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BancorpSouth (NYSE:BXS)

Q1 2013 Earnings Call

April 23, 2013 11:00 am ET

Executives

Randy Burchfield - Senior Vice President of Corporate Marketing

James D. Rollins - Chief Executive Officer, Director, Member of Executive Committee and Chief Executive Officer of Bancorpsouth Bank

James Ronald Hodges - Vice Chairman and Chief Lending Officer

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

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

Analysts

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

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

Matt Olney - Stephens Inc., Research Division

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

Dave Bishop

Blair C. Brantley - BB&T Capital Markets, Research Division

John Lawrence Rodis - FIG Partners, LLC, Research Division

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Operator

Good morning, and welcome to the BancorpSouth's First Quarter 2013 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. Mr. Burchfield, please go ahead.

Randy Burchfield

Thank you, Kayleigh, and good morning, and thank you for being with us. On the call this morning from Tupelo is: CEO, Dan Rollins; Jim Kelly, President and Chief Operating Officer; Bill Prater, Chief Financial Officer; Ron Hodges, Chief Lending Officer; and James Threadgill, our Vice Chairman of Financial Services.

Before Dan begins the discussion with his comments, again, to 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 variety of factors and the risks. Information concerning certain factors can be found in BancorpSouth's 2012 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 a reconciliation of these measures on the Investor Relations portion of our website at bancorpsouth.com.

Dan would be referring to prepared slides during his 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 as the exhibit to the 8-K that we filed earlier. Dan?

James D. Rollins

Thank you, Randy. Good morning, everyone. Welcome to BancorpSouth's conference call for the first quarter of 2013, and thank you for joining us today. First, I'll provide an overview of our results for the quarter, then our executive management team will be happy to answer any questions that you may have. Let's turn to the slide presentation.

Slide 2 contains our customary Safe Harbor statement with respect to certain forward-looking information in the presentation. Slide 3 begins our review of the first quarter.

Net income for the quarter was $20.8 million, or $0.22 per diluted share compared to net income of $17 million or $0.18 per diluted share for the fourth quarter of 2012. We incurred charges totaling $6.8 million during the quarter, related to various legal matters. Excluding this charge, noninterest expense declined $7.1 million, or 5% from the first quarter of last year and $14.6 million or 10%, compared with the fourth quarter of last year. Foreclosed property expense drove a significant component of the decline. Foreclosed property expense for the first quarter was $2.4 million compared to $8.4 million and $12 million for the first and fourth quarters of last year. This line item could continue to be volatile as we work through the remaining ORE. Aside from this item, we are beginning to see the results of some of our expense control efforts in areas such as public relicense and advertising. Additionally, late in the quarter, we sold one of our corporate aircraft. While the total impact of these items was relatively small, these areas allow for a more immediate impact as we continue working on additional measures that should produce more meaningful results. We look forward to sharing additional details at the appropriate time.

We are pleased to report our eighth consecutive quarter of steady improvement in credit quality. Both NPL and NPA totals were approximately 1/2 of the peak levels reached 2 years ago. Our mortgage lending operation produced another solid quarter, with origination volume totaling $425.9 million. Total mortgage lending revenue for the quarter was $12.3 million, including a positive MSR evaluation adjustment of $1 million. While refinancing activity is declining slightly, it still comprises a significant component of our originations. Of our total volume for the quarter, 62% represented refinances of existing mortgages, while 38% represented purchase money. Of the refinances, 42% represented refinances of mortgages that are not previously serviced by our company, BancorpSouth. We also reported meaningful revenue increases in insurance commissions. Commission revenue increased $3.5 million or 15% on a comparable quarter basis, and $6.1 million or 30% on a sequential quarter basis. However as a reminder, the fourth quarter of each year is normally cyclically low due to the seasonality of our book of business.

If you'll turn to the next slide, we will discuss our company's capital position. The graph provides a visional depiction of continued increases in the 3 primary regulatory capital metrics. As we work through an environment where capital expectations are evolving, specifically related to stress-testing requirements and Basel III, we will continue to evaluate the appropriateness of our capital levels as well as various alternatives to deploy excess capital.

