NBH Holdings' (NBHC) CEO Timothy Laney on Q4 2015 Results - Earnings Call Transcript

| About: NBH Holdings (NBHC)

NBH Holdings Corp (NYSE:NBHC)

Q4 2015 Earnings Conference Call

January 29, 2016, 11:00 AM ET

Executives

Timothy Laney - Chairman, President and Chief Executive Officer

Brian Lilly - Chief Financial Officer, Chief of M&A and Strategy

Richard Newfield - Chief Risk Officer

Analysts

Chris McGratty - KBW

Matt Olney - Stephens

Gary Tenner - D.A. Davidson

Tim O'Brien - Sandler O'Neill

Operator

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2015 fourth quarter earnings call. My name is Joanna, and I will be your conference operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session following the presentation. As a reminder, this conference is being recorded for replay purposes.

And I would like to remind you that this conference call will contain forward-looking statements, including statements regarding the company's loans and loan growth, deposits, strategic capital, potential income streams, gross margin, taxes and non-interest expense. Actual results could differ materially from those discussed today.

These forward-looking statements are subject to risks, uncertainties, and other factors which are disclosed in more detail in the company's most recent filings with the U.S. Securities and Exchange Commission. These statements speak only as of the date of this call and the National Bank Holdings Corporation undertakes no obligation to update or revise these statements.

It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation's CEO, Mr. Tim Laney.

Timothy Laney

Thank you, Joanna. Good morning, and thank you for joining National Bank Holdings' fourth quarter earnings call. I have with me our Chief Financial Officer, Brian Lilly; and Rick Newfield, our Chief Risk Management Officer.

Turning quickly to the quarter and the year, we continued to make progress adding and expanding relationships with clients in our markets. The organic growth of high-quality loans, relationship deposits and fees were solid during 2015 and we feel good about our momentum as we enter 2016. It's also important to point out that we grew our loans, while maintaining a very granular and diversified portfolio. As a reminder, by policy, no industry sector can exceed more than 15% of our total loans.

Now, Rick will cover our energy, agriculture and commercial real estate exposures in great detailed during this call. So I'll simply point out that our total energy exposure is only 5.7% of loans or only 3.4% of earning assets. No sector of our commercial real estate exposure is greater than 3.4% of loans. And our total CRE exposure is only 85% of capital, one of the lowest ratios amongst our peers. And our ag exposure is at 6.3% of total loans.

The performance on our loan book continues to be strong, as indicated by a decline in criticized and classified loans during the fourth quarter. Finally, to the extent that there is concern about the economic outlook, I'll remind everyone that we currently operate with excess capital of $135 million above a 9% leverage ratio.

On that point, Rick, I'll turn the call over to you.

Richard Newfield

Thank you, Tim, and good morning. First, I'll address our credit quality and our trends during the fourth quarter as well as full year metrics. I'll also cover our energy loan portfolio in detail. And as Tim said, provide some positive color on our non-owner occupied commercial real estate loan portfolio and the quality of our agriculture loan portfolio.

Second, I'll discuss our loan origination activity during the fourth quarter and for the full year. Third, I'll discuss our success this past quarter in reducing non-strategic loans and the continuing positive economic benefits generated through those efforts.

During the fourth quarter, criticized and classified loan levels improved from September 30, 2015, as did our level of non-accrual loans. Specifically, within the non 310-30 loan portfolio, criticized loans improved 5% or $7.7 million during the fourth quarter and ended $132.5 million, primarily driven by a decrease in classified loans of $6 million or 8%.

Non-accrual loans improved from 1.24% of non 310-30 loans to 1.08%, decreasing $3 million from $28.6 million at September 30 to $25.6 million at December 31, 2015. I expect this positive trend to continue over the next several quarters. Overall, past dues were in line and 90-day past dues remained immaterial. And for 2015, net charge-offs were only 12 basis points, solidly within our guidance of 10 basis points to 15 basis points.

Let me talk about one commercial loan charge-off that was responsible for two-thirds of our total net charge-offs in 2015. It's always been our practice to identify problem loans early, and then work aggressively to resolve them. Furthermore, within accounting standards and with thorough analysis to support our decisions, we proactively identify reserve against potential credit losses.

