Q1 2017 BancorpSouth Inc Earnings Call
Apr 20, 2017 AM EDT
BXS - BancorpSouth Inc
Q1 2017 BancorpSouth Inc Earnings Call
Apr 20, 2017 / 03:00PM GMT
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Corporate Participants
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* Chris A. Bagley
BancorpSouth, Inc. - President, Interim CFO, COO, Treasurer, Interim CFO of BancorpSouth Bank and Treasurer of BancorpSouth Bank
* James D. Rollins
BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank
* James Ronald Hodges
BancorpSouth Bank - Vice Chairman and Chief Lending Officer
* Will Fisackerly
BancorpSouth, Inc. - SVP and Director of Corporate Finance
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Conference Call Participants
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* Blair Craig Brantley
Brean Capital LLC, Research Division - MD and Senior Equity Research Analyst
* Catherine Mealor
Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP
* Emlen Briggs Harmon
JMP Securities LLC, Research Division - MD and Senior Research Analyst of Regional Banks
* Jason Matthew Oetting
JP Morgan Chase & Co, Research Division - Analyst
* Jennifer Haskew Demba
SunTrust Robinson Humphrey, Inc., Research Division - MD
* Jon G. Arfstrom
RBC Capital Markets, LLC, Research Division - Analyst
* Kevin Patrick Fitzsimmons
Hovde Group, LLC, Research Division - Co-Head of Research
* Matthew Covington Olney
Stephens Inc., Research Division - MD
* Peyton Nicholson Green
Piper Jaffray Companies, Research Division - MD and Senior Research Analyst
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Presentation
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Operator [1]
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Good day, and welcome to the BancorpSouth First Quarter 2017 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.
I would now like to turn the conference over to Will Fisackerly, Senior Vice President and Director of Corporate Finance. Please go ahead.
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Will Fisackerly, BancorpSouth, Inc. - SVP and Director of Corporate Finance [2]
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Good morning, and thank you for being with us. I will begin by introducing the members of the senior management team participating today. We have Chairman and Chief Executive Officer, Dan Rollins; President, Chief Operating Officer and Interim Chief Financial Officer, Chris Bagley; and Senior Executive Vice President and Chief Credit Officer, Ron Hodges.
Before the discussion begins, I'll remind you of certain forward-looking statements that may be made regarding the company's future results or future financial performance. Actual results could differ materially from those indicated in these forward-looking statements due to a variety of factors and/or risk. Information concerning certain of these factors can be found in BancorpSouth 2016 annual report on Form 10-K.
Also during the call, certain non-GAAP financial measures may be discussed regarding the company's performance. If so, you can find the reconciliation of these measures in the company's first quarter 2017 earnings release.
Our speakers will be referring to prepared slides during the discussion. You can find these slides by going to bancorpsouth.com and clicking on our Investor Relations page, where you'll find them on the link to our webcast or you can view them at the exhibit to the 8-K that we filed earlier this morning.
And now, I'll turn to Dan Rollins for his comments on our financial results.
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [3]
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Thank you, Will. Good morning. Thank you for joining us today for BancorpSouth's First Quarter 2017 Conference Call. I will begin by making a few comments regarding the highlights for the first quarter; Chris will discuss the financial results in more detail as well as 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 highlights for the quarter, which continue to reflect progress on our efforts to grow earnings through measured balance sheet growth and disciplined expense control.
Net income for the quarter was $38.1 million or $0.41 per diluted share. We were particularly pleased with our deposit growth during the first quarter, as we reported total deposit growth of $354.7 million or 12.3% on an annualized basis. While first quarter is always seasonally high in deposit growth, we are extremely proud of the efforts our teammates have made to ask for deposits and focus on winning more of each customer's business.
Total deposits have grown $556.1 million or 4.8% over the past year. While the first quarter is seasonally high for deposit growth, it has historically been our slowest loan growth quarter. Loans were essentially flat compared to fourth quarter 2016. Our net interest margin also remained flat at 3.46% compared to the fourth quarter, despite a shift in our earning asset mix as a result of seasonally elevated deposits and overnight investments. Chris will provide a little more color on our business development activities, including our balance sheet efforts and our margin in just a moment.
Moving on to the remainder of the financial results. We had a positive pretax mortgage servicing valuation adjustment of $900,000 during the quarter. While it's not shown on this slide, our mortgage team produced $288 million in mortgage loans during the quarter and generated $8.1 million in mortgage production revenue. Our insurance team had a nice quarter as well, producing revenue of $32.9 million compared to $33.2 million for the first quarter of last year. The other category of insurance revenue, which includes contingency commissions, was down $1.1 million compared to the first quarter of last year, while our commission revenue, including P&C and life and health, was actually up $800,000 during the quarter.
