BancorpSouth, Inc. (NYSE:BXS)
2016 Earnings Conference Call
July 21, 2016 11:00 ET
Will Fisackerly - SVP & Director of Corporate Finance
James Rollins - Chairman & CEO
William Prater - Senior EVP & CFO
Chris Bagley - President & COO
William James Threadgill - Senior EVP & Chief Business Development Officer
James Hodges - Senior EVP & Chief Credit Officer
Catherine Mealor - Keefe, Bruyette & Woods, Inc.
Steven Alexopoulos - JPMorgan
Jon Arfstrom - RBC Capital Markets
Kevin Fitzsimmons - Hovde Group
Matt Olney - Stephens Inc.
Good morning and welcome to the BancorpSouth Second Quarter 2016 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Will Fisackerly, Senior Vice President and Director of Corporate Finance. Please go ahead.
Good morning and thank you for being with us. I'll begin by introducing the members of the senior management team participating today. We have Chairman and CEO, Dan Rollins; Chris Bagley, President and Chief Operating Officer; Bill Prater, Senior Executive Vice President and Chief Financial Officer; Ron Hodges, Senior Executive Vice President and Chief Credit Officer; and James Threadgill, Senior Executive Vice President and Chief Business Development Officer.
Before the discussion begins, I'll remind you of certain forward-looking statements that may be made regarding the company's future results or future financial performance. Actual results could differ materially from those indicated in these forward-looking statements due to a variety of factors and/or risks. Information concerning certain of these factors can be found in BancorpSouth's 2015 Annual Report on Form 10-K. Also during the call, certain non-GAAP financial measures may be discussed regarding the company's performance. If so, you can find the reconciliation of these measures in the company's Q2 2016 earnings release.
Our speakers will be referring to prepared slides during the discussion. You can find these slides by going to bancorpsouth.com and clicking on our Investor Relations page, where you'll find them on the link to our webcast or you can view them at the exhibit to the 8-K that we filed earlier this morning.
And now, I'll turn to Dan Rollins for his comments on the quarter.
Thank you, Will, good morning. Thank you all for joining us today for BancorpSouth's 2016 second quarter conference call.
I will begin by making a few brief comments regarding the highlights from the second quarter. Bill will discuss the financial results in more detail. Chris will talk about our business development activities in the bank. James will provide some comments on our business development activity in mortgage and insurance. And finally, Ron will discuss highlights regarding credit quality. After we conclude our prepared comments, our executive management team will be happy to answer any questions.
Let's turn to the slide presentation. Slide 2 contains our customary Safe Harbor statement with respect to certain forward-looking information in the presentation. Slide 3 covers the highlights for the quarter, beginning with the financial highlights. Net income for the quarter was $34.7 million or $0.37 per diluted share. We reported net loan growth of $131.3 million or 5.1% annualized in the second quarter as expected and as we have experienced in the past years deposit balances declined during the quarter. Chris will provide some highlights on our loan and deposit efforts in a moment including some color on specific teams and geographies.
We've announced during the quarter, regarding the Consumer Financial Protection Bureau in the U.S. Department of Justice joint investigation of our fair lending practices. While we continue to believe our fair lending policies and practices were compliant with applicable laws and regulations during the time period in question, we determined it was in the best interest of our customers, teammates and shareholders to settle this matter. There was no material impact on our second quarter financial performance as a result of this settlement. As we had previously made provision for $13.8 million liability during the first quarter of this year.
Additionally, while the accrual included estimates for legal and consulting services, we do not expect the material financial impact in future periods related to this matter.
We're moving on to the remainder of financial results; we had a non-cash negative mortgage servicing valuation adjustment of $4.1 million that had an adverse impact on our results. Our mortgage team otherwise had a very nice quarter with production volume of $463 million in production and servicing revenue of $13.1 million. We reported net operating income excluding MSR of $37.2 million or $0.39 per diluted share. We believe the quality of our core results continues to improve quarter-after-quarter. Bill will go over comparisons to prior periods in a moment.
