Green Bancorp's (GNBC) CEO Geoffrey Greenwade on Q4 2015 Results - Earnings Call Transcript

| About: Green Bancorp (GNBC)

Green Bancorp, Inc. (NASDAQ:GNBC)

Q4 2015 Earnings Conference Call

January 29, 2016 9:00 AM ET

Executives

John Durie - Executive Vice President and Chief Financial Officer

Manuel Mehos - Chairman of the Board

Geoffrey Greenwade - President and Chief Executive Officer

Donald Perschbacher - Senior Executive Vice President and Corporate Chief Credit Officer

Analysts

Brad Milsaps - Sandler O’Neill

Michael Young - SunTrust Robinson Humphrey

Brady Gailey - Keefe, Bruyette & Woods

Preeti Dixit - J.P. Morgan

Kevin Fitzsimmons - Hovde Group, LLC

Jon Arfstrom - RBC Capital Markets

Operator

Greetings and welcome to the Green Bancorp Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, John Durie. Thank you, John. You may begin.

John Durie

Thank you, operator, and good afternoon, everyone. We appreciate your participation in our fourth quarter and full year 2015 earnings call. Participating with me today on the call are Manny Mehos, Chairman of the Board and Chief Executive Officer of the Company; Geoff Greenwade, President of the Company and Chief Executive Officer of the Bank; and Donald Perschbacher, Corporate Chief Credit Officer of the Company and the Bank.

As a reminder, a replay of this call will be available through 11:59 PM Eastern Time on February 5, 2016. A slide deck to complement our discussion is available on our website at investors.greenbank.com.

Before we begin I want to remind you that many of our remarks today contain forward-looking statements based on current expectations. Please refer to Slide 3 of our earnings slide deck as well as our fourth quarter 2015 earnings press release and our other public filings including the risk factors in our 10-K where you will find factors that could cause actual results to differ materially from these forward-looking statements.

Now, I’ll turn the call over to Manny. Manny?

Manuel Mehos

Thank you, John, and good afternoon, everyone. We appreciate your time and attention today. Following our comments, we will open the call to your questions. Turning to Slide 4, we delivered fourth quarter net income of $0.07 per diluted common share or $2.6 million after taking a $12.5 million provision for loan loss, related to energy credits.

Adjusted for one-time acquisition related expenses, earnings for the quarter would have been $0.13 per share. Looking past provisioning, our core performance for the quarter was better than our initial expectations with pre-tax, pre-provision adjusted net income of $19.7 million in the fourth quarter, compared to $10.5 million in the third quarter of 2015 and $8.4 million in the fourth quarter of 2014.

This 88% increase from the prior quarter was due largely to the contribution from former Patriot operations, but also reflected strong non-interest income and continued expense control.

For the full-year 2015, we delivered net income of $0.53 per diluted common share, or $15.4 million after taking a $17.9 million provision for loan loss. Adjusted for one-time acquisition expenses earnings would have been $0.67 per share.

Our pre-tax, pre-provision net income, adjusted for one-time acquisition expenses was $48.5 million for the full year and represents a 56% increase compared to $31 million for the full-year 2014.

Our organic loan growth exceeded our target of 10% for the full year, having delivered growth in 2015 of 14%, despite a more challenging environment in Houston relative to prior years.

Turning to credit and our energy exposure, which Donald will review in more depth, we ended the year with 9% of our portfolio exposed to the energy sector with 4% in E&P and 5% in oilfield service, inclusive of the Patriot portfolio.

As I mentioned, we took a $12.5 million provision in the quarter, which is related to a very small number of energy credits. The reserve on our energy loan book now stands at 6%. Through the fourth quarter, we have been taking action to reduce our energy exposure, given the challenging market conditions in this sector. We continue to evaluate this portfolio segment and regularly meet with our customers and believe the majority of our energy credits are positioned to assure continued performance in the current price environment.

We will continue to closely monitor and manage our credit exposure as we navigate this cycle. With respect to Texas and local economies where we operate, Houston is clearly been impacted by the drop in crude oil prices, given the job losses and reduction of capital expenditures in the upstream oil and gas industries. This has slowed the pace of growth in Houston and will lead to further challenges ahead if oil stays at current levels for prolonged period of time.

We are experiencing this direct pressure in several of our energy loans as I have discussed. Additionally, we are beginning to hear a softening in several pockets of the Houston market, such as commercial real estate, with sublease space increasing within Class A office; a moderation of growth in residential real estate; and some challenges in Class A multifamily; all are results of the weakness in the upstream oil and gas industry.

Importantly, we have little direct exposure to these markets. As I have said in past calls, Houston is a diverse market with the upstream oil and gas industries on the west side of the city and refining and petrochemical industries on the east. The investments being made into petrochemical, refining and LNG plants are significant, with estimates of $50 billion of total spend targeted through 2017.

Evidence of Houston’s economic diversity and health can be seen in our portfolio, which outside of energy, continues to perform well and is not pointing to economic weakness.

Turning our merger with Patriot, we are pleased to announce that we have realized the bulk of expense saves in the fourth quarter, which is ahead of our plan. Patriot operations added over $8 million to our pre-tax core earnings power in fourth quarter with the potential for continuing revenue enhancements over time.

