Will Fisackerly - SVP and Director of Corporate Finance Dan Rollins - Chairman and CEO Chris Bagley - President and COO Bill Prater - Senior Executive Vice President and CFO Ron Hodges - Senior Executive Vice President and Chief Credit Officer James Threadgill - Senior Executive Vice President and Chief Business Development Officer.

Jennifer Demba - SunTrust Catherine Mealor - KBW Kevin Fitzsimmons - Hovde Group Michael Rose - Raymond James Steven Alexopoulos - JPMorgan Jon Arfstrom - RBC Capital Markets John Rodis - FIG Partners.

Good morning and welcome to the BancorpSouth Third Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode [Operator Instructions]. After today’s presentation, there will be an opportunity to ask question [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..

Good morning and thank you for being with us. I’ll begin by introducing the members of the senior management team participating today.

We have Chairman and CEO, Dan Rollins; Chris Bagley, President and Chief Operating Officer; Bill Prater, Senior Executive Vice President and Chief Financial Officer; Ron Hodges, Senior Executive Vice President and Chief Credit Officer; and James Threadgill, Senior Executive Vice President and Chief Business Development Officer.

Before the discussion begins, I’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 2015 Annual Report on Form 10-K. Also during the call, certain non-GAAP financial measures may be discussed regarding the Company’s performance. If so, you can find the reconciliation of these measures in the Company’s Q3 2016 earnings release.

Our speakers will be referring to prepared slides during the discussion. You can find the slides by going to bancorpsouth.com and clicking on our Investor Relations page, where you’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 the quarter..

Thank you, Will, and good morning. Thank you for joining us today for BancorpSouth’s third quarter 2016 conference call. I will begin by making brief comments regarding the highlights from the third quarter. Bill will discuss the financial results in more detail. Chris will talk about our business development activities and the bank.

James will provide some comments on our business development activities in mortgage and insurance. And finally, Ron will discuss highlights regarding credit quality. After we conclude our prepared comments, our executive management team will be happy to answer any questions. Let’s turn to the slide presentation.

Slide two contains our customary Safe Harbor statement with respect to certain forward-looking information in the presentation. Slide three covers the highlights of the quarter, beginning with the financial highlights. Net income for the quarter was $37.8 million or $0.40 per diluted share.

We were particularly pleased with our frontline efforts on the deposit side of the balance sheet as we reported total deposit growth of $225.7 million or 7.9% on an annualized basis. We’ve consistently communicated to our teammates the importance of leading our sales efforts with deposits. We are happy to see those efforts pay-off.

We also reported net loan growth during the quarter of $82.8 million or 3.1% annualized. As we mention in last quarter’s call, we recorded a significant reduction in our direct oil and gas exposure early in the third quarter. This reduction, along with other seasonal C&I paydowns, resulted in lower loan growth for the quarter.

Chris will provide some highlights on our loan and deposit efforts in a moment, including some color on specific teams and geographies. Moving on to the remainder of the financial results, we had positive mortgage servicing valuation adjustment of $1.8 million during the quarter.

Our mortgage team continues to produce at a high level with production volume of $478 million and production and servicing revenue of $10.5 million. There were no material non-operating items in our third quarter numbers. We reported net operating income, excluding MSR, of 36.7 million or $0.39 per diluted share.

Bill will go over comparisons to prior periods in a moment. Our credit quality metrics remain strong as we had no reported provision for credit losses in the third quarter. Ron will discuss considerations impacting our provision as well as other credit quality metrics in a moment. We continue to hold our expense base in a very tight range.

Our total non-interest expense increased just under 800,000, compared to the second quarter, despite our annual merit increases being effective July 1st, as well as continued investments in technology. While we still have a lot of room for improvement, our operating efficiency ratio, excluding MSR, was under 70% for the third consecutive quarter.

Finally, I'm pleased that we were able to execute on our share repurchase plans during the quarter after being blacked out for some period of time. We repurchased just over 550,000 shares at a weighted average price of $23.80. I expect us to continue to be active in the market with our share repurchase program as we look forward.