We reported net operating income, excluding mortgage servicing MSR, of $36.9 million or $0.39 per diluted share. This metric excludes the MSR valuation adjustment I just mentioned, as well as $1.1 million in net securities gains recognized during the quarter. Chris will go over comparisons to prior periods in a moment.
Our credit quality continues to remain strong, reflected by a modest provision of $1 million for the first quarter. Ron will discuss the considerations impacting our provision as well as other credit quality metrics in a few minutes. We continue to challenge expenses across all areas of our company as total operating expenses declined compared to both the first and fourth quarters of last year, and our operating efficiency ratio, excluding MSR, declined to 68.4%. While we've clearly got more work to do to reach an acceptable long-term efficiency ratio, I'm confident we can continue to hold expenses relatively flat, while growing our balance sheet and revenue.
We continue to utilize our stock repurchase plan in an effort to efficiently manage capital and maximize shareholder value. We repurchased just over 1.6 million shares during the first quarter at a weighted average price of $30.62. That leaves approximately 4.4 million shares available under our current share repurchase authorization, which is set to expire at the end of this year. While it's not shown on this slide, I'm also pleased with the continued patience of our merger partners: Ouachita Bancshares Corporation and Central Community Corporation. While we are all frustrated with the amount of time it has taken to close these transactions, all parties involved continue to believe these mergers are in the best interest of our shareholders, our teammates and the communities we serve. Both transactions remain subject to required regulatory approvals and the satisfaction of other closing conditions. Although we can provide no assurance that either merger will close timely or at all, we have been working very closely with our primary regulators to answer all of their questions as they work to complete the current CRA and compliance exams that are ongoing, and we remain hopeful that we will receive the necessary regulatory scores to allow us to move forward soon.
I will now turn to Chris and allow him to discuss our financial results and business development activities in more detail. Chris?
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Chris A. Bagley, BancorpSouth, Inc. - President, Interim CFO, COO, Treasurer, Interim CFO of BancorpSouth Bank and Treasurer of BancorpSouth Bank [4]
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Thank you, Dan. If you'll turn to Slide 4, you'll see our summary income statement. Net income was $38.1 million or $0.41 per diluted share for the first quarter. As Dan mentioned, our first quarter results included net securities gained of $1.1 million, which we exclude from operating earnings. There were no other material nonoperating items in the first quarter 2017 or the fourth quarter 2016 results that are presented here. You recall that our first quarter results for last year included a $13.8 million pretax charge related to the resolution of the CFPB and DOJ investigation. Dan also mentioned the noncash positive MSR valuation adjustment of $900,000 during the quarter. We reported net operating income, excluding MSR, of $36.9 million for the quarter or $0.39 per diluted share compared to $30.7 million or $0.33 per diluted share for the fourth quarter of 2016 and $36.9 million or $0.39 per diluted share for the first quarter of 2016.
Net interest revenue declined 0.7% compared to the fourth quarter of 2016, as a result of the short day count in the first quarter, an increase of 3.1% compared to the first quarter of 2016. The net interest margin was stable at 3.46% compared to the fourth quarter of 2016. We said in our fourth quarter conference call that we expected upward pressure on asset yields given recent rate increases combined with the fact that fully-indexed rates are now starting to move above floors on some of our floating rate loans. We saw slight increases in yields on both our loans and securities portfolios. At the same time, total deposits remained flat. However, the pickup in the margin provided asset yield -- I should have said total deposit cost remained flat. However, the pickup in the margin provided asset yield increases were offset by a shift in the asset mix as a result of net loans and leases being flat quarter-over-quarter as well as seasonally higher deposit balances and overnight investment balances. As we look forward, we continue to expect to see future benefit in loan yields and potential upward pressure on our margin as a result of the recent Fed rate increases.
If you turn to Slide 5, you'll see a detail of our noninterest revenue streams. Total noninterest revenue was $70.9 million for the quarter compared to $72 million for the fourth quarter of 2016 and $64.7 million for the first quarter of 2016. We have a more detailed slide dedicated to mortgage and insurance that I will discuss in a moment. The other line items on the slide are relatively stable quarter-over-quarter. Slight declines in our service charge and card revenues are common in the first quarter each year following the holiday season.
Slide 6 presents a detail of noninterest expense. Total noninterest expense for the first quarter was $127.1 million compared with $130.5 million for the fourth quarter of 2016 and $141.5 million for the first quarter of 2016. The schedule at the bottom of the slide shows the aggregate impact of any nonoperating items. As I mentioned earlier, the only material nonoperating item impacting the periods presented was the $13.8 million pretax charge related to the CFPB, DOJ settlement incurred during the first quarter of 2016. Most of the other expense line items shown continue to remain relatively flat. Salaries and benefits increased nominally as a result of beginning of year FICA reset. In our fourth quarter conference call, we did discuss 2 items that were unique to the quarter: the special advertising program led by our marketing team and a onetime insurance agency earn-out adjustment. These 2 items didn't recur in the first quarter, contributing to a decline in advertising and public relations as well as other miscellaneous expense, as we look at our first quarter results compared to the fourth quarter of 2016. That concludes the review of our financials. I will now move on to our other business development activities.
