Bank Of The Ozarks Inc (NASDAQ:OZRK) Q4 2015 Earnings Conference Call January 15, 2016 11:00 AM ET
Susan Blair - Investor Relations
George Gleason - Chairman of the Board, Chief Executive Officer
Greg McKinney - Chief Financial Officer, Chief Accounting Officer of the Company and the Bank
Tyler Vance - Chief Operating Officer, Chief Banking Officer of Company and the Bank
Michael Rose - Raymond James
Jennifer Demba - SunTrust
Matt Olney - Stephens
Joe Gladue - Merion Capital Group
Brian Martin - FIG Partners
Welcome to the Bank of the Ozarks Incorporated Fourth Quarter Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note, that this conference is being recorded.
It is now my pleasure to turn the call over to Susan Blair. You may begin.
Good morning. I am Susan Blair, Executive Vice President in charge of Investor Relations for Bank of the Ozarks. The purpose of this call is to discuss the company's results for the quarter just ended and our outlook for upcoming quarters.
Our goal is to make this call as useful as possible to you in understanding our recent operating results and outlook for the future. A transcript of today's call, including our prepared remarks and the Q&A will be posted on bankozarks.com under the Investor Relations tab.
During today's call and in other disclosures and presentations, we may make certain forward-looking statements about our plans, goals, expectations, thoughts, beliefs, estimates and outlook, including statements about economic conditions in the United States and globally, including the state of the current United States economic recovery and certainly economic and geopolitical risks, real estate market, competitive credit market and interest rate conditions, including expectations for further changes or adjustments in monetary and interest rate policy by the United States Federal Reserve, revenue growth, including the possibility for additional revenue growth in 2016 from reallocating overhead from less productive activities to geographies and areas of business, which may be more productive, net income and earnings per share, net interest margins, net interest income, the expected impact of recent actions intended to reduce our cost of federal home loan bank FHLB borrowings, non-interest income including service charge income, mortgage lending income, trust income, bank-owned life insurance income, other income from purchased loans and gains on sales of foreclosed and other assets, non-interest expense, including acquisition-related, systems conversion and contract termination expenses, our efficiency ratio, including our goal for achieving a sub-30% efficiency ratio, asset quality, our various asset quality ratios, our expectations for net charge-offs and our net charge-off ratios, our allowance for loan and lease losses, loan and lease growth, including growth from unfunded closed loans and growth from loans currently in the underwriting and closing processes, deposit growth, including growth from existing offices, acquisitions and other sources, growth in earning assets, changes in expected cash flows of our purchased loan portfolio; changes in the value and volume of our securities portfolio; estimated cost savings in connection with the conversion of our core banking software, the opening relocating and closing of banking offices, our expectations regarding recent mergers and acquisitions, including our expectation that such [ph] acquisitions will enhance our community banking, loan administration and other business functions provide capabilities and technology and innovation, which will be transformational to customer experiences and operational efficiency, our goals and expectations for additional mergers and acquisitions in the future; the availability of capital, changes in growth in our staff, the timing and eventual impact of the Durbin Amendment on non-interest income and expenses with regard to regulatory compliance, including the eventual impact on non-interest expense from total asset reaching $10 billion.
You should understand that our actual results may differ materially from those projected in the forward-looking statements, due to a number of risks and uncertainties, some of which we will point out during the course of this call.
For a list of certain risks that may impact any of these forward looking statements and other risk associated with our business, you should also refer to the Forward-Looking Information section of our periodic public reports, the Forward-Looking Statements caption of our most recent earnings release, and the description of certain Risk Factors contained in our most recent annual report on Form 10-K, all as filed with the SEC.
Forward-looking statements made by the company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of future performance. The company disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise.
Any references to non-GAAP financial measures are intended to provide meaningful insights and are reconciled with GAAP in our earnings press release.
Let me turn the call over to our Chief Executive Officer, George Gleason.
Thank you, Susan, and thank you all for joining our call today. In our 18-plus years as a public company, we have reported many great quarters and many great years, but we believe our work in 2015 and particularly the fourth quarter of 2015 is by far our best yet.
Of course, the year and the quarter just ended were notable for many record-breaking financial results, which Greg and Tyler will discuss short, but we believe our work in 2015 will be best remembered for how well we prepared and positioned ourselves for even greater achievement in 2016 and future years.
In today's call, we hope to give you clear insights and both of these very important elements our team's accomplishments in 2015, both the outstanding financial results and the highly strategic preparation for our future.
Let me start with a quick summary of financial highlights. Our fourth quarter net income of $51.5 million was a quarterly record, providing a strong finish to our most profitable year ever. In fact, our record annual 2015 net income of $182.3 million was a stellar 53.7% increase over the previous record annual results in 2014.
During the quarter and year just ended, we achieved both, quarterly and annual records for a large number of measures, including diluted earnings per common share, growth in funded non-purchased loans and leases, growth in closed and unfunded loans, net interest income, service charge income and trust income. Additionally, we ended the year with some of our best asset quality ratios as a public company, including our best past due ratio for non-purchased loans and leases.
Of course, 2015 was another and a long string of excellent years as evidenced by the fact that our 2015 return on average assets of 2.11% continued our exceptional record of having achieved returns on average assets in excess of 2% for six consecutive years.
As I already mentioned, our excellent 2015 results were just part of the story and we believe the strategic preparation 2016 and future years is even more important.