Moving on to the remainder of the financial highlights, we have now reported several consecutive quarters of strong credit quality. We saw improvement this quarter in many credit quality metrics including total non-performing assets and classified assets. Ron will discuss credit quality further in a moment including the factors impacting our $2 million provisions for the quarter.
We continue to maintain a stable net interest margin while growing our balance sheet. The net interest margin for the second quarter was 3.56%, which is flat compared to the first quarter of 2016 and up two basis points from the quarter last year. Again, Bill will cover other components of our margin in more detail in his remarks.
We continue to make steady progress towards leveraging our cost structure and driving out unnecessary expenses. Total operating expenses which exclude any applicable disclosed amount non-operating items declined this quarter compared to both the second quarter of 2015 and the first quarter of 2016. Our operating efficiency ratio, excluding MSR continues to turn down. This ratio was 68.2% for the second quarter, compared to 71.2% in the second quarter of 2015 and 68.7% in the first quarter of this year.
Finally, I want to recognize the patience of our merger partners as we have worked to resolve the issues which have delayed regulatory approval. We remain committed to the two pending transactions and are working directly with our primary regulators to resolve any remaining outstanding issues. With the terms of our -- while the terms of our settlement with the CFPB and DOJ do not prevent us from completing these transactions, we can provide no assurance as to whether we will receive regulatory approval.
I'll now turn to Bill and allow him to discuss our financial result in more detail. Bill?
Thanks, Dan. We'll turn to Slide 4. Net income was $34.7 million or $0.37 per diluted share for the second quarter. There were no material non-operating items in the second quarter results of either 2016 or 2015. We did have one material non-operating event in the first quarter of 2016 as we incurred a charge of $13.8 million for an estimated CFPB-DOJ settlement. As well as an estimated legal and consulting fees.
Dan also mentioned the non-cash MSR valuation adjustment of $4.1 million during the quarter. If you look at net operating income excluding the MSR, you'll see continued improvement in our core operating performance. We reported net operating income, excluding MSR of $37.2 million for the quarter or $0.39 per diluted share compared to $36.9 million or $0.39 per diluted share for the first quarter and $37 million or $0.39 per diluted share for the second quarter of 2015.
For operating income excluding the MSR is relatively flat in each of the quarters presented, there are some significant differences in the components of income expenses that I would like to point out. In compared to the second quarter results in 2016 to 2015, net interest income increased $5 million as loans grew $568 million during that period. And the net interest margin increased two basis points to 3.56%.
Our core earnings performance during the quarter was strong enough to overcome a $7 million swing in provision expense. During the second quarter of 2016, we recorded a provision for loan losses of $2 million compared to reserve [ph] of $5 million in the second quarter of 2015. Excuse me, I need some water. Excuse me. Mortgage production and servicing revenue grew $12.4 million to $13.1 million. And non-interest expenses increased less the 1% from the second quarter of 2015. The following two slides break our non-interest revenue and expense into further detail.
If you turn to Slide 5, you'll see a detail of our non-interest revenue streams. Total non-interest revenue was $69.7 million for the quarter compared to $65.5 million for the first quarter of 2016 and $74.3 million for the second quarter of 2015. James will discuss mortgage banking revenue and interest commission revenue in a moment.
I'd like to make a few comments regarding card fee revenue and the positive service charge revenue. Card and merchant fees are up compared to both, the second quarter of last year and the first quarter of this year while deposit service charges were flat quarter-over-quarter and down just over 4% compared to the second quarter of last year. We expect deposit service charges revenue to continue to remain under pressure as we move forward.
Slide 6 presents a detail of non-interest expense. Total non-interest expense for the second quarter was $128.7 million compared to $142.3 million for the first quarter of 2016 and $128.2 million for the second quarter of 2015. The schedule at the bottom of the slide shows the aggregate impact of non-operating items incurred in each of these quarters. You see the regulatory charge in the first quarter results which I mentioned. I'd like to make a few comments about certain -- for the line items included in non-interest expense.