Overall, I am pleased with the performance of our employees, the speed with which we have realized the expense saves and the production of our new bankers. Looking to 2016, I remain optimistic that we can deliver 8% loan growth despite the challenging economic backdrop. With Patriot, we have increased scale, which is already proving to be a benefit in taking business from our larger peers.

Importantly, we continue to be well-capitalized with excess capital and earnings power to withstand what could be a prolonged downturn. We are comfortable with our current provision level of 6% on our energy book.

I would now like to turn the call over to Geoff. Geoff?

Geoffrey Greenwade

Thank you, Manny, and good morning, everyone. As Manny touched on, we are very pleased with the merger of Patriot and the integration of the Bank. We have quickly made the necessary personnel decisions and achieved largely all of the cost saves that we outlined on our Q3 call.

We continue to expect to achieve at least a 40% reduction from Patriot’s core noninterest expense measure from the first-half of 2015. From a personnel perspective, we have added 95 net new positions to our combined employee base, in line with our original projections, representing a decline from Patriot’s employee base of 172 as of June 30.

We believe that our combined team of production bankers and support staff is sufficient to achieve our 2016 growth objectives. Through our initial quarter as a combined bank, we are very pleased with the performance of the Patriot loan book. Our new customers and employees seem pleased with the transition to Green Bank as attrition has been very minor.

Looking forward, the merger with Patriot adds critical mass and scale to our position in the Houston and Dallas markets, that will allow our bankers to be more effectively compete and gain market share from our larger competitors.

Slide 6 shows our combined team of bankers and relationship managers whose sole responsibility is business development. Another benefit of our increased scale from our merger is a further leveraging of our core infrastructure. Our fourth quarter results are evidence of this as we achieved a 50% efficiency ratio, excluding one-time acquisition-related expenses, which is a further improvement to drive our efficiency ratio even lower.

Turning Slide 7, total deposits as of December 31 were $3.1 billion, representing a 68% increase from year-end 2014. On an organic basis, excluding acquired Patriot deposits, deposit growth was $168 million for 2015, a 9% increase from year-end 2014.

Turning to Slide 8, total loans as of December 31 were $3.1 billion, representing a 74% increase from year-end 2014. On an organic basis, excluding acquired patriot loans of $1.1 billion net loan growth was $250 million, a 14% increase from year-end 2014. We are very pleased that we exceeded our 2015 loan growth target of 10% despite what was a more challenging year, particularly considering our emphasis on reducing energy exposure.

Organic net loan growth for the fourth quarter was a strong $67 million from the linked quarter, representing growth of 3%. Today our loan generation pipeline is strong and our seasoned team of bankers has significant remaining capacity. As I have previously mentioned, this provides a continued opportunity to leverage our bankers and infrastructure, and further improve our efficiency ratio.

With that, I would like to turn the call over to Donald for a credit update. Donald?

Donald Perschbacher

Thank you, Geoff. From Slide 9, nonperforming assets increased $57.2 million, a 1.51% of period-end total assets at December 31, 2015; compared with $36.3 million, a 1.5% of period-end total assets at September 30, 2015. The increase is primarily the result of energy-related migration and the addition of $10.5 million in Patriot-owned real estate.

From Slide 10, reserve based E&P balances were down $4.5 million. At December 31, 2015, reserve based loans totaled $131 million or 4.1% of total loans. And oilfield service loans totaled $162 million or 5.1% of total loans, which includes $79.8 million in Patriot oilfield service loans added through the merger.

Our combined energy exposure is now 9.2% of the total portfolio. We recorded provision for loan losses of $12.5 million in the fourth quarter of 2015, bringing the year-to-date provision to $17.9 million, primarily driven by reserves on energy loans. Although, classified assets has experienced an upward trend from our historically low levels due to increases from the energy book and the addition of adversely classified Patriot loans, they remain controlled at 37.6% of regulatory capital.

In fact, excluding adversely classified energy-related and Patriot loans from the classified totals, the trend is positive, as classified assets would represent only 8.2% of regulatory capital, down from 11.8% at year-end 2014.

Fourth quarter net charge offs were $277,000, resulting in a year-to-date net charge off position of only $522,000 or two basis points of average loans outstanding. Importantly, our three-year average net charge off opposition as of December 31, 2015 was only 9 basis points.

Our allowance for loan losses was 1.05% of total loans at December 31, 2015, compared with 1.05% of total loans at September 30, 2015. At December 31, 2015, our allowance for loan losses was 1.7% of total loans, excluding acquired loans and our allowance for loan losses plus the acquired loan net discount to total loans adjusted for the acquired loan net discount was 1.85%.

I’ll now turn the call over to John.

John Durie

Thanks, Donald. Turning to Slide 12, for the quarter ended December 31, 2015, noninterest income totaled $4.3 million. Noninterest income reflected a growth in customer service fees from the Patriot merger; continued strong revenue from the sale of the guaranteed portion of government guaranteed loans; and $772,000 in securities gains, as we restructured the combined investment portfolio to shortened duration and reduced price risk.

