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Edited Transcript of BXS.N earnings conference call or presentation 24-Jan-19 4:00pm GMT

Q4 2018 BancorpSouth Bank Earnings Call

TUPELO Jan 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Bancorpsouth Bank earnings conference call or presentation Thursday, January 24, 2019 at 4:00:00pm 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 & Director

* John Gary Copeland

BancorpSouth Bank - Senior EVP, Treasurer & CFO

* Will Fisackerly

BancorpSouth Bank - Senior VP & Director of Corporate Finance

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Conference Call Participants

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* Catherine Fitzhugh Summerson Mealor

Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP

* Jennifer Haskew Demba

SunTrust Robinson Humphrey, Inc., Research Division - MD

* John Lawrence Rodis

FIG Partners, LLC, Research Division - Senior VP & Research Analyst

* Jon Glenn Arfstrom

RBC Capital Markets, LLC, Research Division - Analyst

* Michael Edward Rose

Raymond James & Associates, Inc., Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Good morning, and welcome to the BancorpSouth Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Will Fisackerly, Senior Vice President and Director of Corporate Finance. Please go ahead.

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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'll 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 2017 annual report on Form 10-K. Also during the call, certain non-GAAP financial measures may be discussed regarding the company's performance. If so, you can find the reconciliation of these measures in the company's fourth quarter 2018 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 & Director [3]

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Thank you, Will. Good morning. Thank you for joining us today to discuss BancorpSouth's record fourth quarter 2018 financial performance. I'll begin by making a few brief comments regarding the highlights about the year in the fourth quarter. John will discuss the financial results and Chris will provide more color on our business development activities. After we conclude our prepared comments, our executive management team will be happy to answer questions.

Let's turn now to slide presentation. And Slide 2 contains the legal reminders that Will has already discussed with you. Slide 3 covers the highlights for the year. We reported net income of $221.3 million or $2.23 per diluted share for 2018, both of which are all-time record highs for our company. This represents an increase of over 30% on a per share basis compared to last year. While the reduction in the federal corporate tax rates certainly contributed to this improvement, we have made measurable progress in many other fundamental areas of our performance.

First of all, our net interest margin, excluding accretable yield, increased by 10 basis points year-over-year to 3.64%. We've been able to successfully outpace rising deposit cost through the repricing opportunities in our loan and securities portfolios. Additionally, the 3 bank transactions, which closed during the year, contributed to this improvement. I'll discuss these transactions more in a moment.

We continue to improve our cost structure. Our operating efficiency ratio, excluding MSR, declined by over 100 basis points compared to 2017 to 66.6%. While we continue to be pleased with this trajectory, we have additional work to do to reach an acceptable long-term level.

Our credit quality remains strong as evidenced by our provision for credit losses of $4.5 million for the year. Net charge-offs totaled $2.6 million for 2018, which represents only 2 basis points of average loans.

This speaks volumes about the quality of the underwriting and monitoring that our credit team provides. Chris will touch on credit more in a moment, particularly on the impact of the acquired loans on our credit quality trends late in the year.

As we mentioned in our third quarter call, we recognized a onetime tax benefit of over $11 million, or $0.11 per diluted share, as a result of a pension plan contribution and tax accounting method change related to software development cost. While we considered this item to be nonoperating, we're very pleased with the strategic tax planning initiatives provided by our tax team. When adjusting for this item, as well as merger-related cost and other onetime items, our net operating income, excluding MSR, was $220.7 million or $2.23 per diluted share, which similar to GAAP income, represents an increase of over 30% compared to 2017.

Our annual operating income is also the highest in our company's history.

Moving on to capital deployment and management. We completed the first 3 bank transactions that our company has completed in 11 years. Our merger with Central Community Corporation and Ouachita Bancshares Corporation closed on January 15, while our merger with Icon Capital Corporation closed on the first day of the first -- fourth quarter, October 1. These transactions collectively added almost $2 billion in loans and over $2 billion in deposits to our company. We crossed $18 billion in total assets for the first time in our company's history.

We accomplished all of this while producing organic deposit and loan growth for 2018, including approximately 10% organic loan growth in Texas. As we continue to expand in higher growth economies, we expect our organic loan growth to continue to improve as we offset some of the slower growing geographies we serve.

Finally, we were active in our share repurchase program, accelerating our repurchase activity late in the year to take advantage of the market pullback. For the full year, we repurchased the full 6 million shares authorized by our board for 2018. As we entered the New Year, our board authorized another 3 million shares for 2019.

Slide 4 provides a view of our summary financial results over the past 5 years, both on a GAAP basis and on operating basis. I don't need to spend a lot of time on the details here, however, I do want to emphasize the positive trends and successes detailed on the slide. Most importantly, we have grown operating EPS at a compound rate of 15% per year over the past 4 years.