Moving to Slide 7, you'll see our funding mix as of March 31 compared both to the fourth quarter and first quarter 2016. Total deposits, including customer repo balances, are up $277 million or 9.2% annualized compared to December 31 and $501 million or 4.2% over the past year. As a reminder, historically, first quarter has seasonably been our best quarter of the year for deposit growth. Our quarterly and annual trends continue to show a shift in deposit mix as time deposits remained flat, while lower cost demand and saving accounts continue to grow.
Our ability to grow deposits by holding our total deposit costs flat at 23 basis points quarter-over-quarter despite the rate increases is further evidence of the value of our community bank model places on relationship banking and core funding.
As we look to the geographical performance relating to deposits, we have 5 community bank divisions stand out this quarter for deposit growth. Central Mississippi, Northeast Mississippi, Missouri, Pine Belt and Northeast -- excuse me, Northwest Louisiana divisions all reported excellent results for the quarter. As I mentioned in last quarter's call, continuing to grow deposits was identified as a top priority in our 2017 budgeting and planning process. I believe we are off to a great start toward reaching these 2017 goals.
Moving to Slide 8, you'll see our loan portfolio as of March 31 compared to both the fourth and first quarters of 2016. Loans were essentially flat compared to December 31, 2016, while loans have increased $357 million or 3.4% since March 31, 2016. First quarter is typically a seasonally slow loan quarter as Dan mentioned of the year. Despite net loans and leases being flat on consolidated basis, we had several teams stand out during the first quarter for their loan production efforts.
Our loan production office in Dallas, Texas, had a great quarter. In addition, our Missouri, Northcentral Alabama and Northeast Texas divisions stood out this quarter. As we look to the remainder of 2017, we continue to be confident with our business development efforts and optimistic about our ability to continue to grow loans.
Moving onto the mortgage and insurance. Tables on Slide 9 provide a 5-quarter look at our results for each product offering. Our mortgage banking operation produced origination volume for the quarter totaling $288 million. Home purchase money volume was $196 million or 68% of our total volume for the quarter. Deliveries in the quarter were $260 million compared to $380 million in the fourth quarter of 2016 and $294 million in the first quarter of 2016. Production and servicing revenue, which excludes the MSR adjustment, was $8.1 million for the quarter compared to $5.6 million for the fourth quarter of 2016 and $9.8 million for the first quarter of 2016. Margin was 1.97% for the quarter. Our pipeline was $250 million at March 31 compared to $257 million at December 31, 2016. As Dan mentioned earlier, we had a recovery on our MSR asset of $900,000 in the first quarter. As we move forward, we will continue to test our processes and procedures surrounding the hedging of this MSR asset.
Moving on to the insurance. Total commission revenue for the quarter was $32.9 million compared to $25.7 million for the fourth quarter of 2016 and $33.2 million for the first quarter of 2016. As we have reported previously, first quarter historically has been our best quarter of commission revenue as a result of the seasonality in the renewal cycle as well as the receipt of the annual contingency commissions. We continue to see a soft insurance market as rates across most commercial property and casualty lines remain under pressure. I would like to point out that the first quarter results include the incremental revenue associated with the Waguespack insurance agency acquisition, which closed in the fourth quarter of 2016. As we mentioned in last quarter's call, we expect this team to contribute approximately $3 million in revenue to our agency on an annual basis.
Now I'll turn it over to Ron for his comments on credit quality.
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James Ronald Hodges, BancorpSouth Bank - Vice Chairman and Chief Lending Officer [5]
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Thanks, Chris. Slide 10 presents some highlights of credit quality for the first quarter. As Dan mentioned, we had a provision for credit losses of $1 million for the first quarter compared with provision of $1 million for both the fourth quarter of 2016 and the first quarter of 2016. Virtually, all of our credit quality metrics continue to remain very strong. However, there were asset-related loans identified during the quarter that required a specific reserve allocation. This was the main factor and the need for a small revision to our allowance. We reported net recoveries of $0.5 million for the quarter compared with net charge-offs of $3.2 million for the fourth quarter of 2016 and net charge-offs of $1 million for the first quarter of 2016. The ALLL was 1.16% of net loans and leases as of March 31, 2017. Both NPLs and NPAs declined meaningfully during the quarter. NPLs decreased $20.3 million to 0.76% of net loans and leases, while NPAs decreased $19.6 million to 0.83% of net loans and leases. NPAs as a percentage of net loans and leases were at the lowest level we reported since credit cycle. These declines were driven primarily by a $22 million decline in restructured loans and leases still accruing. This decline was driven by one large payoff as well as certain restructured loans that continue to perform in accordance with their contractual terms and no longer meet the accounting requirements for reporting within this nonperforming category. Consistent with the commentary we provided for some time now, we expect to continue to see normal fluctuations in these balances in either direction. While it is not shown on this slide, ORE was essentially flat at $8.5 million at March 31, 2017, compared to $7.8 million at December 31, 2016. The final bullet on this slide relates to near-term delinquencies, which declined to $25.8 million at March 31, 2017, from $27.8 million at December 31, 2016. This balance continues to remain at a very stable level.
