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 activities, 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 from 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 purchased accounting adjustments was 60.2 million for the quarter ended March 31, 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 31, 2016 were 9.654 billion, an increase of 488 million or 5.3% compared with 9.166 billion at March 31, 2015. Our linked quarter loans increased 215 million or 2.3%, 9.1% annualized from 9.439 billion at December 31, 2015. Our linked quarter loans were impacted by the acquisition of Tradition Bank as well as 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 31, 2016, oil and gas loans totaled 362 million or 3.8% of our total loans compared with oil and gas loans of 461 million or 5% of total loans at March 2015. The…

Thank you, David. Net interest income before provision for credit losses for the three months ended March 31, 2016 was $166.3 million compared to $162.9 million for the three months ended March 31, 2015. This change was primarily due to an increase in average earnings 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 31, 2016 compared to 3.57% for the same period in 2015 and 3.24% for the quarter ended December 31, 2015. Excluding purchased accounting adjustments, the net interest margin on a tax equivalent basis for the quarter ended March 31, 2016 was 3.21% compared to 3.17% for the same period in 2015 and 3.11% for the quarter ended December 31, 2015. Non-interest income increased $2.4 million or 8.3% to $30.8 million for the three months ended March 31, 2016 compared to 28.4 million for the same period in 2015. Non-interest expense for the three months ended March 31, 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 31.08% for the three months ended March 31, 2015 compared with 41.83% for the same period last year and 32.58% for the three months ended December 31, 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. 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 31, 2016 totaled $56,985,000 or 59 basis points of loans and other real estate as compared to $43,459,000 or 46 basis points at December 31, 2015. The March 31, 2016 nonperforming assets total was made up of $40,129,000 in loans, $161,000 in repossessed assets and $16,695,000 in other real estate. Of the March 31, 2016 nonperforming asset total, $17 million are energy credits, are 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, $7,526,000 or 13% of the March 31, 2016 nonperforming assets total have been liquidated or under contract for sale. But there can be no assurance that those under contract for sale will close. The net charge-offs for the three months ended March 31, 2016 were $11,670,000 compared to net charge-offs of $119,000 for the three months ended December 31, 2015. $14 million was added to the allowance for credit losses during the quarter ended March 31, 2016 compared to $500,000 for the fourth quarter of 2015. The average monthly new loan production for the quarter ended March 31, 2016 was $250 million compared to $286 million for the quarter ended December 31, 2015. Loans outstanding at March 31, 2016 were 9.654 billion compared to 9.439 billion at December 31, 2015. The March 31, 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]. The first question comes from Jefferson Harralson with KBW.

Great. Thanks. I’m not used to being first. I’ll ask you about commercial real estate. I saw some pick up at 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 talking, I think overall you see weakness probably in more multifamily or office space in the Houston market and as retail’s still very good in other markets, like in Dallas and Austin and Bryan/College Station, things are going very good. Having said that, somebody can jump in with the 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 relationship type of bank and we may have your business financed or we may have your car financed and your home financed. We’re not really into what some other banks do in getting five broker loans or getting brokers to just put commercial real estate. That’s really not out 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 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 9 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 6 million more square feet of sublease space available than what the norm has recently been. But I guess the good news there is the tenants are still paying their rent, so it’s not a disaster situation.

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

On our end, it is. That’s correct.

All right. 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 hopefully.

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. It’s right around 5%.

Around 5%.

Yes, that’s right.

All right, great. Thanks, guys.

Thank you. The next question comes from Dave Rochester with Deutsche Bank.

Hi. Good morning, guys.

Good morning.

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 is more than what we expected but also our loan losses were too. So hopefully that will coincide. Do you want 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 necessary anything that was unexpected. Randy, do you have any thoughts other than that?

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.

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?

This is Dave Hollaway. I think that’s true but as we’re looking over our expense carry over the last few quarters, we can see that – I think I said last quarter we were trying to target maybe around 79 and it was 80.5 this quarter. But I think we will get some additional cost saves 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 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 something like that.

Yes, that’s right.

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. But as we started buying, prices continue to go up. But again, I think we’re going to be opportunistic about it at the same time.

Okay. And maybe just one more quick one on the securities portfolio. I know you didn’t expand that this quarter. It actually came in a little bit. Was just curious where reinvestment rates are today as you invest that cash flow coming from the book?

I’m going to just take – I don’t have this exactly, you may, but I’m thinking that from when talking to Chip Kiesewetter who manages that, I think that probably what we’re buying today is probably coming in about the same way 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, I think in talking to Chip this past week, right now we’ve been buying about 1.90, 1.95 something like that. It’s not up to 2.25.

Again, we haven’t been buying either. Again, we try not – again, we’re not trying to call rights but again we’re only buying when the opportunity presents itself. So I think the 10 years have really gone up in the last few days. 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 wanted to. But if it does start going up, we will actually go back and buy again when the yields go up.

What you’re referring to is we did – we’re always opportunistic and a couple of weeks ago, I forget the exact date, but we did go in and buy a sizable chunk actually in the quarter. That was a one off that we did get.

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

Yes, and it’s a good observation. I see what you see. When you look for March 31 quarter, the overall total to investment securities are down compared to the fourth quarter. But you can all see that on the loans and sales were also up and that’s kind of the strategy. 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. That’s what you see in the numbers when you’re looking at March 31 numbers. So hopefully we can maintain that going forward, because that’s the best case scenario for us.

And 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 had to make up for that. I still think we did pretty good.

And Tradition obviously I think the numbers in the first quarter --

Excluding Tradition [indiscernible] but really when you look at $99 million reduction in oil and gas loans, 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. I appreciate it.

Thank you. The next question comes from Joe Fenech with Hovde Group.

