Officer. The rest of our team is available for the Q&A session of the call as well.
If you’ve not already obtained a copy of our press release and supplemental PowerPoint presentation, you may access those documents from our website at www.iberiabank.com under Investor Relations. A replay of this call will be available until midnight on February 4. Information regarding that replay is provided in the press release.
Our discussion deals with both historical and forward-looking information. And as a result, I will recite our Safe Harbor disclaimer. To the extent, the statements in this report relate to the plans, objectives or future performance of IBERIABANK Corporation, these statements are deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are based on management’s current expectations and current economic environment. IBERIABANK Corporation’s actual strategies and results in future periods may differ materially from those currently expected due to various risks and uncertainties. A discussion of factors affecting IBERIABANK Corporation’s business and prospects is contained in the Company’s periodic filings with the SEC.
In fairness to everyone listening to the call, we ask that you push the mute button on your phone to limit any background noise that may occur during the conference call.
I’ll now turn it over to Daryl for his comments. Daryl?
John, thanks, and good morning, everyone. From an operating perspective, the fourth quarter was very solid, in fact, may be one of our best, particularly in light of the environment we faced. We had good legacy loan growth, margin strength, we added to our capital position and we’ve reported record operating EPS, for both the quarter and for the year. We excelled on the things that we could control and we managed well the over which we have little or no control.
In a minute, I’ll briefly walk you through how we got to where we are, and Randy will hit some highlights regarding our energy portfolio. Given investor focus on energy, Randy’s team has worked diligently to update some of the Analyst Investor Day materials that we prepared for you 11 months ago and which we hope you find of interest.
Finally, Anthony and John will cover a few remaining topics, including interest rate risks and our expectations, as we proceed into 2016. You may have noticed that we reorganized our investor deck to be more concise and hopefully more helpful.
My comments will focus on slides four through seven in that deck. As one of the key drivers of our business, total loans grew 1% this quarter, our legacy loan growth was up 4% or 15% on an annualized basis. This legacy growth was tampered at $90 million and risk-off loan reductions during the fourth quarter, including $39 million in energy; $35 million in indirect; and $16 million in the Acadiana credits.
For the full year, we risked off $442 million in loans at an estimated cost of $5.5 million in 2015. With this, we still achieve record loan originations, both for the quarter and for the year. Deposits were seasonally slower and deposit cost eased one basis point. Since the Fed move in mid-December, we had little change in marginal deposit rates. Our reported margin climbed 14 basis points and the cash margin increased 7 basis points. The difference was due to periodic FDIC pool closings and ongoing recoveries in the covered and non-covered acquired loan portfolios. We anticipate these benefits to continue over time. The FDIC loss receivable is now down to less than 20 basis points of our total assets.
We have explored the possibility of unwinding the FDIC loss share program but thus far we have decided it’s more economical to continue along as we’re doing. Our fee income businesses were seasonally slower in the fourth quarter, but still stronger than comparable periods in prior years. We had record mortgage production volume and sales this year and the sales margin has been favorable. In the fourth quarter, our operating revenues increased $3 million or 2% and our operating expenses declined $6 million or 5%. This is a significant improvement in our operating efficiency.
Expense control continues to be a primary focus for our company, during the fourth quarter our staffing declined 2% and we closed four branches in three other locations. We’ll talk about our latest branch efficiency efforts in a minute.
We’re beginning to see some economic softening at certain markets. Sorry to skip ahead, but Slide 7 provides a graphical representation of monthly unemployment rates in the MSAs in which we operate. The vast majority of our markets are doing quite well. The Lafayette and Houston have exhibited some softening. The most favorable unemployment rates are in Dallas and the MSAs and Arkansas and Florida many of which are well below the national average.
On the right hand side of slides 5 and 6, you will see that we are blessed with significant market diversification in our loans and deposits. The same is true from a client growth perspective of our 25 major metro markets, 68% of our markets experienced loan growth and 60% exhibit deposit growth during the quarter. Indirect and Texas energy clients accounted for only 2% of our aggregate deposit base.
Our asset quality remains stellar. In fact, as many of our credit statistics improved this quarter. We reported an annualized 8 basis points in net charge-offs to average loans and a 1 basis point decline in NPAs to assets ratio to 42 basis points. Despite those results, we continued our risk-off efforts, and we more than doubled our loan loss provision on a linked quarter basis.
Our loan loss provision cover our net charge-offs four times, as we increased the energy reserve by $8 million to $27 million or 3.9% of energy loans at year-end. Please keep in mind, that Randy will describe in more detail shortly, the type of energy credits, the size of energy exposures, the levels and quality of guarantor support and the general underwriting of energy credits matters greatly. Also, many banks have different approaches to credit. We have stated consistently that we’re in the E&P space that in the E&P space we’re focused on the larger participated and syndicated credits, where the borrowers are large enough to have diversified exposures and access the high-yield markets to increase collateral where we enjoy the first lane position.
There are many energy industry credits currently exhibiting significance for us, we choose not to participate in many of those credits and we have exit credits, which we were not comfortable. We are conserved to concentration limits, we also tend to have smaller individual loan amounts.
At year-end 2015, we had only a $173 energy relationships, of which 7 are over $20 million, only 2 over $30 million, and none over $33 million. So, despite the energy related provisioning, we achieved record results in net book, our guidance, and your guidance. As Anthony will describe shortly the recent Fed rate increase did not materially influence our fourth quarter results, but should benefit us beginning in the first quarter of 2016.
In the fourth quarter, our operating ROA was 92 basis points, operating ROTCE was 11.2%, our tangible operating efficiency ratio dropped from nearly 65% last quarter to 61% this quarter very close to our 60% goal. Our dividend payout declined and we are slowly accumulating capital. Just to head of the question, we do not have an active buyback program in place currently, but the Board may consider one in the future.
Please keep in mind though, unlike many of our appearance decisions, we continue to see very strong balance sheet growth. Overall, we’re making good progress towards our strategic goals. From a shareholder perspective, our GAAP EPS was up 5% on a linked quarter basis; operating EPS was up 4%; book value – and tangible book value per share reach up 1%; and our share price was down 22% since the start of the fourth quarter and down 30% since the start of 2015, seems like they bit disconnect. To do things right requires thoughtful considerations and executions, we continue to methodically execute on our revenue growth and expense containment initiatives with the goal of improving the operating leverage and profitability of our company, without question we continue to face challenges.