Slide 5 represents some quick highlights of credit quality for the first quarter. The company's first quarter provision of $4 million declined from $6 million in the fourth quarter of 2012. Total nonperforming loans declined by $26.5 million, or 11% during the quarter, and total nonperforming assets declined $33.5 million, or 10%. As I mentioned earlier, this marks the eighth consecutive sequential quarter of steady improvement in both of these measures. Other real estate owned decreased $6.9 million or 7%, from $103.2 million at December 31 last year to $96.3 million at March 31 this year. Total dispositions for the fourth quarter were $7.8 million, resulting in a net gain of approximately $200,000. Foreclosures and write-downs were $2.2 million and $1.3 million, respectively. Even with the 11% decrease in nonaccrual loans, the percentage of nonaccrual loans that are paying as agreed remained relatively flat, representing 56% of total nonaccrual loans as of the end of the first quarter of 2013. Additionally, near-term delinquencies, representing loans 30 to 89 days past due, declined $3.8 million or 14%, from $28.2 million at December 31 to $24.4 million or 0.28% of total loans at March 31, 2013.

We also had continued improvement in classified asset totals. In addition to the reduction and nonperforming loans that I discussed earlier, substandard classified loans declined $30.9 million or 6%, compared to December 31, 2012.

The next slide is a summary overview of our income statement for the comparable and sequential quarters. This presentation highlights several trends. First, you'll notice continued pressure on our net interest margin. Our net interest margin declined to 3.37% during the quarter from 3.44% last quarter. I will discuss our strategic opportunities in a little more detail later, but the key to addressing declining interest revenue is to begin to convert excess liquidity into loan growth. Second, you can see improvement in the provision for loan losses, which declined $2 million linked quarter and $6 million compared to the first quarter of last year. Non-interest revenue remained flat at just over $70 million. Finally, noninterest expense, which was flat on a comparable quarter basis, declined $7.8 million compared with the fourth quarter of last year. This decrease again is driven primarily by foreclosed property expense, which declined from $12 million for the quarter ended December 31, to $2.4 million for the quarter ended March 31, 2013.

If you exclude the $6.8 million legal charge discussed earlier, our noninterest expense run rate has declined nicely from last quarter and from the comparable quarter last year.

Slide 7 shows a breakdown of the revenue generated from our noninterest revenue sources and lines of business. We continue to be pleased with the performance of our mortgage and insurance teams. All -- excuse me, our other noninterest revenue streams are relatively flat on both a sequential and comparable quarter basis, with the exception of declines in service charge revenue, which were primarily the result of continued impact from the NSF regulations that were implemented late in 2010 and partially the result of changes in customer behavior.

Slide 8 presents a comparable and sequential quarter comparison for our loan portfolio, broken down by classification. As you can see from the table, these loan balances were relatively flat quarter-over-quarter, declining 0.6%. The runoff of NPLs and other criticized loans which I discussed earlier, is the primary driver of this small decrease. As these balances reach lower levels, we hope to reach an inflection point this year, at which time loan production efforts will outpace strategic as well as normal runoff.

Now, let's take a closer look at credit quality, starting with Slide 9, which breaks down nonperforming loans by category. This slide highlights the progress made in working through problem credits over the course of the past quarter as well as the past year. Our construction and nonperforming loans, which have been the primary source of credit issues, declined $13.1 million or 18% during the quarter, and have declined $62.5 million or 51% since March 31, 2012.

Construction-related nonperforming loans peaked at $229.2 million at March 31, 2011. Total nonperforming loans declined by $26.6 million or 11%, compared with the fourth quarter of 2012, and have declined $78.2 million or 27% since March 31, 2012. Nonperforming loans represented 2.41% of net loans and leases at March 31, '13, compared to 2.7% at December 31, '12, and 3.26% at March 31 last year.