As we have previously discussed, we believe ongoing noninterest income will run at approximately $3.7 million per quarter beginning in the first quarter 2016. From Slide 13, for the quarter ended December 31, 2015, noninterest expense totaled $21.5 million. Noninterest expense included $1.8 million of one-time acquisition expenses resulting in $19.6 million in core noninterest expense compared to $13.6 million in core noninterest expense in the third quarter.

As we have previously discussed, we believe ongoing noninterest expense will run at approximately $19 million per quarter beginning in the first quarter of 2016 as we fully realized savings in data processing, occupancy, and loan and ORE expense.

Turning to Slide 14, net interest income for the fourth quarter was $35 million and our net interest margin was 3.92%. This compares to $21.2 million and 3.63% in the third quarter. Net interest income includes approximately $4.7 million in net accretion of the purchase accounting valuation allowances on loans, time deposits, borrowing and subordinated debt.

At December 31 2015, the net accretable purchase discount on loans was $11.9 million and the accretable mark on time deposits was $4.7 million. We believe net accretion on these valuation allowances should produce approximately $6.7 million in net interest income in 2016 before the impact of early loan repayments.

Due to the maturity profile of the loans and deposits, the accretion will reduce over time. Accordingly, we believe our net interest margin should run between 3.65% and 3.75% in 2016. We are continuing to forecast $130 million to $140 million in net interest income in 2016.

We continue to be well-positioned to benefit from rising short-term interest rates with minimal exposure to the long-end of the yield curve. I will reiterate that the Patriot merger has not materially changed our asset sensitivity profile. While difficult to discern due to other changes in the components of net interest income, the positive impact of the recent rate increase was right in line with our previous guidance. We estimate that the Fed’s rate hike in December will result in $1 million in additional net interest income in the first quarter.

From my perspective, the most important financial takeaway from our discussion today is the improvement in pretax pre provision income net of one-time acquisition expenses. Conservatively attributing $8 million of the increase to the Patriot merger means, Patriot has added approximately a 2.3% return on assets on a pre-tax, pre-provision basis based on the acquisition day total assets.

As we move through 2016 with core earnings exceeding 1% ROA and efficiency ratio in the low 50s and balance sheet growth less than earnings growth, we will be able to build capital for future deployments and cover any additional reserves needed if the economy becomes worse than expected.

As Manny mentioned, capital efficiency is a primary focus. We are constantly evaluating our options for capital deployment to drive improved efficiency and shareholder return, which may include repurchases of Green Bancorp shares, acquisitions and growth opportunities.

We remain well-capitalized with a capital buffer of $19 million over a 10% total risk-based capital ratio as of year-end.

With that, let me turn the presentation back to Manny for some concluding remarks. Manny?

Manuel Mehos

Thanks, John. To conclude, while the drop in oil prices has resulted in a moderation of growth in the local Houston economy, we continue to experience opportunities for attractively priced loan generation in industries that are not directly impacted by the slowing energy sector.

With regard to the Patriot acquisition we closed in a short timeframe, we rapidly integrated the bank. And as we have discussed, we have immediately seen the revenue benefits from the deal. While to date we have not made any repurchases of our stock, given our outlook, earnings forecast and the capital buffer that John discussed, we plan to repurchase shares under our existing $15 million authorization.

We have always believed that buying back shares below tangible book value make sense and we see our current share prices very attractive relative to the fundamentals of our business. While we note that during periods of duress it is very important to have adequate capital, we believe that our current capital levels are sufficient and we expect to continue generate capital through earnings throughout the balance of 2016.

Operator, please open the line for questions.

Question-and-Answer Session

Operator

At this time we will be conducting a question-and-answer session. [Operator Instructions] One moment please, while we poll for questions. Our first question comes from the line of Brad Milsaps of Sandler O’Neill. Please proceed with your question.

Brad Milsaps

Hey, good morning, guys.

Manuel Mehos

Good morning, Brad.

John Durie

Good morning, Brad.

Brad Milsaps

John, I appreciate all the guidance around 2016. Just want to see if maybe Manny or Donald could talk about your thoughts in the provision, kind of what price of oil might be driving those numbers. And you talked about 1% ROA and I assume that encompasses some thoughts on kind of where you may need to increase reserve and where that number needs to go?

Geoffrey Greenwade

Brad, when we’re talking about that, we’re talking about $10 million normalized provision from 2016 and I’ll let Donald kind of talk about where we are with the provision we took in Q4.

Donald Perschbacher

Hey Brad. So, the Q4 provision was a result really of further analysis of some names that we’ve talked about before. We’ve indicated we’ve had some couple of - few credit small numbers that we’ve been talking about. And it’s really just the continued price environment resulted in impairment in that small number. We’ve been through the entire portfolio.

We think that’s the worst of it. And we’re looking forward to what 2016 will hold at this price environment. We’ve also done analysis in terms of it - if it goes lower what we think it will do in the - from a provision standpoint.

Brad Milsaps

Can you tell us what price of oil you are assuming, maybe in some of the sensitivity analysis you were doing? And then secondly, on the oilfield service loans that came over from Patriot, how big was the mark on that group of loans?

Donald Perschbacher

Sure. So our price deck today very closely tracks to strip pricing. I did a comparison just yesterday afternoon. And in many instances our price deck in some of the outer years is below strip pricing.