As I tell people, I learned a lot of hard lessons during my banking career of well over 30 years, particularly in the mid-80s in Lafayette. Fruits of many of these lessons learned then play out today. Our experienced culture, risk management processes continue to caution us to approach judiciously. We are fortunate that our fundamentals continue to serve us well today in this very challenging environment.
At this point, I’ll turn it over to John.
Thanks, Daryl. My very brief remarks will focus on how our fourth quarter results differ from the sell-side communities, projections for the quarter. Our margin of 3.64% was up 14 basis points on a linked quarter basis, well above our stated expectations and guidance. We were 13 basis points above the consensus Street estimate. Our average earning asset volume was on the lower side of the sell-side estimates. The positive differential on the margin more than offset the unfavorable volume differential, the net effect was, we were about $3 million better on the Street – on the consensus estimate for net interest income.
Our loan loss provision more than doubled on a linked quarter basis to nearly $12 million and we were about $4 million higher than the Street’s provision estimates, though analysts estimates had a fairly wide range of about $5.5 million to $10 million. This differential was likely energy related in many of our asset quality statistics during the quarter. Regarding non-interest income, we were about $2 million below average estimates, which appears likely due to our mortgage income being below analysts’ estimate by a similar amount.
Moving to expenses, we’re about $5 million in non-interest expenses this quarter. I’m sorry, we had about $5 million in non-interest expense this quarter, due primarily to the branch closure cost. On an operating basis, we were about $4 million better than Street’s estimates. The favorable differential was likely due in part to lower occupancy and equipment costs of about $1 million, a $1.7 million reduction in the provision for unfunded commitments and $1.8 million decrease in mortgage commissions. So from a bottom-line perspective, beat the Street’s estimate by depending on GAAP and non-GAAP operating EPS.
And at this stage, I’ll turn it over to Anthony for his comments. Anthony?
Thanks, John, and good morning, everyone. I’m going to hit a few items very quickly, and then – and kind of expand on these if needed during the Q&A session.
We had good margin expansion during the quarter. The overall margin expansion of 14 basis points can be broken into a few components. Eight basis points of the margin expansion was driven by improving legacy loan yields and improved yield on the investment portfolio. We saw a six basis points yield expansion on the acquired portfolios while during the quarter. Two basis points was the overall expansion, it was from the front running LIBOR move heading up to the Fed announcement as well as the actual fed move in December. I still expect a meaningful impact in Q1 from the full impact of the rate move that occurred in December.
The six basis point improvement in the acquired portfolio was driven by recoveries in pool closing events that are hard to predict that will happen from time-to-time. In fact, three of the last 13 quarters benefited from significant recoveries of pool closure impacts. I think it is a safe bet to be able to see more of these events as we are nearing resolution in the various loan pools.
Relative to the base margin, excluding pool close and recovery events, the consolidated margin of 358 should grow in the first quarter by a few more basis points. I expect the margin to be a few ticks over 360.
Slide 12 of the PowerPoint presentation shows you the daily asset repricing over the last 45 days. Relative to third to the – relative to the third earnings initiative plan announced during the second quarter, our earnings release this year, I’m glad to say that we have achieved to the targeted run-rate savings, and we’ll realize the benefits as expected. As a reminder, the run-rate benefits from this program are $15 million on an annualized basis and approximately $3.25 million of the projected $3.75 million quarterly improvement was realized during the fourth quarter.
The benefit of the three earnings initiatives has resulted in three years of continues improvement in the bank’s efficiency ratio. You’ll see on Slide 11 of the – supplemental presentation that our tangible efficiency ratio declined 6% this quarter, 61.1%. We feel very good about our ability to contain costs and continue our focus on improving the overall profitability of the company. To that extent, early in the fourth quarter, we decided to close an additional 17 branches this quarter. This branch reduction is an addition to the previously announced earnings initiatives.
As part of the closing process, we incurred $3.4 million of closure costs in the fourth quarter and we’ll have an estimated remaining closure cost of $2.7 million to be recorded in the first quarter. We estimate the earnings improvement from these closures to be approximately $4 million on an annual basis resulting in an earn back period of the closing costs of just over two years.
The overall impact of our branch rationalization process has dramatically improved the overall efficiency of our branch network. We have provided some of the key metrics on Slide 10 of the supplemental for your review. But let me touch on a couple of the highlights from the rationalization process. Since 2013 and including those scheduled to close, we will have closed 59 branches, opened nine and acquired 62.
During that same time period, we have added $5.8 billion of assets and $5.4 billion of deposits. So more simply stated we grew the company approximately 25% in size, with a net addition of only 12 branches. I think that proves the power of an effective branch rationalization plan, and disciplined expansion, both have clearly helped to improve the overall operating efficiency of the company. From a branch efficiency perspective, loan volumes per branch were up 42% and deposits per branch are up 60%.
Switching over to capital, our capital ratios were largely flat quarter-over-quarter. The good news is that we have grown earnings to the point, where we’re starting to grow capital organically. Outside of the phased in capital rules impacting in Q1 of this year, I would expect the capital to continue building throughout 2016.
As a reminder the final 25% of troughs currently included in Tier 1 capital will be phased into Tier 2 capital in the first quarter of 2016. Ratios based on the Tier 1 capital will be reduced by approximately 18 basis points as a result of the troughs classification adjustment. There will be no impact to total risk-based capital.
We have received a variety of questions during the fourth quarter, that I want to run through very quickly. The impact of the federal highway bill that will reduce the dividends on Fed stock that we hold is expected to reduce pre-tax earnings by approximately $1.9 million or $0.04 remember this dividend yield will flow with a 10-year treasury moving forward instead of being fixed at 6%. Regarding the proposed new FDIC assessment, we do not expect to see a material impact from the proposed rule at this time. And last but not least, the movement in interest rates is also not expected to have a material impact on purchase accounting or income on the acquired portfolio.
