Q4 2016 BancorpSouth Inc Earnings Call
Jan 26, 2017 AM EST
BXS - BancorpSouth Inc
Q4 2016 BancorpSouth Inc Earnings Call
Jan 26, 2017 / 04:00PM GMT
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Corporate Participants
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* Mandy Mitchell
BancorpSouth, Inc. - SVP of Business Development
* Dan Rollins
BancorpSouth, Inc. - Chairman and CEO
* Bill Prater
BancorpSouth, Inc. - Senior EVP and CFO
* Chris Bagley
BancorpSouth, Inc. - President and COO
* Ron Hodges
BancorpSouth, Inc. - Senior EVP and Chief Credit Officer
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Conference Call Participants
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* Catherine Mealor
Keefe, Bruyette & Woods, Inc. - Analyst
* Jason Otting
JPMorgan - Analyst
* Kevin Fitzsimmons
Hovde Group, LLC - Analyst
* David Feaster
Raymond James - Analyst
* Jennifer Demba
SunTrust Robinson Humphrey - Analyst
* Casey Haire
Jefferies & Co. - Analyst
* Jon Arfstrom
RBC Capital Markets - Analyst
* Matt Olney
Stephens Inc. - Analyst
* Blair Brantley
Brean Capital - Analyst
* John Rodis
FIG Partners, LLC - Analyst
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Presentation
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Operator [1]
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Good morning, ladies and gentlemen, and welcome to the BancorpSouth fourth-quarter and annual 2016 financial results conference call and webcast.
(Operator Instructions)
Please note that this event is being recorded.
I would now like to turn the conference over to Mandy Mitchell, Senior Vice President Business Development. Please go ahead.
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Mandy Mitchell, BancorpSouth, Inc. - SVP of Business Development [2]
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Good morning, and thank you for being with us. I will begin by introducing the members of the senior management team participating today. We have Chairman and CEO Dan Rollins; Chris Bagley, President and Chief Operating Officer; Bill Prater, Senior Executive Vice President and Chief Financial Officer; and Ron Hodges, Senior Executive Vice President and Chief Credit 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 companies fourth-quarter 2016 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 will find them on the link to our webcast, or you can view them at the exhibit to the 8-K that we filed earlier this morning.
And now I will turn it to Dan Rollins for his comments on our financial results.
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Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [3]
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Thank you, Mandy, and good morning. Thank you for joining us today for BancorpSouth's fourth-quarter 2016 conference call. I will begin by making a few brief comments regarding the highlights for both the year and the fourth-quarter, Bill will discuss the financial results in more detail, Chris will talk about our business development activities, 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 annual highlights for the year, which reflect the same message we have been communicating for quite some time.
We continue to drive core earnings growth through balance sheet growth and disciplined expense control. A reported net income of $132.7 million, or $1.41 per diluted share, which represents an increase of $0.08 or 6% per share compared to 2015.
We generated net loan growth of $439.2 million or 4.2% for 2016, and total deposit growth of $357 million, or 3.2%. This growth, combined with the very stable asset yields and funding costs, resulted in our net interest income increasing by $17.8 million, or 4.1% compared to 2015.
Loan and deposit growth continues to come from various geographies and product offerings. Chris will talk more about our business development activities in a moment.
As a reminder, we've reached a settlement related to the Consumer Financial Protection Bureau and the Department of Justice joint investigation into our lending practices. This settlement resulted in a pretax charge of $13.8 million. This item was our only material non-operating item included in our annual results for 2016. Accordingly, our net operating income, excluding MSR, was $141.4 million, or $1.50 per share, for 2016, which represents an increase of $0.06, or 4.2%, compared to 2015.
As I mentioned, we continue to drive costs out of our company. Total operating expense declined $5.1 million, or 1%, compared to 2015. Our operating efficiency ratio, excluding MSR, declined from just over 72% for 2015 to 69.9% for 2016. Finally, we continue to manage capital in a manner that is in the best interest of our shareholders. We repurchased just under 1 million shares during 2016 under our share repurchase program at a weighted average price of $23.40 per share.
Slide 4 provides a view of our summary financial results over the past five years, both on a GAAP basis and an operating basis. While I won't go into specific detail, these results further reflects the trends that I mentioned on the previous slide. We've driven consistent profitability improvement through growing revenue and reducing expenses. These results reflect the compound operating EPS growth of 13% over the past four years.
Our 2016 results were produced in spite of a $17 million swing in the provision for credit losses compared to 2015. The $13 million negative provision in 2015 clearly was not a sustainable earning source. Despite this headwind, net operating income for 2016 was the highest annual net operating income in our company's history.
Moving to slide 5, I would like to touch briefly on our fourth-quarter highlights. We posted the best fourth-quarter earnings in our company's history. Net income for the quarter was $37.7 million, or $0.40 per diluted share. We were particularly pleased with our loan production efforts during the fourth quarter, as we reported net loan growth of $153.2 million, or 5.7% on an annualized basis. We also reported total deposit growth during the quarter of $98.1 million, or 3.4% annualized. As I mentioned earlier, Chris will touch on business development activities in just a moment.
Moving on to the remainder of the financial results, we had a positive pretax mortgage servicing valuation adjustment of $11.2 million during the quarter. While our mortgage production and servicing revenue is down compared to the third quarter, primarily as a result of seasonal decline in the pipeline, our mortgage team grew production volume by over 25% when compared to the fourth quarter of 2015.
There were no material non-operating items in our fourth-quarter numbers. We reported net operating income, excluding MSR, of $30.7, or $0.33 per diluted share. Bill will go over comparison to prior periods in just a moment.
Our credit quality metrics remain strong, reflected by a modest provision of $1 million for the fourth quarter. Ron will discuss the considerations impacting our provision, as well as other credit quality metrics in just a few minutes.