With that, I will now turn back to Dan for his concluding remarks.
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [6]
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Thanks, Ron. As we look to the remainder of the year, I'm excited about the opportunity to continue our positive momentum and improved performance. While loans were flat for the quarter, our teammates continue to produce quality credits. I'm optimistic about our ability to continue to grow both sides of the balance sheet, while continuing to hold expenses flat.
Finally, our mortgage, insurance and wealth management teams are working diligently to battle current headwinds specific to each of those respective industries. I can continue, but the message is no different than it's been for several quarters now. I'm excited about the direction and future of our company.
With that, I will conclude our prepared remarks. And operator, we'd now be happy to answer any questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions) And our first question comes from Catherine Mealor with KBW.
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Catherine Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [2]
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First on the share repurchases, nice to see that increase this quarter. Can you talk to us a little bit about your outlook for that? How aggressive you think you can and want to be for the rest of the year? And is there a capital level that you're managing to? And how does the pending deals kind of play into how aggressive you make it on the share repurchase for the rest of the year?
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [3]
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Okay. I think all of the above falls into that. We do have a plan out there, 10b-5 1 plan that's out there, and I think that's what you see. That plan's been out there for some time and it exercised, or it triggered in this quarter, and I would anticipate that the way it's structured we will continue to see share repurchases. But all of the things that you talked about are in there. We're not managing to a target number or a projected number. We don't have any public guidance on where we're trying to get any of the numbers to, but we are certainly trying to manage capital to a level that is acceptable to us and that will allow us to continue to support the internal growth and the acquisition growth that we intend to see.
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Catherine Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [4]
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Got it. Okay. And then on the loan growth, I'm trying to fit numbers to it, but if we think about loan growth last year, you grew about 4%. Q1 typically is always seasonal low. So is there -- as we think about this year, do you feel like the pipeline and your outlook for what you'll see in your market could show greater growth in that? Or do you feel like kind of the mid-single-digit pace is pretty good for your outlook?
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [5]
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I think a lot of that depends upon the political situation and the crystal ball that's out there on where we're going. There is a lot of talk about business activity, yet we haven't seen a whole lot of optimism that came after the November election turned into actual action within the market. I think -- I don't think we're any different than most of our peers that saw muted or slower loan growth in the quarter than many had expected or thought we would see. Our team's out there competing every day. So I think we feel very confident that we've got the winning team on the field. We can continue to compete. We think there is opportunity for us to continue to grow out there. We're seeing competitors in a rising rate environment. It's been 20-something years since banks have competed in a rising rate environment. And we continue to be surprised at the number of long-term fixed rate credits that are being offered out there, and we are not willing to play in that game. But our team's out there competing every day, and we certainly believe we can win. Chris?
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Chris A. Bagley, BancorpSouth, Inc. - President, Interim CFO, COO, Treasurer, Interim CFO of BancorpSouth Bank and Treasurer of BancorpSouth Bank [6]
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Yes. Catherine, I was going to add to what Dan said on the -- I think there is some -- I don't know, still maybe -- I won't call it uncertainty or choppiness in the pricing market with 2 rate bumps, and we're still seeing a lot of what we consider aggressive pricing. So I think we're competing in a lot of deals, but we're going to be disciplined in our pricing and try to maintain our margin. And as Dan said, I think everybody is [ putting ] customers trying to figure out what to do in anticipation of what rates are going to do over the next 12, 24 months.
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Operator [7]
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The next question comes from Jennifer Demba with SunTrust.
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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [8]
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A lot of this been obviously a growing concern on retail center loans. Just wondering if you guys have any exposure numbers you can give us with regards to your retail center or shopping center loans?
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [9]
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Retail. Are you talking about like large income-producing retail shopping centers?
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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [10]
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I'm talking strip centers, shopping centers, anything of that nature that falls into retail center category.
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [11]
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Yes, I don't know that we have any detail that we'd be able to break that out for you. I can tell you again when you look at us, Jenny, we're going to have smaller pieces. So when you talk about the big major market retail shopping centers, I don't think we have any of those in our portfolio at all. We certainly have smaller strip centers that are going to have some retail outlets within those areas. But we're not seeing or experiencing. We continue to watch what's looking and we continue to watch the credits that we have on our balance sheet. We continue to pay attention to what's out there just like everybody else. But from the large box -- big box retailers, I don't know that we really have any of those in our balance sheet to speak of at all. Ron, do you want to add anything to that?
