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Executives

Randy Burchfield - Senior Vice President of Corporate Marketing

Aubrey Burns Patterson - Executive Chairman, Chairman of Executive Committee, Chairman of Bancorpsouth Bank and Chief Executive Officer of Bancorpsouth Bank

James D. Rollins - Chief Executive Officer and Director

James Ronald Hodges - Vice Chairman and Chief Lending Officer

William Lloyd Prater - Chief Financial Officer, Executive Vice President, Treasurer, Chief Financial Officer of Bancorp South Bank and Executive Vice President of Bancorp South Bank

James Virgil Kelley - President, Chief Operating Officer, Director, Member of Executive Committee, President of BancorpSouth Bank and Chief Operating Officer of BancorpSouth Bank

W. James Threadgill - Executive Vice President and Vice Chairman of BancorpSouth Bank

Analysts

Catherine Mealor - Keefe, Bruyette, & Woods, Inc., Research Division

David J. Bishop - Stifel, Nicolaus & Co., Inc., Research Division

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Michael Rose - Raymond James & Associates, Inc., Research Division

Emlen B. Harmon - Jefferies & Company, Inc., Research Division

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Matt Olney - Stephens Inc., Research Division

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division

Marc Bode

BancorpSouth (BXS) Q4 2012 Earnings Call January 24, 2013 11:00 AM ET

Operator

Good morning, and welcome to the BancorpSouth Fourth Quarter 2012 Earnings Conference Call and Webcast. Today's call is being recorded. I will now turn the conference over to Randy Burchfield, Senior Vice President, Corporate Communications. Please go ahead, sir.

Randy Burchfield

Good morning, and thank you for being with us for our first conference call of the new year. We're pleased to welcome our new CEO, Dan Rollins, to the BancorpSouth team and to our call today. Dan joins BancorpSouth's Chairman, Aubrey Patterson; Jim Kelly, President; Bill Prater, CFO; Ron Hodges, Chief Lending Officer; and James Threadgill, Vice Chairman of Financial Services. We'll be changing our order up just a bit this morning. First up, Aubrey and Dan will have some opening comments, and then Aubrey will overview the quarter and we'll go to the Q&A discussion as usual.

But first, I'll remind you, certain forward-looking statements may be made this morning regarding the company's future results, our future financial performance. Actual results could differ materially from those indicated in these forward-looking statements due to a variety of factors and our risks. Information concerning certain of the factors can be found in BancorpSouth's 2011 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 the measures on the Investor Relations portion of our website at bancorpsouth.com.

Mr. Patterson?

Aubrey Burns Patterson

Thank you, Randy. I want to also welcome Dan Rollins to the conference call this morning. As you know, Dan joined the BancorpSouth team as CEO on November 27, following his appointment by the company's Board of Directors. The board's appointment was consistent with my previously-announced plan to retire as BancorpSouth's CEO prior to the company's Annual Meeting in April.

Board of Directors did an outstanding job in identifying Dan during the comprehensive search process. He emerged early on as our leading candidate and brings to BancorpSouth an impressive record of accomplishments in senior management positions at the well-respected Prosperity Bancshares. The transition process has been going very well. Dan hit the ground running on his first day on the job and we're well ahead of where I thought we'd be at this point.

Our team has made real progress towards returning to our traditionally strong performance levels. We have a strong and energized new generation of banking professionals who are highly motivated to move forward under the leadership of our new CEO. Before we proceed with the quarterly review, I'll ask Dan to make some remarks.

James D. Rollins

Thank you, Aubrey. I am honored and pleased to have the opportunity to serve as BancorpSouth's CEO and to work with such an outstanding senior management team. Today is my 40th working day here at BancorpSouth, and I agree with Aubrey that we are well ahead of the expectations that I have put in place for this transition.

Over the past few weeks, I've enjoyed meeting and visiting with most of our Tupelo teammates and have also been meet with some of my coworkers in Texas and Arkansas, Louisiana, Tennessee and other parts of Mississippi. I look forward to continuing my education on the strengths and the challenges for our company. So far, I've seen a company that has a great group of people with quality and competitive products and services and team members with a great desire to serve their customers.

Our team has made significant progress with the asset quality issues that have taken up so much of our time, efforts and resources. While that work continues, I look forward to refocusing our efforts and going about the business of growing our company, returning it to the levels of performance that have been the hallmark of BancorpSouth.

