BancorpSouth Bank
Q4 2019 Earnings Call Transcript

Published: 23 Jan 2020

[Operator:]

Good morning. Welcome to BancorpSouth's Q4 2019 Earnings Conference call and webcast. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded.I would now like to turn the conference over to Mr. Will Fisackerly, please – Executive Vice President and Director of Corporate Finance. Please go ahead.

[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.Before the discussion begins, I'll remind you of certain forward-looking statements that may be made regarding the company's future results or future financial performance. Actual results could differ materially from those indicated in these forward-looking statements due to a variety of factors and/or risks. Information concerning certain of these factors can be found in BancorpSouth's 2018 annual report on Form 10-K. Also during the call, certain non-GAAP financial measures may be discussed regarding the company's performance. If so, you can find the reconciliation of these measures in the company's fourth quarter 2019 earnings release.Our speakers will be referring to prepared slides during the discussion. You can find the slides by going to bancorpsouth.com and clicking on our Investor Relations page, where you'll find them on the link to our webcast or you can view them at the exhibit to the 8-K that we filed yesterday afternoon.And now I'll turn to Dan Rollins for his comments on our financial results.

[Dan Rollins:]

Thank you, Will. Good morning, everyone. Thank you for joining us today to discuss BancorpSouth's fourth quarter and full year 2019 financial performance. I will begin by making a few brief comments regarding the highlights for both the year and the fourth quarter. John will be happy to discuss our financial results. Chris will provide a little detail on our business development activities. And after we conclude our prepared comments, our executive management team will be happy to answer questions.Let's turn to the slide presentation, where Slide 2 contains the standard legal reminders that Will has already discussed with you. Slide 3 covers the highlights for the year. First and foremost, we are excited to reach the $20 billion mark in total assets for the first time in our company history, actually ending the year with just over $21 billion in total assets. This accomplishment really speaks volumes to the success of all current and former teammates and continuing to grow our company in a judicious manner, both organically and through mergers and acquisitions.We reported record annual earnings for 2019, both on a GAAP basis and operating basis. Our reporting – our reported net income for the year was $234.3 million, or $2.30 per diluted share, while our net operating income excluding mortgage service right adjustment was $254 million –excuse me, $255.4 million, or $2.51 per diluted share. This represents an increase of operating income of 12.6% on a per share basis compared to 2018.While we've battled recent headwinds, resulting primarily from a shift in the earning asset mix on our net interest margin, our net interest margin excluding accretable yield, increased by 8 basis points year-over-year to 3.72%. On a year-over-year perspective, we were able to outpace deposit cost increases with upward repricing opportunities in the loan and securities portfolio. Given the current rate environment, this trend is obviously reverse course in the back half of 2019 and John will be providing a little more detail on this in just a few minutes.I would like to commend our relationship managers for the success we had in 2019 with respect to organic deposit growth. We eclipsed $1 billion in organic deposit growth, which is just over 7% for the year. This is a tremendous accomplishment for our team as we continue to believe that our core deposit base is the greatest strength of our company.Our credit quality remains strong, as evidenced by our provision for credit losses of $1.5 million for the year, net charge-offs totaled $2.5 million for full year 2019, which represents only 2 basis points of average loans. These metrics continue to speak about the quality of our underwriting and monitoring that our credit team provides. Chris will provide a little more information in just a few seconds.We continue to improve our cost structure. Our operating efficiency ratio, excluding MSR, declined by approximately 170 basis points compared to 