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James Ronald Hodges, BancorpSouth Bank - Vice Chairman and Chief Lending Officer [12]
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No. I agree. I don't think we'll see any change or any result of the large boxes or announce a lot of closings of stores. That's not going to affect us.
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Operator [13]
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The next question comes from Emlen Harmon with JMP Securities.
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Emlen Briggs Harmon, JMP Securities LLC, Research Division - MD and Senior Research Analyst of Regional Banks [14]
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I wanted to get on expenses and specifically, the dynamics of comp expenses this quarter. I mean, you guys held that flat in what -- quarter-over-quarter in what tends to be a seasonally elevated quarter. I guess, one, does a lower contingency payment in insurance help you a little bit there? And is there just anything underlying that's going on in terms of cost improvement?
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [15]
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Well, the easy answer is, on the contingency side, the answer is no. The contingency line is not a comp line driver. So there is no impact on that. But clearly, the volume within the mortgage side could have a driver there. We continue to watch our headcount. We continue to try and pay attention to what we're doing with our staffing. I think that what you're seeing is the results of last several years of focus on continuing to watch where we're spending money. It's -- most of that salary line is headcount driven. So it's we're able to make efficiency improvements in our operation and not rehire folks as people leave. We are able to be more efficient, and I think you're seeing that.
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Emlen Briggs Harmon, JMP Securities LLC, Research Division - MD and Senior Research Analyst of Regional Banks [16]
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Got it. And then, Chris, you talked about the portion of loans that are getting above floors is going to [ light ] to catch a little bit more -- capture a little bit more of future rate hike. Could you just quantify the number of loans that are still at floors relative to, say, a year ago? And maybe, give us a sense of the degree of benefit -- how the degree of benefit from future rate hikes is changing.
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Chris A. Bagley, BancorpSouth, Inc. - President, Interim CFO, COO, Treasurer, Interim CFO of BancorpSouth Bank and Treasurer of BancorpSouth Bank [17]
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Yes, I can't quantify that for you. I can tell you that we look at that and say -- I mean, we still have quite a few loans that we haven't passed through the floor on. So we think we'll have some incremental benefit in coming quarters, especially if there is another rate bump if that helps.
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [18]
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I guess, I would cover that a little bit differently in that I think while we may not have seen a rate move on the individual loans because loans may not be floating daily, they could be floating quarterly or annually or some other reset, but the current rates are above the floor where we may not have seen. We have very few loans that are floored below where current rates are.
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Chris A. Bagley, BancorpSouth, Inc. - President, Interim CFO, COO, Treasurer, Interim CFO of BancorpSouth Bank and Treasurer of BancorpSouth Bank [19]
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Correct. I get that. On the asset that maybe I made that backwards, but we still have some loans higher -- earning higher than the current rate. Their floor is higher than the current rate. They are floating that are adjusting over the next 3, 6 and 12 months.
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Operator [20]
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The next question comes from Kevin Fitzsimmons with Hovde Group.
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Kevin Patrick Fitzsimmons, Hovde Group, LLC, Research Division - Co-Head of Research [21]
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Dan, I know you've probably limited in what you can really say on this, but we're almost a month into second quarter. I believe where this is kind of right around the time when you guys kind of imply that you thought you would get some kind of update on the CRA review and then that would be followed by submitting the merger application. So just wondering how we should view the lack of an update because I'm not really sure, honestly, if you would -- if you got the CRA upgrade if you would necessarily announce it, if you would necessarily announce that you submitted the merger applications? Or is this just the process? And the processes can lag more than you thought. So just wondering if there is any update on that front?
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [22]
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I think we're still on the same schedule we talked about when we visited last quarter in that we think we will have some results on where we are from a CRA compliance exam process in the second quarter. You're right. It's early in the second quarter. I can tell you there is nobody more anxious to get these results than we are. But I think you're also right on the process side. It's just a process. We are working diligently with our regulators to answer every question they have and to provide them all the information that they want and need. And as far as the timing goes, I think we still believe that we're in a second quarter a bit. But they've not told us that. That's just our belief. And so your final piece of the puzzle that you kind of laid out was the application process, but filing applications is public. So when we file applications, you would be able to know that we filed applications. We're required to publish notices in newspapers and the filing of those applications are public. So you would certainly know if we filed any applications if you followed those channels, and you'd be able to, I guess, make the assumption that the news had been good to allow us to file those applications.
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Kevin Patrick Fitzsimmons, Hovde Group, LLC, Research Division - Co-Head of Research [23]
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Okay. That's helpful. Could you -- I don't know if you can quantify this so much as just intake there is some -- is there any amount in your current expense rate, run rate that once you are through this CRA review, I know you still have the order in place, but once the CRA review is in the past, is there a certain amount of expenses that can roll off over the next few quarters, but just really can't until that process plays out?