Since I was only a part of the company for 19 working days during 2012, Aubrey will handle today's review and discussion of our past performance. I look forward to more in-depth participation while leading future quarterly conference calls.

Randy Burchfield

Let me remind everyone that Mr. Patterson will be referring to prepared slides in during his discussion. You can find the slides by going to bancorpsouth.com and clicking on our Investor Relations page where you'll find him on the link to our webcast or you can review them at the exhibit to the 8-K that we filed earlier. Mr. Patterson?

Aubrey Burns Patterson

Thank you, Randy. Let's turn now to the slide presentation.

I'll ask that you please look at Slide 2 for our Safe Harbor language with respect to certain forward-looking information in the presentation. Slide 3 presents BancorpSouth's highlights for the fourth quarter. As we discussed earlier, Dan was named BancorpSouth's new Chief Executive Officer.

Our net income for the quarter was $17 million or $0.18 per diluted share, compared to net income of $13.3 million or $0.16 per diluted share for the fourth quarter of 2011 and net income of $23.8 million or $0.25 per diluted share for the third quarter of 2012.

Our mortgage lending operation produced another successful quarter resulting in record production levels in mortgage lending income for 2012. Mortgage loan originations for the fourth quarter were $549 million compared with $608 million for the third quarter of this year. Total mortgage lending revenue for the quarter was $17.2 million. Of the total originations of $549 million for the quarter, 68% represented refinances of existing mortgages while 32% represented home purchase money. Of the refinances, only 55% represented refinances of BancorpSouth mortgages. In other words, 63% of originations were new customers.

Our investment in expanding our mortgage production team over the last 2-plus years continues to pay dividends in terms of the market share that we're gaining through refinances of loans from other institutions.

We're also pleased to report our seventh consecutive quarter of steady improvement in credit quality. Specifically, both quarter ORE dispositions contributed to a meaningful decline in total foreclosed property on hand. Total nonperforming loans, nonperforming assets and classified assets continue to trend down. I'll discuss more specifics regarding credit quality improvement momentarily.

We continue to enhance our capital position. If you'll turn to Slide 4, I'll elaborate on the company's position. The graph provides a visual depiction of significant improvement in regulatory capital ratios over the past year. Total risk-based capital and Tier 1 capital have both improved 205 basis points over the past year, while Tier 1 leverage capital has improved 140 basis points.

While the equity offering that we completed in January bolstered our capital ratios, improved profitability levels and disciplined balance sheet management continue to meaningfully improve our capital position.

Slide 5 presents some highlights of credit quality for the fourth quarter. The company's fourth quarter provision is flat at $6 million compared with the third quarter of 2012. Total nonperforming loans declined by $13.8 million or 6% during the quarter, and total nonperforming assets declined $38.7 million or 10%.

As I mentioned early, this marks the seventh consecutive sequential quarter of steady improvement in both of these measures. Current quarter decrease in total nonperforming assets was driven in large part by a decline in other real estate owned, which decreased $25 million or 19% from $128.2 million at September 30, 2012 to $103.2 million at December 31.

During 2012, ORE declined over $70 million or 41%. Total dispositions for the fourth quarter were $27.9 million, resulting in a net loss of $4.2 million or 15% of carrying values. Foreclosures and write-downs were $8.5 million and $5.5 million, respectively.

We made some decisions during the quarter, which expedited the disposition of ORE properties. We also adjusted the asking prices of certain other properties. While these decisions adversely impacted current quarter income, we believe they were prudent ones which will help continue our momentum and improve operating performance going forward.

The percentage of nonaccrual loans that are paying as agreed remained relatively flat, representing 56% of total nonaccrual loans as of the end of fourth quarter of 2012.

Importantly, near-term delinquencies represented loans 30 to 89 days past due, declined $15.5 million or 35% from $43.7 million at September 30, 2012 to $28.2 million at December 31, 2012.

We've also had continued improvement in classified asset totals. In addition to the reduction in NPLs that I discussed earlier, substandard classified loans declined $44.3 million or 8% compared to September 30, 2012. This decrease included the full repayment of $35.2 million in substandard rated loans.

Slide 6 is a summary overview of our income statements for the comparable and sequential quarters. This presentation highlights several trends. First, you'll notice continued pressure on net interest revenue. Our net interest margin declined to 3.44% during the fourth quarter from 3.69% for the fourth quarter of last year and 3.55% for the third quarter of this year.

