LegacyTexas Financial Group's (LTXB) CEO Kevin Hanigan on Q1 2016 Results - Earnings Call Transcript

| About: LegacyTexas Financial (LTXB)

LegacyTexas Financial Group Incorporated (NASDAQ:LTXB)

Q1 2016 Earnings Conference Call

April 20, 2016 09:00 AM ET

Executives

Scott Almy - EVP, COO, CRO & General Counsel

Kevin Hanigan - President & CEO

Mays Davenport - EVP & CFO

Analysts

Michael Ross - Raymond James

Michael Yang - SunTrust Robinson Humphrey

Frank Barlow - KBW

Brad Milsaps - Sandler O'Neill

Brett Rabatin - Piper Jaffray

Matt Olney - Stephens

Gary Tenner - D.A. Davidson

Operator

Good morning, and welcome to the First Quarter 2016 Earnings Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Scott Almy. Please go ahead.

Scott Almy

Thanks, and good morning everyone. Welcome to the LegacyTexas Financial Group first quarter 2016 earnings call. Before we get started, I’d like to remind you that today’s presentation may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The Company undertakes no obligation to publicly revise any forward-looking statement.

At this time, if you’re logged into our webcast, please refer to the slide presentation available online, including our Safe Harbor statement on Slide 2. For those of you joining by phone please note that the Safe Harbor statement and presentation are available on our Web site at legacytexasfinancialgroup.com, all comments made during today’s call are subject to that Safe Harbor statement.

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

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

Kevin Hanigan

Thank you, Scott. And thank you all for joining us on the call this morning. I will provide some commentary on the quarter and cover the first couple of slides before turning the call over to Mays. Once we close our prepared remarks, we will open up the line for your questions.

In short, we had a fabulous quarter, a quarter that demonstrates the earning capacity and growth trajectory of the LegacyTexas franchise. We reported record earnings, grow loans at mid-teens levels, managed our non-interest expenses, achieved the 49% efficiency ratio, all while bolstering our loan loss reserve. The DFW marketplace continues to exhibit its diversity and resiliency to the downturn in energy prices.

On Page 4 of the slide deck we highlight some of our recent recommission our performances earned us. Mostly recently a recommission came from S&P Global Market Intelligence who ranked us number eight among the best 100 performing banks with assets between 1 billion and 10 billion. In terms of Q1 profitability, we are in 22.1 million on a GAAP basis and core net income was 19.9 million, so $0.48 on a GAAP basis and core EPS of $0.43.

Our return on average assets was 1.2%. We grew our loans at 4% on a linked-quarter basis and for the first time in our history achieved the 49% efficiency ratio. Asset quality remained strong with NPAs to loans and OREO at 1.08% and our charge-offs were stamped 3 basis points. Now 16 months into the energy price downturn the DFW marketplace shows no real signs of contagion. Our tangible common equity ratio now stands at 8.7%.

Slide 5 speaks to our outstanding market share positions in DFW and in particularly the highly affluent Collin County. The DFW market is the headquarters for 21 Fortune 500 companies and has a diverse employment by industry. Companies continue to relocate and expand in our market area and DFW continues to add jobs.

Turning to Slide 6, let me highlight our impressive year-over-year loan and deposit growth up 25% and 21%, respectively. Despite the continued reserve build our net income is up 35% year-over-year and 34% over last quarter. On Slide 7, we depict our consistently impressive loan growth and the diversification of our portfolio.

Now let’s turn to the topics of energy in Houston commercial real estate beginning on Slide 8. Our energy portfolio consists of 39 reserve based borrowers and five mid-stream borrowers. Reserve based loans consist of 52% oil reserves and 48% natural gas reserves. Also for the first time, we’re disclosing the geographic concentration of the reserves. You can see we have nearly 50% of our reserves in the attractive Permian and Ark-La-Tex basins and very well exposure to the Bakken and Eagle Ford region. Additionally 276 million of our energy loans are backed by private equity firms with significant capital committed to-date and in many cases additional equity commitments available to our borrowers.

On Slide 9, we reiterate, we are almost exclusively a first lien lender in our reserve based portfolio with only one $5 million commitment in the second lien space. Perhaps more importantly, we have only 3.9 million in the oil field service company loans. In short, we have only 8.9 million in exposure to what we believe to be higher loss given default asset classes.

Just a couple of comments on the SNC exam, where we did experience 35.9 million in downgrades in Q1. It is interesting to note that we also had 54.5 million of loans upgraded or graded better than we had been graded. We elected the continued carry in this 54.5 million at our Herscher loan grades and we’ll be reviewing these credits during our spring borrowing base redeterminations which are ongoing right now.

You can see in the bottom left hand corner of the slide, we remain very well hedged particularly in gas with 85% of our reserves hedged this year and 84% hedged next year at very attractive pricing of $3.36. On oil, we are a little bit less hedged with 40% of our engineered PDP volumes hedged this year at prices of $70.23 and 35% of volume in 2017 hedged at average prices of $61.17.

Looking to the Page 10, you can see we had an uptick in our substandard energy loan totals as well as a slight uptick in our non-accruals. As we mentioned earlier, we continue to bolster our loan loss reserves from 2.3% of the portfolio up to 3.3%. In summary, we believe a combination of the basins we loan in our focus on first lien secured reserve based lending, strong deal sponsorship and a well hedged portfolio has and will continue to serve us well in this business.

