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Edited Transcript of BXS.N earnings conference call or presentation 18-Jul-19 3:00pm GMT

Q2 2019 BancorpSouth Bank Earnings Call

TUPELO Jul 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Bancorpsouth Bank earnings conference call or presentation Thursday, July 18, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris A. Bagley

BancorpSouth Bank - President & COO

* James D. Rollins

BancorpSouth Bank - Chairman & CEO

* John Gary Copeland

BancorpSouth Bank - Senior EVP, CFO , Treasurer & Interim Chief Risk Officer

* Will Fisackerly

BancorpSouth Bank - Senior VP & Director of Corporate Finance

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Conference Call Participants

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* Brett D. Rabatin

Piper Jaffray Companies, Research Division - Senior Research Analyst

* David Pipkin Feaster

Raymond James & Associates, Inc., Research Division - Research Analyst

* Jennifer Haskew Demba

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Jon Glenn Arfstrom

RBC Capital Markets, LLC, Research Division - Analyst

* Matthew Covington Olney

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Good morning, and welcome to the BancorpSouth Q2 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would like to now turn the conference over to Will Fisackerly, Director of Corporate Finance. Please go ahead.

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Will Fisackerly, BancorpSouth Bank - Senior VP & Director of Corporate Finance [2]

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Good morning, and thank you for being with us. I will begin by introducing the members of the senior management team participating today. We have Chairman and Chief Executive Officer, Dan Rollins; President and Chief Operating Officer, Chris Bagley; and Senior Executive Vice President and Chief Financial Officer, John Copeland.

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 risk. Information concerning certain of these factors can be found in BancorpSouth's 2018 annual report on Form 10-K. Also during the call, certain non-GAAP measures may be discussed regarding the company's performance. If so you can find the reconciliation of these measures in the company's second quarter 2019 earnings release.

Our speakers will be referring to prepared slides during the discussion. You can find the 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 yesterday afternoon.

And now I'll turn to Dan Rollins for his comments on our financial results.

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [3]

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Thank you, Will. Good morning. Thank you for joining us today to discuss BancorpSouth's Second Quarter 2019 financial performance. I will begin by making a few brief comments regarding the highlights for the quarter. John will discuss financial results. Chris will provide more color on our business development activity. After we prepare -- after we conclude our prepared comments, our executive team is ready to answer questions.

Let's turn to the slide presentation. Slide 2 has our normal greetings from the legal team, Will has already discussed.

Moving to Slide 3. It was another record quarter for our company from an operating standpoint. We reported GAAP net income for the second quarter of $53.1 million or $0.53 per diluted share. Reported GAAP earnings were impacted in the quarter by 2 nonoperating items, including merger-related expenses of $3.1 million associated with the closing and integration of the Grand Bank and Merchants Bank mergers as well as a negative mortgage service rights valuation adjustment of $8.8 million. Accordingly, our net operating income, excluding MSR valuation change, was a record $62 million or $0.61 per diluted share. This represents an increase of $0.05 per share or 9% compared to both the second quarter of 2018 and the first quarter of this year.

We are extremely pleased with our front-line teammates' efforts this quarter on both sides of the balance sheet. We generated net organic loan growth for the quarter of approximately $170 million or 5.2% on an annualized basis. Our newer markets in Texas again contributed significantly to our growth efforts as we reported organic loan growth in Texas of over 16% on annualized basis. We also performed very well in Missouri, growing loans 9% on an annualized basis in that market. While Texas has our fastest-growing markets from an economic standpoint, our success in Missouri is a result of our ability to continue to attract and add quality bankers to our team. We were fortunate to have been able to attract and retain experienced relationship managers in several markets across our footprint.

While it is not shown on this slide, deposits were only down nominally during the quarter on an organic basis. We were able to overcome most of the seasonal run-off. Total deposits were up $540 million in the quarter or 7.7% annualized -- excuse me, up $540 million or 7.7% annualized on an organic basis for the first 6 months of the year, which we believe is very good. Chris will comment further on our business development efforts, including additional color on specific markets.

