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

Q1 2019 BancorpSouth Bank Earnings Call

TUPELO Apr 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Bancorpsouth Bank earnings conference call or presentation Thursday, April 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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* Blair Craig Brantley

Brean Capital, LLC, Research Division - SVP and Senior Equity Research Analyst

* Catherine Fitzhugh Summerson Mealor

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

* 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

* William Davis Curtiss

Hovde Group, LLC, Research Division - Director

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Presentation

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Operator [1]

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Good day, and welcome to the BancorpSouth First Quarter 2019 Webcast and Conference Call. (Operator Instructions) Please note, this event is being recorded.

At this time, I'd 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 will begin by introducing the members of our 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 risks. 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 financial measures may be discussed regarding the company's performance. If so, you can find the reconciliation of these measures in the company's first 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 it 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 first quarter 2019 financial performance. I will begin by making a few brief comments regarding the highlights for the 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 now turn to the slide presentation. Slide 2 contains the legal reminders that Will has already discussed.

Moving on to Slide 3. I will briefly discuss our first quarter financial highlights. We reported net income for the first quarter of $51.6 million or $0.52 per diluted share. Reported GAAP earnings were impacted in the quarter by 2 nonoperating items including merger-related expenses of $0.9 million as well as a negative mortgage servicing rights valuation adjustment of $4.9 million. Accordingly, our net operating income, excluding MSR, was $55.9 million or $0.56 per diluted share. This represents an increase of $0.02 per share compared to the first quarter of last year.

We continue to be pleased with our credit quality. Our provision for the quarter was $0.5 million, which was driven by improvement in both our nonperforming and classified asset levels. We saw a slight uptick in the fourth quarter of these levels as a result of acquired loans. We were pleased to have worked through certain of those credits during the first quarter resulting in a decline that was seen in these nonperforming and classified balances. Chris will discuss credit quality a little bit more in just a minute.

I'm also pleased to report continued improvement in our net interest margin. Our core margin, which excludes accretable yield, was 3.74% for the quarter compared to 3.71% in the fourth quarter of 2018. Yields on our loan portfolio and securities book continue to outpace increases in funding costs.

Also, the resolution of certain acquired loans, which I just alluded to, contributed an additional $1.2 million in accretion income to our GAAP margin during the quarter. John will discuss the margin more in detail in just a minute.

We reported balance sheet growth of approximately 7% annualized, which includes total deposit growth of over $600 million or 18% annualized. The trends in our book of businesses are consistent with our seasonal first quarter experience for many years looking back. Deposit growth accelerated partially as a result of seasonal public fund inflows, which accounted for approximately half of our deposit growth in the quarter.

Loans were essentially flat for the quarter as they have been for the first quarter for many of the past first -- for the past years, although we continue to be pleased with the loan growth efforts in our higher-growth markets. Chris will give additional market-level commentary, but I want to point out our loan growth of approximately 6% annualized in Texas for the first quarter.

We are optimistic that the recently closed mergers in high-growth markets along with the additional relationship managers who have recently joined our team will continue to accelerate our growth efforts as a company.

The last 3 bullets on this slide relate to capital deployment. Before I get into our M&A activity, we are active -- we were active in our share repurchase program again in the last quarter -- or first quarter of this year repurchasing 1 million shares. With the recent pullback in the market, the largest portion of the repurchase activity occurred late in the first quarter.

I will conclude by briefly mentioning our recent M&A activity. In March, we announced the signing of definitive merger agreements with Summit Bank, which has 4 offices in the Florida Panhandle; and Texas Star Bank, which has 7 branches in and around the northern part of the Dallas, Texas, market.

Chris will expand on what these banks mean to our footprint more in a moment. But I'd also like to say that we look forward to working with Andy Stein, Frank Hall and their team in Florida as well as Randle Jones and his team in Texas. We hope to have them officially join our company during the second half of this year.

Finally, we're pleased to have closed our transactions with Grand Bank and Merchants Bank, effective April 1. These transactions collectively add over $400 million in loans and over $500 million in deposits to our Texas and Alabama markets. We are particularly pleased to be able to close these 2 deals in just under 5 months from the time of the announcement. We have the operational integration for both of these banks scheduled for later this quarter.

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

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

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Thanks, Dan. If you'll turn to Slide 4, you'll see that our summary income statement is there. And in reviewing the summary income statement, net income was $51.6 million or $0.52 per diluted share for the quarter.

As Dan mentioned earlier, we did have 2 nonoperating items in our first quarter results. We had a negative pretax MSR valuation adjustment of $4.9 million and a merger-related expense of just under $1 million.

Accordingly, we reported net operating income, excluding MSR, of $55.9 million for the quarter or $0.56 per diluted share compared to $56.4 million or $0.57 per diluted share for the fourth quarter of 2018 and $53.6 million or $0.54 per diluted share for the first quarter of 2018.