During the third quarter of 2015, we identified a move, one general industries C&I loan to non-accrual and began our workout efforts. We believe this general industries C&I loan relationship, which was approximately $6 million, to be a one-off and that is not related to any broad industry issue, and this weakness is driven by circumstances unique to this client.

During the fourth quarter, we did take a charge-off of $1.8 million on this loan, out of a total taken during the quarter of $2.1 million in net charge-offs. The charge-off in a separate specific reserve we took in the fourth quarter for this client, slightly over 50% of that unpaid balance of $6 million.

Consistent with our track record, we are aggressively working to recover the charge-off, and we have confidence we'll recover the majority, if not all of our loss. Overall, we maintained excellent credit quality across our $2.4 billion non 310-30 loan portfolio and expect the trend of improving criticized and classified loans we experienced in the fourth quarter to continue.

Now, let me turn to our energy loan portfolio. Over one year into a bear market in oil and gas, our overall energy portfolio has held up satisfactorily and it remains granular, with an average loan balance per client at $5.2 million. As Tim said, as a whole, energy sector loans were just $147 million as of December 31 and represent only 5.7% of total loans, 3.4% of earning assets and only 28.3% of bank Tier 1 capital.

This total is only slightly less than the balance as of September 30. However, our clients continue to raise capital and sell assets. So we expect loan balances to decline, as oil prices remain depressed. We have an implied loan loss reserve on our energy portfolio of 2.65% as of December 31, 2015.

As a reminder, we approached the energy sector, recognizing that price volatility is part of the industry. Our focus has always been on well-capitalized production and midstream clients, which currently comprise $118.3 million or 80.5% of our energy portfolio.

The production subsector totaled $58.8 million of loan balances at December 31, with an average balance per client of $4.5 million. The midstream subsector totaled $59.5 million, with an average balance per client of $12 million. The services subsector totaled $28.5 million, down from $31.5 million at September 30.

Let me provide some data supporting the capital and liquidity of our production and midstream clients, and place the cushion risk impact during a continued low oil prices, and then I'll discuss the services subsector in more detail.

Our approach to reserve-based lending has always been conservative. We lend only against proven reserves, we lend at proven undeveloped to a maximum of 15% of the borrowing base and we are strictly in senior secured positions. Our production clients have net debt to proven reserves, ranging from 0% to 65%, with an average of 27%. And these figures are based on the latest third-party engineering reports obtained in the last 90 days and in conjunction with borrowing base redeterminations.

Net debt to total capitalization for our clients ranges from 0% to 80%, with an average of 21%. Borrowing base commitment utilization remains quite low at 48%. With the exception of one client with an outstanding balance of $6.2 million that we classified due to liquidity constraints, our production clients have liquidity on hands today to cover operating cost for 14 to 137 months.

Excluding this one classified client, the ratio of net debt to EBITDAX ranges from 0x to 2.6x for our clients, with an average of 1.15x. This compares very favorably to the average for large cap E&P companies, as reported recently by Wells Fargo Securities at 2.6x. With respect to our one classified E&P client, we are monitoring closely in the process of taking additional collateral and working with the client on other resolution strategies.

Our five midstream clients have a ratio of senior secured debt to EBITDA ranging from 1.3x to 6.1x with a median of 3.9x. Senior secured debt to total assets rages from 10% to 80% with an average of only 40%.

One of our midstream clients represents an outlier. It is our only client with senior secured debt above 4.5x and senior secured debt to total assets above 51%. And this client has a pending asset sale that will result in leverage metrics in line with our other clients. Generally, we consider senior secured debt to EBITDA of less than 5x to represent acceptable leverage for midstream company.

Turning to the services portfolio, consists principally of five clients with an average loan balance of $5.7 million each. As duration of low oil prices persisted and worsened in the latter half of 2015, we identified two loans within our energy services subsector that we moved to non-accrual in third quarter. We based our decision to move these loans to non-accrual based on the client's weakening liquidity and capital, given persistently low oil prices.

These two loans account for $12 million of loan balances out of just $28.5 million in energy services loans as of December 31. We have specific reserves of $2.1 million against these non-accruals, and we're working with both clients on resolution strategies. We identified no new non-accrual energy loans in the fourth quarter.

