Green Bancorp's (GNBC) CEO Geoff Greenwade on Q2 2016 Results - Earnings Call Transcript

| About: Green Bancorp (GNBC)

Green Bancorp, Inc. (NASDAQ:GNBC)

Q2 2016 Earnings Conference Call

July 28, 2016 17:00 ET

Executives

Manny Mehos - Chairman

Geoff Greenwade - President & CEO

John Durie - EVP & CFO

Donald Perschbacher - Senior Executive Vice President & Corp. Chief Credit Officer

Analysts

Kevin Fitzsimmons - Hovde Group

Brady Gailey - KBW

Michael Young - SunTrust

Brad Milsaps - Sandler O'Neill

Emlen Harmon - Jefferies

Jon Arfstrom - RBC Capital Markets

Operator

Good afternoon, ladies and gentlemen, and welcome to the Green Bancorp's Second Quarter 2016 Earnings Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions with instructions to follow at that time. As a reminder, this conference is being recorded.

I would now like to turn the call over to Mr. John Durie, Executive Vice President and Chief Financial Officer at Green Bancorp and Green Bank. Please go ahead sir.

John Durie

Thank you, operator, and good afternoon, everyone. We appreciate your participation in our second quarter 2016 earnings call. With me today are Manny Mehos, Chairman of the Board and Chief Executive Officer of the Company; Geoff Greenwade, President of the Company and Chief Executive Officer of the Bank; and Donald Perschbacher, Corporate Chief Credit Officer of the Company and the Bank.

As a reminder, a replay of this call will be available through 11:59 PM Eastern Time on August 4, 2016. A slide deck to complement our discussion is available on our Web site at investors.greenbank.com.

Before we begin, I want to remind you that many of our remarks today contain forward-looking statements based on current expectations. Please refer to Slide 3 of our earnings slide deck as well as our second quarter 2016 earnings press release and our other public filings including the risk factors in our 10-K where you will find factors that could cause actual results to differ materially from these forward-looking statements.

Now, I'll turn the call over to Manny.

Manny Mehos

Thank you, John, and good afternoon everyone. We appreciate your time and attention today. Following our comments, we will open the call to your questions.

Turning to Slide 4, we reported second quarter net income of $0.10 per diluted common share or $3.6 million after taking $11 million provision for loan loss, $7 million of the provision was due to an increase in specific reserves which included approximately $6 million related to the additional specific reserves on production loans.

Another $2.4 million was related to the write-down on a group of production loans, which were moved to help our sales status and sold in the third quarter. We will discuss this transaction in more detail in a moment. The remaining $1.6 million was primarily related to increases in reserves on purchase credit impaired loans.

From Slide 5, we delivered pretax, pre-provision adjusted net income of $16.7 million, which was below our expectation of a quarterly run rate of $18 million to $19 million. Approximately $1 million of the short fall was a result of incremental expenses related to the MARS initiative including loan and ORE related expenses. John will provide further detail on our run rate expectations.

Importantly, the core run rate of the bank remains healthy. We continue to expect pre-tax, pre-provision, adjusted net income run rate for the bank to be in the range of $18 million to $19 million per quarter after adjusting for one time expenses related to MARS.

Turning to the MARS initiative, the MARS team has met our expectations in a very short period of time. The team has been in contact with largely all of the MARS portfolio of debtors to inform them of Green Banks plan to resolve the relationship and has developed a detailed resolution forecast focused on timing and expected loss.

As a remainder, the MARS portfolio contains all of our energy credits, other classified loans and loans designated as purchase credit impaired through previous acquisitions. Thus far, the team has successful achieved over 12% reduction in the MARS portfolio, from March 31st through July 21st. And total energy loans have been reduced by $37 million to 7.5% of total loans during the same period. The recent movement in the price of oil about $40 per barrel has clearly improved sentiment in the market.

However, given the volatility that we continue to experience, our resolve to remove the direct commodity price exposure from our balance sheet has not been impacted. We remain confident that we will have substantially eliminated our energy exposure by the end of the first quarter of 2017 with the majority of the resolutions occurring in calendar year 2016. We also continue to expect that our existing reserves purchased discount and acquired loans and 2016 core earnings are more than sufficient to fund the MARS initiative through its conclusion. In fact, we continued to expect to modestly build capital through this year.

We closed the loan sale, which included production credits totaling $8.7 million on July 20. We recorded a $2.4 million write-down on these loans as they were made to help the sales status at the end of the second quarter. It is important to note that we expect the majority of the resolutions to involve full or discounted repayment from the debtor thus producing a lower loss expectation.

