Good day and welcome to the BancorpSouth Q3 2019 Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Will Fisackerly, EVP and Director, Corporate Finance. Please go ahead..

Good morning and thank you for being with us. I will begin by introducing the members of the senior management team participating today. We have Chairman and Chief Executive Officer, Dan Rollins; President and Chief Operating Officer, Chris Bagley; and Senior Executive Vice President and Chief Financial Officer, John Copeland.

Before the discussion begins, I will remind you of certain forward-looking statements that maybe made regarding the company’s future results or future financial performance. Actual results could differ materially from those indicated in these forward-looking statements due to a variety of factors and/or risks.

Information concerning certain of these factors can be found in BancorpSouth’s 2018 annual report on Form 10-K. Also during the call certain non-GAAP financial measures maybe discussed regarding the company’s performance. If so, you can find the reconciliation of these measures in the company’s third quarter 2019 earnings release.

Our speakers will be referring to prepared slides during the discussion. You can find these slides by going to bancorpsouth.com and clicking on our Investor Relations page where you will find them on the link to our webcast or you can view them at the exhibit to the 8-K that we filed yesterday afternoon.

And now I will turn to Dan Rollins for his comments on our financial results..

Thank you, Will. Good morning. Thank you for joining us today to discuss BancorpSouth third quarter 2019 financial performance. I will begin by making a few brief comments regarding the highlights for the quarter, John will discuss the financial results and Chris will provide more color on our business development activities.

After we conclude our prepared comments, our executive management team will be happy to answer questions. Let’s turn to the slide presentation. Slide 2 contains normal legal reminders that Will has already discussed and on Slide 3 we talk about our performance. We are pleased to report yet another quarter of record financial performance.

We reported GAAP net income for the third quarter of $63.8 million or $0.63 per diluted share.

Reported GAAP earnings were negatively impacted in the quarter by two non-operating items, including merger-related expenses of $4.1 million, which was primarily associated with the closing of the Summit Bank and Texas Star Bank mergers as well as a negative MSR valuation adjustment of $4.0 million.

Accordingly, our net operating income, excluding MSR, was $69.7 million or $0.69 per diluted share which is another record for our company. On a per share basis, this represents an increase of over 13% compared with the second quarter of this year and an increase of over 23% compared to the third quarter of 2018.

We have several successes to report in terms of our business development efforts. Our mortgage team had a tremendous quarter, generating total production volume of $536 million as well as production and services revenue of $11.3 million for the quarter.

While the interest rate environment contributed to increased refinance activity, our team also had a strong quarter in purchase money production. Chris will provide more color on these dynamics in a moment.

Within the community bank, we recorded nice deposit growth and customer repo growth for the quarter on an organic basis, which totaled approximately $160 million or just over 4% annualized. Through the first 9 months of 2019, we have grown deposits by approximately 6% on an annualized basis.

Loans were down just over $100 million on organic basis for the quarter. We saw elevated payoffs early in the quarter and several large credits on several large credits primarily as a result of placement of these credits into the non-bank, non-recourse market.

While we were disappointed to lose these loans as earning assets, we were also able to improve our fee revenue by helping our customers place these credits into the non-bank market. We continue to be pleased with the stability of our fundamentals, including our net interest margin and credit.

Our core margin, which excludes accretable yield, was relatively stable at 3.76% for the quarter compared to 3.79% for the second quarter. John will provide more details in a moment, but the nominal decline was driven primarily by a shift in earning asset mix driven by the deposit growth I just mentioned, combined with the slight loan runoff.

On the credit side, we reported net recoveries of $700,000 for the quarter, while our provision for credit losses was $500,000. Excluding the impact of acquired loans, our other credit quality indicators, including classified and nonperforming levels, were very stable.

Finally, we continue to improve operating efficiency as we grow our company while holding legacy expenses within a tight range. Our operating efficiency ratio, excluding MSR, was 63% for the third quarter, which represents meaningful improvement over both the second quarter of 2019 and the third quarter of 2018.