Our net interest revenue was essentially flat as a result of a shorter day count compared to the fourth quarter of 2018, while it increased about 10% compared to the first quarter of 2018.

The fourth quarter closing of the Icon transaction obviously impacted the year-over-year comparisons. Our reported net interest margin for the first quarter was 3.86%, while our net interest margin, excluding accretable yield, was 3.74%. Comparable metrics for the fourth quarter of 2018 were 3.80% and 3.71%, respectively. We reported a GAAP margin of 3.67% for the first quarter of 2018 while our core margin was 3.60%.

Increases in the yields on our earning assets continued to outpace rising deposit cost, albeit only slightly this quarter. The reported loan yield, excluding accretion, increased by 12 basis points compared to the fourth quarter of 2018 while our total cost of deposits increased by 11 basis points quarter-over-quarter.

We also saw a nice pickup in the yields on our securities portfolio as lower-yielding securities continued to roll off. I would also like to point out that a large percentage of our deposit growth, which Chris will discuss further in a moment, came from our interest-bearing DDA product. This shift in mix did contribute to pressure on deposit cost. Nonetheless, we are pleased to report continued improvement in our margin.

Before we move to noninterest revenue expenses, I'd like to briefly mention credit quality. We continue to be pleased with our credit quality strength. We have a provision of $0.5 million for the quarter compared to a provision of $1 million for both first and fourth quarters of 2018. We saw linked quarter improvement in many of our credit quality metrics including classified assets, nonperforming loans and nonperforming assets as well as near-term past dues.

If you'll turn to Slide 5, you'll see a detail of our noninterest revenue streams. Total noninterest revenue was $64.2 million for the quarter compared to $59 million for the fourth quarter of '18 and $78.9 million for the first quarter of 2018.

The -- our MSR valuation adjustment is responsible for most of the volatility in these numbers. Other noninterest income for the fourth -- first quarter did have a $1.2 million gain on the sale of a branch building. Otherwise, trends within each of our noninterest revenue streams are in line with our expectations.

Card fees and service charges are typically seasonally low in the first quarter given the short day count and following the holiday season. On the other hand, insurance commission revenue is seasonally high as a result of the renewal cycle in our book of business.

Slide 6 represents a detail of noninterest expense. Total noninterest expense for the first quarter was $150 million compared with $152.3 million for the fourth quarter and $147.7 million for the first quarter of 2018.

I'd like to briefly point out a few items noted within the trends on these items. First, I would like to discuss salaries and benefits, which increased just over $5 million quarter-over-quarter. As we mentioned in our fourth quarter call, we did anticipate some increase due to several factors.

First, resets of FICA limits resulted in additional FICA expense for the company of approximately $1.5 million compared to the fourth quarter. Second, we mentioned last quarter, the bonus expense -- bonus plan expense was lower as a result of year-end accrual true-ups. Finally, our insurance producer commission compensation is generally seasonally high as a result of seasonal trends. Chris will discuss that more in a moment.

We saw improvement of approximately $3 million quarter-over-quarter in other miscellaneous expense. We mentioned several small items in our fourth quarter call that were elevated within this line item including consulting expense, meals and entertainment and fraud losses. These items returning to more normalized levels resulted in this $3 million decline. Otherwise, there were no significant or unexpected variances within the trends noted on this slide.

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

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

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Thank you, John, and good morning, everyone. Slide 7 reflects our funding mix as of March 31 compared to both the fourth quarter of 2018 and the first quarter of 2018.

We reported total deposit and repo growth of almost $700 million for the quarter or 19% annualized. We know from prior years that the first quarter typically reflects a seasonal increase in deposits. However, we are pleased with our team's efforts this quarter as the first quarter of 2019 outpaced what we've typically seen in the first quarter of each year.

For reference, our organic deposit and repo growth during the first quarter of last year was 8% on an annualized basis. You'll notice a mix in the shift of our deposit book with more of the growth coming from our interest-bearing DDA products but also note that we grew deposits in all categories for the quarter. The increase in the public funds in the interest-bearing book contributed approximately 5 basis points to the 11 basis point increase in cost of the deposits that John referenced earlier.

As we look at geographical performance relating to deposits, more than half of our geographical divisions reported double-digit annualized growth for the quarter. The 4 divisions at the top of the list were our Missouri, Mid-Mississippi, Pine Belt and South Louisiana divisions.

Moving to Slide 8. You'll see our loan portfolio as of March 31 compared to the fourth quarter of 2018 and the first quarter of 2018. Loans are essentially flat compared to the fourth quarter, and as Dan mentioned earlier, first quarter is generally always our slowest loan quarter for the year.

As a reminder, the comparisons to the first quarter of last year include the addition of Icon. If you exclude the Icon loans and the associated credit marks, loans have grown approximately 2% organically over the last year.