I mentioned the two clients that are on non-accrual. Let me cover the three that are still performing. These three clients are effectively managing capital, liquidity and cash flow in the face of the protracted and severe downturn in the industry, prepared for a lower longer scenario in oil prices. Specifically, they have senior debt to assets ranging from 50% to 71% with an average of 59%.

In summary, we believe our energy loan portfolio was well-selected and the majority of our clients are effectively managing through persistently low oil prices. However, we also recognize that the longer oil prices remain depressed, the greater the stress is on all companies in the industry and could contribute to further risk migration in our portfolio. But as a reminder, energy loans compose only 5.7% of our total loans, only 3.4% of our earning assets and only 28.3% of bank Tier-1 capital.

Now, let me touch on two other industry topics that are prevailing, non-owner occupied commercial real estate and agriculture, and discuss how NBH has built a loan portfolio in a safe and sound manner relative to these two sectors. As Tim shared in his opening remarks, we established in-house concentration limits from day one. For example, with respect industry sectors, no single industry can compose more than 15% of total loan exposure.

We put in place additional limits on consumer loan types and importantly limits on non-owner occupied commercial real estate and then property types within commercial real estate. As of December 31, our non-owner occupied commercial real estate was only 85% of bank Tier-1 capital. Importantly multi-family exposure stood at less than $10 million of loans as of December 31, 2015, and no specific property type comprised more than 3.4% of total loans.

Finally, we've identified specialist within commercial banking to handle non-owner occupied commercial real estate, therefore maintaining stronger controls than banks that allow all commercial bankers to handle such business. We maintain a selectivity based on our concentration limits and underwriting standards, based on our experience during downturns historically in commercial real estate. Apart from acquired problem loans, we have less than $1 million in non-accrual loans within our non-owner occupied commercial real estate portfolio.

Agricultural loan portfolios are also getting attention, given low commodity prices and a concern around farmland valuations. In NBH, we've had a specialty banking group in place to handle food and agro business since late 2011. Our portfolio, as Tim said, is only 6.3% of total loans, it is granular and highly diversified. For example, exposure to corn crops is less than $20 million. Furthermore, the average loan balance per agriculture client is $360,000.

There has been talk of a farmland valuation bubble for many years, and we've maintained discipline in our lending. We only have 5% or $7 million of our agriculture exposure in loans exclusively secured by farmland. The balance of our agriculture portfolio loans are collateralized by mix of crops, equipment and farmland, and we underwrite some moderate leverage thresholds against those assets.

We're also diversified geographically. About 30% of our portfolio is in Kansas and Missouri, with the other 70% spread evenly across Northern and Southern Colorado. We have one non-accrual agricultural loan in just under $2 million that is expected to be resolved this quarter with full collection of principal and interest. In summary, we have a high-quality well-diversified agriculture portfolio.

Stepping back to the bigger picture of our total diversified originated loan portfolio, it's $2.2 billion as of December 31, 2015, an increase of $107 million in the quarter and a 20% annualized growth rate. We delivered these results, while remaining disciplined in our underwriting and credit structuring.

During the quarter, we continue to drive our growth with a granular mix of commercial and consumer loan types. Combining commercial, industrial, agriculture and owner-occupied commercial real estate, we make up 60% of our originated portfolio. Residential mortgage loans 25.5%, non-owner occupied commercial real estate only 13% and other consumer loans 1.5%.

For the fourth quarter, we originated $238 million in new loans, bringing our total originations for the year to $967 million. We had a diversified mix in the quarter, with 69% coming from C&I, agriculture and owner-occupied commercial real estate, only 12% from non-owner occupied commercial real estate, 17% very high-quality quality residential loans and 2% all other consumer.

During the fourth quarter and for the year, we continued our granularity. Average commercial loan fundings averaged $1.58 million during 2015. Our residential originations averaged $148,000 per loan with average FICO of 764 and loan-to-value of 62%.

Our resolution of problem loans from FDIC-assisted acquisitions continues to be a great story. During the quarter, reductions in our non-strategic loans were $23.5 million, a strong 65% annualized rate. We ended the quarter with just $120 million remaining in non-strategic loans.

OREO balances did increase somewhat, driven primarily by one commercial loan foreclosure at quarter end. I will point out that our pipeline for both problem loan disposition and OREO sales remains as strong as ever for the coming quarters. And it's also important to note, the non-strategic balances are now only 4.6% of total loans.

