Torry Berntsen - President and Chief Operating Officer David Brooks - Chairman and CEO Michelle Hickox - Executive Vice President and Chief Financial Officer Daniel Brook - Vice Chairman and Chief Risk Officer.

Matt Olney - Stephens, Inc. Brady Gailey - Keefe, Bruyette & Woods, Inc. Brad Milsaps - Sandler O'Neill & Partners Michael Young - SunTrust Robinson Humphrey Steve Moss - Evercore ISI Brett Robinson - Piper Jaffray John Moran - Macquarie Capital Adam France - 1492 Capital Management, LLC.

Good day, ladies and gentlemen, and welcome to the Independent Bank Group Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I’d now like to turn the conference over to Torry Berntsen, President and Chief Operating Officer. You may begin..

Good morning. Welcome to the Independent Bank Group conference call to discuss financial results for the third quarter 2015. I’d like to thank you for joining us this morning. I’ll 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 earlier this morning and a copy is posted on our website, www.ibtx.com. We will be going over much of the release on this call. If you have any trouble accessing it, please call Robb Temple 214-544-4777 and we will e-mail 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 the text in this morning’s 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 be only a statement of management’s beliefs at the time the statement is made.

Predictions that we make may not continue to reflect management’s belief and we do not publicly update guidance. We will discuss a number of financial measures considered to be non-GAAP under the SEC’s rules.

Reconciliations of these financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are included in our earnings 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 questions.

With those reminders out of the way, I’d like to outline the agenda for this call. David will open with his thoughts regarding our third 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 for questions. I’ll now turn it over to David..

Thanks, Torry. Good morning, and welcome to our third quarter earnings conference call. This was a transitional quarter for us. Our loan growth returned to historically strong levels, while we made a decision to take an additional reserve for the potential risk of the current energy commodity price environment.

While this decision impacted our earnings for the quarter, we believe it positions us well for the possibility of lower oil and gas prices for a long period. With that background, I will address a few of the highlights. We reported loan growth of 18.1% on an annualized basis for the quarter.

This growth brings our year-to-date loan growth more in line with our expectation for the year. Much of the growth came in the latter part of the quarter, and as a result earnings do not reflect the full effect of this increased growth.

We expect to recognize the full benefits of the third quarter growth in the fourth quarter, and the pipeline for the fourth quarter looks good as well, although, we expect some headwind overall from the pay downs in the energy loan book.

Third quarter earnings were lower than expected, primarily due to this position to take an additional provision for loan loss. This provision recognizes the anticipated loss on our one nonperforming energy credit, as well as builds up our general reserve. The additional provision increases our energy-related reserves to 3.4% of the energy portfolio.

Although the energy portfolio is holding up well and our borrowers are cooperating, we believe this approach positions us well, if in fact, energy prices remain low for an extended period. I want to emphasize that our asset quality remains strong.

Total nonperforming assets decreased from the previous quarter and are consistent with levels from a year ago and our aggregate criticized and classified energy credits represent 1.6% of total loans, which is consistent with the previous quarter.

Our loan growth was primarily in Dallas and Austin regions, while we saw an overall reduction of $17 million in energy portfolio. We think that our non-energy related growth demonstrates the continued overall health of the Texas economy.

Our announced Grand Bank transaction is proceeding ahead of schedule with closing scheduled for November 1, and our systems conversion scheduled for early 2016. Our teams are working very closely together identifying additional revenue and expense synergies. In addition, Grand Bank has began to reposition its balance sheet to improve earnings.

We remain very excited about the long-term prospects of this strategic acquisition. With that, I’d like to ask Michelle to go over our 2015 third quarter operating results.

Michelle?.

Thank you, David, and good morning, everyone. As noted in the earnings release, our third quarter core net income was $8.9 million, or $0.52 per diluted share compared to $9.5 million, or $0.58 per diluted share for the third of 2014, and $10.5 million, or $0.61 per diluted share for the quarter ended June 30, 2015.

Net interest income was $38.1 million for the third quarter 2015, compared to $32.4 million for the same quarter 2014 and $37.8 million for the linked quarter. The increase from the previous year resulted from our organic growth and loans acquired in the Houston community acquisition.