And finally, let me give you some high level thoughts around our expectations for 2016. First and most importantly, our budget for 2016 is in-line with current Street expectations of $4.58. Absent any change in interest rates, the budgeted margin for 2016 is projected to be 355. I expect the first quarter margin to be a few ticks over 360. I also believe, our operating expenses will come in slightly below $560 million for the full year.
We expect to incur non-operating expenses in the first quarter of 2016 of approximately $2.7 million related to the previously mentioned branch closings. I would ask everyone to be mindful of the day count impact on the first quarter and seasonal influences that we discuss every year.
This year will be no different and we will see a meaningful reduction in EPS from the fourth quarter to the first quarter and then a strong recovery into 2Q and the remainder of the year. We have included historical information of the seasonal items on Page 9 of the PowerPoint presentation for your review.
We have budgeted provision expense for 2016 at $35 million, relative to our strategic goals, I expect to be better than 60% on our tangible operating efficiency ratio, during the year, but may come up a little short on the return on tangible equity goal for the year, if the projected forward curve rate changes fail to materialize.
I’ll now turn the call over to Randy.
Thanks, Anthony, and good morning, everyone. In the fourth quarter, the Company’s non-performing asset and charge-offs metric strengthened, while we increased provision expense by $6.5 million. The provision was up from what we booked in Q3 as we expected downward migration in certain credits in our energy book continued in the fourth quarter. In addition, we incurred $1.8 million in provisioning related to acquired loan pool impairments which is more than offset by the impact of pool closures, et cetera, on the margin as Anthony noted.
We enjoyed another quarter of sub-10 basis points of net charge-offs compared to the prior quarter, we had a about $1 million left in gross charge-offs as well as lower recoveries netting out to an annualized eight basis points of net charge-offs.
Allowance coverage to non-performing assets improved in the fourth quarter and from the fourth quarter and above, and the overall allowance to total loans is up from 92 basis points last quarter to 97 basis points. At quarter-end the allowance from the energy portfolio was $27 million, and was equal to 3.9% of energy outstanding. The energy allowance coverage of the total NPAs in the energy portfolio was 315%.
Looking at the asset quality data for the overall portfolio including both legacy and acquired loans, we saw a improvement across both of the metrics on table five.
Non-accrual loans came down 6% from the third quarter to $154 million, that’s 9% below where we ended 2014 despite adding $8.4 million of energy non-accruals during the year. Overall energy non-accruals are 1.2%. OREO balances decreased $6 million or 15% from the third quarter, even as we added more than $4 million in OREO from the book branch closure initiative Daryl and Anthony discussed earlier.
Past dues were up at just over $35 million or 30% less in year-end 2014 levels, in energy loans 30 days plus pass due at the end of the year totaled $15,000. Overall NPAs as a percentage of total assets are 98 basis points compared to 107 basis points last quarter and a 140 basis points a year ago.
Slide 14 of the supplemental gives a good overview of our NPA trends over the past few years. We all know that you all have questions about our energy exposure, so I’m going to spend a few minutes and give you some additional detailed color on that now.
Slide 15 of the supplemental presentation shows the trend for energy outstandings, which were less than 4.8% of our total portfolio, which is down from 8.4% at their peak in the second quarter of 2014. Furthermore, our broader risk-off strategy which we previously described, that reduced our overall exposure to the most sensitive areas of our book by $442 million last year, that trend will continue into 2016.
On Slide 16, you can get an update on the composition of the energy book at year-end and some data showing that’s overall contraction from year-end 2014.
Slide 17, gives you a more granular look at the energy loan portfolio outstandings by relationship size. At year-end, we had one E&P, one midstream and no service company relationships in the $30 million to $35 million range, and the largest energy loan relationship outstanding in the entire portfolio is approximately $33 million.
In total, we had 25 energy relationships between $10 million and $35 million and those loans make up about two-thirds of our outstandings. We have no commitments in excess of $35 million. But we’re able to really stay very close to and on top of that number of relationships.
Slide 18 gives a view of our reserve build throughout the year, as well as our total level of NPAs in this sector. We built reserves throughout 2015 commensurate with the continued energy industry stress that is probably downgraded than we expected to see earlier in the year.
On pages 21 through 27 of the supplemental we give you more detail in many other aspects of the energy portfolio, which in interest of time, I won’t walk through in my comments, but we can cover in Q&A if needed.
Over the past five quarters, this portfolio has behaved in the manner we expected. We’ve had downward moderation in ratings and significant portion of the energy book rolling into credit side in the last five categories.
We’ve met those downgrades with provision build all along the way. The macro picture is a bit different than it was when we were looking at it this time last year. We expected to see the rig count drop significantly which has, the drop in rig count was offset due to large degree by increased efficiency in the industry.
In addition, we saw the capital markets open back up for a time as crude prices bounced in the second quarter from the low 40s back up to the low 60s. So we didn’t see the rollover in U.S. production come as soon as we expected. We’ve moved into a period where addition to the excess supply we saw at the end of global demand picture is now raising concerns.
So, that brings us back to the point we stressed all during the year, which is that the depth and duration of the downturn will play a major role in determining ultimate loss rates and provision needs.
Our current view is that if we see prices close to the current strip, but the provisioning we have baked into our 2016 budget should be sufficient. The timing is difficult to pin down and we could see more of that pulled forward into the front half of the year. We have five specific credits we’re watching right now that we may put some specific reserves again at some point.
I expect to see our non-accruals in this sector increase some as we move through the year. And that some of the reserves we have built used to cover charge-offs. However, it’s important to remember that as of 12/31/2015, again we had $15,000 in past dues, 1.2% of the portfolio on non-accruals status and get zero charge-offs in the energy book.
Across all aspects of our lending businesses, credit card is first and foremost of the client selection. That includes both management experience as well as the strength of sponsorship and guarantees. Our clients have been working extremely hard to make the right and responsible decision to their companies. Our clients have executed asset sales, capital injections, capital market transactions, significant cost reductions, mergers and other actions to manage through this downturn. There are more of these actions both contemplated and in processes – and in process on an ongoing basis.