Our 310-30 loan pools are composed entirely of loans acquired through our three failed bank purchases. Our remeasurement of the expected cash flows from these loans resulted in a net $2.7 million in accretable yield pick up for the fourth quarter. Cumulative life-to-date, net accretable yield pick up is $204 million. We believe this clearly demonstrates the effectiveness of our problem loan workout efforts.

Now, let me provide some guidance on provision expense for 2016. There are three important considerations. First, provision expense in 2016 will be driven by continued loan growth, as Brian will discuss in his comments. Second, we seen net charge-offs across our loan portfolio in 25 basis point to 30 basis point range for the year.

However, it's very important to note that we reserved $3.5 million in 2015 for possible charge-offs on two loans, the general industries commercial loan and the one energy services loan, both of which I covered earlier in my comments. This represents roughly half of our charge-off guidance.

And again, because reserves were taken in 2015, charge-offs on these two loans are not expected to materially impact provision expense in 2016. Third, as we expect to resolve these two problem loans in the first half of 2016, net charge-offs are likely to be heavier over the first two quarters of the year, and then moderate to fall within our guidance.

To summarize, we maintained solid organic loan growth, while adhering to our discipline underwriting standards. We remain committed to building and maintaining our loan portfolio with outstanding credit quality, and we will not compromise our standards for short-term loan growth.

While we see continued pressure in the energy sector, we see the vast majority of energy clients effectively managing capital, liquidity and cash flow through the downturn. And we've maintained a low concentration of non-owner occupied commercial real estate loans, which we believe positions us well going forward.

I'll now turn the call over to Brian Lilly, our Chief Financial Officer.

Brian Lilly

Well, thank you, Rick. That was excellent detail. And good morning everyone. As Tim and Rick have shared, we accomplished much in the quarter and we're very well-positioned for growing success in 2016. We covered a lot in last night's release, so I will limit my comments to the fourth quarter highlights as well as providing our outlook for 2016.

Before going too far, I should point out that inherent within our guidance, our economic assumption is consistent with the current outlook of leading economist, where our markets continue to perform better than the national averages and we look for 2016 to continue to provide excellent growth opportunities.

Please note that we have not included any interest rate increases in our guidance. Given our asset-sensitive position, we would benefit nicely from increasing interest rates, but we decided to be more conservative entering this year.

For the fourth quarter we earned $0.11 per share. Quarter delivered on our prior guidance with the exceptions of additional provisions for loan losses that we set aside for a few non-accrual loans and a negative $0.08 impact from the retirement of one of our founding executives, primarily due to the stock compensation of deferred tax asset write-off. We are very pleased to have delivered on our guidance for the balance sheet, net interest income, non-interest income and expenses.

Total loans ended the quarter at $2.6 billion and grew a strong 20% over last year. The originated loan portfolio now spans at $2.2 billion and grew a very strong 32.5% over 2014. With the $238 million fourth quarter originations, we ended the year just shy of $1.967 billion.

During the fourth quarter, we did experience higher than normal loan paydowns as well as a steady exit of the non-strategic loans, which contributed to the lower than normal 10% annualized total loan growth. Several clients sold assets or entire business, and we saw a typical management of yearend debt levels.

The good news is that our unfunded commitments increased a $160 million or 32% during the quarter, which bodes well for the future growth. The new loan origination yield remain consistent with 2015's quarters at 3.6% with 69% variable rate.

As we look to 2016, we do expect to exceed $1 billion in originations. These originations will be built on solid relationships and will continue to be very industry diverse and granular in size. We are forecasting the December rate hike to stick in the market pricing for an overall originations yield of 3.8%. Total loan growth is forecasted in a range of 15% to 20%. This range does consider our continued aggressive workout of the problem loans we acquired in our failed bank acquisitions.

In terms of deposits, we are very pleased with our performance in 2015. Year-over-year we grew transaction deposits close to 10% led by double-digit demand deposit growth. In 2016, we look for our relationship banking model to deliver high single-digit transaction deposit growth with strong growth in non-interest bearing demand deposits. Given our lack of incremental funding needs, we see current deposit balances decreasing, resulting in total deposit growth in the low single-digits.