We again saw improvement in our net interest margin. Our core margin, which excludes accretable yield, was 3.79% for the quarter compared with 3.74% for the first quarter of 2019. This improvement was attributable both to the 2 acquisitions that closed during the quarter as well as continued spread improvement in our legacy book of business. John will discuss these factors in more detail. We believe we can continue to protect our margin. However, given the current rate environment, we are less opportunistic -- less optimistic about being able to further improve the margin from its current level.

We continue to be pleased with our credit quality. Our provision for the quarter was $0.5 million, which was driven primarily by improvement in our classified asset levels as well as low levels of net charge-offs. Chris will provide additional information on credit quality in just a minute.

Finally, we continue to be opportunistic in our share repurchase program. We repurchased just over 600,000 shares during the quarter at a weighted average price of $28.21. Year-to-date, we have repurchased 1.6 million shares, which leaves 1.4 million shares available for repurchase in our current authorization that expires at the end of the year.

I'll now turn to John and allow him to discuss our financial results in more detail.

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John Gary Copeland, BancorpSouth Bank - Senior EVP, CFO , Treasurer & Interim Chief Risk Officer [4]

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Thank you, Dan. We'll jump right into the numbers. If you'll turn to Slide 4, you'll see our summary income statement. In reviewing the income statement, net income was $53.1 million or $0.53 per diluted share for the second quarter. As Dan mentioned a few minutes ago, we did have 2 nonoperating items in our first quarter results. We did have a negative pretax MSR valuation adjustment of $8.8 million and merger-related expenses of just over $3 million. Accordingly, we reported net operating income, excluding MSR, of $62 million for the quarter or $0.61 per diluted share compared to $55.9 million or $0.56 per diluted share for the first quarter of 2019 and $55.6 million or $0.56 per diluted share for the second quarter of 2018.

Our net interest revenue increased 4.9% compared to the first quarter of '19 and 12.6% compared to the second quarter of 2018. Of course, the transaction closings of Icon Bank in the fourth quarter of '18 as well as Grand Bank and Merchants during the second quarter this year did impact those comparisons. While these transactions certainly contributed to a portion of the net interest income growth, we have continued to produce some organic growth, as Dan mentioned as well as improvement in our margin.

Our reported net interest margin for the second quarter was 3.87%, while our net interest margin excluding accretable yield was 3.79%. Comparable metrics for the first quarter of '19 were 3.86% and 3.74%, respectively. We reported a net interest margin of 3.71% for the second quarter of 2018, while our core margin for that period was 3.63%. As we look at the quarter-over-quarter change from a 3.79% to a 3.74%, approximately 3 basis points of that improvement was attributable to the 2 acquisitions that closed April 1. And then about 2% -- sorry, 2 basis points of that 5 basis points was related to continued spread improvement in our legacy business.

In looking more specifically at the components with the margin, the pace of rising deposit costs did slow considerably during the quarter as we saw a 5 basis point increase in our total cost of deposits, following several consecutive quarters of higher and more significant increases. As expected, we saw continued increases in yields on both our loan and securities portfolios.

As Dan mentioned earlier, while we expect to continue to have repricing opportunity on the asset side of the balance sheet, given the current rate environment, we are a little less optimistic about our ability to continue the margin improvement that we reported for several consecutive quarters now.

Before we move to noninterest revenue expense, I'd like to briefly mention credit quality and Dan alluded to this as well. We continue to be pleased with our credit quality strength. We had a provision of $500,000 for the quarter compared to $500,000 for the first quarter of '19 and provision of $2.5 million for the second quarter of 2018. We saw linked-quarter improvement in our nonperforming and classified asset levels, while net charge-offs for the quarter were very low at $1.3 million.

If you'll turn to Slide 5, you will see a detail of our noninterest revenue streams. Total noninterest revenue was $66.3 million for the quarter compared to $64.2 million for the first quarter of 2019 and $72.5 million for the second quarter of 2018. The MSR valuation adjustment that we mentioned is obviously the primary contributor to the volatility in these totals. Outside of the negative MSR adjustment, mortgage had a good quarter, reporting production and servicing revenue of $9.2 million.

