BancorpSouth's (BXS) CEO James Rollins on Q2 2014 Results - Earnings Call Transcript

Jul.22.14 | About: BancorpSouth Inc (BXS)

BancorpSouth, Inc. (NYSE:BXS)

Q2 2014 Results Earnings Conference Call

July 22, 2014 11:00 a.m. ET

Executives

Dan Rollins – Chairman and CEO

Chris Bagley – President and Chief Operating Officer

Bill Prater – Senior Executive Vice President and Chief Financial Officer

Ron Hodges – Senior Executive Vice President and Chief Credit Officer

James Threadgill – Senior Executive Vice President, Business Development

Gordon Lewis – Senior Executive Vice President, Business Development.

Analysts

Jennifer H. Demba – SunTrust Robinson Humphrey

Catherine Mealor – KBW

Kevin Fitzsimmons – Hovde Group

Matt Olney – Stephens Inc., Research Division

Emlen Harmon – Jefferies & Company

Steve Moss – Evercore Asset Management

Ken Zerbe – Morgan Stanley

David Bishop – Drexel Hamilton

Blair Brantley – BB&T Capital Markets

Kevin Reynolds – Wunderlich Securities

Steven Alexopoulos – JPMorgan

Peyton N. Green – Sterne Agee & Leach Inc

Matt Olney – Stephens Inc.

Jon Arfstrom – RBC Capital Markets

Operator

Good morning, and welcome to the BancorpSouth Second Quarter 2014 Earnings Conference Call. (Operator Instructions). Please note that this evening is being recorded. I would now like to turn the conference over to Will Fisackerly, Senior Vice President, Director of Corporate Finance, please go ahead.

Will Fisackerly

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

Before the discussion began, I'll remind you certain forward-looking statements that may be made regarding the company's future results or future financial performance. Actual results could differ materially from those indicated in these forward-looking statements due to a variety of factors and/or risks. Information concerning each of these factors can be found in BancorpSouth's 2013 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 in the company's Q2 '14 earnings release. Our speakers will be referring to prepared slides during the discussion. You can find the slides by going to bancorpsouth.com and clicking on our Investor Relations page, where you'll find them on the link to our webcast, or you can view them in the 8-K that we filed earlier this morning. And now I will turn to Dan Rollins for his comments on the quarter.

James Rollins

Thank you, Will and good morning. Thank you for joining us today for BancorpSouth's conference Second Quarter 2014 Conference call. I believe the results for the second quarter demonstrate continued progress toward improving our operating performance.

I will begin by making a few brief comments regarding the highlights of the quarter. Then Bill will discuss the financial results in more detail. James will provide some comments on our business development activities and mortgage and insurance. Gordon will provide some insights into our business development efforts in lending and general banking and finally Ron will discuss highlights regarding credit quality. After we conclude our prepared comments, our executive management team will be happy to answer any questions you have.

Let’s turn now to the slide presentation. Slide 2 contains our customary Safe Harbor statement with respect to certain forward-looking information in the presentation. The next slide begins our review of the second quarter. Before I get into the financial results I’d like to spend a few minutes discussing the transactions with Ouachita Bancshares Corp. and Central Community Corporation. We along with our merger partners had determined to additional time would be required to obtain the regulatory approvals needed to close these transactions. Therefore we have jointly extended the respective merger agreements until June 30th, 2015.

We’ve recently learnt that all regulators have identified some concerns with our procedure, systems and processes related to certain of our compliance programs including Bank Secrecy Act and anti-money laundering. Additionally, the Consumer Financial Protection Bureau is apparently conducting a review of our pre-lending practices. While we are certainly disappointed in the delay in closing these deals, we are confident that the appropriate steps are being taken to address these concerns that have been identified.

We continue to believe these two transactions are in the best interest of all stakeholders and we remain committed to closing them as soon as all required approvals are received. We also believe the willingness of our merger partners to extend the agreements, reflects their confidence and our ability to resolve these issues.

