Green Bancorp's (GNBC) CEO Geoffrey Greenwade on Q1 2016 Results - Earnings Call Transcript

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Green Bancorp, Inc. (NASDAQ:GNBC)

Q1 2016 Earnings Conference Call

April 28, 2016 05:00 PM ET

Executives

John Durie - Executive Vice President and Chief Financial Officer

Manuel Mehos - Chairman of the Board

Geoffrey Greenwade - President and Chief Executive Officer

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

Analysts

Brad Milsaps - Sandler O’Neill

Michael Young - SunTrust Robinson Humphrey

Emlen Harmon - Jefferies

Jon Arfstrom - RBC Capital Markets

Brady Gailey - Keefe, Bruyette & Woods

Preeti Dixit - J.P. Morgan

Kevin Fitzsimmons - Hovde Group, LLC

Operator

Greetings and welcome to the Green Bancorp First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, John Durie, Executive Vice President and Chief Executive [ph] Officer. You may begin.

John Durie

Thank you, operator, and good afternoon, everyone. We appreciate your participation in our first quarter 2016 earnings call. With me today are Manny Mehos, Chairman of the Board and Chief Executive Officer of the Company; Geoff Greenwade, President of the Company and Chief Executive Officer of the Bank; and Donald Perschbacher, Corporate Chief Credit Officer of the Company and the Bank.

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

Before we begin I want to remind you that many of our remarks today contain forward-looking statements based on current expectations. Please refer to Slide 3 of our earnings slide deck as well as our fourth quarter 2016 earnings press release and our other public filings including the risk factors in our 10-K where you will find factors that could cause actual results to differ materially from these forward-looking statements.

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

Manuel Mehos

Thank you, John, and good afternoon, everyone. We appreciate your time and attention today. Following our comments, we will open the call to your questions.

Turning to Slide 4, we reported first quarter net income of $0.05 per diluted common share or $1.8 million after taking a $16 million provision for loan loss. We recorded $9.2 million in net loan charge offs during the quarter, primarily related to one energy production credit that we have discussed in prior quarters. A second energy production credit continues to carry a large specific reserve. This loan was effectively assumed this month by a new operator and we are expecting to see improved performance on the underlying collateral as a result.

From Slide 5, our core performance for the quarter was strong with pre-tax, pre-provision adjusted net income of $19.3 million, compared to $19.7 million in the fourth quarter of 2015 which include securities gains and significant accretion of purchase discount on the Patriot loans.

The core earnings power of the bank has grown substantially as a result of the scale and efficiencies that we have achieved through the Patriot acquisition as well as the solid organic growth delivered by our portfolio bankers. We will continue to execute our strategy of building the bank through both organic loan growth and disciplined acquisitions. That said we have clearly been impacted by the challenging energy cycle and the duress that it is causing throughout the oil patch.

As we have discussed on previous calls, we have been taking proactive steps to reduce our energy exposure, which includes both E&P and oilfield service credits. It is now clear that the uncertainty in our energy book has created a temporary roadblock to the near-term execution of the strategic plan that we have consistently articulated. It is our belief that as the economic cycle continues to play out in Texas, there will be both organic growth opportunities as well as acquisition candidates to consider.

In order to participate in these opportunities, we have made the decision to accelerate the removal of the uncertainty created by our energy book, regardless of the risk rating as well as some of our other classified assets. To successfully accomplish this goal, we have created a strategic initiative that we are calling the Managed Asset Reduction Strategy or MARS for short as described on Slide 6.

We have formed a dedicated team to manage the execution of this plan and efforts are in place today which are already producing results. The team is led by Donald Perschbacher and the collective experience of our management team in prior adverse cycles will be invaluable.

Our objective is to substantially reduce the uncertainty created by the energy book over the balance of this year. This uncertainty is not only overshadowing the core earnings power of the bank and ultimately our valuation, it is also impacting our ability to successfully execute our strategic plan.

When Green Bancorp was formed in 2006, we believed there was a terrific opportunity to build a very valuable franchise in major Texas metropolitan markets. Ten years later, we are even more confident in our strategy and our opportunity to build a premier Texas-based bank exceeding $5 billion in assets.

We see the MARS plan as the best strategic approach to position the bank to continue with our organic growth and return to opportunistic M&A. Importantly, we believe our existing capital reserves, purchase discounts on acquired loans and core earnings are sufficient to fund our MARS initiative. Although 2016 earnings will be negatively impacted, we believe a substantial reduction in energy and classified assets resulting from the strategy will position us to continue all aspects of our growth plan beginning in early 2017.

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

Geoffrey Greenwade

Thank you, Manny, and good afternoon, everyone. As Manny touched on, we are taking a deliberate and aggressive approach to managing the current uncertainty created by our energy portfolio. We have a formed a dedicated team of eight workout professionals reporting to Donald Perschbacher, our Corporate Chief Credit Officer, who have the responsibility of managing the MARS portfolio as their sole function within the bank. This portfolio includes all of our energy related loans as well as other classified assets.