Salaries and benefits continue to be very stable totaling $81.8 million for the quarter compared to $82.5 million for the first quarter of 2016 and $79.8 million for the second quarter of 2015. We continue to be disciplined in our management of FTEE and our controls of this expense line item. As a reminder, our annual merit increases which were effective July 1 could impact this line item as we move towards to the remainder of the year.
Most of other expense items shown here are either flat or turning down. The legal line as well as other miscellaneous expense which includes consulting were elevated in the first quarter of this year as a result of those respective components of the regulatory related charge. As Dan mentioned earlier, our operating efficiency ratio excluding the MSR with 68.2% for the quarter.
That concludes our review of the financials and I'll turn it over to Chris for his comments on our frontline banking efforts.
Thank you, Bill. Slide 7 reflects our funding mix as of June 30 compared to both first quarter of 2016 and second quarter of 2015. We highlighted in our first quarter call with seasonality associated with tax receipts as well as related headwind created by outflows of that money during the second quarter. This headwind contributing to a decline in total deposits and customer repose of $138 million during the quarter.
However, if you look at the trends over the past year, you'll see that deposits and customer repo balances are up $269 million or 2.3% compared to June 30, 2015. Despite the anticipated seasonal decline, we had five divisions in our Community Bank standout this quarter for deposit growth; our central Arkansas division, our central Alabama division, our three Louisiana divisions, northeast, northwest Louisiana and south Louisiana, all reported great results this quarter on deposit growth. We continue to emphasize the importance of core deposits and it is a business development focus across our entire organization.
Moving to Slide 8 you will see our loan portfolio as of June 30 compared to both, the first quarter of 2016 and the second quarter of 2015. We reported net loan growth for the second quarter of $131 million or 5.1% on an annualized basis. Loans were up $568 million or 5.7% compared to June 30, 2015. Our loan growth continues to come from across our entire geographic footprint. Four of our five regions reported net loan growth during the quarter. Consistent with our Community Bank model, we continue to grow loans across virtually all of our portfolios and these trends vary from quarter-to-quarter based on many factors.
With several specific lending teams in our Community Bank that stood out during the quarter our loan production offices in Houston, Dallas and Austin had another solid quarter. In addition, our eastern Mississippi division, our northeast Arkansas division, our Gulf Coast division and our northeast Texas division stood out as well having successes across our diverse footprint is a testament to our Community Bank business model and helps create a diverse and balanced risk profile. We are proud of each of these teams and their contributions during the quarter.
I will now turn it over to James to discuss our business development results in mortgage and insurance.
William James Threadgill
Thanks, Chris. The tables on Slide 9 provide a five quarter look at both mortgage and insurance. Our mortgage banking operation produced origination volume for the quarter totaling $463 million. Home purchase money volume increased 17% compared to the second quarter of 2015 to $353 million or 76% of our total volume for the quarter.
As we have noted previously, comparable quarter comparisons are more relevant given the seasonality in the business. Increases in production volume continue to be largely attributable to the addition of originators, as well as the decline of mortgage rates. We have increased originators from 122 at June 30, 2015 to 148 at June 30, 2016 and mortgage rates are nearing all-time lows. Deliveries in the quarter were $352 million compared to $294 million in the first quarter of 2016 and $366 million in the second quarter of 2015. Production and servicing revenue which excludes MSR adjustment was hurting $13.1 million for the quarter compared to $10.6 million for the first quarter of 2016 and $9.8 million for the second quarter 2015.
Our margin was 2.99% for the quarter representing an increase from the 2.45% in the first quarter of 2016. As we've indicated in the past, our normal margin is generally in the 1.6% to 1.7% range when the pipeline is stable. Margin was elevated in both the first and second quarters of this year as we had meaningful increases in the pipeline. The pipeline increased during the second quarter from $303 million at March 31 to $385 million in June 30, 2016. This resulted in a margin that is higher than what we would consider to be a normalized margin. When the pipeline contracts in future quarters, we expect to see this margin decline. While home purchase volume remains strong, we are starting to see increased rate refinance volume as a result of these declining mortgage rates.