While it is not shown in this slide, I'm also pleased with the commitment of our merger partners, Ouachita Bancshares and Central Community Corporation, demonstrated in to our pending transactions through the extension of our merger agreements until December 31, 2017.

While we're all frustrated with the amount of time it has taken to close these deals, all parties involved continue to believe that these transactions are in the best interest of our shareholders, our teammates, and the communities we serve. I will now turn to Bill and I’ll let him to discuss our financial results in more detail..

Thanks, Dan. If you'll turn to slide 4, you'll see our summary income statement. Net income was $37.8 million or $0.40 per diluted share for the third quarter. There were no material non-operating items in the three quarters presented. Dan also mentioned the non-cash positive MSR valuation adjustment at $1.8 million during the quarter.

We reported net income, excluding MSR, of 36.7 million for the quarter, or $0.39 per diluted share, compared to $37.2 million or $0.39 per diluted share for the second quarter of 2016, and $37.6 million or $0.39 per diluted share for the third quarter of 2015. Our operating income, excluding MSR, is relatively flat in each of the quarters presented.

There are some significant differences in the components of income and expenses that I would like to point out. Net interest revenue increased 2% compared to the second quarter of this year, and 3.2% compared to the third quarter of last year.

We did see some compression in our margin, as we've added some Federal home loan bank borrowing over the last couple of quarters to improve our balance sheet liquidity. These borrowings have been deployed, primarily in the securities portfolio.

This balance sheet management decision actually provides some-pick up in net interest income to penalize with the margin. Our loan yields and positive comps continue to remain in very stable ranges. You'll also notice some variances in our provision for credit losses.

During the third quarter, we had no quarter provision compared to a provision of $2 million in the second quarter of this year and a negative provision of $3 million for the third quarter of last year. Ron will discuss the factors impacting our provisions in a moment.

I will provide some color on non-interest revenue and non-interest expense in the next two slides. If you turn to slide five, you'll see the detail of our non-interest revenue streams. Total non-interest revenue was $70.9 million for the quarter compared to $69.7 for the second quarter of 2016, and $63 million for the third quarter 2015.

James will discuss mortgage banking revenue and insurance commission revenue in a moment. The other line items on this slide are relatively flat quarter-over-quarter. We expect service charge revenue to continue to face headwinds going forward. Slide six presents a detail of non-interest expense.

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

I would like to make a few comments about certain of the line items, including non-interest expense. Salaries and benefits continue to be very stable, totalling to $82.1 million for the quarter compared to $81.8 million for the second quarter of 2016, and $81.4 million to the third quarter of 2015.

The slight increase during the quarter was driven by our annual merit increases, which were effective July 1. Most of the other expense line items shown continue to remain flat.

We did see an increase in our deposit insurance assessment expense during the quarter, primarily as a result of our estimate of the surcharge to be led on all larger banks to bring deposit insurance fund ratio to the statutory minimum. We also saw an increase in our technology cost as we continue to make investments in that area.

Many of these investments will have some cost savings that we will start to realize as we move forward. As Dan mentioned, we continue to run just under 70% on the efficiency ratio. That concludes the review of the financials, and I’ll now turn it over to Chris for his comments on the frontline banking efforts..

Thank you, Bill. Slide seven reflects our funding mix as of September 30th compared to both the second quarter of 2016 and third quarter of 2015. And Dan has previously mentioned, we’re continuing to emphasize the importance of growing deposits, as we believe core deposit relationships are the foundation of the community bank.

The success of our teammates asking for business and taking care of customers is reflected in the fact that total deposit and customer repo balances are up $279 million, or 9.4% annualized compared to June 30th, and $492 million or 4.3% compared to September 30th of last year.

You’ll notice that our growth continues to come from core transactional based accounts, our time deposit balance continue to remain flat.

We’ve had six divisions in our community bank standout this quarter for deposit growth; East Central Mississippi, Kansas Metro, Missouri, Gulf Coast, East Texas and South Louisiana divisions, all reported excellent results for this quarter for deposit growth; doing core to deposits and taking care of our communities and customers will continue to be top priorities.