As expected, we continue to see the criticized loan numbers creep up, and we ended the quarter with 21.6% of the energy portfolio criticized, and 11.6% classified. Given the pre-announcements from some other banks relative to increased provisioning and the subsequent lag down in the oil prices since the first of the year. To be frank, we’ve asked ourselves are we missing something here. We worked hard to really double check our methodologies and we now see that we used to reaffirm our views of the portfolio.
Based on what we know now and the work we’ve done, we come away from that work and don’t see a lot of surprises out there. Generally the names we’ve felt would require the most work and attention a year ago were the right ones for us to be focused on. But we see prices back down in the low to mid-20s for more than a year will likely have some additional provisioning but don’t see a scenario where that provisioning is not manageable.
We’ve been able to track back a number of deals that are having credit issues that we looked at and chose to pass on but were a fit for other banks at that time. In a limited number of cases, there’s a credit that we were in but saw warning signs that let us to action before they got into more serious troughs
None of our current borrowers in the energy sector have filed for bankruptcy. We know that in energy lending as in all types of lending there are different risk appetites across institutions and there is a continuum of conservatism to addressing this.
So here are some of the facts that we look to in reaffirming that we’re towards the more conservative end of the spectrum. Our price deck has always been lower relative to the average for the industry, based on third-party surveys, we review as part of our normal price deck setting process. We don’t ever rely on company engineer. We use our own independent resources to value reserves and on a sample basis we use two different firms to evaluate the same sets of engineering data to ensure consistency and integrity in our approach to valuation.
Our E&P portfolio has largely, virtually RBLs. We don’t do second liens, volume metric deals or upstream MLPs. We don’t have market share to protect in terms of capital market fees, we don’t [indiscernible] balance sheet needs and we do participate in capital market transactions. We don’t enter into syndications where the proposed volume basis are out of times without viewing where they should be set. We walk from those, those deals generally get done, but not by us.
Our Houston team that does a bulk of our services lending looked at all the deals they’d passed on over the past 30 years. We can see that for every dollar of outstanding, we have in that portfolio we passed on about $4.50 of other opportunities again largely got done somewhere else.
We also looked at deals that we were in, but accident and that’s about $0.50 per every dollar of outstanding in that portfolio today. On a dollar basis, nearly one-third of our service companies have benefited over the past year from sponsorship support. They demonstrated their willingness and ability to stand behind their companies in a number of ways ranging from cash equity injections to additional collateral and guarantees.
In the E&P portfolio, overall lien utilization has been declining and was at 47% approximately year-end down from about 51% at the end of 2014. Seven of our eight criticize to classified E&P credits had a 43% decrease in both commitments and outstandings during the year was $53 million plus in outstandings. The other one credit had an increase of about $8 million.
We maintain concentration limits, we were comfortable with over the past several years. We didn’t want to get too heavily exposed in the services sector, and we are very deliberate in keeping those limits in place to keep us from creeping up into the teens, in terms of energies, pushed into the overall portfolio. When capacities constrained, you have to be more selective in how you build your portfolio. After those limits, we could very easily have built a much larger, high risk portfolio. We passed on certain acquisition opportunities that would have bumped us up against and in one case well over those limits. I hear all of that not to say that we don’t expect to see some additional provisioning increase in NPAs and ultimately some levels of loss; we do expect to see some of that. Rather to underscore the point that we believe the impact to be manageable.
You shouldn’t expect to see everyone in the sector with the same percentage in their allowance as it relates to energy any more than everyone should have the same overall level of allowance. Every bank portfolio is different. One final point on the provision and allowance, we have a very methodical approach to determine our ratings and reserved levels, and we’ll continue that practice based on the actual facts, circumstances and outlook for each of our credits.
We’ll always be prudent in our approach and our estimates and our allowance for credit losses as appropriate at year-end. We had another quarter of strong overall credit performance and the weakness in the small part of our portfolio was counterbalanced by the strength in the other 95% plus in the portfolio.
I’m very appreciative of all the hard work of our frontline, relationship management, credit and special asset teams that they put forth every day in driving our credit results.
I’m going to turn it back over to Daryl. Daryl?
Yeah, Randy. Thanks. One last comment before we open it up for questions. I want to thank our associates, leadership team, board members, advisory board members for their efforts in creating an incredible organization, their focus and hard work in achieving many accomplishments this year.
I’m proud that our team delivered record results and profitability, loan and deposit growth, commercial loan originations, mortgage loan originations and sales, commercial loan pipeline, treasury management income, purchase card income, title income, wealth management income, retail brokerage income, client derivative income and branch consolidations.
In addition to continued tax saving initiatives, significant efficiency improvements, executing our first preferred capital raise, making enhancements to our CRA, BSA, cyber security and other risk management programs, and successfully completing three acquisitions in five conversions. It was quite a year. Thanks for your perseverance and efforts.
At this time, we’d open up the call for questions. Denise?
Thank you, Mr. Byrd. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Stephen Scouten of Sandler O’Neill. Please go ahead.
Hey guys, good morning. Thanks for all the clarity on energy and all the overall guidance, we appreciate it.
I wanted to ask one further question kind of I guess ancillary to energy. You mentioned some economic weakness beginning to show, especially Lafayette and Houston. And then, you’ve got, give or take 11% of loans in consumer and CRE in those Acadiana regions in Houston. So how much, I mean, how much concern do you have about that, how much of that concern is may be built into your provision estimates for 2016, if you can kind of speak to what you’re doing to further ramp up the reduction and risk there in those markets?
Yeah. Stephen, as I mentioned in my comments, I was in Lafayette in during the mid-1980s, when Lafayette went through a fairly tough time. I think, it’s a different community today than it was then, but as we indicated, we’re seeing some uptick and unemployment in both that market and the Houston market, which you would expect in this kind of environment, particularly in some of the service companies. So, we expect to see that. As we look at, and I think Randy has got some statistics in the PowerPoint presentation that speaks to kind of past dues and some relative nature of that portfolio. It continues to hold up extraordinarily well. And the community seems to be pretty busy. I was there earlier this week, and amazed at the amount of activity, traffic, I was at a hotel that was absolutely packed, and there was a just kind of ancillary. I think you’ve also got one other one that you have to consider, particularly where that community is concerned.