Looking forward, our forecast is promising, as our team has made good progress in a short period of time and we expect to see material resolutions in the third quarter again with relatively modest net losses.

To conclude, we remain confident in our abilities to successfully execute the MARS program and are confident that the majority of the financial impact will be realized this year.

I would now like to turn the call over to Geoff.

Geoff Greenwade

Thank you, Manny, and good afternoon everyone.

I'm pleased with the progress that we have made towards repositioning the bank for organic growth as we look to 2017. Importantly, we are now beginning to see the ancillary benefits of the segregation of the MARS asset, as our portfolio bankers can more fully focus on their primary objective, building and maintaining solid banking relationship.

In addition, our team of commercial and private banking managers can now spend more of their time executing on key strategic initiative designed to drive organic growth and enhance shareholder value.

Turning to Slide 6, one such initiative that we touched on last quarter is the bank's focus on driving deposit growth since the closing and integration of the past Patriot acquisition. To accomplish this, we have positioned deposit relationship managers into each branch initiated ongoing advertising campaign, implemented several promotion and take on a defensive stand from repricing maturing time deposit for retention. The early results were promising as we grew deposits by $150 million or 5% from the first quarter's level. We are optimistic that this strategic emphasis will continue to drive strong deposit growth going forward.

Turning to loan growth on Slide 7, we continued to expect net loan growth to be flat for the year given the disposition of the MARS portfolio combined with the need to reduce loan concentration that resulted from Patriot bank customer overlap. At quarter end, total loans were $3.2 million representing a $21.3 million or 3% annualized increase from the first quarter. Our cumulative total new loan production year-to-date has been $343 million comparing favorably to $177 million in cumulative new loan production for the same period in 2015. This level of production reflects continued fall of the loan demand in the non-energy segments of our market. The additional production capacity from our former our Patriot bankers and our strong position in the market. We are confident the loan production phase that our bankers delivered over the first two quarters will continue through the second half of the year.

A primary focus for incremental growth is expansion in Dallas, which remains a very attractive market. We are currently adding commercial bankers in this market to expand Green Bank's presence and capitalize on the significant available opportunity.

Slide 8 shows our combined team of bankers and relationship managers, the sole responsibility is business development. Currently, our bankers have 34% capacity to grow their portfolio to Dallas and our goal is to increase that capacity in order to expand our market position and achieve a better geographic balance in our asset base. A third area of focus that you will hear us speak more about in the coming quarters is our strategy to grow non-interest income through four primary areas of business, government guaranteed lending, treasury management, interest rate swaps for borrowers and service charge revenue.

For example, our goal is to build the government guaranteed lending business to $10 million in annual revenue from $3.5 million that we achieved in 2015. We are making good progress and are on track to generate $4 million to $5 million this year.

Another example came from last year's program to drive more account fee income. For the 2014 share plus acquisition, we assumed approximately 4000 checking accounts with low balance. We have established market base fees on these accounts and are seeking acceleration in this revenue stream. And finally, heightened emphasis by management and incentives for the bankers are expected to produce grow the both treasury management fees and interest rate swap fee, [but we list] [ph] in both categories more than tripled on a monthly run rate basis from this point last year.

With that, I would like to turn call over Donald for a credit update.

Donald Perschbacher

Thank you, Geoff. Good afternoon everyone.

From Slide 9, as Manny touched on we've had good initial success with the execution of the MARS plan including discounted pay-offs where the borrower has found alternative financing at a nominal discount, restructuring of loans for non-energy collateral plus in some cases additional borrowers and guarantors have been added with defined alternative cash flow to repay the debt and guarantor initiated pay downs. Additionally, we have completed a portfolio sale in July, where we recognized a $2.4 million or 28% write-down on $8.7 million portfolio.

Looking forward, our expectation remains at the vast majority of dispositions will come in the form of direct resolutions, the portfolio sales only playing a relatively small part.

Turning to Slide 10, in terms of specifics, total energy related MARS reductions including the July loan sale totaled $37 million in resolutions and pay downs. During the second quarter, we recorded charge-offs of less than $1 million on the energy dispositions not included in the loan sale, which was almost entirely covered by existing reserves. E&P loans through July 21st now totaled $104 million and represent 3.2% of total loans.

Oil field service loans totaled $137 million and represent 4.3% of total loans, which brings our total energy portfolio down to $241 million or 7.5% of total loans.