2018 to 64.9%. We continue to benefit from the added efficiency achieved through our growth efforts, while also challenging expenses across all facets of our business; contract renewals, vendor relationships, facilities and suppliers, just to name a few. I expect our team to follow the same path in 2020, challenge each and every dollar we spend to ensure we are adding value to our customers and our shareholders as we continue to improve on efficiency.Moving on to capital deployment and management, during 2019 we completed the four bank transactions listed on the slide. These transactions added $1 billion in loans and $1.3 billion in deposits to our balance sheet. All four of these transactions have been converted to our operating systems, with the most recent two having been converted over in the middle of the fourth quarter. As we move into 2020, we hope to continue to realize improved efficiencies associated with these transactions.Finally, we were active in our share repurchase program, repurchasing approximately 2.5 million of the 3 million share authorization for 2019 at a weighted average price of $28.20. As we enter the New Year, our Board authorized another 8 million shares for 2020. The increase in the authorization is primarily the result of our fourth quarter capital raise, which I'll discuss in just a second.Slide 4 provides a view of our summary financial results over the past five years, both on a GAAP basis and operating basis. I certainly don't need to spend a lot of time on the details here. However, I do want to emphasize the continued positive trends and successes detailed on this slide. Most importantly, we have grown operating EPS, excluding MSR, at a compound rate of 15% over the past four years.Moving on to Slide 5, we will briefly review the fourth quarter highlights, which are very consistent with the annual highlights. Accordingly, I can again be very brief here. We reported GAAP net income for the fourth quarter of $65.8 million, or $0.63 per diluted share. We had a positive MSR valuation in the quarter of $3.2 million, while merger-related expenses totaled $5.8 million for the quarter. Accordingly, our net operating income, excluding MSR, was $67.8 million, or $0.65 per diluted share. On a per share basis, this represents an increase of over 14% compared to the fourth quarter of 2018.While loans were essentially flat in the quarter on an organic basis, we had another outstanding quarter with respect to organic deposit growth, generating $385 million, or 9.5% annualized growth during the quarter. This deposit growth, combined with the additional liquidity associated with the capital raise is the results – resulted in a shift in earning asset mix that put downward pressure on the net interest margin. John will discuss the dynamics of the margin in just a few minutes.Credit quality continues to remain a strength for us. We had net recoveries of $2.2 million for the quarter, which supported the lack of any reported provision during the quarter. Virtually, all of our credit quality metrics, including non-performing and classified asset balances were stable.The last three bullets relate to capital manage – management. Of the 2019 share repurchase total that I mentioned earlier, just under 300,000 shares were repurchased during the fourth quarter. We also went to the market during the fourth quarter with a simultaneous offering of $300 million in subordinated debt and $172.5 million in Perpetual Preferred Stock. We viewed the historically low rates respective to these capital instruments as an opportunity to bolster and diversify our capital mix. As a reminder, our bank has historically operated with 100% common equity and this will improve our capital stock. We anticipated this additional capital will be used to either support further growth efforts or support additional share repurchases or a little of both.Finally, the last bullet point on this slide relates to the closing of our merger with Texas First State Bank, which closed effective January 1 of this year, 2020. We’re excited to formally welcome Rodney Kroll and all of our new Texas First teammates. This transaction adds approximately $390 million in total assets to our company as we enter the Waco, Texas market and further enhance our market share in other surrounding communities.I'm now going to turn the call over to John and allow him to discuss a little more financial results in detail.