Last two bullets related to capital deployment. We are excited about Rodney Kroll and his first Texas First State Bank team becoming a part of our company. This transaction will provide an entry point for us into the Waco, Texas, market and also enhance our presence in several other surrounding Central Texas markets.

We also continue to be opportunistic in our share repurchase program. We repurchased just over 561,000 shares during the quarter at a weighted average price of $27.04.

Year-to-date, we have repurchased 2.2 million shares, which leaves approximately 800,000 shares available for repurchase in our current authorization that expires at the end of the year. I will now turn to John and allow him to discuss our financial results in more detail.

John?.

Thank you, Dan. If you turn to Slide 4, you will see our summary income statement. In reviewing the summary income statement, net income was $63.8 million or $0.63 per diluted share for the third quarter. As Dan mentioned earlier, we did have two non-operating items in our third quarter results.

We had a negative pre-tax MSR valuation adjustment of $4 million and merger-related expenses of also just over $4 million.

Accordingly, we reported net operating income, excluding MSR, of $69.7 million for the quarter or $0.69 per diluted share compared to $62 million or $0.61 per diluted share for the second quarter of 2019 and $55 million or $0.56 per diluted share for the third quarter of 2018.

Our net interest revenue increased 4.1% compared to the second quarter of 2019 and 17.2% compared to third quarter of 2018. The transaction closing in the fourth quarter of 2018 and both the second and third quarters of 2019 obviously would impact these comparisons.

As Dan mentioned earlier, we continue to be pleased with our ability to manage the net interest margin in this challenging rate environment. Our reported net interest margin for the third quarter was 3.88%, while our net interest margin excluding accretable yield was 3.76%.

Comparable metrics for the second quarter of ‘19 were 3.87% and 3.79%, respectively. We reported a net interest margin of 3.67% for the third quarter of 2018, while our core margin for that period was 3.62%.

As we look at the quarter-over-quarter change in our core margins, the shift in earning asset mix that Dan also alluded to is the primary driver for that 3 basis point decline. As Dan mentioned earlier also we had 4% annualized deposit growth, combined with some runoff in our legacy loan portfolio.

This dynamic resulted in higher levels of overnight and short-term investments during the quarter. And looking more specifically at the components of the margin, loan yields were flat as the impact of the recent fed rate cut on floating rate loans offset pretty much offset the positive impact of other loans that re-priced from the portfolio.

As expected, security yields increased nominally for the quarter. Finally, we saw a 3 basis point increase in our total cost of deposit, which was primarily driven by the re-pricing of time deposits. Chris will discuss our strategy around deposit pricing more in a moment.

Before we move on to non-interest revenue expense, we can briefly talk about credit quality. We had a provision of $500,000 for the quarter compared to a provision of also $500,000 for the second quarter of 2019 and no recorded provision for the third quarter of 2018.

Excluding acquired loans, our credit quality metrics including non-performing and classified assets remained pretty stable during the third quarter. We also reported net recoveries of $700,000 for the quarter. If you turn then to Slide 5, you will see a detail of our non-interest revenue streams.

Total non-interest revenue was $75.4 million for the quarter compared to $66.3 million for the second quarter of ‘19 and $71.6 million for the third quarter of 2018. The MSR valuation adjustment that I did I mentioned already is obviously the primary contributor to the volatility in these totals.

Outside of that negative MSR adjustment, mortgage had a great quarter, reporting production and servicing revenues of $11.3 million. Chris will discuss our mortgage business more in a moment but we continue to benefit from the low rate environment both in the purchase money market and in refinance activity.

The final item I would mention is the other non-interest revenue, which increased to $8.3 million for the quarter. This increase is driven by a number of items, none of which were individually significant but which did add up to a sizable increase quarter-over-quarter. All the other items shown on the slide were within our range of expectations.