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [24]
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No. I would tell you, I don't think we're expending any additional funds on that process than we have been over the last several quarters. So compliant with all of the bank regulations that are out there as an ongoing obligation that all financial institutions have, we have got a compliance team, a risk management team and internal audit team that are all doing a great job for us, a credit risk review team. When you look at all of the parts that we use or all the components of our risk management processes, those are in place. They are not going anywhere. They've been in place now for some time. I don't see that as a place to -- for us to be able to eliminate cost unless or until there is some change in the regulatory environment. There is a lot of talk about potentially changing some of the Dodd-Frank rules. We spent a lot of time and effort on our stress testing process. If we fall out of the team that has to do that, maybe there is something there that could drop off. But our risk management practices are baked into the numbers today. What you're seeing us do on the expense side is continue to mine for opportunities to be more efficient in what we're doing and you heard me say, 68%. It's hard to be proud at 68%, but when you came from 82% to 68%, we've made big moves. We've got big moves still to move, and we're moving in the right direction, and we think we can continue to get there.
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Kevin Patrick Fitzsimmons, Hovde Group, LLC, Research Division - Co-Head of Research [25]
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Great. One last one if I can fit it in. Any update on the CFO search?
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [26]
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Yes. We're actively working with our headhunter, and we've had multiple visits with different folks, and we hope to be able to get to that finish line here in the next couple of months.
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Operator [27]
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The next question comes from Jon Arfstrom with RBC Capital Markets.
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Jon G. Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [28]
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Quick, just back to question on the margin. Loan yields up a couple of basis points. And I guess, I probably would've expected that to be up a little bit more. And I know you touched on it a bit. But is the message that with the March hike and as things roll over in the portfolio, we're likely to see a bigger lift in loan yields in Q2? Is that the message?
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [29]
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I think we've still got upward pressure on our margin. I think what you saw when we talked about a little bit, I think this kind of goes back to the question on floors from a few minutes ago. I think the rate hike in December pushed the now calculated rate on most of our credits above where the floor was, not all of them reset on a daily basis. So again, we may or may not have had that individual credits reset at the new rate that would be up a little bit or the December rate hike moved it to where it's equal to the floor. The March rate hike, I think, gives us opportunity to see rising -- not rising rate on the overall loan portfolio. But we're still putting new credits on sometimes similar to the rates that are rolling off. So there is upward pressure on margin. We continue to expect to see that. We think that we've got strong upward pressure. But how you quantify that, when you look at for the first quarter, let's back up and talk about where we are today, what you see in the first quarter was we would've seen margin expansion in this quarter pretty good, 3, 4, 5 basis points, had we not been carrying another $300 million in deposits on the balance sheet that we turned around and deployed into low-yielding overnight investments. So that -- there is where your negative drag on the first quarter margin was, was in the volume of deposits that flowed in during the quarter and the investment of those deposits into overnight rates.
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Jon G. Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [30]
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Okay, okay. Just a question on mortgage, too. How is the pipeline tracking so far quarter-to-date? Others have reported that the pipelines are really starting to pick up. I know you identified the current pipeline. But do you feel like there is more room to run and then we could see a little better number in Q2?
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Chris A. Bagley, BancorpSouth, Inc. - President, Interim CFO, COO, Treasurer, Interim CFO of BancorpSouth Bank and Treasurer of BancorpSouth Bank [31]
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We would expect to see a better number in Q2 compared to Q1 just because the seasonality of Q1 is just typically and historically been a low Q. So yes, I think, is the answer to your question. But with that said, you got, are rates going up? Are they going down? We're watching prime go up, continual goes down, it goes up, people refi, they don't refi. There is still some uncertainty in those mortgage rate markets we are seeing bounce around a little bit. It always drives your volume.
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [32]
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I think we've got a very solid, qualified, dedicated mortgage team out in front of us. And as I talk to them, some of them will tell you that they think there is pent-up demand for folks that want to buy something now before rates go up again faster before the next rate hikes, and there’s others that will tell you that they're seeing that people are beginning to trend, wonder, "Well, did I missed the opportunity?" So it's a mixed signal out there. But our team had -- we are going to be able to win business with the team we've got on the field.
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Jon G. Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [33]
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Yes. Okay. Yes, I thought the origination number is -- was good -- was better than I thought it was going to be, so hopefully that can pick up.
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Operator [34]
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The next question comes from Steven Alexopoulos with JPMorgan.
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Jason Matthew Oetting, JP Morgan Chase & Co, Research Division - Analyst [35]
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This is actually Jason Oetting on for Steve today. I guess, first on insurance. I know that the industry headwind on the lower property and casualty pricing has been an issue. But do you have a sense for when that negative pricing environment might actually begin to shift the other way and become a tailwind? Do you think this is maybe a 2018 event when we might see prices increase? Or is it going to be a much more prolonged cycle, do you think?
