Prosperity Bancshares Inc (PB) 2016 Q1 法說會逐字稿

Welcome to the Prosperity Bancshares' first quarter 2016 earnings conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions (Operator Instructions)

Please note, this event is being recorded.

Now I would like to turn the conference over to Charlotte Rasche. Ms. Rasche, please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' first quarter 2016 earnings conference call. This call is being broadcast live over the Internet at www.prosperitybankusa.com, and will be available for replay at the same location for the next few weeks.

I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. And here with me today is David Zalman, Chairman and Chief Executive Officer, H.E. Tim Timanus, Jr., Vice Chairman, David Hollaway, Chief Financial Officer, Eddie Safady, President, Randy Hester, Chief Lending Officer, Mike Epps, EVP for Financial Operations and Administration, and Merle Karnes, Chief Credit Officer.

David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by David Hollaway who will review some of our recent financial statistics, and Tim Timanus who will discuss our lending activity, including asset quality. Finally, we will open the call for questions.

During the call interested parties may participate live by following the instructions that will be provided by our call moderator, Keith.

Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the Federal Securities laws, and, as such, may involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of Prosperity Bancshares to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements.

Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including forms 10-Q and 10-K and other reports and statements we have filed with the SEC.

All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

Now let me turn the call over to David Zalman.

Thank you, Charlotte. I would like to welcome and thank everyone for listening to our first quarter 2016 conference call.

Some of our successes this quarter include we showed an impressive return on first-quarter average tangible common equity of 17.6%. In addition, an impressive 1.24% return on first-quarter average assets.

Our quarterly earnings were $68.9 million in the first quarter 2016, compared to $73.6 million for the same period in 2015.

Our net income, excluding purchase accounting adjustments, was $60.2 million for the quarter ended March 31st, 2016, compared with $61.3 million for the same quarter in 2015.

This quarter's net income was impacted by a $14 million provision for loan losses. We experienced a loss in three credits that were from acquired banks. Two of the credits were energy credits with total charge-offs of $6 million, and one was an agricultural credit with a charge-off of $7 million.

Diluted earnings per share were $0.98 for the first quarter of 2016, compared to $1.05 for the same period in 2015.

Loans at March 31st, 2016 were $9.654 billion, an increase of $488 million or 5.3% compared with $9.166 billion at March 31st, 2015.

Our linked quarter loans increased $215 million or 2.3%, 9.1% annualized, from $9.439 billion at December 31st, 2015. Our linked quarter loans were impacted by the acquisition of Traditions Bank, as well as a reduction in oil and gas loans, which decreased $36.3 million.

Historically, we generally experience our lowest loan production in the first quarter of each year. Excluding the loans acquired with Tradition, linked quarter loans were basically flat.

At March 31st, 2016 oil and gas loans totaled $362 million or 3.8% of total loans, compared with oil and gas loans of $461 million or 5% of total loans at March 2015. The $99 million decrease represented a 21% decrease in oil and gas loans when comparing March 2016 to March 2015.

Our unfunded commitments to oil and gas companies totaled $188 million at March 31st, 2016, of which $85 million were to production companies and $102 million were to service companies.

Unfunded commitments are down from their level of $196 million at yearend 2015. These commitments, which may never be funded, are secured by proven developed reserves in the case of production companies and by accounts receivable, inventory, and equipment in the case of service companies. The borrowing basis supporting these commitments are re-determined on a regular basis, in some cases monthly.

Our nonperforming assets at March 31st, 2016, were $57 million or 29 basis points of quarterly average earning assets, one of the lowest in the industry and a sign of strong asset quality.

Our nonperforming assets were up on a linked quarter basis mainly due to an agricultural credit from one of our acquired banks, as well as other real estate that we acquired with the Tradition's acquisition.

Deposits at March 31st, 2016 were $17.873 billion, an increase of $311 million or 1.8% compared with $17,561 billion at March 31st, 2015, primarily due to the addition of Traditions.

Excluding deposits assumed in the Tradition acquisition and new deposits generated at acquired banking centers since the acquisition date, deposits at March 31st, 2016 decreased $164 million or nine-tenths of one percent compared with March 31st, 2015 and decreased $284 million dollar or 1.6% on a linked quarter basis.