Of the share repurchases I mentioned earlier, just over 435,000 shares were purchased during the fourth quarter at a weighted average price of $22.91 per share. This leaves approximately 6 million shares available under the authorization, which expires at the end of 2017.
We also had an insurance agency acquisition during the fourth quarter, as we purchased the assets of Waguespack & Associates in Gonzales, Louisiana. We are excited about having the Waguespack team join our agency, as we continue to look for ways to fill in our insurance footprint and grow our customer base. Chris will provide additional information on this transaction shortly.
I will now turn to Bill and allow him to discuss our financial results in more detail. Bill?
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Bill Prater, BancorpSouth, Inc. - Senior EVP and CFO [4]
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Thank you, Dan. If you'll turn to slide six, you will see our summary income statement. Net income was $37.7 million, or $0.40 per diluted share, for the fourth quarter. There were no material non-operating items in the third or fourth quarter of 2016 results. There was one material non-operating item in the fourth-quarter 2015 results, as we incurred a $16.5 million charge related to the settlement of a 2010 class action lawsuit.
Dan also mentioned the non-cash positive MSR valuation adjustment of $11.2 million during the quarter. We reported net operating income, excluding MSR, of $30.7 million for the quarter, or $0.33 per diluted share, compared to $36.7 million, or $0.39 per diluted share, for the third quarter of 2016 and $29.6 million, or $0.31 per diluted share, for the fourth quarter of 2015.
Net interest revenue increased 0.7% compared to the third quarter of 2016 and 3.7% compared to the fourth quarter of 2015. Net interest margin declined from 3.51 % for the third quarter of 2016 to 3.46% for the fourth quarter. The decline was primarily the result of seeing the four-quarters impact of the balance sheet management decision we discussed in our third-quarter call regarding the incremental federal home loan bank barrings and securities we added to enhance our liquidity position. As this decision was made during the third quarter, we only saw a partial impact during that quarter.
Our loan yields and deposit costs continue to remain in a relatively stable range. If you'll turn to slide 7, you'll see a detail of our non-interest revenue streams. Total non-interest revenue was $73 million for the quarter compared to $70.9 million for the third quarter of 2016, and $67.4 million for the fourth quarter of 2015. Chris will discuss mortgage banking revenue and insurance commission revenue in a moment.
The other line items on this slide are relatively stable quarter-over-quarter, with the exception of deposit service charges. We've said for several quarters now we expect this revenue source to be pressured as a result of internal payment order changes, as well as consumer behavior. The fourth quarter of 2016 includes the four-quarters impact of the payment order changes that were made in September 2016.
Slide 8 presents a detail of non-interest expense. Total non-interest expense for the fourth quarter was $131.5 million compared to $129.5 million for the third quarter 2016 and $148.4 million for the fourth quarter of 2015. The schedule at the bottom of the slide shows the aggregate impact of any non-operating items. As I mentioned, the only material non-operating item impacting periods presented was a $16.5 million legal charge incurred during the fourth quarter of 2015.
Most of the other expense line items shown continue to remain relatively flat. We did have two somewhat unique items in the fourth-quarter results that I would like to point out. First, our marketing team led a special advertising program targeted at specific markets in our footprint that resulted in advertising and public relations expense being elevated beyond what we view as a normal run rate. Second, we had a one-time insurance agency earnout adjustment of approximately $1 million related to a prior agency acquisition that was included in our other miscellaneous expense for the quarter.
That concludes our review of the financials, and I will now turn it over to Chris for his comments on our business development efforts.
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Chris Bagley, BancorpSouth, Inc. - President and COO [5]
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Thank you, Bill. Slide 9 reflects our funding mix as of December 31, compared to both the third quarter of 2016 and the fourth quarter of 2015. Total deposit and customer repo balances are up $83 million, or 2.7% annualized compared to September 30 and $405 million, or 3.5% for the full year of 2016.
While quarterly trends can bounce between various deposit types, our annual trends continue to represent the consistent theme of focusing on relationships and improving the mix of lower-cost, transactional-based accounts. It is worth reiterating the we have been working since 2012, battling the headwind of runoff of single-service, special-rate time deposits. From that point, we continue to emphasize the importance of building core, long-term customer relationships, and we have not relied on any special rate or product promotions to drive this deposit growth. This strategy is reflected in our ability to maintain a very core and relationship-based deposit base.
As we look at the geographical performance relating to deposits, we had four community bank divisions stand out this quarter. Our West Tennessee, Northeast Arkansas, Gulf Coast, and Northeast Louisiana divisions all reported excellent results this quarter. As we have traveled our footprint visiting with our teammates, we have continued to emphasize the importance of leading our sales efforts with deposits. Deposits are the most valuable asset of a community bank, and continuing to grow deposits will be a top priority as we move into 2017.
Moving to slide 10, you will see our loan portfolio as December 31, compared to both third quarter of 2016 and fourth quarter of 2015. We reported net loan growth for the fourth quarter of $153 million, or 5.7% annualized. Our net loan growth for the year totaled $439 million, or 4.2%. For the quarter, we had a nice improvement in owner-occupied real estate, which is another indication of our focus on relationship banking.
Reflecting our diverse footprint, we continue to have different teams stand out for their loan production efforts. Our loan production offices in Houston and Dallas in Texas had great quarters. In addition, our Tennessee Metro, West South Arkansas, Gulf Coast, and Northwest Louisiana divisions all stood out this quarter.
Moving on to mortgage and insurance, the tables on slide 11 provide a 5-quarter look at our results for each product offering. Our mortgage banking operation produced origination volume for the quarter totaling $396 million. Home purchase money volume increased 17% compared to the fourth quarter of 2015 to $264 million, or 67% of our total volume for the quarter.
While seasonal trends adversely impacted mortgage production revenue in our margin for the quarter, we continue to report growth in both our production volume and pipeline when looking at comparable prior year quarter.