The other items shown on this slide were within our range of expectations, given the merger activity during the quarter and other seasonal factors. From a comparison standpoint, I would remind you that other noninterest income for the first quarter was somewhat inflated with a $1.2 million gain on the sale of a branch building.

Slide 6 presents the detail of noninterest expense. Total noninterest expense for the second quarter was $157.7 million compared with $150 million for the first quarter of 2019 and $145.2 million for the second quarter of 2018.

Total operating expense, which includes merger-related expense and other onetime items, was $154.5 million for the quarter compared to $149 million for the first quarter of 2019 and $143.3 million for the second quarter of 2018. The expense basis or bases for Merchants Bank and Grand Bank has been approximately $20 million per year combined or $5 million per quarter. Accordingly, these 2 transaction closings are essentially the primary driver of the increase in operating expense.

Beyond that, I don't believe there are any large variances or onetime items that warrant further discussion. I would point out that as we've been able to grow the bank and hold expenses very stable, our operating efficiency ratio, excluding MSR, has continued to trend down. For the second quarter, this metric was 65.5%, marking the lowest quarterly level in several years.

That concludes our review of the financials. Chris will now provide some color on business development. Chris?

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Chris A. Bagley, BancorpSouth Bank - President & COO [5]

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Thank you, John. Slide 7 represents our funding mix as of June 30 compared to both the first quarter of 2019 and the second quarter of 2018. Total deposits and repos grew just over $400 million for the quarter. This addition of Grand Bank and Merchants Bank added just over $500 million funding to our balance sheet, which means that on an organic basis, deposits and repos declined approximately $100 million during the quarter.

As mentioned on previous calls, we typically experience seasonal downward pressure on deposits due primarily -- or second quarter deposits due primarily to public fund money run-off, outflows for tax payments, et cetera. We are pleased in this quarter's performance in that we have typically experienced higher levels of run-off during the second quarter.

Year-to-date, deposits and customer repos have increased approximately $560 million on organic basis or 7.8% annualized. This success is a testament to our bankers' continued focus on cultivating relationships and growing deposits.

As we look at pricing, the pace of the trajectory of our total deposit cost declined during the quarter. Our total cost of deposits increased to 68 basis points for the second quarter from 63 for the first quarter of this year. This 5 basis point increase is roughly half of what we reported for the previous several quarters. The increase is driven primarily by the repricing of time deposits, which have weighted average pricing term of close to 1.5 years. All that to say, it's still a competitive rate environment, but we are seeing some downward pressure on advertise rates specials and posted rates throughout our markets in our rate survey process.

As we look at geographical performance relating to deposits, we have several divisions across our footprint stand out this quarter. The Northeast Mississippi, Missouri, Central Arkansas, Northwest Arkansas and East Texas divisions all reported strong deposit growth for the quarter.

Moving to Slide 8, you will see our loan portfolio as of June 30 compared with the first quarter of 2019 and the second quarter of 2018. Total loans and leases increased $588 million compared to March 31, $415 million of which was a result of the 2 transactions previously mentioned.

On an organic basis, we produced net loan growth of approximately $170 million or 5.2% annualized during the quarter. We've said for some time that we're pleased with our pipelines and production levels. We're also pleased to see these efforts result in some meaningful growth this quarter.

As we look at our first quarter lending efforts from a geographical perspective, we had several divisions produce meaningful loan growth. Austin, Dallas and Houston all had great quarters in Texas. In addition, our Missouri, Northwest -- or, excuse me, Northeast Arkansas and South Arkansas divisions all had great quarters from a loan growth perspective.

You'll notice that these comments are again heavily weighted towards some of our newer, higher-growth markets, particularly the 16% annualized growth in Texas that Dan mentioned earlier. With that said, as we traveled our footprint this year, conducting our internal town hall meetings, we've reiterated to our teammates that all of our markets will play an integral role in our growth and success going forward. We need our teammates in our smaller markets to continue to protect our low-cost deposit base and take care of those customers, while our teammates in higher-growth markets take advantage of opportunities to grow on the loan side of the balance sheet.