Like others in the industry, we continue to face significant headwinds with respect to loan pricing and securities yields. Second, you will see continued stabilization in the provision for loan losses which remained flat at $6 million quarter-over-quarter. Noninterest revenue remained flat as well with just over $70 million. I'll talk more about the details of this meaningful component of our earnings in just a moment.

Finally, noninterest expense increased on both a sequential and comparable quarter basis. These increases were related primarily to the increases in salaries and benefits expense and foreclosed property expense. Salaries and benefits expense increased $6.7 million on a comparable quarter basis and $2.4 million on a sequential quarter basis. These were primarily as a result of increases in projected variable compensation accrued as the operating performance has improved significantly during the year.

Foreclosed property expense increased $3.2 million on a sequential quarter basis and $1.2 million on a comparable quarter basis. I discussed ORE activity earlier and will provide some more details in a moment.

Slide 7 shows the complete breakdown of the impact of our noninterest revenue streams. As I mentioned earlier, our mortgage lending group produced another solid quarter, reporting origination and servicing revenue of $17 million. The valuation of the MSR asset was basically flat quarter-over-quarter, resulting in a minimal impact to mortgage lending income for the quarter. Insurance produced a solid quarter as well. The sequential quarter decline is the result of seasonality as interest renewals are cyclically lower for us during November and December. With that said, insurance commission revenue increased 6% on a comparable quarter basis.

Slide 8 presents a comparable quarter comparison of our loan portfolio broken down by classification. As you can see from the table, total loan balances declined $233 million or 3% over the course of the year. As I discussed earlier and I will again in more detail momentarily, much progress has been made at reducing classified and nonperforming loans. Substandard loans declined $169.9 million over the course of the year and total NPLs declined $88.7 million. While this has been a negative offset to net loan growth, we've been pleased with loan production efforts nonetheless.

As classified and problem assets have significantly declined, we expect to reach an inflection point in 2013, producing meaningful net loan growth.

Now let's take a closer look at credit quality, starting with Slide 9, which breaks down NPLs by loan category. This slide highlights the progress made in working though problem credits over the course of the year. CAD NPLs, which had been the primary source of our credit issues, declined $63.2 million or 47% over the course of the year. Total NPLs have declined by $88.7 million or 28%. NPLs represented 2.7% of net loans and leases at December 31 compared to a 3.63% at December 31, 2011.

Slide 10 provides a visual of the significant improvement in NPLs, ORE and total NPAs over the past next several quarters. In addition to the decline in NPLs, which I just discussed, ORE declined $70.6 million or 41% during 2012. The 2 combined, representing total nonperforming assets, declined $159.3 million or 32% over the course of the year.

ORE sales for the quarter totaled $27.9 million, the highest sales quarter in the credit cycle. This is particularly encouraging, given that the fourth quarter of the year is typically slower than other quarters.

As I mentioned earlier, we did make decisions during the quarter to accept some offers lower than our asking prices to expedite the disposal of certain properties. We also decided to more aggressively price some additional properties, resulting in incremental downgrade.

As noted earlier and as shown on Slide 11, we continue to be encouraged by the percentage of nonaccrual loans that are being repaid in accordance with contractual terms. As explained in our news release, these loans have been classified as nonaccrual because there's some doubt as to whether the borrower will be able to fully satisfy the debt in compliance with these terms, the most common reason being uncertainty about the realization of value from the underlying real estate collateral.

The loans that are paying as agreed, accounted for 56% of the dollar amount of total nonaccrual loans at the end of the fourth quarter.

Slide 12 contains some additional information with respect to the performance of nonaccrual loans. We collected $31.6 million of cash payments on nonaccrual loans during the quarter after having collected $26.7 million during the third quarter of this year. We collected a total of $106 million of cash payments on nonaccrual loans during the year 2012. This trend is very encouraging and further confirms the decisive nature with which we've dealt with credit issues and placed loans on nonaccrual status throughout the credit cycle.

Slide 13 presents a visual of net charge-offs and annualized net charge-offs as a percentage of average loans for the last several quarters. Net charge-offs for the fourth quarter of 2012 were $10.6 million, representing improvement from $23.8 million for the fourth quarter of last year and from $12.8 million for the third quarter of this year.

