Mandy Mitchell - SVP, Business Development Dan Rollins - Chairman and CEO Bill Prater - Senior EVP and CFO Chris Bagley - President and COO Ron Hodges - Senior EVP and CCO.

Catherine Mealor - KBW Jason Oetting - JPMorgan Kevin Fitzsimmons - Hovde Group David Feaster - Raymond James Jennifer Demba - SunTrust Jon Arfstrom - RBC Capital Markets Blair Brantley - Brean Capital John Rodis - FIG Partners.

Good morning ladies and gentlemen and welcome to the BancorpSouth Fourth Quarter and Annual 2016 Financial Results Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions.

[Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mandy Mitchell, Senior Vice President Business Development. Please go ahead..

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; and Ron Hodges, Senior Executive Vice President and Chief Credit 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 fourth quarter 2016 earnings release.

Our speakers will be referring to prepared slides during the discussion. You can find the slides by going to bancorpsouth.com and clicking on our Investor Relations page, where you’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 it to Dan Rollins for his comments on our financial results..

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

And finally, Ron will discuss highlights regarding credit quality. After we conclude our prepared comments, our executive management team will be happy to answer any questions. Let’s turn to the slide presentation. Slide two contains our customary Safe Harbor statement with respect to certain forward-looking information in the presentation.

Slide three covers the annual highlights of the year, which reflect the same message we've been communicating for quite some time. We continue to drive core earnings growth through balance sheet growth and disciplined expense control.

We reported net income of $132.7 million or $1.41 per diluted share, which represents an increase of $0.08 or 6% per share compared to 2015. We generated net loan growth of $439.2 million, or 4.2% for 2016 and total deposit growth of $357 million, or 3.2%.

This growth combined with a very stable asset yields and funding cost resulted in our net interest income increasing by $17.8 million, or 4.1% compared to 2015. Loan and deposit growth continues to come from various geographies and product offerings. Chris will talk more about our business development activities in a moment.

As a reminder, we reached a settlement related to the Consumer Financial Protection Bureau and the Department of Justice joint investigation into our lending practices. This settlement resulted in a pretax charge of $13.8 million. This item was our only material non-operating item included in our annual results for 2016.

Accordingly, our net operating income, excluding MSR, was $141.4 million, or $1.50 per share for 2016, which represents an increase of $0.06 or 4.2% compared to 2015. As I mentioned, we continue to drive cost out of our company. Total operating expense declined $5.1 million, or 1% compared to 2015.

Our operating efficiency ratio, excluding MSR, declined from just over 72% for 2015 to 69.9% for 2016. Finally, we continue to manage capital in a manner that is in the best interest of our shareholders. We repurchased just under 1 million shares during 2016 under our share repurchase program at a weighted average price of $23.40 per share.

Slide four provides a view of our summary financial results over the past five years, both on a GAAP basis and on operating basis. While I won't go into specific detail, these results further reflect the trends I mentioned on the previous slide. We've driven consistent profitability improvement through growing revenue and reducing expenses.

These results reflect the compound operating EPS growth of 13% over the past four years. Our 2016 results were produced in spite of a $17 million swing in the provision for credit losses compared to 2015. The $13 million negative provision in 2015 clearly was not a sustainable earnings source.

Despite this headwind, net operating income for 2016 was the highest annual net operating income in our company's history. Moving to slide five, I would like to touch briefly on our fourth quarter highlights. We posted the best fourth quarter earnings in our company's history. Net income for the quarter was $37.7 million, or $0.40 per diluted share.

We were particularly pleased with our loan production efforts during the fourth quarter as we reported net loan growth of $153.2 million, or 5.7% on an annualized basis. We also reported total deposit growth during the quarter of $98.1 million, or 3.4% annualized.

As I mentioned earlier, Chris will touch on business development activities in just a moment. Moving onto the remainder of the financial results, we had a positive pretax mortgage servicing evaluation adjustment of $11.2 million during the quarter.

While our mortgage production and servicing revenue is down compared to the third quarter, primarily as a result of seasonal decline in the pipeline, our mortgage team grew production volume by over 25% when compared to the fourth quarter of 2015. There were no material non-operating items in our fourth quarter numbers.

We reported net operating income excluding MSR of $30.7 million, or $0.33 per diluted share. Bill will go over comparison to prior periods in just a moment. Our credit quality metrics remained strong, reflected by a modest provision of $1 million for the fourth quarter.

Ron will discuss the considerations impacting our provision as well as other credit quality metrics in just a few minutes. Of the share repurchases I mentioned earlier, just over 435,000 shares were purchased during the fourth quarter at a weighted average price of $22.91 per share.

This leaves approximately 6 million shares available under the authorization which expires at the end of 2017. We also had an insurance agency acquisition during the fourth quarter as we purchased the assets of Waguespack & Associates in Gonzales, Louisiana.