Moving on to the financial highlights of the quarter. Net income for the quarter was up 49% to 30.9 million from the second quarter of last year. Our diluted earnings per share was up over 45% to $0.32 per diluted share. Net operating income which excludes merger related and other non-operating expenses was 31.5 million or $0.33 per diluted share. I believe this improvement continues to validate the progress we are making towards achieving our goal.

Bill will discuss the components of net income in more detail shortly. In April we announced and closed the acquisition of Knox Insurance Group in Lafayette, Louisiana. Knox contributed approximately 1.1 million to insurance commission revenue for the quarter. James will talk more about this transaction as well as our overall insurance results in a moment.

We reported net loan growth of $243 million or 11% on an annualized basis. This is the largest quarter of net loan growth in our company’s history in the fifth consecutive quarter of net loan growth overall.

We are extremely pleased with the efforts of our lending team and their ability to continue to capitalize on the momentum we have built. Gordon will speak more specifically on our lending efforts momentarily. This loan growth combined with time deposits continuing to reprise has helped us maintain the positive bias towards our interest margin which increased to 3.59% in the second quarter compared to 3.54% in the first quarter of this year.

We continue to make progress in reducing core cost, while increases in merger related expenses as well as elevated ORE and legal cost, we are going to total non-interest expense from declining on a sequential quarter basis, we are encouraged by the trends in our core operating cost. Bill will discuss some of these in more detail in a moment and Ron will discuss the continued positive trends in credit quality.

Finally, we made two other announcements in mid-June. Chris Bagley will succeed Jim Kelley as President and Chief Operating Officer upon his August. We are extremely grateful for Jim's leadership and thankful for the 14 years of service that he has provided to BancorpSouth since our merger with First United Bank Share in 2000. Chris brings a welcome knowledge and experience to BancorpSouth. We are excited about the new ideas and leadership he will bring to our company. Chris has 31 years of banking experience across several areas of the bank both operational and front line.

We also announced the comprehensive reorganization of the company senior management responsibilities and reporting structure. All front line teams including banking, mortgage, insurance, wealth management along with leasing and equipment finance, will be a part of our business development team.

Business development team will be supported by the other four teams which include credit, operations, administrations and the accounting and finance. We believe this new structure will facilitate a more streamlined operating environment and will promote improved corporation in the building of client relationships and cross-selling the products as we work towards achieving our long term goals. Before we turn the call to Bill for comments, I would like to introduce Chris Bagley and allow him to take few moments.

Chris Bagley

Thanks, Dan. I am excited to be on the BancorpSouth team and very much looking forward to my new role with the company. Everyone has been very welcoming and supported as I transitioned to Tupelo especially Mr. Kelley has been critical in making the transition as positive and effective as possible. Thank you very much Jim.

As I met and visit with our teammates across our footprint, I continue to be impressed not only by the experience and the ability of our bankers but the passion and the commitment they share for BancorpSouth. I have seen firsthand the results of their hard work as exhibited by our associates overcoming the last few challenging years, thus I am very confident together we can implement and execute the aforementioned changes in our organizational structure and achieve our goals effectively and efficiently growing loans, deposits and customer relationships while providing excellent products and customer service across all of our business minds.

I know our teammates will give 110% and they can expect no less from me. Thanks again. I will now turn the call to Bill for his comments on our financial performance. Bill?

Bill Prater

Thanks Chris. If you’ll turn to slide 4, you will see our summary income statement. Net income was 30.9 million or $0.32 per diluted share for the second quarter compared to $28.4 million or $0.30 per diluted share for the first quarter of this year and 20.8 million or $0.22 per diluted share for the second quarter of 2013. With the exception of 1 million of merger related expenses, there were no other items in the second quarter results that we considered to be non-operating.

As a reminder for comparative purposes, we recorded a free tax charge of 10.9 million during the second quarter of last year related to the voluntary early retirement program.

You will also see on this slide the continued improvement in our net interest revenue. Net interest revenue increased from 98.2 million in the second quarter of last year to 103.1 million for the current quarter.

Our net interest margin was 3.59% for the second quarter of this year compared to 3.54% in the first quarter of this year and 3.36% in the second quarter of 2013. Consistent with the last couple of quarters, net loan growth as well reprocessing of higher cost CDs has allowed us to hold net interest margin relatively stable.