Now turning to Slide 11, we provide information on our Houston CRE portfolio, which continues to perform very well. We now have 455 million in Houston CRE loans split pretty evenly between office, retail and multi-family with only 76 million in the energy corridor. Just as a reminder, we finance multi-tenant existing buildings on a low LTV, non-recourse basis. And importantly, we are financing cash borrowing properties in the B office space market and generally in the B and C multi-family market.

This underwriting not only gives us, this gives us from the overbuilt A office market in Houston it also yields us high debt service coverage ratios of 1.79 times than the entire portfolio, and 1.58 times in the energy corridor. This portfolio has very high yields on debt of over 12.6%. Our oil debt service coverage ratio in the energy corridor is still strong at 1.38 times. We continue to watch our Houston CRE exposure closely, but we have not seen any signs of stress at this time and believe our strong underwriting will service well as it has in the space for the past 13 years.

Let me now turn the call over to Mays.

Mays Davenport

Thanks, Kevin. Turning to Page 12, you will see we grew our deposits 76.1 million in the first quarter and 909.8 million or 20.7% year-over-year. Non-interest bearing deposits ended the quarter at 22.2% of total deposits up from the 20.6% of total deposits at March 2015. Our cost of deposits including non-interest bearing demand deposits increased slightly to 32 basis points in 2016, up from 29 basis points in 2015.

Slide 13 shows a significant growth in net interest income as a result of our strong organic loan growth. Net interest income for the first quarter was 65.4 million this was 1.6 million higher than linked-quarter and 9 million higher than first quarter 2015, that’s a 16% year-over-year growth in net interest income. And interest margin ended 388, compared to 394 linked-quarter and 403 for the same quarter last year. 1.2 million in accretion of interest related to the LegacyTexas and Highland’s acquisition contributed 7 basis points to the net interest margin. Net interest margin excluding accretion of purchase accounting fair value adjustments on acquired loans was 3.81% for the quarter ended March 31, 2016 down 3 basis points from the 3.84% for the linked-quarter and up 1 basis point from 3.80% for the quarter ended March 31, 2015.

Slide 14 shows the components of our efficiency ratio, net interest income was 65.4 million in core non-interest income which excludes one-time gains and losses on securities and others assets was 11.3 million for the quarter. Non-interest expense was 37.5 million for the quarter, these amounts resulted in a efficiency ratio for Q1 '16 of 49% down from 51.9% linked-quarter and 54.58% for Q1 of '15. Salary expense was positively impacted by a lower average stock price and by a higher amount of compensation expense capitalized on origination of loans.

Turning to Slide 15, you will see that while non-performing assets were up 12 million from last quarter, credit quality remains strong with the company having NPAs at 56.9 million. We had net charge offs of only 409,000 and booked at 8.8 million loan loss provision for Q1 '16. Our allowance for loan loss grew to 55.5 million at March 31, 2016 compared to 47.1 million at December 31, 2015. We ended the quarter with the allowance for loan loss equal to 1.25% of total loans held for investment excluding acquired and warehouse purchase program loans. 5.4 million of provision and 17.4 million of the allowance are specifically related to energy loans.

I'll end with Slide 16 which shows our strong capital position at March 31, 2016. I will highlight here that our Basel-III Tier 1 common ratio is estimated at 9.5%. We ended the year with 8.7% TCE to total assets and a 9.3% Tier 1 leverage ratio. All of our regulatory capital levels remained in excess of well capitalized levels.

With that I'll turn it back over to Kevin.

Kevin Hanigan

Thanks Mays. Let me wrap up with a couple of thoughts. As I've said at the outset I think we're now in month 16 or perhaps month 17 since the energy downturn began. While we certainly can't rule out any further potential credit migration, at this stage we've not realized any losses in our traditional energy portfolio and have only had nominal impairments. Dallas continues to add jobs and new companies continue to move here. As such we've really not see any measurable contagion and LegacyTexas has continued growing our loan portfolio with high quality well underwritten loans. Finally I think this quarter helps prove up the value of the LegacyTexas merger of last year and the earnings capacity of this company.

With that let's open it up for questions.

Question-and-Answer Session

Operator

Thank you, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Michael Rose of Raymond James. Please go ahead.

Michael Rose

Maybe if we could start on Slide 11 on the Houston CRE exposure, some related color there, but Kevin I mean have you seen any negative migration at this point and maybe what is the kind of the reserves against that portfolio that would make us say it is a little bit more comfortable about the exposure?

Kevin Hanigan

Yes I will tell you the -- we haven't seen any form of migration at all, because it’s the worst deal in that portfolio is that near energy corridor but it's still kind of 138 debt service coverage ratio. So other than our standard reserves that we put up against every real estate deal, that's all we have against that portfolio and it is all we feel we need against the portfolio. They're in the single past due in that entire portfolio across the entire bank so it's performing really well, I think we're continuing to watch it and we're watching this as leases roll over. And if you think about that portfolio it's generally a five year fixed rate portfolio and the vast majority of the leases in those buildings were signed up for five years, there's a couple of seven year leases but they're basically five year lease kind of deals. So watching rent rollovers between now and few years from now. We have 39% of the tenants rollover so that's pretty typical about 20% a year plus it is five year leases. We're watching that the biggest rent rollover we have and most of these are 3,000 to 5,000 kind of square foot tenants it is about a 15,000 square foot tenant and we're in touch with our borrower as it relates to that rollover. The conversations are going well they started them early. They're reasonable confident they're going to retain them, we've actually run the cash flows on that thing if they lost them in the loans still cash flows so far so good.