Slide 6 presents the detail of non-interest expense. Total non-interest expense for the second quarter was $159.6 million compared with $157.7 million for the second quarter of 2019 and $142.4 million for the third quarter of 2018.

Total operating expense, which excludes merger-related expense and other onetime items, was $155.6 million for the quarter compared to $154.5 million for the second quarter of ‘19 and $141.5 million for the third quarter of 2018.

The closings of the Summit and Texas Star mergers on September 1 were responsible for the nominal quarter-over-quarter increase. Beyond that, I don’t believe there are any large variances or onetime items that need to be mentioned.

As our core expense base remains in a relatively tight range, we are pleased to see continued improvement in our operating efficiency ratio, excluding MSR, which declined to 63% for the third quarter, representing an improvement of over 200 basis points compared to both the second quarter of 2019 and the third quarter of 2018.

This again marks the lowest quarterly level that we have reported in a number of years. That concludes my comments on the financial, Chris financials. Chris will now provide some color on our business development. Thanks..

Austin, Texas, Central Arkansas, Northeast Arkansas, and North Central Alabama divisions all had great quarters from a loan growth perspective. Slide 9 contains credit quality highlights. We continue to be pleased with our credit quality.

As John mentioned, we had a provision for credit losses of $500,000 for the third quarter compared with the provision of $500,000 for the second quarter of 2019 and no recorded provision for the third quarter of 2018. We had net recoveries of $700,000 for the quarter.

Finally, despite the lumpiness created primarily by acquired loans, our nonperforming and classified assets remain stable. NPA as a result of net loan and leases were 0.82% at the end of the third quarter compared to 0.70% at the June 30, 2019, quarter. The 0.82% for the third quarter is actually flat compared to the end of 2018.

As we have mentioned in the past, our view is that we will experience some lumpiness in conjunction with the closing of the transactions as we work to remediate those credits. Moving on to the mortgage and insurance, the tables on Slide 10 provide a 5-quarter look at our results for each product offering.

Our mortgage banking operation produced origination volume for the quarter totaling $536.1 million. Home purchase money volume was $353.9 million or 66% of our total volume for the quarter. This is consistent with our commentary in the last quarter’s conference call that our pipeline had shifted to a 7/30 purchase refi mix.

Deliveries in the quarter were $374 million compared to $304 million in the second quarter of 2019 and $309 million in the third quarter of 2018.

Production and servicing revenue, which excludes the MSR adjustment, totaled $11.3 million for the quarter compared to $9.2 million for the second quarter of 2019 and $5 million for the third quarter of 2018. Our margin was 2.38% for the quarter, representing an increase from 2.31% for the second quarter of 2019.

The margin increase is attributable to the $65 million increase in the mortgage pipeline quarter-over-quarter. This interest rate dynamics in September resulted in the elevated pipeline as compared to the normal seasonal third quarter trends. The $370 million pipeline at September 30 was comprised of approximately 50% refi and 50% purchase money.

Finally, as Dan mentioned earlier, the MSR valuation adjustment during the quarter was a negative $4 million. Moving to insurance, total commission revenue for the quarter was $31.5 million compared to $34 million for the second quarter of 2019 and $31.7 million for the third quarter of 2018.

As we mention each quarter, we typically benchmark to the same quarter in the prior year given the seasonality in our renewal cycles.

While total insurance commission revenue was flat compared to the third quarter of last year as a result of the decline in contingent commission estimates, our core P&C commissions and life and health commissions increased by 2.5% collectively. This is in line with our loan growth and comments on pricing in the last several quarters.

Finally, I would like to briefly mention our wealth management team. We reported wealth management revenue of $6.7 million for the quarter, which represents an increase of over 10% compared to both the second quarter of 2019 and the first quarter of 2018.

Terry Mobley and his team have worked hard to attract quality producers, enhance our wealth management product offerings. Their hard work is paying off quarter-after-quarter. Now I will turn it back over to Dan for his concluding remarks..

