BancorpSouth Bank
Q1 2021 Earnings Call Transcript

Published: 22 Apr 2021

[Operator:]

Good day, and welcome to the BancorpSouth First Quarter 2021 Earnings Conference Call and Webcast. Note this event is being recorded. I would now like to turn the conference over to Will Fisackerly. Please go ahead, sir.

[Will Fisackerly:]

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 and Chief Operating Officer, Chris Bagley; and Senior Executive Vice President and Chief Financial Officer, John Copeland.

[Dan Rollins:]

Thank you, Will. Good morning. Thank you for joining us today to discuss BancorpSouth's first quarter 2021 results. I'll begin by making a few remarks regarding the quarter. John will discuss the financial results in a little more detail. Chris will provide some color on credit quality and our business development activities. After we conclude our prepared comments, our executive management team is happy to answer questions. It is an exciting time to be a part of the BancorpSouth team. The economies in our footprint are open and performing well. While the virus rates in our footprint have improved considerably, we continue to exercise caution as it relates to our internal COVID protocols as the vaccine distribution continues and the public vaccination rate continues to rise. We have started transitioning teammates back to the office with the goal of returning everyone by June 1. We will obviously continue to monitor the situation closely and adjust as needed. Let's now turn to the slide presentation and spend a few minutes looking at our first quarter results. Slide 2 contains the legal reminders Will has already discussed. The most exciting news relates to our continued efforts to grow our company. We recently received regulatory approval to close our pending mergers with National United Bank and FMB Bank. We look forward to closing these transactions May 1 and officially welcoming these 2 teams into our family.

[John Copeland:]

Thanks, Dan. Slides 5 through 7 show our summary income statement as well as details of our noninterest revenue and expenses. Dan has already mentioned the trends in our EPS and PPNR numbers. I have a few brief comments around the dynamics in our net interest margin as well as a few other items that had variances compared to the fourth quarter of 2020. You'll notice on Slide 5 that net interest revenue declined by approximately $4 million compared to the fourth quarter of 2020. Approximately $2.5 million of this decline is a seasonal factor associated with the short day count in the first quarter of each year. Beyond that, as Dan mentioned earlier, the balance sheet dynamics for BancorpSouth and the industry continue to put pressure on the margin and net interest income. We reported a net interest margin, excluding accretion, of 3.08% for the quarter compared to 3.24% for the fourth quarter of 2020. This compression continues to be driven primarily by balance sheet mix. Deposit growth of over $1 billion, combined with pressure on loan balances outside of PPP really weighs on the margin. When you look at the individual yield and cost components of the margin, we continue to be pleased. Our loan yields, excluding PPP and accretion, declined by only 4 basis points from 4.53% for the fourth quarter to 4.49%. We also saw a comparable decline in our cost of deposits from 38 basis points for the fourth quarter to 33 basis points. We are optimistic that we can continue to drive deposit costs down, particularly in the time deposit and public fund categories. Regarding PPP, net interest income for the quarter included approximately $3.1 million of accelerated income recognition associated with PPP loans that were forgiven or paid off during the quarter. As of March 31, we had approximately $22 million in remaining unamortized net fees on PPP loans. This number includes the most recent round of funding. Slide 6 shows the breakout of our noninterest revenue components. There really aren't any material variances in the first quarter results. While refinance activity is declining our mortgage production volume and revenue continues to remain higher than what we would consider to be a more normal mortgage environment. Wealth management revenue for the quarter did benefit from 1 unusually large fee totaling approximately $800,000. Finally, the variance in other noninterest revenue was driven by $2.7 million in historic tax credit amortization that was recorded in the fourth quarter, reducing other noninterest revenue. We discussed this item during our fourth quarter earnings call.