It should be noted, however, that we had a $741 million increase in deposits at December 31st, 2015, which historically is normal for us in the fourth quarter, but still high at 17.6% annualized.

I think when comparing the deposits at March 31st, 2016 to those at March 31, 2015, part of the decrease was attributable to the maturity of higher cost certificates of deposits assumed in prior acquisitions that we intentionally lowered the rate on at maturity.

Certificates of deposits decreased from $2.8 billion at March 31st, 2015 to $2.5 billion at March 31st, 2016, a $336 million decrease.

With regard to acquisitions, we continue to hear from bankers about the added regulatory requirements that are impacting their profitability, and believe that these requirements, combined with management and board fatigue, will continue to create opportunities for those that have the ability and the will to deal with these headwinds.

In January of 2016, we announced that the Company's Board had authorized a stock repurchase program of up to 5% of outstanding shares, approximately 3.5 million shares over a 12-month period. As of March 31st, 2016, the Company had purchased 1.160 million shares at an average weighted price of $40.66 per share.

Management intends to continue to repurchase shares when market conditions are favorable to do so.

A little bit on the economy. Despite the oil and gas industry, the unemployment rates in Texas and Oklahoma remain very strong. Obviously, parts of Texas are impacted more than others, such as Midland, Odessa, south Texas, and Houston. Areas that are doing well include Dallas-Fort Worth, showing strong population and strong job growth, as well as Austin, San Antonio, and the Bryan College Station area.

The petrochemical, medical, and hospitality industries have taken up a lot of slack in the Houston and south Texas areas. I'm still amazed at the resiliency in the markets we serve.

In Houston, we still see busy highways, full airlines, and crowded restaurants. Grade A office space and multifamily apartments have been affected in Houston, but are still holding up. Retail real estate is still doing well.

The aerospace industry is creating new jobs and a need for new homes in Oklahoma.

I would like to thank our whole team once again for a job well done. Thanks again for your support of our Company.

Let me turn over our discussion to David Hollaway, our Chief Financial Officer, to discuss some specific financial results we achieved.

Thank you, David. Net interest income before provision for credit losses for the three months ended March 31st, 2016, was $166.3 million compared to $162.9 million for three months ended March 31st, 2015.

This change was primarily due to an increase in average earning assets of 3.8%, offset by a decrease in loan discount accretion of $5.1 million.

The net interest margin on a tax equivalent basis was 3.48% for the quarter ended March 31st, 2016, compared to 3.57% for the same period in 2015 and 3.24% for the quarter ended December 31st, 2015.

Excluding purchase accounting adjustments, the net interest margin on a tax equivalent basis for the quarter ended March 31st, 2016 was 3.21%, compared to 3.17% for the same period in 2015, and 3.11% for the quarter ended December 31st, 2015.

Non-interest income increased $2.4 million or 8.3%, to $30.8 million for the three months ended March 31st, 2016, compared to $28.4 million for the same period in 2015.

Non-interest expense for the three months ended March 31st, 2016 was $80.5 million compared to $79.5 million for the same period in 2015, an increase of $1 million or 1.3%.

The efficiency ratio was 41.08% for the three months ended March 31st, 2015, compared to 41.83% for the same period last year and 42.58% for the three months ended December 31st, 2015.

The bond portfolio metrics at 3/31/2016, showed a weighted average life of 4.0 years and effective duration of 3.7 and approximate projected annual cash flows of $1.5 billion.

And with that, let me turn over the presentation to Tim Timanus for some detail on loans and asset quality. Tim.

Thank you, Dave. Our nonperforming assets at the end of the quarter March 31st, 2016, totaled $56.985 million or 59 basis points of loans and other real estate as compared to $43.459 million or 46 basis points at December 31st, 2015.

The March 31st, 2016 nonperforming assets total was made up of $40.129 million in loans, $161,000 in repossessed assets, and $16.695 million in other real estate.