Let me briefly discuss eight strategic highlights. I think you will find these items to be the most helpful part of today's call.
First, we continue to intensify our longstanding focus on credit quality and conservative underwriting standards. We think this is of critical importance. Clearly, the current United States economic recovery has lasted for relatively long time, but that recovery has never been robust and has seemed to require highly accommodative monetary policies to be sustained.
From its beginning, we focused on the fragile nature of this domestic economic recovery. The relatively poor performance of many other economies around the globe and the myriad economic risks posed by a long list of global economic and geopolitical circumstances, all this has amplified our traditional focus on very conservative credit underwriting causing us to focus primarily on transactions involving great projects, strong and capable sponsors, low leverage and defensive loan structures.
You can see this focus on credit quality in a number of metrics. For example, at December 31, 2015, excluding purchased loans, our non-performing loans and leases as percent of total loans and leases were 0.20%.
Our non-performing assets as a percent of total assets were 0.37% and our ratio of loans and leases past due 30 days or more, including past due non-accrual loans and leases to total loans and leases were just 0.28%. These December 31, 2015 ratios for non-performing loans and leases and non-performing assets were our best since the third quarter of 2007, and our December 31, 2015 past due ratio was our best ever as a public company.
For our construction loans with interest reserves, which is the majority of our construction loans, we do not yet have the data compiled at year end, but at September 30, 2015, our average loan-to-cost was an ultraconservative 51% and our average loan to appraised value was just 43%.
None of us can say for sure when the next recession will occur or when the real estate cycle will turn, but for years we have tried to be very conservative in our underwriting, structuring and portfolio management and we think all that will serve us very well in terms of future economic challenge whenever they come.
Second, we carefully managed our balance sheet growth in the quarter just ended to maintain total assets under $10 billion. At December 31, 2015, our total assets were $9.88 billion. We have previously explained that reaching $10 billion in total assets will subject us to the Durbin Amendment, which will result in a loss of some interchange revenue and will also subject us to increased regulatory compliance cost.
By staying below $10 billion in total assets at year-end, we delayed the impact of the Durbin Amendment on our interchange revenue by one year from July 1, 2016 until July 1, 2017. Based on our current business volume, we estimate that the annual revenue loss attributable to the Durbin Amendment will be about $5.35 million, so our net income in the second half of 2016 and the first half of 2017 should benefit noticeably from our staying below $10 billion at December 31, 2015.
Third, quarter just ended, we sold certain purchased loans with a carrying value of $12.5 million, recognizing a net gain of $6.3 million. These sales were motivated in part by our desire to maintain our year-end balance sheet under $10 billion, and also by our desire to be defensive in maintaining asset quality. When we reviewed our portfolio of purchased loans, we concluded that these loans were among our most vulnerable purchased loans to an economic downturn.
Fourth, during the quarter just ended, we sold $167.3 million of investment securities recognizing a net gain of $2.9 million. These sales are motivated primarily by our desire to maintain our year-end balance sheet under $10 billion and to a lesser extent by our desire to reduce our investment portfolio's exposure to the uncertainty surrounding possible rising interest rates.
Fifth, at December 30, we prepaid $120 million of Federal Home Loan Bank, FHLB advances. These advances had maturities in September 2017 and October 2017 and had a weighted average interest rate of 3.80%. We initially replaced these long-term advances with over nine FHLB borrowings and during the first week of January the short-term borrowings were replaced with deposit growth.
These prepayments resulted in penalties of $6.4 million in the quarter just ended, but this should significantly reduce our cost of FHLB borrowings in 2016 and 2017 and increase our FHLB borrowing capacity, which is an important secondary source of liquidity for us.
For those of you updating your models, we now have just $40 million of FHLB advances half maturing in November 2017 and a half maturing in January 2018 and with a weighted average rate of 2.85%.
Sixth, as you know we focus intensely on efficiency and we always try to deploy our resources in the most efficient manner. In the quarter just ended, we reviewed the productivity of every lender and lending team in the company looking at production volume, quality, yield and other factors. That review results in and our decision to consolidate our stabilized properties group and its reminding servicing team and real estate specialties group and of lesser significance to eliminate certain underperforming lenders and other team members and community banking. This resulted in approximately $2.2 million in severance costs in the quarter just ended.
While other divisions of our company notably real estate specialties group and most of community banking were very successful in originating a good volume of good quality, good yielding loans in 2015 the stabilized properties group business model was severely challenged to produce the needed volume, quality and yield in the current highly competitive low yield environment for loans to its target customer segment.
Based on the significant overhead expenses attributable to stabilized properties group and the lack of satisfactory production, we made a decision to wind down the New York loan operations of stabilized properties group by December 31, 2015. The stabilized properties group Florida staff was retained in its entirety and will continue as the servicing team for that portfolio and as an important special servicing unit for other portfolios.
These actions in the aggregate eliminated somewhere between $3 million and $4 million of annual overhead expense, but you won't see any overhead reductions in our results in 2016. That is because we are reallocating that overhead to grow our team and geographies in areas of business, where we believe we can achieve much greater productivity, so we hope you will see the results of these actions and greater revenue growth over the course of 2016.
Seventh, on December 8, we issued $2.1 million shares of common stock at a price of $52.42 per share for gross proceeds of $110 million and expenses of approximately $20,000. The shares were offered to certain institutional investors in a registered direct offering conducted without an underwriter or placement agent.