[John Copeland:]

Thanks, Dan. I will jump right into the numbers. If you'll turn to Slide 6, you'll see our summary income statement. In reviewing that statement, net income was $65.8 million, or $0.63 per diluted share for the fourth quarter. As Dan mentioned earlier, we had two non-operating items in our fourth quarter results. We had a positive pre-tax MSR valuation adjustment of $3.2 million and merger-related expense of just under $6 million. Accordingly, we reported net operating income, excluding MSR, of $67.8 million for the quarter, or $0.65 per diluted share compared to $69.7 million or $0.69 per diluted share for the third quarter of 2019 and $56.4 million, or $0.57 per diluted share for the fourth quarter of 2018.Our net interest income increased 2.5% compared to the third quarter of 2019 and 11.7% compared to the fourth quarter of 2018. The transaction closing, the merger closings in both the second and third quarters of 2019 did obviously impact those comparisons. As Dan mentioned earlier, we've seen some recent pressure on our margin, largely attributable to the shift in earning asset mix. Our reported net interest margin for the fourth quarter was 3.76%, while our net interest margin, excluding accretable year – yield, our core margin was 3.61%, comparable metrics for the third quarter of 2019 were 3.88% and 3.76% respectively. We reported a net interest margin of 3.8% for the fourth quarter of 2018, while our core margin was 3.71%.As we look at the quarter-over-quarter change in our core margin, the shift in earning asset mix is largely responsible for the margin decline. As Dan mentioned earlier, we had a great quarter from a deposit growth perspective and we also completed a public offering of subordinated debt and preferred stock. The deposit growth success and the capital raise, collectively contributed approximately $850 million in additional liquidity during the quarter that had to be put to work.In addition, we were active in December, purchasing shares in advance of the Texas – I'm sorry, purchasing securities in advance of the Texas First merger closing. This earning asset mix shift was responsible for approximately 8 basis points of the margin compression. We also had some pressure on earning asset yields. And looking more specifically at those components, loan yields excluding accretion were down 7 basis points from 5.02% for the third quarter to 4.95% for the fourth quarter. This 7 basis point decline was largely the result of the impact of the September and October rate cuts on our variable rate portfolio. Securities yields were down normally as well. And finally we saw a 3 basis point decline in our total cost of deposits, which did help to offset some of the pressure on asset yields.Before I move onto non-interest revenue expense, I'd like to briefly mention credit quality that Dan alluded to. We did have no recorded provision for the quarter compared to the provision of $0.5 million for the third quarter and a provision of $1 million for the fourth quarter of 2018, but our credit quality metrics, including non-performing and classified assets did remain fairly stable during the quarter. We also reported net recoveries of $2.2 million for the quarter, which certainly helped.If you'll turn to Slide 7, you'll see a detail of our non-interest revenue streams. Total non-interest revenue was $74.7 million for the quarter, compared to $75.4 million for the third quarter of 2019 and $59 million for the fourth quarter of 2018. The MSR valuation adjustment as usual is obviously a primary contributor to the volatility in these totals. Outside of the MSR adjustment, considering the seasonal factors mortgage had a nice quarter, reporting production and servicing revenue of $6.9 million. Chris can discuss our mortgage business more in a moment, but we continue to benefit from – some refinancing activity associated with the low rate environment. The quarter-over-quarter decline in insurance commissions is driven typically by seasonal factors associated with the renewal cycle in our book of business. All other items shown on this slide were within our range of expectations given the merger activity during the quarter and other seasonal factors.Slide 8 represents a detail of non-interest expense. Total non-interest expense for the fourth quarter was $162.4 million compared with $159.6 million for the third quarter of 2019 and $152.3 million for the fourth quarter of 2018. Total operating expense, which excludes merger-related expense and all other one-time items, was $156.6 million for the quarter compared to $155.6 million for the third quarter of 2019 and $147.9 million for the fourth quarter of 2018. The merger closings that occurred on April 1 and September 1 certainly impact the comparability of these figures.As we look at the quarter-over-quarter trends, the decline in salary and employee benefits compared to the third quarter is the result of year-end true-ups to several of our accruals, including our medical accrual and incentive programs. These items provided a benefit of approximately $4 million in the fourth quarter. As our core expense base remains in a relatively tight range, we are pleased to see continued improvement in our annual operating efficiency ratio, excluding MSR, which improved to less than 65% in 2019 versus 66.6% in 2018.That concludes my review of the financials. Chris will now provide some color.

[Chris Bagley:]