Looking forward, we expect to continue to fund the loan growth with cash flow from our investment portfolio and non-strategic loan paydowns in addition to deposit growth. As a result, we are forecasting the earning assets to increase in a low single-digit ending 2016 in the range of $4.3 billion to $4.5 billion.

Net interest income totaled $39.9 million for fourth quarter and the fully taxable equivalent net interest margin was 3.73%. Both of these were better than the third quarter, owing to a nice pick up of $1 million in our acquired loan income, with the margin further benefiting from lower average levels of low yield and short-term investments.

In terms of 2016's guidance, we are forecasting net interest income in a quarterly range of $38 million to $39 million. The corresponding net interest margin is unchanged from recent guidance at 3.5% to 3.6% on a fully taxable equivalent basis. However, given the ever-decreasing contribution from the 20% yielding ASC 310-30 loans, we do see the net interest margin narrowing during the year.

We are forecasting that this margin narrowing does not translate to net interest income decrease, as we are continuing to remix the earning assets with the relationship oriented sustainable loan growth. Rick did an excellent job addressing credit quality, and please referred to his comments for our 2016 guidance.

Turning to non-interest income. We are very pleased to have the FDIC loss-share accounting behind us, with the sizable explanation point of a $4.9 million gain. Focusing on banking fees, we delivered year-over-year growth of 8.6%, which was better than our mid-single digit growth guidance for the year.

As we look to 2016, we see overall growth in the mid-single digits, driven by our expanding treasury management fees, increased mortgage gains and interchange fees, which more than offset an expected continued decrease in overdraft fees. We do continue to expect some level of gains on the failed banks previously charged-off loans and OREO income, with the added benefit of not sharing approximately 70% with the FDIC.

Non-interest expenses totaled $42.2 million for the quarter and contain several initiatives that will continue to make us better. One-time items totaled $33.7 million and related to the completion of the core system conversion, accruals for the consolidation of seven banking centers, the retirement of a founding executive, some carryover of Pine River acquisition costs and expense related to the increase in the fair value of warrant liabilities. All these initiatives will benefit future periods.

I should mention that we did amend the warrant contracts, resulting in an accounting change from expense to equity. The equity accounting is more consistent with the industry practice. We thought that this change was important now, as we wanted to avoid increasing charges to income, as our share price rises.

Looking to 2016, we are targeting total expenses in the low $140s million. We are projecting the first quarter to come in around $36 million. However, as usual, the quarterly amounts will fluctuate due to uneven OREO and problem loan workout expenses.

As you can appreciate, the total expense target is a healthy reduction from the $158 million last year and over $200 million just a few years ago. The net reductions in expenses represent the realization of many initiatives become more efficient, while keeping our focus squarely on revenue generating activities.

As we have discussed, tax expense for the fourth quarter and the year was influenced by several factors, including FDIC loss-share accounting, large deferred tax assets write-offs related to stock compensation, non-taxable warrant liability value changes, tax-exempt lending and tax efficiency strategies. We are forecasting a much cleaner tax expense picture in 2016, with an effective tax rate in the low 20s%. This rate is lower than the statutory rates, given our favorable tax strategy is implemented and our growing book of tax-exempt lending.

Capital ratios remain strong with $135 million in excess capital, using a 9% leverage ratio as a target. This excess capital gives us flexibility to create value through supporting organic growth, mergers and acquisitions and share buybacks. We have in place the buyback authorization of $56 million that could be used to take advantage of a discount, currently on our share price. And we do still see opportunity to deploy value-adding mergers and acquisitions. We continue to maintain financial flexibility to take advantage of opportunities as presented.

That completes our guidance picture. We believe that these results add up to excellent progress towards our stated future goal of a return on tangible assets of 1% and $2 earnings per share. We also realized that it is not a straight line from today to achieve these goals by late-2017 or into 2018. But we are well-positioned with strong business momentum and financial strength to take further actions overtime that will add to our achievement of our goals.

Tim, that concludes my comments.

Timothy Laney

Thanks, Brian, and well done. I want to take this opportunity to thank all of our teammates for helping us safely grow our company during 2015. I also want to thank our Board and associates who worked diligently behind the scenes to complete an important trifecta of regulatory initiatives.

Finally, I want to thank and congratulate my teammates for the successful integration of the Pine River Valley Bank acquisition and the complete conversion of our banks operating systems. All of these accomplishments are important steps on our path to a 1%-plus return on assets and $2-plus of earnings per share.

