Independent Bank Group Inc (IBTX) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Independent Bank Group first-quarter 2016 financial results conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I will now turn the call over to your host, Torry Berntsen. Please go ahead.

Thank you. Good morning. Welcome to the Independent Bank Group conference call to discuss financial results for the first quarter 2016. I would like to thank you for joining us this morning. I will go over a few housekeeping items and then hand it over to David Brooks, our Chairman and CEO, to lead the presentation.

We issued our earnings release last night and a copy is posted on our website. We will be going over much of the release on this call. If you are having trouble accessing it, please call Rob Temple at 214-544-4777 and we will email or fax you a copy.

Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. We intend such statements to be covered by the safe harbor provisions for forward-looking statements contained in the act. Please see page 4 of the release for additional information about the risks associated with these statements.

Please also note that if we give guidance about future results, that guidance will only be a statement of managements' beliefs at the time the statement is made. Predictions we make may not continue to reflect managements' beliefs and we do not publicly update guidance.

In this call we will discuss a number of financial measures considered to be non-GAAP under the SEC's rules. Reconciliations of these financial to the most directly comparable financial measures calculated and presented in accordance with GAAP are included in our release.

At the conclusion of our remarks, we will open the telephone lines for questions. At that time, we will provide instructions for submitting your question.

With those reminders out of the way, I would like to outline the agenda for the call. David will open with his thoughts regarding the first-quarter results. Michelle Hickox, our Chief Financial Officer, will lead you through the quarter's operating results and some balance sheet highlights. David will then close the presentation and open the phone lines to questions.

I will now turn it over to David.

Thanks, Torry. Good morning, everyone, and welcome to Independent Bank's first-quarter earnings conference call. This was another successful quarter for us and demonstrates our continued focus on consistent earnings performance. Here are a few highlights.

Our earnings were strong and reflect continued growth, both sequentially and on a year-over-year basis. Quarterly core earnings of $12.4 million are the best reported by our company to date and represents a 9.3% increase in core earnings from fourth-quarter 2015. Our core efficiency ratio also decreased to 55.7%.

Our organic loan growth was strong for the quarter also, 14.2% on an annualized basis. Growth was focused in the commercial real estate and non-energy C&I portfolios and occurred across all our markets.

Total assets increased to $5.3 billion at quarter end, an increase of $1 billion over first quarter 2015. We completed a system conversion for the Grand Bank acquisition in the middle of February. Loan growth from the acquired Grand branches was very strong for the quarter, highlighting the great potential for this transaction going forward.

Maintaining a strong credit culture is a fundamental principle of our company and we remain focused on asset quality. Nonperforming assets increased primarily due to an energy loan participation being placed on nonaccrual by the lead bank. That said, nonperforming assets remained low at 0.62% of total assets at quarter end.

As of quarter end, our entire energy portfolio was $185.9 million, or 4.5% of total loans. This was a decrease of 9% from the balance at the end of the fourth quarter. 66% of the energy portfolio is working interest credits, 27% is royalty fundings, and 7% is oilfield-related service loans.

The oilfield service area experienced a material decrease during the quarter and the balance is now only $12.7 million, down from approximately $30 million a year ago. The royalty portfolio continues to hold up well given its significant property diversity, conservative margins, and support by solid borrowers. Michelle will provide further detail on the energy portfolio in her comments.

Our Houston branch loan portfolio continues to perform very well with metrics similar to last quarter. The total portfolio is $1.1 billion and represents 27% of our overall loan portfolio. 45% of the Houston CRE is owner-occupied and less than 10% of the Houston portfolio is office buildings and multifamily. At year-end Houston classified assets were only 0.16% of the entire Houston portfolio.

We made a $3 million provision to bolster our overall allowance for loan losses to support our loan growth and also in recognition of current market conditions. This also specifically increased the energy-related reserve to 5% of energy outstandings. Despite the increased provision, we were able to build upon our fourth-quarter earnings performance and maintain strong earnings for the first quarter.

With that introduction, I will now ask Michelle to go over more detail on our first-quarter operating results.