As a routine course, we sensitize using 80% of our price deck, so we can look at in our analysis on a borrow-by-borrow basis. We can look at what a further 20% decline would do from a cash flow and valuation standpoint. And so that all is taken into consideration in our - certainly in the reserve provision that we did in the fourth quarter played a big part in that.

With respect to the oil field service loans that came over, I don’t have the specific mark in front of me. With respect to that I will say that we did two things with effect of that, Brad. We did a third-party loan review of 100% of that book as of October 1 to make sure that it was properly accounted for in that mark.

And then second, we have just completed from the credit executive side here a re-review of those names. There is about 38 names in that portfolio, in the oilfield service portfolio. And we’ve done a name-by-name review of those with our credit team and don’t see any impairment in those today as we see it.

Geoffrey Greenwade

Yes, Brad. I don’t believe any of the Patriot OFS ended up in the purchase credit impaired bucket. And so the valuation allowance would depend on what pool they ended up in the performing categories. But I would say the valuation allowance would range between 13 and 16 on that group.

Brad Milsaps

Great. Thanks, guys.

Operator

Our next question comes from the line of Michael Young, SunTrust Robinson Humphrey. Mr. Young, please proceed with your question.

Michael Young

Hi, good morning.

Geoffrey Greenwade

Good morning.

John Durie

Hey, Michael.

Michael Young

So I wanted to start off with kind of a specific question. Just of that 6% energy reserve, how much of that is a specific reserve for RE [ph] identified credits?

Donald Perschbacher

Hey, Michael, this is Donald. I mean, the majority of that is specific reserves on that small number of credits. As our normal practice is, when we review these on a very frequent ongoing basis, when we identify impairment we’ll put up specific reserve based upon that.

Geoffrey Greenwade

Michael, one thing that I want to point out that I think others have - our peers - that those specific reserves are done as impairment analysis. And so it’s basically the equivalent of the market ability of those properties today. And we don’t necessarily expect those kinds of losses if and when they occur. I know you’ve heard that already, but that’s the way that impairment analysis works and how we end up with those specific reserves.

Michael Young

Okay. So the - I guess, the right way to think about it, is that the $10 million of additional provision you expect in 2016 would be to provide for additional downgrades that you might see occurring, now at this little price range?

Geoffrey Greenwade

Now, the $10 million in 2016, Michael, is really just the function of growth in the portfolio.

Michael Young

So additional downgrades would represent upside to that number?

Geoffrey Greenwade

Correct.

Michael Young

Okay. Okay. I’ll sit back for now.

Geoffrey Greenwade

Not necessarily downgrades, Michael, but additional impairment where we would have to set aside additional specific reserve that obviously we’ll be revaluing these every quarter. But yes, we - the $10 million is kind of core growth in the portfolio.

Michael Young

Okay.

Operator

Our next question comes from the line of Brady Gailey of KBW. Please proceed with your question.

Brady Gailey

Hey, good morning, guys.

Manuel Mehos

Hi, Brady.

Brady Gailey

So maybe I’ll disclose some of the metrics about your classifieds that it was as a percentage of regulatory capital. And, would you mind just giving us the dollar amount of what total classifieds did in 4Q versus 3Q?

Manuel Mehos

Great. Let us work on that and get back to you before the end of the call.

Brady Gailey

Okay. Yes, no worries. And then, on the energy book, it sounds like you all are anticipating that portfolio to define from here. I was just wondering - we’re seeing things kind of take both sides of that. Some saw a lot of growth the last couple of quarters and they’re going to keep growing it, others are shrinking it. How much do you think that your oil book could potentially shrink in 2016?

Geoffrey Greenwade

This is Geoff. If we follow 2015, if you look at the - each quarter have a continual decline, I think it’s based on monthly cash reductions on the E&P, the occasional reduction on E&P, not to mention the oilfield services, the term payouts and that’s offset if there is any advances. I think we would continue to see probably for 2016, a 10% decline in the total book minimum.

Brady Gailey

Okay, all right. And then, the mortgage warehouse, I think it’s 3Q at a $184 million, did that balance change much in 4Q?

Geoffrey Greenwade

No, it stayed fairly flat for the fourth quarter. We actually expected it to decline in the fourth quarter. As you know that business is fairly seasonal, the warm months and cold months, but it actually stayed fairly steady and above what our expectations were for the fourth quarter.

And I think that’s - just judging by what we see the first quarter of 2016, if they continue to have higher usage then we thought on a customer basis. And I think that’s just a matter of what the ten-year treasury is doing and the rates staying lower, and the housing markets continuing to do well from a resell standpoint.

Remember, these customers are just in Houston or Dallas, but they do business throughout Texas and throughout other states in the south-central, southeast part also.

Brady Gailey

Yes. And then, lastly for me, Manny, your currency obviously is not where you want it. You still have a little bit of excess capital, but not as much as you did pre the Patriot deal. Is M&A pretty much off the table for you guys in the near term?

Manuel Mehos

Generally speaking, yes, I mean we have a - we’ve sort of - we’ve raised the bar on size that we’re looking for. And in order to do any sort of deal upsize and using our stock, whether it’s in MOE or [indiscernible] acquisition, we would need a higher priced stock.

