National Bank Holdings Corp (NBHC) 2015 Q4 法說會逐字稿

Good morning everyone, and welcome to the National Bank Holdings Corporation 2015 fourth quarter earnings call. My name is Joanna and I will be your conference operator for today. At this time, all participants are in a listen only mode.

We will conduct a question and answer session following the presentation. As a reminder, this conference is being recorded for replay purposes.

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

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

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

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

Turning quickly to the quarter in the year, we continued to make progress adding expanding relationships with clients in our markets. The organic growth of high quality loans, relationship deposits, and fees were solid during 2015 and we feel good about our momentum as we enter 2016. It is also important to point out that we grew our loans while maintaining a very granular and diversified portfolio.

As a reminder, by policy, no industry sector can exceed more than 15% of our total loans. Now, Rick will cover our energy, agriculture, and commercial real estate exposures in great detail during this call so I will simply point out that our total energy exposure is only 5.7% of loans, or only 3.4% of earning assets.

No sector of our commercial real estate exposure is greater than 3.4% of loans, and our total CRE exposure is only 85% of capital, one of the lowest ratios amongst our peers. And our ag exposure is at 6.3% of total loans.

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

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

Thank you Tim, and good morning.

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

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

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

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

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

During the third quarter of 2015, we identified and moved one general industry's C&I loan to nonaccrual and began our workout efforts. We believe this general industry's C&I loan relationship which was approximately $6 million, to be a one-off and that is not related to any broad industry issue, and its weakness is driven by circumstances unique to this client. During the fourth quarter, we did take a charge off of $1.8 million on this loan out of a total take in during the quarter of $2.1 million in net charge offs.

The charge off in a separate, specific reserve we took in the fourth quarter for this client slightly over 50% of that unpaid balance of $6 million. Consistent with our track record, we are aggressively working to recover the charge off and we have confidence we will recover the majority, if not all of our loss.

Overall, we maintain excellent credit quality across our $2.4 billion non-310-30 loan portfolio and expect the trend of improving criticized and classified loans we experienced in the fourth quarter to continue.

Now let me turn to our energy loan portfolio. Over one year into a bear market in oil and gas our overall energy portfolio has held up satisfactorily and it remains granular with an average loan balance per client at $5.2 million. As Tim said, as a whole energy sector loans were just $147 million as of December 31 and represent only 5.7% of total loans, 3.4% of earning assets, and only 28.3% of bank tier 1 capital. This total is only slightly less than the balance as of September 30, however our clients continued to raise capital and sell assets so we expect loan balances to decline as oil prices remain depressed.

We have an implied loan-loss reserve on our energy portfolio of 2.65% as of December 31, 2015. As a reminder, we approach the energy sector recognizing that price volatility is part of the industry. Our focus has always been on well capitalized reduction and mid-stream clients which currently comprise $118.3 million, or 80.5% of our energy portfolio.

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

Let me provide some data supporting the capital and liquidity of our production and mid-stream clients, and placed a cushion risk impact during the continued low oil prices, and then I'll discuss the services subsector in more detail. Our approach to reserve space lending has always been conservative.

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

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

Excluding this one classified client, the ratio of net debt-to-[EBIT] tax ranges from 0 to 2.5 times for our clients with an average of 1.15 times. This compares very favorably to the average for large cap E&P companies as reported recently by Wells Fargo Securities at 2.6 times. With respect to our one classified E&P client we are monitoring closely in the process of taking additional collateral and working with the client on other resolution strategies.

Our five mid-stream clients have a ratio of senior secure debt-to-EBITDA ranging from 1.3 to 6.1 with a median of 3.9. Senior secured debt of total assets range from 10% to 80% with an average of only 40%. One of our mid-stream clients represents an outlier. It is our only client with senior secured debt above 4.5 times and senior secured debt to total asset above 51%. This client has a pending asset sale that will result in leverage metrics in line with our other clients. Generally, we consider senior secured debt-to-EBITDA of less than five times to represent acceptable leverage for a midstream company.

Turning to the services portfolio, consists principally of five clients with an average loan balance of $5.7 million each. As the duration of low oil prices persisted and worsened in the latter half of 2015, we identified two loans within our energy services subsector that we moved to nonaccrual in the third quarter.

We based our decision to move these loans to nonaccrual based on the client's weakening liquidity and capital given persistently low oil prices. These two loans account for $12 million of loan balances out of just $28.5 million in energy services loans as of December 31.

We ask specific reserves of $2.1 million against these non-accruals and we're working with both clients on resolution strategies. We identified no new nonaccrual energy loans in the fourth quarter.

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

In summary, we believe our energy loan portfolio was well selected and the majority of our clients are effectively managing through persistently low oil prices. However, we also recognize that the longer oil prices remain depressed, the greater the stress is on all companies in the industry and could contribute to further risk migration in our portfolio. But as a reminder, energy loans compose only 5.7% of our total loans, only [3.7]% of our earning assets, and only 28.3% of bank tier 1 capital.