We are excited about having the Waguespack team join our agency as we continue to look for ways to fill in our insurance footprint and grow our customer base. Chris will provide additional information on this transaction shortly. I will now turn to Bill and allow him to discuss our financial results in more detail.

Bill?.

Thanks Dan. If you turn to slide six, you'll see our summary income statement. Net income was $37.7 million or $0.40 per diluted share for the fourth quarter. There were no material non-operating items in the third or fourth quarter of 2016 results.

There was one material non-operating item in the fourth quarter of 2015 results as we incur $16.5 million charge related to the settlement of 2010 class action lawsuit. Dan also mentioned non-cash positive MSR valuation adjustment of $11.2 million during the quarter.

We reported net operating income excluding MSR of $30.7 million for the quarter or $0.33 per diluted share compared to $36.7 million or $0.39 per diluted share for the third quarter of 2016 and $29.6 million or $0.31 per diluted share for the fourth quarter of 2015.

Net interest revenue increased 0.7% compared to the third quarter of 2016 and 3.7% compared to the fourth quarter of 2015. The net interest margin declined from 3.15% for the third quarter of 2016 to 3.46% for the fourth quarter.

The decline was primarily the results of seeing the full quarter's impact of the balance sheet management decision we discussed in our third quarter call regarding the incremental Federal Home Loan Bank borrowings and securities we added to enhance to liquidity position.

As this decision was made during the third quarter, we only saw a partial impact during that quarter. Our loan yields and deposit cost continue to remain in a relatively stable range. If you'll turn to slide seven, you'll see a detail of our non-interest strengths.

Total non-interest revenue was $73 million for the quarter compared to $70.9 million for the third quarter of 2016 and $67.4 million for the fourth quarter of 2015. Chris will discuss mortgage banking revenue and insurance commission revenue in a moment.

The other line items on this slide are relatively stable quarter-over-quarter with the exception of deposit service charges. We said for several quarters now we expect this revenue source to be pressured as a result of internal payment order changes as well as consumer behavior.

The fourth quarter of 2016 includes the full quarter's impact of the payment order changes that were made in September 2016. Slide eight presents a detail of non-interest expense. Total non-interest expense for the quarter was $131.5 million compared to $129.5 million for the third quarter of 2016 and $148.4 million for the fourth quarter 2015.

The schedule at the bottom of the slide shows the aggregate impact of any non-operating items. As I mentioned, no material non-operating item impact in periods presented was $16.5 million legal charge incurred during the fourth quarter of 2015. Most of the other expense line item shown continue to remain relatively flat.

We did have two somewhat unique items in the fourth quarter results that I'd like to point out. First, our marketing team led a special advertising program targeted at specific markets in our footprint that resulted in advertising and public relation's expense being elevated beyond what we view as a normal run rate.

Second, we had a one-time insurance agency earn-out adjustment of approximately $1 million related to prior agency acquisition that was included in our other miscellaneous expense for the quarter. That concludes our review of the financials. And I will now turn it over to Chris for his comments on our business development efforts..

Thank you, Bill. Slide nine reflects our funding mix as of December 31st compared to both the third quarter of 2016 and the fourth quarter of 2015. Total deposit and customer repo balances are up $83 million or 2.7% annualized compared to September 30th and $405 million or 3.5% for the full year of 2016.

While quarterly trends can bounce between various deposit types, our annual trends continue to represent the consistent theme we're focusing on relationships and improving the mix of lower cost transactional based accounts.

It is worth reiterating that we have been working since 2012 battling the headwind of run-off of single service, special eight time deposits. From that point, we continue to emphasize the importance of building core, long-term customer relationships and we have not relied on any special rate or product promotions to drive this deposit growth.

This strategy is reflected in our ability to maintain a very core and relationship based deposit base. As we look at the geographical performance relating deposits, we had four Community Bank division standout this quarter.

Our West Tennessee, Northeast Arkansas, Gulf Coast, and Northeast Louisiana divisions all reported excellent results this quarter. As we traveled our footprint visiting with our teammates, we've continue to emphasize the importance of leading our sales efforts with deposits.

Deposits are the most valuable asset of a Community Bank and continuing to grow deposits will be a top priority as we move into 2017. Moving to slide 10, you will see our loan portfolio as December 31st compared to both third quarter of 2016 and fourth quarter of 2015.

We reported net loan growth for the fourth quarter of $153 million or 5.7% annualized. Our net loan growth for the year totaled $439 million or 4.2%. For the quarter, we had a nice improvement in owner-occupied real estate was just another indication of our focus on relationship banking.

Reflecting our diverse footprint, we continue to have different teams stand out for their loan production efforts. Our loan production offices in Houston and Dallas, and Texas had great quarters. In addition, our Tennessee Metro, West South Arkansas, Gulf Coast, and Northwest Louisiana divisions all stood out this quarter.

