Q3 2016 BancorpSouth Inc Earnings Call

Oct 20, 2016 AM EDT
BXS - BancorpSouth Inc
Q3 2016 BancorpSouth Inc Earnings Call
Oct 20, 2016 / 03:00PM GMT 

==============================
Corporate Participants
==============================
   *  Will Fisackerly
      BancorpSouth Inc - SVP and  Director of Corporate Finance
   *  Dan Rollins
      BancorpSouth Inc - Chairman and CEO
   *  Bill Prater
      BancorpSouth Inc - Senior EVP and CFO
   *  Chris Bagley
      BancorpSouth Inc - President and COO
   *  James Threadgill
      BancorpSouth Inc - Senior EVP and Chief Business Development Officer
   *  Ron Hodges
      BancorpSouth Inc - Senior EVP and Chief Credit Officer

==============================
Conference Call Participants
==============================
   *  Jennifer Demba
      SunTrust Robinson Humphrey - Analyst
   *  Catherine Mealor
      Keefe, Bruyette & Woods, Inc. - Analyst
   *  Kevin Fitzsimmons
      Hovde Group, LLC - Analyst
   *  Michael Rose
      Raymond James & Associates, Inc. - Analyst
   *  Steven Alexopoulos
      JPMorgan - Analyst
   *  Jon Arfstrom
      RBC Capital Markets - Analyst
   *  John Rodis
      FIG Partners, LLC - Analyst

==============================
Presentation
------------------------------
Operator   [1]
------------------------------
 Good morning, and welcome to the BancorpSouth third-quarter 2016 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.

------------------------------
 Will Fisackerly,  BancorpSouth Inc - SVP and  Director of Corporate Finance   [2]
------------------------------
 Good morning, and thank you for being with us. I'll begin by introducing the members of the senior management team participating today. We have Chairman and CEO, Dan Rollins; Chris Bagley, President and Chief Operating Officer; Bill Prater, Senior Executive Vice President and Chief Financial Officer; Ron Hodges, Senior Executive Vice President and Chief Credit Officer; and James Threadgill, Senior Executive Vice President and Chief Business Development Officer.

 Before the discussion begins, I will remind you of certain forward-looking statements that may be made regarding the Company's future results or future financial performance. Actual results could differ materially from those indicated in these forward-looking statements due to a variety of factors and/or risks. Information concerning certain of these factors can be found in BancorpSouth's 2015 annual report on Form 10-K. Also during the call, certain non-GAAP financial measures may be discussed regarding the Company's performance. If so, you can find the reconciliation of these measures in the Company's Q3 2015 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, or you will find them on the link to our webcast, or you can view them at the exhibit to the 8-K we filed earlier this morning.

 Now I will turn to Dan Rollins for his comments on the quarter.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [3]
------------------------------
 Think you Will, and good morning. Thank you for joining us today for BancorpSouth's third-quarter 2016 conference call. I'll begin by making a brief comment regarding the highlights from the third quarter. Bill will discuss the financial results in more detail. Chris will talk about our business development activities in the bank. James, will provide some comments on our business development activity in mortgage and insurance, and finally Ron will discuss highlights regarding credit quality. After we conclude our prepared comments, our Executive Management Team will be happy to answer any questions.

 Let's turn to the slide presentation. Slide 2 contains our customary Safe Harbor statement with respect to certain forward-looking information in the presentation. Slide 3 covers the highlights for the quarter, beginning with the financial highlights. Net income for the quarter was $37.8 million or $0.40 per diluted share. We were particularly pleased with our front-line efforts on the deposit side of the balance sheet as we reported total deposit growth of $225.7 million or 7.9% on an annualized basis. We have consistently communicated to our teammates the importance of leading our sales efforts with deposit. We are happy to see those efforts pay off.

 We also reported net loan growth during the quarter of $82.8 million or 3.1% annualized. As we mentioned in last quarter's call, we recorded a significant reduction in our direct oil and gas exposure early in the third quarter. This reduction, along with other seasonal C&I paydowns, resulted in lower loan growth for the quarter. Chris will provide some highlights on our loan and deposit efforts in a moment, including some color on specific teams and geographies.

 Moving on to the remainder of the financial results, we had positive mortgage servicing valuation adjustment of $1.8 million during the quarter. Our mortgage team continues to produce at a high level with production volume of $478 million and production in servicing revenue of $10.5 million. There were no material nonoperating items in our third-quarter numbers. We reported net operating income, excluding MSR, of $36.7 million or $0.39 per diluted share. Bill will go over comparisons to prior periods in a moment. Our credit quality metrics remain strong as we had no recorded provision for credit losses in the third quarter. Ron will discuss considerations impacting our provision, as well as other credit quality metrics in a moment.

 We continue to hold our expense base at a very tight range. Our total noninterest expense increased just under $800,000 compared to the second quarter, despite our annual merit increases being effective July 1, as well as continued investments in technology. While we still have a lot of room for improvement, our operating efficiency ratio, excluding MSR, was under 70% for the third consecutive quarter.

 Finally, I am pleased that we were able to execute on our share repurchase plans during the quarter, after being blacked out for some period of time. We repurchased just over 550,000 shares at a weighted average price of $23.80. I expect us to continue to be active in the market with our share repurchase program as we look forward. While it is not shown in this slide, I am also pleased with the commitment our merger partners, Ouachita Bancshares and Central Community Corporation, demonstrated to our pending transactions through the extension of our merger agreements until December 31, 2017. While we are all frustrated with the amount of time it has taken to close these deals, all parties involved continue to believe that these transactions are in the best interest of our shareholders, our teammates, and the communities we serve.