Thank you, Chris. We continue to look for opportunities to grow our company by continuing to recruit revenue producers for all of our products. This is certainly easier when we are recognized, as the BXS Insurance was, by Business Insurance magazine as one of the best places to work in insurance.

Specifically, within the bank, we ended the quarter up 17 relationship managers compared to the beginning of the quarter. On a year-to-date basis, we are up 36 relationship managers net from the end of 2018, with over 50% of those revenue producers located in the high-growth markets within Texas.

Our team is pleased with our ability to continue to report improved profitability in a very challenging environment from both a rate and growth perspective. We’ve worked very hard to protect our net interest margin, maintain strong credit quality and improve our operating efficiency.

Each quarter different teams stand from a business development standpoint. This quarter, we were particularly pleased with the deposit growth achieved by our bankers and relationship managers. Our mortgage team had an outstanding quarter both from purchase money production and refinance activity.

And finally, as Chris just alluded to, our wealth management team had a great quarter. With that, operator, we would now be happy to answer any questions..

[Operator Instructions] Our first question comes from Catherine Mealor with KBW. Please go ahead..

Thanks. Good morning..

How are you?.

I am doing well. I thought I would start with the margin. Really nice stability in the core margin particularly compared to some of the other margins we have seen this quarter. And if we look at the loan yields, it seems like the fed rate cut is being offset by some of the re-pricing that you are seeing in the portfolio.

Is there a way to think about when you think we’re going to see that inflection point to where we’ll actually start to see the loan yields start to come down or do you still think there’s a little bit of room left in the re-pricing up of what’s left in the portfolio? Thanks..

Hey, Catharine, this is John. Good morning..

Good morning..

Good morning. We do think that for the next quarter, maybe the next two quarters, we can resist some of that squeeze in the margin that you are alluding to. But after that, then certainly we are going I think we are going to see a little less optimism on being able to hold the margin up.

We do have $2.2 billion in loans re-pricing over the next 12 months that are going to roll off at a 5%. The last 90 days, we have re-priced new loans at about a 5.30%. So there’s an opportunity there, which you alluded to, that’s going to be offset somewhat by our floating rate loans that take hit every time prime is changing.

But those are kind of sort of offset, I think, over the next couple of quarters to some extent, although we wouldn’t be surprised to see some minor some small degradation in the margin going forward, but still have some hopes that we can have hold up the margin pretty well over the next couple of quarters.

We do have, I think, $200 million in investment portfolio, securities, going to be maturing between now and the end of the year, that are going to re-price maybe. Of course, it depends on what the fed does, there’s maybe 30 bps of re-pricing opportunity upward in those as well, depends on what the fed does..

And from a margin, this quarter, Catherine, it was really mix shift that moved it. So the deposit growth is what moved the margin this quarter more than anything else..

We gave up about 2.5 bps just from the mix. That’s most of that 3 bps of decline in the core margin for the quarter was asset mix..

Okay, alright.

And so then as we look so if you can resist in your words, John, resist the squeeze over the next couple of quarters, could you argue that then that gives you time to catch up on the deposit side as we get into next year? And so arguably kind of over the next fed cutting period, your margin should kind of stay fairly stable?.

Well, that’s the wildcard, isn’t it, what we can do on the deposit rate, the funding rate, but you could say that’s a fair comment that we do have some opportunity to protect the margin by adjusting deposit rates down a little bit, yes..

And have you seen any decline in deposit costs month over month?.

Well, the last three or four quarters, we have seen, gosh, 9 basis points increase, 11 basis point increase, and then in the second quarter, only a 5 basis points increase and then in this quarter, only a 3 basis point increase in total deposits.

So the trends are going the way we want them to go certainly, and it’s true for most banks, I would think less pressure less upward pressure on deposits. And for the quarter, our deposit increase as I think I commented on earlier was mostly driven by re-pricing our CD portfolio..