Immediately following the offering, we made a capital contribution of $110 million to our bank subsidiary to support its expected growth in loans and leases. Our thinking behind this offering is probably much more obvious in light of the substantial fourth-quarter growth in both, the outstanding balance of non-purchased loans and leases and our unfunded balance of closed loans.
Later in the call, we will provide updated 2016 loan and lease growth guidance, which should provide additional clarity.
Eighth, acquisitions were an important part of our story in 2015, and our two pending acquisitions both, announced in the quarter just ended are in our opinion of particular strategic importance and value. Our pending acquisition of Community & Southern Bank, which we announced on October 19, 2015, will be our largest acquisition to-date.
Community & Southern Bank provides us 47 strategically located and highly complementary at Georgia banking offices and one Florida banking office, a large number of talented bankers, particular expertise in both, direct and indirect consumer credit and important loan operations group, two important loan and business analytics groups and numerous other team members and capabilities, which will enhance our community banking, loan administration and other business functions.
Our pending acquisition of C1 Bank, which we announced on November 9, 2015, will provide us 32 strategically located and highly complementary Florida banking offices, including offices in some of Florida's highest growth and strongest economic markets. We believe that C1's unique culture and leadership in technology and innovation will be transformational in our quest to be an industry leader in best of class customers' experiences and operational efficiency. Both transactions are expected to close in the first half of 2016.
In summary, we think the quarter just ended was remarkable, not only for its record net income but as a quarter in which we further enhanced our already excellent asset quality, further reduced our exposure to possibly rising interest rates, aborted the adverse impact of the Durbin Amendment on our interchange income until July 1, 2017, greatly reduced our FHLB borrowing costs, enhanced our secondary liquidity by bringing up FHLB borrowing capacity, enhanced our productivity by bringing up overhead from underperforming departments and reallocating them to increase our focus on more productive geographies and areas of business, raise new common equity to support continued growth and announced to strategic acquisitions, each of which provides a valuable and highly complementary branch network, many talented bankers and expertise and technology, which we expect to have significant application throughout our combined enterprise. All of which has been more excited about the future of our company than ever before and that is saying a lot.
Let me turn the call over to our Chief Financial Officer, Greg McKinney.
Net interest income is traditionally our large source of revenue as a function of both, the volume of average earning assets and net interest margin. Our fourth quarter 2015 net interest income was a record $106.5 million and our full-year 2015 net interest income was a record $382.2 million. We enjoyed a very positive trend in net interest income in each quarter of 2015, as a result of excellent growth in average earning assets, which more than offset the reduction in our net interest margin.
Of course, loans and leases comprise the majority of our earning assets. In the quarter just ended, our non-purchased loans and leases grew a record $1.08 billion. This growth was $400 million more than our previous quarterly growth record achieved in the third quarter of 2015.
Our unfunded balance of closed loans also increased by a record amount $939 million during the quarter just ended and at December 31, 2015 was a record $5.8 billion. While some portion of this unfunded balance will not ultimately be advanced, we expect the majority will be advanced. This has favorable implications for future growth in loans and leases.
Our growth in non-purchased loans and leases accelerated over the course of 2015 from $331 million in the first quarter of 2015, $456 million to $680 million, and finally $1.08 billion in the fourth-quarter resulting in record non-purchased loan and lease growth for the full year of 2015 of $2.55 billion.
In our October conference call, we introduced guidance for full-year 2016 growth in the purchased loans and leases of at least $2.5 billion. Based on growth in our customer base, our pipeline of transactions currently in underwriting and closed link and as previously discussed, our largest ever unfunded balance of closed loans, we are raising our 2016 growth guidance. We now expect growth in non-purchased loans and leases in 2016 of at least $3 billion.
On the deposit side, we have long expected to add with reasonable limits we could accelerate deposit growth as needed to fund our loan and lease growth. In the first quarter of 2015, the excess cash generated from the Intervest acquisition provided sufficient funds to support our loan and lease growth. Likewise, our pending and any possible future acquisitions maybe sources of liquidity to fund portions of our expected future growth.
In the second and third quarters of 2015, we successfully utilized the combination of organic deposit growth and several good low cost wholesale funding sources to fund our growth in a cost-effective manner.
In fourth quarter, we deployed our deposit spin-up strategy to fund our record loan and lease growth. This spin-up occurred in 31 offices and 21 cities, primarily in Florida and Texas, where capacity to raise to raise deposits is significant and we enjoy a mass complement of offices. You can see this in our $365 million of deposit growth in the quarter just ended.
As George alluded to earlier, in an effort to make sure the excess deposit growth do not force us over $10 billion at year end, we restrained deposit growth in the last half of the fourth quarter relying on short-term FHLB borrowings to bridge our funding needs.
During the first week of January, we loosened restraints on deposit growth and we quickly generated sufficient deposits to repay all short-term FHLB borrowings we had at year end. We continue to believe, we have substantial capacity for deposit growth within our existing branch network and from established wholesale funding sources and we expect our pending acquisitions to augment our deposit growth capacity.
We consider net growth in core checking accounts as our most important deposit metric. In 2015, we achieved record growth in our number of net new core checking accounts with approximately 12,232 net new accounts added and that does not include the additional accounts from acquisitions. That is 30.5% increase over the number added to the prior year. This record net new core checking account growth, along with account acquired in our acquisitions, were key contributors to our record 2015 service charge income. Tyler and the entire retail banking team continued to do a great job in 2015 growing core deposits.