 I'll now turn to Bill to discuss our financial results in more detail.

------------------------------
 Bill Prater,  BancorpSouth Inc - Senior EVP and CFO   [4]
------------------------------
 Thanks, Dan.

 If you'll turn to slide 4, you'll see our summary income statement. Net income was $37.8 million or $0.40 per diluted share for the third quarter. There were no material nonoperating items in the three quarters presented. Dan also mentioned the non-cash positive MSR valuation adjustment of $1.8 million during the quarter. We reported net income, excluding MSR, of $36.7 million for the quarter or $0.39 per diluted share, compared to $37.2 million or $0.39 per diluted share for the second quarter 2016, and $37.6 million or $0.39 for the third quarter 2015.

 Operating income, excluding MSR, is relatively flat in each of the quarters presented; there are some significant differences in the components of income and expenses I would like to point out. Net interest revenue increased 2% compared to the second quarter this year, and 3.2% compared to the third quarter of last year. We did see some compression in our margin, as we have added some federal home loan bank borrowings over the next couple quarters to improve on balance sheet liquidity. These borrowings have been deployed primarily in the securities portfolio. This balance sheet management decision actually provides some pickup in net interest income but penalizes the margin.

 Our loan yields and deposit costs continue to remain in very stable ranges. You'll also notice some variances in our provision for credit losses. During the third quarter we had no third-quarter provision, compared to a provision of $2 million in the second quarter this year and a negative provision of $3 million for the third quarter of last year. Ron, will discuss the factors impacting our provision more in a moment.

 I will provide some color on non-interest revenue and non-interest expense in the next two slides. If you'll turn to slide 5, you'll see a detail of our noninterest revenue streams. Total not interest revenue was $70.9 million for the quarter compared to $69.7 million for the second quarter for 2016 and $63 million in the third quarter of 2015. James will discuss mortgage banking revenue and insurance commission revenue in a moment. The other line items on this slide are relatively flat quarter over quarter. We expect service charge revenue to continue to face headwinds going forward.

 Slide 6 presents a detailed non-interest expense. Total non-interest expense for the third quarter was $129.5 million compared to $128.7 million for the second quarter of 2016 and $126.5 million for the third-quarter of 2015. The schedule at the bottom of the slide shows the aggregate impact of any nonoperating items which are immaterial in each of the quarters presented.

 I would like to make a few comments about certain of the line items included in non-interest expense. Salaries and benefits continue to be very stable, totalling $82.1 million for the quarter compared to $81.8 million for the second quarter 2016 and $81.4 million for the third-quarter 2015. The slight increase during the quarter was driven by our annual merit increases which were effective July 1. Most of the other expense line items shown continue to remain flat. We did see an increase in our deposit insurance assessment expense during the quarter, primarily as a result of our estimate of the surcharge to be levied on all larger banks to bring the Deposit Insurance Fund ratio to the statutory minimum. We also saw an increase in our technology costs as we continue to make investments in that area. Many of these investments will have some cost savings that we will start to realize as we move forward. As Dan mentioned we continue to run just under 70% on the efficiency ratio.

 That concludes the review of the financials and I'll now turn over to Chris. Chris comments on our front-line banking efforts.

------------------------------
 Chris Bagley,  BancorpSouth Inc - President and COO   [5]
------------------------------
 Thank you, Bill.

 Slide 7 reflects our funding mix as of September 30 compared to both the second quarter of 2016 and third-quarter of 2015. As Dan has previously mentioned, we continue to emphasize the importance of growing deposit, as we believe core deposit relationships are the foundation of a community bank. The success of our teammates, asking for business and taking care of customers, is reflected in the fact that total deposit and customer repo balances are up $279 million for 9.44% annualized compared to June 30 and $492 million or 4.3% compared to September 30 last year. You'll notice our growth continues to come from core transactional-based accounts of time deposit balances continue to remain flat.

 We have 6 divisions with our community bank stand out this quarter for deposit growth: East Central Mississippi, Memphis Metro, Missouri, Gulf Coast, East Texas, and South Louisiana divisions all reported excellent results for this quarter for deposit growth. Drawing core deposits and taking care of our communities and customers will continue to be top priorities. We are proud of our teammates as they remain focused on these goals.

 Moving to slide 8, you'll see our loan portfolio as of September 30 compared to both second quarter of 2016 and third quarter of 2015. We reported net loan growth for the third quarter of $83 million or 3.1% annualized. Loans are $439 million or 4.3% compared to September 30, 2015. As Dan mentioned previously, we did experience some headwinds for loan growth resulting from seasonal paydowns of ag credits and the C&I book, along with some significant paydowns in our direct oil and gas book. Our internal pipeline analysis continues to reflect the fact our lenders are still seeing good volume and opportunities across the footprint, albeit what is still a competitive rate and structuring environment.

 Reflecting a diverse footprint, we continue to have different teams standout from the loan production efforts. Our loan production offices in Houston, Dallas, Austin continue to contribute to meaningful loan growth for us. In addition, our Tennessee Metro, Northeast Arkansas, and mid-Mississippi division stood out this quarter.

 I'll now turn it over to James to discuss our business development results in the mortgage and insurance space.