So just because of the mathematics we really can’t do one in near term, plus the fact that we’re still digesting Patriot, although we’ve integrated everything. But it’s - we want to give it a little more time. Be that as it may price rises we are back in the hunt, because we still feel very strongly about that strategy in expanding more in Dallas and getting some more deposits.

Brady Gailey

Yes. All right, great. Thanks, guys.

Manuel Mehos

Thank you.

Geoffrey Greenwade

Brady, we’ll come back to you on that number.

Operator

Our next question comes from the line of Preeti Dixit. Please proceed with your question.

Preeti Dixit

Hi, good morning, everyone. It’s Preeti from J.P. Morgan.

Manuel Mehos

Hi, Preeti.

Preeti Dixit

So, Donald, what percent of the energy book is now in non-accrual, maybe you could give us some color on how many loans and the size of loans that migrated into that bucket this quarter, what types of credits they were?

Donald Perschbacher

Hey, Preeti. In terms of nonperforming, it’s about $32 million is the balance in the E&P portfolio. That probably represents of what a quarter of that portfolio. I think in the oilfield service it’s still - and that’s just a small number of names in the oilfield service. Similarly I don’t have that number in front of me, but it’s - we didn’t really see any material change in nonperforming in the oilfield service portfolio, and again, it’s centered in just a very small number of names.

Preeti Dixit

Okay, that’s very helpful. And then, Manny, the 8% loan growth you talked about, can you give us a feel for the mix in terms of markets. And I imagine Houston might be a smaller piece relative to the past year. But maybe you could just give us some color on where you’re seeing that growth, which market?

Manuel Mehos

Geoff, want - I’ll let Geoff handle that.

Geoffrey Greenwade

Yes, sure, the growth that we’re seeing, we still - if we look at Houston and Dallas, that’s 95%, 96% of our franchise, especially after we’ve done the combined banks. We’ve got - of the two markets on a banker level we have the most capacity in Dallas, just because most of the bankers on the Green and Patriot legacy side in Houston have been with the Bank for five years or more, where the average length of stay with the combined banks in Dallas is probably a third of that time.

So we’ve got a much more - larger capacity in Dallas to grow from a banker standpoint. Also from everything we’re seeing from an economic standpoint and activity standpoint, the energy piece is not touching Dallas whatsoever. So they continue to chase basically all the different asset classes in Dallas from C&I to real estate.

I think in Houston, based on more of the bankers with larger more mature portfolios. And then, what we are seeing was some softening on larger commercial real estate, be it Class A office or Class A multifamily.

We were tending to focus on the real estate side on owner-occupied or stabilized small/medium size commercial real estate, but it amazes me that we continue to do well with our bankers even with a larger portfolios. In Houston, they’ve got a good network of customers and prospects to work on. So I think for this year we are going to expect a 10% loan growth, and then focusing on with the combined banks on continuing to build out a deposit franchise to keep up with our loan growth.

Preeti Dixit

Okay. That’s really helpful. That will give me my next question, your expectation as U2 [ph] is similar phase of deposit growth?

Geoffrey Greenwade

Yes. We actually like to get ahead of our loan growth. That is one of the - I would say the challenges with the Patriot. They were very similar to us on higher loan to deposit. Usually, our acquisition strategy is, pick something up that has a very lower loan to deposit ratio and it helps us. Well, this one, they were very similar to us, not only at the customer level and the markets, but they did have a higher loan to deposit ratio that does help us on our core earnings going forward.

But we’ve made some over the last part of the year, going into this year we’ve made some changes to our incentive program to focus more on deposits. We do have a group of bankers now that is approximately 16 bankers that we call deposit relationship managers that are located at 16 of our 22 locations. And at some point over time, we plan on having one of those at every single location that just focus on deposit growth.

And I think that’s what we’re going to have to do to continue to have deposit growth ahead of loan growth. And we’re starting the year basically a 100% loan to deposit. We like to be at 95% loan to deposit on ongoing basis.

But one of the things that was a positive in 2015 that caused that was our mortgage warehouse business did double from the end of 2014 to the end of 2015. We did not expect that. And so if you back that out, which we do fund with flob [ph] advances on a program that they have. Our loan to deposit ratio would be more in line with the 95% number. So that does make us still a little bit better from that standpoint.

Donald Perschbacher

Yes. Preeti,on rate with the rise of the interest rates in December there is a heightened sensitivity in the market to deposit rates. And we feel like we can be creative in offering rates that will attract deposits to the bank without having it run through the balance of our deposit book. So we feel good that that gives us an extra tool as other banks are trying to hold down right.

Geoffrey Greenwade

Yes. Plus we have budgeted 2016 some more money in our marketing advertising budget for deposit growth, which based on where we were in the past, we never really did much of that. But we know that the size we are, we’re going to be looking for some $300 million to $400 million of deposit growth for this year that we do have more of a branch deposit growth function going forward.

Preeti Dixit

Okay. Got it. That’s really a helpful color. Thank you, gentlemen.

Operator

Our next question comes from the line of Kevin Fitzsimmons of Hovde Group. Please proceed with your question.

Kevin Fitzsimmons

Hey, guys, good morning.

Geoffrey Greenwade

Hi, Kevin.