Deliveries in the quarter were $380 million compared to $424 million in the third quarter of 2016 and $292 million in the fourth quarter of 2015. Production and servicing revenue, which excludes the MSR adjustment, was $6.6 million for the quarter compared to $10.5 million for the third quarter of 2016 and $7.7 million for the fourth quarter of 2015.
Margin was 1.14% for the quarter, representing a decline from 1.93% for the third quarter of 2016, due to the declining pipeline in the quarter. Our pipeline declined from $340 million at September 30 to $257 million at December 31, 2016. However, while lower on a seasonal linked-quarter basis, our pipeline trend with still favorable at the end of 2016 as compared to the end of 2015.
As Dan mentioned earlier, we had recovery on our MSR asset of $11.2 million in the fourth quarter, which actually resulted in a positive total MSR adjustment for the year of $1 million. As we continue forward, we will continue to test our processes and procedures around the hedging of the MSR asset.
Moving on to insurance, total commission revenue for the quarter was $25.7 million compared to $28.2 million for the third quarter of 2016 and $25.3 million for the fourth quarter of 2015. It bears repeating that the fourth quarter is always our lowest quarter for commission revenues as a result of the seasonality and timing of renewals in the insurance book of business. Along with this seasonal aspect, we are still experiencing some downward pressure from softening of rates in the P&C segments, and there's still some residual impact from declining oil and gas business.
We had one insurance acquisition in the quarter, and we're very excited about the recent Waguespack acquisition that Dan mentioned earlier. We believe Tim, Mike, and their team will be a valuable addition to our franchise. While the impact on 2016 results is immaterial, this team is expected to add approximately $3 million in revenue to our agency going forward. This additional products and resources we can add to their core property, casualty, life, and health offerings, will better enhance their offerings to both current and future clients.
Now I will turn it over to Ron for his comments on the credit quality.
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Ron Hodges, BancorpSouth, Inc. - Senior EVP and Chief Credit Officer [6]
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Thank you, Chris. Slide 12 presents some highlights of credit quality for the third quarter. As Dan mentioned, we had a provision for credit losses of $1 million for the fourth quarter compared with no recorded provision for the third quarter of 2016 or the fourth quarter of 2015.
Virtually all of our credit quality metrics continue to remain very strong. The nominal provision was necessary to support the loan growth achieved during the quarter.
Net charge-offs were $3.2 million for the quarter compared with net charge-offs of $1 million for the third quarter of 2016 and net charge-offs of $6.6 million for the fourth quarter of 2015. Net charge-offs for the quarter totaled 0.12% annualized as a percentage of average loans.
The ALLL was 1.14% of net loans and leases as of December 31, 2016. Despite slight increases during the fourth quarter, non-performing loan and non-performing asset balances both remain at very low levels. NPLs increased $10.9 million to 0.94% of net loans and leases, while NPAs increased $7.3 million to 0.74% of total assets. As we look forward, we expect to continue to see normal fluctuation in these balances in either direction.
ORE declined $3.6 million during the fourth quarter. The remaining ORE balance at December 31, 2016, was only $7.8 million.
The final bullet on this slide relates to near-term delinquencies, which declined to $27.8 million at December 31, 2016, from $46.7 million at September 30, 2016. As we mentioned in our third quarter call, we had one loan that was in the process of renewal on September 30 that resulted in a slightly elevated near-term delinquency balance at the time. This credit was subsequently renewed and is current on all payments
With that I will turn back to Dan for his concluding remarks.
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Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [7]
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Thank you, Ron. I'm pleased with the progress we have made as a company, specifically during 2016, but more broadly over the past several years. We've grown our loan portfolio at a compound rate of approximately 6% over the last four years, while our deposits have grown at a 3% clip since reaching an inflection point at the end of 2013, despite continued run off of single service accounts during that time period.
We have been able to hold operating expenses essentially flat over the last four years while growing our company and enhancing our compliance processes and risk management systems. Our operating efficiency ratio, excluding MSR, has steadily declined from over 82% in the fourth quarter of 2012 to 69.9% for 2016. This simple formula has allowed us to consistently improve our profitability year-over-year.
As we move into 2017, I am confident we are positioned to continue to build on this momentum. I believe our lenders and producers can continue to drive revenue growth, both in the bank and in other product offerings. And finally, I am confident that we have the opportunity to continue to hold operating expenses essentially flat, excluding the potential impact of investments made and the growth opportunities that may arise.
Before we conclude our call, I want to thank Bill Prater for his leadership here at our Company. Bill will be leaving us in March to begin the next chapter in his life, and we wish him much success and happiness.
With that I will conclude our prepared remarks. Operator, we're now happy to take any questions.
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Questions and Answers
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Operator [1]
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Thank you, Mr. Rollins. We will now begin the question and answer session.
(Operator Instructions)
Catherine Mealor, KBW.
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Catherine Mealor, Keefe, Bruyette & Woods, Inc. - Analyst [2]
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Thank you. Good morning, everyone. Bill, one for you on the margin. Can you update us on your outlook for the margin given the outlook for higher rates? And do you think it's safe to assume this quarter is a bottom for the margin?
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Bill Prater, BancorpSouth, Inc. - Senior EVP and CFO [3]
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I think it's safe to assume that. We put all those securities on. And those are relatively low yields, and that is what pulled the margin down, although the net income dollars went up.
If you look at the prospect for what happened, the net effect of that five basis point decline was all in the investments area. If you think about the investments portfolio, ours is relatively short, as you know, we have about $619 million maturing over the remainder of this year and another $650 million maturing next year. The maturing rate on that $619 million is the average rate of 109%, and next year's is 140%.
We typically -- this is agency bullet product we're buying. Yesterday, I haven't checked this morning, but yesterday the three-year agency was at 158%, so the balance of the current year, that is about a 50% increase in the dollars. 50 basis points on $600 million is a pretty good chunk of change.