It's important to note that the $6.4 million of total current quarter charge-offs were loans that had been identified and reported as impaired and which were specifically reserved for in previous quarters. Additionally, recoveries of previously charged-offs loans has increased significantly over the last year. Recoveries for the fourth quarter were $9.2 million compared with $2.6 million for the fourth quarter of last year and $6.1 million for the third quarter of this year.

Recoveries for the year totaled $30.7 million compared with $10.2 million for 2011. Annualized net charge-offs for the fourth quarter of 2012 including charge-offs of those balances previously reserved, were 0.49% of average loans.

This concludes our slide presentation. To comment, 2012 was a year marked by several significant accomplishments. Over the course of the year, we were able to reduce NPLs by over 25%, ORE by over 40% and total NPAs by over 30%. Net income for the year exceeded 2011 net income by over $45 million. We had a record year in terms of mortgage production and mortgage lending income.

Other fee revenue streams, including insurance commissions, demonstrated meaningful growth as well. As we move into 2013, we believe that the foundation work in 2012 has positioned BancorpSouth well to continue progress in restoring operating performance to our traditionally higher levels.

Thank you for your time and attention this morning and for your interest in BancorpSouth. Operator, we'd now be happy to answer any questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Catherine Mealor at KBW.

Catherine Mealor - Keefe, Bruyette, & Woods, Inc., Research Division

Aubrey, you spoke a little bit about the ORE dispositions that you did this quarter, and it was really nice to see that you got a little bit more aggressive in disposing of both NPLs and OREO. Do you see this will continue -- you'll continue to dispose of OREO at this kind of pace into 2013, especially since fourth quarter is typically a little slower for dispositions? Or do you think that'll slow down this year and really this quarter was kind of a one-time cleanup?

Aubrey Burns Patterson

Well, I wouldn't characterize it as a one-time cleanup. It certainly has been, is and will continue to be a focus for us. As far as predictions as to how much more progress and the rate of progress that we will achieve during the next year, I'll ask Mr. Hodges, Ron Hodges, our Chief Lending Officer, who oversees this process, if he wants to make any comment. But I'm quite sure that he will want to focus on what we have done, are doing, the track record we've established and take a brief look into the future. Ron?

James Ronald Hodges

Thank you, Aubrey. Catherine, you're correct. We did take an aggressive approach in the fourth quarter, and I think that was -- we were allowed to do that because of the real estate markets had firmed up some in the markets we operate in, specifically in the real estate lot sales, residential lots that we have a good supply in our ROE. We see that continuing to firm up for us which will allow us to maintain our aggressive approach. We've got -- we think we have our ORE priced appropriately and we're going to continue to move it out as fast as we can in a judicious manner.

Catherine Mealor - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, that's helpful. And maybe as one follow-up on the expenses. You walked us through how some of the higher expenses was in OREO, but personnel and other expenses were up a little bit this quarter as well. For the personnel, was some of that just higher incentive comp, and so we may see that line item actually come down a little bit in the first quarter? Or do you think this is a good run rate to go on? And then other -- in other expenses, are there any kind of onetime-ish seasonal items in there as well that we may see come down next quarter?

Aubrey Burns Patterson

We did have a couple of fairly significant items in the personnel area. As performance improved, bonus accruals were increased. There was an increase based on expected earnings related to our split dollar life insurance program. And of course, the bigger item is, as you mentioned, was foreclosed property expense, write-downs and losses on sales. Bill Prater, do you have any comment to add to that?

William Lloyd Prater

Yes. Specifically, the -- right to some of the benefit plans, it wasn't just Bowie. That was one component of it. But lowering of discount rates in a prolonged lower interest rate environment, we tried to true that up throughout the year, but made the decision to take it on down further in the fourth quarter. We did have a few minor write-downs that probably aggregated just south of $1 million and other expenses that are nonrecurring in nature related to the write-down of some assets. But we're in the process of disposition that are not OREO assets.

Operator

We'll go next to David Bishop at Stifel, Nicolaus.

David J. Bishop - Stifel, Nicolaus & Co., Inc., Research Division

Aubrey, I noticed a little bit of spike in sort of the near-term liquidity, near-term cash there that impacted the margin a bit there. What's the outlook here? You mentioned that you're hopefully reaching an inflection point there. Any sort of the near-term plans to deploy that liquidity?