Slide 10 provides a visual of the significant improvement of nonperforming loans, ORE and total nonperforming assets over the past several quarters. In addition to the decline in nonperforming loans which I've just discussed, ORE declined $6.9 million or 7%, compared to the fourth quarter of 2012 and has declined $71.5 million or 43% since March 31, 2012. Total nonperforming assets have declined $33.5 million or 10% from December 31, 2012. Nonperforming loans and nonperforming assets have declined to 51% and 46%, respectively, from their peak levels during the first quarter of '11.

Slide 11 contains some additional information with respect to the performance of nonaccrual loans. As I mentioned earlier, 56% of our nonaccrual loans continue to pay in accordance with their contractual terms. This performance continues to be a key driver in the reduction of nonperforming loans. We collected $23.6 million in cash payments on nonaccrual loans during the quarter, after having collected $31.6 million during the fourth quarter of last year. We have collected $109 million of cash payments on nonaccrual loans over the past 12 months. This trend is very encouraging, and further validates the decisive nature with which we've dealt with credit issues in placed net loans on nonaccrual status throughout the credit cycle.

The next slide 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 first quarter of 2013 were $5.9 million, representing improvement from $23.3 million for the first quarter of last year, and $10.6 million for the fourth quarter of last year. Of the $5.9 million of total current quarter charge-offs, $2.3 million were loans that have been identified and reported as impaired, and which were specifically reserved for in previous quarters. Additionally, recoveries of previously charged-off loans continue to have a meaningful impact on net charge-offs. Recoveries for the first quarter were $3.9 million, compared with $5.5 million for the first quarter of last year and $9.2 million for the fourth quarter of last year. Annualized net charge-offs for the first quarter of '13 were 0.27% of average loans.

Finally, I want to talk a minute about our future. Since I arrived late last year, I have traveled across our footprint and asked our team to refocus their efforts on returning our company to the historically strong levels of performance this organization was recognized for. I am very pleased with the dedication our team is exhibiting daily. Our to-do list is relatively simple: We need to grow our company. We need to grow our loans. We need to grow our deposits. We need to find ways to grow our fee income. And we need to do all this, while lowering our cost structure. I can assure you that everyone on our team understands these challenges, and is committed to our success.

In closing, our team is working diligently to continue to improve operating performance, requiring several levers that can provide meaningful earnings improvement potential. First, we have almost $1 billion in overnight funds that need to be redeployed into loans. We are undertaking the necessary steps to get our best salespeople refocused on the road, rather than on problem asset resolution. Second, we are working on rationalizing our expense base and improving efficiency. We have several specific initiatives that are currently being considered, however it takes time to develop specific plans and to execute these types of measures. We look forward to being able to share details regarding these initiatives at the appropriate time.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Steven Alexopoulos with JPMorgan.

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

I want to start on the mortgage banking side. Given the decline in origination volumes, maybe could you give us a sense, what kind of expenses you've been able to take out of the mortgage company? And is the strategy, as the secondary rates strip down here, to keep your primary rate high and maybe try to improve the gain on sale spread, or maybe let that fall and try and drive more volume?

James D. Rollins

James can jump in here with me, Steven. I think that production actually was up from this comparable quarter last year. It was down from the fourth quarter a little a bit, but up from the fourth quarter of last year.

James Ronald Hodges

From the first quarter of last year. Yes. Yes.

James D. Rollins

Go ahead, James.

James Ronald Hodges

Well, we're really not seeing any decline in volume. I mean, we did, first quarter last year was about $390 million, first quarter this year was $426 million. So first quarter over first quarter, we were up significantly. We're still having a lot of activity. The interest rates are staying low. We are seeing an uptick in the purchase business. We are -- the refi business is, as a percentage of our total book is going down a little bit, but the volume is still there.

James D. Rollins

Closing portfolio is up from first quarter of last year, a little over $200 million. So our servicing portfolio has continued to grow, also.

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

Okay. I guess I was looking at origination volumes off from around $550 million down to $426 million. But I hear you on the year-over-year, okay. And then Dan, now that you've had some additional time in the CEO seat, is your initial assessment that the company has more of a revenue challenge in front of it, or is this an expense problem, given the efficiency ratio?