Total energy loans including the July sale are down $52 million from December 31, 2015. During the second quarter, classified assets declined $3 million as a result of $15 million in MARS resolutions, which included $3 million in ORE sales and $12 million migration to classified. Classified assets totaled $196 million or 49% of total holding company regulatory capital as of June 30, 2016.

From Slide 11, non-performing assets increased to $93.5 million or 2.4% of period end total assets at June 30, 2016 compared with $77.5 million or 2.01% of period end total assets at March 31, 2016. It is natural to see an up tick in non-performing and classified levels has an accelerated disposition strategy is initiated. There is tend to be more reluctant to remain current hoping for a discount and the bank has been more aggressive in avoiding short-term renewals as loans can do in order to maximize our collections options.

With that said we believe classified assets reached their peak at the end of the first quarter and will begin to trend down rapidly as our strategy plays out.

We recorded provision for loan losses of $11 million in the second quarter of 2016. As Manny touched on, we recorded $7 million in additional specific reserves. Second quarter net charge-offs were $3.3 million, which included the previously discussed $2.4 million mark on the portfolio sale.

Finally, general reserves increased as a result of additional impairment on purchase credit impaired loans. Our allowance for loan losses was 1.49% of total loans at June 30, 2016 compared with 1.25% of total loans at March 31, 2016. At June 30, 2016, our allowance for loan losses plus the acquired loan net discount to total loans adjusted for the acquired loan net discount was 2.11%. The total reserve on our energy loan book has increased to $22 million or 9.2% of total energy loans due to additions to general and specific reserves.

I will now turn the call over to John.

John Durie

Thanks Donald.

Turning to Slide 13, for the quarter ended June 30, 2016, non-interest income totaled $3.8 million. Non-interest income reflected growth in customer service fees from our treasury management initiatives and continued strong revenue from the sale of the guaranteed portion of government guaranteed loans and our interest rates swap program as borrowers see the advantage of locking in long-term rates through a swap.

As we have previously discussed, we believe ongoing non-interest income will run at approximately $3.5 million to $4 million per quarter throughout 2016.

Turning to Slide 14, non-interest expense totaled $20.7 million, which included $1 million in MARS loan, and ORE expenses, which includes administrative, legal and ORE costs and an increase of $515,000 in provision to increase our reserve on off balance sheet exposure. Excluding these expenses non-interest expense would have totaled $19.2 million generally in line with our expectations in previous guidance.

Looking forward, we believe non-interest expense will run at approximately $19.5 million to $20.5 million per quarter through the remainder of 2016, which is slightly higher than the original guidance due to expenses associated with the MARS initiative.

Turning to Slide 15, net interest income for the second quarter was $33.5 million and our net interest margin was 3.74%. This compares to $34.2 million and 3.87% in the first quarter. Net interest income was down $687,000 from the prior quarter due to increased interest expense of $1 million, offset by an increase in interest income of $338,000. Importantly, our base loan yield before considering fees and discounts remained consistent with the prior quarter. $259,000 of the increase in interest expense was due to increased volume of interest bearing deposits and $842,000 was related to rate increases resulting from a $652,000 reduction in accretion of the deposit mark and the initiatives that Geoff discussed.

Net interest income for the quarter includes approximately $2.5 million in net accretion of the purchase accounting valuation allowances on loans, time deposits, borrowing and subordinated debt.

At June 30, 2016, net accretible purchase discount on loans was $10.1 million and the accretible mark on time deposits was $3.1 million. Due to the maturity profile of the loans and deposits, the accretions were reduced over time. We continue to believe net interest margin should run between 3.65% and 3.75% and net interest income should run between $130 million and $140 million through the balance of the year even including the increases in deposit cost we saw this quarter. Simply annualizing our 2Q results would produce $134 million in net interest income with no net growth, which we believe is achievable and sustainable.

As Manny discussed, we are pleased with early success of the MARS program and we remain confident that our pretax, pre-provision adjusted net income at the current adjusted run rate energy reserves of $22 million as of the end of the second quarter and PCI discount of $14 million are collectively more than sufficient to fund the expected losses from our MARS initiative resulting in net capital growth for 2016.

With that, let me turn the presentation back to Manny for some concluding remarks.

Manny Mehos

Thanks John.

To conclude, we are acting to remove the uncertainty that exist on our balance sheet largely by year end, so that the bank return to balance sheet and earnings growth in 2017. The core bank continues to perform well with pretax, pre-provision adjusted net income power of $18 million to $19 million, once we clear the incremental expense associated with the MARS plan. Importantly, I'm even more confident today that we will build capital as we resolve the MARS portfolio.