Thank you, John. Slide 9 reflects our funding mix as of December 31, compared to both the third quarter of 2019 and the fourth quarter of 2018. Total deposits and repos grew almost $370 million for the quarter, or 8.8% on an annualized basis. Over the course of 2019 deposits and repos increased $2.4 billion, $1.3 billion of which is associated with the four transactions closed during this time. Organic funding growth has totaled $1.1 billion, or 7.6%.We're very pleased with our deposit growth efforts, both for the quarter and for the year. As we look at pricing, our total cost of deposits declined 0.68% for the fourth quarter from 0.71% for the third quarter of 2019. As we mentioned in our third quarter call, we were nearing the inflection point on the repricing of time deposits, which allowed us to ultimately improve our total cost of deposits in the fourth quarter. Roughly half of the fourth quarter deposit growth came in the non-interest bearing demand products, which contributed to improvement in deposit mix as well.As we look at geographical performance relating to deposits, we had several divisions across our footprint standout this quarter. The Houston, Texas, Texas Hill Country, Tennessee Metro, West Tennessee, Missouri and our Northeast Arkansas divisions all reported strong deposit growth for the quarter.Moving to Slide 10, you will see our loan portfolio as of December 31 compared to the third quarter of 2019 and the fourth quarter of 2018. Loans were essentially flat on an organic basis, driven primarily by some larger payoffs in the quarter and to some extent, competitive pricing and structuring headwinds. For the year, we added just under $1 billion in acquired loans to our balance sheet. And our teammates have done a good job of holding these loans balances during the turmoil of conversion integration.The mix of our loan portfolio is very consistent for each of the period shown here, while our pipeline of opportunities remained good, the recent redirection of Fed rate action has led to some very competitive pricing and structuring in the markets that has presented a headwind for organic loan growth while you try to protect margin. We are working hard to protect these loan balances, as well as margin, while the rate environment stabilizes.Despite the overall organic loan growth pressures, we continue to have success in our lending efforts from a geographical perspective. We had several divisions produce significant meaningful loan growth. Our Dallas, Texas, Missouri, South Arkansas divisions all had great quarters from a loan growth perspective.Slide 11 contains some credit quality highlights, which continue to be a strength for our company. As John mentioned earlier, we had no recorded provision for the quarter compared with the provision of $500,000 for the third quarter of 2019 and a provision of $1 million for the quarter of 2018 – for the fourth quarter of 2018.We had net recoveries of $2.2 million for the quarter. Non-performing assets represented 0.84% of net loans and leases at December 31 compared to 0.82% at September 30, 2018, and 0.81% at December 31, 2019. Other than the previously discussed and anticipated lumpiness associated with acquired loans with our merger activity, we've been fortunate to maintain good credit quality metrics.To sum up the year, we believe our due diligence processes have performed well through our M&A activity, and combined with our legacy efforts has generated stable and acceptable credit quality metrics. We will continue to focus our attention on asset quality as we believe this is a core strength of the company.Moving on to mortgage and insurance, the tables on Slide 12 provide a five quarter look at our results for each product offering. Our mortgage banking operation produced origination volume for the quarter totaling $505 million. Home purchase money volume was $322 million or 64% of our total volume for the quarter. This is consistent with our third quarter mix, which was 66% purchase money.Industry consensus projects downward pressure on total production, driven by a decrease in refinance production due to the current rate environment. We feel positive about our diverse geography and our participation in growth purchase money markets like Houston, Dallas and Nashville.Deliveries in the quarter were $419 million, compared to $374 million in the third quarter of 2019, and $251 million in the fourth quarter of 2018. Production and servicing revenue, which excludes the MSR adjustment, totaled $6.9 million for the quarter compared to $11.2 million for the third quarter of 2019, and $4.8 million for the fourth quarter of 2018.Our margin was 1.03% for the quarter, representing a decline from 2.38% for the third quarter of 2019. The margin decline is attributable to seasonal aspects and an $80 million increase in mortgage pipeline quarter-over-quarter. This is common each year as the pipeline declines leading into the winter months, which are slower from a home purchase standpoint as evidenced by a 0.88% margin for the fourth quarter of 2018. The $290 million pipeline on December 31 was comprised of approximately 50% refi, 50% purchase money. Finally, as Dan mentioned earlier, the MSR valuation adjustment during the quarter was a positive $3.2 million.Moving on to insurance, total commission revenue for the quarter was $27.6 million, compared to $31.5 million for the third quarter of 2019, and $28 million for the fourth quarter of 2018. As we mentioned, each quarter, we typically benchmark to the same quarter in the prior year, given the seasonality in the renewal cycles.Our total insurance commission revenue was relatively flat to the fourth quarter of 2018. This was a direct result of year-end true-up in contingent commission estimates. Notably, our core P&C commissions and life and health commissions increased by 3.3% collectively, this is in line with our growth rates and comments on pricing for the last several quarters.Finally, I'd like to briefly mention wealth management. We reported wealth management revenue of $6.6 million for the quarter. For the year, wealth management revenue totaled $24.8 million, which represents an increase of 8% compared to 2018. During the fourth quarter, we completed the system conversion for the Summit Bank Wealth Management book of business, which was acquired effective September 1 with the Summit merger closing. We are pleased to have this conversion behind us, excited about the value these new teammates will add as we continue to build our wealth management teams.Now I'll turn it back over to Dan for his concluding remarks.

[Dan Rollins:]

Thank you, Chris. We are very pleased with our financial results for 2019. We've continued to improve virtually all of our performance metrics quarter-after-quarter and year-after-year. As I mentioned, we surpassed $21 billion in total assets during the latter part of 2019 and achieved record earnings for the year. We improved most of our profitability metrics compared to 2018, while maintaining strong credit quality.As we look forward into 2020, consistent with industry expectations, we anticipate this year to be a challenging year from an earnings growth standpoint, particularly given recent trends in loan demand and margin pressure.Our message to our team is to simply control the things that we can control. Our frontline teammates will continue to focus on protecting our customer base and winning new business on both sides of the balance sheet, while not compromising on structure or credit quality.Our business development and tech teams will continue our efforts to enhance the customer experience through technology improvements and improved product offerings. We will also keep challenging every dollar we spend in an effort to continue improving our operating efficiency.Finally, we must work to efficiently manage and deploy our capital in a manner that maximizes value for our shareholders. Here's to a successful and prosperous 2020.With that operator, we'd be happy to answer any questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Catherine Mealor from KBW. Go ahead.