Slide 9 contains credit quality highlights. All of our credit metrics are very stable. As John mentioned earlier, we had a provision for credit losses of $500,000 for the second quarter compared with a provision of $500,000 for the first quarter of 2019 and a provision of $2.5 million for the second quarter of 2018. Net charge-offs were very low at $1.3 million for the quarter or 0.04% of average loans annualized.

Finally, our NPAs continue to remain manageable and at stable levels while our classified and criticized assets trended further down during the quarter.

We are very pleased with our credit quality. I would again reiterate that our credit metrics are at low levels and they may experience quarter-to-quarter lumpiness, particularly as we continue to close and integrate acquisitions.

Moving on to the mortgage and insurance. The tables on Slide 10 provide a 5-quarter look at our results for each product offering. Our mortgage banking operation produced origination volume for the quarter totaling $495.5 million. Home purchase money volume was $397.9 million or 80% of our total volume for the quarter. This purchase refi mix is consistent with what we've been reporting for some time now. However, given the recent rate environment, we are seeing and our pipeline mix has shifted more toward 70% purchase money and 30% refinance.

Deliveries in the quarter were $304 million compared to $239 million in the first quarter of 2019 and $303 million in the second quarter of 2018. Production and servicing revenue, which excludes the MSR adjustment, totaled $9.2 million for the quarter compared to $6.9 million for the first quarter of 2019 and $7.1 million for the second quarter of 2018.

Our margin was 2.31% for the quarter representing an increase from 1.7% for the first quarter of 2019. The margin increase is attributable primary -- primarily to the $70 million increase in the mortgage pipeline quarter-over-quarter. Finally, as Dan mentioned earlier, the MSR valuation adjustment during the quarter was a negative $8.8 million.

Moving to insurance, total commission revenue for the quarter was $34 million compared to $30.2 million for the first quarter of 2019 and $33 million for the second quarter of 2018. As we mention each quarter, we typically benchmark to the same quarter in the prior year, given the seasonality in our renewal cycles in insurance.

Our results for the quarter reflect revenue growth of 3% compared to the second quarter of last year. This is consistent with the comparable quarter growth that we reported for the last couple of quarters as our team has started to see some price firming in the market. Hopefully, we will be able to accelerate this growth if that trend continues.

Finally, while it's not shown on this slide, I would like to briefly mention our wealth management team. We continue to see the benefits of their efforts to add quality producers and to grow assets under management. We reported wealth management revenue of $5.9 million for the quarter, which is a 5% increase over the first quarter of 2019 and a 3% increase over the second quarter of last year. Our team has grown the total assets under management, including trust and brokerage, to over $8 billion.

Now I'll turn it back to Dan for his concluding remarks.

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [6]

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Thanks, Chris. Our second quarter results reflect another successful quarter for our company. Record operating earnings were achieved through the contributions of and the hard work of all of our teammates. We added over $400 million in loans and over $500 million in deposits through the mergers with Grand Bank and Merchants Bank. In addition, our bankers produced meaningful net loan growth for the quarter, while also successfully retaining deposits in the quarter that has historically had high seasonal run-off.

In addition, excluding the MSR adjustment, our mortgage, insurance and wealth management teams all reported revenue growth compared to the prior quarter and the second quarter of last year. This revenue growth, combined with strong credit quality and improving net interest margin and a stable expense base has resulted in continued performance improvement quarter-after-quarter.

And with all of that, operator, we're now ready to -- happy to answer questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Jennifer Demba with SunTrust.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

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Two questions. Can you just talk about the strategies to protect the margin with and without rate declines?

And two, can you talk about the M&A environment and what you're seeing out there right now?

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [3]

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Sure. Appreciate it. Strategies to protect margin, that's a good one. We're -- as Chris calls it, it's hand-to-hand combat. I mean we're fighting every day to make good decisions. So in the deposit side of the balance sheet, I think Chris mentioned, we're seeing some relief on upward rate movement and actually, seeing some downward opportunities. Chris may want to jump in on the rate side. On the loan side, it's very competitive.

Chris, do you want to jump in on any of that?