We are proud of our teammates as they remain focused on these goals. Moving to slide eight, you see our loan portfolio as of September 30th compared to both second quarter of 2016 and third quarter of 2015. We reported net loan growth for the third quarter of $83 million or 3.1% annualized.

Loans are up $439 million or 4.3% compared to September 30, 2015. As Dan mentioned previously, we did experienced some headwinds for loan growth, resulting from seasonal paydowns of Ag credits and the C&I book, along with some significant paydowns in our direct oil and gas book.

Our internal pipeline analysis continues to reflect the fact our lenders are still seeing good volume and opportunities across the footprint, albeit what is still a competitive rate and structuring environment. Reflecting a diverse footprint, we continue to have different team standout for the loan production efforts.

Our loan production offices in Houston, Dallas, Austin, continue to contribute to meaningful loan growth for us. In addition, our Tennessee Metro, Northeast Arkansas, and Mid-Mississippi Division stood out this quarter. I will now turn it over to James to discuss our business development results in the mortgage and insurance space..

Thanks, Chris. The table on slide nine provide a five quarter look at both mortgage and insurance. Our mortgage banking operation produced origination volume for the quarter totalling $478 million. Home purchase money volume increased 11% compared to the third quarter of '15 to $343 million or 32% of our total volume for the quarter.

Increases in production volume continue to be largely attributable to the addition of originators, as well as a low interest rate environment. We have increased originators from 129 in September of '15 to a 147 on September 30, 2016.

Deliveries for the quarter were $424 million compared to $352 million in the second quarter of '16, and $397 million in the third quarter of '15. Production and servicing revenue, which excludes the MSR adjustment, was $10.5 million for the quarter compared to $13.1 million for the second quarter of '16, and $7.6 million for the third quarter of '15.

Margin was 1.93% for the quarter, representing a decline from 2.99% in the second quarter of '16. Our pipeline was elevated during the second quarter as a result of a sizeable increase in loan demand. The pipeline actually declined slightly during the third quarter from $385 million on June 30th to $343 million at September 30, '16.

The decline in origination volume was primarily attributable to the lower mark-to-market gains in the third quarter as a result of the decline in our loan pipeline.

As we look to the fourth quarter, I'll remind you that it's not uncommon to see meaningful declines in both, our mortgage pipeline and margin, related to slower selling activity during the winter months.

As Dan mentioned, we had a recovery of our MSR asset of $1.8 million in the third quarter, reducing our total impairment to $10.2 million year-to-date. As I've mentioned in the past, we continue to test our processes and procedures, surrounding the hedging of the MSR asset.

However, we continue to believe the timing is not appropriate to implement the hedge given current interest rate levels. Moving on to insurance, total commission revenue for the quarter was $28.2 million compared to $28.8 million for the second quarter of '16, and $28.6 million for the third quarter of '15.

The decline in comparable quarter revenue reflects the continued softening of the insurance markets. While we have seen slight increase in our employee benefits revenue, the property, casualty and workers compensation rate environment continues to soften, as we're seeing 1% to 8% decline in premiums on renewals.

These decline reflect the enormous capacity available in the market, both domestically and internationally. We continue to both energy and resources to new sales efforts, expanding coverage for existing clients, and providing services that assist our clients in controlling costs.

Historically, our fourth quarter revenue declined approximately $3 million from the third quarter, and we expect that trend to continue as a result of the seasonality of our book of business. Now, I'll turn it over to Ron for his comments on credit quality..

Thank you, James. Slide 10 present some highlights of credit quality for the second quarter. As Dan mentioned, we had no recorded provision for credit losses for the third quarter compared with the provision of $2 million balance for the second quarter of 2016, and a negative provision of $3 million for the third quarter of 2015.

Low levels of net charge-offs and continued stability in our other credit quality metrics was sufficient to support the loan growth for the quarter without a recorded provision for credit losses.

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

Non-performing loan and non-performing asset balances both increased compared to June 30, 2016 with total NPLs increasing about $10.7 million, our total NPAs increased by $7.4 million. Increases in both of these metrics were driven primarily by an increase of $8.2 million in our restructured loans and leases still approving category.