Moving on to Slide 5, I will briefly discuss our fourth quarter financial highlights. We reported record net operating income, excluding MSR, of $56.4 million or $0.57 per diluted share. This represents an increase of almost 40% on a per share basis compared to the fourth quarter of '17. It also represents a slight increase over the third quarter of '18, which is notable given the seasonal fourth quarter headwinds in both our mortgage and insurance businesses.

Net operating income excludes a negative pretax MSR adjustment of $8.1 million, as well as a merger-related expenses of $4.5 million, which were primarily related to the closing and operational integration of Icon Capital Corporation.

As I mentioned in my comments about the annual performance, our fourth quarter results also reflected margin improvement. Our net interest margin, excluding accretable yield, increased to 3.71% from 3.62% for the third quarter of '18.

John will discuss the margin components in more detail in just a moment.

In November, we announced the signing of definitive merger agreements with Grand Bank of Texas and Merchants Bank. Mike Casey and his team have done a tremendous job of growing Grand Bank to almost $350 million in assets today. They have 4 locations in Dallas-Fort Worth and the Texas Hill Country markets. Joe Bedwell, Jim Reed and their team have grown Merchants Bank to almost $250 million in and around Mobile, Alabama. We're excited about having both of these teams join our company this year.

Finally, of the full 6 million shares we purchased last year, almost 3 million shares were repurchased during the fourth quarter. Let me now turn to John and allow him to discuss the financial results in more detail.

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John Gary Copeland, BancorpSouth Bank - Senior EVP, Treasurer & CFO [4]

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Thanks, Dan, and good morning all. Thanks for dialing in. If you'll turn to Slide 6 in the deck, you'll see our summary income statement. As a reminder, the Icon merger closing impacts comparability when comparing to the third quarter results, while all 3 merger closings during the year that Dan mentioned affect the comparability of the fourth quarter -- to the fourth quarter of last year. In reviewing the summary income statement, net income was $47.1 million or $0.47 per diluted share for the fourth quarter. As Dan mentioned earlier, we had 2 nonoperating items, sizable nonoperating items in our fourth quarter results. We had a negative pretax MSR evaluation adjustment of over $8 million and merger-related expenses of $4.5 million associated with the closing and integration of Icon Capital Corporation.

Accordingly, we reported net operating income, excluding MSR, of $56.4 million for the quarter or $0.57 per diluted share, compared to $55 million or $0.56 per diluted share for the third quarter of 2018 and $36.8 million or $0.41 per diluted share for the fourth quarter of 2017.

Our net interest revenue increased 7.6% compared to the third quarter of '18 and almost to 26% compared to the fourth quarter of '17. Our reported net interest margin for the fourth quarter was 3.80%, while our net interest margin, excluding accretable yield, was 3.71%.

Comparable metrics for the third quarter of '18 were 3.67% and 3.62% respectively. We reported a net interest margin of 3.58% for the fourth quarter of 2017, which, obviously, was not impacted by any purchase accounting accretion. The increase in our margin is attributable to 3 main factors: first, we had anticipated purchase accounting accretion associated with Icon; second, Icon had higher loan yields on average and a higher margin than our legacy book; and third, we reported core net interest margin expansion in our legacy book of business. The reported loan yield, excluding accretion, increased by 19 basis points compared to the third quarter of 2018. Of this increase, approximately 7 basis points is attributable to the addition of the Icon loans to our portfolio.

Our total cost of deposits increased by 9 basis points from 43 basis points -- I'm sorry, 43 -- 0.43% in the third quarter to 0.52% for the fourth quarter. The Icon deposit base contributed only 1 basis point to this increase. Accordingly, the primary driver of the increase in deposit cost is continued pressure on deposit pricing across our footprint. Our deposit mix remained relatively stable quarter-over-quarter.

As Dan mentioned earlier, Chris will speak in more detail about our deposit sales efforts and pricing. Before we move to noninterest revenue expense, I'd like to briefly mention credit quality, we did have a provision of $1 million for the quarter, compared to no recorded provision for the third quarter and a provision of $0.5 million for the fourth quarter of 2017.

We do continue to experience low levels of net charge-offs combined with some sustainability and many of our other credit quality indicators compared to recent quarters.

If you'll turn to Slide 7, you'll see detail of our noninterest revenue streams. Total noninterest revenue was $59 million for the quarter, compared to $71.6 million for the third quarter of 2018 and $63.1 million for the fourth quarter of 2017. Outside of the movement in the MSR asset valuation, most of our noninterest revenue streams were in line with our expectations. Fourth quarter is seasonally the lowest -- slowest quarter for both mortgage originations and insurance renewals. Wealth management all saw -- also saw a revenue decline during the quarter, primarily as a result of the overall pullback in the market, which puts pressure on assets under management.