Yes. Most of what we are seeing out in the market would be that the high-rate specials are have pretty much gone away. So we are not seeing that higher rate competition many banks were advertising the 13-month or the 17-months or whatever they wanted to advertise from a CD perspective.

Most of that’s gone, which is helping take some of that pressure off..

Got it. Okay, great. And so then – and then maybe just on your thoughts on organic growth, I mean it’s been fairly flat this quarter.

Is there any kind of outlook into looking into next year that makes you believe that your organic growth rate should improve from here?.

Yes. I think that is what I commented on toward the end of the conversation just a few minutes ago. I think we continue to find what we think are quality relationship managers. We continue to add folks onto our team. Many of them are not in traction at this point yet, but they’ll start gaining some traction.

As I said, over half of our new producers are in Texas and some part of Texas, which helps us. I think we expect to be able to grow. The wildcard obviously would be the overall economy. If the economy stops rolling, then obviously that changes the game a little bit. But I think we’re putting people in the right places.

I think we have the ability to play. When you look at pipeline, Chris was talking about that a few minutes ago, I think our pipeline is full. We’re holding our own on that level. So the impact that we’ve seen has been more of the non-bank irrational pricing. We’ve seen 2.88% for 10 we’ve seen 3.15% for 15 years.

We’re not willing to play at those rate levels, and so we’ll let a customer move a transaction for that..

Make sense. Great, thank you so much. Great quarter..

Thank you, Catherine..

Our next question comes from Jennifer Demba with SunTrust. Please go ahead..

Hey, guys. It’s actually Steve on for Jennifer..

Hey Steve..

Question on when did you adjust the posted rates this quarter?.

Throughout the quarter..

Okay. So it was kind of through the quarter.

And do you think you guys will move kind of again on maybe an October cut or do you guys react to those or is it kind of just as you see the competition move?.

We track competition on a weekly basis, and we’re making moves in real time. Clearly, the fed moves have impact on all of that, but we’re making moves in real time..

Okay. The mortgage pipeline looks pretty strong and tough for Q you guys are going to be able to outgrow that seasonality in that business.

Are you still seeing refi pretty strong?.

We are seeing everything strong, refi and purchase. The mix is up on the refi side, as you would expect, and we commented on and because of, I guess, when the rate climbs. But I think it’s a function of the rate environment plus we’ve added producers there.

As we grow it in different and new markets, we’re seeing some opportunities to keep volume up there..

Okay. And final question, I guess, on the M&A side.

Are you guys seeing any kind of different activity from competition, other people stepping into deals, growth just seems to be slowing, and it seems like maybe people move more to M&A, anything there?.

I am not sure I followed all of that conversation, but from an M&A perspective, there is still a lot of people talking. I don’t know that I’ve seen more people talking or less people talking. There is activity out there on the M&A front..

Great. Thanks..

Thank you..

Our next question comes from Matt Olney with Stephens. Please go ahead..

Morning, Matt..

Hey, good morning.

How are you?.

Good..

I just wanted to ask you about the stock repurchase plan and expectations for how aggressive you are going to be on that going forward?.

We’ve been opportunistic. So when you look at what we were able to purchase in the last quarter, we’ve got an automatic program that executes on its own. It is price sensitive. And so in today’s environment, we haven’t seen that. But if you remember last year, it was in December that the market threw up all over all of us.

So we want to make sure that we’re prepared and ready for that. We think we’ve done well in that. To get my crystal ball out, I would hope that the market doesn’t back up like it did last year. But if it did, we’ve got protection in place for that..

Okay. And then going back to the M&A discussion, I guess the data points we’re hearing are there’s more and more smaller banks that continue to raise their hand and look for M&A partners. I’m just curious what you’re seeing on the grand [ph] as far as the M&A pipeline and how your combinations are coming right now..