Kevin Fitzsimmons

I’m not sure if I missed this. If I did, I apologize. But on the 6% reserve for energy can you - what if that come to for the different components of the portfolio. So what is it for E&P and what is it for oilfield services?

Donald Perschbacher

Well, as we tried to explain a little earlier that the majority of that is specific reserves and related to E&P credits. There is some general reserve just in our overall reserve methodology that’s energy related, but most of that is going to be specifics for the E&P portfolio, on loans in the E&P portfolio.

Kevin Fitzsimmons

Got it. And is there - is it just - it’s just your approach that there is not as much of a qualitative component, given all that what you are seeing in terms of the slow - and I guess, I’m talking about in the energy reserve but also in the broader reserve, the fact that the Houston economy is slowing down, why there wouldn’t be more of an increase to the overall reserve for just a qualitative component for that? Or is it just your approach you wait? Do you see the actual downward migration and you tend to wait heavily on loan specific.

Geoffrey Greenwade

Well, we continued, Kevin, to see it build in our qualitative reserve over time, and certainly think about the concentrations in energy component of that as part of our evaluation. So we have been building that. The interesting thing is as we’ve been building that our average loss rates been, our three year average loss rates been coming down in that analysis.

But we have been building that up and so - and another point to be made is of the $80 million that we added in Patriot loans there is book - the valuation allowance I talked about a little bit earlier that’s not included in that $17.6 million number we’re talking about.

Kevin Fitzsimmons

Right. Fair point.

Manuel Mehos

Yes. Kevin, I think it’s not always evident that, we call hidden factors, such as changing economic conditions, changes in the risk ratings, the portfolio mix, all of those things are part of our methodology. It’s just not as evidenced to you guys.

Kevin Fitzsimmons

Got it. Got it. And just a quick follow up, Manny, you had mentioned about the buybacks and the willingness to step in. Can you talk about the timing of that over the course of the year?

On one hand, it seems like that no time is better than the present where the stock is. On the other hand, the TCE ratio happen to come in quite a bit because of the deal closing. So can you and are you willing to be able to step in this quarter pretty aggressively or do you have to wait to get that TCE ratio up next quarter or so?

Manuel Mehos

No. We can step in now. I mean, in prior calls as you may recall, I said I’d get real tempted closer to book value, if that, say, is easier. We wouldn’t want to wait. It’s going to be difficult to get the stock, but that’s the only limitation really. But we like this price and is accretive.

Kevin Fitzsimmons

You were projected to build a lot of capital through 2016.

Manuel Mehos

Yes. I mean, our run rate, which is really the point of this - the biggest point of this call, I mean, I know it’s all about oil right now. But our run rate right now is much better than we thought it was going to be. So I think we’ll be building very good capital for next year and we’ll have plenty of room.

Kevin Fitzsimmons

Got it. Thank you. Thanks very much guys.

Manuel Mehos

Thank you.

Operator

Our next question comes from the line of Jon Arfstrom of RBC Capital Markets. Please proceed with your question.

Jon Arfstrom

Hey, thanks. Good morning.

Manuel Mehos

Hey, good morning.

Jon Arfstrom

Just a question on services, because I think that’s probably the big thing that people are maybe the most nervous about at this point. How fresh is the information on your services book? And I guess Donald saying that there isn’t a lot of issue or reserves allocated to the services book is bit of a surprise to maybe an outsider looking. And so maybe kind of walk us through the big credits, the kind of updated information you have and why those reserves should be lot higher in services.

Donald Perschbacher

Sure. So, two things I would say, as I mentioned earlier we had third party loan review look at the oilfield service loans as a part of the October 1 closing of the Patriot transaction.

But we just completed based upon year-end a review of all of the names in that portfolio and that was done by the credit team here at Green Bank. And so, we’ve done a name-by-name review. There are 38 specific names that are in the oilfield services portfolio. And we have looked at each and every one of those here within, again the beginning of 2016.

And at this point, we’ve just not identified any that are impaired that require specific reserves.

Obviously, as this progresses that could change, we continue to review those quarter-to-quarter and will make adjustments as necessary. But we’ve done a pretty deep dive, Jon, on the portfolio. I think a lot of it speaks to client selection, in terms of the profile that we try to choose going into this market, lending into the oilfield service sector. If we have better quality names, it should allow them to withstand the cycle little bit longer.

Manuel Mehos

Jon, what they did was very similar to what we do in due diligence. I mean, they went in with, of course, the Relationship Officer and tried to come up with expected loss numbers. And with the same methodology we use based on rating and the value of the collateral et cetera.

These are seen in Iowa. And they’re not as easy to value as E&Ps. So what they came up with doesn’t mean that there is not going to be drift later next year, because it takes time, sometimes to permeate some of these companies.

But it was surprisingly healthy at this time - while healthy is a poor source of words. It was - they seem to be stable is a better way to say it. And, like I said, possible drift but nothing justifies a specific reserve right there.

Jon Arfstrom

Yes, okay. And I guess, I mean, Manny, just you’ve been at this for a long time but that’s clearly the issue, right, it’s the $10 million provision guidance versus all the exposure that you have and your stocks at 80% of tangible book and but you’ve the projections called for a $1.15 in earnings around that, so that’s the gap and that’s the thing I think we are all struggling with and we can ask around the question of why is the reserve enough, particularly with the Houston thing. So I guess that’s the part we really struggle with and I just wanted see if you have any another - anything else you can do to help us on that.