This increase is not surprising nor concerning, as we said for several quarters now, each of the components of non-performing assets are at levels where we could see normal fluctuations in either direction in quarter-to-quarter.

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

With that, I will now turn back to Dan for his concluding remarks..

Thank you, Ron. I feel like I am repeating myself quarter-after-quarter. We continue to execute on the simple goals we have communicated to our team. We are growing loans and deposits with steady yields and rates, while holding our expense base very flat.

Credit quality remained stable and we continue to work tirelessly on exceeding all regulatory expectations. As we look forward, we will continue to emphasize this simple strategy. And additionally, we will focus on finding ways to offset continuing revenue headwinds within certain of our non-interest product lines.

We will also continue to manage capital in a way that is in the best interest of our shareholders through supporting growth, share repurchases and hopefully M&A activity. I am excited about the direction of our Company and the opportunity we have to continue to improve our operating performance.

On a personal note, I can’t let today’s call to end without recognizing James Threadgill with his 30 year commitment to our Company. Today will be James’ final conference call as he has decided to retire at year-end.

James has relocated his family several times during his career here, and at each stop along the way, his efforts improved our organization. That is certainly the case here in Tupelo where James has spent the last 15 years of his career in senior management roles. James, we will all miss your leadership, and we all wish you the best in your retirement.

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

We will now begin the question-and-answer session [Operator Instructions]. The first question comes from Jennifer Demba of SunTrust. Please go ahead..

Can you give us any color on when you think your pending acquisitions could close in 2017, as you’ve extended the merger agreement through the next year? You have [multiple speakers] it is still very much up in the air?.

Yes, it's very much up in the air. I think our thoughts just today as you know it's at best today 3Q, and could be 4Q. So, best case is probably late 3Q and worst case could be late 4Q..

And what about provisioning the next year Dan, are you estimating they’re going to up, or you think they could stay at this incredibly low levels like they were this year, last year?.

We'd like for them to stay at incredibly low levels like they were this year and last year. But I think that all is dependent upon what your view of the economy and the territory that we serve is. Clearly, we intend to continue to grow our loan book.

We're still carrying a 1.18 loan loss reserve, which, I think, comparatively speaking to many of our peers, is still on the high end, while our credit quality metrics probably appear to be certainly no worst that middle of the pack, and maybe better than many of our peers. So, I think you can read into that.

We've got a very elaborate ALLL methodology that Bill and Ron and many others on our team are grabbing on monthly and quarterly basis that we're paying attention to.

And so, when we look at the history within our loan book, or the recent history within our loan book and we're looking forward, I think we feel very comfortable that our credit quality is very clean. And so we're hoping that we can continue to manage that process in a way where we protect our shareholders.

Bill, Ron, maybe one of you got to add anything to that?.

I don’t have anything to say to that. I agree with you..

The next question comes from Catherine Mealor of KBW. Please go ahead..

First on the buyback.

Can you talk about your expectations for the pace of buyback that you think we should see as is? Is there a payout ratio you target, or a payout ratio that you think you should stay under as a capital management tool? Or is it just, each quarter is different kind of depending on where your price stays in the market?.

I don't know if there's a specific payout ratio that we're looking for, nor do I think there's a speed at which we're trying to accomplish where we want to be. So that leaves your third option, which is when there's opportunity there, we want to take advantage of those opportunities.

And I think that you'll continue to see us in the market and buying back stock. We've got, as you hope, plenty of capital or sufficient capital to allow us to do things we want to do, and expand and to buy our shares back. And I think you'll continue to see that..

And then specific question on the expense lines. If you look back over the last couple of years and you look at the salary lines, typically, you'll see a peak in the third quarter. I think it's usually associated with your increase in merit pay. And then typically you'll see pullback in the fourth quarter.

Should we expect a similar trend this year? Or is there anything that would increase the salary line going into the fourth quarter?.

I think what you're seeing is the standard cycles that run through for us. And so some of the comp that you see is seasonal, some of it is not. So 3Q typically runs hot, and that's also, as you said, July 1 is our merit increase time of the year. Headcount drive that also.