Chris will touch on each of these businesses more in a moment.

Slide 8 presents a detail of noninterest expense. Total noninterest expense for the fourth quarter was $152.3 million, compared with $142.4 million for the third quarter of '18 and $125.9 million for the fourth quarter of '17. I would briefly point out a few items noted within the trends for certain of these line items. First, there are couple of notable items related to salaries and benefits. In the salary and benefit line item, our bonus and incentive comp expense was lower in the fourth quarter than other quarters as a result of year-end true-ups of some accrual balances. Also, looking forward, as we move into the fourth -- the first quarter of '19, FICA will reset proportion of our headcount. On the flip side, we should also begin to see more benefit from cost savings associated with the October 1 Icon acquisition. Second, the $1.1 million decline in the deposit insurance assessments is the result of the elimination of the temporary FDIC surcharge as well as the improvement in other underlying metrics included in the calculation specific to our bank. Also, a small portion of the decline is related to true-up of our accruals. The increase in amortization of intangibles is the result of core deposit premium amortization for Icon.

As I noted earlier, the increase in merger expense is primarily the result of the closing and integration of Icon. Finally, we saw an increase in other miscellaneous expense. The third quarter was artificially low as a result of a fraud loss recovery, while our fourth quarter results included the elevated expenses related to a consulting, credit card and debit card losses and business meals and entertainment, none of which were individually significant. All other expense lines shown on this chart either increased nominally quarter-over-quarter as a result of the Icon merger or remained stable.

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

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

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Thank you, John. Good morning, everyone. Slide 9 reflects our funding mix as of December 31, compared to both the third quarter of 2018 and the fourth quarter of 2017. We ended the year at approximately $14.5 billion of just over $2 billion from a year ago ended 2017. While that overall deposit mix remained fairly stable, with the 3 mergers closing during 2018, the comparability of current balances and deposit cost to both year-end and interim periods is complicated by the addition of the 3 mergers. The 2 mergers that closed in January had seasonally high deposits at the date of acquisition and some decline in these balance was expected. In addition, we've seen meaningful runoff in public fund balances across the entire footprint as we've experienced very competitive deposit pricing in this space and we've been unable to justify paying the rate required to keep many of these accounts.

There's no question that the competition around deposits continues to remain strong. As John mentioned earlier, our total cost of deposits increased from 43 basis points for the third quarter of 2018 to 52 basis points for the fourth quarter. We continue to have regular and frequent conversations around our deposit pricing, our product offerings in an effort to ensure our bankers are properly equipped, compete and take care of our customers. As we look at geographical performance relating to deposits, we have 5 community bank divisions standout this quarter for deposit growth. Our Dallas, Texas, Memphis Metro, Tennessee Metro, West Tennessee and Northeast Arkansas divisions all reported excellent results this quarter.

Moving to Slide 10, you will see our loan portfolio as of December 31, compared to the third quarter of 2018 and the fourth quarter of 2017. We ended the year at just over $13 billion in loans and the same comments that made regarding the impact of the transactions on period-over-period deposit balance comparability and also applicable to the loan portfolio.

Our history tells us that mergers typically generate some loan runoff. So we are particularly pleased in our ability to overcome expected runoff in the acquired portfolios and produce organic growth for the year.

It's important to note, and I think Dan mentioned, the organic loan growth in Texas, where we have announced and closed 2 acquisitions, was 10% for 2018. In fact, as you look at our loan totals by geography, Texas, at just over $3.5 billion in total loan footings, is now just behind Mississippi and it's our expectations that Texas will soon be our largest loan geography. We believe our geographic diversity is a core strength of the company, and we're excited about the prospect of achieving loan growth in these higher-growth markets, especially when paired and combined with the stable core funding base provided by our legacy markets.

As we look at our fourth quarter lending efforts from a geographical perspective, we had several divisions produced meaningful loan growth. Standout divisions for the quarter were our Texas -- excuse me, our Dallas, Texas, Heart of Texas, East Texas and Northwest Louisiana divisions.

Slide 11 contains credit quality highlights.

I'd like to touch briefly on a couple of these bullets. As John mentioned earlier, we had a provision for credit losses of $1 million for the fourth quarter, compared with no recorded provision for the third quarter of 2018, and a provision of $500,000 for the fourth quarter of 2017. Net charge-offs were $1.9 million for the quarter or 6 basis points of average loans on an annualized basis. Net charge-offs for the year totaled only $2.6 million or 2 basis points of average loans. Our nonperforming loans and nonperforming assets are very stable year-over-year as a percentage of net loans and leases.

At December 31, 2018, NPLs represented 74 basis points of net loans and leases, compared to 71 basis points a year ago, while nonperforming assets were 81 basis points of net loans and leases, compared to 76 basis points a year ago.