Thinking about on the loan portfolio, we did get that one rate increase right in the middle of December, but you don't get much impact out of that for 15 days. But right now we have got -- a one-month repricing, we have got $1.6 billion of loans that are either fixed that will mature over the 30 days after year end or are variable rate loans that reprice immediately. And over the next 12 months, that is another $1.5 million of the same type thing. Some of those 5/1 ARMs take a little bit longer to mature but, the weighted average maturity of all that is about 20 months.
So as rates continue to walk up, we should see some expansion in the margin.
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Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [4]
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Remember, the decline in the margin is all the decision that we made to increase our on-balance-sheet liquidity. So by increasing on-balance-sheet liquidity, the investment portfolio grew, which lowered our margin. And that was our decision that was made late last year. So we expected to see exactly what we saw.
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Catherine Mealor, Keefe, Bruyette & Woods, Inc. - Analyst [5]
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Thank you, that is a lot of very helpful color. Thank you, Bill.
One on the mortgage, as well. How can you talk about your outlook for mortgage revenue compared to the MBA forecast? I know you have got the market share opportunities and the production clearly was good year over year versus quarter over quarter, so how should we think about some of the offsets that you've got to battle the lower rate outlook on the mortgage side? Thank you.
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Bill Prater, BancorpSouth, Inc. - Senior EVP and CFO [6]
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I think Chris can jump in here, too. I think what we're most proud of is the purchase money portion of our business is superior to the MBA numbers in general. So when you compare us to the MBA numbers, our purchase money numbers are good. So we're connected into what we believe to be the right places to continue to assist borrowers that want to buy homes, and that will help us grow volume.
Our team is focused on that. We think we are in some good footprints. As you said, we grew volume fairly significantly quarter over quarter from fourth quarter to fourth quarter 2015 to 2016, and our expectation is that our team will continue to produce.
The margin number is purely a, Chris called it yesterday, it is mathematics, it is algebra, it is all around the increasing or decreasing of that pipeline. And as we expected, and we talked about it on the third-quarter call, we expected to see a decline in our pipeline, which turns into a decline in the margin.
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Chris Bagley, BancorpSouth, Inc. - President and COO [7]
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I would add to it, Catherine, besides the purchase money volume, which is just another theme of our relationship banking model, is that one of the advantages we have is we have a branch footprint that helps the mortgage side of the house. And then we've got a very established recruiting and program. I think we are company that MLOs, or mortgage loan originators, would like to work for. And we have got an eight-state footprint that we can plug folks into across a big area. So I think we have got some good things to work toward in the mortgage production space.
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Catherine Mealor, Keefe, Bruyette & Woods, Inc. - Analyst [8]
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Great. Thank you for the color.
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Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [9]
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Thank you.
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Operator [10]
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Stephen Alexopoulos, JPMorgan.
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Jason Otting, JPMorgan - Analyst [11]
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This is actually Jason [Otting] on for Steve today. I want to start first on the C&I balances for the quarter. Two questions, did you see any C&I pay downs? And second, are you hearing anything in your markets in regards to customer sentiment post-election looking out to 2017? Are you thinking there could be some upside on C&I?
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Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [12]
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I don't know if we have any identified payment issues in that book in the fourth quarter. Ron can jump in on that.
If you're talking about people's attitudes since the election, I think our footprint is predominantly a southern footprint. My guess is if we are looking at the map, we're predominantly red states, and I think most folks are feeling good about the direction that the economy is heading over the election.
So I think we see that a lot. We hear a lot of business people talking about wanting to do something. People are exciting about the potential changes that can come our way. It is still too early to tell you that we can put our finger on anything, but there is a lot of talk about that, if that's what your question is.
Ron do you see anything in the C&I book?
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Ron Hodges, BancorpSouth, Inc. - Senior EVP and Chief Credit Officer [13]
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No, I didn't see any. We didn't have any unusual pay downs in the quarter. It's just normal business. I would echo what Dan said about that there seems to be a general more optimistic attitude among our customer base out there.
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Jason Otting, JPMorgan - Analyst [14]
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Okay, that is helpful. Thank you. On insurance I was just curious. So you have been hiring staff, and you've been picking up agencies along the way, which is great. But just looking at the broader industry, I think most brokers are still able to see pretty decent top-line revenue increases despite the soft pricing environment for property/casualty. I'm just curious if there's any unique challenges that you specifically are facing that maybe we are not thinking about that is different from the industry as a whole.
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Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [15]
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My guess is you're looking at the very large public agencies or public brokers, and you're not comparing to the folks that we compete. So I'm not sure that you're talking apples to apples when you're quoting your numbers there.
But the specific to our footprint, Chris mentioned it, is we're in an oil and gas footprint where we produce quite a bit of our business in the Louisiana and Texas markets, and those markets have been even softer than the insurance. So you've got a soft insurance market on top of a soft footprint, and I think we're pretty pleased. Our retention within our insurance agency, retention of customers, is extremely high, so we're not losing customers. We're actually growing customer base, and we count the number of customers in the agency.
So the customer base is actually growing. It is all premium dollars that is causing the pressure. Chris?
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Chris Bagley, BancorpSouth, Inc. - President and COO [16]
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I think it's a mix of business, and it's what -- we're focused on that P&C business. And that combined with the footprints we're in, there's some softness for headwinds there. But like Dan mentioned, we're bidding for, competing, and retaining those customers at a very high retention rate.
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Jason Otting, JPMorgan - Analyst [17]
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Okay. Thank you for the color.
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Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [18]
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Thank you for your questions.
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Operator [19]
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Kevin Fitzsimmons, Hovde Group.
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Kevin Fitzsimmons, Hovde Group, LLC - Analyst [20]
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Good morning, guys. Dan, I'm just going to ask the question. I'm not sure there is an update to provide, but I will ask anyway. What I would assume is a happening already or about to happen is the FDIC is reassessing the CRA rating. And can you give us any clarity, if you can, whether that is happening and when you would expect to learn whatever the outcome of that is?