Our team will take a multi-faceted approach to reducing the portfolio by utilizing proven management and disposition techniques. This strategy is familiar to members of our management team who have significant workout experience from prior cycles. We are confident that we have the right team in place with the necessary experience to successfully execute this strategy and navigate the headwinds that we’re currently facing.

At this point, I would like to spend a few moments reviewing our core results which continue to meet and exceed our internal expectations with the principal driver being the scale and operating efficiency achieved following our acquisition of Patriot. Through the first quarter we have completed the systems integration and brought all of Patriot’s customers on to our platform. Attrition has been in line with our expectations as our new customers and bankers appear to be pleased with the service and execution that we have delivered.

Additionally, we successfully reduced the last of the targeted expenses and stabilized our expense run rate having achieved our goal of reducing Patriot’s core noninterest expense by 40% as measured from the first half of 2015. Looking forward, the Patriot acquisition provided the necessary scale in the Houston and Dallas markets that allows our bankers to more effectively compete and gain market share. Another benefit of our increased scale from the acquisition is the further leveraging of our core infrastructure. Our first quarter results are evidence of this as we achieved a 49.75% efficiency ratio, excluding one-time acquisition related expenses.

Slide 7 shows our combined team of bankers and relationship managers whose sole responsibility is business development. Although we are now out of the business of making energy loans, we are not wavering in our commitment to provide credit and banking services to strong small and middle market companies doing business in our target markets. A side benefit of the MARS asset segregation has been to transfer the enhanced monitoring requirements for the designated credits from our bankers to the MARS team which will enable our bankers to focus on their primary strength, building solid banking relationships.

Turning to Slide 8, total deposits as of March 31st were $3.1 billion, which is a modest decrease from the fourth quarter’s level. Given our large number of sizable deposit accounts, we can see some volatility in deposits quarter to quarter. We continue to enhance our deposit initiatives to drive core deposit growth which includes promotional rates on time deposits and consumer and corporate money market accounts. Additionally, we have revised our 2016 portfolio banker incentive program to further emphasize deposit growth. We are pleased with the initial response to these initiatives as deposits have rebounded strongly in April and are currently up $113 million from quarter end.

Turning to Slide 9, total loans as of March 31st was $3.2 billion, representing a 5% annualized increase from the fourth quarter. Net loan growth for the first quarter was $38 million from the linked quarter. We remain disciplined with respect to customer selection and pricing and continue to see resilience in the many industry sectors, not directly tied to energy.

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

Donald Perschbacher

Thank you, Geoff. Good afternoon everyone.

From Slide 10, reserve based E&P balances were down $19.6 million. At March 31, 2016, reserve based loans totaled $111 million or 3.5% of total loans. And oilfield service loans totaled $166 million or 5.3% of total loans. Our combined energy exposure is now 8.8% of the total portfolio.

From Slide 11, non-performing assets increased to $77.5 million or 2.01% of period end total assets at March 31, 2016 compared with $57.2 million or 1.51% of period end total assets at December 31, 2015. The net increase is evenly split between energy-related and Patriot migrations.

Classified assets have experienced an upward trend from our historically low levels due to increases from the energy book and the addition of adversely classified Patriot loans as a result of our continued review of this portfolio. Classified energy loans currently represent approximately 75% of our total classified loans. The Patriot increase was not unexpected and we continue to believe the portfolio will perform in accordance with our original expectations.

First quarter net charge offs were $9.2 million, which included an $8.9 million partial charge off on a troubled E&P loan. We recorded provision for loan losses of $16.0 million in the first quarter of 2016. Specific reserves increased $7.5 million of which $6.2 million related to E&P loans. General reserves increased $8.5 million under our existing allowance methodology, driven by loan growth, increases in classified loans, changes in economic factors and an increase in our general reserve factor related to historical losses.

Our allowance for loan losses was 1.25% of total loans at March 31, 2016, compared with 1.05% of total loans at December 31, 2015. At March 31, 2016, our allowance for loan losses was 1.91% of total loans, excluding acquired loans and our allowance for loan losses plus the acquired loan net discount to total loans adjusted for the acquired loan net discount was 1.96%. The total reserve on our energy loan book has increased to 7% due to additions to general and specific reserves even after taking an $8.9 million charge off on the previously discussed E&P loan.

As Manny and Geoff have discussed, we have put into place the MARS initiative to reduce the uncertainty in our balance sheet stemming from our energy exposure. We have assigned the entire $277 million energy portfolio as well as other classified assets. We have already implemented this new management strategy with some early successes thus far.

I’ll now turn the call over to John.

John Durie

Thanks, Donald. Turning to Slide 13, for the quarter ended March 31, 2016, noninterest income totaled $4.2 million. Noninterest income reflected a growth in customer service fees from our treasury management initiatives, continued strong revenue from the sale of the guaranteed portion of government guaranteed loans and a renewed interest in our interest rate swap program as borrowers see the advantage of locking in long term rates through a swap. As we have previously discussed, we believe ongoing noninterest income will run at approximately $3.5 million to $4 million per quarter throughout 2016.