Well, I think we have been pretty active in what you would call the smaller bank world. I think we see opportunities. When we look at the transactions that we’ve completed this year or announced this year, I think all of those transactions have been beneficial to us. They are claim, core banks.

They’re relatively simple in their business model, which means they’re relatively low risk for us. They’ve expanded us into some geographies or overlapping geographies that benefit us from an efficiency standpoint.

The two that we’re working on today, the Summit Bank that closed on September 1 and Texas Star also on September 1, we expect to integrate those onto our operating system here within the next couple of weeks. So being able to integrate those banks quickly is a big benefit to us. The Florida Panhandle is a great market.

We are excited about what the team down there is doing for us. We’re already in the Dallas market and Texas Star and the Dallas MSA and then north of that. I think that market can be a big plus for us. So we’re excited to get those folks in line. The announcement in the quarter was Rodney Kroll’s bank in Waco, Texas, Texas First State Bank.

Great franchise there in the Waco market. A college town, undefeated town right now, I guess, we can all say. We have overlap within our markets in the Temple and Killeen area that will benefit us. I think there’s more and more of that type of opportunity out there. We’ll kind of continue to play and talk with the folks that are in our neighborhoods..

Okay, sounds great. Thank you..

Thank you, Matt..

Our next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead..

Thanks, Good morning, everyone..

Hey, John..

Hey, few questions here. Early in the call, you guys talked about the elevated payoffs going to the non-bank market, but then you talked about the ability to pick up some fee revenues by helping clients place those credits.

Can you talk about that a little bit and then maybe if you can share the magnitude or the size of these credits and then what the offsetting fee opportunity was?.

Yes. There were several in there. The biggest one was a $40-plus million the credit was an $80-plus million credit, we were carrying $40-plus million of it on our balance sheet. And our team, our capital markets team assisted that borrower in moving that out. That happened literally in the first week or 2 of the quarter.

And then there were several other smaller ones on top of that. The capital markets team John was talking about some of the perfect storm of multiple items that generated some revenue for us in his conversation. That capital markets team is one of them, and I don’t remember exactly what that was.

It’s a little less than $1 million, $750,000 on that transaction. So while we hate to lose the earning asset, when the borrower can take it out into a non-recourse, what we consider to be exceptionally low rate fixed for a long term, it’s hard to argue with that..

Right. Okay.

And you’re saying it’s pretty broad, but if you had to aggregate maybe the top 3 or 4 credits that left, is that $100 million in credit that’s just lumped in a few credits?.

I don’t know that I’d get to $100 million in that. We’re probably in the $50 million, $60 million, $70 million range that we can identify that went out.

Chris, you want to jump on that in any way?.

Yes. I mean after that, it gets smaller and smaller, but you start to get down in $10 million and $5 million credits. But I would say the bigger size, as Dan suggest, maybe $60 million or $70 million..

We also exited some credits in the quarter that would be acquired credits that were not listed as nonperforming to us but were acquired credits that we had intended to and wanted to exit, so you had some of that happening also..

Okay. That helps. I guess another question I had was around the relationship manager hires that you talked about at the end of your comments, Dan. You talked about insurance, but then you went to talking about the bank and the relationship managers.

It sounds like you’re hiring a wealth insurance in the bank and I’m just curious of the profile of who you’re hiring. Help us understand that..

Yes. We’re trying to hire in all of our categories. Insurance was recognized in their industry as one of the better places to work, we like that. We’ve got good revenue producers in our insurance team, they continue to do well. They’re continuing to recruit on their side also.

On the mortgage side, we continue to recruit mortgage producers, and we’ve done well at picking up folks in some pretty high-growth markets that is helping the production on that side. And then I was specifically talking about the bulk of the adds have been within the bank. Again, I can’t remember my exact number now.

Was it 36 year-to-date? And again, half of those or a little more than half of those are in Texas. They’re coming from lots of different places. There’s no real one or two places that those are coming from. We’ve hired from some much bigger banks than us in some markets, we’ve hired from some much smaller banks than us in other markets.