[Catherine Mealor:]

Thanks, good morning.

[Dan Rollins:]

Good morning. Catherine.

[Catherine Mealor:]

Just wanted to start with the balance sheet and margin dynamics. Can you talk a little bit about how quickly you think you'll be able to deploy the excess liquidity that we saw built up this quarter? And how we should think about how that will translate into loan growth this year? Thanks.

[Dan Rollins:]

Yes. So John is ready to jump in here, too. So a couple of things were happening in the fourth quarter. We closed on the Texas First transaction on the first, and we were looking to kind of get ahead of the portfolio that they will be bringing across. So some of that will be used in sucking up the portfolio that's not coming across on theirs, they're very liquid, and so cash will come in to take some of that.Your specific question on loan growth, now we continue to be focused on loan growth, I like the fact that we're showing good growth in Texas. However, parts of our footprint are slower growth or no-growth spots today. So we saw some contractions in the outstandings in a couple of states, but we saw really good growth across the state of Texas.Specifically, I think Chris mentioned the pay down structure. We got another pay down today on a non-recourse low-rate CRE credit. And so you saw CRE credits drop for us. I don't think, we're willing to play in those low-rate non-recourse games. And so we're seeing some headwinds on those payoffs. However, the production side, especially in Texas continues to do very well.John, do you want to take some of that?

[John Copeland:]

Yes, just a bit on the Texas First, and that wasn't a very big portfolio. We did prefund the debt restructuring of that portfolio. So we -- in January here, we'll be selling those securities and paying down some borrowings.

[Catherine Mealor:]

Got it, okay. And so, I mean, do you -- as we think about a growth range for next year, I mean, is it -- do you feel like on a net basis kind of low single digit is a good place to start as we're thinking about next year, just given these dynamics?

[Dan Rollins:]

Yes, I expect us to grow. So how we get there, we grew the balance sheet this year on the deposit side, but the loans weren't there. So again, I think I'm really proud of the team and the core low cost deposits that we're attracting. We want to continue to do that, we got to deploy that into higher earning assets and if we can continue to do that across the state of Texas and the higher growth footprint, I think we're -- we've been on the ground in the Florida Panhandle for only a couple of months now, that area has promise for us. We think with the team down there, they can help us grow. So we've got that opportunity in front of us.

[Catherine Mealor:]

Got it, okay. And so then on the margin side, outside of the impact from excess liquidity, how are you thinking about the outlook for the margin this year assuming no further rate cuts?

[John Copeland:]

Well, we are obviously less optimistic than we were in the second quarter of this year. No doubt, there’s going to be continued pressure on the margin. We've had 10 or 11 quarters, straight quarters of an increasing earning asset yields. And we've had 13 or 14 consecutive quarters of higher interest-bearing liability rates. But we've also had a number of quarters of improving net interest margins. We've reached an inflection point on that in the fourth quarter were earning asset to yields are – have fall – did fall and also deposit rates did fall.Now deposit rates, there is a big tail on deposits, that's a lagging -- lagging thing. So I guess the wildcard would be, can we maintain higher-than-expected loan repricings. We were repricing loans at 5.5% in the second quarter. We're going to reprice those loans that couple of billion in loans over the next 12 months and current repricings are somewhere between 4.50% and 4.90%. So that's going to put pressure on the margin, maybe the wildcard is what can we do relative to deposit -- repricing deposits. That is, as I said, somewhat lagging. So the prime rate cuts in the third quarter and fourth quarter, that cost is about 5.5 basis points in the margin for the fourth quarter. And then we already mentioned that the, sorry for the train.

[Dan Rollins:]

Train is coming through John's office, right here.

[John Copeland:]

The asset mix would cost us 8 basis points. So that's about 14 bps of the 15 bps decline.