I think there is going to be stress in the A space there is no question about it because of the new product coming on and the shadow space or the sub lease space that's also in the A market. And generally speaking rents on those new buildings need to be close to 40 bucks and on the sub lease space it is 30. Our hires rent of anything we've got in the energy corridor is 21 and I think down the low side we are at 17 so this whole model of ours focusing on B retail and B office and B and C multifamily separates us from that A space and I think there will be stress in the A space as well in multifamily and it is not only just playing in the B space we play in the B space at really low LTVs across that portfolio I think we are talking about a 61% or 62% overall LTV so if the combination of those things that have allowed us to come through this 13 years with very low loss given defaults, frankly very few defaults over the 13 years but when we have them we will generally manage our way out of it, are we so pollyannaish that we don’t think there can be pressure from the sub lease space on some of our space.

It wouldn’t surprise me to see some of that sub lease space dropdown into the low 20s due to get tenants if that's what they need to do. I'm pretty confident they wouldn’t go below their expense levels and the expense level is probably on that sub lease space are probably 14 bucks and most of our portfolio would stand it even if they drop down to 14 bucks. So far so good, we are watching it, we are talking to those borrowers frequently but we really haven’t seen anything that would lead us to believe it's going to be up.

Michael Rose

And then maybe I can just switch to kind of the loan side at this point. You previously talked about loan growth kind of mid-teens ex the warehouse maybe 200 million to 225 million quarter it looks like you are a little below that this quarter any kind of change to that outlook and then obviously the warehouse is a little bit better. May possibly move through the year especially going into the seasonally stronger second quarter of the warehouse business what that can look like? Thanks.

Kevin Hanigan

Yes. And don’t think we have missed it at all I think we’re at 4% linked-quarter due to the 16% last time I checked it was 16% it is still mid teens so I'll give you all the color you want but I don’t think we missed our mid teens we hit it right on the button. And that was and as I signaled on the last call we may go in with a slower first quarter because of the massive loan production net growth we had in the fourth quarter of last year. And that was just the pipeline it was a little weaker it played catch up and frankly we really thought the first quarter was probably going to be more like 150 million in online and then right at the end of the quarter a couple of deals closed it kick us up to the 203 million and then 4% linked-quarter number. This quarter we go into a little better pipeline I think the Allpower took note that we didn’t book any new energy deals in Q1. I would tell you that somebody rings a bell on energy deals trading and properties trading out probably 6 weeks ago and there are several new deals in the marketplace in the energy space. I wouldn’t be surprised if we participate in one or two of those in the second quarter because the structures are really-really good and finally pricing has moved up maybe not enough yet but it has moved up 100 basis points across the entire pricing grid so I would say the risk return that we see in energy is probably as good it has been since 2009 or 2010 so that -- all I'm signaling there is with the return of the potential of dealing some energy deals I'm really confident we are going to maintain this mid teens loan growth.

Michael Rose

Okay any comments on the warehouse?

Kevin Hanigan

Warehouse has been strong it remains strong and we’re moving into the planned season. If there is one thing like our guys are doing a great job and I feel one thing I'm particularly proud of it goes on noticed there a handful of those banks that report our weighted average coupon in this book of business and we have held 335 now for over a year in a market that is highly competitive for pricing and where I think most banks that are reporting what they are earning on to are down in the low three's or in the high two's so we have managed to protect our turf there is pricing pressure in that every day and as we've shown in the past if pricing gets a little too low in that space we will walk we will part ways with a good client, if it gets too low but I'm really proud of what we've done in it and I think the second quarter is probably going to be just as good as the first quarter if not better.

Michael Rose

Okay, that is helpful. And then just one final one from me I would be remised if I didn’t ask some energy question. How far are you guys along in the spring volume base redeterminations and kind of what have you seen in terms of declines of several larger banks sort of seeing anywhere from kind of low to mid 20s? Thanks.

Kevin Hanigan

Yes. We haven’t seen that kind of drop of Michael I think we probably only done six deals so far we are right in the middle of close the bid. We approve loans on Thursdays around here. I know with borrowers it is going to be a busy day next Thursday it will be a busy day will move through it pretty quickly from here on our but we haven’t seen those kind of drop offs and in fact we've got a couple of folks who are still drilling in the Permian that are adding to reserve pebbles so that helps but I think maybe the biggest drop off we've seen is 12% to 14% in terms of the 6 we have looked at. There's still plenty to go I mean we have 39 tie ups in the reserve based space, but we're anticipating kind of 12% to 15% out of our portfolio.

Operator

Our next question comes from Michael Yang of SunTrust Robinson Humphrey. Please go ahead.

Michael Yang

Kevin wanted to ask you about your energy loan loss reserve, you guys have obviously grown energy loans through the cycle whereas other banks haven't but you still stand out a little bit to the low end, I obviously see that it's all E&P etcetera but can you maybe just talk about what gives you confidence that that's kind of the right number at this point?

Kevin Hanigan

Yes, I mean we looked at this really closely and it's not just us, we have an independent accounting firm that looks at that and looks at impairments we have outside, asset review teams, we have inside asset review team, we got our own loan grading system, so there's at least four or five sets of eyes that have looked at every loan grade for everyone of these including now 60% to 65% of the portfolio looked at in the SNC exam. And as we look at the SNC exam in general like we did have 39 roughly million in downgrades, but we have almost 55 million in upgrades. Now we chose not to process those upgrades, figuring let's just go through the borrowing base season and see where it plays out, I don’t like quirky jerky moves in loan grades. So if we move those credits then they're all OAM credits that would have moved back to pass, right. And then we feel a month later when we get through the borrowing base season, that they're back to OAM I just don't like those gyrations so look we could have.