[Chris Bagley:]

Thank you, John. Starting with Slide 8, you'll see our funding mix. We reported $1.3 billion in deposit and customer repo growth for the quarter or 26.7% on an annualized basis. Our total cost of deposits declined 5 basis points to 33 basis points. We do believe there is still room to continue to drive overall funding cost down as time deposits and public fund bids continue to reprice. Moving to Slide 9, you will see similar data for our loan portfolio. The story continues to be one of PPP, and total loans were essentially flat quarter-over-quarter when. You exclude PPP loans, it declined approximately $140 million in the quarter. While we are seeing opportunities, these are being somewhat offset by some aggressive pricing as well as larger loans refinancing and/or moving to the nonrecourse market. On the CRE side of things, opportunities have presented themselves in the multifamily space and owner-occupied transactions, albeit at very competitive rates, and we are experiencing good pipelines in the general C&I book. Slide 10 contains some updated stats on our PPP efforts. To the end of the quarter, we have processed applications for forgiveness on just shy of $700 million in loans and have received funds on $570 million. We have funded just over $460 million during 2021 and at an average loan size of $62,500. Moving to Slide 11. Net charge-offs were 9 basis points annualized. Total nonperforming assets declined by 17% and and we saw declines in criticized assets as well. These metrics, along with improvement in the economic forecast in our CECL process resulted in no provision being necessary for the quarter. Our allowance coverage remained stable at 1.74% of net loans and leases, excluding PPP loans. We continue to actively monitor the segments of the loan portfolio that have been identified as higher risk as a result of the pandemic, which is shown on Slide 12.

[Dan Rollins:]

Thanks, Chris. 2021 is off to a great start. While it would be nice to see some more positive movement in rates and improved loan demand, we're extremely pleased to be able to share the results we have reported today, given what we've been through over the past year. Our teammates have done a tremendous job of taking care of our customers and controlling the things we can control throughout the pandemic. These efforts are certainly evident in our record earnings for the quarter. As we look forward, our operational and back office teams will be busy closing and converting our national United Bank and FNB bank mergers while also continuing the planning phase on our Cadence transaction. Our customer-facing teammates will continue doing what they do best, taking care of our customers and supporting the communities we serve. With that, operator, we're now happy to answer any questions.

[Operator:]

And the first question will come from Jennifer Demba with Truist Securities.

[Jennifer Demba:]

Curious as to what your thoughts are as to when loan demand worn to be returning right now. It seems to be the big question for the industry right now. And curious what you're seeing in your pipeline and what you hand for your clients right now?

[Dan Rollins:]

The pipeline continues to be doing well. It's just we continue to get payoffs. And that's a mixed message that you hear from a lot of our peers. We hear some peers that have been saying they don't know when loan growth is going to happen. We've got other peers saying that they expect significant loan growth in the back half of '21. And I think the answer for us is probably some of both. I think it's part footprint-driven. And parts of our footprint, we're seeing lots of business activity and potential opportunity to grow some loans. And in other parts of our footprint, still relatively slow. Chris, you want to talk about pipeline?

[Chris Bagley:]

Yes, I'd jump in there. So I've not been through a pandemic before nor have I had a PPP or PPP program in our process. But I'll make a couple of comments there. When you talk about loan and the energy it takes to originate loans, we did 7,527 loans in the quarter that were PPP transactions. Those don't just happen by themselves. So that's almost 1 location, 1 loan per location per day when you look at it that way. So PPP is also, I think, eating away at some of the community bank demand for loans. So if you're a customer that needs a loan and you're getting a PPP loan, how many loans are you going to get in addition to that and when do you circle back into the loan market? So to kind of answer your question, as we look at the second half of the year, we're seeing businesses open as the community is open. We're seeing trade and some business practices normalizing. More -- they're going to come in different stages. Obviously, we're seeing slowness in hospitality, large CRE, retail type or lease type commercial and health care that we're starting to see opening up in the commercial and C&I world, specialty, transportation and industrial, C-stores, those type of things. So I think it's going to be a mixed bag as PPP rolls off and then other business segments open at different times going forward.