The increase on a sequential basis is due to higher average loan balances. Our net interest margin was 4.08% for the third quarter, compared to 4.04% for the prior year quarter, and compared to 4.10% for the second quarter. The decrease from the prior quarter is primarily due to reduced accretion income on acquired loans.

Our core net interest margin, which does not include accretion income was 4.07% for the third quarter, compared to 4.02% in the prior quarter, and 4.04% in the linked quarter. Total noninterest income decreased 411,000 compared to third quarter 2014, and decreased 310,000 compared to second quarter 2015.

The decrease from the prior year is a result of a decrease in gain on sale of loans. You may remember that, we recognized a $1.1 million gain in third quarter 2014 from the sale of the SBA loan portfolio acquired in the Bank of Houston acquisition, and an increase in losses on sale of premises and equipment.

Offsetting the decrease were increases in deposit service charges and mortgage fee income. With respect to the linked quarter, the decrease was primarily related to lock on sale of premises and equipment, reduced mortgage fee income, and reduced gains on the sale of securities.

The decrease was offset by an increase in deposit service charges and a gain on sale of loans. Total noninterest expense increased $3.7 million compared to third quarter 2014, and increased $1.4 million compared to second quarter 2015.

The increase in the prior year is due to increased salaries, occupancy, data processing, communication, and other noninterest expenses resulting from increased employees and locations added in the Houston community acquisition during fourth quarter, as well as overall loan growth.

On a linked quarter basis, the increase is related to higher operating expenses, including increased incentive compensation accruals for loan growth and mortgage activity, increased acquisition expenses related to the Grand Bank transaction, higher legal fees on existing litigation, and increased costs related to monitoring and servicing the energy portfolio.

We recorded a $3.9 million provision for loan loss for the quarter, an increase of $3 million from the third quarter 2014, and an increase of $2.2 million from the prior linked quarter.

The significant increase in the provision this quarter is directly related to our increased organic loan growth and increasing qualitative factors related to the energy portfolio generally, an additional specific reserve on the existing nonperforming energy credit.

As it relates to loans for the quarter, organic loans held for investment grew 4.6% from June 30, 2015, or 18.1% on an annualized basis. The composition of the overall loan portfolio remains comparable to previous quarters.

Energy, E&P outstandings at the end of the third quarter were $209.6 million comprised of 27 borrowers, representing 5.9% of the loan portfolio. For the remainder of the year, approximately 70% of our portfolio was hedged that are priced at $67 per barrel. In 2016, close to 50% of the portfolio was hedged at an average price of $56 per barrel.

As discussed in our prior earnings releases, we have one nonperforming energy credit, which has a balance of $4.2 million. During the third quarter, two performing energy credits were classified, which have an aggregate balance of $28.5 million.

Aggregate criticized and classified energy credits totaled $56.4 million, oil field service related balances continue to represent less than 1% of total loan balance at September 30, 2015, and remain stable at $23 million. None of the oil field service loans are criticized or classified.

With respect to overall asset quality, total nonperforming assets was $15.1 million and represented 0.34% of total assets at September 30, 2015, compared 0.33% of total assets at September 30, 2014, and 0.37% at June 30, 2015.

The decrease in the linked quarter is due to the sale of other real estate and the repossession of collateral and related charge-off of previous nonaccrual loan. With respect to funding, total deposits were $3.53 billion at September 30, 2015, compared to $2.81 billion at September 30, 2014, and $3.47 billion at June 30, 2015.

We continue to focus on new ways to grow our core deposit base, while keeping costs low. The Grand Bank acquisition will also have a positive impact on our deposit. The average cost of interest-bearing deposits decreased to 0.48% for the quarter, compared to 0.49% for the third quarter of 2014, and was slightly higher from the second quarter 2015.

Our year-to-date cost of deposits is 0.35%. Total borrowings increased by $63 million from June 30, 2015, due to the use of short-term FHLB advances to fund linked quarter loan growth. That concludes my outline of the highlights of our financial statements. I’ll turn it back over to David..

Thanks, Michelle. We’re encouraged by the third quarter results. Loan growth returned to anticipated levels, and we plan to build on that momentum going forward. Although the additional provision reduced earnings, we believe that this minimizes uncertainty in the energy portfolio.

Aside from the additional provision, earning remained solid and asset quality remained strong despite the volatility in the energy markets. The Grand Bank transaction represents continued execution of our targeted acquisition strategy. We are quite pleased to have our regulatory approvals in hand and are on course from earlier than expected closing.