Turning to Slide 14, for the quarter ended March 31, 2016, noninterest expense totaled $19.5 million, which included $390,000 of acquisition-related expenses, primarily reflecting the final round of Patriot transitional employees exiting. Looking forward, we believe noninterest expense will run at approximately this rate through 2016, which is slightly higher than the original guidance due to expenses associated with the MARS initiative.

Turning to Slide 15, net interest income for the first quarter was $34.2 million and our net interest margin was 3.87%. This compares to $35 million and 3.92% in the fourth quarter. The company remains well positioned to benefit from further interest rate increased. Net interest income for the quarter includes approximately $3.6 million in net accretion of the purchase accounting valuation allowances on loans, time deposits, borrowing and subordinated debt.

At March 31, 2016, the net accretable purchase discount on loans was $9.2 million and the accretable mark on time deposits was $3.6 million. Due to the maturity profile of the loans and deposits, the accretion will reduce over time. Accordingly, we continue to believe our net interest margin should run between 3.65% and 3.75% through the balance of the year. We are also continuing to forecast $130 million to $140 million in net interest income in 2016.

At this early stage, it is difficult to quantify the impact that the MARS program will have on our 2016 net income. We will manage the company to improve asset quality and reduce the assets, presenting the most uncertainty with respect to our future results and our ability to execute on our strategic plan.

As Manny indicated, we believe our existing capital, which exceeds regulatory guidelines, specific reserves of $13 million, PCI discount of $14 million and adjusted pre-tax, pre-provision income projected to be $18 million to $19 million per quarter are collectively more than sufficient to fund our MARS initiative. In fact, we expect an improvement in our total risk-based capital ratio as the strategy plays out.

Lastly, the company repurchased 178,000 shares at an average purchase price of $7.04 per share in the first quarter and our $15 million share repurchase authorization remains in place.

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

Manuel Mehos

Thanks, John. To conclude, the core bank continues to perform well. It is the overhang from the challenging energy market that has overshadowed that performance and impeded our ability to execute our long-term strategic plan of building Green Bank into a very profitable and valuable bank with assets in access of $5 billion. We believe that the MARS initiative is the best strategic approach to reposition the bank to successfully execute our plan in order to maximize shareholder value.

Operator, please open the line for questions.

Question-and-Answer Session

Operator

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

Brad Milsaps

Hey, good afternoon, guys.

Manuel Mehos

Hey, Brad.

Brad Milsaps

Manny, I guess I’ll go with the MARS program, I know it’s early on, but how can you think about how to measure your success in the program this year, is it going to be looking at total outstandings at the end of the year relative to charge offs? I guess just probably getting my arms around what you guys are thinking in terms of where you can reduce the energy book and where it can be at the end of the year? How that’s going to affect the overall growth?

Manuel Mehos

Well, Brad, I mean, when we start by saying, this is an initiative for the energy book and you know we are exiting the business. We are going to be focusing on reducing that hopefully to zero. I mean it’s hard to say how close we’ll get by year end but that’s our goal. We’ll also likely include some classified assets in there to reduce our classified book, to exit. But by the end of the year or into next year, it’s really early to try to predict the result of that as far as any losses or further provisions. But as I said before, we have adequate capital and we have adequate earnings, the goal is to get it down flat. In terms of footings at the end of the year, we earlier had said we are looking at loan growth around 8%, I think we have 5% in the first quarter. If we’re successful with MARS, you can do the math, but that would leave us about flat. So on footings, year-over-year, if we’re able to bring the energy book all the way down close to zero and remove some of the classifieds.

Brad Milsaps

Okay. So maybe a question for John, if you’re flat on loans, your accretion is probably coming down a bit, you still feel like you can attain these pre-provision numbers and NII numbers you’re talking about?

John Durie

Yes, Brad, we feel good about the $18 million to $19 million pre-provision number. In terms of the margin, there’ll be some positives and some negatives. Clearly as we go through this, we’re going to use rate as a tool to help encourage some of our borrowers to move and so we could see some increase. And obviously getting rid of the NPAs will be a positive to the margin. So we think that expense associated with the initiative is probably about 525 [ph], so we think we can maintain that. What I like about a 50% efficiency ratio is that I only have to remember one number, so we can maintain the $19 million pre-provision number and about a $19 million [indiscernible].

Brad Milsaps

Okay, great. And last question and I’ll hop back in the queue. Can you give us the total classified number at March 31? I’m sorry if I missed it.

Manuel Mehos

Let us get that and come back to you, Brad.

Brad Milsaps

Okay, great. Thank you guys.

Operator

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

Michael Young

Thanks. Wanted to see if we could talk a little bit about the larger charge off this quarter, just curious, you know kind of the total loss rate on that credit and is that fully resolved at this point and out of the bank?