We still have approximately 50 million remaining in the 3.9% five-year CD money that will roll off in October this year. This will allow us to continue to offset some of the pressure on our loan deals.

Another one item I would like to discuss on this slide is non-interest expense. Total noninterest expense for the current quarter was 128 million compared to 126.7 for the first quarter this year and 142.3 million for the second quarter of last year.

If you remove the impact of merger related expenses and the charge related to VERO program, this reflects the decline of approximately 5 million compared to the second quarter of last year and essentially no change compared to the first quarter this year.

Despite, elevated foreclose profit expenses and legal expenses during the quarter, foreclosed property expense increased 1.6 million compared to first quarter as a result of write down on existing properties as well as losses on the sale properties during second quarter. Ron will discuss our ORE efforts in more bit more detail in a moment.

Additionally, legal expenses increased 1.1 million compared to the first quarter. We believe that ORE and legal expenses will both decline meaningfully overtime otherwise we are pleased with progress we are making in reducing core expenses.

Slide 5 shows the detail of our noninterest lines of business. Total noninterest revenue was 69.8 million for the quarter, compared to 66.5 million for the first quarter of this year and 76.1 million for the second quarter of last year. Mortgage had a very nice quarter rebounding from the first quarter which was adversely impacted by the weather. Insurance had a nice quarter as well continuing to capitalize on the momentum they have had.

Insurance continues to benefit from both the GEM and the Knox acquisitions. This is the first quarter Knox have been part of our operation.

If you turn to slide 6, James will spend a few moments discussing each of these areas in more detail.

James Threadgill

Thanks, Bill. The tables on slide 6 provide a a five quarter look at both mortgage and insurance. On mortgage lending operation produced origination volume for the quarter totaling 291 million. Of the 291 million, 241 million or 83% represented purchased money. This represents the largest quarter of purchased money production in company history.

Mortgage lending revenue totaled 9.1 million for the quarter which included a negative MSR evaluation adjustment of 2.1 million compared to revenue of 3.4 million during the first quarter this year which included a negative MSR evaluation adjustment of $1.5 million.

Margin was 3.31% for the quarter, an increase from 3.37% in the first quarter of this year. The increase in the margin is partially the result of an accounting policy election we have made during the quarter to record our loans held for sale at fair value rather than lower of cost to our market.

Prior to the change, timing mismatches occurred in our related hedges have always been accounted for a faired value compared to loans held for sale accounted at the lower cost of market as we have previously stated.

We expect this election to reduce the volatility in our margin and more consistently reflect the value proposition of our mortgage business. Have we not made the election this quarter, the margin would have been 2.43% for the quarter. We take an additional measure to improve our margin by implementing the best delivery approach rather than selling only the Fannie Mae's cash window. We continue to hire (inaudible) originators and grown the origination staff by 12% this year.

Moving on to insurance, total commission revenue for the quarter was 28.6 million compared to 31.6 million for the first quarter and 25.9 million for the second quarter of last year. As a reminder, the first quarter was seasonally hot as a result of contingency commissions we have received.

We are excited about the recent Knox acquisition in Lafayette that Dan alluded the to earlier. Dwayne David and Randall Bonaventure are integrating their operation into our insurance team's plan. As Dan mentioned they contribute 1.1 million in commission revenue this quarter.

Our GEM acquisition at Huston, Texas is also transitioning well into our current operations. Because of the vibrant Houston economy, we expect them to grow at a faster rate than our other agents.

While the insurance market remains soft, somewhat soft in most property and causality business lines the oil and gas industry and general construction remain steady with the positive outlook for continued growth.

Now I will turn it over to Gordon who will spend a few moments discussing our loan production efforts in general banking.

Gordon Lewis

Thanks, James. In the opening comments Dan alluded to our outstanding loan growth during second quarter. To reinforce, the 243 million increase represents the largest quarterly growth in the history of the bank. This is also the fifth consecutive quarter for us to report loan growth.