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [36]
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Jason, I would like Chris jump in here too. We've got a great insurance program and a great team out there, but the question you're asking is really, one, is there going to be natural disaster that's going to cause insurance companies to rise rates. So if your crystal ball says we're going to have a major natural disaster later this year or in 2018, that will instantly turn into some pricing support on our products. If we don't experience a natural disaster of some type that causes the insurance companies' reserves to be pressured a little bit, then we don't see that happening. So I don't know how we would answer your question on when that will change because that's going to be all dependent upon the carriers.
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Chris A. Bagley, BancorpSouth, Inc. - President, Interim CFO, COO, Treasurer, Interim CFO of BancorpSouth Bank and Treasurer of BancorpSouth Bank [37]
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That's exactly. That's a crystal ball-type question. And then additionally you've got -- I think in our footprint, you still have some -- I don't know, I'd call it flatness in the oil and gas, P&C world. So some of that's driving that softness. Our guys are approaching it like it's going to be this way for the foreseeable future or forever. So they're trying to operate business grow, grow new customers, take care of the renewals, control expenses, try to do everything they can on the insurance side, just like we are on the bank side.
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [38]
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We're trying to grow customer base. When you're in a down market, if we can continue to grow the number of customers that we are taking care of even if the individual per customer ticket is lower, that's a benefit to us when the per ticket rate begins to move up and that will move up when and if we ever have some natural disaster that puts pressure on the insurance reserves that the carriers hold.
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Jason Matthew Oetting, JP Morgan Chase & Co, Research Division - Analyst [39]
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Okay. That makes sense. Moving back to expenses for a second. You had some year-over-year improvement in the efficiency ratio. Can you remind me, do you guys have a longer-term efficiency ratio target or like an aspirational goal? How should I think about that longer term?
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [40]
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Yes, we've never put out any targets of any kind for any numbers, Jason. So I don't know that we have a target for you. What we've continually said is we think we can compare favorably with like-type peers, and I would tell you that 68% is not equal to like-type peers. So we've got room to improve.
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Operator [41]
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The next question comes from Matt Olney with Stephens Inc.
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Matthew Covington Olney, Stephens Inc., Research Division - MD [42]
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I want to go back to Jon's question on the mortgage. It looks like the gain on sale margins were restated from previous quarters. Any color you can provide on that? And I think in the past, we've talked about a normalized gain on sale margin in the $160 million to $170 million range. Does that still hold under this new level?
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [43]
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Yes. So what happened is, as we went back and we moved some compensation expense that was showing up as an expense, and we took it out of the gain on sale. So I think that negatively impacted the gain on sale margin in the teens basis points. And I think you can go back and calculate from the restatement. So we include all of our origination cost and net that out of the gain on sale until we went back and did a review of what we were doing. We identified some additional compensation expense that we had not been letting out of the gain on sale. And so that's what you see going back. As far as the go forward, I think we think we're down a little bit from that because the compensation cost is going to come out of that. But again, I think, we're in the teens bucket on how far down that margin would be. So -- if we were telling you before, $160 million, $170 million, maybe we're 10 or 15 basis points under that.
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Operator [44]
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The next question comes from Peyton Green with Piper Jaffray.
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Peyton Nicholson Green, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [45]
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Dan, I was wondering if maybe you could give a little color on the C&I book. And I apologize if I missed some reference to this earlier on the call. But going down, it's been flat really in '15, and it's down 8% in '16. And it's down, again, in the first quarter of '17. How much of it is related to line utilization versus maybe BancorpSouth's decision not to renew certain credits and that type of matter?
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [46]
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Yes, I don't know that we've made any decisions not to renew very many lines at all that I can think of. And I think there is certainly competition out there. I think line utilization is a piece of it. Rate structure is a piece of it. I think we continue to be interested in any and all credits that we can do. As I like to say, loans are us. We will play. Depending upon where we are having better successes or less success is what's driving the movements in those buckets. Ron, do you want to add any color to that?
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James Ronald Hodges, BancorpSouth Bank - Vice Chairman and Chief Lending Officer [47]
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You're right. We haven't exited any particular loans -- C&I loans. I think it's an indication of competition is very steep and very fierce in that market segment. I think a lot of banks are trying to diversify their portfolio, get out of -- reduce some of their construction and get into C&I lending just like we are. So it's a matter of softness in the market. We had some major lines that are -- have gone away and as far have gotten out of the lines -- they haven't gone away, excuse me, but they paid their lines off, and they have not grown up like the past. But I just think it's a function of the competition.
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [48]
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Did that help you, Peyton?