I don't think any of us see anything that would be unusual that would cause this year to be any different than past..

Catherine a part of that is insurance is always also in the fourth quarter. It's just a very seasonal business. So, the commissions on that are in salary line. So the commissions on insurance slow down as well..

James mentioned that on the revenue line. Again, James, what was our number $3 million give or take drop between 3 and 4....

That’s historically that what is done..

Yes, again on that, I think we build the same there Catherine. So, we saw $3 million drop in commission revenue between third quarter and fourth quarter last year. And I think we feel like we’re in the same track again this year and experience the same thing..

The next question comes from Kevin Fitzsimmons of Hovde Group. Please go ahead..

Just a few questions here. If I could ask about the outlook for the margin, this is probably for Bill. You guys have done a job keeping the margin very stable, and so it's a little more of a downtick we saw this quarter, and given your explanation about the liquidity position, the bigger liquidity position and maybe some of the paydowns this quarter.

How do you view that going forward? Do you view some of that liquidity getting being put to work and the margin being able to bounce back a little? Or is that more of permanent thing you want to keep in place and maybe we’re at a new level here on the margin..

I am going to let Bill jump in and give you the specifics to that. I think we look at margin, I don’t think we’ve ever tried to manage the margin number. We’re looking at net interest income. And so I think what you saw this quarter was we had really good deposit growth, and really good deposit growth is going to naturally drive margin down.

At the same time, we put on some on balance sheet liquidity that I think Bill will tell you, is probably a permanent fix on the liquidity side. So there is two parts to your questions; one would be can we deploy the deposits where we want the deposits to be; and how does that impact the margin going forward.

Bill, I don’t know that we have any guidance on margin, but you can give the details..

Kevin, we, over the past three or four months we’ve borrowed in three separate borrowing from the federal home loan banks and auction rate, two year to money that resets every couple of weeks. But it’s a fairly good rate on it, and it gives us the ability to -- we’re staying fairly short on the securities.

But we typically bought something in the three year agency bullet range. This is our target security. So, I mean, I think the downshift that you saw this time is something that will be that way until rates change. The yields on loans and the costs on deposits have held very steady for.

So I think if you see somebody’s margin go down because of decreases in loan yields or increases in deposits that could have a continuing impact. And we’ve been fortunate to be able to hold ours at this point. But the asset-mix and the overnight investments and of course some of that was parked in until we could deploy it.

And in the securities portfolio, being at a lot lower rates that putting it in loans did costs us 5 basis-points this quarter..

Let me answer that in different way. So, we don’t manage margin, but we are trying to manage deposit cost and loan yield. And so if we can hold loan yield where we wanted and we could hold deposit costs where we wanted, then the rest of it is just a function of the mix of the assets on the balance sheet..

That’s right, that’s what -- if I didn’t make that clear that's what I was trying to explain. But when you put it in three year and two year borrowings to three year investments, it's not much of a case, right. It's pretty well time wise matched all. So, it's right for us. It’s where we're kind of positively disposed to increase in the margin..

And just a quick follow-up on the expenses.

Can you just gauge for us or context the several steps that got outlined in the consent order with the CFPB and DOJ? And how much of that is in the current run-rate versus how much has to get layered onto expenses? And then you, I guess you'd look for savings to offset that?.

I think when we announced the settlement with the CFPB we fully accrued for all of the one-time costs that were associated with that expense. And so you saw 13 point something million dollars in total accrual, which included the fines and other costs along with the ongoing consulting and other one-time costs associated with that.

The recurring costs of compliant with the regulations that are out there, we think that's already in our run rate, has been in our run rate, and we're doing what's needed on that front. So, I don't think we see any additional expense line items on a go-forward basis from playing by the rules..

Okay, great. And I just wanted to clarify your answer to Jenny's question, initially.

Did you say best case late third quarter '17 worst case late fourth quarter '17, is that?.

I did..

And that's just the way I just want to make sure I'm thinking about the right way that, A, I'm thinking about is, you guys are -- because it was retroactive, you get CRA rating reassessed. And that's basically happening this year, early next year.