Thank you, David. Good morning, everyone. As noted in the earnings release, our first-quarter core net income was $12.4 million, or $0.67 per diluted share, compared to $10.2 million, or $0.60 per diluted share, for the first quarter of 2015 and to $11.4 million, or $0.63 per diluted share, for the quarter ended December 31, 2015.

Net interest income increased during the first quarter to $45.7 million, compared to $36.1 million for the first quarter 2015 and $42.2 million for the fourth quarter 2015. The increase in net interest income reflects increased average loans balances resulting from organic loan growth in loans acquired in the Grand Bank acquisition. In addition, we recognized increased accretion and fee income.

Our net interest margin was 4.08% for the first quarter, compared to 4.07% for the prior-year quarter and compared to 3.96% for the fourth quarter 2015. The increase from the linked quarter is related to higher accretion income on acquired loans, as well as income recognized on the payoff of a nonaccrual loan and an extension fee collected on an energy loan.

Our core net interest margin, which does not include accretion, was 3.96% compared to 3.91% in the fourth quarter as we continued to deploy the Grand liquidity. Nonaccrual interest and the fee mentioned previously also added 3 basis points to the first-quarter margin.

Total non-interest income increased $504,000 compared to the first quarter last year and increased $216,000 from the prior quarter. The increase from the first quarter last year is primarily attributable to increased service charges on deposit accounts, increased earning credit on correspondent accounts, and increased mortgage fee income. The increase from the linked quarter relates primarily to increased mortgage fee income.

Total non-interest expense increased $4.1 million from the first quarter last year and decreased $8,000 from the prior quarter. Overall increases in non-interest expense from the prior year are generally due to the increase in number of employees and operating costs resulting from the Grand transaction. Increased professional fee expense is due to greater legal fees on existing litigation inherited in the Bank of Houston transaction.

With respect to the linked quarter, professional fees related to litigation in the energy portfolio decreased, but were offset by expenses related to their repossessed assets. In addition, salary and benefit expense increased slightly due to severance payments and payroll taxes on restricted stock vestings.

The provision for loan-loss expense was $3 million for the quarter, an increase of $1.3 million from the first quarter 2015 and an increase of $1 million from the fourth quarter 2015. The increases from the prior periods reflect loan growth in addition to increases in reserves for the energy portfolio in consideration of the continued volatility in commodity prices.

As it relates to loans in the energy portfolio, for the first quarter organic loans held for investment grew 3.5% from December 31, 2015, or 14.2% on an annualized basis. Our Austin area branches were the biggest distributor, but we experienced growth across all regions.

As David mentioned, energy outstandings at the end of the first quarter were $185.9 million versus $204.9 million at year-end. The quarter-end number represented 4.5% of the entire loan portfolio. The energy portfolio includes $123.5 million in working interest credit, $49.8 million in royalty credit, and $12.7 million in oilfield-related service credit.

We participate in three SNCs agented by other banks. We currently have three nonperforming energy credits totaling $23.8 million and four performing classified credits totaling $24.6 million. Aggregate criticized and classified energy credits total $67.3 million, which is comparable to the $67.7 million at the end of the fourth quarter, representing 1.6% of total loans.

None of the $12.7 million of oilfield-related service loans are criticized or classified. The energy-related allowance is now 5% of the energy portfolio.

With respect to overall asset quality, total nonperforming assets represented 0.62% of total assets at March 31, 2016, compared to 0.43% at March 31, 2015, and compared to 0.36% at December 31, 2015. The increase compared to the prior period is primarily due to the addition of a $17.1 million SNC energy loan participation that was placed on nonaccrual status in the first quarter by the agent bank. It should be noted that last week we received a $2.9 million repayment of that loan.

With respect to funding, total deposits were $4.17 billion at March 31, 2016, compared to $4.03 billion at December 31, 2015. The average cost of interest-bearing deposits was 0.48% for the quarter compared to 0.45% for both the first quarter 2015 and the fourth quarter 2015. Our year-to-date rate on total deposits was 0.36%.