[Dan Rollins:]

So I guess, I would want to jump in there, just a second. Margin is certainly important to us and we're working hard to manage deposit costs the best we can. The mix of the loans that we're bringing on you saw C&I credits grow this quarter, you saw CRE credits go down, C&I credits come on at a skinnier rate. So there is a mix here coming onto, I would want to focus on NII. We continue to look for opportunities to grow our bottom line income and we think we have that capacity.

[Catherine Mealor:]

Great. Okay, that's all very helpful, thank you.

[Dan Rollins:]

Thanks Catherine.

[Operator:]

Our next question is from Jennifer Demba from SunTrust. Go ahead.

[Jennifer Demba:]

Good morning. Two questions. First, wondering what the CECL day one impact will be on the BancorpSouth loan loss reserve? And then my second question is, Dan, you've been around M&A block, as many times, it's probably almost anybody in the industry and I'm just wondering what your opinion is on these larger MOEs and if they could ever make sense for BancorpSouth? Thanks.

[Dan Rollins:]

All right. So on the CECL side, John may want to jump in here again too. I know CECL is walking around in our building, I haven't met him yet, but I'm pretty sure he's here. On day one impact, our team is working hard on that. I don't think, we have really anything to add more than what we had put out back in the Q last time, which was kind of a range of what we expect the numbers to be. John, do you want to?

[John Copeland:]

$30 million to $50 million.

[Dan Rollins:]

$30 million to $50 million on the numbers.

[John Copeland:]

Right.

[Dan Rollins:]

And so I don't know whether we're smart in the middle of that or a little bit outside of that range one way or the other, but the team is working hard, I suspect we will have that all done here in the next week or so, and you will see more about that in the K, when the K gets filed.On the M&A front, there is a lot of activity and a lot of talk out there still going on from bigger to smaller, several transactions within our footprint just in the last week. There is still lots of talk out there. Your specific question was on the larger transactions. I think some of those can do well. I think it's going to be purely driven off of execution. And so if you have a better opportunity to execute, you probably have a better opportunity to make something like that work.There is opportunity for all of them, but there is also increased risk on the size. So we continue to talk and look at lots of things that are out there. We're not afraid to talk to anybody. We think there is lots of opportunity within our footprint for us on the M&A front.

[Jennifer Demba:]

Thanks a lot Dan.

[Dan Rollins:]

Thanks Jeni.

[Operator:]

Our next question is from Kevin Fitzsimmons, D.A. Davidson. Go ahead.

[Kevin Fitzsimmons:]

Hey, good morning, everyone.

[Dan Rollins:]

Kevin, good to hear from you.

[Kevin Fitzsimmons:]

Good to hear from you, Dan. Just on the subject of what Jeni just brought up about some of these large mergers, does that present market disruption opportunity for you that you've seen yet in terms of going out and hiring and that of course if it's done to a large degree, would entail some near-term expenses, but then longer term, some production, some revenues coming in. How much do you think you're going to get to participate in that?

[Dan Rollins:]

Yes. There is certainly disruption. Everybody wants to talk about Atlanta and we're not in Atlanta. So I can't speak to the disruptions over there, but there has been multiple transactions in other parts of our footprint, from Tennessee to Arkansas to Texas and all of those areas will lead to disruption. We have seen some movement among producers or among relationship managers. We continue to add relationship managers across our footprint. I think our net relationship manager gain for 2019 was 51 across our footprint, with right at half of those in the Texas footprint. We believe that we will be able to take advantage of that even more as we look into 2020. So that's certainly part of our game plan.

[Kevin Fitzsimmons:]

Okay, great. And just a quick follow-up on buybacks, is that going to strictly be governed by where the stock price is or do you have a certain idea – we want to get through this much within this at a time?

[Dan Rollins:]

Yes, I don't think we have a number that says we have to buy X shares back. We do have a 10b5-1 plan that is executing and is driven off of price. That's what drove some of the movement in 4Q and I suspect that will drive movement here as we get deeper into the year and we watch what's going on. Maybe we change our gears a little bit, but right now I think we like the plan that we've been operating under. And I suspect we will be in the market buying shares back throughout the year would be my thinking right now.

[Kevin Fitzsimmons:]

Okay, great. Thank you.

[Operator:]

Our next question is from Jon Arfstrom from RBC Capital Markets. Go ahead.

[Jon Arfstrom:]

Hey, good morning guys.

[Dan Rollins:]

Hey, good Jon. How are you?