------------------------------
 James Threadgill,  BancorpSouth Inc - Senior EVP and Chief Business Development Officer   [6]
------------------------------
 Thanks, Chris.

 The tables on slide 9 provide a 5-quarter look at both mortgage and insurance. Our mortgage banking operation produced origination volume for the quarter totalling $478 million. Home purchase money volume increased 11% compared to the third quarter of 2015 to $343 billion or 72% of our total volume for the quarter. Increases in production volume continue to be largely attributable to the addition of originators as well as a low interest-rate environment. We have increased originators from129 in September of 2015 to 147 on September 30, 2016.

 Deliveries for the quarter were $424 million, compared to $352 million in the second quarter of 2016 and $397 million in the third quarter of 2015. Production and servicing revenue, which excludes the MSR adjustment, was $10.5 million for the quarter compared to $13.1 million for the second quarter of 2016 and $7.6 million for the third quarter of 2015. Margin was 1.93% for the quarter, representing a decline in 2.99% in the second quarter of 2016. Our pipeline was elevated during the second quarter as a result of a sizable increase in loan demand. The pipeline actually declined slightly during the third quarter from $385 million on June 30 to $343 million at September 30, 2016. The decline in origination volume was primarily attributable to a lower market gains in the third quarter as a result of the decline in our loan pipeline.

 As we look to the fourth quarter, I will remind you that it is not uncommon to see meaningful declines in both our mortgage pipeline and margin related to slower selling activity during the winter months. As Dan mentioned, we had a recovery of our MSR of $1.8 million in the third quarter, reducing our total impairment to $10.2 million year to date. As I mentioned in the past, we continue to test our processes and procedures surrounding the hedging of the MSR asset. However, we continue to believe the timing is not appropriate to implement the hedge given current interest rate levels.

 Moving on to insurance. Total commission revenue for the quarter was $28.2 million compared to $28.8 million for the second quarter of 2016 and $28.6 million for the third quarter of 2015. The decline in comparable quarter revenue reflects the continued softening of the insurance markets. While we have seen a slight increase in our employee benefits revenue, the property-casualty and workers compensation rate environment continues to soften, as we are seeing 1% to 8% decline in premiums on renewals. These declines reflect the enormous capacity available in the markets both domestically and internationally.

 We continue to devote energy and resources to new sales efforts, expanding coverage for existing clients and providing services that assist our clients in controlling costs. Historically, our fourth-quarter revenue declined approximately $3 million from the third quarter and we expect that trend to continue as a result of the seasonality of our book of business.

 Now I'll turn it over to Ron for his comments on credit quality.

------------------------------
 Ron Hodges,  BancorpSouth Inc - Senior EVP and Chief Credit Officer   [7]
------------------------------
 Thank you, James.

 Slide 10 presents some highlights for credit quality for the second quarter. As Dan mentioned we had no recorded provision for credit losses for the third quarter compared with the provision of $2 million for the second quarter 2016 and a negative provision of $3 million for the third quarter of 2015. Low levels of net charge-offs and continued stability in our other credit quality metrics was sufficient to support the loan growth for the quarter without a recorded provision for credit losses.

 Net charge-off was $1 million for the quarter compared with net charge-offs of $1.6 billion for the second quarter of 2016 and net charge-offs of $2.3 million for the third quarter of 2015. Net charge-offs for the quarter totaled 0.04% annualized as a percentage of average loans. The ALLL was 1.18 % of net loans and leases as of September 30, 2016.

 Nonperforming loan and nonperforming asset balances both increased compared to June 30, 2016, with total NPLs increasing about $10.7 million while total NPAs increased by $7.4 million. Increases in both of these metrics were driven primarily by an increase of $8.2 million in our restructured loan and leases still accruing category. This increase is not surprising or concerning, as we have said for several quarters now, each of the components of nonperforming assets are at levels where we could see normal fluctuations in either direction quarter to quarter.

 The final bullet on this slide relates to near-term delinquencies, which increased to $46.7 million at September 30, 2015 from $31.9 million at June 30, 2016. This increase was driven by one $14 million credit that was in the process of renewal set at September 30. This credit is subsequently been renewed as current on all pilots.

 With that I'll now turn back to Dan for his concluding remarks.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [8]
------------------------------
 Thank you, Ron.

 I feel like I'm repeating myself. Quarter after quarter we continue to execute on the simple goals we have communicated to our team. We are growing loans and deposits with steady yields and rates while holding our expense base very flat. Credit quality remains stable and we continue to work tirelessly on exceeding all regulatory expectations. As we look forward, we will continue to emphasize this simple strategy. Additionally we will focus on finding ways to offset continuing revenue headwinds within certain of our non-interest product lines. We will also continue to manage capital in a way that is in the best interest of our shareholders through supporting growth, share repurchases, and hopefully, M&A activity. I am excited about the direction of our Company and the opportunity we have to continue to improve our operating performance.

 On a personal note I cannot let today's call end without recognizing James Threadgill and his 30-year commitment to our company. Today will be James's final conference call, as he has decided to retire at year end. James has relocated his family several times during his career here, and at each stop along the way, his efforts improved our organization. That is certainly the case here in Tupelo, where James has spent the last 15 years of his career in senior management roles. James, we will all miss your leadership, and we all wish you the best in your retirement.

 With that I'll conclude our prepared remarks. Operator, we'd now be happy to answer any questions.