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Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [21]
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Sure. You didn't expect that we would make it through this call without talking about this subject, did you, Kevin? I didn't.
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Kevin Fitzsimmons, Hovde Group, LLC - Analyst [22]
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No, not at all.
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Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [23]
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I think we're ready. We have been ready, you've heard for a while, we're proud of what we have done. Our team has been working very hard for a long time. We have been communicating with our regulators almost constantly now for some time. The actual begin of the three-year cycle compliance CRA review actually begins next week, and they will be here for three or four or five weeks, however long they want to be here.
So we still anticipate that we should have some communication with them during the first quarter to get some indication of whether we're doing the things we need to be doing as we think we are or whether they believe we've still got room to improve. Our team is ready to talk. We've got a story to tell. We're ready to share what we've done. We have loaded up thousands of pages of information for them to review, and I suspect they are well into the review process of that information we've loaded to them.
Unfortunately there's not a -- you don't get a score every day. It's just we're waiting to get the game playing, and the start of the game officially, is next week.
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Kevin Fitzsimmons, Hovde Group, LLC - Analyst [24]
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Is there a typical amount of time that tends to take, Dan? That review?
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Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [25]
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There is not. We've tried to push in on that ourselves. And what you hear is sometimes it can take three or four weeks and sometimes it can take 8 or 10 weeks, and it is all dependent on what we see. So there is really not any formal -- there's a limit on how long they can take to do their process. You probably read in the press as I have that some companies have had an exam that has been quote open for over a year or more.
We certainly do not anticipate and don't want that, We're hopeful that they will be in here. We've got, again I think, a really organized, very well put together information for them to see, and we expect they'll be able to get in and out of here in a reasonable time period and make their conclusions. And we're hopeful that we understand what those conclusions are no later than early second quarter.
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Kevin Fitzsimmons, Hovde Group, LLC - Analyst [26]
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Okay. Great. Very helpful. If I could is ask a follow-up, there's been a few questions already on the fee areas, and that was a source of some of the downside this quarter and some of it seasonally. But if you could speak to mortgage, insurance, and deposit service charges in terms of a run rate basis.
I know last year we had big bounce backs in mortgage, and you tend to have it, I think, in insurance. It sounds like deposit service charges are maybe more of a permanent thing, based on your comments, Bill. But if you could just talk about how we should be looking. Should we be modeling something more similar to last quarter's -- the third-quarter run rate in some of those areas or -- with mortgage especially because I recognize you guys are making a lot of moves to take more share. But if the overall pie is shrinking, I'm just not sure how long that transition takes for you to ramp up that run rate. Thank you.
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Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [27]
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You've got a lot of moving parts in there, so let me start with part three on your question, which was service charges. As you heard Bill say, we did make some changes in our processes mid-Q3 last year that we expected and are experiencing lower fee revenue on the deposit service charge side. So I think we do think that the Q4 run rate is probably indicative of our where would be on a go-forward basis. Maybe the bottom and we can grow from there.
But we certainly believe that it is not going to bounce back to where was in Q2 or Q1 last year because of the changes that we implemented.
On the mortgage and insurance side, I think you hit the nail on the head early on. I think you already answered your question. Insurance is very much different quarter to quarter. First quarter is by far the best quarter we have in a year, and fourth quarter is considerably weaker than any other quarter in the year. So you called it a bounce back.
We do expect to see that in Q1 on the insurance side. As I said earlier, our insurance team is out there competing every day, winning business, holding our customer base in place. We feel good about our insurance side, and the mortgage team, again, I think one of the questions was on comparing us to MBA numbers, we do expect to be able to continue to grow volume by taking share even in a tighter market. And our team is focused on that. Bill, you want to add on that?
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Bill Prater, BancorpSouth, Inc. - Senior EVP and CFO [28]
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No, I don't have anything to add.
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Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [29]
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Does that answer your questions, Kevin?
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Kevin Fitzsimmons, Hovde Group, LLC - Analyst [30]
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Yes, that's great. And just want to say congrats to Bill on the retirement.
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Bill Prater, BancorpSouth, Inc. - Senior EVP and CFO [31]
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Thank you, Kevin.
------------------------------
Operator [32]
------------------------------
David Feaster, Raymond James.
------------------------------
David Feaster, Raymond James - Analyst [33]
------------------------------
Good morning, guys. I'd like to start on expenses. Could you just give us a brief outlook for us on the expenses, and remind us of the seasonality in the first quarter with FICA and payroll taxes?
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [34]
------------------------------
I don't know that we give a whole lot of guidance that you're asking for, but we can talk about the factors that are underneath there. And Bill, you probably have more specifics on that, but certainly our first-quarter run rate on salary and the overall compensation cost is always elevated because of taxes. I'm not sure of anything else that is a first quarter elevation. Are you, Bill?
------------------------------
Bill Prater, BancorpSouth, Inc. - Senior EVP and CFO [35]
------------------------------
Nothing comes to mind.
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [36]
------------------------------
Bill mentioned in his comments that we had a couple of items in Q1 that we do not expect to be continuing. So he identified a little over $2 million in expense run in the fourth quarter that we considered to be true operating expenses of the Company but not to continue in Q1. Bill identified those in his comments, but you may want to talk about those again.
------------------------------
Bill Prater, BancorpSouth, Inc. - Senior EVP and CFO [37]
------------------------------
Insurance aren't out. Once you have established your good will in insurance acquisition, any true-up of any additional payout is expense. And you don't know that until the very end.
That one was a bit of a surprise, but again typically that's something that you don't have very often. The advertising campaign, we may do those from time to time or similar programs, but they are intended to generate new business. Nothing else I would really -- if you look at last year on a GAAP basis, we had the big settlement in the first quarter, but I don't think there's much noise outside of that.