Even as we achieve substantial deposit growth, our favorable cost of interest-bearing deposits contributed to our net interest margin of 4.98% for the fourth quarter. Achieving a superb net interest margin continues to be one of our key goals, and although there has been pressure on interest margin in recent years, we continue to be among the best in the industry in this important measure.
Our 2015 net interest margin on an FTE basis was 5.19%, 33-basis point decrease from 2014.
In our January conference call last year, we guided toward a decrease in our net interest margin in 2015 of approximately 28 basis points. That guidance was based on our achieving $1.35 billion in non-purchased loans lease growth in 2015.
We have said numerous times that greater non-purchased loan and lease growth would tend to put additional pressure on our net interest margin, the much higher than originally expected growth in non-purchased loans and leases was one of the most significant factors and our net interest margin declined 5 basis points more than we expected in January of last year.
We were happy to trade the 5 basis points of net interest margin for the extra $1.2 billion of loan and lease growth. Our focus on reducing credit risk and interest rate risk also contributed to our decline in net interest margin in 2015.
In recent years, we have been focused on decreasing our loan to cost and loans to value on loans to reduce credit risk and we had focused on originating more variable-rate loans and fewer fixed rate loans to lower interest rate risk. While we believe these actions have significantly reduced our risks, they have also lowered our average yield on new loans.
With the Federal Reserve's recent rate increase and economic conditions as volatile as they are, we believe being more defensively positioned is worth giving up some margin. At December 31, we had increased variable rate loans to 79.0% of our total non-purchased loans and leases and we anticipate further pressure on our net interest margins in 2016.
As part of our guidance provided in 2015, we said we expected our cost of interest-bearing deposits would increased between 1 basis point and 5 basis points in each quarter of 2015 as a result of our deposit gathering activities to fund loan and lease growth. Our cost of interest-bearing deposits has been consistent with that guidance in each quarter having increased 2 basis points in the first quarter, none in the second quarter, 2 basis points in the third quarter and four basis points in the fourth.
We believe that our cost of interest-bearing deposits will increased between 3 basis points and 7 basis points in each quarter of 2016, due to the recent fed rate increase and further fed rate increases we anticipate this year and our expectation that we will need to accelerate our deposit gathering activities in 2016 to fund the expected volume of loan and leased growth.
Now, let me turn the call over to Tyler Vance.
Traditionally, we had been among the most efficient bank holding companies in the U.S. and the improvement in our efficiency ratio this year compared to 2014 further enhances our excellent standing among the nation's most efficient banks.
Our efficiency ratio for the quarter just ended was 37.1%. For the full-year of 2015, our efficiency ratio improved to 38.4% compared to 45.3% for the full-year of 2014. While our efficiency ratio will vary from quarter-to-quarter, especially in quarters where we have significant unusual items of income and non-interest expense we have stated in recent conference calls that we expect to see a generally improving trend in our efficiency ratio in the coming years. This is predicated upon a number of factors, including our expectation that we will ultimately utilized a large amount of the current excess capacity of our extensive branch network.
Our expectation that our core software conversion improvement projects over the past two years will provide greater functionality for our customers, employees creating opportunities for enhanced operational efficiency, our expectation of achieving additional productivity gains by reallocating resources from stabilize properties group and a few underperforming community banking elements to more productive geographies and areas of business and our expectation that we will achieve significant efficiencies from our pending acquisitions, including efficiencies from the adoption of Community & Southern Bank's consumer lending platform and the deployment of numerous technology applications from C1 Bank's, C1 Labs innovation group.
We are hopeful by fully leveraging these factors among others; we can achieve our goal of a sub-30% efficiency ratio over the next several years. Our efficiency ratio results for both, the fourth quarter and full-year of 2015 were significantly impacted by unusual items of non-interest income and non-interest expense. During the quarter just ended, we incurred $6.4 million in penalties from prepaying FHLB advances, $2.2 million of severance cost associated with the consolidation of stabilized properties group and approximately $1.0 million of acquisition-related and system conversion expenses, offset by $2.9 million of income from gains on sales of investment securities and $6.3 million of gains on sales of certain purchased loans.
For the full year of 2015, we incurred $8.9 million in penalties from prepaying FHLB advances, the $2.2 million of severance costs associated with the consolidation of the stabilized properties group, approximately $6.7 million of acquisition-related system conversion expenses and $1.0 million of software and other contract termination charges, offset by $2.3 million of tax-exempt income from bank-owned life insurance death benefits, $5.5 million of gains on sales of investment securities and $6.3 million of gains on sales of certain purchased loans.
In the financial tables accompanying our earnings release, we included a calculation of a core efficiency ratio effectively excluding the various items of income and expense we just discussed. We believe this calculation provides additional insight into the level of efficiency we are achieving.
Based on these calculations, our core efficiency ratio was 32.3% for the fourth quarter of 2015 and 35.7% for the full-year 2015. We will incur additional unusual items of non-interest expense in future quarters, including non-interest expense related to the closing the core system conversions of acquisitions.
As for our two pending acquisitions Community & Southern Bank and C1 Bank, we can expect acquisition-related and system conversion expenses to be incurred in each quarter of 2016. We expect both transactions will close in the first half of 2016 and we anticipate both core systems conversions will occur in the second half of 2016.