And looking at quarter-over-quarter trends, we saw an increase in certain of our nonperforming and criticized loan balances. These increases were driven primarily by loans in our acquired portfolios, and we provided additional detail in our press release this quarter to break out nonperforming and criticized balances by acquired loans, as well as BancorpSouth originated credits. Moving on to the mortgage and insurance. The tables on Slide 12 provide a 5-quarter look at our results for each product offering. Our mortgage banking operation produced origination volume for the quarter totaling $305 million. Home purchase money volume was $239 million or 78% of our total volume for the quarter. Our total volume was relatively flat, compared to the fourth quarter of 2017 volume of $308 million, although purchase money volume was up 9% over this time period.

Deliveries in the quarter were $251 million, compared to $309 million in the third quarter of 2018 and $267 million in the fourth quarter of 2017.

Production and servicing revenue, which excludes the MSR adjustment, totaled $4.8 million for the quarter, compared to $5 million for the third quarter of 2018 and $4.9 million for the fourth quarter of 2017.

Our margin was 0.88% for the quarter, representing a decrease from 1.02% for the third quarter of 2018. Our margin is typically lower in the fourth quarter as a result of the declining pipeline and the slowest period of the year for home sales. The seasonality is reflected in the quarter-over-quarter pipeline decline of $21 million. While recent rate movement has resulted in some additional refinance activity, we still expect competitive pressure to drive our 2019 margins down to 150 range, compared to our historical average of approximately 170. Finally, as Dan mentioned, earlier the MSR valuation adjustment during the quarter was a negative $8.1 million.

Moving to insurance, total commission revenue for the quarter was $28 million, compared to $31.7 million for the third quarter of 2018 and $25.8 million for the fourth quarter of 2017. As we've mentioned on the last several quarters, the accounting revenue recognition change or contingent commissions impacts the comparability of fourth quarter results to the prior year. This contingent commissions are included in the other component of insurance commission revenue. The decline in total commission revenue compared to the third quarter is seasonal, as fourth quarter is always our lowest quarter for the year in terms of policy renewals in our book of business. When comparing the fourth quarter results to the fourth quarter of 2017, property and health commission revenue was up approximately 3%, while life and health commission revenue was essentially flat. This growth rate is consistent with what we've been reporting for quite some time now. In a soft premium market, our team is continuing to find ways to grow our customer base, as well as broaden relationships with current customers in order to sell new policies. As I've mentioned in the past, we continue to have an outstanding policy renewal rate.

While it's not shown on this slide, I'd like to briefly mention our success by our wealth management team, our market valuations negatively impacted our fourth quarter, and as John mentioned, our wealth management team had a great year in 2018. Total wealth management revenue for the year was $23 million, which represents an increase of over 7% compared to 2017. We will continue to strive to attract quality producers and grow customer relationships in this area. Now I will turn it back over to Dan for his concluding remarks.

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

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Thanks, Chris. 2018 was a remarkable year for our company. I'm pleased to see our team's persistence and hard work pay off. As I mentioned earlier, we closed the first 3 bank mergers that our company has completed in over a decade. We also announced 2 additional transactions late in the year, which we are -- which are currently pending regulatory approval. Our lenders worked hard to overcome runoff in our acquired loan portfolio and produce meaningful organic loan growth. I was particularly pleased to see our team produce approximately 10% organic loan growth in Texas. As we continued to expand faster in growing geographies, we expect our total organic growth to continue to improve. While the fourth quarter has historically been one of the lowest quarters for insurance, our insurance team continues to grow revenue, our wealth management team had a record year, and our mortgage team continues to battle through the industry headwinds and grow purchase volume. Importantly, we achieved all of this success while improving our net interest margin, improving our efficiency and maintaining strong credit quality. These wins resulted in record annual earnings for 2018. As we move into 2019, we have more work to do to achieve desired levels in certain of our operating metrics, including efficiency.

We will continue to focus on growing our company, both organically and through strategic opportunities, while controlling our cost structure and effectively managing credit and interest rate risk.

I'm confident we can continue to build on the successes achieved in 2018. Operator, we're now ready to take 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 Michael Rose with Raymond James.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [2]

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Dan, I'm going to ask you to pull out your crystal ball here. Appreciate the comments on Texas loan growth 10% organic last year. Looks to be about 27% or so the loan book and clearly growing. What's kind of the expectation as you obviously integrate these deals and get some momentum out of them? It seems like that could be a number that moves higher. And maybe if you could just give some color around what you're seeing in your legacy markets in terms of competition and activity? I guess it's roundabout way of asking what the -- what this core growth rate of the company would be this year, but again, I'm asking you to pull out your crystal ball?