Moving on to mortgage and insurance, the tables on slide 11 provide a five quarter look at our results for each product offering. Our mortgage banking operation produced origination volume for the quarter totaling $396 million.

Home purchase money volume increased 17% compared to the fourth quarter of 2015 to $264 million or 67% of our total volume for the quarter.

While seasonal terms adversely impacted mortgage production revenue and our margin for the quarter, we continue to report growth in both our production volume and pipeline when looking at comparable prior year quarter.

Deliveries in the quarter were $380 million compared to $424 million in the third quarter of 2016 and $292 million in the fourth quarter of 2015. Production and servicing revenue which excludes the MSR adjustment was $6.6 million for the quarter compared to $10.5 million for the third quarter of 2016 and $7.7 million for the fourth quarter of 2015.

Margin was 1.14% for the quarter, representing a decline from 1.93% for the third quarter of 2016 due to the declining pipeline in the quarter. Our pipeline declined from $340 million at September 30th to $257 million at December 31st, 2016.

However, while lower on a seasonal linked quarter basis, our pipeline trend was still favorable at the end of 2016 as compared to the end of 2015. As Dan mentioned earlier, we had a recovery on our MSR asset of $11.2 million in the fourth quarter, which actually resulted in a positive total MSR adjustment for the year of $1 million.

As we continue forward, we will continue to test our processes and procedures around the hedging of the MSR asset. Moving on to insurance, total commission revenue for the quarter was $25.7 million compared to $28.2 million for the third quarter of 2016 and $25.3 million for the fourth quarter of 2015.

If there's repeating that the fourth quarter is always our lowest quarter for commission revenues as a result of the seasonality and timing of renewals and insurance book of business.

Along with the seasonal aspect, we're still strengthening some downward pressure from softening of rights in the PNC [ph] segments and there's still some residual impact from declining oil and gas business. We have one insurance acquisition in the quarter and we're very excited about the recent Waguespack acquisition that Dan mentioned earlier.

We believed Tim, Mike and their team will be a valuable addition to our franchise. While the impact on 2016 results was immaterial, this team is expected to add approximately $3 million in revenue to our agency going forward.

This additional products and resources we can add to their core property, casualty, life, and health offerings will better enhance their offerings to both current and future clients. Now, I will turn it over to Ron for his comments on the credit quality..

Thanks Chris. Slide 12 presents some highlights of credit quality for the third quarter. As Dan mentioned, we are provision for credit losses $1 million for the fourth quarter compared with no recorded provision for the third quarter of 2016 or the fourth quarter 2015. Virtually, all of our credit quality metrics continue to remain very strong.

The nominal provision was necessary to support the loan growth achieved during the quarter. Net charge-off were $3.3 million for the quarter compared with net charge-offs of $1 million for the third quarter of 2016 and net charge-offs of 6.6 million for the fourth quarter 2015.

Net charge-off for the quarter totaled 0.12% annualized as a percentage of average loans. The ALLL was 1.14% of net loans and leases as of December 31, 2016. Despite slight increases during the fourth quarter, non-performing loan and non-performing asset balances both reminded at very low levels.

NPLs increased $10.9 million to 0.94% of net loans and leases, while NPAs increased 7.3 million to 0.74% of total assets. As we look forward, we expect to continue to see normal fluctuations in these balances in either of the directions.

ORE declined $3.6 million during the fourth quarter; remaining ORE balance at December 31, 2016 was only $7.8 million. The final bullet on this slide relates to near-term delinquencies which declined to $27.8 million at December 31, 2016 from $46.7 million at the September 30, 2016.

As we mention in our third quarter call, we had one loan that was in the process of renewal on September 30th that resulted in a slightly elevated near-term delinquencies balance at the time. This credit was subsequently renewed and is current on all payments. With that I will now turn back to Dan for his concluding remarks..

Thank you, Ron. I am pleased with the progress we’ve made as a company. Specifically during 2016 for more broadly over the past several years. We’ve grown our loans portfolio with a compound rate of approximately 6% over the past four years, while deposits have grown at 3% clip since reaching an inflection point at the end of 2013.

Despite continued run off of single service accounts during at time period. We have been able to hold operating expenses essentially flat over the past four years while growing our company and enhancing our compliance processes and risk management systems.

Our operating efficiency ratio excluding MSR has steadily declined from over 82% on the fourth quarter of 2012 to 69.9% for 2016. This formula has allowed us to consistently improve our probability year-over-year. As we move into 2017, I am confident we are positioned to continue to build on this moment.

I believe our lenders and producers can continue to drive revenue growth both in the Bank and other product offerings and finally, I am confident that we have the opportunity continued to hold operating expenses essentially flat, excluding the potential impact of the investments made and the growth opportunities that may arrive.

Before we conclude our call, I want to thank Bill Prater for this leadership here at our company. Bill will be leaving us in March to begin the next chapter in his life and we wish him much success and happiness. With that, I will conclude our prepared remarks. Operator, we’d now be happy to take any questions..