As we have previously discussed, we have been adding staff and taking other actions in recent years to prepare for the additional regulatory and compliance burdens associated with exceeding $10 billion in total assets we are pleased with our progress and preparations today and we have detailed plans for further staff additions and other preparatory actions. All this will add additional non-interest expense in future quarters and years.
We expect our annualized additional compliance costs, including cost of staff additions to increase compared to our annualized cost for such items in the quarter just ended by about $3.4 million in 2016 and an additional $1.9 million in 2017 and another $0.3 million in 2018.
Our guidance regarding an improving efficiency ratio in future years considers the impact of our ultimately exceeding $10 billion in total assets and the two pending mergers, but it does not consider the potential impact of any future acquisitions.
Let me provide updated guidance on asset quality and a few comments about growth and acquisitions. In our January conference call last year, we said we expected our 2015 net charge-offs ratio for total loans and leases would not be significantly different from the range of net charge-off ratios we had experienced for total loans and leases in 2013, which was 26 basis points, and in 2014 which was 16 basis points.
Our 2015 net charge-offs ratio for total loans and leases came in at 0.17% toward the lower end of our guidance range. We think our overall asset quality is even better than a year ago, so we are introducing a slightly lower guidance range of 10 basis points to 25 basis points for our 2016 net charge-offs ratio for total loans and leases.
In regard to growth and acquisitions, organic growth of loans leases and deposits continues to be our top growth priority and we have clearly demonstrated our ability to achieve substantial growth apart from acquisitions. M&A activity continues to be another focus for us as we believe M&A provides significant opportunities to augment our healthy organic growth.
We will continue to be active in identifying and analyzing M&A opportunities and we believe an active and disciplined M&A strategy will allow us to continue to create significant additional shareholder value.
Now, let me turn the call back to George Gleason.
We have traditionally reminded listeners in the January call that our first-quarter results are often affected by numerous seasonal factors. For example, lower post holidays consumer transaction volume typically results in lower service charge income. Home sales are often lower in the first quarter, resulting in less mortgage income, business disruptions due to winter whether are not uncommon and our annual premium increase for health insurance and a majority of our salary increases-type effect in the first quarter.
You should consider these seasonal factors in establishing your quarter-to-quarter estimates for 2016, which we expect to be another record-breaking year for Bank of the Ozarks. That concludes our prepared remarks. At this time, we will entertain questions. Let me ask our operator to once again remind our listeners how to queue in for questions. Operator?
Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have our first question from Michael Rose with Raymond James.
Hey, good morning guys. How are you?
Hey, doing great, Michael. Good morning.
Good morning. Just a couple of quick questions, maybe we can just start off with the housekeeping question. The severance cost, if we are looking to kind of back that out the run rate should we back that out of salaries and employee benefits or should we back it out of other operating costs?
Salaries and employee benefits.
Okay. That gets to my second question, which is you know what kind of drove the big sequential decline in that line item this quarter?
In part was the staff reductions, our total FTE headcount at 12/31/2015 was 1,641 employees, compared to 1,653 employees at September 30. In addition, we had a lower accrual for our performance-based bonuses. We have been occurring over the course the year assuming that we were going to get 100% of those bonus targets, we did not achieve maximum performance objectives and one of the criteria for the bonuses, so that resulted in our earned bonuses being 94% of the maximum and we had lower accrual in Q4 as a result of that.
Okay. That is helpful. Then if I can dig into kind of the loan growth outlook for the year, obviously, you raised a decent amount, pipeline looked good. George, can you talk a little bit about the deals that you put on the books now and kind of those leverage levels you are using and have you started to do larger deals, because you now exceeded the loan growth and the pipeline for nine consecutive quarter, so just may I get a sense if you are moving upstream or if you are just seeing a lot more deal activity?
Yes and yes, on both respects. Every year, we have increased the size range of transactions that we are doing, because our balance sheet is growing and capital account is growing and that has allowed us to look at larger transactions, so that has been helpful. Yes, we are, as Greg alluded to in his comments, adding new customers and in some cases very substantial new customers that we have never done business with before getting substantial volume buyer and we are getting increased deal flow from existing customer. The growth is coming from a variety of sources, which is very encouraging, very pleasing to us.
I think the reason that were getting this growth from so many different front is that our reputation for being able to execute in a very effective and timely manner for our customers is growing, the market is becoming more aware of that and that is, I believe, making us the lender of choice for many customers for their commercial real estate transactions. Our expertise and execution is definitely paying dividends for us.
Okay. Great. Just one more for me. I know you gave some of the pieces, but I do not think you actually kind of gave an initial NIM outlook for the year. Would you care to comment on that?
I would be happy to comment on that. We did not give a NIM outlook on that and there are a variety of reasons for that. One is, and I think part of the guidance that Tyler gave on the cost of interest-bearing deposits was predicated upon two Fed rate increases is what Tyler is modeling or Greg is modeling on the deposit cost side, but frankly with the volatility in economy, I do not know whether we have zero Fed rate increases or four Fed rate increases next year. If it is one, two or three, so there is considerable uncertainty in our minds about how that plays out. The rest of you guys might have it all figured out. If you do, please send me an email giving me the answer, but we are confused about that.
Then the magnitude of our growth over the course of next year, we are working with a fairly wide range of outcomes there that start with $3 billion minimum growth in non-purchased loans and lease. Then the two very substantial acquisitions, you know, the CSB and C1 deal have total assets of $6 million adding to our $10 billion, almost, balance sheet and the until we actually do our final market pricing on those loans, valuations almost loans, we won't know exactly what the yields of those portfolios are, so there are so many variables at play there that we elected to not try to give precise guidance.