James D. Rollins

All of the above. I think that we've got 2 sides of -- there's 2 sides to every piece of paper. And clearly, we've had revenue runoff. We've had net interest revenue runoff. We've had fee revenue runoff. The Durbin Amendment, the NSF changes, the opt in, there's a lot of revenue that has left because of some of those things. But at the same time, our expense structure is too high. So we're working hard everyday and challenging every nickel and every dime that we're spending to make sure that we're doing the right thing with our expense base, and there's room for us to improve on both sides of the law.

Operator

We'll take the next question from Jennifer Demba with SunTrust Robinson Humphrey.

Unknown Analyst

This is Philip Curran [ph] for Jennifer. I was just hoping to get a little bit of additional color around areas you might expect to see, the expense base being reduced. And additionally, maybe some offsets that you expect from strategic investments to be able to grow these -- the revenue base?

James D. Rollins

Okay, I'm not sure I follow the second part of that. Offsets from investments, we'll have to come back to that one. On the expense side, Philip, I think we're -- we have not talked any specifically. We just talked a few minutes ago, you can see that we've challenged the team to spend money wisely on public relations, advertising, marketing dollars and you can see that we've had some results on that. We did sell one of our corporate aircraft late in the quarter, so you'll see some benefits from that, going forward. But there's really been no big ticket item that we can talk and say, this ticket alone is going to create x dollars in savings. We hope to be able to announce projects like that, but we want to make sure that we've got everything lined up and ready to go before we talk about that.

Unknown Analyst

Right, that's great. So I guess the -- for the other point, possibly, where do you expect some additional cost to come in, in respect to how you're going to be building out, possibly personnel technology investments that you're going to be making for the growth of the platform?

James D. Rollins

Again, I'm not fully sure I'm following the question. Bill do you understand? I mean, from a head count perspective, I think that's a cost save item. We're continuing to rationalize our head count. We're looking at what we're doing with our folks. If you're asking about any particular large investments that we're looking at, we don't have anything that we can talk about today that would fall into that category.

Operator

And we'll take our next question from Emlen Harmon with Jefferies.

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

Dan, just -- what do your view as kind of a linchpin to turning to positive loan growth as you get into the back half of this year? Just because, I look at the different categories of the loan book and pretty broad declines this quarter. I'm just kind of wondering if there's 1 or 2 things in particular that you think need to turn, in order for you guys to start showing that growth?

James D. Rollins

Well, I think there's a couple of things that I would talk about, and I'm going to let Ron jump in here and talk about our pipeline a little bit. I think we need some external benefit. When you look at the economy in the first quarter, we take a couple of steps forward and we take a step back. Some of the markets that we're in are performing better than some of the other markets that we're in. So if all of our markets could be performing well, that would help. But, really if you focus inside, as we've said, we need to continue to reduce the problem assets that we have on the balance sheet. And as we reduce the problem assets, that creates a hole for us to fill. I think we are working, our team is working to kind of refocus our efforts on growth, and Ron will probably add some information about what we're doing there, and what our pipeline looks like.

James Ronald Hodges

Thanks, Dan. I'd agree with Dan that the major thing that we can have -- that would help us is the economy would turn around and give us some opportunities. But we are refocusing our efforts, somewhat centralizing some of our efforts on our problem assets. We've done a good deal of the heavy lifting over the last couple of years to get us to the position we are in today with the problem assets. And that's not to say we've lost the focus on that, but I think that we can turn our attention a little bit to loan production and loan growth and we're -- as I said, centralizing some of those efforts on problem assets and less numbers and fewer numbers of loan officers, which will allow them to have more opportunity to get out and to visit with customers and car loan clients as we go forward. The pipeline is continuing to show some growth in the pipeline. We [indiscernible] we've been having a pretty good hill to overcome just to replace the problem assets that we were liquidating off our balance sheet, and that's [indiscernible], reducing I think, we'll see some opportunities to increase the portfolio going forward.

James D. Rollins

I think we've had some good winds recently, and I think talking about some specific customers, we've had some good wins. I think our team is feeling good. We need a couple of things to happen for us. We need to get rid of the -- we need to slow the flow -- I shouldn't want to say slow the flow out, but we need to eliminate or get rid of the problems that we have, and then we need to make sure that our team is focused on growing.