As we look at our first quarter lending efforts from a geographical perspective, we had several divisions produce meaningful loan growth. Standout divisions for the quarter were our Dallas, Texas, Texas Hill Country, Northeast Mississippi and Missouri division.

As we look forward, I would like to reiterate Dan's comments about our recent transaction. I would like to compliment our Houston, Texas, division and particularly the teammates who joined from Icon in the fourth quarter. The Houston division reported mid-single-digit loan growth during the quarter. This is an impressive accomplishment given the turmoil caused by fourth quarter merger closing and operational integration.

In my career, it's been rare and unusual for new teammates to grow the balance sheet throughout the course of the transaction. Kudos to the Icon team.

As we look at the other transactions, Grand Bank and Texas Star Bank will meaningfully enhance our presence in the Dallas market. We already continuously mention Dallas in our success stories quarter-after-quarter, and we feel continuing to add to the footprint in this dynamic market is a real positive for our company.

Looking forward, Merchants Bank and Summit Bank will really help our efforts in South Alabama and Florida Panhandle. We're excited about the value that each of these teams will add as we look to continue levering our core deposit base, which is, as we have always stated, a key strength of our company.

Slide 9 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 loss of $0.5 million for the first quarter compared with the provision of $1 million for the first quarter and fourth quarters of 2018. Net charge-offs were $4.1 million for the quarter or 12 basis points on average when looking on an annualized basis.

On a year-over-year comparison, nonperforming loans and nonperforming assets were very stable. We did see a slight uptick in the fourth quarter associated with acquired loans as we worked through several of these credits through the resolution in the first quarter, which contributed to the first quarter improvement in these metrics.

Finally, while not shown on this slide, I would also like to point out that we reported decline in both classified loans as well as near-term past dues in the first quarter.

We're very pleased with our credit quality. With that said, I would again remind everyone that we expect that many of the credit metrics may experience quarter-to-quarter lumpiness as we continue to integrate acquisitions.

Moving on to 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 $291.7 million.

Purchase money volume was $227.5 million or 78% of our total volume for the quarter. I think it's notable that our team achieved growth of just over 11% in purchase money volume compared to the first quarter of last year.

Deliveries in the quarter were $239 million -- welcome to Tupelo and the train -- deliveries in the quarter were $239 million compared to $251 million in the fourth quarter of 2018 and $215 million in the first quarter of 2018.

Production and servicing revenue, which excludes the MSR adjustment, totaled $6.9 million for the quarter compared to $4.8 million for the fourth quarter of 2018 and $7.7 million for the first quarter of 2018.

Our margin was 1.7% for the quarter, representing an increase from 0.88% for the fourth quarter of 2018.

As we've mentioned in the past, our margin typically increases in the first quarter each year as we move into the spring selling season in our pipeline growth. This seasonality is reflected in the quarter-over-quarter pipeline increase of $37 million.

We believe there is still downward pressure on the margin, and we expect margin to average in the 1.5% range with what we're experiencing in the pricing in the market today.

Finally, as Dan mentioned earlier, the MSR valuation adjustment during the quarter was a negative $4.9 million.

Moving to insurance, total commission revenue for the quarter was $30.2 million compared to $28 million for the fourth quarter of 2018 and $29.1 million for the first quarter of 2018.

The accounting revenue recognition change for contingent commissions that we've referenced on past calls is now implemented in the first quarter of last year, so we now have 5 quarters of comparable results at view here.

The increase in total commission revenue compared to the fourth quarter essentially is seasonal, as first quarter is always one of our highest quarters for the policy renewals along with the third quarter. However, we also saw an increase in total commission revenue of 3.6% compared to the first quarter of last year, which was driven primarily by a 5.7% increase in property and casualty commissions. While we would not call this increase robust, it does represent an improvement over what we reported for the several quarters.

Our team is beginning to see some firming in premium pricing and as always our renewal retention rates continued to be very high.

While it's not shown on this slide, I would also like to briefly mention our wealth management team. While market volatility has impacted the revenue stream from quarter-to-quarter, we continue to look for opportunities to add quality producers and grow this aspect of our business. Of the 7 bank transactions that we've either announced or completed over the last couple of years, Summit Bank, which Dan mentioned earlier, is the first to have a wealth management offering. We are excited about the opportunity of adding their producers and teammates to our platform and the value that they will add to our efforts to grow in the Florida Panhandle.

Now I will turn it back over to Dan for his concluding remarks.

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

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Thank you, Chris. I think I speak for our entire management team when I say we are pleased and proud of the results our company has been able to report for the first quarter of 2019. Our trajectory, as we move into the second quarter, is certainly heading in the right direction by almost any measure. Our margin story and credit quality continue to seem to be repetitive quarter-after-quarter. We are very pleased with our deposit growth efforts for the quarter. Our mortgage team reported growth in home purchase money volume while our insurance team produced nice growth in commission revenue.