Thank you, Mr. Rollins. We will now begin the question-and-answer session [Operator Instructions]. Your first question this morning will come from Catherine Mealor of KBW. Please go ahead..

Thanks good morning everyone..

Hey, Catherine. Good to hear from you..

Hey you too.

Bill one for you on the margin, can you update us on your outlook for the margin and given the outlook for higher rates and do you think it’s safe to assume this quarter is at the bottom for the margin?.

I think it's safe to assume that. We put all those security zone and those are relatively low yields and that’s what pulled the margin down, although the net interest income dollars went up. I mean if you look at kind of both the prospect of what happened, it was all -- the net effect of that five basis point decline was all in the investments area.

If you think about the investments portfolio and ours is relatively short. As you know we have about $619 million maturing over the remainder of this year and another $650 million maturing next year. The maturing rate on that $619 million is the average rate of 109 and next year's is 140.

But we typically are -- this is agency bullet kind of product we're buying yesterday. I haven’t checked this morning, but yesterday, the three-year agency was at 158, so the balance of the current year, that’s about 50% increase in the dollars -- 50 basis points on $600 million is a pretty good chunk of change.

Thinking about the loan portfolio, we did get that one rate increase right in the middle of December, but we don't get much impact out of that for 15 days.

But right now, we’ve got kind of one month repricing, we’ve got $1.6 million loans that are either fix that will mature over the 30 days after year-end or are available rate loans that reprice immediately and over the next 12 months, this is another $1.5 million of the same type thing.

Some of those 501 arms take a little bit longer to mature, but the weighted average maturity of all that's about 20 months. So, as rates kind of continue to walk up, we should see some expansion in the margin..

Yes. And remember that the decline in the margin is all decision that we made to increase our on balance sheet liquidity. So, by increasing on balance sheet liquidity, investment portfolio grew which lowered our margin and that was decision that was made late last year. So, we expected to see exactly what we saw..

Make sense. That's really a helpful color. Thank you, Bill. And then, one of the mortgage as well, how can you talk about your outlook for mortgage revenue compared to MBA forecast? I know you've got market share opportunities and either production clearly was good year-over-year versus quarter-over-quarter.

So, how should we got to think about some of the offsets that you've got to battle this lower rate outlook on the mortgage side? Thanks..

I think Chris can jump in here too. I think what we're most proud of is that the purchase money portion of our business is superior to MBA numbers in general. So, when you compare us to MBA numbers, our purchase money numbers are good.

So, we're connected into what we believe to be the right places to continue to assist borrowers that want to buy homes and that will help us grow volume. Our team is focused on that. We think we're in some good footprints.

As you said, we grew volume very significantly quarter-over-quarter from fourth quarter to fourth quarter 2015 to 2016 and our expectation is this that our team will continue to produce.

The margin number is purely a -- Chris calls it mathematics, its algebra, it’s all around increasing or decreasing of that pipeline and as we expected we talked about it on the third quarter call, we expected to see a decline in our pipeline which yield, which turns into a decline in the margin.

I will add to what Catherine the size of the purchase money volume which I think just is another theme of our relationship banking model is that one of the advantages that we have is we have branch footprints that helps the mortgage side of the house. And then we got a very established recruiting and program.

I think we're a company that MLO or mortgage loan originators would like to work for and we’ve got an eight-state footprint that we can plug folks into across big areas. So, I think we’ve got some good things to work toward in the mortgage production space..

Great. Thanks for the color..

Thank you..

And your next question will come from Steven Alexopoulos of JPMorgan. Please go ahead..

Hey, good morning everybody. This is actually Jason Oetting on for Steve today. I guess I want to start first on the C&I balances in the quarter. Two questions.

Did you see any C&I pay-downs? And second, are you hearing anything markets in regards to customers sentiment post-election kind of looking after 2017, do you think there could be some upside on C&I?.

I don’t know that we have any identified payment issues in that book in the fourth quarter. Ron can jump on that. If you're talking about people's attitude since the election, I think our footprint is predominantly a southern footprint.

My guess is if we were looking at the map where predominantly red states and I think most folks are feeling good about the direction that the economy is heading over the election. And so I think we see that a lot. We hear a lot of business people talking about wanting to do something.

People are excited about the potential changes that can come our way. It’s still too early to tell you that we can put our finger on anything, but there's a lot of talk about that if that's what's your question is.

Ron, you see anything in the C&I book?.

No, I don't see any -- we didn’t have any unusual pay-downs in the quarter and makes just normal business. I would echo what Dan said about -- there seems to be a general more optimistic attitude among our customer base out there..

Okay. That's helpful. Thanks..

Thank you, Jason..

On insurance I was just curious, you've been hiring staff and you've been picking up agencies along the way, which is great, but just looking at the broader industry, I think most brokers are still able to see pretty decent topline revenue increases despite the soft pricing environment for property, casualty.