As Dan mentioned earlier, our MSR asset was impaired at $4.1 million in the second quarter bringing our total impairment to $12 million year-to-date. While we are prepared to hedge the value of our MSR asset, we feel it would be inappropriate to hedge asset now while it is valued at 78 basis points which is near its all-time low.
Moving onto insurance, total commission revenue for the quarter was $28.8 million compared to $33.2 million for the first quarter of 2016 and $29.3 million for the second quarter of 2015. As a reminder, first quarter is typically seasonally high, primarily as a result of the receipt of annual contingency commissions. Consistent with our message in the first quarter, we continue to see a soft insurance market with respect to premiums across most of our product lines. This market provides a real headwind to growing revenue. We expect this to continue to be a challenge in the coming quarters. Our producers are focused on continuing to grow our customer base to help offset this headwind.
Earlier in the second quarter, we announced the addition of Ed Scheinuk and his team in Metairie, Louisiana to our insurance agency. Ed brings 35 years of industry experience and large regional, national and international commercial accounts and generates approximately $1.6 million in annual revenue. We are excited to add a team of this caliber to our insurance family.
Now, I'll turn it over to Ron for his comments on credit quality.
Thanks, James. Slide 10 presents some highlights of credit quality for the second quarter. As Dan mentioned, we had a recorded provision for credit losses of $2 million for the second quarter compared with a provision of $1 million for the first quarter of 2016 and negative provision of $5 million for the second quarter of 2015. Virtually all of our credit quality indicators improved during the quarter. Classified asset levels declined, non-performing assets declined and net charge-offs remained at a very low level. I will discuss certain of these metrics in more detail in a moment.
With that said the need for the provision for the quarter was driven primarily by an adjustment required as a result of the receipt of an updated appraisal associated with a large impaired loan. Otherwise, overall credit quality improvement would have been sufficient to support loan growth without provisioning. Net charge-off was $1.6 million for the quarter compared with net charge-offs of $1 million for the first quarter of 2016 and net recoveries of $6.7 million for the second quarter of 2015. Net charge-offs for the quarter totaled only 0.06% annualized as a percentage of average loans.
The ALLL was 1.20% of net loans and leases as of June 30, 2016. Non-performing loans and non-performing asset balances both declined compared to March 31, 2016 with total NPLs declining by $14 million while total MDAs declined by $12 million. Declines in both of these metrics were driven primarily by decline of $13.3 million in our non-accrual loans. I would again reiterate that each of the components of non-performing assets are at levels where we could see normal fluctuations in either direction quarter-to-quarter. The final bullet on this slide relates to near-term delinquencies which increased to $31.9 million at June 30, 2016 from $23.6 million at March 31, 2016. Near-term delinquencies represent 0.30% of net loans and leases at June 30, 2016.
With that, I will now turn back to Dan for his concluding remarks.
Thanks, Ron. Outside of the CFPB-DOJ settlement which we are relieved to have behind us, our results reflect the same message we have been repeating for several quarters. Despite certain headwinds on the revenue side, including insurance commissions, we continue to grow total revenue while keeping expenses flat. We've been able to achieve growth and net interest income through balance sheet growth and a steady net interest margin and mortgage lending income excluding MSR valuation has helped offset other headwinds in our non-interest revenue streams. We've been able to hold operating expenses flat by finding opportunities to lower or eliminate specific items to pay for investments made in our growth initiatives.
We've saved money through diligent headcount, contracting vendor management, reductions in our location accounts and to many other areas to list. I'm confident we still have plenty of opportunities in front of us to continue the same trajectory of probability and permit as a report.
With that I will conclude our prepared remarks and operator, we're now happy to answer any questions that people may have.
[Operator Instructions] Our first question comes from Catherine Mealor, Keefe, Bruyette & Woods, Inc.
Can you help us layout what the regulatory path looks like from here now that we've got the CFPB settlement behind us? Can you talk about timing -- if you have any senses of that and certain hurdles that you may need to cross over the next few months to get approval on the two deals?