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

As of December 31, our non-owner occupied commercial real estate was only 85% of bank tier 1 capital. Importantly, multi-family exposure stood at less than $10 million of loans as of December 31, 2015, and no specific property type comprised more than 3.4% of total loans. Finally, we have identified specialists within commercial banking to handle non-owner occupied commercial real estate, therefore maintaining stronger controls than banks that allow all commercial bankers to handle such business. We maintain a selectivity based on our concentration limits and underwriting standards based on our experience during downturns historically in commercial real estate.

Apart from acquired problem loans, we have less than $1 million in nonaccrual loans within our non-owner occupied commercial real estate portfolio. Agricultural loan portfolios are also getting attention given low commodity prices and a concern around farmland valuations. In NBH we have had a specialty banking group in place to handle food and agribusiness since late 2011. Our portfolio as Tim said is only 6.3% of total loans. It is granular and highly diversified. For example, exposure to corn crops is less than $20 million. Furthermore, the average loan balance for agriculture client is $360,000.

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

We also diversified geographically. About 35% of our portfolio is in Kansas and Missouri, the other 70% spread evenly across northern and southern Colorado. We have one nonaccrual agricultural loan in just under $200 million that is expected to be resolved this quarter with full collection of principal and interest. In summary, we have a high quality, well diversified agriculture portfolio.

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

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

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

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

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

OREO balances did increase somewhat driven primarily by one commercial loan foreclosure at quarter end. I will point out that our pipeline for both prime loan disposition and OREO sales remains the strongest ever for the coming quarters. It's also important to note that nonstrategic balances are now only 4.6% of total loans.

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

Now let me provide some guidance on provision expense for 2016. There are three important considerations. First, provision expense in 2016 will be driven by continued loan growth as Brian will discuss in his comments.

Second, we see net charge-offs across our loan portfolio into 25 to 30 basis point range for the year. However, it's very important to note that we reserve $3.5 million in 2015 for possible charge-offs on two loans.

The general industry's commercial loan and the one energy services loan both of which I covered earlier in my comments. This represents roughly half of our charge off guidance. Again, because reserves were taken in 2015, charge-offs on these two loans are not expected to materially impact provision expense in 2016.

Third, as we expect to resolve these two problem loans in the first half of 2016, net charge-offs are likely to be heavier over the first two quarters of the year then moderate to fall within our guidance.

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

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

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

Thank you, Rick, that was excellent detail. Good morning everyone.

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

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

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

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

Total loans ended the quarter at $2.6 billion and grew a strong 20% over last year. Originator loan portfolio now stands at $2.2 billion and grew a very strong 32.5% over 2014. With the $238 million fourth quarter originations, we ended the year just shy of $1 billion at $967 million.

During the fourth quarter we did experience higher than normal loan pay downs as well as a steady exit of the nonstrategic loans which contributed to the lower than normal 10% annualized total loan growth. Several clients told assets or entire businesses and we saw a typical management of year-end debt levels. The good news is that our unfunded commitments increased $160 million or 32% during the quarter which bodes well for the future growth.

The new loan origination yield remained consistent with 2015's quarters at 3.6% with 69% variable rate. As we looked at 2016, we do expect to exceed $1 billion in originations. These originations will be built on solid relationships and will continue to be very industry diverse and granular in size. We are forecasting the December rate hike to stick in the market pricing for an overall originations yield of 3.8%.

Total loan growth is forecasted in the range of 15% to 20%. This range does consider our continued aggressive workout of the problem loans we acquired in our failed bank acquisitions.

In terms of deposits, we're very pleased with our performance in 2015. Year-over-year we grew transaction deposits close to 10% led by double-digit demand deposit growth. In 2016, we look for our relationship banking model to deliver high single-digit transaction deposit growth with strong growth in non-interest bearing demand deposits.

Given our lack of incremental funding needs, we see [kind] deposit balances decreasing, resulting in total deposit growth in the low single digits. Looking forward, we expect to continue to fund the loan growth with cash flow from our investment portfolio and nonstrategic loan pay downs in addition to deposit growth.

As a result, we are forecasting earning assets to increase in the low single digits ending 2016 in the range of $4.3 billion to $4.5 billion. Net interest income totaled $39.9 million for the fourth quarter and the fully taxable equivalent net interest margin was 3.73% percent. Both of these were better than the third quarter owing to a nice pickup of $1 million in our acquired loan income with the margin further benefiting from lower average levels of low yielding short-term investments.