In closing and reiterating on Chris' points, I'm excited about the Grand Bank and Merchants Bank's team, which joined April 1 as well as the Summit Bank and Texas Star teams, which we hope to officially welcome in the second half of the year.

I believe each of these teams are critical to both our growth efforts and our continued focus on leveraging our infrastructure and improving our efficiency.

In addition to those teammates joining through acquisition, we continue to succeed in attracting relationship managers in various markets across our footprint, which we believe will help our company grow.

With that, operator, we'd now be happy to answer any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Catherine Mealor of KBW.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [2]

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I want to start with the margin. Now that we're in an environment where the Fed is paused, can you give us any color on how you're expecting your margin to hold up? And then maybe specifically within that, can you talk about your loan yields, and how we should think about how much lag we still got left in loan yields from past rate hikes?

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

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Yes. Thanks. [My helpings] have changed over the last couple of months from up, up, up to oh, wait, pause, as you said. We're certainly watching margin, (multiple speakers) what's that?

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [4]

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I said, or down.

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

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Yes. Right. We're certainly watching margin and our outlook continues to change as we watch what's happening in the market. But I think generally, I think we think we can protect that margin.

John, you want to put some details around some of that?

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

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Yes. Thanks, Catherine. We do expect -- as we saw in '18, we do expect in '19 to see quarterly modest improvement in our net -- our core margin, and of course, the accretion effect on that will be somewhat lumpy. But we do expect, as I said, some modest increase every quarter in our core margin.

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

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Accretion could be lumpy.

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John Gary Copeland, BancorpSouth Bank - Senior EVP, CFO, Treasurer & Interim Chief Risk Officer [8]

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Yes. Historically, it has been lumpy.

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

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Yes. The second part of her question, John, was what's left in repricing up on loans. And I think our loan repricing is historically lagged, but I'll let you talk about that.

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John Gary Copeland, BancorpSouth Bank - Senior EVP, CFO, Treasurer & Interim Chief Risk Officer [10]

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It has. We don't expect a huge effect on our loan repricing as we go through 2019. I really don't have much more color than that.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [11]

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Well, could you say as part of the outlook for a higher core NIM, is part of that from the acquisition? I mean the 4 deals you've got coming on this year, all are coming on I think with a higher margin than you've got in other smaller deals. But is that a piece of it? Or do you see upward momentum with just kind of your legacy core margin as well?

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

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I don't know that I would couch it as strong upward momentum. When we look back last quarter and everybody was forecasting rising rates for the year, I think we felt like we did have a better chance, and we were poised to continue to see increasing margin. While we think there is upward pressure a little bit on our margin today, I think I'd be more comfortable saying we think we can protect our margin today where we are and not give back over the next couple of quarters while rates try and decide what they want to do.

I do believe, as John said, that we do have some lagging, repricing coming because some of our loan book is not reset on a daily basis and so we still have -- improving there. But we're still seeing -- our deposit cost is still rising.

So the question is, is what's happening in the market and with the rate stop or the pause, as you called it, out there, does that take some pressure off of the rising deposit rates. If that happens, then I think we have a much better chance of seeing an increasing margin.

John, adding anything?

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

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No. That's fine. Yes.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [14]

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That's helpful. And then on fees, if you look at card fees and service charges, we know they're always down first quarter seasonally. But if you look year-over-year, they were both still down year-over-year. Can you -- do you know why that is? And you think there -- is there a path to get back to the levels that we saw last quarter for those 2 line items?

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John Gary Copeland, BancorpSouth Bank - Senior EVP, CFO, Treasurer & Interim Chief Risk Officer [15]

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Catherine, we did notice the drop in fees, deposits, service charges, and we can attribute that to I think to -- some of it to acquisitions, and we do have, I think, a generally lower fee structure than some of the banks that we've acquired recently. And from the time period when we closed some of these mergers, in particular, in January of last year and in October of last year we had fees at -- until we integrated those banks at their higher fee rate, and when we converted we did drop our fees a little bit to conform to our pricing structure.

Secondly, we did have 4 small business accounts and those kinds of things in the first quarter of this year where fees are charged based on volumes. We did experience much lower volumes for some reason in that customer base, so that affected downwardly the fees during the first quarter of this year as well.

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

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Compared to 4Q.

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John Gary Copeland, BancorpSouth Bank - Senior EVP, CFO, Treasurer & Interim Chief Risk Officer [17]

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Yes. Compared to 4Q.

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [18]

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Yes. So day count certainly in there 4Q to 1Q. The comparison 1Q over 1Q, that's a valid comparison. I think we're still trying to figure out what's driving some of that. I think our team is doing well, and we are trying to make sure we can continue to grow those volumes.