Operator, please open the lines for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Kevin Fitzsimmons with Hovde Group. Please proceed with your question.

Kevin Fitzsimmons

Hey, good evening guys.

Manny Mehos

Hi, Kevin.

Kevin Fitzsimmons

John, maybe we can touch on the -- how we get back to the 18, 19 pretax, pre-provision maybe, I was trying to write down your numbers quickly, you might not have gotten all of them but I’m getting core expense run rate this quarter more or like $20.6 million, so maybe you can go through that with me again how that got dialed back to 19 and change. And then, with the fees coming where they are, how do we get back to 18, 19 because I’m getting pretax pre-provision of under 17 this quarter? Thanks.

John Durie

Yes. So the under 17, so Kevin if you take the $20.7 million that we had in expenses and we had really to -- so we had -- $1 million that was related to MARS and then $500,000 that was sort of a one-time deal to raise our reserve on our unfunded, so that takes non-interest expense to $19.2 million. I don't have the net interest income number in front of me. But non-interest -- we think non-interest income will run right at the core, right around $4 million a quarter, and then that net interest income number that we had -- turn to a page to get that.

Kevin Fitzsimmons

Hey, John, what's the big delta that's going to get you back to four on the fees or should the gain on sale of guaranteed portion of loans or is it those, it's a collection of…

John Durie

We were down about -- yes, we were down about 300 this quarter from the prior quarter and Kevin, we just feel like that's the timing difference, we feel pretty good about that 3.5 to 4 and probably will be more on the four side we got a good pipeline on the SBA side. And we are seeing a lot of interest in the swap program as the Fed makes noises off and on about whether they're going to raise or lower; I think people are seeing the advantage of doing the swaps.

We think $4 million on the non-interest income is good. Net interest income was right at 33.5 as we talked about in the prepared remarks that included about 600 and something thousand increase from the prior quarter due primarily to the roll-off of some of the purchase accounting mark. So let's take, I'm just doing this on the Slide 33 plus four minus call it 19 is 18 pretax, pre-provision. And then, if you add back, if we kind of say we can get $1 million out of there for the MARS thing that's 18 to 19.

Kevin Fitzsimmons

Okay. And just a quick follow-up. We've been talking a lot about pretax pre-provision, if we look at the provision line, I know this is tough to try to time or try to talk about it in terms of a run rate. But, when we look at the provision you took this quarter lower than the prior quarter, but still elevated do we think about that provision this quarter as setting up what you think you're going to incur the next couple of quarters, or do you think we have this kind of $10 million plus provision over the next two or three quarters?

John Durie

Certainly the $64 question, let me first be a politician here and first answer the question, you didn't ask. And that is, so the question is what are the losses on MARS going to be? We want to really stress, we took 28% haircut on the loan sale. We run a really reemphasize the fact that this is not a loan sale initiative this is a resolution initiative where we are trying to move that to top of the books. But what we found and Donald and Geoff can probably comment on a little bit further. But, what we found is our group has dug into the portfolio. We see a lot of opportunity. We've already had some significant successes and we see a lot of opportunity to move these assets as fairly moderate discount. But from the guidance we’ve given and we gave last quarter and we reiterating this quarter is that between our reserves and our purchase discounts and our pretax pre-provision number. We've got plenty of room to fund the MARS initiative.

Let me kind of give some more detailed context on that and may help everybody. We've got $22 million in energy reserves; we've got $14 million in PCI reserves that's $36 million, that's really already run through the financials to cover losses on these assets. Let's just say conservatively that we're going to make $17 million pretax pre-provision per quarter including the MARS expenses that's another 34.

I guess without being overly specific what we would tell you is that, we think we will make as much to the bottom line in the second half of the year as we reported in the first half of the year. So ought to give some pretty good boundaries on what we think losses were not I mean -- losses are one thing but additional provision and other. And we believe that that puts us in a position where very little provision would low over into 2017 for the finalization of the resolution strategy.

Donald Perschbacher

And Kevin to follow-up I think what we found in the first quarter of doing this is note sales will be on the minority side of it and the majority is more refinances discounts on the refinances and restructuring where we actually keep the dollars we just move into other entities or structures to take it out of energy or classified.