Slide 7 provides the summary of debt growth by loan category including comparisons to last quarter and the second quarter of 2013. Loans were 7.3% higher than year ago and the annualized growth rate of 10.8% during the second quarter indicates acceleration in the rate of increase from prior periods. C&I loans and commercial real estate loans were the categories with the largest amount of increase and all categories except the other grouping reported varying degrees of growth. Loan growth is occurring across all regions of our footprint and we continue to develop synergies between our community banking equipment finance and corporate lending groups in fact in market referrals by our local bankers to our corporate lending group are proving much of the increased activity in the C&I activity, in C&I category.

We believe the strong pipeline currently in place provides the platform for further expansion of our loan portfolio. Since our bankers are now dealing with fuel problem credits and the related distractions, they have more opportunity to add new customer relationships and enhance existing relationships. We also sense the improvement at local economies in many of our markets is giving our customers added confidence is by considering capital investments or expansion.

Deposits experienced slight decline when compared to first quarter of 2014 and the second quarter of 2013. A portion of the decline from the first quarter is due to seasonal factors including income tax payments and declines in balances attributed to public entities. Declines in term deposits and interest bearing transaction accounts from a year ago will partially offset by increases in traditional savings and non-interest bearing demand accounts. Some of the deposits were utilized by customers as their equity investments to support the loan growth we’ve experienced.

Understanding the impact of core bounding we are reinforcing with our bankers the importance of developing the same level of attention to deposit gathering activities that we have already devoted to loan growth. During quarter we’ve completed the closure of three branches as we have discussed on our last call. Our ongoing review of banking operations includes individual locations as well as process improvements which impact our efficiency.

Our banking teams have achieved a loan growth that we’ve requested are giving great emphases for lowering our operating expenses and headcount. Compared to the first half of the 2013 salary expense including overtime and the general banking division is down by almost 8%.

We are also experiencing improving trends in most of our direct expense categories. The confidence we have expressed previously and our banking team has been confirmed by the results of this quarter and the momentum we continue to build. We realize there is more progress to be made in growing our bank and then improving our efficiency. We believe the team we have in place has demonstrated their ability to accomplish these tasks. I will now turn it over to Ron to discuss credit quality.

Ron Hodges

Thanks, Gordon. Slide 8 presents some highlights of the credit quality for the second quarter. The credit store has been virtually the same for several consecutive quarters. All of our credit quality indicators and balances continue to trend in a positive direction.

Total nonperforming loans declined by 19.6 million, or 21% during the quarter; and total nonperforming assets declined 27.9 million, or 18%. ORE decreased 8.3 million or 13% from 63.6 million at March 31, 2014 to 55.3 million at June 30, 2014. Total dispositions for the second quarter were 10.3 million, resulting in a net loss in sale of 1.1 million.

Foreclosures and write-downs for the quarter were 4.2 million and 2.2 million, respectively. Losses on sales and write-downs were slightly elevated during the quarter as a result of our decision to accepts some offers that amounts less than book value in order to move certain properties as well as our decision to more aggressively prior several other properties.

Near-term delinquencies representing 30 to 89 days past due remain stable at 28.8 million or 0.31% of total loans at June 30, 2014. There was no provision for credit losses for the second quarter which is consistent with no recorded provision for the first quarter of this year and represent the decline from 3 million for the second quarter of 2013. A provision was not necessary due for the continued improvement of credit quality indicators and loan levels of net charge offs.

The A-LLL remains at 1.58% of the total loan portfolio. It is not shown on the slide but I would clarify loan levels continue to trend down. Net charge-offs continued to remain at relatively low levels. Net charge-offs were 2.6 million for the second quarter of this year compared to 3.5 million for the first quarter of this year and 4.6 million for the second quarter of last year. Recoveries totaled 3.1 million for the second quarter. Recoveries have trended down a little over several quarters as the balance of impaired loans have been reduced significantly providing a small approved loans that represent opportunities for recoveries.

The percentage of nonaccrual loans paying as agreed continues to represent a meaningful portion of nonaccrual loans representing 57% of total nonaccrual loans at the end of the second quarter. We received cash payments of 12.49 million on nonaccrual loans during the second quarter compared with 23.2 million during the first quarter of this year.