==============================
Questions and Answers
------------------------------
Operator   [1]
------------------------------
 (Operator Instructions)

 Jennifer Demba, SunTrust.

------------------------------
 Jennifer Demba,  SunTrust Robinson Humphrey - Analyst   [2]
------------------------------
 Thanks. Good morning.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [3]
------------------------------
 Hello, Jenny.

------------------------------
 Jennifer Demba,  SunTrust Robinson Humphrey - Analyst   [4]
------------------------------
 Hi. Can you give us any color on when you think your pending acquisitions could close in 2017, since you've extended the merger agreement through the end of next year? (multiple speakers) it is still very much up in the air?

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [5]
------------------------------
 It is very much up in the air. I think our thought process today is as you know -- it is at best today 3Q and could be 4Q, so you know, best case is probably late 3Q and worst-case could be late for Q.

------------------------------
 Jennifer Demba,  SunTrust Robinson Humphrey - Analyst   [6]
------------------------------
 Okay and what about provisioning needs next year, Dan? Are you estimating they will go up, or do you think they could stay incredibly low levels like they were this year and last year?

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [7]
------------------------------
 We would like for them to stay at incredibly low levels like they were this year and last year, but I think that all is dependent on what your view of the economy and the territory that we serve is. Clearly we intend to continue to grow our loan book. We are still carrying a [118] loan loss reserve, which I think comparatively speaking to many of our peers, is still on the high end, while our credit quality metrics probably appear to be certainly no worse than middle of the pack, and maybe better than most of our peers, so I think you can read into that.

 We had a very elaborate ALLL methodology that Bill and Ron and many others on our team are driving on a monthly and quarterly basis that we are paying attention to. And so when we look at the history within our loan book, or the recent history within our loan book and we are looking forward, I think we feel very comfortable that our credit quality is very clean, and so we are hoping that we can continue to manage that process in a way where we protect our shareholders. Bill, Ron -- either of you have anything?

------------------------------
 Bill Prater,  BancorpSouth Inc - Senior EVP and CFO   [8]
------------------------------
 Can't add anything to that, I agree with you.

------------------------------
 Jennifer Demba,  SunTrust Robinson Humphrey - Analyst   [9]
------------------------------
 Okay.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [10]
------------------------------
 Jenny, does that cover you?

------------------------------
 Jennifer Demba,  SunTrust Robinson Humphrey - Analyst   [11]
------------------------------
 Yes. Thank you.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [12]
------------------------------
 Thank you.

------------------------------
Operator   [13]
------------------------------
 Catherine Mealor, KBW.

------------------------------
 Catherine Mealor,  Keefe, Bruyette & Woods, Inc. - Analyst   [14]
------------------------------
 Good morning, everyone.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [15]
------------------------------
 Hi, Catherine.

------------------------------
 Catherine Mealor,  Keefe, Bruyette & Woods, Inc. - Analyst   [16]
------------------------------
 Question is on the buyback. Can you talk about your expectations for the pace of buybacks that you think we could see? Is there a payout ratio that you target? Or a payout ratio that you think you should stay under as a capital management tool? Or is that just each quarter is different kind of depending on where you are priced in the market?

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [17]
------------------------------
 I don't know that there is a specific payout ratio that we are looking for, nor do I think that there is a speed at which we are trying to accomplish where we want to be. So, that leaves your third option which is when there is opportunity there we want to take advantage of those opportunities and I think that we will continue to be in the market and buying back stock. We have, as you know, plenty of capital -- sufficient capital to allow us to do the things we want to do it expand and buy our shares back. I think you'll continue to see that.

------------------------------
 Catherine Mealor,  Keefe, Bruyette & Woods, Inc. - Analyst   [18]
------------------------------
 Okay. Great. And a specific question on the expense line. If you back over the past couple years and you look at the salary line, typically you will see a peak in the third quarter. Usually associated with your increase in merit pay and typically you'll see a pullback in the fourth quarter. Can we expect a similar trend this year? Is there anything that would increase the salary line going into the fourth quarter?

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [19]
------------------------------
 I think what you have seen is the standard cycles that kind of run through for us, and so some of the comp that you see is seasonal, some of it is not, so 3Q typically runs hot and that also, as you said, July 1 is our merit increase time of the year. Head count drives that also. I don't think any of us see anything that would be unusual to cause this year to be any different than the past.

------------------------------
 Bill Prater,  BancorpSouth Inc - Senior EVP and CFO   [20]
------------------------------
 Catherine, a part of that is insurance is always off in fourth quarter. It is just a seasonal business so the commissions on that are in the salary line so the commissions on insurance go down as well.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [21]
------------------------------
 James mentioned that on the revenue line again -- James was our number? $3 million? Give or take. Drop between $3 million and $4 million?

------------------------------
 James Threadgill,  BancorpSouth Inc - Senior EVP and Chief Business Development Officer   [22]
------------------------------
 That is historically what it has done.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [23]
------------------------------
 Again, I think we feel the same there, Catherine. We saw a $3 million drop in commission revenue between third quarter and fourth quarter last year and I think we feel like we are in the same -- we are on the same track again this year and we should experience the same thing.

------------------------------
 Catherine Mealor,  Keefe, Bruyette & Woods, Inc. - Analyst   [24]
------------------------------
 Great. Okay. Thank you.

------------------------------
Operator   [25]
------------------------------
 Kevin Fitzsimmons, Hovde Group.