Kevin Fitzsimmons

And as far as the pace that we got through, so this was the first quarter out of the gate. And I'm guessing I don't want to put words in your mouth, but I'm guessing that its probably not a surprise that it was a low percentage of MARS you got through this quarter, but there is a lot of -- there is a lot of grounds work or ground game involved in getting dissolved contacting everybody, and then that was the plan from the beginning to really hit it hard in the back half of the year or am I looking at it wrong?

John Durie

Yes. Because the team wasn't fully together at the first week in May when we announced it -- when we were at the Gulf Bank South conference that was the first week we actually had them all together. So they're 60 days into it at quarter end. And I think Donald has a weekly call with them and you may actually go over pretty -- not ever credit in there, but most of the large once. The activity that you're seeing in the resolution plan from week to week is really becoming more solid on timing and what's going to happen. So I think you're going to see more about hockey stick in the third and fourth quarter this year into the first quarter of next year.

Kevin Fitzsimmons

Okay. Thanks guys.

John Durie

Thank you, Kevin.

Operator

Our next question comes from the line of Brady Gailey with KBW. Please proceed with your question.

Brady Gailey

Hey, good afternoon guys.

John Durie

Hey, Brady.

Brady Gailey

You mentioned $0.5 million of expense that raises the reserves on your unfunded commitments. I'm not sure if that's related to energy or not but how are you all handling the unfunded commitments in the energy department? Does everybody know that you guys are out of the business and there is no way they can draw down there, how does that progress?

Manny Mehos

Donald you want to speak to that with -- I mean what the MARS team is working on?

Donald Perschbacher

I'll do that. Brady, so a couple of things, one, on the E&P side, availability the fund is obviously based upon borrowing base redeterminations. There is very little availability in that portfolio or unfunded commitments. It's really related to just a couple of strong borrowers within that portfolio that have low LTVs or in confirming status in terms of covenants and things like that. On the oil field service side we talk about it length in our weekly meetings that reducing unfunded commitments is equally as important as getting pay downs. And we're taking opportunities to do that and we'll see more of that flowing through. So many of these borrowers are in default and we spoke to a little bit earlier in that. We're purposely not extending loans and short-term extensions keeping them in default that also is limiting their ability to draw down. And so we're using every opportunity we can to reduce those commitments as well.

Manny Mehos

Yes. Brady let me just add to that. So the 500 we took really had nothing to do with MARS, it was really a tweaking of the methodology. We look at potential utilization and then we just tweak with methodology to make it line up better with our general reserve methodology. Really good piece of news for us this quarter as we were able to reduce unfunded commitments on loans with maturity greater than a year by $74 million during the quarter and that's a big area of focus for us as we're managing our capital very carefully.

Brady Gailey

Okay. And then, you all mentioned possible upside from SBA fees, the $45 million this year and then longer term may be up to $10 million. How much of that will drop to the bottom line?

Manny Mehos

So John, what would be the typical percentage after we pay out to the banker the SBA lender that's usually 10% number?

John Durie

10% to 15%, so, yes, I would say Brady, we've got the engine build to do that without adding significant additional expenses you may have a little bit of banker expenses. But I'm wagging and looking at Geoff, I'd say at least 60% would drop to the bottom.

Geoff Greenwade

Yes. Without sharing our secret sauce on our compensation. What we typically do, we're going to be adding SBA lenders over the course of this year and the next year to get there. But, basically the plan is they have to cover their salary first and then they start participating and the guaranteed loan premiums that we get typically at a 10% nature. So after they cover their salary they get -- there is -- once they get pass the certain level it goes up and you think in terms of 90% of it would fall to the bottom line.

Brady Gailey

Okay. And then lastly updated both from the buy back?

Manny Mehos

We're on hold.

Brady Gailey

Okay. All right thanks guys.

Operator

Our next question comes from the line of Michael Young with SunTrust. Please proceed with your question.

Michael Young

Hey, good afternoon.

Manny Mehos

Hey Michael.

Michael Young

Wanted to start off with the acquired loans that required an additional impairment were those all energy related or are there other asset classes in there?

John Durie

No, those were unrelated to energy.

Michael Young

Okay. So it's just general degradation of that portfolio?

John Durie

Yes. It's really I think, if I think back Michael its probably home builder, construction, development related in terms of the asset class that probably was most affected by that.

Michael Young

Okay. And is it safe to say that would be in Huston? Those would be Huston loans or…

John Durie

It is Michael probably but it's really unrelated to anything going on right now. If you think about it, it was identified during the due diligence is purchase credit impaired. It was already a problem; it had a mark against it. We've just increased the amount of the mark against it, but it's really unrelated to anything that might be going on in the Huston economy. It's a poor project probably related.