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [38]
------------------------------
Does that help you, David?
------------------------------
David Feaster, Raymond James - Analyst [39]
------------------------------
Yes, that's extremely helpful, actually. Thank you. Let's talk about capital. You're well-capitalized, actually over-capitalized. Could you just talk about your thoughts on the uses for capital going forward? Is it additional insurance or other non-bank M&A, just organic growth, or even utilization of your buyback?
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [40]
------------------------------
How about all of the above? I think we want to be good stewards of capital. We agree with you. We have sufficient capital to give us lots of tools in our toolkit. The choices we've got is to deploy it in acquisitions, dividend it out to our shareholders, or buy back our own shares.
We continue to believe that our own shares represent good value, we continue to believe that we can increase our dividend reasonably over time, and we are certainly hopeful that we get the opportunity to deploy capital on the acquisition trail.
------------------------------
David Feaster, Raymond James - Analyst [41]
------------------------------
Perfect. Thank you. Just one quick follow-up. Do you have any rate hikes baked into your NIM outlook?
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [42]
------------------------------
We didn't give you a NIM outlook, so there is no forward-looking discussion that we provided because we typically don't provide guidance on that. Within our outcome modeling internally and within our internal budgets, we use a consensus forecast of hundreds of economists. And just like yours, I'm sure, your economists; I don't know any economist that's not baking in rate hikes into 2017. So in our consensus looking forward, that is certainly there.
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Bill Prater, BancorpSouth, Inc. - Senior EVP and CFO [43]
------------------------------
That is not what I was speaking to.
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [44]
------------------------------
Bill was not giving you guidance on the forward (multiple speakers).
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Bill Prater, BancorpSouth, Inc. - Senior EVP and CFO [45]
------------------------------
I was giving you information to help you understand what would be repricing, based on the recent rate hike and how that would impact any future rate hikes.
------------------------------
David Feaster, Raymond James - Analyst [46]
------------------------------
Got it. Thank you.
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [47]
------------------------------
Thank you.
------------------------------
Operator [48]
------------------------------
(Operator Instructions)
Jennifer Demba, SunTrust.
------------------------------
Jennifer Demba, SunTrust Robinson Humphrey - Analyst [49]
------------------------------
Thanks. Good morning.
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [50]
------------------------------
Hello, Jenny.
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Jennifer Demba, SunTrust Robinson Humphrey - Analyst [51]
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Can you give us an update on the CFO search? And we're going to miss you, Bill.
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [52]
------------------------------
We are. You're exactly right. We've engaged a consultant to help us with that. We are deep in the process, and we hope to find a replacement for Bill here shortly. I don't know that it will be in the next 30 or 60 days or whether it will be 90 days, but the process is ongoing. We are well underway with that.
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Jennifer Demba, SunTrust Robinson Humphrey - Analyst [53]
------------------------------
Okay. All right. I think that's it. Thank you.
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [54]
------------------------------
Thank you, Jenny.
------------------------------
Operator [55]
------------------------------
Casey Haire, Jefferies.
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Casey Haire, Jefferies & Co. - Analyst [56]
------------------------------
Good morning, guys.
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [57]
------------------------------
Good morning
------------------------------
Casey Haire, Jefferies & Co. - Analyst [58]
------------------------------
I wanted to touch on credit. Obviously aside from one episodic event, holding up pretty good here. I was wondering what is the charge-off outlook for 2017? And assuming it holds relatively benign, what is your appetite for continuing to drive that reserve ratio lower?
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [59]
------------------------------
Rod has been polishing his crystal ball all morning so he can answer that question. Ron, what is your outlook for charge-offs?
------------------------------
Ron Hodges, BancorpSouth, Inc. - Senior EVP and Chief Credit Officer [60]
------------------------------
If I knew what the outlook for charge-offs were, I could make a heck of a lot of money. Our charge-offs actually trended downward over the last few years. Our gross charge-offs in 2016 were less than they were in 2015. Our credit quality, you can look at the metrics and see that we've got a clean portfolio. We anticipate keeping it that way.
But I can't tell you what the charge-offs are going to be. I don't see anything on the horizon that would cause them to go up precipitously or go down either way. That's the best I can do.
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [61]
------------------------------
Does that help you, Casey?
------------------------------
Casey Haire, Jefferies & Co. - Analyst [62]
------------------------------
Yes, but in terms of the LLR, are you guys -- is there room to take that lower from this 113% level?
------------------------------
Ron Hodges, BancorpSouth, Inc. - Senior EVP and Chief Credit Officer [63]
------------------------------
That is driven every quarter by our modeling. We've got a very sophisticated and detailed modeling that we put all the numbers into, and it spits out and tells us what the ALLL should be based on our growth, the critical quality that we have, the charge-offs. As you can --
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [64]
------------------------------
And past performance of that credit. So if you continue to add in current and past performance that says charge-offs are lower, you would expect the model to continue to run that down.
------------------------------
Ron Hodges, BancorpSouth, Inc. - Senior EVP and Chief Credit Officer [65]
------------------------------
That's correct. And you've got to remember we don't have any purchase money loans. We don't have any purchase loans in our portfolio.
------------------------------
Casey Haire, Jefferies & Co. - Analyst [66]
------------------------------
Okay. Great. Just circling back to the loan growths outlook. Given that it doesn't tell me there was much paydown on the energy book this quarter, and your borrower base are obviously feeling a little bit more optimistic post-election, do you guys feel good about potentially doing better from a dollar-volume perspective on loan growth? And what are some of the categories that would drive that growth?
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [67]
------------------------------
I don't think we talked about energy credit, so let's clear up some misunderstanding there maybe. The question was on C&I credits, which maybe included some of that, but energy credits for us is extremely small. I don't even have the number. It is a very small number of loans for us, so we are not tracking it today in a way like we were before because it has gone away from us. The total, I think, was under $50 million when we were talking last time.