26% of our deposits are non-interest-bearing, up from 24% for the first quarter 2015. There was a net increase in total borrowings of $73.5 million from the fourth quarter of 2015. These movements reflect uses of short-term FHLB advances for liquidity purposes. In addition, $5.8 million of 7% subordinated debentures were repaid during the first quarter.

As we previously disclosed, we redeemed the SBLF preferred stock in January 2016. The Company and the Bank are both well-capitalized at the end of the first quarter.

That concludes my outline of the highlights of our financial statements. I will turn it back over to David.

Thanks, Michelle. Our earnings this quarter demonstrate our continued commitment to stronger earnings performance. We remain focused on quality loan growth and improving our efficiency ratio.

Asset quality is a key to continued future strong earnings and we continue to monitor our loan portfolio, including the energy portfolio at all levels of the Company. We increased our allowance for loan losses to support growth and in recognition of current market environment.

I continue to have conversations with banks located in markets where we plan to grow. While the current environment has slowed M&A activity, we are maintaining a dialogue with potential partners and are continuing all approaches to transactions that will enhance value for our shareholders.

In conclusion, we remain committed to our strategy and continue to believe in our fundamental business, the strength of our asset quality, and our ability to execute. We were pleased to report another successful quarter and are confident that it represents a solid first step toward a successful year.

With that, we will open the call to questions.

(Operator Instructions) Brady Gailey, KBW.

Good morning, guys. Congrats on a nice quarter and record earnings.

So the efficiency ratio showed some nice improvement from where it was running last year. It's now at around 55%, 56%. David, you talk about improving that even further.

Where do you think -- what's your goal for the efficiency ratio?

Our goal for the efficiency ratio, Brady, is to get it -- continue to push it toward 50%. Our numbers and the way we think about this year is that it should continue to come down into the low 50%s by the end of the year, fourth quarter. We're hoping something in the low 50%s by the fourth quarter on an annual run rate.

Okay. And then I noticed the yield accretion was a little larger this quarter than it has been historically. It added around 13 basis points to the margin in 1Q versus I think on average it was around 3 basis points last year.

Was there anything abnormal in that accretion or is this kind of just a higher level of accretion that you think will be somewhat continuing for the rest of the year?

No, I think it was a one-off. We had a large credit in Houston, Brady, that we put a mark on when we repurchased Bank of Houston two years ago and it was the dispute between a couple of partners. The credit was good, but dispute between a couple of partners and we thought it would take a while to get resolved. So our credit guys put a mark on it.

That loan was paid off and refinanced in the first quarter and that was the significant -- I think that was a big chunk of that prepayment. We expect it to run at the historical levels going forward.

Okay. And then the energy book continues to shrink here. Do you think that shrinkage will continue kind of for the foreseeable future?

We do, Brady. It will probably level out, we think, in the late second into the third quarter probably. But we did not get as many pay downs in the first quarter as we expected to get, so we expect some of those to come in here in the second quarter.

We have -- you make the point, and I think it's an important one for us, that over the last year -- a year ago we were $280 million in total outstandings in the energy book. We finished the quarter at $186 million and so that's down some 36% year over year and then our -- a year ago we were -- 8% of total loans were in our energy book and today that's down to 4.5% of total loans. So we have had significant movement risk off, if you will, on the energy book.

We reiterate again we intend to be in the business, committed to being in the business in the long run, but it just has worked out over the last year that as we have resolved credits and worked through relationships that it has come down. We think it could go as low as $150 million, down from $186 million it is at the end of the quarter. But we expect this will level out somewhere in there, Brady, and then rebuild from there.

Okay. Then my last question is on capital. Tangible common equity was pretty much flat at around 6.9%. It doesn't seem like you all need to raise capital any time in the near term. But when you do have to raise capital next, do you think you could get away with another form of either debt or preferred, or do you think you have to raise common?

Good question. We did not accrete capital as quickly in the first quarter as we thought we might and that was due to a bit larger, faster growth than we had expected for the first quarter, both in deposits and loans, which is a first-world problem, as they say.

That said, we think about sub debt as being our next capital move. We do not feel the need to issue common stock for the foreseeable future. At 6.9 and we believe our numbers -- Michelle can comment on more detail on this if you like, but our numbers indicate that, even if we hit our growth goals for the year, that we will finish the year with PCE in excess of 7%.

And that's -- again, I know that's -- people write and comment that that's not a robust PCE ratio. But again, that's consistent with how we run the Bank for the last 28 years, and because of our clean asset quality and consistent earnings performance, we have been comfortable with that. Our board has been comfortable with that as have the regulators.

Okay, great. Thanks for the color.

Brett Rabatin, Piper Jaffray.

Good morning. I will also offer my congratulations on a pretty good quarter with the growth and everything.

Can you -- maybe I guess first, just going back to energy. If I have it correct, SNCs where I think like $66 million last quarter and you had that one moved to nonaccrual. Can you just talk about your SNCs are not that big relative to your energy piece, but what's going on with the SNCs you have?

Right. We do have about $62 million right now of our total energy book at $186 million, so about a third is in SNCs.

We did -- we had approximately 36%, 36%, 37% in our what we consider to be criticized/classified bucket that did migrate a little during the quarter. We had one loan move from criticized to classified and another loan was classified, moved to nonperforming. That participation SNC that we mentioned in our press release.

Other than that the book has been pretty steady. We put a little more money into the specific reserve and got it up to 5%, as Michelle mentioned earlier. So we've got to reserve 5% against the energy book.

But we feel there wasn't a big inflow into the bucket, if you will, and that's what we were watching is to see if 36% of the bucket at the end of the year, out of $204 million that we had on the books in energy at the end of the year, that came down to $186 million. But our percentage of -- in the criticized/classified bucket stayed the same. So we felt good about that.

Okay. Then loan origination trends, can you talk maybe about yields and how you see competition and if -- thinking about the core margin out a few quarters, can you keep it stable with what you are putting on the balance sheet versus current portfolio?

That's a good I think two questions really there, Brett. One is about our loan yields and then obviously a part of that or follow-on to that would be NIM. So let me talk about the loan yields and I will get Michelle to talk about the NIM and our thinking about it going forward.

But as far as the loan yields go, we are seeing consistent loan pricing with what we had seen the previous quarter. The bump in -- by the Fed in the Fed funds rate and prime rate going up 0.25. We did see that push the floating-rate loan yields up, just because they tend to be either primal or prime with a margin or LIBOR with a margin. And those moved up a little bit during the quarter.

Fixed rate stayed pretty steady in the low, mid 4%s, so we do feel good about that. By the way, our average life of our loan portfolio shrank and came in some, so that's I think a good point to think about. So it means we were moving a little more toward floating-rate loans during the quarter, which do have a little better yields.

But, Michelle, you want to talk about the NIM?

Yes. If you take out that nonaccrual interest that we had during the quarter, I think what I would say our core NIM actually expanded a couple of basis points, which was consistent with what we had said last quarter. And I think that that's realistic for us. But it's going to stay pretty close to the range that it's in right now for the rest of the year.

Our asset liability model still shows us very neutral. So even if the Fed has another small increase this year, I don't think that will affect our margin that much.

Last, David, you mentioned you were looking at some M&A. The activity is slower. Is there one market better than another in terms of activity? And how optimistic are you that you might do something else this year?

I have noticed a bit of a change in the tone of discussions. I think a year ago when we were six months into the energy commodity price decline, Brett, we really know that a lot of people thought, hey, this is going to be a quick down and back up.

And I think the fact that this has gone from 12, to 15, heading to 18 months now, and the bank stock price is being relatively soft during this period that I think some of the folks who would like to find a partner for their bank are beginning to think more in terms of I want to find the right partner and get the right currency that I think will grow with time. And maybe a little bit less about absolute price.

Absolute price is always a big part of the discussion, but whereas I think a lot of people thought 18 months ago -- you would go back to the summer of 2014 -- anyone with a quality bank wanted 2 or 2.5 times book and 20 times earnings. And I think people are talking a little less about those terms now and a little more about, if we're going to find a partner, what does that look like in today's world, today's environment?

A little bit more acceptance of where we are in bank stock prices and how that affects the value of privately-held banks. That said, we continue on in a number of discussions and we maintain relationships, as we have for the last 10 years, with people across the state that we think are good potential partners for us.

I wouldn't say one area is stronger than any other at this point, Brett. There are banks all across our target market, the four major markets -- Dallas-Fort Worth, Austin, San Antonio, and Houston -- and we continue discussions in all those markets.

Okay, great. Thanks for all the color.

Steve Moss, Evercore ISI.

Good morning, guys. Wanted to touch on energy again here. With regard to sensitivity of the price of oil, what are your thoughts about potential losses over the next year with oil at $40 and say $30?

Well, I think it's more a question of provisioning and what the migration of those credits might be than it is about absolute losses, Steve. Prices are in the $20s and $30s. You are going to have more migration and more reserving than you have in the $40s, but in terms of losses and actual charge-offs, we still don't see a lot of absolute losses coming down the pike.

But we continue to work through the credit. It is helpful. One point I would make is it's helpful if energy -- if oil prices stabilize here in the $40, $45 range for a prolonged period time. And I think once investors and folks become convinced that we've seen the bottom of the oil prices, if we have -- not saying we have, but assuming we have -- then I think that really opens up a lot of capital markets and buyers and people willing to take possession of assets. It's the whole price discovery thing we've talked about last couple quarters.

It's what happened in the first quarter, to use a specific example, of that one credit, that SNC that moved from classified over to nonperforming. That was a credit that had a very good workout plan in place and a sale of the assets in place. Well, that fell apart in the first quarter when oil prices went to the mid-$20s. Then it had to be put back together by the bank group and by the owner and by the investment bankers.

What has happened is it's just pushed some of these credits out which then subjects them to migration. If they don't get resolved quickly, then they are subject to being classified or becoming nonperforming while you are trying to work through the solution to the problem.

But in terms of losses, Steve, I would say just a reminder that we have $12 million of total oilfield service exposure at the end of the quarter, down from $30 million a year ago. And so we have very minimal exposure to oilfield services, which is where most people believe that, if there are going to be losses, that's where they will be. We also have no second lien or sub debt and I think that's different than a lot of banks as well.

Then within sight we try to give a little more breakout or transparency this quarter in terms of the three buckets that our energy loans are in. One being what we think of the traditional E&P, which we call working interest credits.

And then we have some royalty credits, credit secured by royalty, which are just the cash flows coming from leases. And they don't share in development risk or cost or anything like that. It's just what people commonly referred to as mailbox money. And then the small service piece.

With no second lien debt, minimal oilfield service exposure, and then about $125 million approximately of what we consider to be true E&P credits -- and that's where most of these sub standards and the nonperformings and everything are, in that $120 million, $125 million bucket. As an absolute percentage that's down to 3% of our total loan book that's really E&P exposure.

Then we've got the royalty credits, which are typically to family trusts and wealthy families. They have guarantees. We underwrite those very conservatively and then minimal oilfield service exposure. By the way, of those -- in that bucket of oilfield service, we still have no criticized or substandard -- criticized or classified credits.

I think overall we feel very good about where we are in energy. There's still work to do and our folks have their sleeves rolled up and are working really hard, but we've continued to put reserve as well. Just an acknowledgment of the fact that energy prices are staying lower longer than most of us expected.

We've continued to put specific general energy reserves aside in case we are wrong or in case prices go back down. But we feel really good about where we were at the end of the first quarter.

Okay, thanks. That's really helpful. Then in terms of -- the other thing I want to touch on was loan growth expectations. Had a solid quarter here on loan growth, just wondering what your updated thoughts are there.

I think we continue to think, Steve, low double-digit kind of growth. 11% to 13% maybe as a range. This quarter was a bit above that and that was as much as anything we didn't get the energy pay downs we expected in the quarter. So that was a little bit of a surprise there.

But I do think it's indicative. Michelle mentioned that we had a really robust quarter in Austin in the first quarter. North Texas, Dallas-Fort Worth also very strong. Houston we had growth in the first quarter; not as strong as they were last year, but still growing. And the team down there is seeing lots of good opportunities and are off to a good start this year.

Overall, the economy is better than I think most people think here. We are continuing to see opportunities in our sweet spot, which is medical and medical office and small business. And home construction is going really well, especially in Austin and North Texas.

So overall good, but I don't think, Steve, we would guide toward a higher loan growth at this point, just because we're early in the year and there's still a lot of uncertainty right around energy prices and the economy. We like to see that play out another quarter or two, but we're certainly pleased with the first quarter.

Great, thank you very much.

Kevin Fitzsimmons, Hovde Group.

Good morning, everybody. David, I'm assuming you really touched on a number of these things already, but on the energy reserve, you guys did take it up. But for folks looking from the outside and looking at some of -- particularly more the larger banks that took the energy reserve up to more of a high single-digit pace. And a lot of that seemed to stem from the SNC exam.

What would you point to as the main explanations or reasons why that's not a good apples to apples? And I totally acknowledge that it's not.

But is it that you have a lower percentage of SNCs? Is it a lot of other things? Can you just give us a sense on why IBTX is fine to be at 5% and some of these larger banks are up in more of an 8% to 9% reserve ratio?

Sure, Kevin. I think it's a fair question. We have minimal oilfield service and no second lien. I think that alone sets us completely apart from the bigger banks.

We also have very little exposure to unfunded commitments, which is another thing I think a lot of the large banks have to deal with is they are sitting with X amount outstanding today, but they might have 50% or 75%, that much more, sitting out there in unfunded that could fund in the future. And so I think when they think about the reserves they are thinking about what is outstanding today, plus what could be outstanding going forward. And so that.

Then you point to our smaller percentage of SNCs in terms of our total outstandings, which means that's really the key, Kevin, as to how we brought our exposure down by over 35% in the last year is that we've been able to work with our borrowers directly when they are smaller credits with only one or -- us and maybe one or two other participants in the deal. We're able to work through those, come up with a strategy, get that strategy executed, and so, for those reasons, we feel like 5% --.

We are certainly not the lowest in Texas in terms of our percentage of reserve against energy. We think, of the Texas banks, we're kind of in the middle of the pack. And we think that's appropriate, given that our exposure is below 5% of our loan portfolio now and we've already got 5% reserved against it.

Got it, that's great. One quick follow-up. It seems like a quarter or two ago, or maybe even a little farther back, there used to be a lot more discussion -- not just from you guys, from other banks -- about hedging.

Is that -- it seems like maybe it's just less relevant as deeper we get into the year. Because there's been less activity on that front, so it's maybe perceived as less of a protection for some of the E&P loans, particularly going into 2017.

Can you give us your thoughts on that? Is that accurate, my observation there? How do you view hedging right now in terms of being a positive, negative, or even relevant at this point?

I do think it's still relevant, Kevin, but I think it's unique to each bank and how they -- the types of borrowers they have. I think hedging is more relevant on some of these larger gas credits, for instance, where gas has been flat at price for a long time here and so the hedges are in place, maybe even two and three years out still. So that is an important point and relevant point.

I noticed -- I know on some of our credits the hedges are an asset, right, typically. And for a credit that is in the process of paying off --. For instance, if one of our customers has decided to get out of the business and sell their asset portfolio, and we know and we are talking with them and working with them and they are out working with an investment banker to broker sell their assets, we may look at those hedges.

In fact, we did. When the prices of oil in the first quarter were down in the $20s, hedges had their maximum value there.

So if we know that someone is in the process of getting out of the business and selling their assets, but they've got two years worth of hedges on that have a lot of value, then there's an opportunity there, in some cases, to work with that borrower just to liquidate those hedges and go ahead and apply that against the debt and reduce the exposure. Thereby, reducing the amount they need to get from the sale of those assets.

In some cases, the borrowers have come to us and said, gosh, the amount of debt I've got now -- I've delevered my balance sheet and I'd like to liquidate some of those hedges in order to further reduce the debt. I will give you additional collateral or I will guarantee the debt or provide some other enhancement to replace those hedges, but let's take the value of those hedges when oil is at $26 and continue to delever the balance sheet.

So I think still relevant, but I think to just go -- every bank should have X% is difficult to say, Kevin. Still relevant, but I think, as banks have gotten their exposures down per borrower and the borrowers have delevered their balance sheets, I think the belief -- and I think it's accurate -- is that the amount of risk in these E&P credits has continued to come down largely.

Great. Thanks, David.

Matt Olney, Stephens Inc.

Thanks. Good morning, guys. Going back to energy, I believe there was previously an energy credit that had a specific reserve on it back in 3Q and 4Q. Any update on that credit?

We still have it on our books, Matt. It's small. We continue to put reserve against it, but it's one of the three nonperforming -- one of the two small nonperforming credits. And then the one that migrated at the end of this past quarter, which is what drove our nonperforming number up a little bit.

Still there and in the process of being resolved, but it has continued to pay down. I think it's down to $3.7 million. It was net exposure and it was, I think, around $5 million at one point.

What's the reserve on that right now?

Hang on one second; let me take a look at that. I think the reserve is $3 million against that one.

Okay. And then on the $17 million participation that migrated this quarter, I believe Michelle said in prepared comments there was a $2.9 million repayment. Did I hear that correctly? And what was that exactly on?

It was a pay down, Matt, on that particular credit. You heard it right; that was a reduction in that nonperforming that has come in since the end of the quarter. It was a pay down on that and it was from the sale of some non-core assets.

So it didn't affect the borrowing base, if you will, because they were -- those were non-core assets that's included in the borrowing base. They were our collateral, but they weren't a given value in the borrowing base.

So that was a good kind of a pay down because it reduced the bank, all the bank group's exposure by over 20%, or approximately 20%, without lowering the amount of the collateral pool, if you will. So it improved and enhanced that credit and that's been in development since the end of the quarter.

Just to clarify, that loan was downgraded during the quarter and subsequent to the end of the quarter that sale took place of some of the non-core assets?

Correct, exactly right.

Okay, perfect. All right, thank you very much, guys.

Brad Milsaps, Sandler O'Neill.

Good morning. Michelle, appreciate the color on the efficiency ratio. Just curious on the absolute level of expenses. Do you feel like you've gotten most of the cost saves out from Grand? Just curious, do you see that number drop down from the 1Q level, if in fact you still have some more to go?

I think we probably have seen most of the cost saves from the Grand acquisition. But we have also been just looking overall at our expenses here and putting some initiatives in place that I think we're going to get benefit from second half of the year.

I think our core number for Q1, it was about 27.1. 27, around there, is probably a good number for Q2. And then we should get some more benefit in Q3 and Q4 later in the year, I think, from some of the initiatives we are putting in place.

That's great; that's helpful. And then, David, just to follow-up on the deposit growth this quarter, pretty strong; kept pace with your loan growth. Looks like most of it came in the interest-bearing categories. Can you talk about maybe what you did there, if you had some specials in the market, and what you feel like you've got to do to continue to fund yourself as you move through the year?

Brad, that was -- we did not run any deposit specials. That was not any intentional focus of ours to run up our interest-bearing deposits, but was just seasonal.

As you remember, a part of our core funding is this large number of public entities, public funds that are core banking customers of ours. They have seasonal -- they get -- start collecting their tax deposits at year-end or tax payments at year-end, whether they are school districts or counties or cities. And so we get a seasonal inflow in the first quarter of money there and that's what that was.

That's great, thank you.

(Operator Instructions) John Moran, Macquarie Capital.

Just to circle back on the loan growth, obviously a pretty good quarter and EOP looks like -- end-of-period balances look like they finished up even stronger than average. So I was just wondering if you could comment a little bit on the pipeline heading in 2Q.

And then, I assume by geography it would mirror what we saw in the first quarter with Austin still showing a lot of strength; Houston being a little bit slower.

Yes, I think that's a fair assessment of it. I think you will continue to see a lot of the growth in Austin and Dallas-Fort Worth. But the pipeline in Houston is also good and the pipeline overall, John, we think is supportive of our view that we will still see good loan growth here over the next three quarters.