Much of this is coming through referrals from our own folks. I like it when our own folks are out talking to their peers in the market and saying you need to come join us, and we’ve had some success with that. But it takes them some time to get in and get organized and learn their way around before they can start seeing some real traction.

But if we keep adding people, we’ll continue to gain that traction from those folks joining the team..

Okay, appreciate that.

And then one small one, I know this number jumps around a little bit, but for John Copeland, the miscellaneous income, was there anything to call out there in terms of the increase?.

Well, Dan has already mentioned the placement fee, the $750,000 capital markets placement fee. We saw our swap fee income go up quarter-over-quarter $600,000 or $700,000. We had about a $600,000 gain on some sale of some other real estate. And then a whole slew of other smaller individual items.

But that’s a flavor of the kind of things we’re talking about. BOLI income or debt BOLI debt benefit was up $600,000 or $700,000. So that’s those are the kinds of things we’re talking about..

The perfect storm of everything hitting a little bit, I am not sure that all of that happens again, but it was a nice quarter for us..

You could say some of those are recurring. The BOLI might be considered to be recurring, but it did hit in the quarter..

Yes. Okay, alright. Thanks a lot, guys..

Thank you, Jon..

Your next question comes from David Feaster with Raymond James. Please go ahead..

Hey, Good morning, everybody..

Hey, how are you?.

Very well. I just wanted to follow up on the buyback question.

Could you remind us where you manage your capital ratios to, and what your limiting ratio is? And I guess as the current plan expires, do you have any expectations for the potential size of a new authorization, and how CECL might play into that, if at all?.

Wow, let’s see. Let’s unpack that a little bit. I don’t know that we have targeted ratios that we’ve ever disclosed that we’re managing to. We don’t manage that to a target like that. I think we want to be opportunistic with what’s out there.

When we look forward into what may happen in 2020, our Board of Directors will certainly look at that opportunity at the end of the year, that would be a December Board meeting activity for us. So I would hesitate to kind of force them into what if or how much on a look-forward basis.

I think we want to make sure that we’ve got all the tools in our toolkit for capital management, and the stock buyback is one of those..

Okay.

And then back to the mortgage, do you have any thoughts on the gain on sale margin? I mean I guess, given the pipeline, do you think it should hold up? And has there been any additional conversation or thoughts about hedging the MSR?.

Okay. There is two parts there. Margin would be first, MSR was second. We are hedging a little bit of the MSR. We’ve been hedging a little bit of it. And when rates move around, you could argue that it may or may not be the time to do that when rates are really low. You’re giving up future income, so we certainly have taken the hits.

We’re now hedging 20%, give or take, of the value that’s in there. So we’re playing in the hedge but we haven’t turned on a full-size hedge with the thought process that if rates do come back up to a more normal level in the future some time, we would want to take advantage of that.

Chris, you want to talk about gain on sale?.

Yes. The gain on sale margin, you see a lot of that’s volume driven and timing to the quarter. So we continue to say that we think our average margin will be flat, it would be 175 if you’re looking at it across the full year.

So I don’t know you would we would expect to see some lumpiness, like we always had, where it bounces up and down quarter-to-quarter depending on volume environment..

Okay.

And then last one for me, just any thoughts on expenses? I mean how much of the Summit and Van Alstyne’s synergies are already in the run rate? And what’s the timing going forward? Maybe just what’s a good rate run rate as we enter 2020?.

Yes. So remember, there is nothing in the run rate there. When you look at the quarter, we only had one month of their expense base in 3Q. So we will have 3 months of that expense base in 4Q.

And as I said a few minutes ago, our intention and our plans are to integrate them into our operating systems in the next couple of weeks, which will allow us to start pulling back on some of those expenses. But you’re really looking at the large majority of them carrying through the fourth quarter..

Okay.