And on that note, Joanna, we will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instruction] Your first question comes from Chris McGratty with KBW.

Chris McGratty

Brian, a question on the fee guidance. I just want to make sure I'm starting with the right number. The mid-single digits, what's the dollar that you're jumping off of?

Brian Lilly

Well, for 2015 that would have been just about $33 million.

Chris McGratty

So take $33 million and then the growth rate off of that.

Brian Lilly

Right.

Chris McGratty

If I could ask a question, the color on the energy portfolio was great. I wanted to know, one of the topics that's coming up on energy, it's not only direct, but it's kind of indirect, whether it be in the in real estate markets. Can you just remind me, how much of this portfolio was acquired through your failed banks? Whether any of it was previously covered? And also, kind of the growth trajectory to get to the 140 and change number that we see today?

Richard Newfield

Look, we had some modest energy exposure that came with the bank acquisitions. But first of all, all of it's been re-underwritten and in many cases restructured under our watch, and truly all of that I would call originated to our standards. I think your second question was or the first part was about just derivative risk or exposure.

I'll just remind folks again that we don't have downtown Denver office exposure, for example, that's come into the news. We don't see negative impacts across our broader C&I portfolio. In fact, lower energy prices, in many cases, translates to lower operating cost. And we just maintain, as Tim and I both pointed out that that concentration policy to avoid any particular issues that can come whether they are direct or indirect.

Timothy Laney

Chris, I would add that while we don't have the downtown energy exposure, this is anecdotal, but we were talking to some CBRE folks recently, and they were saying that they actually wish they had more services, energy services companies vacating space, because they've got such a demand, they were looking forward to the turnover and the opportunity to generate new commissions.

So again, I can say that objectively, because we're not really in that lending business. But I do think it speaks more broadly to the diversification of Denver and the State of Colorado, and while we still feel very good about the Colorado economy.

Brian Lilly

Tim, if I could, Chris just one other point to that. You see a lot of folks talking about the net increase in jobs in Texas, for example, despite the loss of energy sector jobs, we really had the same dynamic in Colorado. As Tim said, it's highly-diversified. And I think two years ago the percentage of the workforce somehow associated with energy was around 3.4%. I believe that's in the low-2s now. So again, we feel like we're well-cushioned and well-diversified.

Chris McGratty

If I could ask a follow-up Tim. The one on tangible assets and the $2 number, I think in the past you've talked about you need a little bit of help from rates, and I guess we're starting to get a little bit of help. Obviously, you guys are being conservative with not factoring in more in the forecast. But if I look out to any of the comments that late '17 or early '18, you could start seeing a little bit more clearly.

What needs to be done on the expenses? And I can appreciate what you've done in the fourth quarter in the Colorado branches that you're addressing now. What else is on the expense horizon to get to that number? Because I think where some of the analysts and investors, there's a little bit of disconnect is how do you get there without something more drastic on expenses?

Timothy Laney

We understand that question and it's very fair. And I would point to the regulatory actions taken in the fourth quarter is an important catalyst for being able to address some significant expense, not even necessarily all identified at this point. We're working through every element of our current infrastructure.

Keeping in mind, everyone should keep in mind, that in order to obtain our charter were being held to the midsize bank standards of the OCC. So when banks talk about the additional cost being born by crossing over the $10 billion threshold, here we were as a $5 billion bank carrying those additional costs. And working with our new regulators there's an understanding that we will be regulated as a community bank, and that brings with it the opportunity to right-size a number of those related cost.

Furthermore, I'm not going to go into much more detail at this point, Chris. I will tell you that the work that we've done with the banking center consolidations is really, you could almost think of it is as a couple of pilots. And the results to date are encouraging, because one of the things we wanted to understand is how far apart we could have two banking centers get them consolidated and what percentage of the total business of the two we could retain, and the results have actually exceeded our expectations.

I'll tell you that we are also at a point, as the company has evolved, where we understand not only the direct contribution of each our banking centers, but equally important have done all of the market analysis to understand what we believe to be the market potential within the service area of those banking centers.