I continue to remain involved in M&A discussions and in developing and expanding relationships for future opportunities. I believe we will see more activity once we have some stability for a period of time in the oil prices. We will continue to remain disciplined in our approach to acquisitions with respect to both strategic fit and valuation metrics.

We are confident that our actions during the third quarter will improve the performance going forward and that our conservative approach will continue to yield positive results and enhance shareholder value. And with that, we’ll open the call to questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Matt Olney with Stephens, Inc. Your line is open..

Hey, thanks. Good morning, guys.

How are you?.

Good morning, Matt..

Hey, Matt..

Hey, I think, Michelle may have brought this up on the prepared comments.

But can you just go over the, again, the dollar amounts of total criticized energy loans in the third quarter, and how this breaks down between classified, nonperforming, and special mentioned?.

Yes..

I have that detail. I just know the total is….

I have, that is [ph]….

Yes, the total criticized and classified number, Matt, is $56.4 million..

And then $4.2 million is that nonperforming and then there’s the $28 million, that is the classified, that’s performing, and then the rest would be in the criticized. So in essence you have the $28 million that’s classified and performing, you have the $4.2 million, that’s classified not performing.

And then the difference between that and the $56.4 million is your criticized….

24 million..

Right..

Okay. Got it. Thank you.

And then outside of energy, any commentary about what you’re seeing on credit quality or items that you’re watching pretty closely to there?.

We feel really the same as we did at the end of the second quarter, Matt, regarding our portfolio. It’s strong, performing well. We don’t see any signs of weakness at this point.

We’re particularly paying attention to Houston and commercial real estate in Houston, looking for any signs of stress or strain, so that we can get on it early, that’s been part of our strategy over the years has been to get – to identify early, address early, we think that’s been one of the things that’s helped us so far through this energy downturn.

So no change. The big change, Matt, and I know a lot of folks are concerned appropriately so about any regulatory – how the regulators are going to deal with not only the SNCs, but any other issues around the energy and how they’re going to ask banks to classify an account for it.

Our view in – is the only thing that really changed materially for us from a credit quality standpoint third quarter over second quarter is that, oil was $58, $60, $62, we’ll call it $60 at the end of the second quarter, and it’s been mid-40s.

And during the third quarter, it went – tested the lows and went down to $38, and ended the quarter at mid-40s.

And so, the big driver, if you will, of our additional loan loss provision was just – when we looked at our formula and the qualitative factors inside of our loan loss reserve formula, we felt like that the possibility now of prolonged mid-40s oil prices is a different scenario than we were to looking at the end of the second quarter.

So we felt like we were properly reserved and everything fully accounted for, if you will at the end of the second quarter. But the facts on the ground changed dramatically during the third quarter to oil prices in mid-40s.

And a lot of very smart people think that it’s going to be in the mid-40s for a while in that, we’d be a long slow recovery, which we always thought. But a long slow recovery from a $60 base is different than a long slow recovery from $45 base.

Again, we don’t see any big problems, or big things coming down the track in terms of our portfolio specifically. But we just felt like, there’s more risk in an energy portfolio at $45 oil prices than there are $60 oil prices. And we felt like we wanted to get ahead of the curve here and make provision, or adjust our formula accordingly.

So that’s what drove the additional loan loss provisions just an acknowledgement that oil prices are $45, not $60..

And, Matt, just to give you those exact numbers on the criticized were $23.7 million, and on the classified were $32.7 million. But of that $32.7 million, $4.2 million is the only piece that’s nonperforming. And on the classified on the other piece, we feel very good about the rest of that strong asset values.

We’ve estimated 1.5 times asset coverage on those other loans. So we feel good about the others that are on the classified category..

Okay. That’s a great color. Thanks, guys..

Thanks, Matt..

Thank you. Our next question comes from the line of Brady Gailey with KBW. Your line is open..

Hey, good morning, guys..

Good morning, Brad..

Hi, Brady..

So, it sounds like loan growth picked up in the back part of 3Q and the pipeline is good headed into 4Q.

What’s the source of kind of the pickup in loan growth? What sort of product are you putting on? What’s happening that’s driving a little uptick?.