------------------------------
 Kevin Fitzsimmons,  Hovde Group, LLC - Analyst   [26]
------------------------------
 Hello, everyone. Good morning.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [27]
------------------------------
 Kevin, good to hear from you.

------------------------------
 Kevin Fitzsimmons,  Hovde Group, LLC - Analyst   [28]
------------------------------
 Good to talk to you, Dan. Just a few questions here. If I could ask about the outlook for the margin. This is probably for Bill.

 You guys have done a good job keeping the margin very stable so it was a little more of a downtick we saw this quarter. Given your explanation about the liquidity position -- the bigger liquidity position or maybe some of the pay-downs this quarter, how do you view that going forward? Do you view some of that liquidity being put to work and the margin being able to bounce back a little or is that more of a permanent thing you want to keep in place and maybe we're at a new level on the margin?

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [29]
------------------------------
 I will let Bill jump in and give you specifics. When we look at margin I don't think we have ever tried to manage the margin number. We are looking at net interest income and so I think what you saw this quarter was we had really good deposit growth and really good deposit growth is going to naturally drive our margin down.

 At the same time, we put on some on balance sheet liquidity that I think Bill will tell you is probably a permanent fix on the liquidity side. There's two parts to your question -- one would be can we deploy the deposits were we want to deposits to be? And how does that impact margin going forward? I don't know that we have any guidance on margin, but you can give the details.

------------------------------
 Bill Prater,  BancorpSouth Inc - Senior EVP and CFO   [30]
------------------------------
 Kevin, we found over the past three or four months we have borrowed -- in three separate borrowings from the Federal Home Loan Banks option rate 2-year money. It resets every couple weeks but it is a fairly good rate on it and it gives us the ability to stand fairly short on the securities, but we typically buy something in the three-year agency bullet range. It's kind of our target security. I think the downshift that you saw this time is something that will be that way until rates change.

 The yields on loans and the cost on deposits has held very steady for us, and I think if you see somebody's margin go down because of decreases in loan yields or increases in deposits, that could have a continuing impact and we have been fortunate to be able to hold ours at this point. But, the asset mix and the overnight investments, which some of that was parked in until we could deploy it, and in the securities portfolio -- you know being at a lot lower rates than putting it in loans, it cost us about five basis points this quarter.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [31]
------------------------------
 Let me ask that a different way -- so we don't manage margin but we are trying to manage deposit cost and loan yield and so if we can hold loan yield where we want it and we can hold deposit cost where we want it, then the rest of it is just a function of the mix of the assets on the balance sheet.

------------------------------
 Bill Prater,  BancorpSouth Inc - Senior EVP and CFO   [32]
------------------------------
 That is right. If I did not make that clear that as I was trying to explain, but when you put in three-year and two-year borrowings and three-year investments it is not much of a carriage rate. It is pretty well time wise maxed off, so if rates rise, we are positively disposed to increasing the margin.

------------------------------
 Kevin Fitzsimmons,  Hovde Group, LLC - Analyst   [33]
------------------------------
 Got it. That is great. In just a quick follow-up on the expenses. Can you gauge for us or put into context the several steps that got outlined in the consent order with the CFPB and DOJ and how much of that is in the current run rate versus how much has to get layered onto expenses and then you -- I guess you would look for savings to offset that.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [34]
------------------------------
 I think when we announced the settlement with the CFPB we fully accrued for all of the one-time costs that were associated with that expense and so you saw $13 million-something in total accrual, which included the fines and the other costs along with the ongoing consulting and other one-time costs associated with that. The recurring cost of complying with the regulations that are out there, we think that is already in our run rate and has been in our run rate and we are doing what is needed on that front, so I don't think we see any additional expense line items on a go forward basis from playing by the rules.

------------------------------
 Kevin Fitzsimmons,  Hovde Group, LLC - Analyst   [35]
------------------------------
 Okay. Great. I just wanted to clarify your answer to Jenny's question initially -- did you say best case late third quarter 2017 worst-case fourth quarter 2017?

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [36]
------------------------------
 I did.

------------------------------
 Kevin Fitzsimmons,  Hovde Group, LLC - Analyst   [37]
------------------------------
 Okay, and that is just the way -- I would just want to make sure I am thinking about it the right way. The way I am thinking about is you guys -- because it was retroactive you get CRA rating reassessed and that is basically happening this year, early next year and probably you are layering like a 6-plus month timeframe onto that for them to review the merger application. Is that the way to think about it?

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [38]
------------------------------
 That is right. So, we don't have any applications before any regulators today at all so we have to get past the CRA exam cycle and next year and depending on how long that cycle takes. It could be that they finish early in the year. It could be that they don't finish until the end of the second quarter -- whenever the exam cycle finishes. Then we believe we are doing what we need to do, so we are certainly hopeful that we get the grades on the test that we expect. If we do then we with immediately be filing our applications again then you have to go through the application process. That could be as short as three or four months or it could be as long as six, seven, eight or nine months, depending on how long they want to take to process those.

------------------------------
 Kevin Fitzsimmons,  Hovde Group, LLC - Analyst   [39]
------------------------------
 And you would put both applications in right away but then you would probably deliberately time the integrations one after another and not do those at the same time I would assume.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [40]
------------------------------
 Yes, you're really asking two questions, Kevin. The timing of the closing of the mergers would be at the same time. So when we get approval to close the transactions we fully intend to close them as soon as we can. The operational integration behind that would be staged out after the closing of the transactions.