[Dan Rollins:]

So yes, we're in the same general economic environment in our part of the world as you are. There are parts of the country that are still relatively closed. Still parts of the country that have got limits on occupancy in different facilities. And most of the limits across our entire footprint have been removed. So there's no limits on indoor restaurants, there's no limits on pretty much anything. You heard me say a few minutes ago, we're in the process of reintegrating our folks back into the office. So we're lucky to be in a footprint that's ahead on that. Obviously, we're watching to make sure we don't have a relapse back with the virus, but we certainly were encouraging our folks to get vaccinated as soon as they can.

[Jennifer Demba:]

Okay. My follow-up is on residential mortgage. That obviously was incredibly strong last year. Still relatively strong this year. Are you thinking does the spring and summer selling season is going to be pretty healthy based on what you're seeing right now?

[Dan Rollins:]

The other problem is product. There's not anything for sale. Things that are for sale and our footprint are being moved very fast. So certainly, there is opportunity out there. People are hungry for residential properties. There's just not enough product on the market for sale to keep us at the same levels where we were before, and the refi business has slowed down. So I think our normal spring/summer time will be good. I don't know that it's going to be as good as it was last year.

[Operator:]

The next question will come from Kevin Fitzsimmons with D.A. Davidson.

[Kevin Fitzsimmons:]

Dan, with the Cadence transaction, I was wondering, there's a lot of focus, obviously, on Texas and getting a bigger presence there, but you also inherit this or add this presence in Metro Atlanta and Middle Georgia and the Florida Gulf Coast around Metro Tampa. And I'm just curious what -- where you see the combined bank going from those positions in terms of -- do you take those and expand further or maybe you don't need to expand metro Atlanta any further than where it is, you just ride the growth in that market. But maybe more specifically in Florida, that's just -- I know you're already on the panhandle. But now you got -- you'll gain a big position in that market. Do you have any interest longer-term in expanding throughout the state?

[Dan Rollins:]

Yes. Great, Kevin. I think those are 2 great growth markets that we have not been in before. So we certainly are looking forward to continuing to grow in those markets. The teams that are there, I've been able to talk to some of the folks on those teams, great teams of people in those markets. And frankly, the opportunity to continue to expand to the team and expand within those markets is very important to us. Florida as a whole, we can now connect the dots from the Panhandle presence that we have down to the Tampa St. Pete presence that is already there. There's great opportunity across the state of Florida for us. And when we can find good bankers to join our team, we're putting them on our team, and we will not stop doing that because we're in the middle of our merger process. We want to continue to grow. Both of us, both the Cadence team and our team have both been able to continue to attract producers over the last several months, and I think we will be able to continue to attract producers going forward to help us grow. Not only in those 2 markets because they're very important, but in all of our markets.

[Kevin Fitzsimmons:]

Okay. Great. And just -- this is -- when other banks hear about a large transaction like this, they always are quick and probably you guys as well when there were other transactions among your neighbors, that point to the opportunity for taking business and taking talent. And so obviously, it wouldn't be a surprise that some of your competitors will be talking about that opportunity. And so how do you -- being on the other side of that now, how do you ensure that you keep the folks and the business you want to keep when folks are trying to approach that?

[Dan Rollins:]

Yes. We we've been on both sides of that game also, Kevin. We certainly want to take advantage of opportunity when the opportunity presents itself. Our business is all about people. So it's how you treat people. It's how you take care of your folks. And if we keep doing what we need to do to take care of our people and keep them engaged and enrolled and feeling good about what we're doing. We certainly want to make sure that they feel needed. We want to make sure there's retention incentives for our teams. And I think we're doing that today. And I think, again, as I've made the rounds, you heard me say a little while ago, as I've been able to make it around. Chris actually jumped into Florida, jumped into Georgia for a little bit. I've been able to travel a couple of our other states, and we're traveling again later today. Everybody we're talking to seems to be really excited because we have just not a whole lot of direct overlap. So it's not as much stress on any of the teams because the lack of direct overlap.