Donald Perschbacher

Hey, Michael, this is Donald. The credit is still on our books. It’s been charged down substantially based upon the underlying collateral. We’re still working through with that borrower. We’re trying to come up with a satisfactory resolution. Relative to the overall credit, it was a fairly large [indiscernible] talking about in prior quarters.

Michael Young

Okay. Can you give us an update where any of the kind of the negative migration this quarter, how much of that was from like exam or OCC guidance, etcetera, versus just your own downgrade in your book?

Manuel Mehos

There wasn’t any that was really related to sheer national credit or regulatory downgrades from that aspect. The new OCC guidance was certainly taken into consideration but our own methodology is pretty consistent with that guidance. And so any downgrade migration is really just in the ordinary course of our monitoring of the portfolio and review and not only just energy loans which get lot of scrutiny but the rest of our portfolio in our ordinary process.

Michael Young

Okay. Just last one for me if I can, then I’ll set back. Don, can you give us a little bit of perspective on what do you expect to play out from a provision perspective this year with the MARS initiative. Should we expect kind of things to be accelerated in the first half? I know you guys don’t do the seasonal borrowing base redeterminations but they’re ongoing, so is that less of a catalyst to higher provisioning next quarter, just hoping you can take through some of the puts and takes there.

Donald Perschbacher

Yes, Michael, the provision is really going to be a function of the timing on disposition of these assets and what the loss will be as we go through the portfolio. We really can’t put a number on it today as we’re going through the portfolio with the team and really trying to get a sharp pencil on what that number might be. So provision will be elevated, net income will be down, but we’re not prepared today to put a number to that.

John Durie

And Michael, this is John. With respect to borrowing base redeterminations, more than half of the portfolio is in process right now. We’re going through that. Again, the problems that we’ve talked about in previous quarters continue to be the same ones that we’re thinking about. The rest of the portfolio continues to perform as we expect it to. And like I said, we’re going through redeterminations now on half in terms of numbers of borrowers that probably takes up the bulk of the dollars will get covered by that. I don’t think that where we sit today from a price deck standpoint compared to when these were last done, we’re going to see price deck changes that are going to cause an impact in those redetermination and really come down to production volumes. And we’ve seen borrowers that have been successful in increasing production in this environment. So too soon to tell but we’re in the process of all that right now.

Michael Young

Okay. Sorry, one last one, just on the oilfield services side, do you have all the year-end financials for your oilfield services clients? Or can you give us kind of a qualitative guesses, how much is reflected?

Geoffrey Greenwade

I don’t want to say we have all of them because there may be one or two that we’ve missed, but we’ve been pretty strident in following up with all those customers to get that, to review their financial condition. And all of that, for the most part, is reflected in our 3/31 [ph] numbers. I think what we saw is probably no different than what everybody else saw. Fourth quarter was a difficult quarter for a lot of oilfield services companies and it reflected that. But again, I think that’s taken into account in our 3/31 [ph] numbers.

Michael Young

Okay, great. Thanks.

Operator

Thank you. Our next question comes from the line of Emlen Harmon with Jefferies. Please proceed.

Emlen Harmon

Hey, good evening.

Geoffrey Greenwade

Hey Emlen.

Emlen Harmon

You guys had mentioned earlier that, I guess you weren’t ready to talk about just what the profitability impact of the MARS actually was on through the rest of the year, but excluding provision expense, could you give us a sense of what MARS, I guess with the energy book in general, what the contribution was for earnings in the first quarter?

John Durie

Yes, Emlen, a way to look at it would be $277 million in outstandings and call it a 3% contribution.

Emlen Harmon

Is the 3% contribution as the percent of the balance sheet?

John Durie

No, not as percent of the – but call it a 3% margin on that book of loans. So if you’re trying to back out how much earnings we’re going to lose as a result of exiting the portfolio, it’d be about 3% of 277.

Emlen Harmon

Got you.

Geoffrey Greenwade

Yes. And Emlen, that would be over a period of time, so we’ll really be replacing those loans with other loans. And I think that leads to what Manny was saying earlier about we expect this year, if we’re successful, moving those off as quickly as we would like to, will be flat loan growth this year.

Emlen Harmon

Got it. And so the 3% includes any kind of fees that are running either through NII or the gain line as well?

John Durie

Yes, there’s not a lot of fees running through NII and so…

Manuel Mehos

It’s more of a net interest margin.

John Durie

About 42 million of that is NPA, so that’s why I’m using a 3%. It’s probably a 350% margin but 3% is probably a good number inclusive of the NPA.

Manuel Mehos

So that’s a good point. If we replace those with performing loans, we actually have a benefit to our net interest margin and profitability.

John Durie

Right.

Emlen Harmon

Right, got you. And then as we think about other assets that potentially get added to that MARS book, I mean should we effectively think that it’s some portion – or some subset of the other 25% in the classified portfolio. Is that the way to think about that?