Lafayette is only about an hour, hour and 15 minutes from Lake Charles, and you got a fairly significant amount of capital project, construction projects going on in the Lake Charles area, it’s up over $30 billion and that’s a fairly small community for that kind of construction. I think there are about 19,000 or 20,000 jobs needed for that construction.
And so, if you live particularly on the west side of Lafayette, it’s not a big community to get over the Lake Charles. So, probably you are seeing some jobs kind of move over into that market, where appropriate. Michael, Randy?
I would agree. If you think about the jobs that are being created in Lake Charles, they’re dependent upon the petrochemical, LNG businesses. Their large investment projects, their multi-year construction projects, they need lot of labor, the labor that they need happens to be fabrication oriented, welders, pipe fitters, et cetera. Those are the types of jobs that are being displaced in the Acadiana market. So, if you look at the inward migration for a community like Lake Charles, Lafayette and Houston are the primary generators of employee.
So, I think to a great degree that somewhat mitigating the level of issues that one would normally see in a slowdown in Acadiana. But you also ask, what we’re doing specifically and I think that’s reflected in our slowdown and lending in those markets, we stop lending in Acadiana broadly last year, we probably see run off a large part of our indirect portfolio, which is principally in Acadiana. So a combination of from equity, many consumer loans, indirect, commercial, risk out strategy that we began last year has really slowdown to the growth in the market actually shrunk it quite considerably.
And Stephen again, we became concerned roughly 18 months to two years ago when I thought oil and gas were just priced too high and too much supply. So, we’ve been working to make the appropriate corrections in terms of our lending approach in those markets for some time, and have been willing to walk away as we said, in the risk-off kind of discussion $442 million in loans. And that’s really loans that we kind of have exited our portfolios. That's not the stuff that we might have done as we wanted to which would add up to much bigger number, but we try to be pretty careful and we’re going to be continue to careful, Randy.
Yeah. Something I would add to that Daryl, but Michael’s comments about Lake Charles, we’re absolutely seeing that one of the other things we’re seeing bear out there is, don’t see things like the job here has been held in Lafayette from the large – larger employers in Lake Charles. And one of the other interesting aspects is we see people that are actually commuting from Lafayette to Lake Charles to take these jobs, they’re staying in the houses if they are in Lafayette.
As Daryl mentioned we’ve made a number of adjustments in Acadiana and Houston and kept them underwriting perspective and then credit standards perspective earlier in the year, and that’s paying some dividends for us. We’ve made some investments in our collection shop in anticipation of that activity picking up at some point. If you look at past dues in Acadiana and Houston, we don’t see it showing up there in terms of past dues at this stage of the game, but we expect that we will see some more of that start to flow through the portfolio.
And we also look pretty closely at what our CRE exposure, you mentioned CRE, if you go through what we have in our Houston portfolio, it’s pretty limited direct exposure there to the oil and gas. And the CRE that we do have, I think our average investor CRE deal over there is less than $9 million and not a large number of individual transactions.
I think as I mentioned to you before, we kind of stayed away from more of the speculative high end Class A apartment building that’s going on in that market. There’s a lot of that over there, we’re not in those deals to speak of. So I feel pretty good about where we are. One last point, if you look at both Acadiana and to a limit extent Houston, we don’t have a whole lot of really [ph] residential lending in Houston per se.
Acadiana, our real estate – our loans over there backed up by a residential real estate are pretty well seasoned, debt portfolios on average about five years old. LTVs are very strong, generally and relatively strong compared to our overall portfolio, as well as the credit scores of the borrowers that we see in that market. So, we are watching it closely, but I think we’re in good shape at this stage of the game.
It’s Michael again. I just to want to get back to a specific number just to give you a sense for the order of magnitude. If you look at Acadiana between our sort of commercial and consumer lending and then the indirect portfolio, we’re down about $260 million in loans last year.
Yeah. And so with those three categories of derisking that you’ll basically, I would presume continue hear into 2016. Do you still feel good about kind of mid-double digit legacy loan growth maybe high single-digit overall net loan growth or is that has to maybe come down a little bit given those [indiscernible] I know your pipeline is as big as it’s ever been in fourth quarter. So, it doesn’t seem that way.
Yeah. Yeah, Stephen, I’ll start with that. The one thing we’re blessed with and the one thing we’ve achieved, and again I’ll talk about a lot of accomplishments last year. We’ve got a lot of accomplishments the last several years, but I think that position this company in a great place. We have a very diversified franchise geographically. So, we’re in some wonderful markets in Florida, Atlanta is going to be a terrific market for us, Dallas is an amazing market. We’re doing extremely well there. We have a bunch of good markets from those companies. Michael.
Yeah. In terms of expected growth in 2016, we will obviously strive for double digit, our budget expectations are little bit below that. Just simply because of our continued effort to shrink the energy side of the portfolio. To Daryl’s point though, we got some very high expectations for other markets and that’s the one full thing we believe about our organizational structure as we created a diversified income stream as an organization. And that goes beyond just simply loans and margin, we as an organization, doing a much better job diversifying the non-interest income into other product area swaps, Treasury Management, IWA. And those are starting to gain greater traction for us as a company and we expect those to contribute more considerably in 2016 than they did in 2015.
Okay. That’s great. And then maybe one last clarification point from me, on the NIM, Anthony, can you speak to what led to looks like may be 6 basis points, 8 basis points of organic loan yields improvement quarter-over-quarter. And I think, you said, it wasn’t really from the rate hike yet. So, what was really driving that?
Yeah. Within the eight basis points, you had two basis points, really was the front running of LIBOR and the Fed move was two of that. The other six can be broken down. So, if you look at the average balance growth in the investment portfolio. So, if you look at just a movement from cash into investments quarter-over-quarter drove some of the improvement there. We also – on an overall basis, we had a five basis point improvement in the overall bond yield. Coupled with that, we had a few basis points improvement, just in legacy loan yields on the overall portfolio basis.
Okay, great. Well, thank you so much guys. I appreciate it.
The next question will come from Ebrahim Poonawala of Bank of America Merrill Lynch. Please go ahead.
Good morning, guys.
Ebrahim, good morning.