Now moving to slide 9, let's take a closer look at several points that I just discussed. This slide takes sequential and comparable quarter comparisons of our nonperforming loans by classification. You will notice all MPOs types continue to trend down. The level of nonperforming consumer mortgages may remain elevated due to Dodd-Frank regulatory changes that extend the foreclosure process. NPLs represented 0.79% of net loans and leases at June 30, 2014 compared to 1.03% at March 31, 2014 and 1.94% at June 30, 2013.

Slide 10 provides a visual or the significant improvement in NDLs, ORE and total MPAs over the past several quarters. You can see the consistent progress that we have made quarter after quarter and working these balances down to level that are consistent with those from the pre-credit cycle.

The next slide represents the quarterly visual of net charge-offs and annualized net charge-offs both in dollars and a percentage of average loans. Net charge-offs remain steady at relatively low levels. I will discuss specific numbers for the quarter earlier regarding charge option and recoveries. Therefore I won't spend many more time on that.

This concludes my review of credit quality for the quarter. I will turn it back over to Dan for a few closing remarks.

Dan Rollins

Thanks Ron. While the delay enclosing the two banks, two pending bank transactions is certainly frustrating unfortunate, we still have numerous opportunities inside our organization to continue to improve our performance.

Over the past several quarters, you have seen the results of our persistent efforts to grow our company and to reduce operating cost. As a result, we have reported growth in earnings per share of four consecutive quarters. Our business development team continues to build on the momentum they have enjoyed recently, winning new customers and growing revenue in all of our product lines.

We continue to make progress for reducing our cost structure. While it's clearly still not at level that's acceptable over the long term, you have seen our efficiency ratio dropped from last year’s 80% plus to 72.8% in the current quarters. We are identifying and executing on additional cost save opportunities every day.

Our teammates will continue to embrace the key priorities of growing deposits providing exceptional products and services through outstanding customer service and working hard to reduce unnecessary expenses. BancorpSouth is a strong company with opportunities to continue to make real progress with the initiatives we are going to identify to improve our company performance going forward.

I’ll now conclude our prepared remarks and operator we’d like to answer any questions that maybe out for us.

Question-And-Answer-Session

Operator

(Operator Instructions). And our first question comes from Jon Arfstrom of RBC Capital Markets, please go ahead.

Jon Arfstrom – RBC Capital Markets

Thanks, good morning guys.

James Rollins

Jon.

Jon Arfstrom – RBC Capital Markets

Obviously question on the delay in the deals. The question is do you know what you need to do to get to the closing or this is all to be determined.

James Rollins

That’s a complicated question Jon. I think we know the answer to your question is I think just recently we’ve identified -- our regulators have identified some of the things they have talked about whether as we think we’ve made some of those changes we’re working diligently with them to resolve those issues and we’re confident that we can make those improvements and that we will ultimately be what we need to be.

Jon Arfstrom – RBC Capital Markets

And in terms of timing for us knowing when these could potentially close?

James Rollins

The timing is the hard part, I guess where I see this is, you know this is a detour on the route, we thought we had a direct path or a direct flight and now we are going to take a little bit of a detour I don’t have the timing answer today, so pretty poor situation but we are working diligently with the regulators to resolve the issues, they are in progress.

Jon Arfstrom – RBC Capital Markets

Okay, any risk in your mind that they don’t close or there is just too draconian at this point?

James Rollins

Yes, I think the answer is as we believe we can accomplish what we need to accomplish the issue is from our compliance with regulatory standpoint those are all (inaudible) the requirement to comply with the rules that are out there are not that hard we just need to make sure we’ve got all the processes and procedures in place, we can do it in a timely manner and that we’ll be able to get to the point where we can get approval and we can close.

Jon Arfstrom – RBC Capital Markets

Okay and then just one final one on this topic what was behind the decision to extend it by a year versus say six months?

James Rollins

That’s a good question too I think everybody just want to make sure that we had plenty of time to accomplish the things that need to get accomplished and of today's regulatory environment, there is just time, it takes time to move them through the process.