In terms of 2016's guidance, we are forecasting net interest income in the quarterly range of $38 million to $39 million. The corresponding net interest margin is unchanged from recent guidance at 3.5% to 3.6% on a fully taxable equivalent basis. However, given the ever decreasing contribution from the 20% yielding ASC 310-30 loans, we do see the net interest margin narrowing during the year. We are forecasting that this margin narrowing does not translate to net interest income decrease as we're continuing to remix the earning assets with the relationship oriented, sustainable loan growth. Rick did an excellent job addressing credit quality and please refer to his comments for our 2016 guidance.

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

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

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

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

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

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

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

Capital ratios remain strong with $135 million in excess capital using a 9% leverage ratio as a target. This excess capital gives us flexibility to create value through supporting organic growth, merges and acquisitions, and share buybacks. We have in place a buyback authorization of $56 million that could be used to take advantage of the discount currently on our share price.

And we do still see opportunities to deploy value adding mergers and acquisitions. We continue to maintain financial flexibly to take advantage of opportunities as presented. That completes our guidance picture.

We believe that these results add up to excellent progress towards our stated future goal of a return on tangible assets of 1% and $2 earnings per share. We also realize that it is not a straight line from today to achieve these goals by late 2017 or into 2018.

But we are well-positioned with strong business momentum and financial strength to take further actions over time that will add to our achievement of our goals.

Tim, that concludes my comments.

Thanks Brian. Well done.

I want to take this opportunity to thank all of our teammates for helping us safely grow our Company during 2015. I also want to thank our Board and Associates who work diligently behind the scenes to complete an important trifecta of regulatory initiatives.

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

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

(Operator Instructions)

Chris McGratty with KBW.

Good morning, everybody. Hey, Tim; hey, Brian. Brian a question on the fee guidance, I just want to make sure I am starting with the right number, the mid-single digits, what is the dollar that you are jumping off of?

Just point out -- for 2015, that would have been just about $33 million on --

So take $33 million and then the growth rate off of that, okay. If I could ask a question -- the color on the energy portfolio was great. Wanted to know -- one of the topics that's coming up on energy is not only direct but indirect, whether it be in the real estate markets. Can you just remind me how much of this portfolio was acquired through your failed banks, whether any of it was previously covered, and also, kind of a growth trajectory to get to the 140 in change number that we see today? Thanks.

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

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

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

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

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

That's great color. If I could ask a follow-up, Tim, the one on tangible assets, and the $2 number, I think in the past you've talked about you need a little bit of help from rates, and I guess we are starting to get a little bit of help. Obviously, you guys are being conservative with not factoring in more in the forecast, but if I look out, I think the comment was late 2017, early 2018, you could start seeing a little bit more clearly.

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

Right. We understand that question and it's very fair, and I would point to the regulatory actions taken in the fourth quarter as an important catalyst for being able to address some significant expense. Not even necessarily all identified at this point.

We are working through every element of our current infrastructure, keeping in mind -- everyone should keep in mind, that we, in order to obtain our charter, we're being held to the midsize bank standards of the OCC. So when banks talk about the additional cost being born by crossing over the $10 billion threshold, here we were as a $5 billion bank carrying those additional costs. Working with our new regulators, there is an understanding that we will be regulated as a community bank. And that brings with it the opportunity to rightsize a number of those related costs.

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

I'll tell you that we are also at a point, as the Company has evolved, where we understand not only the direct contribution of each of our banking centers, but equally important have done all of the market analysis to understand what we believe to be the market potential within the service area of those banking centers. And we believe what that will translate to will be one of a number of actions: additional consolidation, and/or selling of other locations.

And it's interesting, we have already built a queue of interested buyers for a number of those -- we will call them one-off locations. So more to come on that front. But we clearly will be attacking our core infrastructure as well as continuing to refine the distribution network.

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

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

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

That's great color, thanks, Tim.

Matt Olney with Stephens.

Hi, thanks, good morning, guys.

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

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

Thanks, Matt, I appreciate that, too.

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

You know, we are seeing -- we are seeing and expect to continue to see a number of our energy-related clients as they've continued -- even now -- even as recently as the last two weeks continued to raise capital or sell assets, we're going to see our energy senior bank debt go down. Now I've said publicly, you know, if we could find energy clients despite concerns about [durated] low oil prices.

If we could find [oil] energy clients that we could get comfortable with in this environment, which would require passing some very tough standards, we would actually love to add some clients in that space. But the fact of the matter is, we think the reality is going to be that we're going to continue to see reductions in senior bank debt in the energy space.

And outside of that, I would tell you, that we did have a couple of situations in the fourth quarter where we had some clients sell their businesses and they were just simply liquidity events, and those events hit -- I shouldn't say a couple, a few situations like that interestingly enough, and those certainly hit our loan balances.

It was pretty granular, Matt.