------------------------------
 Kevin Fitzsimmons,  Hovde Group, LLC - Analyst   [41]
------------------------------
 Got it. Thanks very much.

------------------------------
Operator   [42]
------------------------------
 Michael Rose, Raymond James.

------------------------------
 Michael Rose,  Raymond James & Associates, Inc. - Analyst   [43]
------------------------------
 Good morning, guys. Just a quick question -- a follow-up to Catherine's question on the buyback. I know it expires at the end of next year, 7 million shares. You have purchased about 550,000. Would you be comfortable paying out between dividends and buybacks above 100%? I'm just trying to see if you are actually be able to finish out the program.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [44]
------------------------------
 I think the simple answer is yes. When you look at where we are from a capital structure today, we have excess capital. I don't think we are feeling limited by annual earnings.

------------------------------
 Michael Rose,  Raymond James & Associates, Inc. - Analyst   [45]
------------------------------
 Okay. That's helpful.

 And then a follow-up question -- related to the insurance business. Obviously, we understand the step down in the fourth quarter but given the softness in the market in pricing, do you expect to actually grow revenue year on year?

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [46]
------------------------------
 Are you talking about 2016 versus 2015 or are you talking about 2017 versus 2016?

------------------------------
 Michael Rose,  Raymond James & Associates, Inc. - Analyst   [47]
------------------------------
 2017 versus 2016, just because several other banks with insurance businesses have talked about softer revenues.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [48]
------------------------------
 Yes, again James could jump in here with the specific details but you heard him say the current premium market is down 1% to 8% on property and casualty. We did a very small insurance acquisition earlier this year.

------------------------------
 James Threadgill,  BancorpSouth Inc - Senior EVP and Chief Business Development Officer   [49]
------------------------------
 End of May.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [50]
------------------------------
 Yes, so second quarter this year so we will get some benefit from that, but I do not know that the size of the acquisition was big enough to offset the reduction in premium dollars. James do you have any other comments?

------------------------------
 James Threadgill,  BancorpSouth Inc - Senior EVP and Chief Business Development Officer   [51]
------------------------------
 Yes, it was about $1.8 million that we reported in May, that acquisition. On an annual basis. And year to date we are seeing about a 2% increase in employee benefits and as Dan mentioned about anywhere from 1% to 8% decline in renewals on property and casualty, and workmen's comp. We are out there working hard developing new business. We have a large portion of our book that is in the energy sector and that is down substantially. So we have a lot of headwinds with the soft market that Dan is talking about as well as the energy book that we write. So we are going to work hard at it. There's no guarantees. We hope to have a good 2017.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [52]
------------------------------
 The team continues to be focused, Michael, on growing customers, so if we can continue to add customers even though pricing is down on every customer, that continues to add to our future as soon as the price firms or changes.

 I think we look forward to continuing to grow that business. Is just the headwinds of the current industry is what is driving that decline or flat in that revenue category.

------------------------------
 Michael Rose,  Raymond James & Associates, Inc. - Analyst   [53]
------------------------------
 Got it. That's very helpful. Thanks for the color.

------------------------------
Operator   [54]
------------------------------
 Steven Alexopoulos, JPMorgan.

------------------------------
 Steven Alexopoulos,  JPMorgan - Analyst   [55]
------------------------------
 Morning, everybody.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [56]
------------------------------
 Good morning.

------------------------------
 Steven Alexopoulos,  JPMorgan - Analyst   [57]
------------------------------
 Maybe I'll start with a high level question. As we look at slide 4, over the past year we take out the MSR, operating income has declined modestly. Can you talk about your ability to deliver positive operating leverage moving forward and do you have to be more active with cost containment to actually deliver it?

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [58]
------------------------------
 Yes. I think, again from quarter to quarter what we have said for a long time, Steven, is when we look at what is happening to us and the trajectory that we are on in improving our company, I think we have seen some quarters where we have seen tremendous operating leverage and in other quarters we have not and I think we are seeing the same thing today.

 There are many opportunities in front of us to continue to improve the operating performance of our company. You called operating leverage. We are on that train and I think you will see us continue to drive. The answer to your question I think is more specific on I think what you are asking is -- can we continue to trim cost? Or do we have to grow revenue? I think that is your question, is that correct?

------------------------------
 Steven Alexopoulos,  JPMorgan - Analyst   [59]
------------------------------
 Well yes, balancing the two out because it sounds like even if you look at the insurance business -- you said you are adding staff there, so it doesn't sound like you are cutting expenses given the revenue headwinds, it sounds like you are investing.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [60]
------------------------------
 You are correct. We are investing, but we are also cutting steps. If you look at total headcount -- headcount is actually down. We worked very hard to standardize and centralize things where we can be more efficient and reduce headcount and at the same time we have been willing and are continue to be willing to invest in revenue producing opportunities that will help us long term, so I think that has the mix that you see going on there. We want to be able to drive costs out of our system and will continue to do that and at the same time we want to be able to invest in revenue production.

------------------------------
 Steven Alexopoulos,  JPMorgan - Analyst   [61]
------------------------------
 I got you. And then for my one follow-up, on the C&I loan growth can you work through the puts and takes in the quarter and parse out what those energy drags were? I am trying to understand what C&I loan growth was ex some of these drags.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [62]
------------------------------
 We talked about that last quarter. A year ago we had a negative provision, so I think you also have a negative provision -- when you're looking at operating leverage, you had a negative provision last year of $3 million that you probably need to pull out to compare quarter over quarter.