Michael Young

Okay. And then on the E&P, I guess disposition here in July, I believe it was $8.7 million that was sold that just -- that sounds like kind of a small number for a portfolio loan sale. Was it originally -- were there other workouts that took place that made that number smaller than originally anticipated or could you just give a little more color there?

John Durie

Sure. It actually let me say it this way Michael. We were pursuing multiple resolution strategies simultaneously. It was never just about selling loans, but what sort of a maximum resolution strategy for us. And so it started out a little higher and some of the loans that we contemplated telling we're able to get a resolution in terms of a discounted pay-off at an acceptable number for us and it was pulled from initiative.

The real reason I think that the number might seem small is because it wasn't -- we didn’t go in attempting to sell all of our E&P loans, we identified the loans that we felt like this was the best resolution strategy for those loans. You're right. It's not a very big dollar amount, but generally those are the customers that -- the producers that have the least access to capital, the least amount of liquidity that are going to struggle in a continuing low price environment. And so we really identified those -- we thought this was the best resolution strategy versus an attempt to sell the entire E&P portfolio.

Geoff Greenwade

Yes. Michael, I'd add, there are a couple of intangible benefits, we were able to own a process using relatively small group of loans to just get a good type process in place. And then, it also as we said earlier it really did -- does help us send the message to that is ever working out that we have other option to decide than coming up with the money.

Michael Young

Okay, great. And one last one if I can, I think in the past you guys have talked about potentially disclosing sort of your CRE concentrations by group within Huston, could you provide that information at this point or do you have that available?

Manny Mehos

We don't have it available Michael. It's something we're actually spending a lot of time on looking at right now in terms of the geographic and product diversity within the portfolio, but it's not something we're prepared to give out on this call today.

Michael Young

Okay, great. Thanks.

Operator

Our next question comes from the line of Brad Milsaps with Sandler O'Neill. Please proceed with your question.

Brad Milsaps

Hey, good evening.

Manny Mehos

Hey Brad.

Geoff Greenwade

Hey Brad.

Brad Milsaps

Just curious, of the reduction that you had this quarter energy loans, do you think how much were just related to sort of pay downs in the normal course of business that would have occurred anyway versus things you got might have pushed harder on or negotiated more for a pay off from another bank?

John Durie

Yes. Brad, pay down has accounted for about 17% of the reductions and those probably I wouldn't call them normal course of business pay down. I think they were generally pay downs that we encouraged.

Brad Milsaps

Got it. That's helpful. And John just a follow-up on the pre-provision guidance. Obviously, you expect that the pay downs in the MARS program to accelerate in the third and fourth quarter maybe this is for Geoff actually, do you feel like you got enough loan growth in the pipeline to more than offset to hold your NII within the guidance that John provided?

Geoff Greenwade

Yes. One of the numbers that we had in our script was how much in loan production that we've had in the first half of the year and I believe it's around $340 million. And Brad honestly in the second quarter we had outside of MARS we had some abnormal pay debt offs or pay downs on -- just an example, we had a mortgage warehouse customer that we exited was $25 million. We had $30 million of Patriot/Green Bank common customers that reduced down to get within our hold limit. So that's $55 million. We had $43 million of MARS, which took us up to $98 million.

And then, we had a large construction loan that did not have a mini-prem approved that we typically do. That paid off of $50 million. So you -- those were all kind of one-time occurrences that weren't normal circumstances. So you had all that together that's well over $110 million that would have been on top of our $21 million in growth. So we would have actually had outside of those strategic situations we would have had a $100 million growth quarter this which would have been very outstanding in any typical year.

John Durie

Yes. Brad to give a little more context on that $343 million gross production through June, if you go back to last year that number was about $177 million for us. And the total gross production in all of 2015 was $477 million. So I'm not worried, we're going to go, but I think it is very possible that we could more than offset the MARS reductions by growth.

Geoff Greenwade

Yes. I think the plan is to have substantially a lot of the MARS reductions in the third and fourth quarter, so for 2017 we're back to our normal 10% plus growth organic a year.

Brad Milsaps

Great. That's helpful. And just one final question. I know energy prices were upwards looking during most of the second quarter, since the end of the quarter, we've had a pretty significant pull back in the price of oil, is there a level or maybe even a psychological level that would slowdown the program if we do trade, let's say back into the 30, any color around, if we do our further weakness, what do you guys might see or love to do?