For the purposes of this call we could have upgraded those credits, we had every right to, they were reviewed by the SNC exam and they were upgraded and if you back those out of our totals then we got 133 million, 134 million of criticized and classified loans out of if we include the midstream sector in there, 515 and most of our midstream deals were part of the SNC exam as well. So we're talking about 26% of the portfolio in criticized and classified, again having upgraded that 55 million. I think that stacks up really well compared to everybody else in the industry so I'd say that's one element of it. The second element is we are in basins that are still, they may up all the economic to drilling but many of the basins we're in are still economic in terms of production. Your returns are lousy but your cash on cash isn't too bad.

Third I think we may be the only folks who report hedging by crude producing reserve volumes, we're really well hedged. I think we reported now we've got 225 million of that portfolio backed by big private equity firms and most of them have dry powder that is committed to these deals and they've been supportive about them. So it's good sponsorship I think we picked the right kind of SNCs to be in, it's well hedged and we're in the right basins and then most importantly we've boarded the high loss given the fall categories. We strategically do not approve oilfield services loans. Now how do we get 3.9 well we got them through acquisitions and we have only gotten I think 150,000 of that is non-performing so that's actually holding up pretty well and we've got one second lien deal that we think is unique sure everybody thinks their second lien deals are unique. So I don't think we're in a good spot.

The last thing I'd say is after the SNC exam we didn’t have a single impairment and this quarter we finally for the first time had some nominal impairments on two deals, one on about $3.1 million the other one 300,000 or 400,000 so I think our impairment totals after drilling through the portfolio holds up pretty well too, and again I think we can attribute that to good basins and high levels of hedging. So to say that we're really comfortable with 3.3% would be an understatement. We think we're properly reserved at 3.3%, we're watching it, if there's further migration in the portfolio we'll add to it but today I think our portfolio is just different enough to justify us being lower than the average bearer because our performance I think has been better than the average bearer.

Michael Yang

And can you also just talk about maybe customer activity, what you see, and you mentioned that you've seen more asset sales recently but obviously oil's kind of rallied back here from the doldrums up into the 40s, are customers rapidly putting on new hedges at this point, are you seeing ducks come back online etcetera, just maybe if you could talk about that a little bit?

Kevin Hanigan

A little bit of both, we've seen some new hedging activity I mean if you go back and compare our oil hedge in the portfolio to last quarter it's up a bit but at lower prices, so that's because when we first hit 42, whenever that was a month ago before we dipped back down. We have a lot of clients layering some additional hedges and some out years to provide some protection. All that's up was one peak of $26 and a lot of people thought 42 sounded pretty good or wherever you went out on the strip. So they have added some hedges, a few ducks did come back online in certain areas but there wasn't a tonne of that, because we just really haven't seen much additional usage in our portfolio and maybe that's one disclosure Michael, we probably could make should have made in our portfolio but if we look across just the reserve based portfolio so I'm talking about the 457 million-458 million of outstanding so there is 94.3 of unused capacity amongst those 39 borrowers that's not a tonne.

Maybe more importantly out of our criticized and classified totals which is 188 there is less than 10 million available to those guys so we’re not like these big banks that have these big unfunded commitments that they are worried about funding up and going into a big case. Our availability here is actually pretty tight. If you want to measure it across and frankly those are all the exact same numbers we had at the end of the year. So at the end of the year we had 458 million outstanding and 94.3 available. So the availability in the portfolio level hasn’t moved but a couple of thousand dollars over that period of time. Our measuring is across the entire portfolio including midstream at quarter end that entire portfolio was 515 million and there was 134 available and at year-end it was 520 outstanding 521 and 134 million available then, so we have a lot of availability if you will in our midstream portfolio and that's usually not for operating cost and stuff like that most of the midstream deals we've done are backed by private equity and they are going to be acquisitive so there is availability under their current facilities for the acquisition.

Michael Yang

Okay. And one last one just on the efficiency ratio obviously going below 50% is very positive some small gains in terms of the e-stock plan this quarter that will maybe reverse out later but just longer term maybe Kevin if you could just talk about where you think the efficiency ratio could go?

Kevin Hanigan

I think we’re there. Could we kick back up to 50 if the share price kicked up I hope we have to put more money towards these type allocations that would be a good day for us. But it's important to note that that e-stock was established 10 years ago and we are done paying for that this year. But a big part of it this year, so I think by just time passing is it probably it was September.

Mays Davenport

September.

Kevin Hanigan

In September the amount we have to allocate monthly to the e-stock drops a couple of 100 grand a month so if it is back up just realize when we get to September it's going to kick back down again. Other things that could cause the drop there is just normal expense pretty right. But we have already done merit increased for the year and they were baked into our accruals in the first quarter so I don’t -- it's not going to be a matter of decent hiring people perhaps other normal expense group and then last thing we’re doing which we haven’t talked about before is we've been looking at our branch system and we are probably going to close some branches this year in fact we are going to close some branches this year. And we have four leases that are expiring and in all cases we have a banking central location within the 3 mile or 5 mile radius of those leases. And we are going to let them all expire then last one expires at the very end of the year the first one does I guess we closed the first one and we'd get the cost benefit of that coming to us in May and think about those if you world is about a $750,000 cost saving per past due and we don’t know that we are done it before we know we are definitely going to do more. We made you another one or two but those are deals that we have under longer term leases that we are working to see if we can get somebody to sub let some of the space to either that's skinny down a branch or to eliminate some past, so.