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

In the year 2015, Matt, this is Rick, we did. We added several, but none recently, although we do have a very high-quality client in the production space where we had participated out a portion of their total needs and as their needs have reduced, we brought that in-house and slightly increased our loan outstanding in the fourth quarter. But no, nothing that would have materially impacted the second half of the year.

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

You know we -- the pieces I gave you, we had $42.2 million in total expenses and we do have $3.7 million in total one times. So you net that down, you are into the $37 millions, and we are dropping that down into around $36 million.

Okay.

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

I think you can appreciate, though, Matt, from the numbers I gave you, that we already have baked into our guidance quite a nice reduction year over year just on the operating. But thank goodness, going forward, we're not going to be using operating versus total anymore. We'll just talk about the total expenses.

So when I say that $36 million, that's including everything, Matt. That is including our loan workout and OREO, and we'll stay at the total and then point out the unusuals as we go quarter to quarter.

Okay, yes, that is helpful, Brian. Thank you for that. That is all for me. Thanks, guys.

Gary Tenner with DA Davidson.

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

You know I would say, no. I would suggest to you that our in-house limits and standards were actually tighter as it related to loan growth than OCC expectations. I will tell you that, for a number of reasons, as we looked at acquisitions that there were times when it was simply challenging to get an answer in a timely fashion. Now I want to point out that we hold the Midsize Bank group, Bill [Haas], the OCC in the highest regard, but it's just a big, big organization and they've got a lot of very big banks to say grace over.

If there was a challenge for them and for us, it was sometimes more centered around acquisition and the ability to get to an answer, whether that was a yes or no. Finally, I would point out that even on the surface if you just simply look at the basic fees of moving from the OCC to the state, that's a $400 million to $500 million -- million, I wish -- $400,000 to $500,000 savings a year; call it a $500,000 savings in just the outright fee, much less the opportunity to attack infrastructure costs.

All right that's great. Thank you very much.

Tim O'Brien with Sandler O'Neill.

Hi, Tim.

Hi, good morning, Tim. Good morning, Brian and Rick. Following up on the charter change, do you guys have a sense of when -- well, the state will do your examination then I'm assuming -- your next examination?

That's right. It's combined.

Combined with the FDIC?

With the Federal Reserve.

When will that take place? Do have an idea, ballpark?

Sure. Tim, this is Rick. The sort of full annual exam is currently slated for some time in the fourth quarter, most likely October, November. They are going to come in and do a -- sort of a check-in probably toward the end of second quarter.

I will point out that as part of becoming a State Fed Member, we did have the State Fed come in late last year to do a review really across the Company. That was part of the pre-membership process.

That was a December review of our credit book, our other enterprise risk areas. You know, there is some continuity here, right, in that the Fed has regulated our holding company, has been a partner with the OCC, very familiar with our credit processes. Our credit book always received copies of all OCC examinations. So I think that is one of the reasons we were able to move so swiftly with this conversion.

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

Tim, this is Rick. I will remind the group with the OCC mid-sized supervisory approach we had (multiple speakers) I want to say 13 targeted exams during 2015, so it was really a continuous process.

There was never a time when we weren't being examined with the OCC (laughter).

Like a proctologist.

I -- I --

Nevermind (laughter).

I'm not going to respond to that comment.

No, very good. The guidance was great that you guys provided. Out of curiosity, just kind of looking back, trailing as far as the breakdown of overhead costs by line item that you provided, really the biggest piece is consistently salary and employee benefits, 50%, occupancy is another big chunk, and then, lately anyway, other expense has been the third piece.

To combine those three items tend to account for 80%, 90% of total cost in a lot -- in most cases. How will they be affected or come down in order to hit the numbers that you anticipate putting up here on a go-forward basis?

Well I think that we've got to remember there is another side of that equation as well, if you're talking about efficiency, and that's that we certainly intend to continue to grow revenue as well. I mean the productivity is key. And when it comes to -- when it comes to the other expenses we did have a number of one-time significant events that we view as catalysts for moving the Company forward in 2015.

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

All right, Tim. Thanks for taking a shot at answering that. I appreciate it. And those are all my questions. Thanks.

Thank you, Tim.

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

Well I would just -- I would certainly want to think Chris, Matt, Gary, and Tim for their questions. I am pleased that you are happy with the level of detail that Rick shared on the portfolio. We put a lot of time and work into trying to be as transparent as absolutely possible there.

I feel good about where the Company is today and where we are headed, so more to come. Thanks to everyone for joining in today. Take care.

This concludes today's conference call. If you would like to listen to the telephone replay of this call it will be available beginning in approximately two hours and will run through February 12, 2016, by dialing 855-859-2056 or 404-537-3406, and referencing conference ID of 128666 -- sorry, 12866911.

The earnings release and an online replay of this call will also be available on the Company's website on the investor relations page. Thank you very much, and have a great day. You may now disconnect