------------------------------
 Steven Alexopoulos,  JPMorgan - Analyst   [63]
------------------------------
 Going back to positive operating leverage --

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [64]
------------------------------
 Yes. But it (multiple speakers) -- you have a negative provision of $3 million so when you look at total revenue, revenue would have been in a different category, I think, if you ignore the negative provision. Your question on -- your current question is on -- refresh my memory again? In the second quarter call, I think we told you then, that we had a $35-plus million pay down on a large energy credit that came in the first few days of this quarter -- of the third quarter, and so our total exposure outstanding on energy went from $70 million to $30-something million early in this quarter. And then 3Q is also the quarter where our ag book sees dollars coming back in.

 So while ag is not a large line for us, it certainly is out there and that all books into C&I so when you see that paydowns on the agriculture lines in the third quarter and you see the paydowns on the smaller oil and gas book that we had in the quarter -- both of those things -- you see that in the declining balances.

------------------------------
 Steven Alexopoulos,  JPMorgan - Analyst   [65]
------------------------------
 Okay. It looks like C&I was down $82 million quarter over quarter. Was that just other paydowns?

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [66]
------------------------------
 We just identified $35 million of that was oil and gas on one credit and the rest of is in ag and all other.

------------------------------
 Steven Alexopoulos,  JPMorgan - Analyst   [67]
------------------------------
 Okay. Thanks for taking my questions.

------------------------------
Operator   [68]
------------------------------
 Jon Arfstrom, RBC Capital Markets.

------------------------------
 Jon Arfstrom,  RBC Capital Markets - Analyst   [69]
------------------------------
 Thanks.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [70]
------------------------------
 Hi, Jon.

------------------------------
 Jon Arfstrom,  RBC Capital Markets - Analyst   [71]
------------------------------
 A follow-up on Steve's question -- you do expect a rebound in loan growth in Q4? Or you expect some of these paydowns to continue?

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [72]
------------------------------
 I wish I had a crystal ball to tell me what is happening with paydowns but when you look at production, the production team is producing. When we look at what we produced last quarter, Chris can jump in here and talk pipeline, but when we look at what's in the pipeline and when we look at what we produced last quarter, it was no different than we have seen in the past. We have seen good production across our footprint.

 We have full pipelines across our footprint. Obviously some markets are better than others. We do not see why we should not be able to continue to produce loan growth that we had been producing over the last two years.

------------------------------
 Chris Bagley,  BancorpSouth Inc - President and COO   [73]
------------------------------
 We are fortunate in that we have a diverse footprint and diverse markets. And Dan is correct our pipeline and approvals and originations all feel and look strong like they have in previous quarters. There is never a guarantee which loans you win and which loans you won't. It's still a competitive market out there and then as we have already commented on, there is some parts of our footprint in Louisiana, Southwest Arkansas and East Texas that still have oil and gas impact and the paydowns on those C&I credits. Which, frankly, is what you want to see when something slows down in a market like that. We are fortunate that those balances, they are able to pay them down and we are not stuck with problem credit.

 That is a normal asset-based lending cycle that we -- I think it's actually a positive and from a credit perspective although it may put some headwinds on your loan growth. Back to Dan's question, I think our pipeline feels good and given the fact that we have a diverse footprint can leverage off other markets, I think that is a strength for us.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [74]
------------------------------
 Growth when you look at year over year growth, Jon, coincidentally we are showing 4.3% deposit growth and 4.3% loan growth from last year September. 4.3% is below where we said we wanted to be and as you and others have pointed out we said we need to be in 5% to 7% land or higher. I think we continue to believe that we should be able to produce that. We are sitting on the bottom end of the and when you look at this quarter in particular, the numbers were not where we thought they should be and we can identify the why around that. That does not mean the team is not out there producing every day.

------------------------------
 Jon Arfstrom,  RBC Capital Markets - Analyst   [75]
------------------------------
 That helps. And then, I guess the other question you alluded to was on deposit growth. Chris or Dan, it was pretty strong this quarter. I know you touched on some of the reasons but it was I thought unusually strong. Is there anything specific in there, transient or seasonal that drove that?

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [76]
------------------------------
 Not that we can identify. We are not running any special product. We do not have any one-time something that is in there. One of the things we have been talking about now for years here, Jon, is as a company we were dependent upon what I would call higher rate, single product deposit customers that may have just one high rate CD with us but were not really banking with us. And over the past several years we have allowed that single product customer to go wherever they want to go and not pay up on the time deposits that are out there.

 At the same time we have continued to focus and challenge our team to be asking for deposits -- lead with deposits -- that's our number one product. And I think you are seeing the benefit of that we have been talking about for several years now and everything we are doing internally we have to grow deposits, and frankly we need to be growing deposits at our loan to deposit ratio. We need to be growing core deposits to fund us. We are a purely core funded institution so I think we are really proud of the core funding that we have. We need to be able to grow deposits in order to fund the loan growth.