I'm just curious if there's any unique challenges that you specifically are facing that maybe we aren’t thinking about its different from the industry as a whole?.

Yes, my guess is as you’re looking at very large public agencies or public brokers and you're not comparing to the folks that we compete with. So, I'm not sure that you're talking apples-and-apples when you're quoting your numbers there.

But specific to our footprint, Chris mentioned is we're in an oil and gas footprint where we produce quite a bit of our business in the Louisiana and Texas markets and those markets have been even softer than the insurance. So, you've got a soft insurance market on top of the soft footprint and I think we're pretty pleases.

Our retention within our insurance agency -- retention of customers is extremely high. So, we're not losing customers, we're actually growing customer base and we count the number of customers in the agency. So, the customer base is actually growing. It's all premium dollars that's causing the pressure.

Chris?.

Yes, I think it’s a mix of business. We're focused on that PNC business and that combined with the footprint, there is some softness in our headwinds there. But like Dan mentioned, we're bidding for, competing, and retaining those customers at very high retention rate..

Okay. Thanks for the color..

Thanks for your questions..

And the next question will come from Kevin Fitzsimmons of Hovde Group. Please go ahead..

Hey Kevin..

Hey, good morning guys. How are you? Hey Dan.

Dan I'm just going to ask the question, I'm not sure there's an update to provide, but I'll ask anyway on -- what I would assume is happening already or about to happen is the FDIC is reassessing the CRA rating and can you just give us any kind of clarity if you can whether that's happening and when you would expect to learn whatever the outcome of that is?.

Sure. You didn’t expect that we would make -- talking about this subject, did you Kevin? I didn’t..

No, not at all..

I sure did. I think we're ready. We've been ready. You've heard me for a while. We're proud of what we've done. Our team has been working very hard for a long time. We've been communicating with our regulators almost constantly now for some time.

The actual begin -- the three-year cycle compliance CRA review actually begins next week and they will be here for three, four, five weeks however long they want to be here.

And so we still anticipate that we should have some communication with them during the first quarter to get some indication of whether we're doing the things we need to be doing as we think we are or whether they believe we still got room to improve. And we're -- our team is ready to talk. We've got a story to tell.

We're ready to share what we've done. We have loaded up thousands of pages of information for them to review and I suspect they are well into the review process of that information we've loaded to them.

Unfortunately, there's not a -- you don't get a score every day, it's just we're waiting to get the game playing and the start of the game officially, I guess, is next week..

And is there a typical amount of time that that tends to take Dan, that review?.

There's not. We've tried to push in on that ourselves and what you hear is sometimes it can take three or four weeks and sometimes it can take eight or 10 weeks and it's all dependent upon what we see. So, there's really not any formal -- there's a limit on how long they can take to do their process.

You probably read in the presses as I have some companies have had an exam that has been open for over a year or more. We certainly do not anticipate and don't want that. We're hopeful that they will be in here.

We've got -- again, I think a really organized, very well put together information for them to see and we expect they will be able to get in and out of here in a reasonable time period and make their conclusions and we're hopeful that we understand what those conclusions are no later than early second quarter..

Okay, great. Very helpful. If I can just ask a follow-up.

There's been a few questions already on the fee areas and that was a source of some of the downside this quarter and some of it seasonally, but if you could just speak to mortgage, insurance, and deposit service charges in terms of rate basis, I know last year, we had big bounce backs in mortgage and in -- you tend to have it I think in insurance, it sounds like deposit service charges maybe more of a permanent thing based on your comments, Bill, if you can just talk about how we should be looking -- should we be modeling something more similar to last quarter's -- the third quarter run rate in some of those areas or -- with mortgage especially, because I recognize you guys are making a lot of moves to take more share, but if the overall pie is shrinking, I'm just not sure how long that transition takes for you to ramp up that run rate? Thanks..

Yes. You've got a lot of moving parts in there. So, let me start with part three on your question which was service charges. As I heard Bill say, we did make some changes in our processes in mid-3Q last year that we expected and are experiencing lower fee revenue on the deposit service charge side.

So, I think we do think that the 4Q run rate is probably indicative of where we would be on a go forward basis, maybe the bottom and we can grow from there, but we certainly believe that it's not going to bounce back to where it was in 2Q or 1Q last year because of the changes that we implemented.

On the mortgage and insurance side, I think you hit the nail on the head early on. I think you already answered your question. Insurance is very much different quarter-to-quarter. First quarter is by far the best quarter we have in a year and fourth quarter is considerably weaker than any other quarter in the year.

So, you called it a bounce back, we do expect to see that in 1Q on the insurance side. As I said earlier, our insurance team is out there competing every day, winning business, holding our customer base in place.