Donald Perschbacher

I don't, Brad, this is Don. I don't see any change in our strategy even if that occurs. I mean we are committed to exiting our strategies are really based upon how best to get out knowing it's a volatile commodity pricing environment and what are the things that need to be done. So I don't know that it changes anything today for us

Manny Mehos

The other thing, I mean this quarter, I mean a lot of these resolutions occurred as when prices were lower before, and then, started making that happen. And I mean a lot of them are in oil service sector. So -- and so it really we're -- these are not, I think the note sale is -- was really not depending on oil price, of course, it helps. But it's going to be mostly dispositions and it really is not directly related to oil price.

John Durie

Yes. We feel like the rise is going to help refinancing sources get anxious of money to work and if it goes down a little bit it makes one of them to work more.

Geoff Greenwade

Yes. And this bouncing around is going to continue and that's exactly why we do not want to be in this long-term.

Brad Milsaps

Great. Thank you, guys.

Operator

Our next question comes from the line of Emlen Harmon with Jefferies. Please proceed with your question.

Emlen Harmon

Hey, good evening. Hey what was the granularity of the relationships that you guys exited this quarter -- Donald you walked through a few of the difference, the two of the different disposition strategy when you're realizing the loan sale, could you give us the expenses kind of what the break down of that was -- discounted pay back versus restructuring the collateral and kind of as well?

Donald Perschbacher

Yes. I mean I think it was, if you think about the loan sale at $8 million that was relatively small part. The rest but I think is pretty evenly split in terms of -- we had good success with substitution of obligors adding co-borrowers and collateral that eliminated energy or oil dependency that that was I think a key strategy on a couple of large relationships within that kind of pay off.

We had some refinancings at very modest discounts that took place. And it's interesting, I think that the discounted pay offs are offering them when it's a motivated borrower because that discount is, in orders to their benefit as supposed to note buyer. Like I said we were moving simultaneously down multiple pass at once and I think that motivated some of these borrowers to get things care of. But we're also seeing some straight out full refinances particularly on borrowers that have been able to survive this long and had access behind it. So I think it's a pretty even split across those in terms of restructures and the modest discounts of refinancing.

Emlen Harmon

Got it. And then in terms of granularity, I mean it sounds like it was just the way you're talking and it sounds like it was fairly granular. But I'm going to assume the average loan price was kind of a $2 million or something in that neighborhood, would that be fair?

Donald Perschbacher

There were some -- there was some larger relationships than that -- within there. I mean there were -- without really getting too detailed in terms of -- borrowers might be able to prove who they are. We have some that were twice that size -- three or four times that size that were resolved. Again, a very modest discounts or in one case or in couple of cases they were really probably $10 million worth and a number of borrowers were moved it sort of full phase amount because we added co-borrowers and substituted collateral on those expense.

Emlen Harmon

Got it. And then, when you guys substitute collateral -- are you then finding a way to refinance the loan out or is just get shifted around on the balance sheet?

Donald Perschbacher

Well, I mean it shifts on the balance sheet because the purpose code or call codes may change in terms of or the collateral course may change. But we're really looking at dependency in terms of repayment and reliance upon energy as an economic driver for those borrowers so. Collateral often times shows up deficiencies that we may have. It's really the substitution of the obligor, the addition of a strong guarantor or co-borrower that eliminates the energy risk to us in that case.

Emlen Harmon

Okay. And then on the loan sales, I'm sorry if I missed this, were those performing assets prior to the sale and if not what was the reserve that you had against those?

Donald Perschbacher

Those were performing loans, they were all performing loans, no reserves.

Emlen Harmon

Got it. Thank you.

Donald Perschbacher

You bet.

Operator

[Operator Instructions] Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your question.

Jon Arfstrom

All right. Thank you. Good afternoon.

Manny Mehos

Hey, Jon.

Geoff Greenwade

Hey Jon.

Jon Arfstrom

Donald, may be for you, how are you feeling about asset quality up at Patriot and energy MARS whatever you want to call it?

Donald Perschbacher

I feel good Jon. I've yet to see anything in our portfolio that makes me think there is a contingent effect going on in Huston in particular. We look at it very, very closely. Obviously, risk ratings are dynamic and some credit gets better some don't. But overall, I haven’t seen anything extraordinary in terms of changes in asset quality in the portfolio that the non-Huston markets where we are continue to be pretty strong. And I think we do believe we've peaked in terms of our classified assets and we should continue to see improvement quarter-over-quarter and those numbers continue to come down as we work through the MARS initiative.