Jon Arfstrom – RBC Capital Markets

Okay. Alright. Thank you.

Operator

Our next question is from Jennifer H. Demba with SunTrust Robinson Humphrey please go ahead.

Jennifer H. Demba - SunTrust Robinson Humphrey

Thank you. Good morning. Question on the same topic. Dan, do you have a sense of what kind of cost you are going to have incur to remedy these deficiencies that the regulatory have identified?

Dan Rollins

That's a good question Jenny. I think that there is going to be two parts of that. I think you see some of that already in the last quarter legal numbers that Bill was talking about, you have got what I would call short term remediation cost or special cost and then you kind of got the ongoing carry-forward that would be there and the perpetuity. I am not sure we are far off of the ongoing numbers today. We might need to do a little bit going forward but certainly it's going to be some elevated cost in the next couple of quarters as we do what we need to do but as far as the number, I don't have a number for you.

Jennifer H. Demba - SunTrust Robinson Humphrey

Okay. And you said separately in the press release your fair lending practices are being reviewed. Do you have a sense of when that will be concluded and you will have some -- any update on that?

Dan Rollins

That's the wild card in the process. The CFPB as you know is the new we have no experience in dealing with the CFPB and we are certainly doing everything we can do to assist them and answering all the questions they have and working with them but we have no experience in what the timeline is on any of this.

Jennifer H. Demba - SunTrust Robinson Humphrey

Okay. Thank you very much.

Operator

Our next question is from Catherine Mealor of KBW. Please go ahead.

Catherine Mealor - KBW

Good morning guys. I am going to follow-up with just one more question. I'm going to follow-up with just one more question -- not to beat a dead horse. But, Dan, can you talk a little bit about maybe how much you have invested in the BSA, AML processes, maybe over the past couple of years? And talk about what you have done so far that makes you confident that maybe you're not that far off for what you think the ongoing costs will be for these procedures?

Dan Rollins

Well you know we have got a big BSA, AML team. We have got big compliance team. When you look back since I have got here Catherine, we have completely revamped our compliance program from start to finish. We have got our chief compliance officer who has been in the job since April a year ago, I guess and has built the team around her. The BSA, AML team consists of 25 people give or take. I believe we have got good folks in the process. I think we need to make sure that we are tweaking all of the process that we have to make sure we are capturing all the things that need to get captured and we certainly have some work to do to get it to be running perfectly but I think we’ve got pretty good stuff in place today that said we’re certainly going to have some frontload cost on reviewing, we’re going to bring in some folks to review our processes to make sure that our processes are doing what we need to do and I think we are going to accomplish all the things that are there, none of the requirements and themselves are that difficult. We have discussed to do them.

Catherine Mealor - KBW

Got it, helpful, thanks. And then follow-up to Jenny’s question on the CFPB, your services charges linked-quarter were flat where usually we have 1Q as kind of seasonally a lower quarter, so were there any changes to your processing or just practices or overdraft practices recently that would've been driving this? Or is that more about customer behavior?

Dan Rollins

Well, there’s been no changes and this is all relatively recent information here with us. There’s been no changes in any of our processes today that they were dropped down.

Catherine Mealor - KBW

Okay, great. Thank you.

Operator

Our next question from Kevin Fitzsimmons of Hovde Group, please go ahead.

Kevin Fitzsimmons – Hovde Group

Hey guys. Good morning.

Dan Rollins

Hi, Kevin.

Kevin Fitzsimmons - Hovde Group

I'm going to ask one more question, at least for me, on this topic, and I can't say for everyone else. But taking a step back on it, I mean, we've had the issue with M&T as an indicator that this issue is getting looked at a lot. You guys are over $10 billion in size, which is definitely a -- thought of as a threshold for getting more scrutiny. And then earlier in the year, you announced two deals within a couple of weeks of each other. So, I guess the question investors are probably going to have -- like, how does this happen? Because it's not a surprise that this area is going to get more scrutiny. You mentioned, Dan, that these things are not necessarily difficult; it's just a matter of doing them. So, is it something that just came totally out of left field? And -- because I think what some investors are wondering, is this just the same message where the situation with M&T was kind of a chill on large bank M&A? Is this more of an industry-wide signal being sent on banks of your size doing M&A? Or is this something just very specific? So that's what we're all probably trying to get our arms around. I know that's difficult to answer but --.