We feel good about our insurance side and the mortgage team; again, I think one of the question was on comparing us to MBA numbers, I think we do expect to be able to continue to grow volume by taking share even in a tighter market. And our team is focused on that.

Bill, you want to add on that?.

No, I don't have anything to add..

Does that answer your questions, Kevin?.

Yes, that's great. Thanks. And just want to say congrats to Bill on the retirement..

Thank you, Kevin..

And the next question will come from David Feaster of Raymond James. Please go ahead..

Hey, good morning guys..

Good morning..

I'd like to start on expenses, could you kind of give us a brief outlook for your expenses and remind us of the seasonality in the current quarter with FICA and payroll taxes?.

Yes, I don't know that we can give a whole of lot of guidance that you're asking for, but we can talk about the factors that are underneath and Bill you probably have more specifics on that. But certainly our first quarter run rate on salary and overall compensation cost is always elevated because of taxes. I'm not sure of anything else.

It’s a first quarter elevation, are you Bill?.

No, nothing comes to mind..

Remember mentioned in his comments that we had a couple of items in 1Q that we do not expect to be continuing. So, he identified a little over $2 million in expense run in the fourth quarter that we considered to be true operating expenses of the company, but not want to continue into 1Q that Bill identified those in his comments.

Bill, you want to talk about those again?.

Yes, the insurance are now the -- once you have established your goodwill in insurance acquisition, any true-up of any additional pay-out as expense and you don't know that until the very end. That one was a bit of surprise, but again, you typically -- that's something you don't have very often been advertising campaign.

We may do those from time-to-time or similar kind of programs, but they are intent to generate new business. So, nothing else I would really -- I mean if you look at last year on a GAAP basis, we had the big settlement in the first quarter, but I don't think there's much noise outside of that..

Did that help you David?.

Yes, that's extremely helpful actually. Thank you.

Let's talk about capital, you're well-capitalized -- actually over-capitalized, could you just talk about your thoughts on the uses of capital going forward? Is it additional insurance or other non-bank M&A, just organic growth or even utilization in your buyback?.

All of the above..

Okay..

I think we want to be good stewards of capital. We agree with you we have sufficient capital to give us lots of tools in our toolkit. The choices we've got is to deploy it acquisitions, dividend it out to our shareholders or buyback our own shares. We continue to believe that our own shares represent good value.

We continue to believe that we can increase our dividend reasonably over time. And we are certainly hopeful that we get the opportunity to deploy capital on the acquisition trail..

Perfect. Thank you. Just one quick follow-up.

Do you have any rate hikes baked into your NIM outlook?.

Well, Bill didn’t talk about. We didn’t give you a NIM outlook, so you know there's no forward-looking discussion we provide because we typically don't provide guidance on that.

Within our ALCO modeling internally and within our internal budgets, we use a consensus forecast of hundreds of economists and just like yours I'm sure, your economists, I don't know any economist that's not baking in rate hikes in 2017. So, in our consensus looking forward, that's certainly there..

That was not what I was speaking to though..

Yes, Bill was not giving you guidance on the--.

I was giving you information to help you understand what would be repricing. And based on the recent rate hike and how that would impact any future rate hikes..

Got it. Thank you..

Thank you..

[Operator Instructions] The next question will come from Jennifer Demba of SunTrust. Please go ahead..

Thanks. Good morning..

Hi, Jenny..

Just can you give us an update on the CFO search and we're going to miss you Bill..

Thank you, Jenny..

We are. You're exactly right. We've engaged a consultant to help us with that. We are deep in the process and we hope to find a replacement for Bill here shortly. I don't know that it will be in the next 30 or 60 days or whether it will be 90 days, but the process is ongoing and we're well underway with that..

Okay. All right. I think that's it. Thank you..

Thank you. Jenny..

And next question will come from Casey [Indiscernible] of Jefferies. Please go ahead..

Thanks. Good morning guys..

Good morning..

I wanted to touch on credit and obviously aside from one episodic event holding up pretty good here.

I was wondering what's the charge-off outlook for 2017 and assuming it holds relatively benign, what's your appetite for continuing to drive that reserve ratio lower?.

Ron's been polishing his crystal ball all morning. So, he could answer that question.

Ron, what is your outlook for charge-offs?.

If I knew that what's the outlook for charge-offs, well, I could make a heck of lot of money. Our charge-offs actually trended downward over the last few years. Our gross charge-offs in 2016 were less than they were in 2015.

And our credit quality -- you can look at the metrics and see that we've got a clean portfolio, we anticipate keeping it that way. But I can't tell you what the charge-offs are going to be, I don't see anything on horizon that would cause them to go up precipitously or go down in a way. So, that's the best I can do..

Yes, just -- but in terms of the LRR, I mean are you guys -- are you -- is there room to take that lower from this 113 level?.

That is driven every quarter by modeling. We've got a very sophisticated and detailed modeling that we put all the numbers into and it tells us what the ALLL should be based on our growth of credit quality that we have -- the charge-offs. .