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

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Sure. Sure, I think we still think that we can grow where we've been wanting to grow. Last year we didn't quite get where we thought we would be. We grew organically probably on the lower end of the single digits. We think we can grow on higher end of the single digits. Texas is going to, obviously, drive some of that. When you look at job growth across our footprint, today for 2018, though, U.S. Labor Bureau put out some statistics recently. 4 of the 8 states that we're in grew jobs slower than the U.S. and 4 a little faster. 2 of them sitting right on top of the growth rate. Texas clearly is way out front on that. And when you look at just the raw numbers, even 1 of the states that was growing a little faster than the U.S. average, the number of jobs is just considerably smaller than what you see when you look at the Texas economy that's just so big. From a growth perspective for us, we're excited about the ability to continue to expand. We continue to add lenders, we've added some lenders in the Austin market recently. We've added some lenders in the Houston market, both with the Icon transaction and then some new folks joining our team. We've got 2 new locations coming online early in '19 and Houston that will help us. The Dallas transaction with Grand Bank doubles our footprint in Dallas from 2 locations to 4. We need more than 4, obviously. But we really think that there's opportunity there. And frankly, some of the slower growing markets that we're in, they're -- we're just not seeing growth at all. And we have not been complaining about -- I'm not a big complainer, but when you look at what's happening, we always expect to see some loan runoff in what we acquire. So when you're looking at our book today and you see the growth that's there, I think you got to also look back and say, well what really ran off on the loans that were there before that we didn't want. And you can see Chris talked about nonperformers. Clearly, there's some stuff in the books that we need to move out and we've got to cover that back up. Saying all that, I think, we're pretty encouraged about where we are. I think 2019's queued up to be a good year for us.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [4]

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So just related to that, the paydowns have been a pretty big issue for the industry. What -- I guess, if you look back and it's hard to strip out on a organic basis, but what were the kind of the level of paydowns you experienced relative to production? And would you expect that level of paydowns, based on what you can see today, to potentially slow in 2019?

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

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Well, yes, so there's 2 parts to paydowns. If you're looking at just the normal paydowns through normal business, if we had not done any acquisitions, you're right. We think that there's been some opportunity for people to move loans into the secondary market, nonrecourse dollars that are out there. But in addition to that normal piece, we closed the 2 transactions back in January and we experienced those -- those portfolios contracted throughout the year. I think we're towards the bottom of that. I think when we look at the Texas portfolio, we actually grew a little bit in the Texas acquisition in the fourth quarter. And we were basically flat in North Louisiana. You heard Chris say that Northwest Louisiana was one of the territories where we grew in the fourth quarter. So I think those 2 acquisitions that came on early last year, I think, we've made the changes that we need to make there. And I think we're feeling like we can grow from here. But both of those portfolios contracted throughout last year, and we covered that up with the organic growth inside. So I think it's while you're -- many of you all will do the math and say we grew whatever the number was, that's true when you pull off what we actually acquired. If you give us credit back for the loans that ran off that we probably wanted to run off, or it's the natural reduction in acquired credits, I think our organic growth was pretty good.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [6]

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No, it's all very helpful. Maybe just 1 more follow-up for me. Just as we think about the flat curve and the potential for no rate hikes this year, obviously a nice boost in the core margin this quarter. And I appreciate all Chris' comments on the deposit efforts. I mean, in the absence of rate hikes and curve remaining flat, I mean, do you guys think that you can potentially expand the core margin from here as you kind of remix into some higher yielding loans. And then do you have an expectation for what the stated or the scheduled purchase accounting accretion is or will be for 2019?

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

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That was 17 questions in 1, Michael. Obviously, we're not going to start on that. So I'm going to bring John in here on margin. When we look -- you'd really touched on margin and you touched on scheduled loan accretion. As you know, loan accretion can be lumpy because there's really 2 components of that. I don't know that we have anything to disclose on the loan accretion side that you guys -- well -- either one of you guys can jump in on that. But on the margin side, John, I'll let you jump in and talk about, kind of, where we see and what our ALCO modeling is showing for margin.

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John Gary Copeland, BancorpSouth Bank - Senior EVP, Treasurer & CFO [8]

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Well, I would -- Michael, I would mention this and you can pull this out of our press release, that accretion for the third quarter was about 8 bps on loan yields. In the fourth quarter, when you added Icon into that, it was about 11 bps. So Icon added 3 or 4 basis points to that. We expect that to -- that typically will dwindle as you go through time. So that's probably the high point. Now we have 2 projected mergers coming on next year. So that will muddy the water even further. In our budget, I think we've included 2 rate increases?

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

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One at the end of next year.

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John Gary Copeland, BancorpSouth Bank - Senior EVP, Treasurer & CFO [10]

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One of them at the end, so we'll have very little effect on rates for the year. And I forget now what your other question was?

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [11]

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It was all margin related. Where do we see the trend.