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

Got you. That's all helpful detail. Then I guess, one other line item that kind of surprised me in the quarter was the insurance income line. Obviously, there's a good chunk of seasonality in that, but I would say kind of even stronger than I would have expected. Just, James, would you mind just giving us a couple of minutes just on the trends in that business? Obviously, we hear about the pricing hardening some, just wanted to know kind of, you guys are also seeing market share gains, anything else that could drive that strength this quarter?

James Virgil Kelley

Sure, I'll be glad to. Yes, it was a very good quarter for insurance. I'd tell you, we worried about $2 million in new business in the first quarter this year. We were up about $3 million over the first quarter of last year. First quarter is historically the strongest quarter for us in insurance. We get a lot of our contingency revenues in the first quarter. Last year, was somewhat of a down year for contingencies. This year, it got back to a more normalized right. We had about $1 million pick up in contingency revenue this year over last year. So the combination of new sales and contingency was the primary driver of our revenue increase. Well, anybody talks about the market hardening and at times, it seems like it is and then it -- other times, it doesn't. I mean, somebody's curious if it's a piece of business, it -- they don't currently have and they want, they'll cut their weight to get it. And so it's -- we feel like it's starting to form up a little bit, but there's -- there are a lot of mixed signals out there. There's a lot of liquidity in the industry. And there's a lot of money to get working. So it firms up one month, and then it softens the next, so there's just no real trend yet.

James D. Rollins

We've also had some big winds from new customers in that book of business.

James Virgil Kelley

We have. We've had some real big wins.

Operator

And we'll take our next question from Matt Olney with Stephens.

Matt Olney - Stephens Inc., Research Division

On the expense side, Dan, I think there's some good progress there. It looks like the occupancy and equipment line item showed sequential improvement in the fourth quarter. Is there anything there, as far as branch closings, in the quarter that drove from this improvement? And then, can you just speak to the overall branch count today, and how you feel about this going forward?

James D. Rollins

Bill's looking for occupancy numbers, to give you some specifics here.

William Lloyd Prater

Yes. That's one I did not actually expect to get a question on.

There is no change in the branch count, quarter-to-quarter. So as again, Dan mentioned, we did -- we sold one of the corporate aircraft. That actually cost us a little bit in the quarter just because of the selling expenses. But we sold it pretty close to where the book value was on it. But there were some selling expenses, but there's nothing really in there that's a significant change.

James D. Rollins

I think your question on branch count, Matt, is a good one. And that's one of those things -- we continue to look at all of our opportunities. So we're looking to make sure that we have locations that are supporting themselves, they can be profitable but have the ability to grow, and as we identify weaknesses in the process or we want to make a change, we'll talk about that. But we have not made any changes there.

Matt Olney - Stephens Inc., Research Division

Okay, that's helpful. And then on the OREO expense detail that you guys provide in the press release. It looks like you guys, for the first time in a while, had a net gain on your OREO sales, which I believe the first time in a while. Does this imply the OREO book is getting pretty close to where it needs to be marked, and what does that mean for the future OREO expense going forward?

James D. Rollins

A lot of misconception here. 200 -- I wouldn't get too excited about $200,000 in gain though.

James Ronald Hodges

I think, that it's -- we think it has been close to what the book should be. I think what it points to us is, an improvement in the real estate markets in where we operate. So that's -- they're hardening up and then firming up, and there's been some demand for real estate, there's some new construction that is being initiated in the markets we operate in. We see that as a positive sign for not only the economy, but also for the value of our ORE and our ability to resell it. So I think that would be the main contributing factor to it, Matt.

Operator

And we'll take our next question from Catherine Mealor with KBW.

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

The question back on expenses, is there anything one-time in nature in the personnel expense increase? I think I was surprised to see that increase given the bump we had last quarter from the higher [indiscernible] accruals, but I'm thinking maybe a piece of it could've been related to the higher insurance revenue this quarter? Any color around there, maybe a good run rate for us to use in the personnel line going forward would be helpful.