Is there any timing? Do you have any projections for the timing of those synergies? Or is it, I mean, primarily a 1Q ‘20 event?.

Again, I’m not sure exactly how to answer your question. I mean we are actively managing expenses in all of the mergers that we bring through. When we bring them on board, we immediately begin working on the operational integration.

Once they are integrated into our system that allows us to knock some of those expenses off 30 to 60 to 90 days post that integration. We anticipate integrating the Texas Star and Summit here in the next couple of weeks, which would lead to the beginning of that cost cutting..

Appreciate it. Thanks..

Thank you..

Our next question comes from John Rodis with Janney. Please go ahead..

Hey guys..

John, you all talk about the Cardinals..

Baseball’s over Dan..

Oh, okay..

It’s college football. I know you’d like that.

You know, how you doing Dan?.

Good. Thanks..

You know all – I guess basically all my questions have been asked and answered.

But Dan, maybe just big picture, you are in a lot of markets and I know, like, Texas is better than probably most of the other markets you’re in, but just big picture, how do you feel about the economy right now just where you guys stand?.

We see mixed signals on that front. You’re right, when you look at the economy within the states that we serve, some of them are not growing very fast. However, on the other side of that, it’s a tight, tight labor market across our entire footprint. Everybody we talk to is having is straining to find and retain and attract people.

So I think when you talk about the full employment that would tell you the economy is humming along pretty well. When you look at some of the footprints that we are in, we are not seeing the same level of growth that we are seeing in the Texas market. So my answer is it’s kind of mixed.

I think there are still folks that are trying to figure out what all of the tariff talk means, if anything. Some people in our market are impacted by that more than others. I think we’re coming along pretty well right now..

Okay. Makes sense. Thanks, Dan..

Thank you. And by the way, John, baseball is still going on, you know, there’s a World Series games in Houston tonight..

Yes. Houston, that’s right. Good luck. Good luck..

Our next question comes from Kevin Fitzsimmons with D.A. Davidson. Please go ahead..

Hey, yes. Good morning, everyone..

Hey, Kevin. Good to hear from you..

Good day. Good to speak to you, Dan. Just real quick question most of these have been covered, but with Summit giving you this presence in the Panhandle and you had mentioned a few times that, that team is doing very well.

Do you have the infrastructure that you want and need longer term there or do you aspire for something bigger there? In other words do you need to go specifically looking for acquisitions or to hire teams in the Panhandle or do you have just what you need right now?.

I think we have got a great team down there. So I think we can play with what we’ve got for a long time. If opportunities come up that give us the opportunity to add good revenue producers or find another partner down there, I think we would be happy to talk that way, too.

Andy Stein and the team that came over from Summit, they’ve got some really good bankers down there. Our office, we were in the floor to Panhandle prior to Summit. Our location was smack in the center of their footprint. They run from Panama City over to Pensacola and we were right in the middle of that already.

So this gives us a much bigger presence along that corridor. And when you look at what’s happening in the economy down there, that’s an area within our footprint that the economy appears to be humming along quite well..

Are there particular markets that if you found revenue producers you would really want to add to in the Panhandle?.

I don’t think we have a blinder on from a revenue-producer standpoint into any market. When we’ve got opportunities to bring people on that can produce business and help us grow our bank, we’re blind to what market that may be in.

If it happens to be in a higher-growth market, Panama City who was hit by the hurricane last year, that’s going to be some growth in that market for the next several years as they recover from the hurricane damage.

But the entire Florida Panhandle has that opportunity, as does Mobile, Alabama, or Huntsville, Alabama, or Nashville, Tennessee, or I could go on and on, on markets that we’re actively looking for and will be happy to bring on revenue producers..

Okay, alright. Great. Thanks, Dan..

Thank you, Kevin..

This concludes our question-and-answer session. I would like to turn the conference back over to Dan Rollins 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 reach out to us. Otherwise, we look forward to speaking with you all again soon. Thank you very much for participating..

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