Manuel Mehos

Sure, absolutely. I mean, the strategy, the technique, the skills that this team has, we’re going to use those where it is possible to reduce classified assets. But obviously, again, the primary focus is energy but to the extent we have capacity we’ll use those same resources.

Geoffrey Greenwade

Yes, the classified assets that are not energy is, how should I say, it’s normal course of business. You take energy out, it’s a fairly normal level. In fact it’s a low level.

John Durie

And those are already – most of them are being handed by special asset person to that anyway…

Manuel Mehos

With that team in place, they’re going to be actively disposing the loans or whatever and however they resolve them, there’d be various methods. But they might as well be working on the classifieds while they are at it. It’s really what it comes down to and we’d like to get that book even lower by year end or it’s even below normal level so.

John Durie

Yes, Emlen, back to Brad’s question, total classifieds were 199 million at the end of the quarter and that does not include the PCI – I don’t have that number exactly in front of me, it’s about 40 million net.

Emlen Harmon

Got it. And then I just in terms of, I know you guys are exiting the energy business this year. You operate in a market where that’s obviously a large part of the economy. Should we think about you guys are just kind of taking a pause in the business for some interim period, what’d get you re-involved in the energy business at some point in time?

Manuel Mehos

Yes, I think from an upstream standpoint, being oil and gas production and oilfield services when we exit, I think we’re going to permanently stay out of it. Because in Dallas, Houston, Austin, our major markets, there’s plenty of other loan business to participate in. It doesn’t have the volatility of this commodity price.

Geoffrey Greenwade

We from a strategic plan standpoint, having a product sector that relies on a commodity that that’s volatile which has proven to be as we’ve all seen in the last two years, it doesn’t fit with our strategic plan any more. We want to get to profitability and we’ve always talked about some sort of exit down the road or merger of equals and a volatile commodity like energy doesn’t fit. So it’s – we’re better off pursuing the rest of our portfolio which is doing very well.

Emlen Harmon

Okay, thanks for taking my questions.

Operator

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

Jon Arfstrom

Hey, thanks. Good afternoon guys.

Manuel Mehos

Hey Jon.

Jon Arfstrom

Just more MARS question. How large are the non-energy classified right now that you would consider in the MARS book? Is that the 199 that you talked about John?

John Durie

Well, as Donald said, in the comments, about 75% of that in energy, so 25% of that we would consider for MARS and then add the PCI loans on top of that. But we’re going through those on an asset by asset basis right now and don’t have a solid number for what the addition is on top of the 277 energy. The job one is energy and that’s where we want to focus the team and we think they’re using some techniques and some skills that we could certainly use on the other book but job one is energy.

Donald Perschbacher

And the energy book is not all classified, there is some good loans in energy, so it won’t all be focused on classified, but ultimately the goal is to include that. And you can do the math. I mean if we have 199 and 75% is energy, so we – those will all be subject to review by that team and possible disposition.

Jon Arfstrom

Okay. In terms of additions to the book, is this a static book, is it fluid? Meaning, it could grow over time.

Manuel Mehos

That’s a great question Jon. Our intent is once we get through the final identification of the adds, we’re going to lock down the book and just measure our result against the portfolio that we’ve identified this quarter.

Jon Arfstrom

Okay, and what type of information you plan on giving out to the investors in the future. Is it more detailed information on the performance of the portfolio reserve against that loss potential, what do you plan on giving us?

Manuel Mehos

Jon, that’s a good question. I think what – we need to talk about that but we want to be very transparent with the market on what we’re doing. And we will certainly give you what the portfolio is, what the dispositions have been and what the losses have been. And we would want to be as transparent as possible with what we think future losses could be. Sorry, we’re kind of being close to the best on it today, but we just need to get more of the information from the team processed.

Donald Perschbacher

Hey, Jon, it’s Donald, but you know we’ve been reporting energy numbers quarter to quarter in terms of our E&P and oilfield services and that’s the benchmark that’s going to be the easiest to measure the success over time that we’ll be sharing with everybody.

Jon Arfstrom

Okay. A couple of more things but these probably get a little tougher. I guess just an editorialization [ph] whatever the word could be, I think the non-energy stuff is probably the part that’s going to bother people the most if we see more flow in that’s non-energy because I think everybody understands that energy might be a distraction. But I think it’s the other stuff that people will also be interested in if that makes sense in terms of the flow in and out.

Manuel Mehos

These are falling in the classified?

Jon Arfstrom

But you’re saying that classified loan as MARS and it doesn’t count because of the special program. I don’t think people accept that but they will accept the fact that you might take some big losses on energy but you’re exiting the business. Does that make sense?

Manuel Mehos

I think I know what you’re asking. It makes sense. But there’s no intention of taking bigger losses on anything really. I mean, it’s going to be very measured. On the classifieds, we don’t see any unusual migration classifieds because of the Patriot that was a merger. We knew there were going to be some increased classifieds from that. We knew when we were doing due diligence and those all hit in the first quarter. But that wasn’t unexpected. So the classified list is not – we’re not getting migration there. If that’s what you’re trying to ask. And not from the economy if you’re saying like that. The migration has been energy and most of the Patriot loans that ended up that we reclassified after the merger in the first quarter. It takes that long to get them to the right classification, a lot of more energy related and also service related. And that part is 75%.