James D. Rollins

Well, there is some increase on insurance. It's primarily related to the $2 million of additional business that was written there. There's no commissions paid to the producers on contingency revenue, which was about $1 million of that increase. I think if you really think about it, there are 2 -- it's up about $2 million from last quarter, and it's mostly related to people resets on FICA, including bonuses that were paid in the year that had full FICA expense associated with those, as well as our people starting over and the 401-K matching contributions, where people might've maxed out later in the year last year, and that all resets the first part of the year.

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

So would it be safe to say that we could see a decline in the personnel expense line next quarter?

James D. Rollins

Yes, I think so. There is some seasonality in there.

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

Okay, great. And then maybe a follow-up just to the loan growth conversation that we've had. Where do you see the runoff books bottoming? And maybe the timing of when you hope you'll see that inflection point, and is that being flexible, we should really look for where we'll start to see the excess liquidity really start to be invested in stronger loan growth?

James D. Rollins

Well gosh -- if our crystal ball was clear enough to tell us when we hit the inflection point, we'd be -- I'd be doing something else, I guess. I think that we're working hard everyday. There's multiple pieces of that puzzle, Catherine, that are going to drive that answer. If our team can become more focused, win more business, if the economies in the market that we serve turn and we could produce more business, then we can cover up the runoff that's continuing to happen of the problem assets. So the question is, when does that happen? Does that happen in the second quarter? Does that happen in the third quarter? We think we're very close to saying that happened. I can't tell you when it's going to happen. Ron, you want to...?

James Ronald Hodges

Like you, I don't have a crystal ball. I think we're getting close to that point. But aside from that, I couldn't begin to guess as to when it would be.

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

Is there a size in the CAD portfolio that -- where you think that portfolio will bottom? Is it as simple as just taking the problem assets out of that, and that's the bottom, or is there a level where you think that portfolio should be?

James Ronald Hodges

Not really, Catherine. I mean, it's -- we're continuing to see a runoff just from our performing CAD portfolio also. It's just a fact that there's, as I mentioned earlier in another answer to a previous question about it, we're starting to see some improvement and some activity in the CAD portfolio and all across our footprint. But if the performing CAD portfolio is paying off also, so it's -- I really couldn't estimate when the bottom would be on that.

Operator

And we'll take our next question from David Bishop with MLV & Company.

Dave Bishop

Dan, when you think about the level of dividend here, relative to capital, is there any sort of a benchmark that you're sort of targeting before you start to address, maybe, an increase on the common dividend?

James D. Rollins

I think that's a good question. I think when we talked about -- when we talk about capital management, capital planning, we're in the middle of the early stages of the 2013 stress test for mid-tier banks like us. Our team is focused and working hard and working with the regulators on a regular basis to make sure that we can answer their stress-testing questions. I think the income levels are going to drive some of that. Our capital levels are going to drive some of that. And frankly, I think our Board of Directors needs to get comfortable with the process that we're looking forward. So I expect us to continue to review that dividend question on an every quarter basis with our directors, and hopefully we can get to the point where we can make a change there.

Dave Bishop

Okay, and then as it relates to getting back to loan growth there. I think you mentioned in your commentary regarding some of the economic headwinds there. As you sort of stress-test the portfolio, and look at some of the bars there, in terms of their stress, do you get the sense that, to the extent that the Fed eventually does get hawk [ph] issues knows when, that an eventual rise in the interest rates here, can they absorb it here? Just trying to get a sense of what the bar level of the stress out there or health is?

James D. Rollins

Well, Ron's going to have to jump in here again with me. I think my general take, just from traveling across our footprint for the last couple of months, and this guy had lunch with a customer yesterday, I think most of our customers feel like that things are stable. I think some of them get excited about potential future growth. Most of them feel pretty comfortable on the stable side. I don't know that anybody sees that the world is, getting ready to light on fire. Rate structure is a worry to everybody. So you still got a lot of customers that are very cash flush. So if you just start talking about rates spiking up, I think that would be a worry to a lot of customers. Ron, we've got some stress numbers maybe, that you can identify as to how that impacts our customers?