And then you’re probably layering like a six plus months timeframe onto that for them to review the merger applications.

Is that the way to look about it?.

That’s right. So, we don't have any applications before any regulators today at all. So, we've got to get past the CRA exam cycle in next year. And depending upon how long that cycle takes. I mean, it could be that they finish early in the year it could be that they don't finish until end of the second quarter.

Whenever the cycle of the exam cycle finishes, then we believe we're doing what we need to do. So, we're certainly hopeful that we get the grades on the test that we expect. If we do, then we would immediately be filing our applications again.

And then you've got to go through the application process that could be as short as three or four months, and it could be as long as six, seven, eight, nine months, depending upon how long they want to take to process those..

And you would put both applications in right away, but then you would probably deliberately time the integrations one after another and not do those at the same time, I would assume?.

Yes, so you’re really asking two questions, Kevin. So the timing of the closing of the mergers would be at the same time. So when we get approval to close the transactions, we fully intend to close them as soon as we can. And the operational integration behind that would be staged out after the closing of the transactions..

The next question comes from Michael Rose of Raymond James. Please go ahead..

Just a quick question, follow-up to Catherine's question on the buyback, I know it's buyers again in next year 7 million shares, you guys have purchased about 550,000. Would you guys be comfortable paying out between dividends and buybacks above 100%? I am just trying to see if you guys are actually be able to actually finish off the program..

I think the simple answer to that one is yes. So, when you look at where we are, from a capital structure today, we have excess capital. So, I don’t think we’re feeling limited by annual earnings..

And then just as a follow-up question, just related to insurance business; you obviously understand the step down in the fourth quarter, but given the softness in the market and pricing.

Do you expect to actually grow revenues year-on-year?.

From 2016 versus 2015, or are you taking about 2017 versus 2016?.

’17 versus ’16, just because several other banks with insurance references, or insurance businesses has talked about softer revenues....

James can jump in here with the specific details. But you heard him say that the current premium market is down 1% to 8 % on property and casualty. We did a very small insurance acquisition earlier this year..

Yes, end of May..

So, second quarter this year. So, we’ll get some benefit from that. But I don’t know that the size of that acquisition was big enough to offset the reduction and premium dollars.

James, do you actually have any other comments on that?.

Yes, it was about $1.8 million, I think, we reported in May the acquisition. And then we’ve,.

On an annual basis....

On an annual basis, and year-to-date we’re seeing about 2% increase in employee benefits. As Dan mentioned, about anywhere from 1% to 8% decline in renewals on property, and casualty and workers’ comp as they’re working hard, developing new business, we’ve got a large portion of our book that is in the energy sector and that is down substantially.

So we’ve got a lot of headwinds with the soft markets that Dan is talking about, as well as the energy book that we write. So, we’re going to work hard as there is no guarantee, but we hope to have a good ’17..

The team continues to be focused, Michael, on growing customers. So, if we can continue to add customers, even though pricing is down on every customer, that continues to add to our future as soon as the price firms or changes. So, I think we look forward to continuing to grow that business.

It’s just the headwinds of the current industry is what’s driving that decline, or flat in that revenue category..

The next question comes from Steven Alexopoulos of JPMorgan. Please go ahead..

Dan, maybe I’ll start with a high level question. If we look at slide four, over the past year, we takeout the MSR. Operating income has declined modestly.

Can you talk about your ability to deliver positive operating leverage, moving forward? And do you have to be more active with cost containment types of deliveries?.

Yes, I think, again from quarter-to-quarter what we’ve said for a long-time, Steven, is when we look at what’s happening to us and the trajectory that we’re on in improving our Company, I think we’ve seen some quarters where we’ve seen tremendous operating leverage and in other quarters we’ve not. And I think we’re seeing the same thing today.

There are many, many opportunities in front of us to continue to improve the operating performance of our Company, you called it operating leverage. We’re on that train. And I think you’ll see us continue to drop.

The answer to your question I think is more specific on, I think what you’re asking is, is can we continue to firm cost, or do we have to grow revenue. I think that's your question.

Is that correct?.