Donald Perschbacher

Yes, Jon to us, this is very energy related initiative.

Manuel Mehos

Yes, that’s right and that’s it. Don’t take it as meaning that we see migration there, we really don’t, other than energy.

Jon Arfstrom

Okay, that helps. Another tougher question and you may laugh this off, but when you talked about being able to handle this portfolio in the disposition of potential problems, you mentioned reserves, marks and pre-tax, pre-provision, but you also mentioned capital. You have excess capital, but when I look at it if we see it $70 million to $80 million in pre-tax, pre-provision plus the marks plus the existing reserve, did you say capital for a reason? I guess this is my question.

Manuel Mehos

You’re hitting on all cylinders today Jon. We didn’t put number with capital because we don’t think we’re going to need to use any of the capital cushion that we have today. We have $22 million in excess capital at the bank level and $29 million in excess capital over 10% risk-based capital at the holding company. We don’t think we will need that at all to do this initiative. We certainly don’t think we would need to raise any capital, but we think between the pre-tax, pre-provision and the marks and reserves, we’ve got more than enough and we do expect the risk-based capital ratio to build as we see this play out.

Jon Arfstrom

Okay. Now, we’re getting somewhere. I appreciate that. In terms of framing it. I mean what you guys have to understand is we’re in the dark here, right? And understand how deep is the hole, what was the tipping point, things like that, is I think what everybody is trying to get to.

Manuel Mehos

It’s really simple, we’re just getting out of the energy business, that’s probably what we’re telling you. And the portfolio is no worse than we’ve described it in the past. We just can’t anticipate what kind of haircut we’re going to have to take to get out of the business. That’s really what you’re hearing. And we don’t even know. But we don’t expect it to be huge and like John said, earnings and reserves are what will handle it. And there’s nothing more magic to it than that.

John Durie

Yes, Jon, our tipping point was duration of time that the downturn has been and how much a distraction and what it’s affected our stock price. I think we look at that and go – we need to remove the distraction.

Manuel Mehos

Yes, we’re trading along with WTI [ph]. It’s not part of our strategy. We need to improve the valuation of our stock and start doing deals again. And that’s really what this is all about.

Jon Arfstrom

Okay. Good. And then just last question, just examples of successes thus far, maybe Donald what you talked about, give us some examples of that.

Donald Perschbacher

Well, I would say without hesitation, we’ve used some of the same strategies that we expect to use going forward to remove some of the loans. And you think about we’ve had some reductions in the E&P book, we’ve done some small little note sales on a one-off basis, we’ve gone and done some substitution of collaterals and obligors with some people to get it upgraded and / or out of the classified status with any of those kind of creative things. And so again there’re not a lot because we just did get started. But with those kind of things we’ve actually had some success with early on but before we really formulated the team.

Jon Arfstrom

Alright. Thanks for…

Manuel Mehos

And we sold a significant amount of ORE in the quarter as well.

Donald Perschbacher

And yes, we’ve also done that as well.

Jon Arfstrom

Okay. Thanks for taking the questions, appreciate it.

Manuel Mehos

Sure.

Operator

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

Brady Gailey

Hey, good afternoon, guys.

Manuel Mehos

Hey, Brady.

Brady Gailey

So just to make sure I have these numbers right, the amount of energy NPAs at the end of Q1 was $42 million and the amount of energy classifieds was around $150 million. Are those correct numbers?

Manuel Mehos

Correct.

John Durie

Yes.

Brady Gailey

Okay. And I guess what you all were saying; I mean you have a 6.6% reserve against the energy loans that you’ll be selling. And as of today that’s your best bet on what it will take to move those loans out. But as you actually go through the process, that number could move higher and if the cost is more than $80 million you’ll just have to provision more to get those loan out.

Manuel Mehos

That’s correct Brady.

Brady Gailey

Okay.

Manuel Mehos

Yes, of the reserve we got, about 12.8 specific reserves and about 586 [ph] in general reserves. So one of the positive to this is as we get rid of the energy book, some of the historical losses related to energy will flow out of our analysis.

Brady Gailey

Okay. And do you happen to have the numbers of energy NPAs and energy classifieds at the end of 4Q just so we can gauge when quarter changed?

Manuel Mehos

We’ll try to get that for you before the end of the call, Brady.

Brady Gailey

Okay.

John Durie

I mean I can tell you that overall NPAs went up quarter to quarter about $20 million. That changed about – half of that change was energy related and about half were Patriot related changes.

Brady Gailey

All right.

John Durie

Roughly $10 million in each category.