Just one quick, Daryl, you mentioned this in your opening remarks. I’m trying to understand why we are not being a little more aggressive on the buyback front? And I understand the tail risk, that Randy mentioned. Is it more tied to the fact that you’d rather keep some dry powder in case things get worse and you don’t want to be running short of capital, given the growth that you’ve seen on the balance sheet? Or yeah, so, if you could elaborate on that, that would be appreciated.
Yeah, Ebrahim, I don't know if John or Anthony want to jump in here, but what I said was, we don’t have a buyback program in place at this point in time. That doesn’t mean that Board would not consider one. But I think the balance for us, and I mentioned it in my comments is that we have pretty strong organic growth and we have to think through the need for capital. John, Anthony any thoughts.
Nothing to add there, specific [ph].
Understood. And then just a separate question, Daryl. I mean, I think if you take a step back, I think it’s – everyone’s given up on rate clearly been rates helping banks in terms of improving earnings or returns. As we look out assuming no major shift in the oil backdrop, from a strategic standpoint, do you think it lends itself for more meaningful sized M&A opportunities, just given how acquisitive you’ve been? How do you think about that over the next 12 months to 18 months, or do we need a meaningful recovery in stock valuations, stabilization in oil before we can get there?
Ebrahim, I think – I would as I kind of said in my remarks again, probably not all that happy with our stock price, which makes it pretty difficult from an M&A perspective. So, we’ll see where that goes and how we deal with that. The good news and again it didn’t goes back, we have a very diversified franchise. And I think we have a significant amount of opportunity just from an organic perspective in the markets that we’ve entered over the last couple of years. So, I don’t think we have to do anything. I think there will be some opportunities, probably, but we’ll just have to see how that kind of works out. But again, I think we’re well positioned, because we’ve got excellent markets, very diversified markets, very uncorrelated markets that give us a great organic growth. John, your thoughts?
Yeah. Daryl, I think we’ve been very consistent over the 15 years or so. We’ve been here, but we don’t have to do M&A. We’ve been one of the more acquisitive in the companies out there, but it’s really been more opportunistic in finding right partners. And we’re very pleased with the partners we’ve found. Currency makes a big difference. So, obviously from a dilution – accretion perspective and at this stage of the game, it really doesn’t make a lot of sense economically to do some of the kind of stuff, mathematically [ph] didn’t work for us.
And Ebrahim I think Anthony would jump into – we think, we’ve got good organic opportunities and we plan to continue to focus and stay vigilant from an expense perspective, managing the efficiency of this company. So we have plenty to do and plenty of opportunity.
Got it. Thanks for taking my questions.
The next question will come from Michael Rose of Raymond James. Please go ahead.
Hey. Good morning, guys. How are you?
Good morning, Michael.
Maybe if we can just circle back to energy. I appreciate all the color, but you said a couple of items on [indiscernible]. Do you have a sense for – of your clients what percentage of their production is hedged kind of in 2016 and 2017? And then if you have kind of an average price that would be helpful?
Randy, can you talk about that?
Yeah. The – I don’t have the exact numbers in front of me. I think we were in the overall hedged in 2016 at kind of in the upper 30s. I don’t have the 2017 numbers in front of me. The oil and gas, the oil component of the portfolio was more heavily average – on an average more heavily hedged in that and the gas side a little bit, a little bit less than that Michael.
Okay. That’s helpful. And then of the energy reserve that you guys have now. How much of it is kind of general versus specific and then what is – if you can provide, what is the breakout between kind of the E&P side and the service side?
Yeah. We – I don’t think, we’ve broken it out that way Michael. So we’ve got to look at all the components together and as well as individually to get to the aggregate number. But I don’t think, we’ve got the breakdown here that how we split it out, we’re putting after that.
Okay. Is it fair to say that most of reserve is qualitative at this point though?
No. I wouldn’t say that. I think it’s a combination of the two. And as we move through the year, we’ve – as I mentioned, we’ve seen obviously downgrades in sales in our models. Our models are picking up to appropriate level of – the appropriate level of reserving as those credits make that downward migration.
And Michael, just one other comment. We have very limited specific reserves in the energy portfolios at the current time.
Okay. That’s helpful. And then, just one more from me. Just on the expenses, Anthony. And I think you mentioned about $560 million this year. So if I look from a run rate perspective, the $1 million coming out, start at $158 million roughly and building from there, what are kind of puts and takes on the expense front this year, given kind of the lower for longer interest rate backdrop? Thanks.
Look, so I said [indiscernible] little bit below $560 million in the expense side. Really I think from a corporate perspective, our biggest expense growth isn’t really going to come from two categories during the year. One is everybody that works with company largely will get a raise. I don’t think people should be surprise by that, especially to see unemployment and those things come down. So we’ve got our global raise, we do that a one-time during the year for our employees that goes into effect in March. And quite honestly, healthcare expense is going to be up a little bit during the year two. So these are our two largest expenses.
And outside of that, we’re going to work to really have some good containment, which we’ve been working really hard. I think the real positive is we may great strides this year. I feel very positive and I’m going to get through 60% during the year, and I’m looking forward to talking about some really nice expense numbers with you in a couple of quarters.
Great. Thanks for taking my questions, guys.
[Operator Instructions] The next question will come from Emlen Harmon of Jefferies. Please go ahead.
Hi. Good morning, guys.
Randy, I appreciate your commentaries on conservatism and the price deck. What prices are you guys assuming as we look out over the next couple of years here. And how do you quantify the risk to the provision if we were to see another rate down in the oil?
Yeah. The price deck that we’ll use [indiscernible] this part of the year. As we look at it right now, it’s got a kind of $35 oil in the frontend of the curve $2.25 net gas and then on a sensitivity $30 on the oil, and $2 on net gas. So, they’re escalating up into kind of the upper 40s, out to 2021 on the oil side, and $315 on the net gas side.
We also run some other scenarios internally, kind of looking at kind of curve that it’s got $25 on the frontend, to kind of understand what that does for us. Yeah, there are a lot of moving products in this portfolio, that’s one of the challenges we think, there is no model out there, you just drop in the curve and it’s going to tell you exactly what – where a provisioning needed is going to be where or where loss expectations are.