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Operator [19]

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The next question will come from Jennifer Demba of SunTrust.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [20]

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Two questions. First on mergers. You disclosed 2, you have 2 pending. What's the capacity for more this year, Dan? And has the level of discussion ramped up, would you say, in the industry in the last few months? Since we've seen a couple of larger transactions announced.

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

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Okay. You want to put both of them out there, or you want me to start there? So yes, when you talk about M&A activity, volatility in the market has got everybody trying to figure out what's happening. We came through the year-end and everybody bottomed out sometime right around Christmas. And it all came roaring back in the first quarter, and we got to mid-March and here it all went the other way again. That volatility, I think, causes people to try and figure out what's going on.

So I don't know that we're seeing increased conversations after the big announcement for the big MOEs that are out there, but there's still a lot of activity and a lot of small banks as you've heard me say before. We have lots of opportunity in the banks that are under $750 million in size.

Your question is really on capacity. So when we look at us, we took the 2 transactions that were announced last November. We closed them on April 1, and we will have them converted into our -- both of them converted into our operating systems before the end of this quarter. We clearly hope to close on the next 2 sometime in the back half of the year and very quickly thereafter convert them into our operating system.

These smaller transactions, while they take the same legal work and the same accounting work, the integration process and the noise that it causes within our operations is much smaller with the smaller transactions. So again, the Grand Bank guys in Texas, there's 4 offices over there. There's 5 offices down in South Alabama. Those are all in-market offices for us.

So that's much less disruptive for our team than larger out-of-market transactions would be, which means we believe we have capacity to continue to play, and we continue to look for opportunities that make sense for us as we look at our footprint today, and we're certainly looking at funding and how do we make sure that we protect our funding cost.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [22]

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Second question is on CECL. Do you have any estimate at this point as to what the day-1 impact will be next year from CECL?

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [23]

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Yes. I think it's early for us to be putting out any numbers around CECL. I haven't met CECL yet but we're talking to him every day. He'll be here before the end of the year. We are running parallel within our shop. We've got a fully developed process today. We see those numbers but it's still way early in the process for us to have any confidence in where we are.

I think when you look at the range of change that we've seen out there from the bigger banks that have been announcing, we've seen some that've announced a relatively modest or small impact to their numbers, and we've seen others that are talking about a 30% or 40% impact to their numbers. I think what we see is we are going to be somewhere between those 2.

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Operator [24]

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The next question will come from David Feaster of Raymond James.

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David Pipkin Feaster, Raymond James & Associates, Inc., Research Division - Research Analyst [25]

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Last quarter, we talked about loan growth kind of in that high single-digit realm, exclusive of the acquisitions. Understanding the seasonality in the first quarter, do you think that's still reasonable this year? I guess inclusive of the deals you've got, you just closed and the pending ones, combined with the planned runoff of acquired loans, do you think on an end-of-period basis loan growth could be closer to kind of that mid-single-digit realm?

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [26]

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Yes. I do. When we look at what's happening out there today, I think we're pleased. When you look back at Texas, we -- starting this year, we've started breaking out markets for you. So you can see the geographies where those are coming from. And as you know, some of our geography is slower growth than other parts of our geography, and you can certainly see that in this past quarter. We were glad to see some growth in the Missouri market, and we hope we can continue to grow there. Oil and gas business has been a negative and a drag on us in the Louisiana market; and our other markets are relatively slower growing markets, and we're protecting. I think you see several things in our loan process.

One, we're certainly trying to protect margin and credit quality, and we don't feel the need to chase credits over price, so we're not playing in that game. But in the markets where there is growth opportunities, Texas in particular, we continue to see good growth. So to report 6% growth in the first quarter in Texas for us, as Chris said, in the middle of all the integration activities that have been going on over there, I think we feel pretty good.

Chris specifically mentioned 2 of the divisions that we have in Texas today that were standouts for us in the quarter. I think those markets continue to grow, continue to provide opportunity. And in addition to us being in those markets, we've continued to add producers within those markets. So I think we feel good about our forward-looking opportunities.

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David Pipkin Feaster, Raymond James & Associates, Inc., Research Division - Research Analyst [27]

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Okay. That's helpful. And with that kind of loan growth that you're expecting, do you think you can fund that with deposit growth? Deposit growth is obviously seasonally strong in the first quarter and impressive. But do you anticipate kind of that loan-to-deposit ratio staying level? And maybe on the cost front with deposits, do you expect them to kind of stabilize here? Or at least the rate of increase to moderate as we're looking at a flatter rate environment?

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [28]

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Yes. That's kind of the same question that Catherine asked a minute ago. And so when you look at our deposit cost, we're watching that every day and the crystal ball is kind of cloudy as to what's happening, whether rates are going to be driven off of what our competitors are doing. We give rate autonomy into the field for our team to be able to compete with what's going on out there. And some markets have seen a pullback in rate pressure, some markets have not. We certainly hope to be able to moderate the increases on our deposits. We're pretty proud of the deposit cost that we carry as a whole.