[Jon Arfstrom:]

I'm good, I'm good. CECL was driving the train, by the way, do you have a problem?

[Dan Rollins:]

Is that where he is? I have been looking to meet CECL.

[Jon Arfstrom:]

That's where he is. Yes, he shows up every quarter.

[Dan Rollins:]

Already here – he is here.

[Jon Arfstrom:]

Yes. Couple of follow up questions. Chris, you talked about the $1 billion in acquired loans and that you've held a lot of the balances. You just trying to deconstruct the loan growth a bit. Can you talk a little bit about what kind of runoff, you saw from the $1 billion in acquired loans?

[Chris Bagley:]

Yes, I wouldn't say we had – obviously every time we do a due diligence and we identified some loans that we perhaps don't fit our balance sheet we work on those, but other than that I think we've done a good job of holding those. So you would probably see those in our PCI credits, that's direct place where you see those numbers. Just from runoff in general, we're just saying you know Fed change the direction, prime dropped three times. We're seeing some really aggressive, I'd call it maybe try to race to the bottom of interest rate on loans.We're seeing some three handles. We're seeing lot of non-recourse structuring that's put some downward pressure on both our pipeline. Our pipeline remains good, but when we were comparing those opportunities and we're competing against a low three or a non-recourse loan, we'll let that one pass and that also impacts your pay downs when you have some loans that exist on the balance sheet that are seeking out those same kind of opportunities are able to do so.

[Dan Rollins:]

That's in CRE portfolio.

[Chris Bagley:]

It’s most primarily in the CRE portfolio. And so those are just going to go. Those are going to ebb and flow with those rates. So what we're trying or diligently to do is protect asset quality and protect margin in our balance sheet. But in all those things, don't always think up with re-transaction. So that's the downward pressure you've seen on some of the CRE pay downs. Does that help?

[Jon Arfstrom:]

Yes, that definitely helps. And then just buzzing through a couple of fee lines, wealth management it looks like you had decent growth, and it sounds like maybe you're still optimistic on that, and you've made some recent changes. Can you talk a little bit about expectations there?

[Chris Bagley:]

I think it's – some of that is market driven, facing the market increases drive some of that. But overall, we've had a good production, good new business opportunities on the trust and wealth management side. Summit Bank added some assets under management to that books, that's what you're seeing in those comments. So…

[Dan Rollins:]

Added some relationship managers across multiple markets I think he is up three or four people this year to.

[Chris Bagley:]

In fact, we've had a couple in Texas. So we're excited about getting into – again just like on the loan side, higher growth markets from the wealth management side. So I would see some upward pressure on that from the opportunity, but you have to weigh that against what the market does too.

[Dan Rollins:]

We're actively recruiting relationship managers and revenue producers across all product lines. And wealth management has been able to attract some too.

[Jon Arfstrom:]

Okay. And then on insurance, focused on the year-over-year, can you talk a little bit about premium trends versus winning new business or adding new business just help us understand the two of those, the puts and takes?

[Chris Bagley:]

Yes. A lot of it starts with maintaining your business. So we have a great renewal rate for our book of business. It's good. So we have a good stable – great book of business, good producers, good relationships with our customers. There has been some firming of the price. Our guys would tell us that across the P&C sets so you've seen that a little bit in the upward pressure on the revenue, I think.And from a new business it's same story, Dan just mentioned, we've hired new producers in the insurance world to – across the footprint. So that will help us hopefully put upward pressure on the revenue side. It's a little longer lead time for those folks because they joined with the – in the industry it's common to have a non-solicitation. So you're investing in producers with a little more lead time in terms of their ability to start producing meaningful numbers.

[Jon Arfstrom:]

Okay. And then just one follow-up Dan for you on M&A pricing. You talked about the challenging 2020 loan demand and margins and we all get that, but you think that would lead to softening prices in M&A and I'm just curious what you're seeing in terms of pricing? Thanks.

[Dan Rollins:]

I see pricing all over the board. That's really been interesting, you see some transactions with no or low premium. And you've seen other transactions at what I would consider to be very high premiums and some of them we share our head a little bit out, but I think we're all over the board. So I think it's back to expectations and what can institution do for the buyer. So again, I think we're going to see opportunities in our footprint and I think that we will be able to be successful on many of those.

[Jon Arfstrom:]

Okay. I'm feeling a little nervous about anything pending, so we're waiting. Thanks a lot. Appreciate it.