Brady, we haven’t changed the thing. We’ve been – our loan officers has been out hustling all year like we always do looking for owner-occupied real estate for C&I loans, equipment loans, medical office building loans, those types of things.

And that’s really – there has been no change in the complexion of what we’re booking with the exception of the fact that last year if you look at year-over-year, last year we were booking energy credits all through the year. And that’s the one not only missing piece, but it’s the headwind a little bit there in that.

We had a – almost a $20 million pay down in our energy book over the course of the third quarter. But in terms of what we’re adding, it’s just exactly the same complexion and we haven’t put on any special pricing, or anything to drive that. It just happens that it was slower in the second quarter.

And as we said all along for 2.5 years as a public company, our loan growth just happens to be a little bit lumpy, some quarters are strong and some we get extraordinary pay downs et cetera. But nothing grow, but I mean 18%, I think 18% plus growth in the third quarter was higher, but it was really just a reflection of 8% in the second quarter.

So when you put the whole year together, we’re running just under 14%, and that’s about what we thought coming into the year. So we’re right on track. What we see in the fourth quarter not knowing exactly what the energy pay downs will be. Although, we do expect some more significant pay downs in the fourth quarter.

It looks to be kind of in that same range, Brady, that low mid-teens kind of growth is what we expect in the fourth quarter. So, if we had to call right now, we think for the year, we’re going to be in that 13%,14% range.

And that’s a little slower than we thought coming in only, because we expected the energy there the opportunities to make energy loans, and we just haven’t seen that. So far our customers the ones that are getting paid off, tend to be coming from equity, recapitalizations of the companies, or subordinated debt, or that type of thing.

So we’re not seeing the opportunity to finance a lot of energy at this point, and that’s different than we would have guessed. But so far our loan growth, especially in Dallas and Austin is running very good and at historical levels.

Houston is still growing, but it has slowed a little bit here in – this year kind of running right now at an annual pace about 8% growth in Houston. And, again, same asset categories we’ve always seen just a little slower there..

So if you look at it, Brady, probably in the Austin and the Dallas area, as we’re running close to 20% in annualized growth during the course of this year..

Okay. All right, great. And then of the 210 that’s in the energy book, how much of that is Shared National Credits? And have you all heard, it sounds like regulators are going to do another kind of second SNC review in the winter of the share.

Have you all heard anything about that?.

Yes, the same thing that everyone else has heard, Brady. We have – we are only about 27 relationships, only three of are SNCs, one of them is a SNC that we agent and we participate in two other SNCs agented by other Texas banks. So in the total of those three outstanding….

It’s actually 55..

Of the SNCs ….

It’s $55 million..

Okay, got it. So, yes, of those three SNCs totaled $55 million of exposure to us, Brady. And we’ve heard that there’s going to be another round and SNC reviews, and that we’ll see what comes out of that, we would be interesting to see. That should not be material to us.

One of those SNCs, I believe, Dan, is already in the classified bucket, correct?.

Yes..

Correct..

So. Yes, one of those three SNCs has already classified, Brady. So we don’t expect any further downgrades on that, so really we have two credits that I guess would be subject to potential downgrades. Yes, but those two credits are in really good shape, so we’re not expecting – we don’t expect the SNC review to have any ill-effects on our portfolio..

Okay. And then lastly on M&A, you will close Grand here in a couple of weeks. I realize you’re probably a little preoccupied, feel almost all the synergy mess.

But as you’re focused in kind of calling effort on targets changed at all with M&A, or are you still out there pass on like you were a year ago?.

Yes, it hasn’t changed at all. Brady, the only thing that’s changed obviously is the environment we’ve got in Texas. We have been more focused in the Dallas areas and Austin, San Antonio. Dallas/Fort Worth, Austin, San Antonio have – we’ve had more discussions there in the last six months, I guess than we have in Houston.

But overall, our discussions remain the same. The determining factors have a lot to do with the currency of the buyers. The expectations of the sellers in terms of price and then obviously a big factor we always find is the cultural fit and objectives going forward. And so we continue to work that.

I continue to be optimistic that, we’re going to see activity. What – the – it’s really the volatility in the energy prices that kind of creates the chill. I think, if they settle out at a certain level, people know what to expect.