So off of our almost $11 billion book that's not a number that is going to drive the needle. The question earlier on sentiment within the market is what is going to drive the needle and the markets that we cover. I think Chris talked about where we were seeing loan growth. We believe we can continue to grow loans across our footprint into 2017, and our team is ready to play.
------------------------------
Chris Bagley, BancorpSouth, Inc. - President and COO [68]
------------------------------
Yes, I would say our pipeline is staying consistent with where it's been in prior months. And the way we track it, you can't always predict which one of those will close and where it will come from, but we have a good strong pipeline, a lot of good efforts.
And what you see is we have successes in different divisions of our bank almost every quarter. It is a diverse success across our eight-state footprint, and I think that is a strength for our Company to have that different and diverse, both regional- and loan-mixed type diversity.
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [69]
------------------------------
Geographic diversity helps us.
------------------------------
Casey Haire, Jefferies & Co. - Analyst [70]
------------------------------
Great. Thank you.
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [71]
------------------------------
Thank you, Casey.
------------------------------
Operator [72]
------------------------------
Jon Arfstrom, RBC Capital Markets.
------------------------------
Jon Arfstrom, RBC Capital Markets - Analyst [73]
------------------------------
Good morning. I'm just sitting here deep in the question queue practicing my pronunciation of Waguespack and Ouachita.
------------------------------
Chris Bagley, BancorpSouth, Inc. - President and COO [74]
------------------------------
I got it two different ways today, so thank you.
------------------------------
Jon Arfstrom, RBC Capital Markets - Analyst [75]
------------------------------
Chris, I hate to go back to mortgage, but maybe let's go back to that for a second. The lift that you saw in the pipeline last year from Q4 to Q1, would you call that seasonal, and do you expect something like that again in Q1?
------------------------------
Chris Bagley, BancorpSouth, Inc. - President and COO [76]
------------------------------
I would call it seasonal. I would say it has happened in prior years, but I can't tell you what will happen this year. It is way too early in the quarter to answer a question like that. And you don't know what rates and different things happen --
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [77]
------------------------------
The rates in Q1 were an oddball last year. That certainly plays into it.
------------------------------
Chris Bagley, BancorpSouth, Inc. - President and COO [78]
------------------------------
I think it's true, or it has been true in the past, to say that the fourth quarter's typically a slower quarter for mortgage.
------------------------------
Jon Arfstrom, RBC Capital Markets - Analyst [79]
------------------------------
Okay. And the margin, back on that again, the mortgage margin; it seems abnormally low. Is that something that if we do get a little bit of lift in the pipeline that can pick up? I know, hard to predict.
------------------------------
Chris Bagley, BancorpSouth, Inc. - President and COO [80]
------------------------------
The answer to that is yes, and it is purely a function of that declining volume. So the way that the timing of, the way the revenue is recognized and how the margin is calculated, you see it every time. There is a decline in the pipeline, you see the margin contract, and then you see it raise, you see it go up. I think the best way to look at that is maybe an average over multiple quarters. Smooth out that volume. Bill can probably --
------------------------------
Bill Prater, BancorpSouth, Inc. - Senior EVP and CFO [81]
------------------------------
That's right. It's really a function of the size of the pipeline at the end of the quarter. If you looked at the margin on the full year, it would be almost spot-on to what we've said all along was where we wanted our margin to be. A handful or two of basis points one side of 170 (multiple speakers).
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [82]
------------------------------
When you look at what we've been able to do from a production standpoint, we produced $1.4 billion and change. In 2015 we were a shade under $1.7 billion, and volume and -- let's go back to 2015 and then $1.7 billion in 2016. And our team is focused on continuing to grow that volume. When you look at the volume numbers, Q4 is the low quarter of the year, obviously the middle quarter of the year and the summer season is the high. But Q1 is going to come up from Q4 just all things else being equal. That will stabilize and increase our margin.
------------------------------
Jon Arfstrom, RBC Capital Markets - Analyst [83]
------------------------------
Okay. Good. That helps. And then on the insurance line, flattish year over year, and I know you've been under some pressure, but it feels like this is an okay performance year over year. Is that a fair statement?
------------------------------
Chris Bagley, BancorpSouth, Inc. - President and COO [84]
------------------------------
Yes, I think we feel good about the flattish -- as good as you can feel about that because it truly has been a rate environment driving that. Customer retention has been good. The acquisition side, we have been able to do two this year, and that helps.
You'd have to go back and look. There's seasonal pressure or economic event pressure and benefit on insurance premiums over the years. So maybe even looking back further would give more color to that because sometimes you do have rising, declining rate environments in the P&C business. And that's what we're going through right now.
And then throw in a little bit of oil and gas in there in our footprints, and that --
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [85]
------------------------------
I don't know an insurance producer, one, that's happy with a flat revenue. Fire him. So the answer is they are not happy at all when you compare us to what's happening against our peer group in the communities that we serve. I think we feel like we're doing a good job. But there's not an insurance producer, one, that's happy with flat on their numbers.
------------------------------
Jon Arfstrom, RBC Capital Markets - Analyst [86]
------------------------------
Given some of the challenges, it seems that is okay.
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [87]
------------------------------
That's right.
------------------------------
Jon Arfstrom, RBC Capital Markets - Analyst [88]
------------------------------
And then the third leg here that we'll call this the negative trifecta of fees. I'm just trying to get to the bottom of this. On the deposit service charges, it feels like with the change in the short order that we're likely to see the typical Q1 decline, and then that's it. We probably stabilize there. Is that a fair way to look at it?
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [89]
------------------------------
That is. Remember Q1 has fewer days. I haven't looked at the day count for this particular year in Q1. But all those fees are day-driven. So number of business days in a quarter impact your deposit fees there, and Q1 is the smallest number of days of all quarters. So that is a piece of that, along with just the seasonality of the volumes that come in that area. So yes, I think you are spot-on.