We’ve got a lot of things happening in terms of, some reactions I mentioned earlier, there are a lot of things that companies in our portfolio are in the process of doing right now. So, it’s not a static, it’s not a static situation. What I would tell you is, I’m not going to give you a specific number. We run a bunch of different scenarios now, like a specific number is really appropriate for kind of the situation that we see here. But we run a number of different scenarios, looked at in a lot of different ways and kind of run backwards through our portfolios, some of the different pieces of research that are out there. I don’t really get to a scenario that, we certainly see some scenarios that might cost an elevated level of provisioning and some more loss [indiscernible] budget, but there is not a scenario that were on that, that tells us that’s not something that will be manageable for us.
Okay. Thanks. That’s helpful. And then, you guys have been pretty proactive about reducing what you've seen. Do you think the both – your riskier exposures in both energy and I would say this kind of like geographically or some of the consumer effective segments, what do you think the pace at which you could reduce your energy exposure as we look out at over the next year, and kind of like what are the constraining factors there?
So, I would tell you that we will see on average a decrease in the spring borrowing basis, no question about that, I mean you may have something to go up, but on average we’ll see a decrease there. And we saw that – we saw that – we saw that in 2015. So, that’s a natural part of the way these reserve base loans are structured to kind of move with the value of the underlying reserves.
So, that will play a role in it. We’ve got visibility to some other specific situations that we think have a pretty good probability of panning out in terms of some asset sales and some other things that we know are kind of being contemplated that will have an impact as well. So, that’s kind of on the E&P side. The midstream – midstream part of portfolio we see that, that’s really coming down whole a lot, again, that’s part of the portfolio and we feel very, very comfortable in that. On the services side, again you see, you can see where that portfolio continues to come down as those businesses contract, certainly with the lines we have out there, their working capital and nature are going to compress as those things flow through.
And Randy, as you said in the original comments, we’re seeing good support by sponsorship?
Yeah, that’s a hugely important point. I tried to stress that in my comments. We’ve again been very selective in the way that we build this portfolio, Carmen and her team in Huston have really done a great job of doing that, that’s one thing to say. You’ve got good sponsorship is another thing to be able to point few examples where that sponsorship is demonstrated its direct support and we’ve seen the benefits of that in the portfolio, and so that’s another aspect. When we frankly have some pay downs come in, we sponsors it to come in and brought additional equities that they able to kind of right size some of their warrants left.
Right. And then one of the other one that again, we talked about in our original comments, we have a pretty granular portfolio and we have been managing down our exposure over the last couple of years, managing down our exposures over the last couple of years. So we feel pretty good about the size of credits that we’ve got and frankly our ability to stay on top of it.
And just to clarifying point two, we also have not added any names to our energy portfolio. I was talking about Acadiana earlier, we’re not doing any energy lending there. We’re not doing any energy lending to new clients in Huston, either. So that is certainly helped in terms of quickening the pace. It’s quite surprising to be honest to see so many banks continue to lend into space considering uncertainty, but that may help us accelerate the reduction.
Yeah. So, first of all, I think this quarter, just to quantify I mean this quarter, the energy loans were down about 40 million bucks, is that – do you think that, that pace continues or there is maybe the borrowing base return – redetermination accelerate that a little bit in the second quarter?
Yeah, I mean that’s kind of percentage decrease and I think it’s just a good number to use as any. We have some fluctuations. We’re going to have some cases, where we’ll see some increased utilization. I think move around as companies are doing different things. But yeah, we’ll start to see that, we’ll see that continue to kind of come down.
Got it. Okay, thanks. Yeah, sorry, go ahead.
One additional point is, we’re seeing a quicker reduction in outstandings in the reserve based lending portfolio in services. So over time, you will see services grow as a percentage but obviously the overall portfolio will continue to decline.
Got it. Okay. And it sounds like we’re getting to the end of the queue here. So, I’ll throw one more at you. Anthony, thanks for all the color, just kind of on your expectations, your earnings expectations for the year, was curious kind of what rate assumptions you had, you had baked into the budget if any?
Yeah, we – since I got unbridled grief last year for it. But I’ll tell you is, we are – we have a flat rate scenario baked into the budget. So no change in interest rates from where they stood at year-end.
Great. Thank you very much.
Our next question will come from Catherine Mealor of KBW. Please go ahead.
All right. Thanks, good morning, everyone.
Good morning, Catherine.
I wanted to circle back on the expense conversation and I just want to think about this $560 million in expenses that you’ve got filled into the budget for this year. If I look back at the slide deck from the Analyst Day last year, you had a hypothetical expense data of about $560 million also for 2016. And so I would have start with the $15 million expense, 2015 initiative and in the additional branch closures that 0announced this morning, maybe would have seen that 560 move lower and just was curious to what has changed from over the past year to kind of keep that expense number at the same level. Thanks.
Yeah. So, Catherine, I think I said that it came in below the $560. So I think basically in my view obviously we got pluses and minuses. We are continue to invest some of the long haul base. So we’re not harvesting the bank. So again, I don’t view anything is dramatically different then kind of what we talked about it from the – at the Analyst Day, again I think I’ll come in a little bit below $560. So the $560 number was incorporating of the earnings initiatives. We’ll get $4 million of run rate savings out of the current plan. So obviously, we bring this below $560, I think as what I’m telling, I think [indiscernible] I don’t see anything is different from what we talked about.
Okay. All right. That’s helpful. And then, one more on the margin as well, in your NIM guidance, can you help us to think about what your assumption is for the cash accruable yield I think. It sound like you’re implying that – that’s going to pullback from the $11 million we saw this quarter, should we assume about kind of back to the $89 million level that we’ve seen at the beginning part of the year?
I think the overall yield – cash yield will increase in the first quarter reflective of the movement from the full impact as I said increase. And so I think what you’re going to see is probably acquired yield come down a patch, just because one of the pool closures and other thing. So, again you should expect to see the two numbers kind of converge together. Obviously when we have quarters, like the full of quarter we had pool closing events which again we’ll have from time to time moving forward. The acquire yield will – the marginally acquired portfolio will expand for a quarter. But overall my expectation would be, increased growth in the margin on the cash side. The acquired portfolio will kind of revert back a little bit absent in any one-time charges.