Mays Davenport

And Michael we thought about bringing out the kazoos and the horns and celebrating our set of 50% efficiency ratio but we view that one quarter doesn’t make a trend so we do see probably that number trending up in the second quarter obviously we’re hoping that the stock price goes up which will impact that soft based compensation so will see it trend backup for that. But on the other side, if you do see payroll taxes start coming down in the second quarter on as well as some other expenses that specifically debit card losses were again high in the first quarter I think we talked about this in the call last time they were high in the fourth quarter and they were high in the third hopefully those numbers will start coming down, so while we still do see trending back for it what we have had in the fourth quarter I don’t will get all the way to that number.

Kevin Hanigan

Yes and look a lot of people say what you are -- on last call why you were talking about debit card expenses it cost us 1 million bucks this quarter.

Mays Davenport

950,000.

Kevin Hanigan

950,000 and we are going through the process of giving these new A and B cards out and we are not in mass production of getting them out but we will have more or lot I think by midsummer that goes substantially reduced that cost for us is it going to go to zero, no I think we will maybe normalize to 200,000 to 300,000 as opposed to 1 million but, so as I look at all of those things and when I talk about the earnings capacity of the company. If you just back out the additional reserves we've got for energy and this will come to an end I mean the industry is going to get to the point where we’re not have the reserve numbers up against energy anymore except for new production at much lower levels you backed that for us in the quarter it was a $0.51 quarter and that's with the million dollars worth of debit card loss so I think both of those are going to get fixed in one form or another at some point, and so I think I feel really good about the core earnings capacity of the company as we sit here today.

Operator

Our next question comes from Frank Barlow of KBW. Please go ahead.

Frank Barlow

So most of my questions have been answered at this point but I guess if we turn back to the SNC exam we've been hearing, that exam has been going a little bit differently these days, and I just wondered if you could in terms expand on, what drove specifically the downgrade this quarter?

Kevin Hanigan

Yes, I think, most of it was either leverage or cash flow. And they're looking hard at leverage and they're looking hard at deals that have total leverage of over four times and that's both senior and junior forms of debt in the cap structure, or because, or if you don't have hedges your cash flows are really tight. Those are the two things that I think are driving downgrades. We had I guess three credits downgraded, and one was -- and then we have one credit left from accrual to non-accrual.

Mays Davenport

And look that consisted our, and that was a TDR that's actually paying us. We only have one oil and gas deal that's passed due more than 30 days and that form has been in bankruptcy. I mean bad debt. The other ones, even though they are non-accrual are paying us on a deferred basis. So if the new methodology being used and I think it hurts disproportionately the guys who have a lot of forms of junior capital in the cap structure and that's just, look that's a bigger bank’s gain for the most part, not a bank like us, not to say we don't have any deals with junior capital in cap structure but it's more unusual for us if you think about the big banks, right the big JPMorgan, Wells, the other big guys. They make a lot of money doing placements in those high yield debt instruments and to do that you get the agency of that credit. Well that's just, you're going to have a disproportionately higher level of junior capital in your cap structure and so when you see the numbers that some of the bigger guys put up you got to recall, that's what is driving it in their shop. They may not be driving it in the smaller regional bank shops. So I haven't tracked the other guys who've reported yet, that are more our size or slightly bigger, but I'm going to guess you're going to see slightly better results out of the regionals than you do out of the big guys.

Frank Barlow

Okay. And then lastly on M&A, is that something that you all are interested in doing at all at this point or is it strictly internal?

Kevin Hanigan

We're always talking right. There's not a whole lot of meaningful conversation going on. I am of the belief that you could find a merger of equals, and one of our strategies if you're going to go above 10 billion it's going to be to find a merger of equals, it doesn't make a whole lot of sense, since we're growing 800 million to 1 billion a year and we're close to 8 now, if we went out and did a smaller acquisition we are in danger of creeping into 10 a stock for stock deal could make sense even in this environment the way I think about it is because the cost saves and the multiple you could put on the cost saves, are way bigger portion of our overall cap, market cap. I'm not sure everybody thinks that way, but if you're going to do, it's just exchange ratio math so I'm kind of surprised there haven't been more MOE kind of a deals done but if there was one out there we would obviously explore it.

Operator

Our next question comes from Brad Milsaps of Sandler O'Neill. Please go ahead.

Brad Milsaps

Maybe just a little more color on the margin, obviously deposit costs kicked up a little bit this quarter, you had a little more compression, I mean you're almost I think to 100% loan deposit ratio, you got a big warehouse quarter probably coming in the second, can you kind of help me think about how you guys are thinking about deposit growth and then sort of how that relates to sort of how you're thinking about the NIM in 2016?

Kevin Hanigan

Yes I think the biggest operational challenge facing the bank is deposit growth. We have got to get deposits up, we had a really good deposit quarter last quarter but part of that was $120 million or $130 million deposit coming in on the last day of the year it is like 3 O'clock in the afternoon and it blew it up in over the next seven or eight days that deposit moved out which made this one look a little more anemic. But that means we may have to bid up some deposit pricing and we have. So you saw that deposit pricing kicked up a little bit, I wouldn’t be surprised to see it kick up a little bit more in the coming quarters. Does that mean I think we're going to lose it at the margin, that is certainly a headwind to margins, but we do have one tailwind as I mentioned earlier we've finally gotten to the point in the oil and gas space where these pricing grids are going up 75 basis points on the low-end to 100 basis points so far on the high-end across the grid, and we’re about ready to review the entire portfolio right, so that's a $500 million portfolio some of that's been underwritten at higher pricing some of the more recent deals have, but there's probably 400 million of that if we're going to get the benefit of the uptick in pricing on so I think over the next couple of quarters we feel pretty good about it holding pretty stable, Brad.