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Chris A. Bagley, BancorpSouth Bank - President & COO [4]

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Yes. Jenny, we're seeing competitive pressure on the loan pricing so there's definitely that out there. I think everybody's anticipating a rate Fed cut. We monitor and survey, probably like all of our competitors do, throughout our footprint, our market, on the posted and rate specials and from the deposit side, so we're monitoring those very closely. So we picked up our frequency, I guess. Our process is to monitor that more frequently when we're anticipating rate moves and we're staying -- we're just paying particular attention to what our competitors are doing and trying to price competitively to protect relationships, but as hard as we can to protect margin, if that makes sense. So it's a global process and it's hand-to-hand combat at the same time.

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [5]

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Yes. We have not put any derivatives on the balance sheet, if that was part of your question. John, I don't know if you want to add anything on what we're trying to do to protect margin or grow margin?

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John Gary Copeland, BancorpSouth Bank - Senior EVP, CFO , Treasurer & Interim Chief Risk Officer [6]

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Well, Jenny, we do have repricing opportunities built into the balance sheet. We do have $2.5 billion in floating rate loans. We have a couple of billion in fixed rate and variable rate loans that we'll be repricing in the next 12 months. They're there. And this hadn't changed much from last quarter. Those loans are at an average rate right now in the high 490s. In the last 90 days, we've been bringing loans on at an average of 550 or 560. Of course, we are getting pressure on that, certainly, so there's no guarantee that, that can continue. So there is some built-in -- potentially built-in positive repricing in the loan portfolio, in the investment portfolio.

We do have about $400 million in mostly agencies, that's most of our book, rolling off in the second half of the year, probably weighted toward -- more toward the end of the year, rolling off at an average in the 120s. With recent rate moves, we were saying last quarter those are going to reprice over 2, but those are going to reprice and we keep short with 3 years. So those are going to reprice in the 190s, something like that. So there is some built-in repricing opportunity there as well. And then we are seeing some relief on deposit pricing increases as well. So I guess that's kind of the -- a thumbnail sketch of repricing.

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [7]

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Thanks, John. Jenny, your second part was on M&A. Are you talking about where we are with the current processes or are you talking about forward-looking? I guess maybe both. So we can…

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [8]

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Forward-looking, actually is where I was more interested.

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [9]

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Forward-looking, okay. Yes. There's still opportunities out there. So again, when we look at what's happening in the market, you've heard me say for a long time there are plenty of opportunities in the smaller bank, nonpublic bank land. There are conversations being held. There are companies and banks that are trying to decide how do they compete in today's environment. I don't know what the catalyst is that causes people to make a decision, but there's lots of activity and lots of talk. Certainly, the volatility in the valuations creates stress points for transactions. You've got public buyers like us and many times the smaller private banks do not equate the value of their bank to the public currency that they might be taking. Their answer is my bank is worth x, regardless what happens to the value of your bank.

And as you know, that's not realistic in some ways. So some of that discussion has to happen on what is the value and how is the value tied to what's happening in the market. And the volatility is not helping anybody on that front. But having said all of that, there's lots of talk out there. I think we will continue to see lots of consolidation in the smaller bank world for some time to come. Within our footprint on the larger size, there's been a few transactions, but not very many over the last couple of years. And I think a lot of folks in that group are trying to figure out where to go too, but not as actively talking about things as in the smaller bank land.

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Operator [10]

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The next question comes from David Feaster with Raymond James.

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David Pipkin Feaster, Raymond James & Associates, Inc., Research Division - Research Analyst [11]

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Just a follow-up on the NIM question. Do you have an estimate for what a 25 basis point cut would do to the core NIM?

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [12]

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Yes. John's going to jump in here too. I think his comments earlier were, we think we can protect NIM at where we were. So a quarter ago on this call, we were talking about our ability to continue to expand NIM and we've changed a little bit. John?