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John Gary Copeland, BancorpSouth Bank - Senior EVP, Treasurer & CFO [12]

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We expect continued bias toward improving margin. We do have some opportunities in the loan portfolio to reprice from a $120 million, $130 million, $140 million, up to with current rates, to $240 million, something like that. So some significant advantages in the latter in our investment portfolio. Icon's average loan yields exceeded our legacy portfolio by good margins. We're looking for pickups there at [this moment].

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [13]

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I think, again, just tagging on to what John's saying, when you look at our loan book, we've still got a lot of loans that have not repriced since rates have moved 5x. So there's still upward pressure in the loan book that will benefit us. And the flat yield curve, frankly, is helping on the deposit side, because we aren't seeing our peers moving deposit cost up very much.

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Operator [14]

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The next question comes from Jennifer Demba with SunTrust.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [15]

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Dan, could you talk about the M&A environment as you see it right now? And also my second question is on leveraged loans. Do you guys have any outstanding -- we saw some issues from a company this week, just wondering what your balances are there, if any?

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [16]

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Yes, the second question is the easiest one, 0. No. So that's the easy one. On the M&A side, there is a lot of talk. Clearly, the backup in all financial values in the fourth quarter last year, that's got everybody wondering what does that mean and where are we going and what's happening. But there continues to be a lot of discussions around where are we going, what are we doing. And again, I'm typically talking on the smaller size transactions. There's a lot of small banks out there. From the bigger banks, there are certainly those too. And we see opportunities, I think we're continue to have ongoing discussions with lots of different potential partners. They are all trying to decide where are we in the cycle. What is the real value? Is the market going to come back? Do we move forward today, take somebody else's stock and ride the market back up if the market's coming back? Like Michael said a minute ago, I'm not sure what the crystal ball is looking forward on that. But I do think there is a lot of talk out there today, and I think we will see continued transactions through the year.

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Operator [17]

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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 [18]

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Just a couple of questions for you. Maybe let's start on expenses. John, could you give us a little bit of help on a starting point on what kind of expectations do you have for Q1? It sounds like compensation comes off a little bit, obviously, the merger expenses are out. You've got some FICA coming back in, maybe some cost saves from the deal? So there's a lot in there, hard for us to guess. Can you give us a little bit more help on that?

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [19]

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Yes, Oh Geez! Yes, John's got...

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John Gary Copeland, BancorpSouth Bank - Senior EVP, Treasurer & CFO [20]

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There's a lot in there for us to guess at as well.

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [21]

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You hit the big points and John can -- John's turning the page to get it.

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John Gary Copeland, BancorpSouth Bank - Senior EVP, Treasurer & CFO [22]

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Well, I would hesitate to give you any real exact guidance on what we'd expect. You're looking for a run rate?

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [23]

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Yes.

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John Gary Copeland, BancorpSouth Bank - Senior EVP, Treasurer & CFO [24]

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On expenses, it's been particularly salaries -- salaries and employee benefits. Salaries are going up with the acquisitions, obviously. We added the 2 acquisitions earlier in the year. We added Icon in the fourth quarter.

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [25]

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And Icon was in for the full quarter. You have a full quarter for Icon.

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John Gary Copeland, BancorpSouth Bank - Senior EVP, Treasurer & CFO [26]

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They were in for the full quarter. So that should guide you pretty well as to the effect of those. Although, I guess from the first 2 acquisitions, we have achieved most of the headcount-related cost saves. For Icon, we still have significant headway to make on reducing the headcount for Icon. So...

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

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It began this month.

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John Gary Copeland, BancorpSouth Bank - Senior EVP, Treasurer & CFO [28]

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Began this month because the conversion was in the quarter, in the fourth quarter. So that's going to come down. I'm not going to give you a number. But certainly, those factors will affect what we see in the quarter.

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

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Yes, I think there's moving parts there, John talked about them. So the negative to comp in 1Q is, we've got to come back up on -- we had a positive benefit that we were truing up incentive compensation. The negative benefit in 1Q is as we turn back on some FICA expense that wasn't there in the fourth quarter. The positive in the first quarter is as we will start to experience some of the cost savings, probably not a full quarter's worth, but we will start to experience some of the cost savings coming in from the Icon side. On the rest of the expense base, I think, we've got room to continue to move on efficiency. So it's hard for us to put a number out to you John. But I think, we feel pretty good about being able to continue to improve efficiency through 2019.

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John Gary Copeland, BancorpSouth Bank - Senior EVP, Treasurer & CFO [30]

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We can improve efficiencies in particular, although the size of the 3 acquisitions doesn't really move the needle very much. But as we piled these smaller acquisitions into the mix that go coming into the acquisitions, their stand-alone efficiency ratios were better than ours. They don't typically have a lot of, what I would call, low margin businesses like mortgage and insurance that we have. So their efficiency ratios, combined with cost saves that stack on top of those already fairly efficient operations, should by itself tend to push our efficiencies down, at least our efficiency ratio down.