You, specifically, were asking about loan-to-deposit ratio, and I think you've seen our loan-to-deposit ratio bounce pretty far. We're down in the high 80s today or 90, and we've been mid-90s and higher. So I don't think I would be looking to model exact same loan-to-deposit ratio quarter-over-quarter. It's not going to work that way.

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David Pipkin Feaster, Raymond James & Associates, Inc., Research Division - Research Analyst [29]

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Sure. Last one from me. Mortgage has been a pretty tough market lately. You're sitting here with a few more originators now. A pipeline that's up quarter-over-quarter but it's down year-over-year, and you talked about the gain on sale margins, which are also down year-over-year. How do you think about mortgage going forward? Do you think we can see revenues up year-over-year ex-MSR?

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [30]

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Yes. So when you look at -- revenues is a good question, that's going to be margin-driven. I think when you look at volumes, I'd want to brag on volumes first. So when you look at Mortgage Bankers Association numbers, they are telling you that mortgage rate -- mortgage market was down -- production was down 17%, and we weren't down anywhere near 17%. So I think that brags to the team that we've got out there, working hard every day to stay in the game. The purchase money volume that we had was actually up year-over-year, which I think speaks to the team that we've got out there.

Margin is kind of like the same question you were asking on the loans and the deposit side. You got to play in the market that's handed to you. And so if we see some firming up in that margin that would be great.

Chris, you want to add on mortgage?

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Chris A. Bagley, BancorpSouth Bank - President & COO [31]

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No. Just you guys know it's a core business for us, and we're going to be -- stay focused on it. There's been a lot of excess capacity this last year, and I think that's put downward pressure on the margins. I think we're doing a good job of adding -- the opportunity when that happens is that we can pick up producers, and we pick up those producers in new markets to us, like you see in Houston and Dallas. I think that will generate volume, and then when the capacity comes out of the business, we can see upward pressure on the margins again. So we will continue to focus on that core part of our business and do it efficiently and competitively.

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

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Yes. I'm really proud of what our team has been able to do. I think we shine in that area, and how we're outperforming the mortgage market as a total.

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Operator [33]

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The next question will come from Will Curtiss of Hovde Group.

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William Davis Curtiss, Hovde Group, LLC, Research Division - Director [34]

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Dan, I want to just follow up on your comments about the deposit cost going higher and just want to make sure I understand it. The expectation that the pace of increase is going to be pretty similar to what we've seen in the past couple of quarters. Is that correct?

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [35]

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No. If I -- if you heard that from me, I don't think that's what I was trying to say. I don't know what the pace of increase will be. What I was saying was in some markets, we're seeing really a big pullback in competition and rising rates, and so we're not having to pay up in some markets. In other markets, we continue to see rate pressures on our deposits.

I don't know that we can tell you that we're going to see 11 bp increase in deposit cost going forward. Remember, this was the quarter following the rate hike late in December. So I think this will be a full quarter where we potentially will not see a rate hike coming from the Fed. I would hope that we would not see deposit cost increase to that level.

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William Davis Curtiss, Hovde Group, LLC, Research Division - Director [36]

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Okay. Thanks for clarifying that. And then John, I appreciate the detail you provided on the kind of the seasonal factors for the expense base. Just curious where we stand on the cost saves from the Icon acquisition?

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John Gary Copeland, BancorpSouth Bank - Senior EVP, CFO, Treasurer & Interim Chief Risk Officer [37]

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Well, we continue to harvest in cost saves. We're not finished in that regard, and we have some more to go. I don't guess, I'm prepared to give you percentage of cost saves, but we do have some additional cost saves to experience for the Icon transaction.

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

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The way I'd want to look at that, John, would be, we carry the cost well into the quarter.

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John Gary Copeland, BancorpSouth Bank - Senior EVP, CFO, Treasurer & Interim Chief Risk Officer [39]

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We did.

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

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And so if you're trying to compare the full quarter of expense run and how much Icon was in there, there were significant Icon expenses in the beginning of the quarter. As we came through the quarter, some of those expenses were rolled off but this would not be a clean quarter to compare to from there. As John said, I think, we still believe there are additional efficiencies that we can build in down there, and we're working hard to finish those processes but we're not there yet.

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Operator [41]

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(Operator Instructions) Our next question will come from Matt Olney of Stephens.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [42]

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I want to circle back on insurance. Nice quarter on the insurance side. And based on the commentary, it sounds like there's some good movements within the P&C world. How much of that is from improved pricing versus new customer wins? I'm just trying to get a better idea of how sustainable the 6% year-over-year increase is?