Jon Arfstrom

Okay. And then, I don't know if there is a way to estimate this. But maybe give it a shot or best guess. Of the provisions, the last two quarters, the $11 million and the $16 million. Is there anyway to estimate how much of that is for the core book and not necessarily for energy does that makes sense?

Manny Mehos

Yes. I got it Jon. I don't want to guess, I mean we've built general reserves around $5 million, so we've done 27. I would say -- I'd say 20 of that is related to energy we had -- we had a $8 million charge-off, so I would say 20 of the reserve build is energy.

Jon Arfstrom

Okay. So I guess you're thinking about 2017 and theoretically you should have marks provision, reserves basically in the rearview mirror by the time you hit Q1 of 2017?

Manny Mehos

That's our goal. There maybe some hangover in the 2017 because there is some of these loans that aren't impaired, you can't justify under accounting guidance is that's setting up a specific reserve. But, we still may be willing to take a discount so there maybe some carry over, but the goal is to have a substantially in our rearview mirror and the numbers I gave earlier are designed to do that.

Jon Arfstrom

Yes. Okay. Okay. So you expect to be back on -- the older EPS run rate by the time we enter 2017 -- assuming everything works as planned?

Manny Mehos

Yes, absolutely.

Jon Arfstrom

Okay. Couple of more things, the loan yields being flat excluding the fees, anything unusual there or is that new loans replacing old loans at the same rate maybe give us some color there?

Manny Mehos

I think that speaks to the consistency of our pricing over -- quite frankly the last couple of years and we don't see it getting a lot better or a lot worse I think its just been pretty consistent with our pricing discipline and I don't see that changing a lot over the next couple of years unless the market changes.

Jon Arfstrom

Okay. Good. And then I guess the other -- the one other piece of this, you've kind of touched on it, but the funding approach the deposit costs are often, it looks like its CDs and some non-interest bearing increase in cost, yes, just talk a little bit about your thoughts there and what the strategy is there?

Manny Mehos

Yes. Part of it Jon was we did have to play catch up, when we put the two banks together in the fourth quarter of last year, our loan to deposit ratio got over 100% for the fourth quarter and the first quarter. And so we wanted to get caught up and be at least below 100% for the end of the second quarter. So we were very defensive on CDs as they mature, then we did some outbound advertising and marketing on some CD promotions.

We've basically stopped that now and we are focusing more on money market and DDA growth, the last six months of the year. And the part of that is with -- as we think we are going to be flat on the loan growth, this allows us time period to get ahead of on the deposit side. We are going to be focusing mainly on money market and demand deposit. And I would tell you long-term being two years out, our goal is to get back to the third balance that we had between CDs, money markets and DDA interest bearing, non-interest bearing like we were before the Patriot acquisition last year.

Jon Arfstrom

Okay. Thank you.

Manny Mehos

Thanks Jon.

Question-and-Answer Session

Operator

There are no further questions at this time. I'd like to turn the call back over to Mr. Manny Mehos for any closing comments.

Manny Mehos

Thank you, operator. Thanks everyone for joining us. We wish we could tell you more about MARS, it seemed to occupy about 80% of the conversation. It's just there is so much in transition right now with -- some of the large loans, they are very complex. But, they are heading the right direction.

I know, I've talked to all of you have asked questions, I've talked to you one on one about this and they are very -- there is a very, it takes a lot of time for these to either be restructured or paid off. But, we really -- most of the losses happened from a handful of loans. And we think we have -- we know we have our arms around all of those and we are making progress and they are getting better. We try to book as much reserves as we can as early as we can. So, I -- we see a light at the end of the tunnel and we've made a lot of progress, in spite of the fact that it seem small at 12%. But, I assure there is more progress being made behind the scenes and hopefully that will materialize in the third quarter.

John tried to give guidance without guidance, on that because we -- until it's done we don't want to -- we don't want to sharpen our pencils too much. But, we feel a lot better this quarter than we did last quarter and I'm certain that's going to be the same next quarter. And I know that they didn't give you much more guidance, but that's where we are. A lot of this is going to work out on its own, it's going to be discounted payoffs or payoffs not note sales and hopefully a lot of that will happen in the third quarter along with some upgrades because of the guarantor or new collaterals. So it's a mix of many things, but our goal like John said is to get it done by the fourth quarter maybe go into the first quarter a little bit. But, we should be if that run rate that we all expect early next year. We are pretty confident of that.

Anyway that's it. Thanks for joining us. We will talk to all of you soon. Good afternoon.

Operator

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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