And so my expectation is that, if we can get some stability in oil prices, whether it’s in the 40s or the 50s or 60s, then you’ll see more activity, because people kind of get a confidence around, okay, we know what the environment is now, we can adjust our expectations and move forward..

Okay, great. Thanks for the color..

Hey, thanks, Brady..

Thank you. Our next question comes from the line of Brad Milsaps with Sandler O’Neill. Your line is open..

Hey, good morning, guys..

Hey, good morning, Brad..

Hi, Brad..

Dave, I was kind of curious, if you could just breakdown the provision this quarter or maybe in the components that you talked about, what the dollar amount was for growth, and then maybe the Q factors in this specific reserve?.

Michelle?.

Yes, let me try to address that one, Brad. And if you remember, we’ve always commented that we generally try to put away about 1% of our loan growth, which would have fit the provision just for growth this quarter at about $1.4 million. Then we took an additional specific provision on our nonperforming energy credit of $1.2 million for the quarter.

And then I think there was probably 500,000 of other general allocation related to loans that were brought on that were re-underwritten for the Bank of Houston, and then pretty much the rest of that provision would be related to the energy qualitative factors..

That’s great. That’s very helpful. And, Michelle, maybe just to stick with you on expenses, obviously had a tick up again this quarter. Just kind of curious, what your outlook might be there as – if loan growth maybe not as strong as you thought from the beginning of the year, and trying to get to some of the numbers that are out there.

Just kind of curious your outlook for expenses?.

Yes. As we talked about in the release in our comments, comp expense was up primarily due to incentives, because our loan growth was really strong, our mortgage group has done really well. So, we had additional accruals there. And if that – if our loan growth continues through the end of the year, I expect that run rate will be good.

But we did have – I was little surprised, we had some expenses in our noninterest expense this quarter that not that it wasn’t plan for, it was just stuff that kind of all hit in the same quarter, and it’s across several different categories, data processing, loan expenses related to like collection efforts on the energy portfolio that either won’t repeat, or we may even get reimbursed by borrowers.

Occupancy expense, we did a lot of refreshing of branches this quarter. And so that won’t repeat, and then public relations, we had some unusual or higher expenses than normal. So I think all in all we probably have about 400,000 in our noninterest expense that wouldn’t be – I wouldn’t include that in our run rate going forward..

Okay, great. And then just a follow-up on the Grand acquisition, David, I think [ph] in the call report their earnings maybe for the last reporting period were a little bit less than they had been maybe historically.

Is that just them readying their balance sheet to come over with you guys, maybe preloading some charges from payoff of FHLB and things like that, or is there anything else that might be going on there?.

Correct, Brad. We actually think they’ve been – we know they’ve been repositioned their balance sheet in accordance with our discussions and where they know we plan to head with it once we close. And so they have redeemed all of their FHLB advances. There was a significant prepayment penalty, if you will, on those advances.

So that was, I think, in the quarter and accounted for a lot of the decline. We’re actually – we feel good about – we’re very good about where they are and think that we’ll actually be able to accomplish the redeployment of the balance sheet in the manner that we expect to do that we communicated previously quickly here.

And the fact that, we’re closing a month or two sooner than we had expected. We’ll – we had announced that, I believe it was mid-July. And so, getting it close in 3.5 months from the time we announced, we’ll, I think, be the fastest we’ve gotten one close. So we’ve got the approvals and we’re headed to closing. So we feel good about great about that.

So we’ll have even longer to – we’ll have an extra couple of months this year to get the cost saves out and get the balance – we’re going to get the balance sheet reposition. So we’re actually slightly more, I guess, positive about earnings in the next two or three quarters from the Grand acquisition than we were before..

Great. Thank you, guys..

Thanks, Brad..

Thank you. Our next question comes from the line of Michael Young with SunTrust Robinson Humphrey. Your line is open..

Hey, good morning..

Hey, good morning, Michael..

Good morning, Michael..

I was just curious, if you could give us an update on what your price deck is on the energy reserve base lending book? And what efforts you’re taking to stress test the book, and how you’ve done that through your methodology?.

Our price deck is low as it’s been, Michael. It reflects the current price of oil in the mid-40s, and just ever, so slight increases in the next couple of years going forward, I don’t – so I think that – we’ve got.

Our price deck is right in line, because we follow and have conversations with the regulators on a regular basis about what all the banks price decks are looking like and ours is just kind of right in the middle of the pack..