That's a great question. I really don't have a whole lot of color to add unfortunately. We are a couple of weeks out from the settlement, the regulators have that. We've offered to visit with them, we're actually scheduled to visit with them over the next few weeks and hope that we can get some clarity on what the path forward looks like. I don't know what the timing is, I really don't know what the expectations are but where we are today, we do know that the ball is fully in the primary regulators court today and we think we have good relationships with our regulators, we're anxious to sit down and visit and let them ask questions study the settlement and see if there is things out there that they need more information on so we can move forward.
Got it, okay, it makes sense. And then if we look at the CFPB settlement, there are couple of items within that are not as much one-time costs, like there is higher marketing, financial literacy training, and new methods; so how much of -- and they are relatively small items relative to your income statement but how much of the type of items are already reflected in the expense -- the current expense run rate versus what could be incremental from this current quarter?
Virtually all of them. We're not required to open a new branch Catherine; we actually have agreed to open a new loan production office or a branch at our choice in a high minority sense track in Memphis. That has not happened yet so there is some cost there but everything else, advertising dollars to financials, we been doing all that for years.
Got it. Okay. So incrementally there is just not that big of a jump in the expense space from the settlement?
All right, great. Thanks for taking my questions.
The next question comes from Steven Alexopoulos with JP Morgan. Please go ahead.
I wanted to ask -- on the C&I loan growth which has been running relatively light, is that essentially just a function of what the markets will give you and are there any initiatives currently to boost that?
Yes, we would certainly like to grow C&I lending and what we saw in the past quarter that helped -- or I should say didn't help us, it hurt us I guess. You actually saw C&I decline so we had some pay downs. We've actually seen some pay downs in this quarter, some large pay downs actually in our energy portfolio so far in the third quarter so that the headwinds in C&I category for us has been a negative for loan growth. Our team is out there actively soliciting business every day; we're working hard to get paid for the risk that we're putting on our balance sheet. Sometimes we've not been able to come to terms that are agreeable to everybody or somebody else has been able to find something lower. Chris, you want to add on that?
Yes, I would just jump in and say that I think it's a challenge sometimes to look at C&I credit on a quarter-to-quarter basis because of -- due to the revolving nature of some of these relationships. So you've got some credits that were going in and out of a significant fashion that may cross over at quarter end and so that's a good thing. You want to prevent damage [ph] and specifically the oil and gas credits, we've seen some large pay downs in those and that's typically what you would see in a declining revenue market for C&I credits as they collect receivables and that's what we want too. So some of it is positive even though from a growth perspective you might see a negative number. We're working hard to grow C&I credit, we're realizing that's an important part of our diversification in that, we've got to get a team working on.
On the energy side for us, our outstanding energy balance today is somewhere around $40 million. We've ended the quarter somewhere around $70 million which was close to where we were last quarter but that big pay down that's come in in this quarter cuts our energy -- direct energy exposure outstanding today but not changed the availability on the line. That money is still available; the customer is still here, they are able to draw that money back. But today our total energy exposure is $40 million give or take.
Okay, that's helpful. And then just, one other -- I wanted to ask on loan yields which are holding in pretty steady in this 4-20 range. Are you guys able to maintain that in longer duration mortgages into the portfolio each quarter? Given the flatter curve, do you think you can continue to hold it at that level?
Well I think what you're saying is product coming through and size of credit is also a piece of that Steven. We're working hard to make sure we get paid for the risk that we're putting on our balance sheet. I don't think we have extended the duration in our loan book to add rate, we've been very careful not to do that. So I don't think that's a fair assumption on your part that we're adding long-term credits on at a high rate to hold right up there.
Okay, got you. Thanks for taking my questions.
The next question comes from Emlen Harmon with Jefferies. Please go ahead.
Good morning guys, this is Elan Zanger [ph] in for Emlen. I wanted to ask mortgage banking -- it looks like you held a little bit the mortgage production in usual on the balance sheet. I just wanted to know what's driving that. Was that just a timing thing? And then, do you also plan on additional mortgage hires for the rest of 2016?