And we believe what that will translate to will be one of a number of actions, additional consolidation and/or selling of other locations. And it's interesting, we have already built a queue of interested buyers for a number of those, we'll call them, one-off location. So more to come on that front, but we clearly will be attacking our core infrastructure as well as continuing to refine the distribution network.

And finally, I would add that we certainly haven't spent much time talking about acquisitions in the last two years. But with where we stand today, if the right end-market acquisition presented itself, obviously with the right discipline that could be another very important bridge to helping us accelerate on that path to $2 of earnings per share.

So we're going to be focused on driving earnings organically, focused on the expense initiatives that I've alluded to and still focusing on the opportunity. And it's got to be the right opportunity to add value to our franchise through acquisitions.

And I guess I should add a fourth point, which is, if we continue to be painted with this brush as an energy banker and we continue to see heavy pressure on our stock price, we're going to be hard-pressed not to buy-in additional shares both by the company and personally. And obviously, as you reduce your share count, particularly if you're able to do it below tangible book value, that's half of the denominator of your EPS.

Operator

Your next question comes from Matt Olney with Stephens.

Timothy Laney

Matt, I hope you appreciated the detail on energy we provided today.

Matt Olney

I do appreciate that. And Rick, I'll tell you that I had a whole list of questions prepared, and you just went by down all the questions one by one. I checked them all off, for energy, ag, everything. So I appreciate being well-prepared, Rick.

Richard Newfield

Thanks, Matt, appreciate that too.

Matt Olney

There was some commentary about the paydowns in the fourth quarter that were a little bit higher than you guys expected. Anything you can point to as far as a trend, whether if they were in a certain industry or certain loan type that you can share with us?

Timothy Laney

We are seeing and expect to continue to see a number of our energy-related clients, as they've continued -- I mean, even as recently as the last two weeks, continued to raise capital or sell assets, we're going to see our energy senior bank debt go down. Now, I've said publicly, if we could find energy clients, despite concerns of that low oil prices, if we could find all energy clients that we could get comfortable with in this environment, which would require passing some very tough standards, we would actually love to add some clients in that space.

But the fact of the matter is, we think the reality is going to be that we're going to continue to see reductions in senior bank debt in the energy space. And outside of that I would tell you that we did have a couple of situations in the fourth quarter, where we had some clients sell their businesses and they were just simply liquidity events, and those events hit, I should say a couple of few situations like that interestingly enough and those certainly hit our loan balances.

Brian Lilly

That's pretty granular Matt.

Matt Olney

Going back to the energy discussion and the opportunity to add energy clients, did you add any new energy clients in 2015 at all?

Richard Newfield

In the year 2015, Matt, we added several, but none recently. Although, we do have a very high-quality client in production space, where we have participated out a portion of their total needs. And as their needs have reduced, we brought that in-house and slightly increased our loan outstanding in the fourth quarter, but nothing that would have materially impacted the second half of the year.

Matt Olney

And then on the expense discussion, Brian, can you clarify the outlook on the operating expenses? I think you said the run rate for the first quarter, you thought it would be around the $36 million range. What's the apples-to-apples number in the fourth quarter on that? Is it the reporting number or the core number?

Brian Lilly

Well, the pieces I gave you, we had $42.2 million in total expenses and we do have 3.7x in total one-times. And so if you net that down you're into the 0.37%. So we're dropping that down into around $36 million.

Timothy Laney

And to be clear Matt, to the credit of my entire senior leadership team, we're doing cornerstone work. We're looking at every function in our business. And we do believe there is a lot of opportunity. We're going to do it methodically. We're not going to do anything to create additional risk or disrupt revenue. But we're pretty excited about where we're at as a company and the ability to exceed those targets, when it comes to expense reduction.

Brian Lilly

And I think you can appreciate the math and the numbers I gave you that we already have backed into our guidance, quite a nice reduction year-over-year, just on the operating. But thank goodness, going forward, we're not going to be using that operating versus total anymore. We'll just talk about the total expenses. So when I say that 36, that's including everything, Matt. That's including our loan workout and OREO, and we'll stay at the total, and then point out the unusuals as we go quarter-to-quarter.

Operator

Your next question comes from Gary Tenner with D.A. Davidson.

Gary Tenner

One follow-up question on the termination of the agreement with the OCC and the charter change, you addressed the expense part of the equation. Was there anything in terms of the operating agreement vis-à-vis revenue growth or kind of asset growth that would now be eliminated from the equation?