[Kevin Fitzsimmons:]

Okay. And just very quickly on that same topic. You guys are changing the branding name of the bank, and maybe you could just go into a little detail on that. From what I understand, maybe the word South and BancorpSouth you felt might have be a little limiting in Texas and maybe not fly as well, even though you guys are in Texas. But -- or maybe it's just one of those negotiating things that you feel they throw out to the selling bank, but it does presents -- you have a pretty expansive footprint and your going out of your way to change the name of the bank which presents, not confusion, but it's going to present an event for your customers. So I'm just curious how you approach that decision? And what factors you weighed in changing the name of the bank? And maybe why you don't think it will be such a big deal at the end of the day?

[Dan Rollins:]

Sure. Our name has been a question mark for many years. Our Board has looked at our name multiple times as we move up North into Missouri. Some of those folks -- as we get further north into Missouri, where we are in St. Louis today or Clayton, I'm not sure they really think they're in the south. The rest of our footprint today is the south. But we've had geographically limiting names now going back from almost the beginning of our company, 140-some-odd years ago. We were the Bank of Tupelo. We became the Bank of Mississippi, and then we became BancorpSouth. And so those geographically limiting names has been on our Board of Directors concern list since I came here 8 years ago. We came close to making a change several years back and didn't. And this gives us opportunity to take a clean brand that has a fantastic reputation in the markets that they currently serve. And make it what we want it to be on a go-forward basis. So we saw this as a real opportunity to help us and line us up for future growth as we continue to look forward. And you're right, it certainly is when you've been on the same team for a long time and you have to change Jerseys, that's hard. And so we're going to spend a lot of time and effort talking about that. We're certainly going to spend time and effort in the markets with our customers, making sure they understand what we're doing and why we're doing it. And frankly, this isn't going to happen for the next 12, 13, 14, 15 months, while we go through the approval process now close. And then we've got to get to full integration before we actually start changing the name on some of our buildings. So there's plenty of time to make sure that we're communicating this to our customers in a way where they understand what's happening.

[Operator:]

The next question will come from Jon Arfstrom with RBC Capital Markets.

[Jon Arfstrom:]

The name wasn't was it, that you're going to change it to?

[Dan Rollins:]

That's a good one, John. No, that one was a little limiting also in the spelling category.

[Jon Arfstrom:]

Okay. All right. We're a long way from that, clearly. But a question for you on mortgage. What do you think the number of producers looks like in a year? I guess I'm curious about your plans for expanding that business? And does the larger footprint mean that you need to have a larger presence in your hiring producers or kind of walk us through that?

[Dan Rollins:]

Yes. I think that the Cadence mortgage team is a great group of producers. So I think if you're talking about post closing. They've got a great group of producers that will -- we're looking forward to plugging in and making sure that we can all be on the same team and produce mortgages together. We're at 160-some-odd people today. But frankly, when you look at the expanded footprint, there's great opportunity for us to even expand further than the current Cadence producers by making sure we've got good presence in Georgia and the Southwest Florida side. So I would expect to see that -- those numbers go up. Clearly, the mortgage business is a question mark as you look forward as to what happens to us if rates start moving and the refi business, stops. So clearly, people want to make a good living in the mortgage business, and I think there's great opportunity for us because people are going to continue to need to buy and sell the homes that they've got. So I would envision growth in that area. Chris, do you want to jump on that?

[Chris Bagley:]

I would agree. I think we have a great platform and a great mortgage team and with strong leadership. So in a cyclical industry that can bounce around a little bit. I think that gives us an advantage. And I think producers would want to join a stable production company going forward. And our -- our footprint is expanding. So I would see upward pressure on a number of producers.

[Dan Rollins:]

Yes, Scott, Scott has taken care of leading our team and is doing a great job there. Sharon is doing a great job for the Cadence team. And so I think when you put those 2 leaders together and you put the 2 teams together, I think we've got tremendous opportunity to continue to expand.