Brad Milsaps

Okay, great. And then, maybe just a follow-up on the expense, the efficiency commentary. Even ahead of a bigger warehouse quarter, you would still expect the efficiency ratio to move higher over the next couple of quarters?

Mays Davenport

Yes, I do. We had again with the stock-based compensation being real low, we had a significant amount of expenses capitalized on the types of loans. When we go through our FAS 91 calculation, we capitalize primarily salary expenses on loans that were booked during the quarter. And with the types and size of loans that we booked in the quarter, we did have an outsized capitalization of expenses. So, without any specific knowledge of what that bookings are going to look like in the second quarter, I will expect that number to come down. So, I do see that number going up. Again, the warehouse does help because it's a very efficient business, so that will help. I don’t see it going up a ton back to where we were like in the second quarter of 2015 or even at the fourth quarter of 2015. I think will hover around that 50% efficiency ratio. One thing I'll say is this year from a visibility perspective, it's a lot easier to predict and manage expenses. When we put the two companies together last year, we had cost saves baked in and we had budgeting done on a separate company basis and combine. So last year was really difficult to try to manage expenses and know what accurate and reasonable run rate was on expenses. So, it's just a lot easier this year to have that visibility. Now the two things that really are kind of wild cards are the stock-based compensation, which we have no control over the stock price and then also the debit card losses which we’re working hard on. So, we can continue working on those. But I think we can keep it around the 50 and we’re going to work real hard to keep it below 50 on a go forward basis.

Brad Milsaps

That's great and then just kind of one final energy question. Kevin, I was looking back at the hedging numbers that you disclosed at the end of the year. I think in terms of oil, it was around 75% at the end of the year. I think dropped to 47% this quarter. Is that just as simplistic as you had a lot roll off at March 31? Just kind of trying to understand that there kind of the flow through at some of the hedging numbers.

Kevin Hanigan

That's a really good question. So, actually more basic than that, Brad. What we reported in the slide deck last quarter was number -- or percentage of clients that have hedges. So, 75% of our old clients have hedges. I gave color commentary in my prepared remarks about how much we had done in reserves. Once the slide deck was done, we said around that afternoon, this really isn’t all that meaningful, what can we give the market is more meaningful. So, my apologies for the disconnect on the slides. But I think it's actually a little higher at little lower price in terms of the hedges this quarter versus last quarter.

Brad Milsaps

I think that's right; I think you said 48% last quarter. So, yes, thanks for the clarity.

Kevin Hanigan

And one other clarification, just for anybody else that goes back and back check that we also reported 90% of our gas was hedged last quarter and now it’s like 87 or something like that. We have somebody know [ph] couple of hedges and somebody sell the couple of reserves I think in the hedges and we got no data [ph] then paid down the debt. So that caused the decline on the gas from 90 to the high 80s.

Brad Milsaps

Perfect. Thank you guys, appreciated.

Operator

Our next question comes from Brett Rabatin of Piper Jaffray. Please go ahead.

Brett Rabatin

I wanted to just go back, not to beat a dead horse but on expenses, just thinking about this year and efficiency ratio and there is obviously some give and takes with the debit card stuff, the branches, stock-based compensation. Are you guys and sort of the pros are doing any hiring or can you maybe give us little color on other money you are spending this year to continue to grow the franchise?

Kevin Hanigan

Yes. In the first quarter, we hired one new lender to start -- it’s not going to be a big line of business. So, we’re not calling it necessarily new line of business; it's rolled under our corporate banking group. And we hired somebody to start up an insurance lending program, a real industry veteran, 40 plus years in the business; he was also a regulator and I think ran an insurance company as well. We think it’s a really great hire for us, but it is probably going to be a $200 million or $250 million business over the next couple of years. The good news about the business it comes with a ton of deposits, more deposits than loans which is what attracted us to bring them on.

We were looking at some other hires and we backed off of them for various reasons. I think we had five other hires that we've recently backed off, either because we didn’t think there was a cultural fit for or the kind of deals they were underwriting fit, and in some cases, we just decided, we’re growing at mid teens with the team we've got. And we've signaled to the market mid teens. On the first quarter call, I know distinctly I said this is going to be a year we manage expenses and we achieve this 49% efficiency ratio. And again, we could clip up to 50 and that dropped back down to 49; that might be a little lumpy before we stabilize there. But we’re going to grow at mid teen in this market, we can do that with the team we've got here now. And again, we grew at mid teens with no oil and gas, and without the insurance business being started up. So, I'm pretty confident we can grow in the mid teens with the team we've got. So, for right now, we are not actively hiring. If somebody wowed us, would we? Yes. But we’re not really out there pushing it as much as we had in the past.

Brett Rabatin

Okay. Thanks for that color, Kevin. And then just want to go back to -- thinking about you mentioned the 54.9 million that you could have upgraded, just thinking about the loan categories or loan classifications and energy from here, you mentioned there could be some additional downgrades. It's not -- obviously it's difficult to know with certainty how that plays out. But if you assume that energy prices kind of drifted slightly higher from here, would that make you bullish that you are sort of through the worst of it and you could start to see decreases in criticized?