James Ronald Hodges

Well, I mean,, we're doing our stress-testing, but I think to follow up on your comments, I think it's been indicated to us that our customers are able -- would be able to sustain a gradual increase in interest rates, as with any business, the main concern we have, and also our main clients have, is a precipitous spike in the interest rates which they couldn't adjust their cost and also adjust their income. But we're doing the necessary stress-testing. We think our portfolio is in the right position to handle that.

Operator

And we'll take our next question from Blair Brantley with BB&T Capital Markets.

Blair C. Brantley - BB&T Capital Markets, Research Division

Had a question on the margin. With [indiscernible] down another 6 basis points, how does the average rate compares are kind of what you're seeing now, with new production? Are we getting close to the bottom or are you -- do you still expect to see more compression there with the -- than the ellinials [ph]?

James Ronald Hodges

Well, there are a lot of moving parts in it. I'm not sure that we can attribute the decline entirely to loan yields. Those certainly put pressure, if you think about the both the maturing renewals and loans processing prior to maturity, this quarter they were -- that cost about 3 basis points on the margin. The runoff in the investment portfolio cost us about 3 basis points in margin. The reinvestment opportunity's just not there. This quarter, the non-accruals are still costing us about 8 basis points. The higher levels of earning assets, which are, in the -- primarily in the 25 basis point yield area hurts margin percentage some there, too. So we are getting some benefit out of some deposit repricing. And made some changes there, again, kind of early to mid-March that will have a pretty significant, a more significant impact on us in the second quarter than they did in the first quarter. So and that those are -- obviously CDs have been repricing down pretty nicely, but we have moved other deposit rates that are offered or published rates down as well. We'll point out one thing that hadn't come up, relative to net interest income this quarter, the day count, going from 90 -- from 92 days of day count in the fourth quarter, to 90 days in the first quarter cost us about $1.8 million. So it's about $900,000 a day in day count.

James D. Rollins

In interest income.

James Ronald Hodges

In interest income.

Blair C. Brantley - BB&T Capital Markets, Research Division

Okay, and I know, and we talked about before, but don't you have some higher costs of these coming off towards the latter part of the year, is that right?

James Ronald Hodges

We do. There’s a good slug up coming out in the early fourth quarter, and a larger slug coming out in February of 2014.

Blair C. Brantley - BB&T Capital Markets, Research Division

Okay. And then, regarding the trust refers that you have out there right now, the fixed rate, has there ever been any talks about calling that, or has it -- has a way to kind of offset some of the earning asset yield compression?

James Ronald Hodges

Certainty. And we've evaluated that and...

James D. Rollins

That's one of the opportunities on our list of things to work through.

Operator

And we'll take our next question from John Rodis, FIG Partners.

John Lawrence Rodis - FIG Partners, LLC, Research Division

Most of my questions were asked already, but maybe, Bill, just a question for you on the tax rate, it looked a little bit higher versus prior quarters, and can you maybe just provide a little detail on maybe what we should be modeling, going forward?

William Lloyd Prater

Yes, it is. We had a true up of a 10 48 true up, which is a position you take on uncertain tax positions. So we had about $600,000 of incremental tax expense this quarter, that we believe gets us where we need to be, for any settlement on open issues. So it's about 2 percentage points higher on our -- the tax rate on pretax income is about 2 percentage points higher than we would expect to see our run rate.

John Lawrence Rodis - FIG Partners, LLC, Research Division

Okay, so down around the 29% rate, probably going forward is the better number?

William Lloyd Prater

Yes, the 28% to 29%.

Operator

We'll take our next question from Peyton Green with Sterne Agee. [Operator Instructions]

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Just wondered if you could comment maybe a little bit about the competitive pressure, or the effect of the competitive pressure on the loan portfolio. And then, actually given an improving credit quality environment, I mean are you seeing more of your good loans, I mean is the competition increasing for the quality loans that you have on your balance sheet? Maybe, if you can give a little perspective on what you would expect to play out over the next 2 or 3 quarters.