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [31]

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The other 2 transactions that John mentioned, clearly, we're in the queue with the regulators. We hope to be able to close those transactions here in the second quarter. That's all pending regulatory approval. And we drew the protesters that are out there. So we'll deal through that just like we did with Icon. But I think we're are on track to close those 2 transactions in the second quarter, which will muddy your water a little bit for you when you look. But those transactions are relatively small.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [32]

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Okay. And just on that topic, Dan. I know you've seen this before, but would you consider giving us a little bit more detail on the future in terms of what the real core organic growth looks like and what the acquired bank balances look like? Because I think you said century -- or Central Community and Ouachita had bottomed in Q4? But it's just hard for us to get a real good gauge. I'm just curious if you'd be willing to give us more on that?

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [33]

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Sure. I think what we'll look for, John, there's -- we've got some new slides coming into the investor deck as we hit the road this year. You'll be able to see some of that there. Again, it's too early to tell whether they've bottomed or not. But I would tell you that from my appearance, it looks like the central community guys bottomed at the end of the third quarter. And we're hopeful that the Ouachita guys bottomed at the end of the fourth quarter. We had virtually no shrinkage in the fourth quarter. So it looks like we're in good shape there. The Icon group is going to see some contraction here for the next couple of quarters, and so we've got to outrun that.

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Operator [34]

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The next question comes from Catherine Mealor with KBW.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [35]

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I'm going to try the expense question in another way.

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [36]

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In a different way.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [37]

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So 2 parts of it, first on the FICA. Do you remember what your FICA increase was in the first quarter of '18?

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

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I don't.

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John Gary Copeland, BancorpSouth Bank - Senior EVP, Treasurer & CFO [39]

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It's around $1 million. I am guessing around $1 million.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [40]

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Okay, all right. That helps. And then on the expense savings...

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John Gary Copeland, BancorpSouth Bank - Senior EVP, Treasurer & CFO [41]

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Catherine, I guess, it wasn't -- I wasn't sufficiently vague and evasive that...

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [42]

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The first time.

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John Gary Copeland, BancorpSouth Bank - Senior EVP, Treasurer & CFO [43]

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The first time.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [44]

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That's good. I've got a number to work with. And then as I think about Icon, so when we were calculating the deal, I think we had about 20% cost savings, which was about $5.5 million. So how much of that $5.5 million, I guess, that's annual, so if we divide it by 4 we're at $1.4 million. So about how much of that $1.4 million on cost savings do you feel like was in the fourth quarter run rate?

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [45]

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0. Well, that's not true. A little bit. But not much. So here's what happened on Icon in the fourth quarter. So we closed on October 1. We integrated them into our platform and onto our computer system on December 1. So we ran full load pretty much everything through 2 months of the quarter. If there were some savings, it was going to be relatively small for the month of December. So you had a pretty full load in the fourth quarter on them. I would want to brag on the speed of getting that done, though. When you look back, we closed the first 2 on -- in January, integrated 1 in February, 1 in June. So we carried expenses further into the year. With Icon, we're learning and playing a better game every day. So that the 3 transactions that we did, we got better with our team every time. And the ability to do that in a very short window of time in the fourth quarter, I think, is a real positive for us and will benefit us in '19.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [46]

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Got it. Okay. So really I mean, it feels like the FICA and the cost savings from Icon, almost kind of net off to each other. We can do that math. I guess I'm directionally just trying to figure whether 1Q's expenses are lower than fourth quarter with all the moving pieces? But I don't know if John you're comfortable at least giving a direction.

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [47]

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Yes, that's hard. So we're locked, we're walking the same line that you are, Catherine, trying to figure out what's there. I would invite you to go back, you can't go back to last year because last year had the 2 acquisitions in the first quarter. But if you go back the year before, you could probably pick up an idea of what the change was year-over-year from 4Q to 1Q. You've got multiple items that are in there. I think, when I look at the numbers that most of you guys were putting out, most of you had insurance in the fourth quarter higher than it was. That seems to be a recurring theme that happens year after year after year. You guys don't lower the insurance revenue enough in the fourth quarter. We should see improving insurance revenue in the first quarter. So I'd encourage you to go back and look at the last year's first quarter. The comparables on the quarterly basis for insurance, we had none last year because of the accounting change. I think you can look forward to 2019 and build off of the true quarterly run rate off of insurance from 2018. So I think that will help you build up from a number.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [48]

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Okay, that's helpful. And then maybe last on the buybacks. Just given your expectations for additional M&A coming on and still being active there. How active do you feel like you'll be in the buybacks this year?