Manuel Mehos

Right. Now, if I were on the outside, looking in, we’re struggling with the same thing. It’s internally we struggle to make sure, we’re covering everything, but we can, you can only look forward so much, we can’t change our methodology to start picking up anticipated losses and reserving for them when the loan performing and they’re not out of compliance and so forth.

So I understand it and it’s not unjustified, because we are all working with the moving target right now. And so it’s - even though it looks like a disconnect based on what the price of oil is doing, and oil service companies reducing their revenues about 50%, but at the same time, a lot of these are medium to small size C&I companies, C&I credits that - or one specific part of service business and none of them are drillers.

So it’s just a matter of - as time goes by, we’ll know more. But right now we really cannot give anymore guidance to the future other than where we are.

Jon Arfstrom

Okay. And that’s fair.

Manuel Mehos

It’s not a cop out. But it’s just - as far as the stock price goes, it seems like it’s already in the price of the stock anyway, even if we’re not reserving anything more oil service, the price of the stock seems to reflect that.

Jon Arfstrom

Yes, and I mean…

Donald Perschbacher

We definitely are getting the discount. And then also, Jon, the energy is 9.2% of our loan book now, 15 months ago that number was double that 18%. So I think our ability to manage it shrink the balances down, work with those customers getting more deleveraged.

At the same time we’ve been growing loans not only organically, but through acquisitions. It make that a manageable number for us, and I think just through our normal loan loss reserve that’s already implies our provisioning in the future, we can manage through different individual customers that come up and need a specific.

I think by addressing these small number of the E&P that were hit the most in the 2015, and it seems like from reading most of the other banks it’s kind of that same deal, it’s a very small number, and there are some attributes to those that had problems versus the majority that didn’t.

And I think we’re seeing that in the oilfield services too, as if you - if you win after the right type of companies and what they were doing in the oilfield services and they had lower leverage, it’s a manageable credit quality, it might be risk rating migration down, but it doesn’t mean it’s leading to specific reserves or losses either.

Jon Arfstrom

Okay. Just based on my understanding of the analyst roster, I think I’m probably last. So I’m going to ask a couple more if I can. Donald, I think you’d said the classified ex energy was down, can you just go through that again, to help us understand that?

Donald Perschbacher

Sure. And so if you look at our total classified and we sort of backed out the classified loans that we - they came just through the patriot transaction, and then we back out the energy related classifieds that leads a number of about, we call it $30 million of classified asset, that number as a percentage of capital is 8% of regulatory capital. And so year ago classified that same sort of analysis would have resulted in a 11% classified to capital ratio.

And so when we look at the makeup of those, there is nothing extraordinary outside just the ordinary course of dynamic risk rating migration in the portfolio things get - some get better, some change, but nothing else stands out other than overall that’s a small number and as a percentage of capital down from what would have been a year ago.

Jon Arfstrom

Okay.

Manuel Mehos

Jon, let me just push in there, back at Brady’s question. So the dollar amount of classifieds went in from September 30 at $82 million to $140 million, and the bulk of that was the addition of the patriot assets to the balance sheet, and Donald’s point, not to sound like a presidential candidate here, the Donald’s point on the performance of that 90% of our loan book that tends to get overlooked has really not shown any sign of weakness, we think that is a very important point to takeaway.

Jon Arfstrom

Okay. And that was my last question, I guess. Just what do you expect as we roll through the year, particularly on Houston, because I think that’s also the elephant in the room besides just the energy piece? Is it you have a big exposure in Houston we’re starting to see some frame? We all understand the diversity of Houston and things like that, but do you expect it to get worse in Houston as the year rolls on?

Donald Perschbacher

Yes. I expect that certain asset classes to get softened, I think that some of the information come out about Class A office and Class A multi-family, there is a large number that’s been discussed about all the subleasing space on an office space. So that is currently just under $8 million square feet of office sublease space, half of that is in a specific submarket which is being the energy corridor, which is West I-10.

85% of the sub-led space of that $8 million is in 50,000 square feet units or more. So that’s a huge amount meant for large tenants, the office loans that we have are going to be typically on Class B, Class C there it’s spread out through all of the different sub markets, I don’t know right off hand the average tenant size. But I can tell you it’s going to be way under 10,000 square feet for tenants probably somewhere in the four - with a four handle on it.

And so it’s just a whole different asset class. These are tend to be more ten-yeared performing lower leverage type office buildings.

And so I think the other would be Class A multi-family, just due to the size of those type of loans, we’ve stayed away from them - our Class B, Class C multi-family has been a very good perform over the years and I think part of that is the average size of the loan, that we have on our books on the multi-families $2.6 million and that makes up about 76 loans and that is on the combined bank level, and so, because of that most of the borrowers that we have had multiple properties and they can.

If they have one softening, they can make it up on a global cash flow with others and I think that’s a big difference, we’re not just looking to one large project. They have - may five to 10, and they have a global cash flow that spread out among different submarkets, not only in Houston but maybe around Texas.