Kevin Hanigan

Yes. I think if that happens, some of our well head guys could go out our way [ph] and meet their way back in the past. And as I look at the OA [ph] in the list, I mean we are not particularly worried about anybody in there. I mean OAM [ph] is just to fined if something’s got potential weakness. So, if we drift higher in supply and demand does come into balance, which would eventually will, you’ll see some of this start to reverse. The reason I say we don’t rule out further migration is we don’t know where prices are going, number one; we are not that smart which is why we forced a lot of hedging.

And secondarily, we are in the middle of a borrowing base season. And while we kind of look at the other 40% of our portfolio from a far, using a new regulatory guideline, we are just getting new engineering reports on them. So, we are using all the engineering information on a new grading system, if you will. We will get the refinement of having new engineering reports on the new grading metrics or the new grading methods, as prescribed by the regulatory body. So, until we’re done with the borrowing base, reduce these, we have got to hedge our best. Could we have further downgrades, yes we could. Do I think there are going to be meaningfully and bad, not really. But we will get through it, and we will be talking about it at the end of the second quarter.

Operator

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

Matt Olney

Hey, could you clarify on that last point, Kevin? It sounds like you did update the entire energy loan portfolio for the new guidelines and new methodology but portion of them, it was updated for the all engineering reports, is that correct?

Kevin Hanigan

We haven't done the entire. What we did when the guidelines were finally published, what we did is we started with the most stress part of our portfolio and worked our way back. So, we didn’t get all the way through it. And then we got to a point, of course the end of March, early part of -- we said, we’re going to have brand new borrowing base information, any week or any day now; let's just get it and grade it, which is why we frankly elected not to upgrade those credits. We may also upgrade those credits under the new guidelines. But until we do it ourselves, I was not comfortable crossing upgrades and it's okay for us to have more [indiscernible]. I mean there is a lot of science to this but there is also a lot of feel to this. This isn’t just science. So, we took the more conservative task episode for this earnings call and just left them in those partial grade. We will see how they play out over the next couple of weeks and if they warrant upgrade, we will do it at that time.

Matt Olney

Okay that’s helpful. And then secondly on -- you gave us some disclosers on slide nine as far as energy loans, SNC versus non-SNC; how much of the SNCs are aging in by years versus other banks, any observation so far at the credit trends within these bucket so far in the first quarter?

Kevin Hanigan

No. Like I said, we’ve only got one past due energy loan, we don’t have a single past due commercial real estate loan. I was looking at -- every month I sit down with almost the entire lending team and our credit team and a couple of our Directors and go through our portfolios at very high level, past dues, credit migration, exceptions, collateral or otherwise, certificates. We go through good hour and hour and half worth of stuff. And as we look at it the 30-day and over past due, and we only look at the ones that are 100,000 or greater, through the entire bank that list totaled $16 million -- $16.3 million and that includes the $12 million energy yields and bankruptcy, right. So, the rest of the bank had 4.3 million and that was spend around 14 deals; six of those were on non-accrual, the largest of which is like 500,000. And most of those were cleared by the time we were talking about them. They were just -- they know they matured and we were going through the renewal process, either waiting on a tax return or financial statement or something we needed to get them renewed. No past dues over 30 days in our corporate banking group, none in commercial real estate are whapping 176,000 in our home builder group, that’s one house that needed a curtailment on it. So, as I just look at -- if you’re going to find forms of contingent, it’s going to be there, going show up initially probably in NSF charges, or frequent NSF folks. That’s using the first sign of stress and then it comes into the past dues. So when I say I feel comfortable that we haven’t any contingent, [ph] I look at this list, and it’s really a manageably small list; and the ones we’re worried about, the biggest ones, 500,000 on there. So, it just -- my saying we have comfort with where we are at doesn’t just come from me thinking I feel good, it’s from looking at statistics and deep dives in the statistics that say I just don’t see it.

Operator

Our next question comes from Gary Tenner of D.A. Davidson. Please go ahead.

Gary Tenner

Thanks. Good morning, Kevin and Mays. I had just couple of questions. I was going to ask the question about utilization rates on that reserve base lines but it looks like given the numbers that you provided there was some more in the range of kind of low 80% range at March 31st, is that right?

Kevin Hanigan

Yes. That's right. And distressed ones have very little in the way of availability. I think it's 8.8 or 8.9 million out of that 188 million that's criticized or classified in terms of availability. So, it's not like somebody is going to draw it down and bunch of it go into -- bunch of names. There is nobody that can really bring us up like you read about in the Wall Street Journal at the last week.

Gary Tenner

Right. I was actually going to ask it from a different direction, which is as you kind of ballpark I guess the borrowing base reductions that you might expect during the season of 12% to 15%, in total in aggregate, the utilization moves up quite a bit. So, as you are talking to your clients and you are thinking about -- well I guess how do you think about that for clients when that borrowing base comes down and looks like it's a lot closer to the utilization level?