------------------------------
Jon Arfstrom, RBC Capital Markets - Analyst [90]
------------------------------
Okay. Good. Thank you. Bill, best of luck.
------------------------------
Bill Prater, BancorpSouth, Inc. - Senior EVP and CFO [91]
------------------------------
Thank you, sir.
------------------------------
Operator [92]
------------------------------
Matt Olney, Stephens.
------------------------------
Matt Olney, Stephens Inc. - Analyst [93]
------------------------------
Good morning, guys.
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [94]
------------------------------
Matt, good morning.
------------------------------
Matt Olney, Stephens Inc. - Analyst [95]
------------------------------
Dan, I wanted to circle back on the expense outlook. You mentioned that the banks held operating expenses pretty flat over the last few years, and it sound like you're optimistic that you can do it again this year. But can you speak to where the bank is with respect to the regulatory infrastructure of buildout? I think that was a headwind over the last few years. Is that now behind us, or are there still some incremental expenses that we will see from the buildout? Thank you.
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [96]
------------------------------
Some of that would have to do with the results of the upcoming process that we talked about earlier from our exam, but when you look back at our operating expenses, I'm just going to read you some numbers, Matt. Operating expenses in 2013 were $513.4 million. In 2014 they were $513.6 million. They jumped up in 2015 to $523.4 million, and last year we were down to $518.3 million.
So we have stayed in a very narrow range on our operating expenses for the last four years, as we have been building out our risk management and compliance and other regulatory support areas. And believe me we have a lot more people in all of those areas. Remember it wasn't but a couple of years ago when we were talking about we had seven or eight people that were quote dedicated to BSA, and today we have 40 people that are dedicated to BSA.
So I think your question is a good one. And I can't tell you that we are 100% built out in all of those areas because we're still continuing to tweak the model and make sure that we have the right people in the right chairs in all of those areas. But I don't see any significant changes going forward on what we're doing there.
And we continue to find ways to knock off expenses across the rest of our footprints. So we're challenging our people every day to make smart decisions. We're challenging vendors to provide better service to us at lower cost, and we believe we can continue to -- and at the same time we all like to see our incomes rise, so as we look at our annual salary structure we budget in for annual salary increases. And we've got to pay for that by finding other areas to trim.
------------------------------
Matt Olney, Stephens Inc. - Analyst [97]
------------------------------
Okay, that's great color. I appreciate that. Dan, any color you can give us on the pending acquisition targets? Anything you're hearing from the Management Teams as far as business trends?
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [98]
------------------------------
Similar to us, Matt, I think they feel that the political environment, the market's reaction to the election in November has got folks excited about what may come but it also causes people to have a little uneasiness about what may come. But overall I think they feel really good. We are seeing growth. We publish up their numbers, so in our press release you can see their year-end balance sheet numbers. They are ready to go. We're ready to go. We just need to get to the finish line.
------------------------------
Matt Olney, Stephens Inc. - Analyst [99]
------------------------------
Thank you.
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [100]
------------------------------
Thank you.
------------------------------
Operator [101]
------------------------------
Blair Brantley, Brean Capital.
------------------------------
Blair Brantley, Brean Capital - Analyst [102]
------------------------------
Good morning, everyone. Just one, Dan, you mentioned that you still felt like there was still good value in your stock. Are you still comfortable with a total payout ratio near 100%?
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [103]
------------------------------
With our capital ratio, yes I think we are. When you look at where we are today from a capital structure, we need to deploy capital. The same answer that we talked about earlier: we've either got to find places to deploy that on the acquisition trail, or we need to give it back to our shareholders and one of the two opportunities there.
------------------------------
Blair Brantley, Brean Capital - Analyst [104]
------------------------------
Okay. Great. Thank you.
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [105]
------------------------------
Thank you.
------------------------------
Operator [106]
------------------------------
John Rodis, FIG Partners.
------------------------------
John Rodis, FIG Partners, LLC - Analyst [107]
------------------------------
Hello, guys. How are you doing? Actually I was just going to follow up on the buyback, Dan. I think you just answered it again. My question would be with the stock around $30, how active do you expect to be?
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [108]
------------------------------
That is a good question. We have ongoing discussions here on what, how, and when to deploy our capital. I think our team wants to participate, and I think we will watch the market and make what we consider to be smart decisions around that. We've got excess capital, and being able to invest in our own stock we believe is a very good investment.
------------------------------
John Rodis, FIG Partners, LLC - Analyst [109]
------------------------------
Okay. And just back to the acquisitions, Dan. Assuming the CRA exam goes well, is it still hopeful that the deals could close later this year? I think you said last quarter, late third quarter, fourth quarter?
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [110]
------------------------------
Yes. We still have to go through the application process on those. Depending upon the timing of the exam is going to drive the timing of an application start. And so our hope is that we could get those applications on file sometime in Q2 and be able to close the transactions as soon as we can get the approvals of that we need, which we anticipate would be Q3 or Q4.
------------------------------
John Rodis, FIG Partners, LLC - Analyst [111]
------------------------------
Okay. Make sense. Thank you, guys. And Bill, good luck.
------------------------------
Bill Prater, BancorpSouth, Inc. - Senior EVP and CFO [112]
------------------------------
Thank you.
------------------------------
Operator [113]
------------------------------
And ladies and gentlemen, this concludes our question-and-answer session. I would like to hand the conference back over to Dan Rollins for his closing remarks.
------------------------------
Dan Rollins, BancorpSouth, Inc. - Chairman and CEO [114]
------------------------------
Thank you for joining us today. If you need any additional information or have further questions, please do not hesitate to contact us. Otherwise we look forward to speaking to you all again soon. Thank you very much.
------------------------------
Operator [115]
------------------------------
Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.
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