[Jon Arfstrom:]

And then sticking with this, maybe this is Chris, but Cadence has some decent fee businesses as well in treasury products. But it's your call here. And I guess I'm interested in insurance as well how would you grade yourself? How do you think you've done in selling the insurance products into the commercial customers of acquisitions that you've done? How has that gone?

[Dan Rollins:]

Yes. So remember, our commercial insurance brokerage is a bigger ticket commercial business, and we've been a community bank model. So when you talk about forcing those cross-sells across our lines. We have not done that. We've referred -- we've done okay at referring business to insurance, but coming back the other way, that most of our small business customers are not the same type of customer that the big P&C brokers are looking for. On the other hand, as we've grown our C&I book ourselves, and so we we've got in 25 or 30 people on our C&I team today, that relationship back and forth with insurance has been very good. The insurance team has been very pleased. Our bankers are pleased to go with them. And so as we've been out talking to the cadence team, I think they see that as a positive piece. Chris, you had some conversations directly about that.

[Chris Bagley:]

Yes. Just to emphasize, the connection between our insurance team and the community bank side of the house is not that strong because of just the size of the transaction.

[Dan Rollins:]

It will never be strong.

[Chris Bagley:]

It will never be that way. So what you're seeing here is a better alignment of business and cross-selling opportunities to the corporate C&I space. Clearly, Cadence has a big book there. And those -- our experience has been in our rolling out of our corporate and C&I initiative over the last 24 months, that that's a great alignment. They work really well together. The introduction to the CFOs to the large corporate space is a perfect alignment for our employee benefits and our P&C sales force and insurance professionals.

[Jon Arfstrom:]

Good. That's helpful. That makes sense. And then maybe 1 for you, John. I know it's -- you're not alone in lower net interest income for the quarter. And I know there's day count issues. But how do you feel about second quarter net interest income growth. Is that possible given some of the dynamics that you're seeing today?

[John Copeland:]

I don't feel about -- you're very faint, John. How do I feel about the second quarter?

[Jon Arfstrom:]

Second quarter NII.

[Dan Rollins:]

We feel better already because we have more days in the quarter, Jon.

[John Copeland:]

Well, in the -- let's frame it in the context of the possibility of continued low growth in the loan portfolio or even flat growth in the loan portfolio. What's the liquidity going to do? What's all this excess cash in the system is going to do. That is the main driver of our margin squeeze is putting another $3 billion or $4 billion in the investment portfolio that we would rather be in the loan portfolio at 100 bps that's what's squeezing the margin, right? So if the cash is going to slow down, does deposit growth going to slow down, if that -- if that does slow down because we seem to be exercising pretty good discipline in our loan pricing, not chasing deals. So our loan yields are holding up pretty well. Plus the rate protection that I've always talked about every quarter, where we have about 50% of our variable rate loan portfolio at floors already. So the loan yields are holding up pretty well going forward. I think we should continue that. Deposit cost is kind of the bogey here with the deposit growth. I think that the opportunities in the deposit book revolve around our CD book, about $2.5 billion in CDS. That are repricing lower and in public funds. We got public funds at mid 70 bp cost that are going to roll off and we can reprice those as well. So we do have some levers to pull on the deposit repricing that's going to help the margin. So is the cash going to start rolling in?

[Dan Rollins:]

That's where I was going, John. I mean, if you'd ask us in our call 3 months ago, if we thought we were going to grow low deposits at a 30% clip in the quarter, I probably would have said, no, there's no way we're going to grow deposits at a 30% clip. And here we are. And we're not alone. I know others are doing it, too. So the liquidity that's flowing in is just very damaging on the net interest margin side.

[Operator:]

Our next question will come from Catherine Mealor with KBW.

[Catherine Mealor:]

A follow-up to the margin, and I apologize if this was discussed. But can you talk about loan yield? And your loans have been really kind of stable over the past couple of quarters. How much more downside do you think you may see that especially as loan growth starts to pick up in the back half of the year?