And past performance. So, if you continue to add in current and past performance, it says charge-off are lower, you would expect the model to continue to run that down..

That's correct. And you've got to remember we don't have any purchase money loan, so we don't have any purchase loans in our portfolio..

Okay, great. And just circling back to the loan growths outlook, given that -- it doesn’t sound there was much pay-down on the energy book this quarter and your borrower base is obviously feeling a little bit more optimistic post-election.

Do you guys feel good about potentially doing better from a dollar volume perspective on loan growth and what are some of the categories where that would drive that growth?.

Casey, I don't think we talked about energy credits. So, let's clear up some misunderstanding there maybe. The question was on C&I credits, which maybe included some of that. But energy credits for us is extremely. I don't even have the number. I mean it is a very small number loans for us.

So, we're not tracking it today in a way like we were before, because it's kind of gone away from us. The number -- the total outstanding number was under $50 million when we were talking last time. So, off of our almost $11 billion book, that's not a number that's going to drive the needle.

The question earlier on sentiment within the market is what's going to drive the needle and the markets that we cover. So, -- and I think Chris talked about where we were seeing loan growth. We believe we can continue to grow loans across our footprint into 2017 and our team is ready to play..

Yes, I would say our pipeline is -- its staying consistent with where it's been in prior months and the way we track it, you can always predict which one of those are closed and where it will come from.

But we have a good strong pipeline, lot of good efforts and what you see is we have successors in different divisions of our bank almost every quarter. So, it's a diverse success across our each day footprint and I think that's a strength for our company that have that different and diverse -- both regional and loan mixed type diversity..

That was the geographic question also..

Yes..

Great. Thank you..

Thanks Casey..

Our next question will come from Jon Arfstrom of RBC Capital Markets. Please go ahead..

Hey Jon..

Thanks. Good morning. I'm just sitting here deep in the question queue practicing my pronunciation of Waguespack and Ouachita..

There you go. That's a good [Indiscernible]..

I've heard it two different ways today. So, thank you..

Okay. Chris, maybe -- I hate to go back to mortgage, but maybe let's go back to that for a second.

The jump that you saw in the pipeline last year from Q4 to Q1, would you call that seasonal and you expect something like that again in Q1?.

I would call it seasonal. I would say it's happened in prior years, but I can't tell you what will happen this year. It's way too early in the quarter to answer a question like that. And you don't know what rates and different things happen--.

1Q were odd ball last year..

Yes..

So, I think that certainly plays into it..

But I think it's true or it has been true in the past to say that four quarter is typically a slower quarter for mortgage..

Okay. And the margin, back on that again, the mortgage margin, it seem to have normally low.

Is that something -- if we do get a little bit of lift in the pipeline that that can pick up?.

Yes..

I know hard to predict, but--?.

The answer to that is yes and that's clearly a function of that declining volume. So, the way the timing -- the way the revenue is recognized and how the margin is calculated, you see it every time there's a decline in the pipeline, you see the margin contract and then you see a raise, you see it go up.

I think the best way to look at that is maybe an average over multiple quarters and smooth out that volume. Bill can probably--.

That's right. I mean it's really a function of the size of the pipeline at the end of the quarter..

I think if you looked at the margin on the full year, it would be almost spot on to what we've said all along was where we wanted our margin to be..

Handful or two basis points one side of 170..

And so when you look at what we've been able to do from a production standpoint, we produced a $1.4 billion and change in 2015. We were a shade under $1.7 billion and volume and -- so, let's go back to 2015 and then $1.7 billion in 2016. And our team is focused on continuing to grow that volume.

And when you look at the volume numbers, 4Q is the low quarter of the year. Obviously, the middle quarters of the year in the summer season is the hot, 1Q is going to come up from 4Q just all things else being equal. So, that won't stabilize and increase our margin..

Okay. Good, that helps.

And then on the insurance line, kind of flattish year-over-year and I know you've been under some pressure, but it feels like that's an okay performance year-over-year? Is that a fair statement?.

Yes, I think we feel good about the flattish as good as you can feel about that, because it truly has been a rate environment driving that. Customer retention has been good, the acquisition side, we've been able to do two this year and that helps.

But I need to have to go back and look, there's seasonal I guess pressure or economic event pressure and benefit on insurance premiums over the years. So, maybe even looking back further would give more color to that because sometimes you do have rising, declining rate environments in the PNC business and that's where we're going through right now.

And then little bit of oil and gas in there in our footprint and that--.

I would say I don't know insurance producer one that's happy with a flat revenue. So, answers they are not happy at all when you compare us to what's happening against our peer group and the communities that we serve. I think we feel like we're doing a good job. But there's not an insurance producer one that's happy with flat on their numbers..

Yes. Just given some other challenges, it seems like that's okay year-over-year..

That's right..