Again, probably have some energy pay downs coming in the second quarter, maybe disproportionate to what we saw in the first quarter. So that could be a little bit of a damper on seeing a mid-teens kind of growth again in the second quarter that we saw in the first quarter.

But good pipeline, good economic activity. Still seeing corporate relocations announced; technology-driven down in, Austin. And continuing to see significant job growth here in the Dallas-Fort Worth area as well. So that's underpinning the growth we are seeing.

We haven't instituted any new lines of business or we haven't started doing anything out of the norm we've been doing for 28 years. Just good core business.

Got you. Then just maybe a quick follow-up. Are you seeing any opportunity to hire or maybe kind of get a little bit more growth out of Houston with some of the competitive banks pulling back more?

And then just a ticky-tack one on Houston, too. Sorry if I missed it in the prepared remarks, but if you have an update on the CRE and multi-fam concentrations.

I'll start with that part of it, John. Our Houston portfolio continues to hold up extremely well. We are -- our past dues there are lower than they are across the rest of the footprint and our criticized/classified assets I think were 0.16% of our loans down there. So that portfolio could not be doing better than it is, which is what we felt would happen, what we've been saying we believe will happen, and continues again this quarter.

The average loan sizes are small and our concentrations -- I think we said earlier our multifamily and office exposure in Houston is less than 10%. But, Torry, you might give some specifics of exactly what that is at the end of the quarter.

John, on the multifamily side, we are at just slightly over 2%; on the office space we're just around 6%. And then even if you take the office space, 75% of that 6% is owner-occupied. So it's a very granular portfolio.

As David pointed out, our classifieds total loans down there is 16 basis points, which is actually even slightly better from last quarter when it was 17 basis points. Again, CRE loan size have stayed pretty much the same, as has the owner-occupied on the CRE standpoint.

Got it. (multiple speakers)

In terms of growth in our team, we've got a really good team in Houston, really good lending team down there across all the markets in Houston and their production continues to be good. They're seeing deals; they're out hustling hard, so we feel good about that.

We hired one lender in the first quarter. But a lot of the approach it seems like, John, from lenders across the state has been to, with the uncertainty going on, hold what they've got. So we haven't seen a lot of movement the last quarter or two.

And we're beginning to benefit now, John, of a lot of the lenders we hired early last year. Early in 2015 and across 2014 we were very aggressive, as you may remember, in hiring teams and so a lot of them are now really kicking in and that's part of what helped us in the first quarter.

Got it. Thanks very much for taking the questions.

Adam France, 1492 Capital.

Good morning, guys. Thank you for squeezing me in here. I had to jump off for a second here and perhaps I missed it, but did offer any description as to the properties behind this $17 million SNC credit? Where is the oil and gas production coming from? Any details you can provide there? I'm not exactly sure as to how much you're allowed to disclose on a SNC loan.

Sure. The portfolio is primarily in Texas, Adam, and good producing properties, primarily West Texas Permian Basin I believe. I'm recalling that from memory. But a good portfolio of assets; very marketable, highly valuable.

As I mentioned I think earlier, Adam, they had a sale in place early in the year -- late last year and early this year and just the oil prices falling to mid-$20s I think chilled that deal out. But it's still moving forward; the asset behind that, that's behind that loan, are strong. That wasn't the reason for it moving to nonperforming.

Very good. Thank you, guys.

That does conclude the Q&A session. I will now turn the call back over to David Brooks for closing remarks.

Great. Appreciate everyone's time this morning. We feel good, again, about the quarter. I think it's a good first quarter toward we believe is going to be a really good year this year.

Continue to work hard on the energy front. We are aware of concerns of what's going on in the market, but feel like we have a good handle on where we are and a good handle, as Michelle mentioned earlier, on cost structure and improvement in that as the year goes along.

Thanks for everyone's time and appreciate all the attention and calls in. We will talk to you next quarter. Have a great day.

Thank you. Ladies and gentlemen, that does conclude today's conference. You may all disconnect and everyone have a great day.