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John Gary Copeland, BancorpSouth Bank - Senior EVP, CFO , Treasurer & Interim Chief Risk Officer [13]

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We're expecting -- David, we're expecting the net interest margin with rate cut that you mentioned to stay virtually flat, to sort of where we had been projecting 1 basis point or 2 increase, it's probably going to be basically flat. I will throw in and I should have added this in Jenny -- as a response to Jenny's question. The 2 pending transactions that we have, we have seen pickup in NIM from the mergers that we've been booking and we may see a couple of basis points pickup in the NIM just from those transactions going forward. So does that answer your question, Dave?

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David Pipkin Feaster, Raymond James & Associates, Inc., Research Division - Research Analyst [14]

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Yes. Yes. That's helpful. And then Texas has obviously been an outsized contributor to growth. Is there any specific sectors or regions in the state that's driving that? You've done -- you've been pretty active in hiring, how's that going? And how is cross-selling in the fee income side of that market?

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [15]

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Yes. The economy in parts of our footprint is better than the economy in other parts of our footprint, and that's clearly the case for the Houston, Dallas, Austin markets. There are pockets across the rest of our 8-state footprint that have growing or more healthy economies, and parts of our footprint are holding on and not growing as fast as others. So you're seeing that in opportunities.

Several things play into that. We have been able to add folks in Texas at a faster pace maybe than we have in some other markets, and those are newer markets for us. So you know a couple of us here have some experience in those markets, and we are comfortable in those higher-growth markets. Your question was specifically, are we seeing anything on any particular industry type or any particular geography, and my answer is no. It's anything and everything across all the markets. So every one of those markets is doing well. Every one of those markets is seeing growth. It's a diversified pickup or add in those markets that we're bringing on. It's people related, it's relationship related.

On the fee income side, we have been able to add -- Chris mentioned that briefly, we have been able to add some producers or some relationship managers on the wealth management side in a couple of markets that have been helpful in that. And we continue to be able to expand and grow our -- excuse me, our insurance revenue. If you look at insurance revenue, quarter-over-quarter, I think this was the best second quarter insurance revenue we've ever had.

So all of those things are contributing to the health of our organization and we're proud of our team.

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David Pipkin Feaster, Raymond James & Associates, Inc., Research Division - Research Analyst [16]

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Okay. That's great. And then last one from me. We spoke a couple of months ago. You talked about seeing more pressure on structures and underwriting standards. Has that improved at all or gotten worse? And are there any specific segments where you're seeing that be more apparent?

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [17]

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Yes. Chris, you can jump in here with me in a minute. I guess my comment on structure, pricing, the nonbank lenders are aggressive. And so we continue to see some outsized payoffs. That's the lumpiness in the growth in the portfolio. The nonbank lenders are making long-term fixed rate, nonrecourse loans that we will not play in. And my guess is most banks are not playing in the nonrecourse third-party or nonbank lending world.

And then when you talk about structure, I don't know that I would point to structure as much as just rate pressure. Just in the last week, some of the folks that have been announcing earnings, I've seen several that have said they're not willing to sacrifice growth to protect margin which means that they're paying or they're slicing price to buy those loans and we're kind of on the other side of that. We're trying to protect margin and grow in a prudent manner.

Chris, you want to jump in?

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Chris A. Bagley, BancorpSouth Bank - President & COO [18]

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Yes. Not much to add, I agree 100%. The structure competition would be on losing it to nonbank lenders. Not a lot of structure craziness in my -- what we've seen on the bank side, but the pricing pressure. So pricing has kind of whipsawed as the Fed has been out there saying we're not doing 3 bumps, we're going back the other way. So that's driving a lot of the bank price.

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Operator [19]

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The next question comes from Matt Olney with Stephens.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [20]

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I guess first off, John, I believe you mentioned that a potential July Fed cut would not have a very big impact on the margin. I'm a little surprised that you said that. I think you have around $2.5 billion of floating rate loans, either liable or prime. Do you have any index deposits that would offset this or is it a short CD book or any color you can give on that?

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John Gary Copeland, BancorpSouth Bank - Senior EVP, CFO , Treasurer & Interim Chief Risk Officer [21]

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It's a short book, for sure. I'm not sure I can give any much additional color on that, Matt. We did run this through our model and, of course, there are a lot of moving parts, but we're pretty confident that we can pretty much hold the margin.