Brady Gailey

Okay. And then if you look at the reserve and if you back out all the energy-related reserves and if you look at kind of the non-energy loan loss reserves, looks like you all have built that ratio pretty notably. Last quarter it was 54 basis points, at the end of the year, it now 74 basis points. You’re talking about how half of the new NPAs are not energy related, although they are related to Patriot. So I’m trying to ask, are you all seeing any worsening conditions outside of energy there in Houston?

Manuel Mehos

No, we’re not seeing and I’m sure that anybody is really seeing it when you listen to – talk to the peer banks. The things that were downgraded, the things that are risk grading is very dynamic and nothing seems out of the ordinary for us in terms of that we would think it was any kind of contagion.

John Durie

When you take Patriot out of that movement, we had very little legacy from Green Bancorp and -- they got downgraded but it doesn’t mean that need specific reserves that just their legacy portfolio and we saw that almost a year ago. So really in terms of the economy where everybody is asking the same thing and we’ve heard some of our peers comments on it. We’ve pretty much echo what they’re saying and it’s -- other than a couple of sectors like office building and maybe class A apartments and that’s only because there several high rises being – it’s still under construction in Houston. We are not seeing weakness in the portfolio; we have to see some of the other categories dropping in Houston. So we’re still being cautiously optimistic of the economy because that how we feel right now. We’re just not seeing it.

Brady Gailey

Okay. And then the last one for me, which is not related to energy but what were the outstanding mortgage warehouse -- at the end of the quarter and where were those at the end of the year?

John Durie

Year-end, end of March they were fairly flat and approximately 150 million to 160 million.

Brady Gailey

Okay, great. Thanks guys.

Operator

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

Preeti Dixit

Hi, good evening, everyone.

Manuel Mehos

Hey, Preeti.

Donald Perschbacher

Hey, Preeti.

Preeti Dixit

Most of my questions have been asked, but Donald, sorry if I’ve missed it, do you got mark on the Patriot energy loan is in addition to the 7% reserves that you guys have on the energy book today?

Donald Perschbacher

Preeti, none of the PCI loans in the Patriot portfolio are oilfield service loans, so there is not a specific PCI mark on any of those. There is kind of a general mark up of about 1.3% -- excuse me, general mark on the rest of the portfolio that’s sub 1% at this point after accretion but that’s not meaningful to be questioned.

Preeti Dixit

Okay, got it. And then Donald, could you give us a sense of where your energy non-accruals are probably mark today?

Donald Perschbacher

Well, the energy non-accruals are you’re talking about our specific reserves?

Preeti Dixit

Right, exactly, specific to the non-accrual book.

Donald Perschbacher

Yes, so it’s still just a very small number. I think John if I’m correct, I don’t have in front of me, it’s $13 million, $14 million, I’ll have to double check that Preeti but it’s – we had very little additional in terms of specific reserves added to those one this quarter.

Preeti Dixit

Okay, thanks, that’s helpful. And then just switch gears here John, could you help us understand what impact the December hike had on loan yields in the quarter and if you could remind us is there any hike assumption in your 365 to 375 ___ outlook.

Donald Perschbacher

Yes, I’ll take the second first. We’re assuming we’re flat with the 50 basis point Fed funds rate through the quarter, so our loan yields Preeti for the quarter, let me get one thing here, we went if you back out all of the yield adjustments related to payoffs and purchase accounting adjustments, we went from 422 at December 31st 2015 to 429 in this quarter. As you know, the 422 had a about a month of the Fed rate increase in it. And so we’re up 7 basis points. Our original projection had that at 431 inclusive of the projection, that’s muted a little bit because of the floors. We went from 14% of our loans having active floors to 10% of our loans having active floors. And obviously repricing during the quarter, but we picked up about 7 basis points quarter to quarter.

Preeti Dixit

Okay, perfect. That’s it for me, thanks.

Operator

Thank you. Our next question comes from the line of Kevin Fitzsimmons with H Group. Please proceed.

Kevin Fitzsimmons

Hey, guys, how are you?

Manuel Mehos

Hey, Kevin.

Donald Perschbacher

Hey, Kevin.

Kevin Fitzsimmons

Just another quick tipping point question. So I hear everything you said that kind of went into it and it was the duration of the cycle, but can you help explain to us how long you guys have been wrestling with this because it does seem like a sudden change from last quarter’s call where you were talking about a $10 million normalized provisions for ’16 and then reconcile for us that since mid-February we have seen the price of oil jump pretty meaningfully and we’d seen a lot of the – maybe not necessarily you all but we’ve seen a lot of the energy exposed bank stocks jump pretty meaningfully. So I’m assuming you had the kind of take into context what your outlook on the cycle is and when you wrestled with this decision. And if you can just give us a little color there. Thanks.

Donald Perschbacher

Yes, Kevin, we’ve been wrestling with it perhaps even long time, even before the last call. We didn’t make a final determination to go forward with this program until this quarter. But one thing we make it clear and John can correct me if I’m saying this inaccurately, the $10 million normalized provision we were talking about is other than I believe as we put it and this is what it was meant to say that it was other than special any specific reserves on energy credits going forward. So we weren’t saying we weren’t guiding that we’re only going to have 10 million in provision, we were basically saying that that’s a normalized rate given our growth and everything else.