Michael, we update ours as frequently and as regularly as anybody and really look at it diligently on a monthly basis..

Okay.

And then what methodology are you using to stress test the book? Is this sort of bottoms up, or you are going to cut it like credit, is that sort of the process, or do you top down securities there?.

Yes, we do it credit by credit. We do it credit by credit, Michael. Look at the – as we stress test and….

We’ll look at it credit by credit, Michael, and each were in the process of going through the redeterminations on – one more time, this could be the third time. This will be the third time since we – the price downgrade.

And then we’re looking at what our hedge book is and what that turns out to be in 2015 and 2016, were actually have added some more hedges even during the course of after this quarter..

Okay, great. And just one last one, if I can. Curious, you are mentioning the slowdown a little bit in Houston.

Do you plan to hire more in Austin and Dallas to sort of pivot the growth going forward?.

I think we’re always going to hire good officers, good lenders in all of the markets that we’re in. So I wouldn’t say that we’ll be focused there, although most of our hires this year have been and not so much intentionally. But we just hire where the right opportunity is and the right people are – has been in Austin and Dallas.

But we continue to have discussions with officers in Houston as well. And so we – it’s situational and lumpy and all those things. But we do feel good about our ability, continue to hire over the next few quarters..

Okay. Thanks..

Thanks, Mike..

Thank you. Our next question comes from the line of Steven Moss with Evercore ISI. Your line is open..

Good morning, guys..

Good morning, Steve..

Good morning, Steve..

Just wondering going back to loan growth here, it sounds like the pipeline has thought heading into fourth quarter.

What are you guys thinking about 2016, given the mixed dynamics going on?.

Yes, we’re just working on our budgets right now, Steve. But we’re rising for it to be a little slower in Houston and – but so far we see a lot of strength in Austin and in Dallas/Fort Worth, North Texas. And so when you average all that together and balance it, I think, we’re going to be looking at a low double-digit kind of a projection.

Without having our budget done, 12% is probably a good way to think about it for us going forward just given the uncertainty and the headwinds on the energy side. I think our core business will continue to grow mid-teens.

But then when you take out some energy pay downs and allow for possible [ph] slowdown in Houston, that’s kind of the number we look at kind of a low double-digit number..

Okay. And then just curious also you mentioned that on the oilfield service book, I know it’s a small book, but there is no criticized or nonperforming assets there.

Just wondering, what is within that book? And are you seeing any signs of stress?.

No. No signs of stress at all, that’s obviously a portfolio, even though it’s small, that gets a lot of attention. And our account relationship managers there are in weekly contact with their customers. We look at it again credit by credit relationship – our relationship and no concerns at all at this time about that piece of the book..

Okay.

Are they credits – are they more service in terms of trucking and delivery, or how should we think about that? What is – what are the underlying businesses?.

Yes, just general..

It’s just really – we couldn’t – I couldn’t characterize it for you, Steve, in terms of – I don’t know it’s all transportation and it’s all whatever, it’s some pipe companies some that or specialty, make specialty drilling things for the drills, drill bits, if you will.

And so machine shops, so yes it’s a very general portfolio and very spread out generally third, fourth generation ownership and not much leverage and so yes, I mean literally of we’re – if you ask our concerned level and then we know we feel good as I said earlier about our credit.

But I think CRE in Houston would be something that we’re paying every bit as much attention to as we’ll pay into this..

Okay..

We don’t see any risk I think we don’t see any material risk there..

Got, you.

And then just on those I was just wondering if you could update us on what you’re seeing in terms of loan pricing have things changed given the oil price that perhaps getting little bit better stability in terms of loan pricing?.

We think loan pricing has been fairly stable although people are trying to grow loans we’re still in a very competitive difficult market.

But loan prices seems to be stable we’re not seeing anything any anyone behaving badly in that arena if you will at this point, so and our – I think our NIM reflects that our core NIM was up the couple of basis points in the quarter. So I think that’s an indication that that our pricing holding about quite well..

Okay, thank you very much..

Okay, thanks, Steve. Thank you. Our next question comes from the line of Brett Robinson with Piper Jaffray. Your line is open..

Hi, good morning everyone..

Hi, good morning Brett..

Hi, Brett..

I wanted to I guess first just ask on the loan growth you had in the quarter I know payoffs have been a bit of a headwind for growth.

Can you talk about maybe payoffs like maybe the number, or just incrementally how much that was less of a headwind in 3Q versus for it was in 2Q?.

I think Brett, payoffs actually were fairly consistent in the second and the third quarter so that’s good loan growth from the third quarter and what we saw. And again as David, pointed out that was more back ended. So you didn’t get the full effect for the quarter. But payoffs were relatively consistent on a quarter basis..

Yes, payoffs were $255 million Brett, versus $250 million second quarter, so just write on the same..

Okay, great. And then just I guess thinking about Houston everyone is going to watching Houston and thinking about commercial real estate there.

Could you maybe just give us your thoughts on their exposure to that the energy quarter or and how much you might have in office versus a part of net what have you in that market?.

Yes, Brett, let Torry, give you some details behind the portfolio there..

Actually, we feel good very good about the Houston portfolio from a CRE standpoint. Our office portfolio is the little less than 9%. And if you look at that 9% close to 69% of that or actually 68% of that is owner occupied.

On the whole CRE portfolio that we have in Houston were close to 49% owner occupied, which is a bigger number than our overall portfolio. And again the portfolio is actually very granular in Houston. And we have about the average size loan size and Houston is around 300,000.

So overall a very conservative numbers consistent with what we told you at the end of the second quarter. Again granular we haven’t seen any down tax in anything and we feel good about where it is at..

And that 9% Brett, of office exposure tends to be Class B office buildings that are in we have a lot of equity and strong tenant base and even if the big new buildings come on spillover. We think that our borrowers those tend to have guaranties on them.

And we have almost no or a very insignificant exposure in the energy quarter on the west side of Houston in terms of office and apartments. And so we – we’re concerned right. We’re watching and we’re aware of the concern about Houston.

We still like that market an awful lot and feel like that’s a place that banks and businesses are going to be want to be over the next 5 plus, 10 plus years. And so we’re paying attention, but we’re not overly concerned about it right now..

Okay. That’s great color. Thank you..

Okay. Thanks, Brett..

Thank you. [Operator Instructions] Our next question comes from the line of John Moran with Macquarie. Your line is open..

Hey, good morning, guys..

Good morning, John..

I just had a couple of ticky-tack follow-ups. Most of mine have been asked. But circling back on the E&P credit, the one NPL. There was, if I’m not mistaken at $1.5 million specific reserve against that last quarter and then it was added to this quarter $1.2 million.

That certainly feels like it’s mark to move, do you have any sense in terms of resolution there? Is that some that you guys are – I’d imagine aggressively kind of working out?.

Correct. We’re focused on aggressively resolving that one. I think, I don’t think we had a quite $1.5 million at the end of the second quarter, I think it was more like $1.3 million. But yes, your point is correct that we put some pretty aggressive marks against that credit.

That as we’ve spoken about in the past, John, an unusual situation it has a lot of facts and circumstances around it, none of which are shared by any of our other energy credit.

So we feel like we get that one resolved here shortly and we feel like we’ve got it appropriate for the reserve now given all of the – given what the oil price points are now, and what the appetite is out there for acquiring assets or loans.

Okay?.

Got it, yes. The – and then the other kind of one that I had was, I guess, it’s round numbers just under 30% of the book criticized and classified today.

Do you have a sense of where that kind of gone to in past cycles or and then kind of a loss given classified, where that might shake out, I mean, I would think on the second part of that question it’s pretty low number?.

Yes. We – that we have the one nonperforming where we’ve made a significant provision and feel like, we’ll realize the loss on that here this quarter and next we come up soon, and we feel like we’ve got it appropriately reserved.

Beyond that the two substandard loans as an example, John, in the energy book, both have, as Torry mentioned earlier about our current market value of the collateral in those loans was approximately 150% of the outstanding balance on those loans.

So we feel like we’re in – our borrowers are in very good position to resolve that and they’re cooperating and working hard to get those resolved. We actually, again, some of those credits are going, where they’ve got assets like that, John. They’re going to depend on what their strategy is, they may be selling assets.

They maybe selling some assets to reduce the debt down to where it’s back in performing non-classified status, or they may be raising additional equity.

All those things are going on and we actually expect the credits that are in our substandard bucket right now to be resolved in a way that is positive for the bank and for the customer here over the next quarter..