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [22]

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Yes. I guess I would say that in a different way. So yes, we've had some floating rate loans, but you've been hearing us say for the last several quarters that we thought there was an upward bias on our margin. So that upward bias is -- has been there, but when you pull that $2 billion in floating rate loans and you mark that back down, that's what I think we believe is going to stop the upward bias and help us -- prevent us from growing, but we think we can protect margin or maintain margin.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [23]

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Okay. That makes sense. And then on the loan growth front, it looks like you only sold a portion of the mortgage production into the second quarter. Was this strategic or just a matter of timing with the strong volume later in the quarter?

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [24]

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Yes. We don't sell all of the production ever. So there's 2 parts to that answer. So we are producing loans within the mortgage team that are products that are not secondary market products, alternative lending products in some markets. And so those products have always been portfolio-ed in our book and we will continue to do that. And then certainly, when you're in the end of June, yes, production was very high in June and you can't get all that delivered before the end of the quarter. So I think the answer is both.

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Operator [25]

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The next question comes from Brett Rabatin with Piper Jaffray.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [26]

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Wanted to just talk about mortgage banking for a second and just kind of the outlook there. And then I know it's hard to hedge it perfectly, but just any thoughts on hedging the mortgage a little more going forward? And then also wanted to talk about the efficiency ratio as we think about 2020.

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [27]

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Okay. Let me take -- let me run those kind of the reverse. When you're talking about mortgage future look, I'm going to let Chris get in. When you're talking about hedging, so let's talk about the hedge. So we hedge our pipeline. We have always hedged our pipeline. And the hedge has been effective on the pipeline. We have not ever hedged our mortgage servicing right valuation. And so you see the big swings and you've been seeing that for years for our company. We are prepared and ready to hedge in that.

We made the decision a year or so ago to begin playing and make sure that we could validate the modeling around hedging the MSR valuation, but at the low rates where we were, the thought process was at the time, if you remember a year ago at this time, we were expecting a lot more upward pressure than downward pressure. And so we said we've been without a hedge on the MSR for a long time, we're go to continue to ride that because we've given up value. So last year, we had basically flat value with swing from quarter to quarter. This year, we're down in the first quarters 2 on MSR valuation, but there really is, for all practical purposes, not much of a hedge at all. It is hedged a little bit but really an insignificant amount and that's more of a -- what I would call a testing process, so that we could be prepared if we wanted to more completely or fully hedge the MSR valuation.

Chris, you want to go to forward-looking?

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Chris A. Bagley, BancorpSouth Bank - President & COO [28]

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Yes, maybe just a production a little bit. So I think it's a combination that the market, obviously there's rate, the downward pressure on long-term mortgage rates has driven some refi activity, so we're seeing some increase there. But we've also added producers. So some of those producers in some of those markets like Dallas, Houston, Austin, where you've got more volume potential are contributing to some of that. And so we feel good about the producers we've added.

I think there's upward pressure on activity there, and then depending on what rates do, that can obviously drive it and make it lumpy, but with the rate environment the way it looks right now, I think we're seeing an opportunity on the refinance side. That's why you see the mix change a little bit.

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [29]

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Let me go to your other question on efficiency, Brett. The efficiency ratio, John said it's the lowest it's been in a while; it's actually the lowest efficiency ratio for a quarter this decade. So when we're in the summer of 2019 and that's the lowest efficiency ratio we've reported in this decade, clearly, we continue to make progress. However, as you've heard me say many times before, I don't think we're proud of where we are. I think we know that we can continue to improve and get better. So we continue to manage the expense base. We continue to want to grow on the revenue side and we continue to believe that we can continue to trend the efficiency ratio in the direction that we're trending now.

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Operator [30]

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The next question comes from Jon Arfstrom with RBC Capital Markets.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [31]

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Just a couple of follow-ups here. The organic growth was much better this quarter than we've seen in previous quarters and I know Olney asked a little bit about the mortgage but even when you set that aside, it was still better. Just curious, anything is -- you feel is different? Is there a change in sentiment at all?