[Dan Rollins:]

Appreciate it.

[Operator:]

Our next question is from Matt Olney from Stephens. Go ahead.

[Matt Olney:]

Great. Thanks, good morning guys, how are you?

[Dan Rollins:]

Good.

[Matt Olney:]

I want go back to the balance sheet remix. I think you guys mentioned that you are pre-funding the balance sheet in the fourth quarter, and you'll be selling some securities in the first quarter from the Texas First deal. Can you quantify that? Did you pre-fund the entire amount or just a portion of it?

[Dan Rollins:]

Yes. So we've done the same thing with multiple of the acquisitions over the last year. So as we're looking at their investment portfolio coming into ours, we are looking to see if there is assets that we want to retain and assets that we want to divest. Many times there are assets we want to divest, they were a $390 million bank with $150 million in loans and my guess is, we did not pre-fund all of the remaining part there, but we were working on trying to make sure that their portfolio looks similar to ours.

[Matt Olney:]

Okay, got it. And on the expense side, it looks like your deposit insurance was still lower in the fourth quarter. Is that the run rate or you still have some insurance credits that offset that? Just trying to get a better idea for the run rate into 2020.

[Dan Rollins:]

I don't know that we have an answer for that. John?

[John Copeland:]

I think that we have a fairly – it's fairly small true-up in our accrue, I think we over accrued a little bit.

[Dan Rollins:]

Yes, not significant.

[John Copeland:]

It wasn't something that really caught my eye as being significant though Matt.

[Matt Olney:]

Okay, that's fine. And then on the – just more of a modeling question, on the preferred dividend if I'm doing this right, it looks like the core of the amount will be about $2.5 million per quarter, but the first quarter could have a higher accrual around $3.5 million, am I do my numbers right there as far as the preferred dividend expense in 2020?

[Dan Rollins:]

Well, I don't think so. I think that the dividend payment is on a quarter from when it was issued. So I think it's little less than $2.5 million per quarter throughout the year. The first payment date is February 20, which is 90 days coming out from when we went out.

[Matt Olney:]

Okay. I was in an understanding that the first quarter would have a higher accrual since it was – I thought it was closed sometime in the fourth quarter, but I can go…

[Dan Rollins:]

It was, but we're not paying on a quarterly basis. We're paying in mid-quarter.

[Matt Olney:]

Got it.

[John Copeland:]

Dividends are accounted for declaration basis, right.

[Dan Rollins:]

That's right.

[John Copeland:]

So you don't accrue them, they are subject to Board action.

[Dan Rollins:]

Yes. In yesterday's press release that went out, I think the dividend is in there. So that dividend is record date February 5, I think and payment date, February 20. So it's not a calendar quarter payment.

[Matt Olney:]

Okay, got it. I'll check that out. That's all from me. Thank you.

[Dan Rollins:]

Okay, thanks.

[Operator:]

[Operator Instructions] Our next question is from John Rodis from Janney. Go ahead.

[John Rodis:]

Good morning, guys.

[Dan Rollins:]

Hey, how are you, John?

[John Rodis:]

Good, Dan. How are you doing?

[Dan Rollins:]

Great.

[John Rodis:]

Just back to the securities portfolio real quick, so I understand the pre-funding and stuff, but, so it was $4.5 billion at the end of the quarter. Would you expect it to grow much from here or is it sort of stable going forward?

[Dan Rollins:]

Yes. I don't know that it grows unless our deposit mix grows significantly. I think what you see is, as you know we're bringing deposits in, we grew deposits pretty healthy way last quarter and you saw that money flow into the bond portfolio. And at the same time you saw us put some borrowings on to make sure that we were prepared for Texas First coming on board. Those borrowings should pull back a little bit this quarter and then if we grow deposits, which I would expect that we will grow deposits in the first quarter, we historically have, then that will impact the level of securities also.

[John Rodis:]

Okay. That makes sense. All my other questions were asked and answered, so thank you.

[Dan Rollins:]

I appreciate it, John.

[Operator:]

Okay. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Dan Rollins, Chairman and CEO. Go ahead.

[Dan Rollins:]

Thank you much. Thank you everybody for joining us today. If you need additional information or have further questions, please don't hesitate to contact us. Otherwise, we look forward to speaking with you again soon. Thank you very much.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.