[Dan Rollins:]

Yes. If loan growth happens, then clearly, that can change some things, too, depends upon what types of loans are coming in. If we're able to grow C&I credits, sometimes those are skinnier priced. But we're also seeing opportunities in other credits. So we've been able to hold loan, right. John, you want to jump in on what's happening there? Chris? Either one?

[John Copeland:]

Well, I mentioned pricing discipline. I think we've been very disciplined in the pricing on loans, and there's a lot of lot of moving parts to that. We've talked about deposit rates and the opportunities lower deposit rates as well and the price protection on our rate floors. So I'm optimistic. I'll just repeat the question I hinted in my last comments on when is the liquidity going to slow down? Putting an extra cash $5 billion -- $4 billion. Actually, $4 billion in the investment portfolio.

[Dan Rollins:]

Over the last 1.5 years.

[John Copeland:]

Yes, over the last 1.5 years, especially ramping up last year, beginning early in the year, going great and straight into the loan portfolio, just to put it to work. That's what's diluting the margin.

[Chris Bagley:]

I'll just jump in and add. It's competitive. So we're seeing loan rates out there in the 3s. We've seen a few with 2s in front of it, a 2 handle. So keeping -- John's right, we just have to stay disciplined and compete on where we can and when we need to, to protect relationships. But I think just remaining disciplined on the loan pricing. Hopefully, we'll get some upward pressure on the yield curve and be able to support higher rates from a fixed rate perspective going forward.

[John Copeland:]

Catherine, 1.5 years ago, our investment portfolio was about $2.8 billion, which was 16% of our earning assets. At the end of the quarter, it was $6.6 billion, which is 30% of our earning assets. That sort of tells the tale right there.

[Catherine Mealor:]

Yes. Yes. The mix shift for sure is the driver. I'm just I'm looking at just loan yields and trying to compare that to -- like one check I had as I'm going back to kind of 2015/'16 levels and seeing where loan yields were there and comparing that to where you could bottom. And you're at like 4 60 now, but you were maybe more like 4 20 back then, but you've also done a lot of acquisitions between now and then. So I'm not sure it's totally comparable.

[Dan Rollins:]

I would not think that's totally comparable, but we're clearly paying attention to what's happening on the loan pricing side today.

[John Copeland:]

I do the same thing, Catherine. I did the same exercise. When I look back at that time, rates have been low for a long, long, long period of time. It dropped off the cliff here to what it looks like going forward is the question. So what is all the liquidity due to rates? A lot of questions I can't answer, but I don't know that it's exactly the same apples-to-apples is 15, 16.

[Dan Rollins:]

Because you're saying prime.

[John Copeland:]

Yes, prime been that way for years. Yes, it would be -- yes.

[Catherine Mealor:]

Yes. That makes sense. That makes sense. And then just on the reserve, how much further reserve release, do you feel like you've got you go back to day 1 CECL, I guess kind of thinking excluding cadence, let's kind of take you as a stand-alone basis. Do you go back to day one, eventually, or if you have flexibility within CECL to kind of give yourself a little bit of little room for growth and then with, of course, Cadence coming on?

[Dan Rollins:]

Yes, Cadence is clearly going to change that, hopefully, before we get to the end of the year. But our CECL model is our CECL model. And so we're going to do what it tells us to do. The answer to your question about where we are from an opportunity standpoint. Can we go back to where we were? I think that's really dependent upon the forward-looking economic environment that's out there because that's really what's driving the model. So on a forward-looking economic environment coming into last year when we changed the CECL things were looking pretty good until about 30 days or 45 days into the year, when things all of a sudden changed pretty dramatically. And we could get back to that looking pretty good situation. So I think that you're -- I don't know that I have a direct answer for you, but there's opportunity there for us. We would like to grow into what we have. But clearly, we're going to follow what the model tells us to do.

[Operator:]

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

[Dan Rollins:]

Thank you all for joining us today. If you need any additional information or have further questions, please don't hesitate to call us. Otherwise, we look forward to speaking with you again soon. Have a good day.

[Operator:]

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