Understood. Thanks for taking my questions.
Thank you. Our next question comes from Jennifer Demba with SunTrust.
Good morning, Jennifer.
Thank you. Good morning George. I wonder if you could get your specific thoughts on the commercial real estate cycle and where you think we are in that cycle at this point. I think that during the last earnings call in October, you said we could be coming towards the end, but you did not have any real conviction, I do not think on that point of view. Can you just kind of give us some more color?
Well, the hazard of making statements like that is sometimes they get interpreted differently than you intended. I think, exactly what I said was not and we were coming to the end or could be coming to end of the real estate cycle, but that we may be in the later stages of the real estate cycle.
What I can tell you is that we are saying tremendous transaction volume. We are underwriting that transaction volume very thoroughly and very carefully. We are paying tremendous attention to the economics and competitive market data on every significant transaction we are doing and the transactions we are doing, we believe, have exceptional economic viability. If we did not think the supply demand metrics in particular markets justified particular projects we certainly would not be approving them and we are being very conservative about that, because there is a lot of turbulence and uncertainty about the economy and where we are in real estate cycle, so caution is merited, really extreme caution is merited, I think, given the uncertainty about the economy globally and nationally.
We are doing things that make sense, and as I said in my prepared remarks, our focus for several years has been trying to find the best projects in a massive universe of projects that are getting done out there. Focus on the best sponsors, and by that I mean sponsors that have significant proven capability to manage developments and not to only produce them, but to manage them through a variety of cycles and sponsors that have very strong balance sheets and very strong liquidity. Then to be very low leverage in these transactions and I know some lenders trying to grasp yield are going to higher leverage.
We are going the opposite direction and willing to absorb a little attrition in yield to be more defensively positioned and I mentioned that at September 30, our average loan to cost in our construction book with reserves was 51% loan to cost and our average loan to the price value was 43%.
To put that in historical perspective those numbers are 20 points or more lower than they were in 2007, so we are being very defensive from a leverage position and we are using very defensive loan structures. For example, we are doing a multi-phase project, we may have very rigorous performance criteria, either pre-leasing our sales criteria on the early phases of project for you to get to the subsequent sizes, so that we make sure that our developers do not get ahead of themselves in developing product that there is no market for and end up with too much supply.
I think all those things position us extremely well for a continued boom in the real estate cycle or a bust in the real estate cycle and that is what we are trying to [ph] is we will be finding things get better, we will be finding things get worse, because I do not know what the exact timing of the turn in the real estate cycle is or the exact timing of a recession.
I have one follow-up. Has the competitive landscape for lending in these projects, has it changed at all in the last three or six months?
Not in any material sense. I mean, there is a continuous ebb and flow of competitors in and out and what different folks are thinking at different times, but there has not been any material change in that landscape.
Thanks so much for the color.
All right. Thank you.
Thank you. Our next question comes from Matt Olney with Stephens.
Hi. Thanks. Good morning guys.
Good morning, Matt.
Given the uncertainty of the national economy that you keep ringing up, I am curious, which markets today you feel still have strong fundamentals that will allow you to continue some growth, and within closed, but unfunded balance, any commentary you can give us as far as the mix by geography?
Well, the mix by geography is gravitating more toward New York and California. I have not seen the data yet, but my guess is that New York probably jumped over Arkansas in the total geographic distribution of loans a 12/31, you know at September 30, Arkansas was $1.28 billion of funded loans and New York was about $100 million less at $1.174 billion, and I would guess those numbers flipped over in the quarter just ended.
I would guess that California, which I think was sixth or seventh on August 5th among our states and loans possibly pushed up into the fourth positioned, surpassingly the Carolina. Clearly, the economies of Metro New York City area and a number of the California MSIs are very vibrant a lot of things are going on. There are a number of other very good economies. We continue to see good activity in the Dallas area. Austin is another good economy; Denver is a very good economy, Seattle another very good economy, so there are a lot of markets that are enjoying very favorable economic results this period of time.
As I said in response to Jennifer's question, we are very thoroughly underwriting and stress-testing supply demand metrics; rental rate metric, sales metrics in all of these markets where we are doing business and I should also probably fill [ph] Florida in there is a state where we are seeing a lot of activity.
Okay. That is helpful, George. As a follow-up, I am curious on your updated thoughts on capital. Obviously, you raised the capital in December, and it looks like you deployed a pretty good chunk of that during the fourth quarter, so I am curious kind of what the scenarios are, what we could see additional actions to the bolster Tier 1 or Tier 2 capital sometime in 2016.
Yes. Our calculation is that we have still got somewhere around one $1.3 billion, $1.4 billion of growth capacity in our balance sheet with existing capital as of December 31, and that of course is based on the fully phased in January 1, 2019, Basel III capital standards, including the capital conservation buffer, so fully-phased and with the buffer we have still got one $1.3 billion to $1.4 billion of growth capacity.
Our needs for additional capital in the future will be guided by the same factors that drove our decision last time and that is are we going to see another acceleration in loan growth that would utilize that capital cushion that we have now and get us closer to our standards and you know we won't get all the way down to our standards before we would take action to make sure we maintain plenty of capital.