Aubrey Burns Patterson

We're certainly looking at all of the alternatives that we have, deploying it, even with some adverse impact on margin but -- in terms of percentage, but increased opportunity for the monetary redeployment, we will see that inflection point that I referred to that you commented on. We obviously have had a significant reduction in problem loans. And the other side of the coin is we're not satisfied at all, but we are pleased to see some increase in new loan production. We do expect to see those lines cross during the next year and we know that the opportunity to get additional margin in this low interest rate environment is going to be by redeploying those loans into our loan portfolio, and we're very focused on that.

James Virgil Kelley

David, this is Jim Kelley. Just to add to that, in the year, we have $850 million in those overnight funds, earning 25 basis points. So it did affect margin. And how we deploy that is really important to us. I mean, the best way to do it is put it in loans at 4% or 5%, and that has a huge effect on margin. Worst thing to do would be for us to put it in a long-term investment at a historically low rate. So we're working on deploying that. We're adding the market, looking for loans. But that can have significant potential for us especially in the margin area.

David J. Bishop - Stifel, Nicolaus & Co., Inc., Research Division

And Jim, in terms of new market trends, what are new loans pricing at relative to those commercial loans, commercial real estate loans that are rolling off?

James Virgil Kelley

As far as the loan part of them, I'm going to refer it to Ron, because he's looking at it every day.

James Ronald Hodges

As Jim indicated, it's in -- predominantly in the 4%, 4% to 5% range. But we're like everyone else, we need loans and it's very competitive out there in the commercial market. It's never enough rate.

Aubrey Burns Patterson

David, what you see there obviously is, there'll be increased compression in the net interest margin as a percentage. But certainly, if we can deploy those debts, significant excess liquidity that we're carrying in the overnight 6 months old [ph], even if the rates run, as mentioned, then we're obviously going to enhance our margin in terms of dollars. And that is our focus.

Operator

We'll go next to Steven Alexopoulos at JPMorgan.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

I wanted to start on the expenses. Given the one-time items, should we expect the run rate in expenses in 2013 to be closer to the third quarter '12 level than the fourth quarter level?

Aubrey Burns Patterson

Let me pass that over to Bill Prater.

William Lloyd Prater

Yes. I think so, Steven. That's probably a better indicator. I would remind you that in the first quarter of the year, you have FICA resets that effect some of the employees, that the matching of that hits during the first quarter, that there's some inquiries and officer salary adjustments typically take place early in the year. So that shouldn't be a significant -- meaningful impact to it. We certainly have to revisit the incentive accruals as we evaluate the performance against goals occurring throughout the year. But I wouldn't expect to see any further adjustment at this point in time to discount rates and employee benefit plans on the Bowie program and things like that, that have had a pretty significant impact on us this year.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Okay. And maybe to follow up on that. I know Dan's only in the seat for 40 days as of today, I guess. But when we look at comp expenses, they were up around 80% in 2012 and the efficiency ratio is now over 80% in the fourth quarter. Should we expect to see a more aggressive efficiency initiative launched here in 2013?

James D. Rollins

I think -- Steven, this is Dan. I think that we're continuing to evaluate all of our options. I think the answer is obviously, we can operate on an 80% efficiency. We got to do a lot better than that. We're all focused on looking for ideas and ways. I don't know that we can talk about any specifics today, but clearly, we're focused on doing more with less. We're going to find better ways to do things and be more efficient. And as we identify some of those things that can have meaning to us, we're going to be ready to talk about those and share those with you all.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Okay, that's great. And then, Bill, on the tax rate, how shall we think about the mechanics for the tax rate? And should we think about 2013 being around the same 28% rate that we saw in 2012?

William Lloyd Prater

That's a pretty good indicator. If you look at the all-in annual rate, fourth quarter had a little bit of noise in it because as you might -- the accounting rules kind of require you to use a projected income. And fourth quarter being a little bit lighter than the first 3 quarters of the year put us in a position where we had over-accrued as to the end of the third quarter based on where the year end performance ended up.

Operator

We'll go next to Mike Rose at Raymond James.

Michael Rose - Raymond James & Associates, Inc., Research Division

I just wanted to -- if you could provide kind of a gross inflows into nonaccrual this quarter. I was happy to see the sharp decline, again, in substandard loans. But given the sales, what were the -- what were actually the gross inflows this quarter?