Of the March 31st, 2016 nonperforming asset total, $17 million are energy credits, or 31% of the nonperforming asset total. This is broken down between $11 million in exploration and production credits and $6 million in service company credits.

As of today, $7.526 million or 13% of the March 31st, 2016 nonperforming assets total have been liquidated or under contract for sale, but there can be no assurance that those under contracts for sale will close.

The net charge-offs for the three months ended March 31st, 2016 were $11.670 million compared to net charge-offs of $119,000 for the three months ended December 31st, 2015.

$14 million was added to the allowance for credit losses during the quarter ended March 31st, 2016, compared to $500,000 for the fourth quarter of 2015.

The average monthly new loan production for the quarter ended March 31st of 2016, was $250 million compared to $286 million for the quarter ended December 31st, 2015.

Loans outstanding at March 31st, 2016 were $9.654 billion compared to $9.439 billion at December 31st, 2015. The March 31st, 2016 loan total is made up of 41% fixed rate loans, 36% floating rate, and 23% variable rate.

I'll now turn it over to Charlotte Rasche.

Thank you, Tim. At this time we are prepared to answer your questions. Keith, can you assist us with questions?

Yes, ma'am. Thank you. We will now begin the question-and-answer session. (Operator Instructions) At this time, we will pause momentarily to assemble the roster. Jefferson Harralson with KBW.

I'm not used to being first. So I'll ask you about commercial real estate. I saw some tick up in some of the credit figures there.

Can you talk about commercial real estate in your home markets? Are you seeing any weakness with what's going on with energy prices?

I'll start off with it Jefferson. This is David. I think, as I mentioned when I was talking, I think overall you see weakness probably in more multifamily or office space in the Houston market.

And retail's still very good in other markets like Dallas and Austin, and Bryan College Station things are going very good.

Having said that, somebody can jump in with a breakdown of our portfolio. But really, in Houston, we don't really have any office towers or anything like that in the Houston market. I think that most, probably half of our commercial real estate is probably owner-occupied.

We've always financed people that really -- we're more of a relationship type of bank where we may have your business financed, we may have your car financed and your home financed, where we're not really into what some of the banks do, getting five-broker loans or getting brokers to just put commercial real estate deals, because that's really not our cup of tea.

So who else wants to jump in?

Well, I've got some statistics that might help. The current vacancy rate for office buildings in Houston is about 14%. So while that's obviously not 100% --.

It's still pretty [good], yes.

-- occupancy, it's still reasonably decent. What is maybe a little more disturbing than the vacancy rate is the available sublease space that's on the market.

Right now there's approximately nine point million square feet of sublease space that's available, and the most recent historical averages are more like 3.3 million square feet. So there's about six million more square feet of sublease space available than what the norm has recently been.

I guess the good news there is the tenants are still paying their rent, so it's not a disaster situation at this point.

I would jump in on that, Tim, and say, I've talked to a number of real estate people, and they think that even though you do have more sublease space available, it's becoming that they are subleasing some of these to other businesses that, in the past, couldn't afford their really high-priced leases. And so where some of the companies have had to take somewhat of a discount, it's given an opportunity to a lot of businesses that are subleasing, and let them have an opportunity to come in too.

So there's probably two aspects of that.

I think that's right. And on the industrial space side, the vacancy rate is approximately 5%. So properties are 95% occupied, which still remains to be a decent market.

There has been additional sublease space that's come on the market. At this time it's approximately 3.7 million square feet. And the kind of historical mean is about 2.4.

So there is a little bit of softness reflected in the sublease space that's available. But all-in-all industrial space is holding its own.

And you're right, I mean, most of our properties are owner-occupied. We have really no large office towers on the books. The office space that we have are suburban smaller buildings that are a little bit different market than downtown and your major enclaves of class A space.

So we haven't seen any substantial deterioration in our portfolio.

Yes. I mean, even though we're seeing that, I think overall you'd have to say that office space is holding up pretty well, quite frankly, I mean, considering everything.

On our end it is, that's correct.

All right. And I'll follow up on the energy reserve. Last quarter I added together the [marks] plus the specific energy reserve, I got to around 5.7. This quarter you had some losses in energy from acquired credits that probably had some mark attached to it.