Well yes, balancing the two out. Because it sounds like if you look at the insurance business, you said you're adding staff there. So, it doesn't sound like you're cutting expenses given the revenue headwinds. It sounds like you're investing..

Well, I think you've got -- I think you're correct. We're investing but we're also cutting staffs. So, when you look at total headcount, headcount is actually down. So, we work very hard to standardize and centralize things where we can be more efficient and reduce headcount.

And at the same time, we've been willing and are continuing to be willing to invest in revenue producing opportunities that will help us long-term. So, I think that's the mix that you see going on there as we want to be able to drive costs out of our system, and we'll continue to do that.

And at the same time, we want to be able to invest in revenue production..

And then probably one follow-up, on the C&I loan growth. Could you walk-through the puts and takes in the quarter? And maybe parse out what those energy drags were? I'm trying to understand what C&I loan growth was, ex-some of these drags? Thanks..

Yes, we’ve talked about that last quarter. Let's go back -- Bill is telling me, pointing out something on, a year ago we had a negative provision. So, I think you've also got a negative, but when you look at operating leverage, you had a negative provision last year of $3 million that you probably need to pull out to compare quarter-over-quarter..

Or going back to positive operating leverage?.

Yes..

Yes..

We've got a negative provision of $3 million. So, when you look at total revenue, revenue would have been in a different category, I think if you ignore the negative provision. Your question on -- your current question is one, refresh my memory again.

Energy, right, in the second quarter call, I think we told you then that we had a $35 million plus paydown on a large energy credit that came-in in the first few days of this quarter, of the third quarter. And so our total exposure outstanding on energy went from $70 million to $30 something million early in this quarter.

And then 3Q is also the quarter where our Ag book sees dollars coming back in. So, while Ag is not a large land for us it certainly is out there, and so when you’ve seen that all books into C&I.

So, when you see the paydowns on the agricultural lines in the third quarter and you see the paydowns on the smaller oil and gas book we that had in the quarter, both of those things, you see that in the declining balances..

It looks like C&I was down about $82 million quarter-over-quarter.

Is that to other paydowns?.

Well, I think we just identified 35 of that was oil and gas on one credit and the rest of it is Ag and all other..

The next question comes from Jon Arfstrom of RBC Capital Markets. Please go ahead..

Just a follow-up on Steve's question.

You do expect a rebound on loan growth in Q4, or do you expect some of these paydowns to continue down?.

Well, I wish I had a crystalball to tell me what's happening with paydowns. But when you look at production, the production team is producing. When we look at what we produced last quarter, Chris, can jump in here and talk pipeline.

But when we look at what's in the pipeline and what we produced last quarter, it was no different than we've seen in the past. So, we've seen good production across our footprint. We've got full pipelines across our footprint. Obviously, some markets are better than others.

We do not see why we should not be able to continue to produce the loan growth that we've been producing over the last two years..

We're fortunate in that, we've diverse footprint in diverse markets. And Dan is correct, our pipeline and our approvals of originations all feel and look strong and good like they have in previous quarters. And there’s never guarantee which ones you win, which ones you won’t. It’s still competitive market out there.

And then as we’ve already commented on there is some parts of our footprint, Louisiana, Southwest Arkansas, East Texas, they still having some oil and gas impact in the paydowns on those C&I credits, which frankly is what you want to see when something slows down in market like that.

You’re fortunate that those balances -- they are able to paying down and we’re not stuck with problem credit. So, that’s a normal asset based lending cycle that we actually -- I think it's actually a positive, and from a credit perspective, although, it might put some headwinds on your loan growth.

So back to Dan’s question, I think our pipelines feels good and given the fact that we have diverse footprint and can leverage up further markets, I think that’s the strength for us..

The growth, when you look at year-over-year growth, Jon, coincidently, we’re showing 4.3% deposit growth and 4.3% loan growth from last year September. 4.3% is below where we’ve said we wanted to be, as you and others have pointed out. We said we needed to be in 5% to 7% and/or higher.

I think that we continue to believe that we should be able to produce that. We’re sitting on the bottom end of that. And I think when you look at this quarter, in particular, the numbers weren’t where we thought they should be, and we can identify the why around that. But that doesn’t mean that the team isn’t out there producing every day..