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [32]

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Yes. I don't know that I would go there. I think the team is competing and so just like we've talked about other things from credit quality being lumpy to growth, I think the team is out there competing every day. It doesn't take but a couple of excess sized payoffs from secondary market or nonbank lenders to throw you back in a different direction.

So I think we were fortunate in the second quarter that our team was out producing. I think our pipelines look good. Our team is playing every day. I don't know that I see anything anywhere in our footprint that would lead me to believe there's any unusual activity going on around the ability to grow or hampering the ability to grow. Chris?

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Chris A. Bagley, BancorpSouth Bank - President & COO [33]

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No, I agree and -- with both points. One, there's always a potential for lumpiness out there because you're in a competitive loan-moving environment, but remember, we've added producers through organic hiring and producers through mergers, and those folks are all kind of getting their legs underneath them so there's some upward pressure there and we're in good markets. So I think we feel good about -- we still feel good about our pipelines and the way we're competing on them and throughout the whole footprint if that makes sense.

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [34]

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Yes. We muddied the water up on loan growth for you guys. We report out the loans that were acquired at the beginning or the day whenever the acquisition is. And we almost always are modeling in some attrition or some run-off in those loan books and so you've seen that. This quarter, we were able to over -- to outrun that attrition in the acquired books and show pretty good organic loan growth. Some of that is exactly what Chris said. The further we get away from the integration time, the more focused on growth the lenders that have joined our team are. The new people are coming on board and we continue to -- we've added some new people just in the last few weeks. So we continue to be able to pick up producers that help us grow on the other side. And again, I think from an economic standpoint, some markets are better than others and we're clearly seeing the ability to grow in Texas.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [35]

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Okay. That's good. That's great. And then Chris, maybe for you, in your prepared comments, you talked about deposit attrition being a little bit less than what you typically see. Can you point to any reason why it was less worse or a little bit better?

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Chris A. Bagley, BancorpSouth Bank - President & COO [36]

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That's a great question. We do know we have always -- we've always had seasonality in the second quarter. I think it's a function of our folks competing and our focus on deposits. We talk about deposits all the time and give them the tools to protect relationships. So I think it's our folks protecting deposits.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [37]

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Okay. And then Dan, one follow-up for you on M&A. One of your bullet points, your current focus, you talk about improved technology offerings and you probably have your finger on the pulse as much as anyone in terms of what the small banker is thinking. We always hear that bigger banks have better technology and smaller banks can't compete. Do you ever hear that from sellers? Is that ever a reason for selling or are the reasons just the same as they've always been?

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [38]

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Sure. Maybe not directly the way you said that. So I would tell you that I think the small bankers have the ability to offer any product that the big megabanks can offer. You're going to pay per click. The 3 big tech providers that are out there offer products that the small banks can buy and offer. The issue becomes can they maintain it? Can they support it? What product set can they run? So our experience has been many times some of the banks that we're talking to, while they may have one part of a technology piece, they may not have all of them because they can't support all of them from treasury management to other products, to the ability to do deposits remotely. Everybody's got some weakness. It's more size-driven, I think, than technology-driven. Technology is out there for people to buy. But yes, that still comes back to the question of how do we continue to compete if we can't support all of the products and all of the things that the bigger boys are able to bring to the table.

There's a lot of talk around how do we compete, both how do we compete in a lowering rate environment when the world thought rates were going up, how do we compete with the continuing technology and the cyber threat. So I think from a technology standpoint, maybe it's not product as much as that's worrying the smaller banks, Jon, as it is the cyber threat and can they -- and we've got a bunch of people that are protecting our stuff all the time, and we think we're vulnerable and you talk to the small banks, they've got to outsource all of that and they're vulnerable to that.

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Operator [39]

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This concludes our question-and-answer session. I would like to now turn the conference back over to Dan Rollins for any closing remarks.

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [40]

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All right. Thank you very much. Thank you all for joining us today. If you need any additional information or have further questions, please don't hesitate to reach out to us. Otherwise, we look forward to speaking to you all again soon.

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Operator [41]

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The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.