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [49]

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I think we want to make sure that we're managing capital that's the most efficient way we can use it in. And so when you look at the price earlier this year, we've got, as you've heard me say before, we've had a, whatever it is, 10b5-1 hut, hut hike ready to go plan in place and it's a formula-driven plan based upon pricing in the market. I would suspect that we're in the market this quarter because of that. Now since then, we've actually improved, as have all banks here coming into the middle of the month. So we will be active with our buyback. The buyback this year was 3 million shares authorized, compared to the 6 million shares that we bought last year. I think whether we fill that whole thing or not is really going to be dependent upon what happens to valuation throughout the year. If we can use our stock and transactions, I think that clearly would be our preference. If the market rewards us, and we run up or the industry runs up, that will help us to be able to do that. If the multiples stay low, that may slow M&A activity and we may stay in the buyback mode.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [50]

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And how do you think about M&A with using more cash in acquisition?

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [51]

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Yes, you can do both. That's the same thing. So you're watching your book dilution there. We -- you can throw a lot of cash in and you can burn up a lot of -- or build a lot of dilution in. We want to -- 2 things from my side. When we're looking at teams that are coming on board from us, so far all 5 of the transactions are community banks with ownership, with customers that have ownership in the bank. We like having that ownership in the communities we serve. So putting stock out into the communities we serve when we're merging with these banks is very beneficial to us, and we want to continue to put that stock out into the markets, because some of those folks are going to hold that stock for a long time. They become very loyal customers to us when that happens, and we like using our stock.

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Operator [52]

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The next question comes from John Rodis with FIG Partners.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [53]

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Just an easy one, I guess. What's sort of the right effective tax rate to use going forward? It was what, 19.5%, 20% for the fourth quarter?

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [54]

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Yes, there was a little bit of benefit in there. John's going to get on here and talk about that. There was a little bit of benefit in the fourth quarter.

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John Gary Copeland, BancorpSouth Bank - Senior EVP, Treasurer & CFO [55]

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About $0.5 million in a R&D tax credit for the fourth quarter. If you adjust for that, then you should get pretty close, I think.

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [56]

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You're pulling for -- John, you're pulling for the St. Louis Rams in the Super Bowl?

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [57]

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Absolutely not, Dan.

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [58]

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Oh, okay.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [59]

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No, there's no way. Dan, one other question just on the insurance business. So you put up low single-digit growth this year. Absent new hires and so forth, what would it take to see better growth out of that business on the fee income side?

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [60]

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Are talking specifically? You bridged to 2 gaps there. You said insurance in the beginning, then you said fee income side.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [61]

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No, I didn't -- yes I just insurance, I'm sorry.

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [62]

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Okay.

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Chris A. Bagley, BancorpSouth Bank - President & COO [63]

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Yes, this is Chris, John. For insurance, we're still in a soft market. You need some firming up of the premiums or acquisitions on our side, as we continue to look for smaller or more cultural fits from an acquisition on the insurance side, which we're continuing to do. So that would be the 2 things we're looking for. In the meantime, I think they're doing a good job battling out, keeping customers and growing the revenue. We were up, what, I think 1.5% for the year, which is not a world record, but it's nice in the market that we're in. Our guys have done a good job.

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [64]

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And I think we can attribute almost all of that to customer growth, not margin growth.

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Chris A. Bagley, BancorpSouth Bank - President & COO [65]

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Correct, that's right.

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [66]

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So we need the market to firm up. There is still talk out there that some of the storms that came through last year can cause the market to firm up some. I don't know that we're experiencing that yet. On the other fee income lines, I guess, I jump back to the other fee lines. We clearly get full year benefit from Icon coming on that we did not have before. We continue to see increasing volume in our card revenues. Our -- we processed through the cards that we have out last year, almost $4.5 billion in transactions through our cards that are out there. So that card revenue continues to grow. There's other growing parts out there on the fee side, insurance has the headwinds of the industry. Mortgage has industry headwinds.

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Chris A. Bagley, BancorpSouth Bank - President & COO [67]

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Right. And it's hard to predict our time on that. But there's going to be, hopefully, we hope for some synergies in our new footprints, in our new markets, to help play in the insurance space too, so.

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [68]

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On the trust and wealth management side, we've seen some wins on the customer side there. I think that -- most of those fees are value based and so you've seen values drop significantly in the fourth quarter. That will impact fees coming into the year on trust and wealth management. But if the market recovers some of that back, that will benefit us. They're continuing to grow customers and grow dollars.

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Operator [69]

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

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James D. Rollins, BancorpSouth Bank - Chairman, CEO & Director [70]

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Thank you all for joining us today. If you need any additional information or have further questions, please don't hesitate to call us. Otherwise, we look forward to speaking to you again soon when we're out on the road.

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Operator [71]

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