So can you update those numbers or give us a feel for what the energy reserve is if you take the marks on acquired loans plus your specific reserve?

Yes. The reserve amount right now on the total energy portfolio that's on the books is approximately $12 million. So it's about 3.3%. And there is, in addition to that $12 million, there's about a $7 million fair value accounting discount on energy loans, if that answers your question.

So if you add those two together, what's the total?

Well, we've got about $362 million in energy credits, and that's net of about $7 million in fair value accounting. So --

It's right around 5%.

Around --

Yes.

-- 5%, yes.

That's right.

All right. Great. Thanks guys.

Thank you. Dave Rochester Deutsche Bank.

What's your outlook on accretion going forward? That had jumped up a little bit this quarter. We're just wondering what that was due to, if it were Tradition or if you had some credit-impaired recoveries in there. If you could just parse that out and then just talk about what you're expecting for next quarter, that'd be great. Thanks.

I'll start off and say that it was more than -- it is more than what we expected, but also our loan losses were too. So hopefully they'll coincide.

Who wants to take it from there?

Well, there was some Tradition Bank in there, that's correct. Other than that, I don't think there's necessarily anything that was unexpected.

Randy, do you have any thoughts other than that?

No, we had some good fortune on a few acquired loans and the Tradition deal helped. But we had about $7.8 million this quarter, and that was higher than normal.

So at some point --

And this is Dave --

Sorry. Go ahead.

Say that again.

Yes, it's $7.8 million.

Great. So there's $7.8 million on the credit-impaired stuff?

Yes, sir.

Okay. Great. And then, I guess I would imagine you probably still have some cost saves coming through from Tradition in 2Q.

Was just wondering what kind of a run rate you were looking at for expenses for next quarter.

Yes, this is Dave Hollaway. I think that's true. But if you're looking over our expense carryover the last few quarters, I mean, you can see that, I think I said last quarter we were trying to target maybe around $79 million, and it was $80.5 million this quarter.

But I think we will get some additional cost base from Tradition, but I don't think we can hold our expenses so low over the next few quarters. And if we have any kind of flexibility, depending on what the revenue side does, I would give the guidance to say we need to be somewhere between $80 million, $81.5 million per quarter going forward.

Okay. Great. And just one last one. I was just curious how you think about the pace of the buyback from here. It looked like the average purchase price you mentioned had a 40 handle. So we're over $50 today. And it just it kind of sounds like, given your comments earlier, David, that you might slow that activity here until you get a better opportunity on the price level. Is that fair?

Well, again, when we announced it, I think our stock was at $33 or $34 --

Yes.

-- something like that.

Yes, that's right.

And if we couldn't have -- we couldn't get in and buy right away until we had the announcement and everything. If it would have stayed at that, we would have bought the whole thing, so. But as we started buying, prices continue to go up.

But, again, I think we're going to be optimistic about it at the same time.

Okay. Maybe just one more quick one on the securities portfolio. I know you didn't expand that this quarter, actually came in a little [bit].

Was just curious where reinvestment rates are today as you reinvest that cash flow coming from the book.

Do you need -- ?

I'm going to just take a -- I don't have this exact, so you may. But I'm thinking that from when talking to Chip Kiesewetter who manages that [port], I think what probably what we're buying today is probably coming in about the same rate or yield that we are at now, about 2.25. Is that right, Tim?

No, I think it's down a little bit. So if you're using the 10 years for proxy --

Right.

-- it's at, I think in talking to Chip this past week, right now we've been buying about a [1.90, 1.95], something like that. It's not up to two.

Yes. Again, we haven't been buying either. Again, we try not to -- again, we're not trying to call [rates], but, again, we're only buying when the opportunity presents itself.

So I think the 10 year's really gone up in the last few days, too. So we haven't really been buying, and I think that's why you saw us not borrowing as many funds either, because the yield really wasn't where we want it to be. But once, if it does start going up, we will actually go back and buy again when the yields go up.

Well, what you're referring to is we did -- we're always opportunistic, and a couple weeks ago, I forget the exact date, he did go in and buy a sizable chunk at 2.25. That was a [one-off] that we did get, so.