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [43]

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Yes. I guess I would want to start higher and then let Chris dive into that. Remember, this is the first quarter that you now have a true comparable since we've changed the accounting rules on the way we recognize income. The first quarter this year was, while it's not the highest first quarter we've ever had when you're looking back, the accounting rules were different. So from our process internally, we think this was a really good quarter. The best first quarter we've had of just the core commission income ever.

So now your question comes back to the firming up of the market and our team is seeing a firmer P&C market. We're also gaining new customers.

Chris, do we have any breakout on what...

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Chris A. Bagley, BancorpSouth Bank - President & COO [44]

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I don't have a specific breakout. Anecdotally, I would tell you it's a little bit of both. We're winning some business but really the first time we've seen some firming in those renewal prices. But what our team will tell you is that it also means our customers are coming back in and shopping hard because they're seeing an increase in their prices. So there's some noise and some competition and hand-to-hand combat going on but all over good news. But you've got I think both an increasing price, firming up a bit of pricing there and we're winning some business.

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

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I also heard some of our folks say that there has been no price firming in some specific products, even some backing up of premium still in some product lines. But most of the P&C saw some firming up.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [46]

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Okay. That's helpful. And on the credit front, I think, in prepared remarks you said you worked through some of the classified loans, down about $47 million sequentially. Any details here, were these loans worked out of the bank? Were they paid down, any general commentary you have on that?

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Chris A. Bagley, BancorpSouth Bank - President & COO [47]

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It's a combination of all of those things, Matt. You just -- when you're doing -- when you're in the acquisition business and you're adding portfolios and those portfolios then start going through all of your process is you're going to see some lumpiness in those numbers. So it's payoffs, it's rehabilitation, it's regrading, it's all of those things.

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [48]

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Yes, I think we -- credit quality is critical for us. We focus on credit quality internally in a big way. I think our processes are very strong but that means that as Chris said as things come onto our balance sheet and work their way through the first year of digestion, you're going to see some lumpiness in how those things flow through. We were glad to be able to work some of the ones out that we identified in the fourth quarter out so quickly.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [49]

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Okay. And then just lastly from me. Going back to the loan growth commentary. Dan, can you just clarify what the guidance is? And does that include or exclude the acquisitions this year?

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [50]

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Yes. We haven't given any guidance. You guys have kept asking questions on mid-single digits and I'm answering that we think we can do that. I'm talking about that excluding. Obviously, we can continue to buy loans but we're talking about organic growth. We're looking at how we grow our company. We're really proud of the teammates that have joined our team.

We found some of what we believe to be some very strong lenders in multiple growth markets for us in the last 3 or 6 months, and they're all on the ground and beginning to get some traction. The markets in Texas continue to grow, again, I would point back to the 6% growth in Texas. If we can stop some of the shrinkage in some other markets that growth is going to show for us in a big way.

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Operator [51]

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Our next question will come from Jon Arfstrom of RBC Capital.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [52]

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I think everything has been covered. But 2 things you flagged in the prepared comments. One was, you called out Icon and it being unusual to have such strong growth right after the acquisition. Are they doing anything different there? What would you attribute that to?

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [53]

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I'm going to let Chris jump in here too, but the market is strong. So I would start with the market and then I would want to add -- I would want to brag on the people. We've got some lenders down there who are very active in the market. They've got a customer following. They have not put their head down and said, oh my goodness, all these changes are going to cause us all these problems.

They've worked their way through the operational and technology changes that we have thrown at them -- I have done this a few times in my career. And like Chris says, I don't know that I can think of very many at all that saw the kind of growth that we saw with that team coming on. So I credit most of it to the people.

Chris?

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Chris A. Bagley, BancorpSouth Bank - President & COO [54]

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Agreed, it is (technical difficulty) [dittos]. It's a good market and good folks. I would add our folks too. Our integration team that gets on the ground and helps the new folks acclimate to the new processes. We worked really hard to try to make that as effective as possible.

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [55]

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We put a lot of support down there for them.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [56]

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Okay. Good. And then Chris, you also flagged wealth management and you said only Summit -- I think it was you that was talking about Summit had wealth management. Is this an initiative for you to add wealth management into some of your newer locations? Or is it just -- was that just kind of a one-off comment about Summit?

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Chris A. Bagley, BancorpSouth Bank - President & COO [57]

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Well. It's both. We're constantly looking for producers in all of our business lines and that would be one of them. But Summit is -- the one thing we wanted to flag, in your words, or highlight is, it's the first new bank that's joining us that actually has a fairly good sized wealth management team. So we're excited about them joining and adding to our numbers there.

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

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Yes. Typically, the banks that are in the size bucket that we've been talking about here that there's a whole lot of them out there trying to look at their strategic opportunities in front of them, most of them do not have the wealth management piece.