And then the third leg here that we'll call this the negative factor of fees I guess, but I'm just trying to get to the bottom of -- from the deposit service charges, it feels like with the change in the short order that we're likely to see the typical Q1 decline and then that's it, we probably stabilize there, is there a fair way to look at it?.

There is.

I think -- remember Q1 has fewer days, I haven’t looked at the day count for this particular year in Q1, but all those fees are day driven, so number of business days in a quarter impact your deposit fees there and Q1 is the smallest number of days of all quarters, so that's the piece of that along with just the seasonality of the volumes that coming in that area.

So, yes, I think you're spot on..

Okay, good. Thanks Bill. Best of luck..

Thanks sir..

And next question will come from Matt [Indiscernible] of Stevens. Please go ahead..

Hey, thanks. Good morning guys..

Matt, good morning..

Hey, Dan I want to circle back on the expense outlook. And you mentioned that the bank has held operating expense pretty flat over last few years and it sounds like you're optimistic that you can do it again this year, but can you speak to where the bank is with respect to the regulatory infrastructure built out.

I think that was the headwind of last few years. Is that now behind us or there's still some incremental expenses obviously from the buildout? Thanks..

Well, some of that would have to do with the results of the upcoming process that we talked about earlier from our exam. But when you look back at our operating expenses, I'm just going to read you some numbers, Matt. Operating expenses in 2013 were $513.4 million and 2014, they were $513.6 million.

They jumped up in 2015 to $523.4 million and last year, we were down to $518.3 million. So, we've stayed in a very narrow range on our operating expenses for the last four years as we have been building out our risk management and compliance and other regulatory support areas and believe me we have a lot more people in all of those areas.

Remember it wasn’t but a couple of years ago, were talking about how we had seven or eight people that were dedicated to BSA and today we have 40 people that are dedicated to BSA.

So, I think your question is a good one and I can't tell you that we are 100% built out in all of those areas because we're still continuing to tweak the model and make sure we've got the right people in the right chairs in all of those areas.

But I don't see any significant changes going forward on what we're doing there and we continue to find ways to knock off expenses across the rest of our footprint. So, we're challenging our people every day to make smart decisions. We're challenging vendors to provide better service to us at lower cost.

And we believe we can continue to -- and at the same time, we all like to see our incomes rise, so as we look at our annual salary structure, we budget in for annual salary increases and we've got to pay for that binding in other areas to trail..

Okay. That's great color. I appreciate that.

And Dan any color you can give us on the pending acquisition targets, anything you're hearing from the management team to as far as business trends?.

Similar to us, Matt, I think they feel like the political environment. The market's reaction to the election in November has got folks excited about what may come. But it also causes people to have a little uneasiness about what may come, but overall, I think they feel really good. We're seeing growth.

We publish up their numbers, so in our press release you can see their year-end balance sheet numbers. They are ready to go, we're ready to go. We just need to get to the finish line..

Thank you..

Thank you..

The next question will come from Blair Brantley of Brean Capital. Please go ahead..

Good morning everyone..

Hey Blair..

My questions have been asked and answered. Just one, Dan, you mentioned that you felt like there was still good value in your stock.

Is it fair; are you still comfortable with targeted -- not targeted but a total fail ratio near 100%?.

With our capital ratio, yes, I think we are. When you look at where we are today from a capital structure, we need to deploy capital. So, the same answer that we talked about earlier. We've either got to find places to deploy that on the acquisition trail or we need to give it back to our shareholders and one of the two opportunities there..

Okay, great. Thank you..

Thank you..

And the next question will be from John Rodis of FIG Partners. Please go ahead..

Hey guys, how are you doing?.

Hey John..

Actually I was just going to follow-up on the buyback DNA, I guess I think you sort of answered again, but I guess my question would be stack around $30, how active do you expect to be?.

That's a good question. We have ongoing discussions here on what, how, and when to deploy our capital. I think our team wants to participate and I think we'll watch the market and make -- what we consider to be smart decisions around that. We've got excess capital and being able to invest in our own stock, we believe is a very good investment..

Okay. And just back to the acquisitions, Dan, assuming the CRA exam goes well, I guess, is it still hopeful that the deals could close later this year.

I think you said last quarter, what late third quarter, fourth quarter?.

We still have to go through the application process on those. So, depending upon the timing of the exam is going to drive the timing of an application start.

And so our hope is that we can get those applications on file sometime in 2Q and be able to close the transactions as soon as we can get the approvals that we need which we anticipate would be 3Q or 4Q..

Okay. Makes sense. Thanks guys and Bill, good luck..

Thank you..

And ladies and gentlemen, this concludes our question-and-answer session. I would like to hand the conference back over to Dan Rollins for his closing remarks..

Thank you for joining us today. If you need any additional information or have further questions, please do not hesitate to contact us, otherwise, we'll look forward to speaking to you all again soon. Thank you very much..

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines..