Torry Berntsen - President & COO David Brooks - Chairman & CEO Michelle Hickox - EVP & CFO.

Brady Gailey – KBW Brett Robinson - Piper Jaffray Steven Moss - Evercore ISI Kevin Fitzsimmons - Hovde Group Matt Olney - Stephens Inc. John Moran - Macquarie Capital.

Welcome to the Independent Bank Group First Quarter 2016 Financial Results 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 will now turn the call over to your host, Torry Berntsen. You may begin..

Thank you and good morning. Welcome to the Independent Bank Group conference call to discuss financial results for the first quarter of 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 Robb Temple at 214-544-4777 and we will e-mail 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 management's beliefs at the time the statement is made.

Predictions we make may not continue to reflect management's belief 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 measures 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 questions.

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 for 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 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 CNI 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 the 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. Non-performing assets increased primarily due to an energy loan participation being placed on non-accrual by the lead bank. That said, non-performing assets remain 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, 7% is oil field related service loans.

The oil field 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 supported 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, it 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 a multi-family. 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 outstanding.

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 of 2015 and $42.2 million for the fourth quarter of 2015. The increase in net interest income reflects increased average loan balances resulting from organic loan growth and loans acquired in the Grand Bank acquisition.

In addition, we recognized increase accretion in 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 our non-accrual loans 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 continue to deploy the Grand liquidity. Non-accrual interest and the fee mentioned previously also added three 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 linked quarter, professional fees related to litigation and the energy portfolio decreased but were offset by expenses related to repossessed asset. In addition, salary and benefits expense increased flatly due to severance payments and payroll taxes on restricted stock vesting.

The provision for loan-loss expense was $3 million for the quarter, an increase of $1.3 million from the first quarter 2015 and then increase of $1 million from the fourth quarter 2015.

The increase from the prior periods reflects loan growth in addition to increases in reserves for the energy portfolio in consideration of the continued volatility and 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 contributor so 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 oil field related service credit. We participate in three snick adjusted by other banks.

We currently have three non-performing energy credit totaling $23.8 million and four performing classified credits totaling $24.6 million. Aggregate criticized and classified energy credits totaled $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 oil field related service loans are criticize or classified. The energy related allowance is now 5% of the energy portfolio.

With respect to overall asset quality, total non-performing 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 snick energy loan participation that was placed on non-accrual 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 of 2015 and the fourth quarter of 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 of 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 SHLB advances for liquidity purpose.

In addition, $5.8 million of 7% subordinate debentures were repaid during the first quarter. As we previously disclosed, we redeemed 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 towards a successful year. And with that we will open call to questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from Brady Gailey with KBW. Your line is open..

Good morning, guys..

Good morning, Brady..

Congrats on a nice quarter and record earnings..

Thank you..

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

Where do you think -- and 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 50s by the end of the year. Fourth quarter, we're hoping something in the low 50s by the fourth quarter on an annual run rate..

Okay. Then I noticed that yield accretion was a little larger this quarter than it has been historically and added around 13 basis points to the margin and 1Q versus -- I think on an average it was around three basis points last year.

Was there anything abnormal in that accretion or it's 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 at Houston, Brady, that we put a mark on when we purchased 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 it resolved so our credit guy put a mark on it, that loan was paid off and refinanced in the first quarter and that was a significant -- I think that was a big chunk of that prepayment, we expect it to run at historical levels going forward..

Okay, alright. And then the energy book continues to shrink here.

Do you think that shrinkage will continue 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 had 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. So that's down some 36% year-over-year.

And then a year ago we were 8% of total loans were in our energy book and today that's down at 4.5% of total loans. So we've had significant movement risk-off if you will on the energy book.

We reiterate again, we intend to be in the business, we're committed to being in the business in the long run but this just has worked out over the last year that as we've resolved credits and work through relationships that -- it's 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 it to level out somewhere in there Brady and then rebuild from there..

Okay. And then, my last question is on capital. Tangible common equity is 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 can get away with another form of either debt or preferred or do you think you have to raise common?.

Good question. We did not have accrete capital as quickly in the first quarter as we thought we might and that was due to the -- 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, that's 69 [ph], 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'll finish the year with TCE in excess of 7% and that's again, I know that's people write in comment that, that's not a robust TCE ratio but again, that's consistent with how we've run the bank for the last 28 years and because of our clean asset quality and consistent earnings performance, we've been comfortable without our Board's been comfortable with as have the regulators..

Okay, great. Thanks for the color..

Thanks, Brady. Have a great every day..

Our next question comes from Brett Robinson with Piper Jaffray. Your line is open..

Hi guys, good morning..

Good morning, Brett..

Also offer my congratulations on pretty good quarter with the growth and everything. Can you -- maybe I guess first, just going back to energy, if I have it correct, snicks were I think like $66 million last quarter and you had that one move to non-accrual.

Can you just talk about -- your snicks are not that big relative to your energy piece but kind of what's going on with the snicks you have?.

Right, we do have about $62 million right now of our total energy book out of $186 million, so about one-third is in snicks.

We did -- we had approximately 36%, 37% or 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 that was classified moved to non-performing, that participation snick that we mentioned in our press release.

Other than that the book's been pretty steady, we put a little more money into the specific reserve and got it up 5% as Michelle mentioned earlier.

So we've got a reserve of 5% against the energy book but we feel -- there wasn't a big inflow into the bucket if you will, that's what we kind of -- we're watching as to see if 36% of the bucket at the end of the year out of $204 million that we had on the books and energy at the end of the year that came down to $186 million and then -- but our percentage of -- in the criticized/classified bucket stayed the same, so we felt good about that..

Okay.

And then loan origination trends, can you talk maybe about yields and how you see competition? And if thinking about the core margin, out of few quarters can you keep it stable -- what you're putting on the balance sheet versus current portfolio?.

That's a good -- I mean, two questions really there Brett; one is about our loan yields and then obviously a part of that or follow-on to that. So let me talk about the loan yields and I'll get Michelle to talk about the NIM or/are kind of thinking about it going forward.

But as far as the loan yields go, we're seeing consistent loan pricing with what we had seen the previous quarter. The bump in the -- by the Fed and the Fed funds rate and prime rate going up a quarter, we did see that pushed the floating rate loan yields up.

Just because they tend to be 8 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 low mid-fours. So we do feel good about that and by the way our average life of our loan portfolio shrank and came in, so that's 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 yield.

Michelle, do you want to talk about the NIM?.

Yes. If you take out that non-accrual 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 that it's going to stay pretty close to the range that it's been 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..

Okay.

And then last, David you mentioned you were looking at some M&A, the activity is slower, is the loan market better than another in terms of activity and how optimistic are you that you might do something else to share?.

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 noted a lot of people thought this is going to be a quick down and back up.

And I think the fact that this is gone from 12 to 15 and into 18 months now, and the bank stock price is being relatively soft during this period, I think some of the folks who would like to find a partner for their bank are beginning to think more in terms of, hey, 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.

I mean absolute price is always a big part of the discussion but whereas I think a lot of people thought 18 months ago, you go back to the summer of '14, anyone with a quality bank wanted 2X or 2.5X book and 20X earnings.

I think that people are talking a little less about those terms now and a little more about, hey, if we're going to find a partner what does that look like in today's world, today's environment; so a little bit more of 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, 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 the color..

Thanks, Brett..

Our next question comes from Steven Moss with Evercore ISI. Your line is open..

Hi, good morning guys..

Good morning, Steve..

I want 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 [ph] of those credits might be then it is about absolute losses, Steve.

The prices are in the 20's and 30'sales, you're going to have more migration and more -- more reserving than you have in the 40's 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 when -- the point I would make is, its helpful if energy -- if oil prices stabilize here in $40 to $45 range for a prolonged period of time and I think once investors and folks become convinced that we've seen the bottom of the oil prices, if we have, I'm not staying 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 full price discovery thing we've talked about the last couple quarters.

Here is what happened in the first quarter to use a specific example of that one credit, that snick that moved from classified over to non-performing, that was a credit they had a very good workout plan in place and a sale of the assets in place, that fell apart in the first quarter when oil prices went to the mid-20s and then it had to be put back together by the bank group and by the owner and investment banker.

So what has happened is, it's just pushed some of these credit out which then subjects them to migration right, if they don't get resolved quickly then they are subject to being classified or becoming non-performing while you're trying to work through the solution to the problem.

But in terms of losses, Steve, I would say just a reminder her that, we have $12 million of total oil field service exposure at the end of the quarter, down from $30 million a year ago, and so we have very minimal exposure to oil field 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.

And then with in sight, we've tried to get a little more breakout or core transparency this quarter in terms of the three buckets, that are energy, loans or are in one being [ph] and what we think is 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 refer to as mailbox money, and then the small service piece.

So with no second lien debt, minimal oilfield service exposure, and then about a $125 million, approximately of what we consider to be true E&P credits and that's where most of these sub-standards and the non-performing or anything in that $125 million bucket.

So as an absolute percentage, just down to 3% of our total loan book, that's really E&P exposure and then we've got the royalty credits which are typically to family trust and wealthy families, they have guarantees where we underwrite those very conservatively and then minimal oil field service exposure, by the way, in that bucket of oil field service we still have though criticized or sub-standard criticizer classified credit.

So I think overall we feel really good about where we are here and there is 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 acknowledgement of the fact that energy prices are staying lower longer than most of us expected.

And so we continued to put specific general energy reserves aside, in case we're wrong or in case prices go back down but we feel really good about where we were through the first quarter..

Okay, thanks, that's really helpful. And then in terms of -- do you have anything you want touch on with loan growth expectations? You had a solid quarter here on loan growth.

I'm just wondering what your updated thoughts are there?.

Yes, I think we continue to think, Steve, low double-digit kind of growth, 11% to 12%, or 11% to 13% maybe as the 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 Steve in the quarter, so that was a little bit of surprise there.

But I do think it's indicative, Michelle mentioned that we had a really robust quarter in Austin, 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.

So overall, the economy is better than I think most people think here and we're continuing to see opportunities in our sweet-spot which is medical, medical office and small businesses, and home construction is going really well, especially in Boston and North Texas.

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

Great, thank you very much..

Okay, thanks Steve. Have a great day..

Our next question comes from Kevin Fitzsimmons with Hovde Group. Your line is open..

Good morning, everybody..

Good morning, Kevin..

David, I'm assuming you really touched on a number of these things already but on the energy preserve, 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 snick exam.

What would you point to as the main explanations or reasons why that's not a good apples-to-apple? And I don't totally acknowledge that it's not but is it that you have a lower percentage of snicks? Is it a lot of other things? Can you just give us a sense on why that's -- why IBTX is fine to be a 5% and some of these larger banks are up in more of 8% to 9% reserve ratio?.

Sure, Kevin. I think it's a fair question. We have minimal oil field 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 an unfunded that could fund in the future.

And so I think when they think about the reserves, they're thinking about which outstanding to-date plus what could be outstanding going forward.

And then you point to our smaller percentage of snicks 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 there are smaller credits with only one or less, and maybe one or two other participants in the deal.

We're able to work through those, come up with a strategy, best strategy executed. And for those reasons we feel like 5% -- that we're 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 middle in 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 a 5% reserve 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. And is that -- it seems like maybe it's just less relevant as deeper we get into the year because there has 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 or how do you view hedging right now in terms of being a positive/negative or even relevant at this point?.

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

I noticed -- I know in some of our credits, the hedges are an assets typically, and for a credit that's in the process of paying off.

So for instance, if one of our customers is -- has decided to get out of the business and sell their asset portfolio, and we know -- and we're talking with them and working with them and they're out working with an investment banker to broke or sell their assets.

We may look at those hedges and in fact we did when prices of oil in the first quarter were down in the 20's, hedges have their maximum value there.

So we know that someone is in the process of getting out of the business and selling their assets but they've got two years where the hedge is on that have a lot of value, then there is 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 the amount of debt I've got now, I've delever my balance sheet and I'd like to liquidate some of those hedges in order to further reduce the debt and I'll give you additional collateral or I'll guarantee the debt or provide some other enhancement to replace those hedges but let's take the value of those hedges when all the $26 and let's continue to delever the balance sheet.

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

Great, thanks David..

Okay, thanks Kevin..

Our next question comes from Matt Olney with Stephens Inc. Your line is open..

Hey thanks, good morning guys..

Good morning, Matt..

Going back to energy, I believe there was a previously 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've continued to put reserve against it, and -- but it's one of the three non-performing -- one of two small non-performing credits, and then the one that migrated at the end of this past quarter which is what drove our non-performing number up a little bit.

So it's still there and in the process 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..

And 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 her prepared comments there was a $2.9 million repayment.

Did I hear that correctly? And what was that exactly on?.

That was a pay down, Matt, on that particular credit, you heard it right. That was a reduction in that non-performing that's come in since the end of the quarter. And 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, they are not included in the borrowing base.

So they were our collateral but they weren't given value in the borrowing base, so that was good kind of a pay down because it reduced the bank -- all the bank groups exposure by over 20% or approximately 20% without lowering the amount of the collateral pool if you will.

So it improvement enhanced that credit and that's been a development since the end of the quarter..

So just to clarify, that loan was downgraded during the quarter and subsequent to the end the quarter that still took place to assume a non-core asset?.

Correct, exactly right..

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

Thanks a lot, Matt..

Our next question comes from Brad Milsaps with Sandler ONeil. Your line is open..

Good morning. Michelle, I 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 and just kind of curious, do you see that number drop down from the 1Q level if in fact it stops more to go?.

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

That's great, that's helpful. And then David, just to follow-up on the deposit growth this quarter, pretty strong to keep pace with your long growth, it looks like most of it came in the interesting bearing categories.

Can you talk about maybe what you did there if you -- you had some specials in the market and kind of what you feel like you've got to do to sort of 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 and they have seasonal -- they get collect to start -- collecting their tax deposits at year-end or tax payments at year-end whether at school districts or counties or cities.

And so we get a seasonally inflow in the first quarter of money there and that's what that was..

Great, thank you..

Thanks, Brad..

[Operator Instructions] Our next question comes from John Moran with Macquarie Capital. Your line is open..

I just want to kind of circle back on the loan growth, obviously a pretty good quarter and EOP looks like it -- kind of end of period balances, it looks like they finished up even stronger than average.

So I just wonder if you could comment a little bit on the pipeline heading into 2Q and then I assume by geography it would kind of 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 fair assessment of it. I think you'll continue to see a lot of growth in Austin and Dallas Fort Worth but the pipeline at Houston is also good and the pipeline overall, John, we think is supportive of our view that we'll still see good loan growth here over the next three quarters.

Again, probably have some energy pay downs coming in the second quarter, maybe disproportion to what we saw in the first quarter. So that could be a little bit of a damper, mid-teens kind of growth again in the second quarter that we saw 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're seeing and 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. And 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, I think you had 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 concentration?.

Yes, I'll start with that part of it. John, our Houston portfolio continues to hold up extremely well. We're -- our past dues there are lower than they are across the rest of the footprint.

So it's been our criticized/classified assets I think where 0.16% of our loans down there, so that portfolio could not be doing better than it is and 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 multi-family 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..

Yes John, on the multi-family side, we're at just slightly over 2% on the office base where just around 6% and then even if you take the office base, 75% of that 6% is owner occupied. So it's a very granular portfolio.

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

Got you..

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

We hired one lender in the first quarter but a lot of the approach seems like John from lenders across the across the state has been that with the uncertainty going on, kind of hold what they've got.

So we haven't seen a lot of movement the last quarter or two, and we're getting the benefit now, John, of a lot of lenders we hired, early last year or early in '15 and across '14 we were very aggressive, you may remember in hiring teams. And so a lot of them are now really kicking in and that's part of what you helped this in the first quarter..

Got it, thanks very much for taking the questions..

Thanks, John..

Our next question comes from Adam France [ph] with 1492 Capital. Your line is open..

Good morning, guys. Thank you for squeezing me in here. For a second here, perhaps I missed a few. Did you offer any description as to the properties behind this $17 million snick credit, where is the oil and gas production coming from, any detail you can provide there, not exactly sure as to how much you're allowed to disclose on an a snick alone..

Yes, 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 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 price is falling to mid-20s I think chilled that deal out but it's still moving forward to assets behind that loan are strong. So that wasn't the reason we're moving to a non-performing..

Very good, thank you guys..

Thanks a lot..

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

Great. I appreciate everyone's time this morning. We feel good again about the quarter.

I think it's a good first quarter to what we believe is going to be a really good year, this year and continue to work hard on the energy front, we're aware of concerns of what's going on in the market but I feel like we have a good handle on where we are and a good hand as Michelle mentioned earlier on our cost structure and improvement in that as the year goes along.

So thanks for everyone's time and appreciate all the attention and calls in and we'll 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..