And we feel very comfortable with that on our commercial real estate. We’re basically banking the same type of customers today at $3.8 billion that we were banking five years ago, when we were $1 billion. And we just believe in granularity, we believe in that small medium size real estate borrower and so they may have $20 million in loans with us.

But it could be five or six loans with five or six different property spread out to five or six different submarkets or markets in Texas. And that’s going to continue to be our strategy and philosophy and it’s not going to be let’s still get a $100 million deal with three or four other banks, and bank A move off a space that’s going up in the energy corridor.

That never was our strategy. And I think that will play well for us over the next year to as the, before energy stabilizes.

Jon Arfstrom

Okay. Okay. Thanks for all the help here. I appreciate it.

Donald Perschbacher

Thanks, Jon.

Operator

Our next question comes from the line of Michael Young of SunTrust Robinson Humphrey. Please proceed with your question.

Michael Young

Hey, Don. Just curious on the indirect energy exposure, have you guys done an analysis of the portfolio due to sense of that?

Donald Perschbacher

When you say indirect, you’re talking about companies that aren’t an oilfield service company, that’s not an E&P, but maybe impacted by declining prices or economic slowdown in Houston. Is that what you’re referring to?

Michael Young

Yes. And maybe you could define, maybe how you approach that if it’s 30% of revenue, what’s your criteria in this there?

John Durie

Yes. So we do. That’s a regular part of our risk management practice. We’ll call ancillary exposure. And it is exactly as you might think that if they’re having a potential impact, they’re not directly co-related like an oilfield service company or an E&P company is. But they could have be impacted by this.

And I’ll give an example. And we don’t have this in our portfolio, but it’s the easiest to illustrate. If it was a hotel in the Eagle Ford Shale, that’s not an oilfield service company and that’s not an E&P independent producer, but they’re going to be directly impacted.

And so, those are the kind of things that would fall on that ancillary that might have an exposure. And we do, we look at that as a grouping in our normal risk management practices. We track it and again that comes back to the 90% of our portfolio that’s not directly energy related. We’re not seeing any major migrations or changes outside of the ordinary course of business that we’ve seen in that.

I don’t have that number changes all the time as businesses come and go in the portfolio, but we do track it and consider it as a risk factor.

Geoffrey Greenwade

Yes. One of the things, Michael, on the - I think John made a very good point earlier. On the 91% that’s non energy, we looked at the weighted average risk rating for that portfolio for over the last two years. And it’s basically hasn’t changed during that period of time. That stayed very stabilized and very predictable. And so, to this point I think that non energy including of the ancillary are continuing to still perform well.

And I think it’s just basically because the Houston market is so much more stronger and broader and diversified than 30 years ago.

Michael Young

Okay. And, John, one follow-up for you just on the NIM and NII guidance, I appreciate that, but can you tell us what’s sort of the underlying rate assumptions are there in terms of number hikes or however you look at it?

John Durie

Yes, we’re that assumption - great question - it is modeled on flat to where we are today, so 50 basis point, that’s been the target. And we still benefit significantly if rates go up.

Michael Young

Okay. Great, thanks.

Manuel Mehos

Okay. I believe that’s all the questions now. I just wanted to sum up a little bit here. I mean, this is right now - obviously, it’s all about energy. We’re in the energy capital of the world. It’s our biggest market. We’re headquartered here. We certainly understand and even to some degree agree with the uncertainty going forward.

We all read the same economic report. So we’re not going to try to make economic predictions for you, but I guess the best way to say it is that the - as far as the Houston economy goes, the room reserve of our debt were greatly exaggerated, as we see it today and as we see it in our portfolio.

It’s a huge city that has had a huge surge of population growth in the last few years. And we went into this sort of downturn in the energy business with very little excess in the economy.

As we said earlier, office building things like that, where there was lot of zeal to build them on the high-quality stuff. That certainly is an overhang. We don’t know where oil prices are going. So certainly there is - going forward, we understand why we are trading where we are in terms of perception of Houston. But I will say, we have our hands around our energy portfolio. We’re very - our arms around it.

We’re looking at it and managing it very closely. We can pretty much define where we see the risk and we believe we’ve accrued for so far. Be that as it may, the only thing left up there in my opinion is materially at risk is the Houston economy. But so far, we don’t see it in the portfolio. And it would surprise you how there is still strength and still growth in many areas.

So we feel strongly enough about it, where we’re repurchasing our stock, let’s put it that way. The most unfortunate thing about this call is that we’re announcing the biggest provision we’ve ever had, when we are also incurring the biggest jump, huge jump, in run rate that we’ve ever had. This Patriot acquisition, Patriot merger, is maybe one of the best things we’ve done. And it turned out to be much better than we thought.

And so, the accretion that is showing up, the cost cuts everything is working at way better than plan. So that’s what we’re so optimistic about it next year and that’s what we’re focusing on and we’d love to do another one just like it.

So, anyway that’s it. Well, certainly contact any of us any time after the call if you would like to for - to dig down deeper. But we appreciate your attendance, listening to us. And we hope to give you very good results next quarter. Thank you very much.

Operator

This concludes today’s conference. Thank you for your participation. You may disconnect your lines at this time.

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