Timothy Laney

I would suggest to you that our in-house limits and standards were actually tighter as it related to loan growth than OCC expectations. I will tell you that for a number of reasons, as we look at acquisitions that there were times when it was simply challenging to get an answer in a timely fashion.

Now, I want to point out that we hold the midsize bank group, Bill Haas, of the OCC in the highest regard. But it's just a big, big organization and they've got a lot of very big banks to say, grace over. And if there was a challenge for them and for us, it was some times more centered around acquisition and the ability to get to an answer, whether that was yes or no.

Finally, I would point out that even on the surface, if you just simply look at the basic fees of moving from the OCC to the state, that's a $400 million to $500 million, I wish -- $400,000 to $500,000 savings a year, call it $0.5 million savings and just the outright fee, much less the opportunity to attack infrastructure cost.

Operator

Your next question comes from Tim O'Brien with Sandler O'Neill.

Tim O'Brien

Following-up on the charter change. Do you guys have a sense of when will the state will do your examination? And I am assuming your next examination?

Timothy Laney

That's right. I think combined.

Tim O'Brien

Combined with the FDIC?

Richard Newfield

With the Federal Reserve.

Tim O'Brien

And when will that take place? Do you have an idea ballpark?

Richard Newfield

The sort of full annual exam is currently slated for some time in the fourth quarter, most likely October, November. But they are going to come in and do a sort of a check-in, probably towards the end of second quarter. I will point out that as part of becoming a state fed member, we did have the state fed come in late last year to do a review really across the company that was part of the pre-membership process.

Timothy Laney

That was a December review of our credit book, our other enterprise risk areas. And there is some continuity here, right, and that the fed has regulated our holding company, has done a partner with the OCC, very familiar with our credit processes or credit book, always received copies of all OCC examination. So I think that's one of the reasons we were able to move so swiftly with this conversion.

Tim O'Brien

So in addition to that initial review, were you also subject to an OCC annual examination in the fourth quarter?

Richard Newfield

I'll remind the group that with the OCC midsize supervisory approach, we had, I want to say 13 targeted exams during 2015. And so it was really a continuous process.

Timothy Laney

There was never a time when we weren't being in exam with the OCC.

Tim O'Brien

Like proctologist.

Timothy Laney

I'm not going to respond to that comment.

Tim O'Brien

The guidance was great that you guys provided. Out of curiosity, so just kind of looking back trailing, as far as the breakdown of overhead cost by line item that you provided, really the biggest piece is consistently salary and employee benefits, 50% occupancy is another big chunk. And then lately, anyway, other expenses have been the third piece. And to combine those, those three items tend to account for 80%, 90% of total cost. And I mean in most cases, how will they be affected or come down in order to hit the numbers that you anticipate putting up you're going to go-forward basis?

Timothy Laney

Well, I think that we got to remember there is another side of that equation as well. If you're talking about efficiency and that's that we certainly intend to continue to grow revenue as well. I mean the productivity is key. And when it comes to the other expenses, we did have a number of one-time significant events that we view as catalyst for moving the company forward in '15.

And I would be disappointed, we certainly don't have outside of a potential acquisition. We don't add any big strategic expenditures in our plan that would be considered a big one-timers dig others outside of potentially launching another round of consolidations or distribution action. But I'm hesitant to go any further, as it relates to other actions.

Operator

Thank you. I'm showing that we have no further questions at this time. I'll now turn the call back to Mr. Laney for his closing remarks.

End of Q&A

Timothy Laney

Well, I would certainly want to thank Chris, Matt, Gary and Tim for their questions. I am pleased that you are happy with the level of detail that Rick shared on the portfolio. We've put a lot of time and work into trying to be as transparent as absolutely possible there. I feel good about where the company is today and where we're headed, so more to come. Thanks to everyone for joining in today. Take care.

Operator

This concludes today's conference call. If you would like to listen to the telephone replay of this call, it will be available beginning in approximately two hours and will run through February 12, 2016, by dialing 855-859-2056 or 404-537-3406 and referencing the conference ID of 12866911. The earnings release and online replay of this call will also be available on the company's website, on the Investor Relations page. Thank you very much and have a great day. You may now disconnect.

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