And then I guess the other question you alluded to on deposit growth. But Chris or Dan, it was pretty strong this quarter. And I know you touched on some of the reason, but it was just, I thought unusually strong.

If anything specific in there, or trending seasonal that drove that?.

Not that we can identify. We’re not running any special product. We don’t have any one-time, something that’s in there.

One of the things we’ve been talking about now for years here John is, as a Company, we were dependent upon, what I would call, higher rate, single product, deposit customers, that may have just one high rate CD where this really want banking with us.

And over the last several years, we have allowed that single product customer to go wherever they want to go and not pay up on the time deposits that are out there. And at the same time, we’ve continued to focus and challenge our team to be asking for deposits. Lead with deposits. That’s our number one product.

And I think you’re seeing the benefits of that that we’ve been talking about for several years now, and everything that we’re doing internally. We’ve got to grow deposits. And frankly, we need to be growing deposits at our loan-to-deposit ratio. We need to be growing core deposits to fund us. We are a purely core funded institution.

So, I think we’re really proud of the core funding that we have. We need to be able to grow deposits in order to fund the loan growth..

And then if I can sneak in one more, probably late in the queue here. But for Dan or James just on insurance. You talked about the headwinds, and you’ve actually probably have some scale in this business. I would imagine that some of the smaller competitors have to be suffering. You’ve done a few acquisitions there.

What’s the likelihood of another one coming? How interested are you in this? And is that the correct assumption that there are people that are putting their hands up to sell?.

James is probably closer to that than I am. But from an appetite perspective, as far as answering what’s happening to the smaller competitors, I can’t speak to that, James probably can. But from an appetite perspective, we clearly want to see and would be happy to continue to expand in that business line.

I think we continue to look for opportunities that fit. The culture of the seller, the culture of the targets that we’re talking to, is important ability to plug in to our process. It's important. You're right. We have some scale that really benefits us, Markham McKnight runs insurance for us. Markham does a fantastic job.

We've built some services into our sales platform that we have the ability to offer to customers that many of the smaller competitors don't have. Whether that's loss mitigation, whether that's other types of consulting environment where we can help customers find the way to lower their insurance costs.

I think those things add value to our team, and at the same time allow us to talk and attract smaller sellers that can't or don't provide those same levels of services.

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

Well, currently, the smaller agencies are -- it's particularly if they're in the commercial area. They are feeling it a lot more than we are. As Dan mentioned, Markham McKnight, runs our insurance team. Markham is industry leader, recognized. He's very involved in a number of industry organizations.

He talks to a lot of new people in our footprint that are in the insurance business, and we're constantly talking to people about our team and kind of how we run our agency. And occasionally, we run across when they join. So, we'll continue to do that going forward..

We'll start with that question on another time Jon..

All right. I appreciate it. All the best James, best wishes..

Thank you, Jon, appreciate it..

[Operator Instructions] The next question comes from John Rodis of FIG Partners. Please go ahead..

Most of my questions have been asked and answered. But maybe either for you Dan or Bill, just back to the securities portfolio.

Would you expect it sort of remain around this range going forward, or do you think is it dependent on deposit growth if it continues to grow? Or how should we think about that?.

I think, there's really two parts to that. Bill can jump in here too. So, assuming that deposits grow and loans don't. Well, that's where it's going to go. It's got to go into securities book. On the other hand, if we're not able to grow deposits and loans are growing, it's going to come out of the securities book to some extent.

But we still have to have a minimum level of on-balance sheet liquidity, which is what, I think, Bill, was alluding to a minute ago. I don't know that I would say that we're at the bottom of the securities book today. But we're not far off the bottom in size. So, you could see it go down a little bit, but probably not in a significant way..

That's exactly right. This was a separate decision to add to on balance sheet liquidity, and increase the size of the securities book over the last few months. But Dan is exactly right. I mean it's kind of balanced out situation. Other than if you need to create more unplanned securities for collateral purposes or something like that..

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

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 to you again soon. Thank you all very much for participating..

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