Your question on do we want to grow wealth management, our team is actively recruiting in most of the major markets we're in, finding the right people to join the team and build around is hard. And so we have not gotten to where we want to be there, but we absolutely would like to see that part of our team grow.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [59]

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Okay. And then last question. You used the term challenge expenses and obviously you've done a lot of work on expense and efficiency over the years. Anything easy that's left to do or where you're finding the opportunities to challenge expenses?

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

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Easy. I don't know that any of it is easy.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [61]

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The Christmas ham was done, I mean that's in the past.

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

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Okay. That one was easy. The processes that we look at every day just challenge where we're spending dollars. And I think we've got -- we've built a process internally. We got our folks thinking about where we're spending money, we want to make sure that we're investing money. So we're not walking away from spending money.

You've heard me multiple times today talking about adding, producing relationship managers across our footprint. We are adding people that can help us. We're not afraid of investing in that and we are adding technology and we are not afraid of investing in technology, but we are trying to make sure that we've got a return on those investments that we're spending in many ways.

And so John, I don't have a quick answer on easiness of it but I know we're still challenging where we're putting our nickels and dimes.

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John Gary Copeland, BancorpSouth Bank - Senior EVP, CFO, Treasurer & Interim Chief Risk Officer [63]

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It's difficult because it is day-to-day. It's -- we've used this euphemism before. It's blocking and tackling. It's looking at where we're spending money and trying to make sure that we have a sharp pencil, and we negotiate new contracts and contract renewals with an eye towards reducing cost.

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Operator [64]

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Our next question will come from Blair Brantley of Brean Capital.

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Blair Craig Brantley, Brean Capital, LLC, Research Division - SVP and Senior Equity Research Analyst [65]

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Just a quick question on the earning asset kind of mix. Just any thoughts on the investment portfolio given the influx of funding that came in the quarter and how we should probably think about that moving throughout the year?

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John Gary Copeland, BancorpSouth Bank - Senior EVP, CFO, Treasurer & Interim Chief Risk Officer [66]

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Well, we are -- I don't have the numbers in front of me but we have taken advantage of some repricing there. We do have securities rolling off. We have pretty good maturity ladder, repricing ladder and we're seeing securities roll off at less than 2 and coming back on at greater than 2. So we have some opportunities there.

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [67]

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Some of the funding cost that came in was used to pay down on some of those borrowings in the first quarter.

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John Gary Copeland, BancorpSouth Bank - Senior EVP, CFO, Treasurer & Interim Chief Risk Officer [68]

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Yes. That's right.

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [69]

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You're asking is if we're changing our investment model?

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John Gary Copeland, BancorpSouth Bank - Senior EVP, CFO, Treasurer & Interim Chief Risk Officer [70]

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No, no.

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [71]

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No, we've got a pretty strong investment model that we've been playing for a long time again on the conservative side of what we're putting money into. We don't -- we're loaned up. So as you heard a little while ago, we're well over 90% -- we're in the 90% loan-to-deposit ratio. We're not going to go out and put a lot of risk in the bond portfolio.

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Blair Craig Brantley, Brean Capital, LLC, Research Division - SVP and Senior Equity Research Analyst [72]

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Okay. And then just with that influx of deposit this quarter, I mean how sticky are those deposits as we kind of work through the year?

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [73]

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Well. I think what you see, again, I think our history -- I would point you to history. If you look at our first quarter results for the last 4 years, you've seen deposits go up in the first quarter, and you've seen deposits shrink a little in the second quarter and then we've had some mixed results in the third and fourth quarter over the last couple of years. I think we expect to see similar results.

I think we see the same history on the loan side. The last year was an oddity in that we had so many transactions that muddied the water up. But I think when you look back in 3 and 4 and 5 years ago, we've had great loan growth in the second quarter. And so I think we're certainly set up to perform as we have in the past we believe, and we believe some of those deposits will roll out in this quarter but our team is fighting for deposits every day.

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Blair Craig Brantley, Brean Capital, LLC, Research Division - SVP and Senior Equity Research Analyst [74]

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Okay. Great. And then just finally on the -- with the capital and buybacks, any change of view here with the deal, pending deals and still being active on your buyback front, given where you bought this quarter?

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James D. Rollins, BancorpSouth Bank - Chairman & CEO [75]

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Yes. I think you can see pretty easily from the last 2 quarters where we put out exactly what we've done. I mean to get -- to purchase the stock back that we did at the price that we told you we bought it back at, obviously we've got a plan or program that's out there that's paying attention to what's moving in the market. And our program is kind of an automatic plan. And if the market backs up on us again, I suspect we'll be back in the market purchasing again. If the market does not back up on us, we may not purchase as much of the stock back. The volatility is what's driving that volume of buyback for us.

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Operator [76]

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Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd 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 [77]

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

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Operator [78]

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