------------------------------
 Jon Arfstrom,  RBC Capital Markets - Analyst   [77]
------------------------------
 And then, if I could sneak in one more, I think I am probably late in the queue here. But for Dan or James just on insurance, you talk about the headwinds and you actually have some scale in this business. I would imagine that some of the smaller competitors have to be suffering. You have done a few acquisitions there. What is the likelihood of another one coming? How interested are you in this, and is that the correct assumption that there are people that are putting their hands up for sale.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [78]
------------------------------
 James is probably closer to that than I am, but from an appetite perspective as far as answering what is happening to the smaller competitors -- I cannot speak to that, James probably can, but from an appetite perspective we clearly want to see and would be happy to continue to expand in that business line.

 I think we continue to look for opportunities that fit. The culture of the seller, the culture of the targets that we are talking to is important. The ability to plug into our process is important. You are right. We have some scale that really benefits us.

 Markham McKnight runs insurance for us, Markham does a fantastic job. We have built some services into our sales platform that we have the ability to offer to customers that many of the smaller competitors don't have, whether that is loss mitigation, whether that's other types of consulting, environment where we can help customers find a way to help lower their insurance costs. Those things add value to our team and at the same time allow us to talk and attract smaller sellers that cant or don't provide those same levels of service.

 James, do you have input on what the market is like in the smaller insurance brokerage business?

------------------------------
 James Threadgill,  BancorpSouth Inc - Senior EVP and Chief Business Development Officer   [79]
------------------------------
 Certainly the smaller agencies -- particularly if they are in the commercial area -- they are feeling it a lot more than we are. As Dan mentioned, Markham McKnight who runs our insurance team, Markham is an industry leader. Recognized, he is very involved in a number of industry organizations. He talks to a lot of different people in our footprint that are in the insurance business and we are constantly talking to people about our team and how we run our agency and occasionally we run across some that want to join, so we will continue to do that going forward.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [80]
------------------------------
 We will charge you extra for that third question another time Jon.

------------------------------
 Jon Arfstrom,  RBC Capital Markets - Analyst   [81]
------------------------------
 All right. I appreciate it. All the best, James. Best wishes.

------------------------------
 James Threadgill,  BancorpSouth Inc - Senior EVP and Chief Business Development Officer   [82]
------------------------------
 Thanks, Jon.

------------------------------
Operator   [83]
------------------------------
 (Operator Instructions)

 John Rodis, FIG Partners.

------------------------------
 John Rodis,  FIG Partners, LLC - Analyst   [84]
------------------------------
 Good morning, guys.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [85]
------------------------------
 John, good to hear from you.

------------------------------
 John Rodis,  FIG Partners, LLC - Analyst   [86]
------------------------------
 How are you doing?

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [87]
------------------------------
 Good.

------------------------------
 John Rodis,  FIG Partners, LLC - Analyst   [88]
------------------------------
 Most of my questions have been asked and answered but maybe either for you, Dan or Bill. Back to the securities portfolio. Would you expect it to remain around this range going forward, or do you think -- is it dependent on deposit growth if it continues to grow? How should we think about that?

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [89]
------------------------------
 I think there are two parts to that. Bill can jump in here too. Assuming that deposits grow and loans don't -- that is where it will go. It has to go into the securities book.

 On the other hand if we are not able to grow deposits and loans are growing it will come out of the securities book to some extent but we still have to kind of have a minimum level of on-balance sheet liquidity, which is what I think Bill was alluding to a minute ago. I don't know that I would say we are at the bottom of the securities book today. We are not far off the bottom in size, so you could see it go down a little bit but not a significant way.

------------------------------
 Bill Prater,  BancorpSouth Inc - Senior EVP and CFO   [90]
------------------------------
 That is exactly right. This was kind of a separate decision to add on-balance sheet liquidity and increase the size of the securities book over the last few months. But Dan is exactly right. It is kind of a balance out situation other than if you need to create more unpledged securities for collateral purposes or something like that.

------------------------------
 John Rodis,  FIG Partners, LLC - Analyst   [91]
------------------------------
 Okay. Fair enough. Thanks guys.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [92]
------------------------------
 Thank you John. I sure appreciate it.

------------------------------
Operator   [93]
------------------------------
 This concludes our question-and-answer session. I would like to turn the conference back over to Dan Rollins chairman and CEO for any closing remarks.

------------------------------
 Dan Rollins,  BancorpSouth Inc - Chairman and CEO   [94]
------------------------------
 Thank you all for joining us today. If you need any additional information or have further questions please do not hesitate to call us. Otherwise we look forward to speaking to you again soon. Thank you all very much for participating.

------------------------------
Operator   [95]
------------------------------
 The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.




------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the 
Transcript has been published in near real-time by an experienced 
professional transcriber.  While the Preliminary Transcript is highly 
accurate, it has not been edited to ensure the entire transcription 
represents a verbatim report of the call.

EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional 
editors have listened to the event a second time to confirm that the 
content of the call has been transcribed accurately and in full.

------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other 
information on this web site without obligation to notify any person of 
such changes.

In the conference calls upon which Event Transcripts are based, companies 
may make projections or other forward-looking statements regarding a variety 
of items. Such forward-looking statements are based upon current 
expectations and involve risks and uncertainties. Actual results may differ 
materially from those stated in any forward-looking statement based on a 
number of important factors and risks, which are more specifically 
identified in the companies' most recent SEC filings. Although the companies 
may indicate and believe that the assumptions underlying the forward-looking 
statements are reasonable, any of the assumptions could prove inaccurate or 
incorrect and, therefore, there can be no assurance that the results 
contemplated in the forward-looking statements will be realized.

THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2017 Thomson Reuters. All Rights Reserved.
------------------------------