True, those are easy questions. James may want to present here but the answer is that we're not holding anything on the balance sheet, it's all timing related so as production was ramping up through the quarter, we're holding -- we're pooling the like-type loans together, we can improve our yield on the sale when we can pool like-type loans together. So we may hold up a loan a week or two longer if we can pool them up with others that are similar to get a higher margin on what we're selling. But there is nothing being held on the balance sheet there for a longer period of time and I think James could jump in but I'd think he would like to hire as many mortgage produces as want to join our team.
We're always looking for talent.
All right, thanks guys.
The next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.
Thanks, good morning. Just a quick follow-up on that. James are -- I think you're saying with the pipeline, and maybe some of the refinance volumes picking up but possibly you guys could hold the margin on loan sold for the near-term?
It is the near-term, probably. I would say yes but the pipeline is very strong, it's continuing to grow. If rates stay low, I think you will start seeing the refi -- start to pick back up. As I mentioned, right now most of our production is purchase and in the last few weeks we have started to see more refi applications coming in. So we've got a strong pipeline now and we'll see how it grows as the year goes forward.
I think it depends on how you define near-term, Jon. Fourth quarter is going to be a slower quarter and mortgage business it's just always is. So if near-term doesn't include fourth quarter then third quarter looks pretty good right now.
All right, good. And then the question I wanted to ask is, the deals have been out there for a couple of years and maybe, Dan or Chris, just give us an idea of how you think central community are doing? And assuming these things are we able to close what are some of the first steps you need to take, in other words, people left the things that you need to do that normally would have done had these deals closed a year or so ago? Just kind of -- two-part question on that.
Sure. I think that the financial condition is all about -- both of the banks are -- they are better, just like us. Over the last two and half years our balance sheet has improved, our profitability has improved. We've seen the exact same thing happening on both of our merger partners. We have had some employment disruption and some back office [ph] and both units that they are having to deal with continuing to operate every day. I think all of us, all three parties are ready willing and able to close these transactions just as soon as we can get all the questions answered that the regulators have for us. And once we get a green light -- if we get a green light, I think it's going to be just like any other acquisition would be. We'll roll them onto our system as soon as we can, thereafter -- frankly, I think what you've seen from a profitability improvement on both parties is some of the headcount reduction that you would normally see if post-closing has happened pre-closing. So some of that benefit for us is already baked in.
All right. Good, that's helpful. Thank you.
And the next question comes from Kevin Fitzsimmons with Hovde Group. Please go ahead.
Dan, just a quick question on the subject of buybacks. Could you guys continue to build internally build capital here? Is that a realistic lever to use now? And I guess one factor is price, maybe the valuation is not ideal. But secondly, is it more a matter of waiting to see what happens or when it happens on the primary regulator blessing, fair lending and then closing the deals? So is it more an issue of you plow into those buybacks if you're out of M&A but you don't use them if M&A proceeds. Just how you feel about that? Thanks.
Sure. I think we need to use all the tools in front of us for capital management. So we've been on the sideline on the buybacks specifically because of the unknown around the CFPB-DOJ, that issue is now out in the open and free and clear. So I don't think we're going to have any restrictions on using the buyback authorization that the Board of Directors has provided to us. I think as we look forward, we want to use all the tools that are there, certainly valuation of our stock makes a difference but we want to use all the tools in front of us for capital management because you're absolutely spot on. We've grown capital significantly over the last couple of years. We need to deploy that capital and give it back to our shareholders.
Okay, great. And one quick follow-on for Bill and I apologize Bill if you've covered this already but -- legal expenses, are we -- is that kind of at a run rate or would you expect that to go even lower in coming quarters?
We've cleared out a lot of lawsuits over the past year and a half, particularly gearing the CFPB matter resolved is going to help significantly. There are still a couple of other suits that are pending in working out there but overtime I'd expect to see that drift down.