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Peyton Nicholson Green, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [49]
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Sorry? No, it does. I guess, the other question is when you all look out in the second and third quarter based on the pipeline, what segments do you feel more optimistic about that may be similar to the past or newfound optimism on any segments broader in the loan portfolio?
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [50]
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Yes, I don't know that I've got any newfound optimism. I go back to the loans are us. We've got folks that are out there competing in every type of loan -- call it loan competition that you want to put us in and where we can be successful and win. We are going to see those loans come on. I don't know that we're measuring any one loan type against another to say we want this or we don't want that or we need more of this. We want to be out there and be competitive in all of the fields. Chris?
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Chris A. Bagley, BancorpSouth, Inc. - President, Interim CFO, COO, Treasurer, Interim CFO of BancorpSouth Bank and Treasurer of BancorpSouth Bank [51]
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I agreed. And really, we folks are from a relationship perspective, so we are looking for not just loans but the deposits and other service charge and key business that goes that along with that. But like everybody else, we have to monitor and manage and diversify. So we're looking to grow in each one of those buckets and maintain our percentages as we kind of exist today.
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Peyton Nicholson Green, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [52]
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Okay. And then last question, I promise. Dan, as you -- you've all done a great job on controlling expenses for several years now. At what point will you need to turn the spigot on a little bit to improve productivity of the company? And maybe, the growth perspective of the company going forward?
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [53]
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Well, I think we're doing that today. I think you're seeing us invest today and opportunities to turn on or grow revenue. We have not shied away from investing in our insurance business. We've not shied away from investing in technology. We've not shied away from investing in facilities to build better efficiencies for us. So I think that's already in our numbers today, Peyton. I think what you're seeing is as we continue to find ways to standardize, centralize, be more efficient in what we're doing, and we believe we can continue to do that throughout this year.
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Chris A. Bagley, BancorpSouth, Inc. - President, Interim CFO, COO, Treasurer, Interim CFO of BancorpSouth Bank and Treasurer of BancorpSouth Bank [54]
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And we are hiring producers at all the time. We are hiring producers all the time. We're focused on that. So that's not a discipline side of the expense control. We want the opportunity to hire good producers.
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [55]
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We have hired revenue producers in almost every business line from wealth management to lending, to insurance, to mortgage. We are putting revenue producers out front everywhere we can.
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Peyton Nicholson Green, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [56]
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Okay. And just to be clear, so I mean you still feel net of the hiring, you still feel like you can keep expenses flat for this year?
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [57]
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Correct.
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Operator [58]
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(Operator Instructions) And our next question comes from Blair Brantley with Brean Capital.
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Blair Craig Brantley, Brean Capital LLC, Research Division - MD and Senior Equity Research Analyst [59]
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Just a couple of quick questions. On the margin, with that kind of earning asset mix shift this quarter, how should we think about that going forward? Will that kind of taper off some of those short-term investments?
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [60]
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Clearly, we would want to deploy investments into the highest-earning assets that we can get them. And I think when you see deposit inflows, the first place those go is into overnight investments and then you try to make your investment portfolio and run your [ outco ] model to maximize your earnings. So I think we would also expect to see as we've seen in past second quarters is second quarter is typically not -- second quarter is a tax payment quarter, and so deposits are typically flat or down in 2Q for us. So as those deposits roll off, if they roll off in this quarter, then that would be a benefit to margin because it would come out of the overnight funds. But clearly, we want to maximize the investment revenue where we can.
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Blair Craig Brantley, Brean Capital LLC, Research Division - MD and Senior Equity Research Analyst [61]
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Okay. And then on a different net, regarding M&A, I'm just curious about how these pending deals and kind of the overhang, has that has any impact on other conversations you're having with other banks out there?
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [62]
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I'm not sure what you're specifically referring to there. But I guess, let me take a high road and kind of talk about just overall. We continue to have conversations with potential merger partners on multiple business lines. It's -- what you're seeing today is a lot more front porch campaigns than auction campaigns. And so where we can spend time and get to know other bankers and determine whether or not their culture and our culture are fits, we continue to spend time doing that. Clearly, with the knowledge on both sides that we're not in a position today to do anything. So if you are a seller or a potential seller on a relatively short time frame, we may not be a good fit for you. But we continue to build relationships and spend time getting to know other folks and talking about how we do business and learning how they do business to see if we can build those relationships that would turn into some future transactions.
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Operator [63]
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This concludes our question-and-answer session. I would like to turn the conference back over to Dan Rollins for any closing remarks.
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James D. Rollins, BancorpSouth, Inc. - Chairman, CEO, Chairman of BancorpSouth Bank and CEO of BancorpSouth Bank [64]
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Thank you for joining us today. If you need any additional information or have further questions, please don't hesitate to reach out to us. Otherwise, we look forward to speaking to you all again soon. Thank you for participating.
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Operator [65]
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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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