Got it..

We don’t anticipate an answer to your broad question, John. When we look at the energy book, we do not see any material losses coming out of that book. Now, again, dependent on how long oil prices stay down, depending on discussions with regulators, all those things will determine kind of there’s some credit migration to the right there.

But that said, I think that our – we’ve got a terrifically experienced team working on this. We got on it early. And our borrowers are resourceful they continue to have a lots of options to deal with the current stress and they’re executing their plans. And we’re trying to facilitate that as best we can..

Got it, yes. And then the last one from me I don’t remember the exact number, but I think coming out of the spring process. You guys had a bunch of borrowers that had kind of tripped into MCR. And if you had any kind of update in terms of I know it’s early in fall yet. But what borrowing basis are doing in terms of percentage decline.

And how many folks yet expect to end up in MCR at this quarter end?.

John, about 60% of our energy borrowers on some form of MCRs right now. The before borrowing basis could trigger I guess a few more to get into MCR, but I don’t think it’s going to be material.

We’ll see the fall borrowing basis again, we’ve been on a continuing basis updating our thoughts on evaluation of collateral and cash flow more importantly and how the result be.

So our kind of view is a little different maybe than some of our peers in that, but while we’re doing fall borrowing base redeterminations those aren’t going to reveal information we don’t already have I guess broadly and likely won’t affect our strategies in terms of how to work with those borrowers and help them resolve any concerns or issues that they’ve got or we got.

So we’re not the fall borrowing base determination is not a big train coming down the track. In our view it’s just either be a little bit of additional update in information, it might affect how we ask borrower to deal with it, but it’s not.

There’s not, we don’t expect any big surprises in the fourth quarter I guess regarding the borrowing base determinations are going to drive any new material big new sub-standard loans and/or any loss expectation that would drive energy loss provision..

Got it. So definitely it’s still kind of manageable in any sense..

Yes, extremely so and we given the commodity decline as I mentioned earlier from $60 oil at the end of the second quarter to $45 oil been in the third quarter. We feel like our team and our borrowers are doing a great job with that..

Perfect. I appreciate you, guys. Okay. Thanks, John..

Thank you. Our next question comes from the line of [indiscernible] with Wells Fargo. Your line is open..

Hello, everyone..

Good morning..

My, question regard the acquisition of Grand Bank, Grand Bank’s balance sheet is very flush with liquidity.

You guys plan on maintaining that on your balance sheet or lending that out with the strong loan growth that you had recently and then pushing that into the fourth quarter?.

Yes, that’s a good point Chad, our strategy with this acquisition has been they have a terrific deposit base and that deposit base will fit nicely in with our balance sheet. And then we’ll invest some of it in short-term securities in the interim time, but we expect our loan growth runs $100 million to $150 million a quarter.

So it won’t take too long to loan that out..

All right, thank you, that’s it..

Okay. Thanks, Chad..

Thank you. Our next question comes from the line of Adam France with 1492 Capital. Your line is open..

Good morning. And thank you, for squeeze me in here..

No problem. Good morning Adam..

Can you speak to all right. Can you give us anymore detail on the nonperforming energy credit.

So there is a unique situation just E&P loan I’m assuming what can you tell us without getting in this trouble?.

Adam, it’s a – it is an E&P loan it’s a small loan it originated I think at $4.5 million and it’s currently at $4.2 million. There’s some hedges in place there it just there it’s a secured by assets in the Midwest, I believe Denver, Wyoming kind of energy E&P assets.

And so beyond that the circumstances the credit itself sort out looking like our normal E&P credits, but just as we work through it we’ve discovered some things that make the characteristics of this credit and what went into the loan and the collateral pool and everything just different than our other credit so….

Okay, very good. Thank you..

Okay. Thank you..

I’m showing no further questions at this time. I’d like to turn the call back to management for closing remarks..

Thank you. I appreciate everyone dialing in. We continue to feel good about been able to execute our plans. And we’ve got our sleeves rolled up like a lot of our colleagues here in Texas, but we still feel like we’re in the greatest markets in the country and that they will be over the next 10 years.

So we’re taking a appropriate view we think in that regard. And I appreciate everyone’s support and we’re happy to continue to communicate if we can help you in any other way. Have a great day..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Everyone have a great day..