Almost two years ago, Kevin we changed our legal team. We brought General Counsel in-house, we brought a couple of other folks in with Chuck [ph], his team has done a tremendous job of eliminating and reducing the legal overhead in front of us and we're real pleased with the progress that's been made in reducing that ongoing cost and certainly putting the big ticket items behind us that you've now seen fourth quarter last year and this quarter on CFPB-DOJ and those items have been a big drag on us and we're happy to put those behind us.
Got it, great. Thanks guys.
The next question comes from Matt Olney with Stephens. Please go ahead.
Good morning. Most of my questions have been addressed. But Dan, I was hoping you could speak to some of your mortgage and your footprint that have some type of energy exposure -- energy impact. Louisiana, East Texas -- I think you downgraded some credits here few quarters ago. Any update now?
We did. You're spot on. We went through a complete portfolio review in all energy territory for us which is South Arkansas, Louisiana, Texas. We did downgrade some credits and put some credits on our watch list so that we could be closer to paying attention to what was happening to them. We did that when all those were lower than it is today. You heard me a minute ago, I am assuming say that our oil and gas exposure ended the quarter somewhere we ended the last quarter at roughly $70 million in outstanding credit and about the same I think in unfunded. And so far this quarter almost $30 million has come back in on a revolving lines so we're currently at about $40 million in outstanding total energy exposure.
You also heard Chris say -- and I'm going to let him jump in on some of those specific markets, but you also heard Chris say that we say actually pretty good deposit growth in all of our Louisiana footprint. All three of our divisions in the Louisiana market saw good deposit growth within the quarter, which I think is indicating that -- those markets are not as weak as maybe some would have thought. Chris?
Not a lot to add other than we just haven't seen -- we're watching it very closely, we've got all the credits identified, not just oil and gas but to that second tier and iteration to the geographic footprint for real estate. We're just not seeing an acceleration and any deterioration there. So I guess the best thing to say is, we're keeping our eye on it because we all know that lower oil prices can impact those areas but so far, so good.
Okay, that's helpful. And then lastly, Dan, you're still seeing some decent recoveries on the commercial side. I know it's tough to find a crystal ball for that line item but how do we think about that going forward as far as commercial recoveries?
I've to do you for the last two or three quarters I thought we were at the end of that but we keep finding more. Our guys are doing a great job of mining for gold nuggets out there somewhere. Again, that's another process that has changed over the last couple of years. We've centralized our special asset group. We've got a team of folks that are actively working that market and maybe that's helping us. It's really hard to put your finger on what's causing that. But I think you're right, I don't think we can expect to see that continue and the perpetuity, we're going to get to the bottom of the barrel here soon.
[Operator Instructions] Our next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.
I'm back. Quick one for Ron. I followed the rule, just one question, one follow-up. Ron, the question on the provision; can you just help us understand the two main [ph]? I think what you're saying is, the provision requirements go way back down again in Q3 but just help us understand that.
Ron, are you on with us still?
Yes. I guess the follow-up is tagged on to what Matt said, as we continue to have unexpected levels of recoveries which allow us not to have two micro provision. If we continue to see that the loan growth continue at the same pace as we've had over the last five quarters, I think we will continue to have minimal -- and I really think $2 million was a minimal addition to the loan-loss reserve. And it will fluctuate based on the level of recoveries and quality of our critics. So I don't know any better way to answer that Jon.
Let me try it a different way Ron while you're on. In your comments you commented that we had an appraisal that came back in on a sub-standard credit that required the provision this quarter. Had that appraisal not come in, we may not have had the provision we had this quarter, is that another way of answering the question.
Yes, that's right. We wouldn't have -- we would not have had to -- have made a provision, just simply for the growth in our portfolio. It was based on improvement in the quality of the portfolio.
So lots of moving parts Jon.
That's what I was getting at. Good, thank you.
This concludes our question-and-answer session. I would like to turn the conference back over to Dan Rollins for any closing remarks.
Thank you for joining us today. If you need any additional information or have further questions, please don't hesitate to contact us. Otherwise, we look forward to speaking with you all again when we're out on the road. Thank you very much for participating.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.