Kevin Hanigan

Yes and that's a really good question. There are two sides to it, all those ones that have availability that could be drawn down; fortunately they have availability. And when we are tight like we are is that's not always great; it's great we can fund up a whole cards without coming us first. And so, the way we feel about it dependents on how well hedged they are. If they are really well hedged, right, but you get them through the next two years, they have good cash flows, so they are little collateral type. And again these are off of 65% to 70% advance rate. So, it's not like there is not enough collateral there and other things that might be valuable that if we don’t give value to. But if they’ve got the cash flow and they’re all stored on collateral, it’s still not going to be an impaired asset because we've got cash flows. So, it all depends on how well hedged you are and how much time you've got to have prices recover, which is the whole purpose of hedge. Hedging doesn’t add a whole lot of value to PW9 values or our loan values, it just protects you for a period of time in times of extreme price rise, which is exactly what we’re encountering now. And maybe that's why we feel little more comfortable is because we have so much of the portfolio hedged. And while it's not all that big of a number, it’s a big number on the gas side; on the oil side it’s not that big of a number. The average prices for this year over 70 bucks. That's a nice cash flow coming into our -- even our stress borrower is benefitting from those nice cash flows.

The guys who are problem credit, going into bankruptcy, the issue there was high leverage, little availability and no hedge. That’s a deal that ends up in bankruptcy, it's exactly where it is. And I'm not particularly worried about it because we’re so well hedged. If hedges roll off and they will, and even they roll off, keep putting on new hedges today but they’re putting on in the 40s, not the 70s. So, those cash flows are growing the transition to worse prices if we don’t have a price recovery over the course of the next year.

Gary Tenner

Okay. I appreciate the color on that. And then just to move over to your comments on the branches and those leases that are expiring. Did you say each branch that you were to close the annual basically expense savings would be 750?

Kevin Hanigan

Yes, that’s between bricks and mortar and salaries and most guys have pretty regular turnover in the retail systems. So, most of those people will bill in spots what might be available elsewhere in the company but it's the basically the bricks and mortar and a couple of people.

Gary Tenner

Okay. And then as you think about sort of redeploying that overhead or the expense elsewhere, is this a good time to acquire talent in your market, given your relative strength maybe compared to some other banks; you talked about M&A a little bit but how about just kind of talent and producers?

Kevin Hanigan

Yes. Again, we probably have opportunities to add but first we’re growing pretty strong, 16% annualized in the first quarter and we've got some other asset classes that are going to probably contribute to the second part that being oil and gas and that being insurance. But I am confident that we’re probably doing oil and gas and I'm really confident we’ll do an insurance deal or two. We probably have tapped [Indiscernible] on that. We are protecting the guys we have because all 50 of us that started the legacy deal together a year or 15 months ago, we’ve added 8 or 9 folks to that. I want to keep those 59 folks. When you think about the movement of people now, especially for those banks like us that may attract people with a small amount of equity through the form of options for a nice producer and all our stocks were down, you also have to think the folks who’ve got stock at 23 or 26 are so far in the water, it’s not as much going to tie to them as it used to be. So we’re hugging our team right now and we want to keep them. And if we can grow mid teens and solidly mid teens and we are comfortable with that, we are less focused on adding big jobs in town. We got to manage our capital position as well and we are going to leverage it pretty well just by growth. And we have got this whole deposit issue, right. I have got to make sure we don’t get too far ahead of stripping our coverage for deposit. So a combination of those things has got us probably not adding a whole bunch of tech new talent this year. And managing our expense line which is why we are probably more comfortable in that although we can achieve this high 40s efficiency ratio.

Operator

[Operator Instructions] Our next question is a follow up from Michael Yang of SunTrust Robinson Humphrey. Please go ahead.

Michael Yang

Hi Kevin you may have kind of just answered this, but on the capital front, just wanted to see your updated thoughts on the share buyback? Now that the stock is up at 23 that was kind of your cutoff before and then last quarter you were talking about not buying back shares until you felt like the market would give you credit from higher oil prices. So just kind of wanted to see where we stood in that landscape at this point?

Kevin Hanigan

Yes, we didn’t buy anything in the first quarter, so obviously the price was set well enough that we didn’t. We talked about managing capital and did have a tonne we felt to dedicate to that, so we viewed it more as putting a floor under the stock price and we will see where the price goes from here and whether we trigger the four at some point this quarter or next. But again it's not a bad time to be hustling capital for opportunity, it really is not. This oil thing going to turn around and there is going to be lots of opportunity for banks who’d run a really good shop and I think I have put us in that path. Do we still have to prove ourselves in oil and gas I guess yes we still do, do we still have to prove ourselves in Houston real estate, I understand that we still do. I believe strongly we will and we will be an advantage player coming out at the other side. So I kind of like to have a little excess capital going into the late innings of this down turn.

Operator

This concludes our question-and-answer session I would like to turn the conference back over Kevin Hanigan for any closing remarks.

Kevin Hanigan

Great I appreciate you all joining us, a good call today. I feel good about the company and the earnings capacity of the company. And I think that’s because of what we do. The asset classes we focus on and maybe nobody likes to be defined on what they don’t focus on, but sometimes people have to be reminded of what we don’t do. So the reminder for today was we don’t do oilfield services, we don’t do much in the way of second lien lending, we are not doing anymore second lien lending. We don’t do construction for the most part, our commercial construction portfolio, land and construction commercial is a whopping $85 million, this is almost an $8 billion footings company that’s really small, why is it small, it could have a really high loss given default in tough times.

So our story is much about the things we avoid as it is about the things we do, right. We just stay away from high loss given default asset classes, Class A office we do Class B, when I say multifamily we do B and C. So I hate to define us by what we don’t do sometimes, but it is just as a reminder there is a lot of things we don’t do which is why this company has managed through a lot of cycles in the past with really low loss within defaults. Are we perfect at it no we are not but I just thought I’d fill the reminder out there. With that again we appreciate you all joining us on the call today and look forward to seeing you all throughout the quarter and answering your questions as they come in. Thanks.

Operator

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

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