The capital issuance we did in Q4 was heavily debated internally within our company. There was a camp of our officers that felt that that would be a better choice, a camp that thought that equity would be the preferred choice common equity and after some discussion, we elected to do the capital raise through common equity, because we felt like we were getting very good execution on the transaction.
I would guess that with that done, the next time we need to tap capital markets that you would probably see that done with Tier 2 capital in the form of subordinated debt is the most likely thinking on that here, but we have no precise time, sort of plans for that and again that creation of additional capital would be dependent and the choices of means for that would be dependent upon the circumstances at that time, sounding like the Fed, we are data-dependent down here, but that is our current thinking on that subject.
Okay. Thank you, George.
Thank you. [Operator Instructions] Our next question comes from Joe Gladue with Merion Capital Group.
Good morning, George.
Hi. Good morning, Joe.
Let me follow-up a little bit on I think the geography question. I guess on the last conference call, you mentioned that you still weren't seeing a whole lot of stresses in Texas markets, just wondering if you would update if anything changed.
Well, that that continues to be the case. Obviously, the market in Texas, where we have some substantial business that would probably be the most interesting to talk about is Houston. I actually was on the phone with our RESG guy in Houston and our South Texas the Community Bank division President in the last couple of days just asking about specific loans and progress and leasing and sales and so forth on specific assets we have in the market and then getting a general update on market conditions and I am very pleased to report that, as we reported last quarter, we are really not seen any stress in our portfolio down there as a result of the old and gas price declines and the impact that that is having in a variety of markets.
The good news about our portfolio there is, predicated in large part on the fact that we really have no meaningful direct exposure to oil and gas to either exploration or development companies or oil service companies. Just no meaningful direct amounts at all, nor do we have a significant indirect to exposure in form of those guys being tenants and buildings that we have the financing on and so forth, so our exposure to the oil and gas economy is really at the macro level. How is that just affecting the general demand for apartments, condos, office, retail space and affected markets including Houston, and you know the interesting thing about Houston, I mean certainly there has been a lot of the oil and gas industry layoffs there in the last year and no doubt there will continue to be some given where oil and gas prices are when I left the house to come to work this morning. I think WTI broken $30 and was at a $29-something price, so clearly that is not good for Texas.
If you look at the Houston employment data, and the last data I looked at was from the October month end data. Job growth in the Houston MSI had broken 3 million jobs for the first time ever and jobs in Houston were up about 1.1%, I believe. Maybe I am wrong [ph]. It is close by roughly 1% on a year-over-year basis, so even with all of the loss of jobs in exploration and development oil field services company Houston has managed to eke out positive job guidance at least through October and the projections in October we were that there will be more positive job gains in November and December followed by normal Houston cyclical downturn in jobs on an annualized basis in January and February and then a resumption in job growth.
That 1% plus or minus job growth compares to numbers that were 3%, 4% and 5% a couple of years ago, but it is still positive job growth and I think the prevailing sentiment is that we will be in that 0% to 1% job growth range down there probably this next year. If the oil and gas situation gets even worse, then maybe you have got some modest brackets around job growth numbers, but all-in-all that market is doing pretty well considering the adversity there and there are a multiple dynamics at work there. Part of it is you have got a lot of job losses on the upstream side in the exploration production and servicing business, but you are having - and that is on the West side of Houston.
On the East side of Houston, where the chemical companies are, you are having significant jobs created because of lower price of oil and the benefits to the downstream side of that equation. Then despite the fact that people are probably going to talk less about it in '16 than they did in '15, the Houston economy is much more diversified now than it was historically and that is resulting in job creation, so we are looking at it and feeling really very good about where we are in that market and the projects we have in that market.
Okay. Thank you. Just one other question, the estimate on the impact of the Durbin Amendment, the $5.35 million, I just wanted to make sure that would include any impact on the two revenues of two pending acquisitions. Does it?
No. It does not include that, so to the extent we get additional benefits from that that number would be bigger.
Yes. Okay. Thank you. That is it for me.
Thank you. Our next question comes from Brian Martin with FIG Partners. Please go ahead.
Hi. Good morning, Brian.
Hey, George, can you just talk about the $1 billion in growth this quarter just kind of the breakout by your, I guess your five or six growth buckets there, just the real estate specialties and whatnot?
Well, clearly Dan Thomas, runs real estate specialties group for us and of course our Chairman of the Board. Dan and his team were the lion's share of that growth. I do not actually have the breakdowns, but community banking contributed a pretty nice number. I think they were a $100 million-plus of the growth in the quarter. Again, I have seen those numbers, but I have seen a lot of numbers since I saw them, so I could [ph] out from that, but I think they were $100 million-plus, but clearly the lion share of it was real estate specialties group.
It was sort of broad-based across product types. Our residential 1 to 4 family loans actually went up about $23 million. Our CRE loans went up about $202 million. Our construction and land development loans went up about $402 million, Agra [ph] credits went up $20 million, multi-family went up about $143 million, CNI dropped about $20 million, consumer and leasing were pretty much unchanged and other loans went up about $315 million or so. It is a pretty broad-based contributions based on product type and different units in the company.
Okay. Then just the seasonality you mentioned as far as first quarter. I guess, in the past I guess it seems like you guys had the seasonality in the loan side and then more recently it sounded as though that was less likely. Does that seasonality comment also apply to the loan growth in the first quarter? You still expect that to be on a little lower than the other quarters?