James D. Rollins

Well, Peyton, I think, Jim, we'll get Ron's input in here, but my answer would be, there's always going to be good competition for quality credits. There are -- we have lots of competitors out there that would love to have good, high-quality credits, as would we. I think what our challenge is, is to get our team fully focused on the front side. I think as we've come through the credit issues that we've dealt with for the last couple of years, and we basically cut in half, the problems from their peak a couple of years ago, we'd now have the time and the effort to put our team that's still 100% intact, that's the forward-facing folks, to get them out of the door and talking to those customers. I think the level of service that we provide will win for us. We've got a product and a team and a service level that will win business for us when we have -- when we're in the competition. Unfortunately for the last year or so, I think our team has been more focused on taking care of their issues inside the bank than getting in and competing for business that's out there. I'm confident that when we have an opportunity to win business and we're competing, we have as good or better chance of playing than many of our competitors. Ron, you may want to talk again a little bit again about pipeline, and what we're doing well.

James Ronald Hodges

Well, as indicated earlier, the pipeline is increasing. I think our challenge is just like any other of our good competition in the markets where we serve is -- we've got a lot of liquidity. Every other bank has a lot of liquidity, and I think it's going to come down to the focus of our staff and our team having more time to visit with customers in their businesses and make sure that we win the business. It is very competitive, interest-rate wise. And there is little alternative, as everyone knows in the investment communities that invest our idle funds, and we're just going to get out and win the business.

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Okay. I mean I guess, I hate to put words in your mouth, but I mean, it sounds like you're feeling a lot more confident, given your change and focus to going after business, the fact that offset the increase of competition going forward, seeing [ph] volume, is that fair?

James D. Rollins

I think that's very fair, and I think that our team is excited and ready to play. And we've got players that have been sitting on the bench, "Put me in, let me play." They're ready to get out there and mix it up.

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Okay, all right, great. And then Bill, a question for you. The overnight liquidity is still running at about 8% of average earning assets. I mean, what normally would you like that number to be, because that still seems like a bit of a earnings millstone for you all?

William Lloyd Prater

Yes. That's kind of a balance out on your interest rate risk position. Today, where the rest of our interest rate risk is, I, because we're fairly short. We're fairly short on the loan portfolio. The funding side has a pretty long average life, 13 month, 14 month kind of range on our CD portfolio. We really could stand to do without most of that. I mean, there are times when it's very prudent to have your overnight position to be in that purchaser of funds. We've got a very strong loan-to-deposit ratio. So, I mean, we could absorb, most all of that liquidity. The, our -- you kind of have to look at a lot of the different components. Your securities that are available for collateral, we're in better shape today there than we have been in probably -- my entire tenure here at BancorpSouth. So that is a tremendous opportunity, if we can get the loan machine moving and use some of that first. Securities, we're probably about where we need to be on the securities book. Given all else being equal, there's probably some room if we chose to grow them, and we've made a few purchases on the few backups in the market that we've seen there. But there's just not a lot of interest income to be had for the interest rate risk you're taking by growing the securities book by a large percentage at this point.

James D. Rollins

Securities were up a couple hundred million in the quarter.

William Lloyd Prater

In the quarter, yes. We had some weakness during the quarter, and bought some securities. Really, kind of out ahead of where the expected maturities of those securities will be, and to this point, where rates are today, those were good purchases.

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Sure, then last question. And what was the effect of prepayments on the yield of the taxable investment securities?

William Lloyd Prater

We don't really have much in the way of any prepayments because ours are primarily agency bullets. We don't have a lot of mortgage-backed product that's sensitive to prepayment speeds, if anything, really.

Operator

There appears to be no further questions. So I'll turn the call over to Mr. Rollins for closing comments.

James D. Rollins

Well, thank you all very much for joining us today. We look forward to talking to you again soon. If you need any additional information, if you have further questions, please don't hesitate to contact Bill or myself, and we look forward to talking to you as we're out on the road over the next couple of months. Thank you all very much for participating in our BancorpSouth call today.

Operator

This concludes today's conference. Thank you for your participation.

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