But we did say that if energy continues to creep, so to speak, we’re going to have more specific – we could have more specific provision. So that’s what you’re seeing. The other point about that is that again, these are the exact same loans we’ve been talking about the last two quarters where the provision came in. I just flipped and said 2, I said less than handful. But the point is, if not, nothing much has changed in the last six months the way we view it. In a world like that small independence as we are and prices down 70%, you’re going to have one or two that are going to take big hits and that’s what happened.

So but at the same time we’ve been discussing it internally for a while now and with the volatility like that oil prices – these are basically asset based loans and/or asset-backed loans and the commodity that is the collateral turned out to be much more volatile than any one was prepared for, particularly the small independents. And we’ve decided that because of our strategic plan we just cannot handle that volatility going forward. I know it seems a little odd, the prices are back up again and we’re still doing but that the best time to exit a business is when it’s getting stronger. Because we have no extension, we don’t needed to build our strategy. So it’s been in discussion but the final plans were laid in the first quarter and going forward we can still build this back to $5 billion very fast without energy.

Kevin Fitzsimmons

Yes, can I….

Donald Perschbacher

One of the tipping point on it was when we did the impairment analysis on the big E&P loans and the price is obviously a piece of it but operating expense is another piece of it. And the quality of the operator is another piece of it. And those things combine when we had another $6.2 million of impairment on these loans is when one of the points where we said, we’re done.

Manuel Mehos

Small independence have a hard time handling 70% price drops even when they’re hedged. Keeping those lease and more CapEx and things like that is very difficult for small independent. So you know it’s just one of those things where you learn from your environment and you make a decision to move forward because we have a strategic plan to – we need a better stock price and we need a better evaluation.

Kevin Fitzsimmons

On that point, Manny, the M&A opportunity that you brought up a couple of times, is there a certain window in your mind that you felt that, hey, there’s going to be opportunities where if we work this out and just be patient and work it out over time, we may miss that window. Is that something that kind of went into your thinking?

Donald Perschbacher

That always goes into my thinking. I hate to miss any window if the M&A activity picks up. As you know right now it’s non-existent but yes, we want to be healthy. We are healthy, but we want to be we want our balance sheet to be very transparent in terms of the risk or evaluation we want to be ready whatever that is. Hopefully it will be about fourth quarter this year or first quarter of next year, we’ve gone pass this cycle, there is little more transparency but the economy in Houston valuations are up a little bit and we went to be participating. If we don’t do this, we run the risk of not being able to participate.

Manuel Mehos

Yes, we put the energy cloud behind us before our acquirer or competitors do. It fits us at a huge strategic advantage next year.

Kevin Fitzsimmons

Okay, thanks guys.

Manuel Mehos

Thank you.

Operator

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

Michael Young

Wanted to ask the M&A question from the other side. I mean, Manny, you’ve kind of reiterated Green Ban’s strategic plan a couple of times throughout the call, so but I kind of want to know that what you’ve been through in kind of reaching the tipping point here and moving forward is there any desire to accelerate your own strategic plans or is it still $5 billion thinking about.

Manuel Mehos

Are you asking me nicely, are we going to exit early? And the answer is no. We still $5 billion plus. With the way things are now, we think that would -- we said this before; we think it would more likely occur as an MOE than it would be an outright sale. So that’s the way we view the future. And we think after going through somewhat of a junior MOE, I mean they were substantial organization and we loved that deal. I mean it was I turned out much better than we expected. I mean the earnings turned out better, the savings 40% cost saves, we want to do another we want to do more MOEs, they work really well in Texas. And we can’t do it with our stock price where it is. But the answer is no, we won’t this is not motivating us for how we exit, it does the opposite. And we need to get the uncertainty off our balance sheet. That’s really what we’re seeing.

Michael Young

Okay, thanks.

Operator

Thank you. We have no further questions in the queue at this time. I would like to turn the floor over to Mr. Mehos for closing remarks.

Manuel Mehos

Thank you, operator. And I know all this sounds a little vague and it’s new to everyone. Everyone is calling it a tipping point, that’s not even our terminology and it already has caught off. We’ve had our tipping point and it happened gradually over the last six months. For that I reiterate the same thing, the story here really is this is a bank that has pre-tax, pre-probation earnings power of 19 million plus and growing. The MARS project is going to be very difficult – it’s difficult to predict how long it will take us and what it will cost us but we have a good idea that that will be hopefully by year end or into the early next year and like we said before we have plenty of reserves and earnings to take care of it. But the objective is to get the evaluation back on our stock and get us back to us our growth plan, albeit we will be organically growing this year, we hope to start to be back in the M&A market by year end. So I appreciate everyone’s attention. Call us up with any follow up questions. We are here and hopefully we’ll have good news to report next quarter. Thank you.

Operator

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

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