Well, I appreciate you are listening closely and noted, but I omitted the loan volume from the seasonality factors, and the reason that I did that obviously with this massive is probably not an overstatement, volume of loans that we have got close that are not funded which is what Greg, $5.8 million now. Those loans are going to fund on a predictable manner and they are already closed and they are in the pipeline.
Now, I think there will be some seasonal impacts, and part of that is people who do large transactions and complex transaction tend to takeoff at the end of the year, so there is always a bit of a law to some degree in the pipeline of new deals that flow in because everybody send you everything they have got before they go on Thanksgiving or Christmas or New Year's vacation and then you have a little lull of the few weeks after they come back to work before they get their next deals skewed up, so there is an element of that that affects closings and initial funding on loans.
Then to the extent that adverse winter weather affects loans in certain market, so you have weather conditions that affect the progress of construction that will slow your construction branches, so I say all that I think the bottom-line is, there will still be some seasonal impacts on loan volume, but because of the significant volume of closed unfunded loans that have been closed over the last six quarters that are funding up that seasonal impact will be more muted than in past years, where we had a lower volume of closed unfunded loans that we were funding up about. It is still some part of the factor I think less than in the past.
Perfect. Thank you for that. Then just maybe you talked about the reallocation from the stabilized property group to other areas. Can you point any was that market or just areas you are focused on as far as that reallocation goes?
Yes. We are looking to increase our RESG staff in New York simply because the RESG staff has been much more effective in producing quality volume and meeting our standards and stabilized property group has. We are also expecting next month to open a RESG office in San Francisco. We are looking at other staff additions two RESG and existing offices and we are making some community bank addition in Charlotte and certain other markets, where we believe that there is a significant opportunities for growth.
It is just a look that we took to determine who was not producing to our standards on volume, quality and price and could we either remedy that insufficiency or did we need to lose those resources and redeploy those resources into markets and products business segments, where we felt like we could achieve much greater productivity.
I would view myself as a coach of a professional team and my annual aspiration is to win the national championship. If I have got, since it is basketball season, now if I have got a guys that has given me eight points game and 12 minutes of playing time, I think and that is not what I need. I need 12 points from that guy in 12 minutes of playing time and I need better defense at the same time and more hustle and better attitude then you have got to make the player trade that you need to make to put a championship team on a championship course. Some of the changes we made were wonderful individuals who are working really hard and trying to do a good job. They just were not getting the ball into the basket for us. We have got to have guys that perform at a high level if we are going to put up the high level resource that you guys expect.
Perfect. Okay. Just the last thing, maybe one for Greg on the tax rate if you just give any sense on that and then maybe just one last one George. You have talked in the past or I guess just kind of the regulatory kind of guideline, if you will, on commercial real estate concentrations maybe not being I guess a big issue given the diversity within your book, I guess. Does that still hold or you are taking any closer look at the concentration at commercial real estate or just any thoughts on that would be helpful.
We continue to believe that conservatism with which we underwrite commercial real estate loans. The very low leverage based on a loan to cost and loan to value basis that we do that. The diversification of the portfolio across a number of geographies really 41 states, the diversification of the portfolio by product type across all of those geographies and the intent servicing that we do assets post closing, so that we are monitoring and managing those assets on a ongoing continuous basis farther on the books.
We believe that the strength of that whole credit culture and process is such that it gives our regulators substantial comfort that our portfolio is much less risky than the average banks' CRE portfolio and that gives us a fair degree of latitude. We understand that continue to enjoy that privilege means we have got to continue to be very conservative, we have got to continue to be very expert, we have got to continue to underwrite with extreme attention to detail, we have got to continue to close and document, we have got to continue to service these loans with extreme attention to detail and make sure that that we know what we are doing and how they are going to work out, hence the focus on best projects, best sponsors, low leverage transaction.
All of that is just part of an overall holistic culture that gives us comfort and I think gives our regulators and obviously our shareholders comfort that we have a lot of expertise in what we are doing in and we are going to do it in a very safe and defensive manner. Greg, you want to comment on the tax right.
Yes. I will be brief Brian, but I mean if you look the tax rate, the biggest drivers may change that would be really in the tax exempt income, primarily the municipal bonds we got and those earnings are tax exempt. With the shrinkage of that municipal bond portfolio as a percent of our total assets just mainly drove the significant growth in our loan portfolio much greater percentage of our asset base and our earnings on those assets is taxable today than I might have been two, three, four or five quarters ago.
As long as that is the case, the tax rate probably will be at or have a tendency to work its way up just slightly over the course of '16. On the flipside, if opportunities present themselves in the bond market if we were to further leverage our balance sheet and add new [ph] both of those types of transactions would have the tendency to mitigate any increase or potentially allow that tax rate to work its way down just slightly.
I do not see a lot of movement in the rate as we move into the 2016, but again to the extent that we see opportunities, either to substantially grow our balance sheet opportunities within the municipal bond market or both, transactions those would certainly have some impact on our tax rate on a go forward basis.
Greg, you thought is that the balance is just slightly up…
Slightly upward. That is correct. Yes.
Slightly upward from the fourth quarter, Greg, or just in the annual number?
Most of the annual number, fourth quarter number to those probably a less so than on the fourth quarter number, but yes up on both.
Okay. Thanks very much.
Thank you, Brian.
Thank you. I see no further questions at this time.
All right, thank you very much. We appreciate you joining the call. There being no further questions, we will conclude the call. We look forward to talking with you again in about 90 days. Have a good day. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. We thank you for participating. You may now disconnect.
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