Okay. And [indiscernible] about a $200 million piece a quarter?
Yeah. That’s going to slow a little bit, so keep in mind for us acquired, as soon as we touch the loans, whether we renew it or obviously if it pays off, it will move out of the portfolio, so that portfolio can’t grow. So on an amortization basis it’s just natural, it’s going to slowly that, that run rate of decline should naturally slow. And then also, every time we acquire a bank, we typically have the heaviest amortization all run off in the portfolio in the two quarters, preceding closing that. So my expectation would be, should expect to start to slow down from the $200 million level.
Okay, great. And then one last one on the expenses. Can you remind us of some of the seasonal increases in expenses that we typically see in the first quarter?
Yeah. And so if you look at, I believe at Slide 9 in the deck, and I hope that’s a right number there. We’ve only got a, we’ve got a couple of items. Obviously we’re going to have a couple of days in the first quarter, so net interest income will be impacted by the day count. From a loan growth perspective Daryl used to like to call the Mardi Gras effect, but I think now that we’re a little bit more of – we got a little bit larger regional footprint, we’ll just call it slower loan growth probably in the first quarter. That’s been the norm for the last five years. And you can see that on Slide 9. So, again we might be different this year but for the last I guess five years, going back we did see that trend. And then you’ve got mortgage entitled obviously, we’ll start to rebuild towards the end of the first quarter but this will be again, we’re in the seasonal class on those businesses.
And then finally payroll taxes kind of reset for all of our employees at the beginning of the year. So you will notice on the bottom of Page 9, payroll taxes really in retirement contributions all reset so those will be available for everybody as we go through the year. Those items kind of pay that, as people go through certain earnings levels impact.
Okay. Helpful. Thank you very much.
Our next question will come from Matt Olney of Stephens Inc. Please go ahead.
Hey, thanks good morning. I just want to clarify one of your comments Anthony on the outlook for the tangible efficiency ratio. Are you saying that you expect to achieve that 60% level at some point during 2016 perhaps during the more seasonally strong quarters but for the full year may not average that, is that correct?
Yeah, I don’t know that, I don’t believe what average it for the full year. I do think, you’ll have quarters where we get below that. Matt, I think your assessment there is correct.
And last question, what should we be using for the effective tax rate in 2016?
I would keep it consistent with where we’ve been, maybe the last two quarters, a slightly uptick from the fourth quarter or maybe more consistent with the third quarter. Something we’re working on, in terms of what other items do we have to lower the effective tax rate, the tax credits some of the banks. But right now I’d say, let’s go with the third quarter rate probably it would be a good place to start.
Great. Thank you.
Our next question will come from Peyton Green of Piper Jaffray. Please go ahead.
Yes, good morning. A question on mortgage...
Good morning, Payton.
It seems to me like the mortgage business maybe set up better than it’s been since almost as good as 2013. And I know Anthony you just noted that it is seasonally slower, but I mean it looks like it sprung pretty nicely for a good first quarter and a good year. How should we be thinking about the business in 2016 relevant to 2015? And maybe...
And maybe to know in the context of your digital markets where maybe they didn’t have the infrastructure that you all have.
Hey Peyton, we’re going to ask Bob Kottler to kind of respond to that, he has consumer businesses.
Great. Thank you.
Hey Peyton, it’s Bob. We actually – I’ll start by saying we had a very good 2015. We actually have higher originations by almost $50 million than we had in the peak three finance years. And we actually in 2012, we were 42% refinanced, and 2015 we were 23% refinanced. And we did almost a third more purchased business in 2015 than we did in 2012. So, I’ll tell you that to say that I think that will set us up well as the housing market recovers.
Interestingly, our diversification for the bank as a whole should plays out in mortgage as well. So, the biggest increases we’ve had were in Florida and Georgia and Dallas. So, I feel good about that. Our pipeline was up $252 million I think as of Monday. And we’ve seen a better January than we had thought we might see month to date. So, yeah, I do think that will set us up well. So, I feel good about, we’re still recruiting new teams, we have very good sales effort and also good about where we could progress if the housing market does [indiscernible] to do the share.
Okay. And then, maybe this one is for Anthony. But other income, I know it tends to kind of seasonally be high in the fourth quarter. Should that be an adjustment down in the first quarter?
I don’t believe so, Peyton. I mean, I think when you look at all the other non-interest income items, you’ve going to have you’re weakness and I’ll call it NSF charges with the consumer levels, people collect their tax payments, that’s a seasonal item. But I’ll start with that. One of the things we haven’t done a lot of I’m talking about is really the strong progress in treasury management that we’ve seen. And treasury management income for us was up on the round about 20%, 25% year-over-year. The nice thing about treasury management is kind of annuity, being that it actually brings deposit to us which are good and creates a steady stream of income that doesn’t really go up and down. So, that’s a business that we’ve invested in, really heavily for the last three years and we’re getting some great return out of that expect to see that continue. So, I wouldn’t say there is anything abnormal that you should look to need to think about other than the seasonal items that we’ve disclosed really on Page 9.
Okay, great. And then maybe one in terms of thinking about your reference to making investments in the franchisee was some of the cost saves that you’re harvesting. I know there is a lot of hesitancy to going after more of the energy apple for sure. But where are, I mean, are you seeing opportunities from people having to pull back because of their energy exposure? And maybe is this a better year to take advantage of those than 2015 would have been?
Peyton, I’ll jump in, the team can respond if you’d like. I think we’ll see some opportunities. I think we’ve been pretty consistent about investing in the franchise across the broad number of areas. We did I think a really good job of investing in the right kind of risk management, CRA, BSA, cyber kind of the initiatives, when we needed to be in a good place to do what we’ve done from an M&A perspective. So, it feel good about that I think we’ll continue to make infrastructure investments as appropriate. And yeah, I think we’ll see some opportunities coming out from some of the people that are having some difficulties. So, we’ll see how that plays out.
Okay, great. Thank you for taking my questions.
[Operator Instructions] And showing no questions at this time. We will conclude the question-and-answer session. I would like to turn the conference back over to Daryl Byrd for his closing remarks.
Thanks everybody for listening today and for your confidence in our organization. Again, everybody have a great day. Thanks for joining us.
Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.
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