Aubrey Burns Patterson

Ron, you want to speak to that?

James Ronald Hodges

Yes, I will. The major inflow was about $13 million, I think, into the nonaccruals this quarter, and that's really a result of one commercial credit that we have that we put in nonaccrual. It is paying. It's paying according to the contract. It has been restructured, and -- but after reviewing it and analyzing, we think in the short-term future that it will not be able to put it on amortization and we thought it prudent to place that on nonaccrual in the quarter.

Michael Rose - Raymond James & Associates, Inc., Research Division

Okay. And then just as we think about next year...

William Lloyd Prater

Michael, this is Bill Prater. I want to clarify what Ron said. I think the question you asked was about the gross inflows. And the gross inflows for the quarter were $44.7 million. The roughly $13 million number that Ron was talking about was kind of the -- speaks most to the change from the previous quarter, but it is not -- I think he referenced that $13 million as the gross inflow.

Aubrey Burns Patterson

Yes, that would be a net number.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Got you. Because I didn't see that number in the press release this time. Okay. And then how should we think about level of provisioning away for -- you all do a great job at pointing out how many of your current nonperformers have reserves and all that stuff. But how should we think at $190 million here of loans -- reserves to loans, how should we think about future provisioning, assuming lower loss content going forward?

William Lloyd Prater

You want me to take that? We continue to feel good about our modeling, Michael. It -- we've got a pretty good, I think, expected loss model. We've had opportunity to test that coming out of the credit cycle and make some improvements to it. The -- while the regulatory ratings that we disclosed within here are not the fundamental basis with which that discounted or calculated, it -- we look for correlations between what we see in those judgmental ratings of what we see in the analytics. And there's relatively good correlation in there. Loss contents have come down. You can tell even with the $44 million of inflows in the nonaccrual, the majority of those will be over a threshold that we would evaluate for impairment. The actual impairments this quarter continue to be at a fairly low level. So seeing less loss content from that, I think the fundamental opportunity for improvement there is back to the number that Aubrey spoke about with having just over half of our nonaccrual loans continuing to pay in accordance with the contractual terms of those loans being able to evaluate that for a sufficient period of time to make a determination that they qualify to be able to place back on accrual. That gives us the opportunity to improve both that -- precise [ph] that number and address any provisions that had been established against those loans because of their being impaired or on nonaccrual.

Aubrey Burns Patterson

You would certainly expect as we continue to have 55%, 56% of them paying as agreed, that over time, there would be a significant opportunity to reinstate them. Obviously, the loan loss provision year-to-year went from 2011's levels of $130 million to $28 million for 2012 and we continue to see improvement in the portfolio. So as we're able to, we're operating at a level that is certainly, we believe, sustainable and that has some contingent opportunity for improvement as those loans are reinstated as performing.

Michael Rose - Raymond James & Associates, Inc., Research Division

Okay, so just a one follow-up to that. Clearly, you've kind of de-risked the balance sheet, the loan mix has changed, there's been less -- there's less construction loans now. Should we think about kind of the loan loss reserve ratio is at least approaching pre-cycle levels once you kind of finish your credit rehab?

William Lloyd Prater

That's difficult to say. I'm not sure the pre-cycle levels, so I don't even recall what they were. That's been so long ago now, to be honest. But I think...

Michael Rose - Raymond James & Associates, Inc., Research Division

Kind of in the $120 million to $130 million range?

William Lloyd Prater

Yes. I think that's perhaps achievable in a very strong economy over a very long period of time. Right now, there, I would say that the qualitative factors that we evaluate and our allowance methodology still have a fair component of the allowances attributed to those, and it's due to things like economic stress and continued portfolio concentrations in areas that have experienced some difficulty and just the overall economy not being robust. It's not nearly as bad as it was even a couple of years ago, but they're -- I think, in order to achieve that, we would have to, for the industry, you'd have to see periods of pretty strong economic growth to justify.

Aubrey Burns Patterson

Like Bill, I can remember a time when there would be numbers that would show significant room for improvement, but we are in the range of approaching it in a publications at peer group performance in some of these critical credit quality metrics already. But we're all subject to the economy and the slowness of the recovery, and we certainly hope not. But with the possibility of some slippage back. So getting back to pre-rate recession levels in terms of these numbers, it's not in the immediate forecast.

Operator

We'll move next to Emlen Harmon at Jefferies.

Emlen B. Harmon - Jefferies & Company, Inc., Research Division

I guess just a -- I'll start off with a question on the margin. I noticed the taxable securities yields down another 10 basis points in the quarter, now at kind of $175 million. Are you guys getting to a point where the compression on that portfolio starts to bottom? And just kind of what is -- more generally, I guess, what does that mean for the pace of margin compression as we look out the next few quarters here?

William Lloyd Prater

Well, the maturities that we are looking at in the fall with maturities over the course of the next year, particularly in the portfolio, I think are around 195. All in, probably -- I don't have it right in front of me, but somewhere on order of close to $0.5 billion of securities that will mature. That is above the current reinvestment right opportunity, but not -- but the 195 is much, much lower than what we've experienced over the past couple of years also. So while it's still trending downward, the downward pressure there will not be as great as it has been over the past couple of years.

Aubrey Burns Patterson

It's going to level out, as Bill said. But our focus is to look for opportunities to instead of putting our liquidity into that portfolio will obviously we look for opportunities in the loan portfolio. We're still going to be subject to some narrowing compression there. But it's still going to -- the yield in the bond portfolio still has a little bit of ways to go.

Emlen B. Harmon - Jefferies & Company, Inc., Research Division

Got you, okay. And then just in the context of helping us understand where you are in terms of OREO dispositions, could you just kind of identify or help us understand how you identified what you pushed out this quarter and how it compares to kind of what's left in the rest of the OREO book?

Aubrey Burns Patterson

Well, let me make a general comment and then I'll ask Mr. Hodges to be a little more specific. The -- we have been more aggressive in our pricing. We have not only done that, but we've put a team of key executives totally focused on this and we have happily seen some resurgence of demand in some of these urban and suburban markets. But Ron, would like to speak to that further?

James Ronald Hodges

Sure. We had identified a number of larger partials that we had in ORE and we're successful in getting some interest in the fourth quarter from purchasers and investors that had some money that they obviously needed to invest before year-end for tax purposes. I don't foresee, going forward, us having the same level of reductions in ORE in the quarters, the first few quarters of this year. But we're still going to be as aggressive as we were in the fourth quarter in our pricing.

Operator

Next we move to Jennifer Demba at SunTrust Robinson Humphrey.

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Could you talk about what you're expecting in terms of noninterest income next year? Can you reasonably expect it to go up? Or I think you mentioned you were looking for better loan growth trends.

Aubrey Burns Patterson

Well, I think it was a bit in our ability to generate that new loan -- that loan growth as opposed to laying off money at 25 basis points overnight. We'll probably do so with some continued constriction in our net interest margin as a percent, but the idea is to redeploy those short-term overnight investments into loans that will give us some additional dollar yield.

Operator

[Operator Instructions] We'll go next to Matt Olney at Stevens.

Matt Olney - Stephens Inc., Research Division

Can you provide some more color on the mortgage pipeline today as you look in the first quarter? And secondly, are you continuing to hire some new mortgage originators as you have in recent quarters?

Aubrey Burns Patterson

We made a passing reference to that, but James Threadgill is here this morning to talk more about it. And Matt, I'll turn the podium over to him.

W. James Threadgill

Thank you, Aubrey. Matt, we, from the fourth quarter of last year till this year, we increased originators by 25, from 82 originators up to 107. We are obviously still looking for good quality originators. We have been able to attract some very high producing originators in some of our markets and we will continue to look for those.

Matt Olney - Stephens Inc., Research Division

And then, I guess as a follow-up, thinking about the balance sheet. And I guess my expectations are for capital to continue to build next year in 2013. What are your overall thoughts on capital management as it stands today. Because it feels like you have several options as far as that goes from increasing the common dividend to instituting a stock buyback. You're going to have some higher cost plus deferrers that are eligibly called at some point. So what are your overall thoughts on capital management for 2013 and '14?

Aubrey Burns Patterson

Well, you've hit on several key possibilities. And all of which will be seriously considered as part of our ongoing capital management plan. We're not really prepared today to be specific about what avenues we're going to pursue. But as you heard in my earlier remarks, we're obviously -- we have very strong capital ratios and we continue to improve earnings. So we're going to have a number of options that will be, I think, contributors to the strategic advantage going forward. And that's really all I can say about that at this time, Matt.

Operator

We'll go next to Kevin Fitzsimmons at Sandler O'Neill.

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division

My questions is for Dan. Dan, I guess it's a little under 2 months now you've been with the company and we're all kind of -- we all tend to think of new CEOs, especially coming in from the outside, as thinking in terms of eventually we're going to get some kind of either accelerated cleanup or efficiency initiative. And I know a lot of folks kind of seized on that when you came in, that you had expertise or focus on efficiency at your prior company. So it's been only 2 months, but can you just give us a sense on what your observations have been and whether we, from the outside, should expect something in terms -- something noticeable in terms of an initiative or clean up? Or will it be more gradual in building on what is already going on in those 2 areas at the company on credit and efficiency?

James D. Rollins

Yes. Kevin, I'm not sure that I can answer that directly. I don't know that there's anything drastic today. Like I said, 40 days in. Like you said, almost 2 months. I don't know that I can identify any drastic turn-the-ship-90-degrees-decision that we're getting ready to make here. But clearly, we've got to do a couple of things. We need to focus on growth. Matt was asking capital questions. We've got to forecast on growth. We need to grow, we need to grow earnings, we need to grow net interest income that Jenny was asking about. And so we've got to be really focused on how to grow. And at the same time, and there could be some announcements or initiatives or all kinds of things that could come out, but today I don't know that I can tell you what that is. And at the same time, we've got to be focused on making sure that we're spending our dollars wisely. And so how we get that efficiency ratio down and how soon we can get that efficiency ratio down, I can tell you that we intend to be communicating with you and let you know what those plans are, whether it's some huge sweep that we can do quickly. I don't know, I don't know that there's any magic wand that we can wave that solves all the problems. We didn't get in the shape that we're in overnight and we're probably not going to get out of the shape that we're in overnight. But I can tell you, we can improve and we can improve relatively quickly.

Operator

We'll move next to Ken Zerbe of Morgan Stanley.

Marc Bode

This is actually Marc stepping in for Ken. I just had a quick follow-up question. I think, Dan, you clearly elaborated on it. If there's anything more you can say on your emphasis on growth being sort of the key to improved profitability. So not so much about the cost side, but as you think about growing the franchise going forward, how should we be thinking about whether that's geographically or what sort of areas in the balance sheet, what type of loan buckets that you'd be most focused on, and also how you see it on the fee income side.

James D. Rollins

Sure. I think -- well, fee income side, when you look at our mortgage business for 2013, James was talking a minute ago, we're carrying now a little over $5 billion in servicing that we're doing today and production was almost $2 billion or right at $2 billion last year. I don't know that's the forward look on the mortgage says we'll be able to continue to produce $2 billion, because the refi business is going to slow. So that's a drag when you look forward on the B side for there. But we've got to do -- we've got to put more of our products in our customers' hands. We've got opportunities on the credit card side. We've got opportunities in the wealth management side. So those teams are already in place. We need to help them grow, we need to get more of our own products into our customers' -- into our customers' hands, back to that mortgage business, $5 billion in servicing that we're doing. And Aubrey or Bill or somebody can probably tell me, we've got a large number of those customers that walk into our bank to pay their payments on a regular basis, 35%, James is saying. Some of those customers are single-product-only customers. We've got do a better job of cross-selling into that, that will help us on our fees. The how part is the hard part and how soon we can do that. Your question specifically was on loans and type of loans. Well, we've got good lenders out there. These lenders have been very focused over the last few years in taking care of and cleaning the portfolio that's here. And it's time to start refocusing that effort. We've done a good job. The nonperforming assets are basically been cut in half from the peak, and we need to refocus back on growing. And so, all of the above. If it's a loan, we need it. You asked about geography. I think we need to grow in all of our -- certainly, within our footprint it's critical. If we can grow within our footprint, we want to do that. If there's opportunities elsewhere, it's going to have to be meaningful and it's going to have to be accretive and it's got to have make sense for us. But growth is going to be key for us going forward.

Operator

And that does conclude today's question-and-answer session. At this time, I'll turn the conference back over to management for any closing remarks.

Aubrey Burns Patterson

Well, thank you all for your questions this morning and for your support. If you need any additional information or have further questions, please don't hesitate to call Dan, Bill or me. Otherwise, we look forward to speaking with you again in our first quarter 2013 conference call. Good day.

Operator

And that does conclude today's conference. Again, thank you for your participation.

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