The answer to this question is the overall portfolio, we're going to be opportunistic and try to buy any when these rates dip real low, we're probably in a good position because we buy ahead. We try to stay on the sidelines, as soon as we see we have an opportunity we jump back in.

And a lot of this does with timing. Our deposits really grow toward yearend. I think we have a lot of people building up money for taxes and municipalities are bringing money in. So you saw us buying heavily probably in the last quarter and before this.

So now, after the first quarter, you saw a lot of money went out for tax dollars that you'll see in the second quarter, and also a lot of tax dollars, I mean, it's (inaudible).

So our deposits will be lower usually in the second quarter and start picking up in the third and fourth quarter. So the time has worked out perfect for us to where we've not had to buy.

And it's a good observation. I mean, I see what you see. When you look at the March 31st quarter, the overall total investment, securities are down compared to the fourth quarter.

But you can also see that the loans themselves were also up, and that's kind of the strategy, right. I mean, if we can grow loans, we're not putting the cash flow coming back from securities hopefully back into the bond portfolio, hopefully we're lending that out. And that's what you see in the numbers when you're looking at March 31st numbers. Hopefully we can maintain that going forward because that's the best case scenario for us.

I mean, even though our loans were flat, I think when you look at we reduced our oil and gas loans by $99 million from last year to this year, so we have to make up for that. I still think we did pretty good.

And Tradition, obviously, is in the numbers in the first quarter with --

Yes. And excluding Traditions, [where we feel are flat], but, really, when you look at $99 million reduction in oil and gas loans, I mean and to build that back up on the loans that we lost, plus the charge-offs from some of these acquired banks, I thought we did really good.

Great. All right. Thanks for all the color, guys. Appreciate it.

Thank you. Joe Fenech with the Hovde Group.

On credit, the increase in non-performers and the charge-offs, it seems almost entirely attributable to Tradition, like you said. But I would assume that was fair valued.

So then the spike in provision is separate from that, unless you saw deterioration in those credits beyond the mark.

So can you talk about just sort of what you're seeing that led generally to the provision jump?

Well, Joe, this is Tim. Let me first state that the net charge-offs were not Tradition Bank credits. About half that amount were two oil and gas loans that were acquired from other banks, and approximately the other half was an agricultural credit that was from another bank.

So Tradition was not involved in that net charge-off mix.

And there's a fair value discount of about $13 million on the Tradition credits that we put on the books. And obviously, we think that that was an accurate mark when it was established. We still believe that's the case. And if it in fact turns out to be the case, we don't anticipate any significant charge-offs from Tradition Bank going forward.

If that clarifies the Tradition side of it for you.

Yes. No, that make sense. And then on the margin, you talked about the accretion bump this past quarter. Does that change your projection, David Hollaway, for accretion over the balance of this year, what you're expecting? Or are you thinking about this more as sort of a one-time boost and it reverts back to the prior trend we were seeing prior to this quarter?

You talking about the accretion on the loan side? Is that what you're referring to?

Yes, accretion income generally.

Yes, I mean, that's exactly right. I mean, if you think about it when we were talking about this quarter ago, we were projecting maybe roughly $8 million a quarter. And if you were to take this extra $7 million that we saw this quarter it would put us back in line. And I think that's right, because it was anomaly.

Now, Randy Hester's sitting in the meeting with us. And you know it's through his hard work and diligence that he's getting out of these credits quicker and not letting them lag. That's why sometimes we get out of these and we can recognize some (inaudible) income, because he just does a good job.

But if we're modeling and projecting, we do want to revert back to what we said earlier, and roughly $8 million a quarter I think's pretty good number. Now, it can [do] better, but that just depends on what happens with these remaining credits.

I agree with that.

Okay. And then, David Zalman, on M&A, you all did the Tradition deal. Generally speaking, is the market just still too volatile right now to contemplate something larger or would you expect not just for you all, but generally, that we might see a pickup in M&A with oil prices and the market seeming to stabilize a bit here?

And within that general comment, what's your specific appetite for doing something larger than Tradition?

Well, first of all, I've always liked bigger deals. I've never been apologetic about that.

On the other hand, and to answer that question, yes, we would always entertain a bigger deal. I feel comfortable in the due diligence scene that we have.

We continue to talk to banks. We probably talked to two or three different banks this quarter. I think some of the banks that we talk with sometimes, again, their portfolios -- you know when we compare a bank that we're buying, we have to compare how much work it is to the assets that we get.

And so we really, really, again, without -- some of the banks we looked at had bigger oil and gas portfolios that we felt for the amount of work that it would take to get out of it, it just wasn't the best timing.

But we're still looking at banks all the time. And I do expect that, again, if you look at our history with 30-something transactions, there will be more for us.

Okay. And then last one for me, just your general sense, David, with oil bouncing around here in the mid-40s, let's assume for a moment that we just stay right here longer term. Are we at a level where you think we avoid material spillover to the local economies in these impacted markets generally, and we dodge sort of material damage to credit portfolios in the energy area? Or, for lack of a better way to put it, is oil still not quite high enough?

Well, this is my opinion. Again, I'm not an oil and gas guy. But, yes, I think at $45 you do avoid the spillover to the -- I mean, it's not that it won't have some impact now.

When oil dropped to $25 or $26 in February, we were puckered up a little bit. But I think today, I think we would like to see it go -- I've always said that $100 was way too much. It made a crazy market. We couldn't find people to employ at restaurants and teachers and things like that.

So we think that probably at $55 to $60, that companies can make really pretty good money for that. So, again, that's kind of the [door] where we're shooting for.

And I do think the $45 does stabilize the market. But having said that, when the price dropped in the 20s and as low as it was for a long period of time, it hurt certain companies that won't be able to rebound from that. So you'll still have some companies and there will be some outfall because of those low prices, it just killed them and there's no way they can come back.

Thank you.

Thank you. Bob Ramsey with FBR.

Just wanted to circle back on margin. The core margin, even when you strip out the purchase accounting pieces, had nice improvement quarter over quarter, by my calculation, about 10 basis points.

Just kind of curious what was driving that if Tradition had any contribution or impact to that, and then how you're thinking about that core market trajectory from that 321 level today.

This is Dave Hollaway again. Multiple variables to that number. Couple things here - one drives the increases for this past quarter, was the slowdown amortization on the bond portfolio, number one.

Tradition did have a little bit of impact to it. And then number three, you saw our loan yield tick up. And when I'm talking about this, it's all excluding any kind of purchase accounting business. You're looking at the core numbers.

So all the variables actually were positive to us. And so that's, you end up, when you look at all three together, that's why you saw the margin expand.

And so again, I think our answer's going to be the same as we look forward. You know we've said over the last few quarters we think we're in a place where our margin should be relatively stable. And if you actually look at the last five quarters going all the way back to last year, 317, 321, 313, 310, pretty stable. I don't think that dynamic changes as we go forward. I mean, we're still there depending on what happens on the loan side, depending what happens with prepayment speeds, all those kind of things.

I think it would be stable over the next few quarters, maybe a couple BPS deterioration just like you've seen [on] the last few quarters. Again, just depends on what we're doing on the balance sheet side.

And in essence, the stars and the moon align this time with all the variables in the right place.

For once, they line up.

There you go. You got three different (inaudible) work together.

It's nice when it happens that way. I guess so that the outlook would be more or less stable, you said maybe a couple basis points of pressure.

And then to sort of sum up everything you all have said on the purchase accounting side of things, if you normalize back to $7 million, $8 million, I guess you're taking the GAAP margin down by about 10 basis points next quarter, understanding there can be volatility around that.

Yes. On the fair value, yes, for taking out the maximum -- you're now talking about the actual stated margin, that absolutely would be impacted when you take [out] $10 million, $8 million, whatever it is per quarter of loan fair value income, yes.

(Inaudible) margin, excluding --.

[Not before]. He's talking about --.

Yes, but excluding fair value adjustments we still [looking] pretty stable.

Right. That's right.

That helps. I think I got. And then just so you can sort of talk about growth, I know you said 1Q seasonally it's slow and you all did have contraction in that energy book.

Do you all still think of, you think about the full year that you're on track to sort of do that mid-single-digit organic growth that you had been expecting as of last quarter?

Well, I think we are because, I mean, really, again, if you look that we dropped $99 million in oil and gas loans over the year period and you just multiply that times four quarters, that gives you $400 million. You divide that by -- and we made that up. And you multiply that times -- divide it by what we have, I mean, I still think that we can, yes.

I think that the February did impact a lot of people with the lower oil and gas prices, not only in Texas, everywhere I think. And I think that I really -- I'm positive going forward, looking out, I don't know why, I mean, I don't have something factual to give to you. But I think that we survived that, we did pretty good, and I just think, to me, things just feel good.

Okay. And then - that's good to hear - last question. It was a pretty material drop in the oil and gas book. I'm just curious if that was customers that paid down loans a little bit, if you had borrowers that refinanced elsewhere, or sort of what drove the drop in the energy book this quarter.

It was pay downs and, obviously, some charge-offs, a couple charge-offs.

The refinancing, that doesn't happen a whole lot.

Okay. All right. Great. Thank you guys.

Thank you. Matt Olney with Stephens.

Just to follow up on that last question on the energy balance, where do you think we are as far as energy loans pay downs? Is this going to stabilize you think in 2Q, or could we be a few more quarters away from seeing stabilization in the energy portfolio?

This is just my gut, and Merle may want to jump into it. But I think you are stabilizing.

We're getting close.

Yes.

We're still seeing some minor downward drift, but we're not going to see any major decline.

I mean, we'll still see some oil and gas decline. But again, I think it is starting to stabilize.

There's still a few loans that we want moved and the --.

Right.

-- people had the ability to move them out. So we're not going to shy away from letting them move them out.

Right.

Okay. And then just secondly, looking at the mix of the loan growth in the first quarter, it looks like the category that experienced pretty good growth was the construction development piece.

Was that from Traditions or was that more outside Traditions in the legacy Prosperity book?

I think the answer is both. There was some increase from Tradition Bank. But we continue to see a reasonable amount of loan requests coming in in that category, even from Houston. So the answer's both.

Yes. I mean, I think when you look at a lot of markets that we're in, you look at Dallas-Fort Worth, Austin, even Oklahoma City, believe it or not, the housing, the inventories are still very low. And so there's a lot of places kicking in. Even Houston's done very well for us.

Thank you.

Thank you. Gary Tenner with D.A. Davidson.

I have one more follow-up question just on the loan production side. In the past you've kind of commented in terms of what your monthly or quarterly production was.

Could you give us the number for the first quarter and remind us what it was either fourth quarter or in the year-ago quarter? And then also just a comment about the pipeline going into 2Q. Thanks.

Well, to try to put the average monthly loan production in perspective, let's just look back three years. And what we said is that normally historically the first quarter is the weakest quarter of the year. And that is correct.

For example, calendar year 2015, the average number was $267 million, but for the first quarter of 2015, it's $216 million. And if you go back to 2014, the average number was $260 million, for the first quarter it was $223 million. And if you go back to 2013, the average number was $184 million, and in the first quarter it was $141 million.

And you can go back even farther in time and you'll see the same thing. So the first quarter historically has always been light.

What is the pipeline like right now? I guess my answer would be that it's stronger than most people would think given the issue with oil and gas prices.

Is it as strong as we would like? No. Is it apt to soften some more? I personally think maybe a little bit, but it depends on the stabilization of the price.

And as David said a little while ago, at the current price, that price avoids a disaster. Is it better if it goes up? I think it's better if it goes to $50 or $60.

But as has been mentioned earlier in the call and in previous calls, a lot of our other markets that aren't quite so tied directly to oil and gas really continue to be doing very well, Austin, Dallas-Fort Worth, San Antonio. Some of our smaller communities have been stable.

So I think there's reason to be optimistic that things are not going to deteriorate and hopefully improve a little bit.

I would say, contrary to popular belief, when we look at population growth from 2014 to 2015, Houston had one of the biggest jumps in population growth out of all the major metropolitan areas.

And today, the fastest-growing 50 metro areas as of February or March, the number one was the Dallas-Fort Worth with, they increased jobs from two -- their nonfarm payroll jobs were 2.465 million. They increased it from March 2015 to 2016, by 112,000 or 4.8% increase. And Austin was number four at a 4.1% increase.

So you have markets in Texas that are really outperforming and outshining the rest of the United States. And even in the Houston market, you had a bigger population growth than most all other metro areas from 2014 to 2015, which is unusual.

Thanks a lot for that detail. And I apologize if I missed it. But what was the first quarter number for 2016?

The quarter that we just ended?

Yes.

$250 million in average production of loans.

And that's monthly production, correct?

That's correct, $250 million a month was average.

All right. Thanks very much.

Thank you. (Operator Instructions) Jennifer Demba with SunTrust.

Question on credit. Could you give us some more color on the net charge-offs and any details you have on those loans that you charged off this quarter, as well as the ag loan that went on NPA this quarter? And then I have a follow-up.

This is Tim, Jennifer. About half the net charge-off was in two energy credits that we knew were not good credits when we acquired them. We had marks against them. Unfortunately, the marks were not sufficient, but we did have marks against them. So they were not surprises. We knew those were problem credits, weak credits.

The agricultural credit which was approximately the other half, was a surprise. We can't say a whole lot about it because we anticipate there's a high probability of litigation going forward involving that credit.

But suffice it to say that we didn't anticipate it. It's a credit that had been in business for many, many years. It's a credit that had a good reputation, had decent numbers financially. So it was a true surprise.

And I guess that happens every now and then when you're in the money lending business. So I hope that's enough color for you.

The energy credits, were those E&P or oilfield service?

One was definitely E&P. And the other was also, wasn't it?

Both E&P.

Yes, they were both E&P.

Okay. And do you know what the loan loss severity was on both of those energy credits?

Loan loss severe -- what was that Jennifer?

How much of the loan did you charge off?

Well, I guess the charge-off on this quarter, Randy, was 30%, 40% of the original credit. We'd already --.

Yes, we'd [come] down with a mark.

There was only about 40% left on the --.

Yes. So --.

I think the bottom line is, though, they were -- they -- we identified them when we went to the acquired banks, we gave them credit for the price of oil and gas at that point in time. And as oil and gas went down, you just had a bigger charge-off.

Yes.

So when you look at the net balance without the mark, Jennifer, it was 30%, 40% of the credit that we charged off in the quarter, which took it to zero, took the credit to zero.

Okay. And David, what do you think about your provisioning outlook in the next few quarters? I know oil's a bit higher now. But these companies are still stressed. What are your thoughts there?

Well, god, I hope it's not what it was this quarter. Again, as Tim said, the $7 million is a complete surprise because it was a company that had been in business for 50 or 100 years, had a great reputation. And so we can't talk a lot about it because we could possibly be in litigation over it.

But I'll go back to what I said basically in the June quarter, somebody asked me, well, why aren't you all making a $40 million or $50 million allocation for oil and gas and all that?

And I said, well, you know we know we'll have losses but we don't know exactly what they are until they happen, and we'll take them as they happen.

And I think the guidance I gave in June, which I usually give for a year out, is usually, I said, in my opinion, there could be anywhere from $5 million to $15 million in charge-offs during that period of time. And I think that, you know we have one more quarter I think (inaudible - background noise) that I think that we're in line somewhere in that category.

Now, in June, you'll have to ask me again. I get to start over again, hopefully.

Okay.

But I think that's kind of where we're at. But again, I think that's an extraordinarily high quarter. But again, as Tim said, you never -- and I qualified this in prior comments, you know in the lending business sometimes you have something you were never expecting and something like this happens. But I hope that doesn't happen again.

Okay. Okay. And I had a follow-up, but it just floated out of my head. So I'll follow up later. Thank you very much.

Thank you. And as there are no more questions at the present time, I would like to return the call to Charlotte Rasche for any closing comments.

Thank you, Keith. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate the support that we get for our Company, and we will continue to work on building shareholder value.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.