Good morning, guys. 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, let me first – 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 $14 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 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, 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’re talking about the accretion on the loan side, is that what you’re referring to?

Yes, accretion income generally.

Yes, that’s exactly right. I mean if you think about it, we were talking about this quarter ago, we were projecting maybe roughly 8 million a quarter. And if we 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 an anomaly. Now Randy Hester is sitting in the meeting with us and through his hard work and diligence that he’s getting out these credits quicker and not letting them lag. That’s why sometimes we get out of these and we can recognize [indiscernible] 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 is a pretty good number. Now it could be better but that just depends on what happens with these remaining credits.

Okay. And then, David Zalman, on M&A, you all did the Tradition deal. But 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?

First of all, I’ve always liked bigger deals because I never make – 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 team that we have. We continue to talk to banks and probably talked to two or three different banks this quarter. I think that some of the banks that we talk with sometimes again their portfolios – when we compare banks that we’re buying, we have to compare how much work it is to the assets that we get. And so we really again without – with 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 wasn’t the best timing. But we’re still looking at banks all the time and I do expect that – again, if you looked 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?

This is my opinion again. I’m not an oil and gas guy but yes, I think at $45 you do avoid the spillover – 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 dough [ph] where we’re shooting for and I do think that $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 those low prices, it just killed them. There’s no way they can come back.

Thank you.

Thank you. The next question comes from Bob Ramsey with FBR.

Hi. Good morning, guys. 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 margin trajectory from that 321 level today?

This is Dave Hollaway again. Multiple variables to that number. A couple of things here. One that 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, we saw our loan yield – and we’re not talking this, it’s all excluding any kind of purchased accounting business. We’re looking at the core numbers. So all the variables actually were positive to us and so you end up and you look at all three together, that’s why you saw that the margin expanded. So, again, I think our answer is going to be same as we look forward. We said over the last three quarters we think we’re in a place where our margins should be relatively stable. And if you actually look at the last five quarters going over back to last year, 317, 321, 313, 310, pretty stable. I don’t think that dynamic changes as we go forward. We’re still there. Depending on what happens on the loan side, depending on what happens with prepayment fees, all those kind of things, I think it would be stable over the next few quarters and maybe a couple bips deterioration just like you’ve seen on the last few quarters. Again, it 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.

It’s nice when it happens that way. So 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.

On the fair value, yes, for taking out the maximum – you’re not talking about the actual stated margin. That would be absolutely impacted when you take out $10 million, $8 million whatever it is per quarter of loan fair value income [indiscernible] that excluding fair value adjustments we still look at pretty stable.

Okay, all right. That helps. I think I got it. 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 have been expecting as of last quarter?

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 divided by what we have, I mean I still think that we can. 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. I’m positive going forward looking at, I don’t why – I don’t have something factual to give to you but I think that we survived that. We did pretty good and to me things just feel good.

Okay, it’s good to hear. A 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 paydowns and obviously some charge-offs, a couple of charge-offs.

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

Okay, all right, great. Thank you, guys.

Thank you. The next question comes from Matt Olney with Stephens.

Hi. Thanks. Good morning. Just a follow up on that last question on the energy balance, where do you think we are as far as energy loans paydowns? 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 we are stabilizing --

We’re still seeing some minor downward drift but we’re not going to see any major --

We’ll still see some oil and gas decline but again I think it starting to stabilize and there’s still a few loans that we want moved out and do not have the ability to move them out. So we’re not going to shy away from letting them move out.

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 Tradition or was that more outside Tradition 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 request coming in, in that category even from Houston. So the answer is both.

I think when you look at a lot of markets that we’re in, you look at Dallas, Fort Worth and Austin, even Oklahoma City and 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. The next question comes from Gary Tenner with D.A. Davidson.

Thanks. Good morning. 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 and 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 '15 it’s 216 million. And if you go back to '14, the average number was 260 million, for the first quarter it was 223 million. If you go back to '13, the average number was 184 million and in the first quarter it was 141 million. And you can go back even further 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 was always a disaster. Is it better if it goes up? I think it’s better if it goes to $50 or $60. But as we 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 and we look at population growth in 2014 to 2015, Houston had one of the biggest population jumps and 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 – they are nonfarm payroll jobs were 2,465,000. They increased it from March 2015 to 2016 by 112,000 or 4.8% increase and Austin was number four. They had 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, it had a bigger population growth than most all other metro areas from 2014 to 2015, which is unusual.

Okay. Thanks a lot for that detail. And I apologize if I missed it, but what was the first quarter number for '16?

The quarter that we just ended.

Yes.

250 million in average production of loans.

And that’s monthly production, correct?

That’s correct. 250 a month was average.

All right. Thanks very much.

Thank you. [Operator Instructions]. The next question comes from Jennifer Demba with SunTrust.

Good morning. A 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 is 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?

The loan loss severity, 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 come down with a mark.

There was only about 40% left on the --

I think the bottom line is they were – 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.

Right. 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 was a complete surprise, because it was a company that had been in business for 50 or 100 years, had great reputations and so we can’t talk a lot about it because we could possibly be in a litigation over it. But I’ll go back to what I said basically in the June quarter. Somebody asked me, why aren’t you all making $40 million or $50 million allocation to your oil and gas and all that? And I said, we know we’ll have losses but we don’t know exactly what they are until they happen and we’ll 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 from that period of time. And I think that we have one more quarter I think but 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 all over again hopefully. But I think that’s kind of where we’re at. But again, I think that’s an extraordinary high quarter but again as Tim said, you never – and I’ve qualified those in prior comments. In the lending business, sometimes you have something that you were never expecting and something like this happens, but I hope that doesn’t happen again.

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.

You’re welcome.

Thank you. And as there are no more questions at the present time, I would like to turn 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 has now concluded. Thank you for attending today's presentation. You may now disconnect.