Dan Rollins

Yes, we still have clear vision to answer any of that, I would tell you I think we feel like this came out of what we feel. We are working hard to work with the regulators and accomplish what they want us to do and we are somewhat hand tied here, you know that Federal banking laws prohibit me from speaking the whole lot of specifics about what we are doing and certainly I don’t have any knowledge about what they are doing from an industry perspective but what I know that we can focus on is that what they would ask us to do and what they have told us is achievable and is achievable relatively quickly and we think we’re going to accomplish what they are asking us to do.

Kevin Fitzsimmons - Hovde Group

Okay, great. And then just a quick follow-up. So, you mentioned that you have a lot of opportunities for expense initiatives and you're going to be looking at that every day. This development and the fact that you're going to have to incur some additional expenses, does that cause you to think about accelerating or heightening some of that focus and I know you're not -- you don't like coming out with a big cost program and throwing a number out there, but does it increase the urgency to maybe get some of those things that you thought you would do over the next few years online now, just to offset some of these extra expenses that are going to be layering on?

Dan Rollins

The answer to your question is that I don't know that our folks here believe that I can come up with any more urgency on what's being put already. So from an urgency standpoint we are not letting any grass grew under our feet on the cost saving and efficiency initiatives in any form or fashion and we have not – we have been very focused on very methodical and well thought out and organized process to reduce cost in our company and I think the urgency of accomplishing those things has been there since day one. So I am not sure what we can do to fix those things. I do think that this – the extra cost that we encourage a lot again will be able to identify that and tell you what it is, and I don’t think that’s going to take our eye off the ball of being more efficient. 72% or 73% efficiency where it shows not acceptable is certainly not acceptable even with all of the heightening and increased regulatory burdens that the Dodd-frank and all the new rules that we are having to comply with and I am assuming everybody else is complying with too. That's not an excuse to tell you, 70% or 75% efficiency ratio is acceptable it's not. We are going to drive cost out of our system.

Kevin Fitzsimmons - Hovde Group

Okay. Great. Thanks Dan.

Operator

Our next question is from Matt Olney of Stephens. Please go ahead.

Matt Olney - Stephens Inc., Research Division

Hey! Thanks. Good morning guys. How are you?

Dan Rollins

Good Matt.

Matt Olney - Stephens Inc., Research Division

Hey on the updated merger agreement I am trying to understand how has the overall consideration changed from the original agreement? In other words, will you be issuing any more or less shares than the originally expected given the change at stock price?

Dan Rollins

No it's the same share count in both cases.

Matt Olney - Stephens Inc., Research Division

Okay and going back to the CFPB review of lending, was this a normally scheduled review that’s required for all banks or do (inaudible)something unusual that was identified that triggered the review out of it normal time frame?

Dan Rollins

I wish I could answer that. You know this is my first experience with the _ I have no knowledge of whether this is normal or not normal or customary or not customary. We don’t have any expense with that and frankly they are not asking us silly things but – that same questions and we’ll make sure this was going off.

Matt Olney - Stephens Inc., Research Division

Okay. Thank you.

Operator

The next question is from Emlen Harmon of Jefferies. Please go ahead.

Emlen Harmon - Jefferies & Company

Hi, good morning guys.

James D. Rollins

Hi, Harmon.

Emlen Harmon - Jefferies & Company

I thought we could talk about loan growth a little bit. Just the LPOs you guys had opened the last couple of quarters, Houston, Lake Charles, could you give us a sense of kind of what the production is coming out of those new markets, and whether you are looking to add any others in the near-term here?

James D. Rollins

Yeah, that’s a good question. You know I think that the loan pipeline is very strong across our footprint. The folks we have got a couple of folks in Houston and a couple of folks in Lake Charles that are doing a good job have built their pipeline. I think both of those have a specific number here today, but I think both those locations have got loans in the pipeline that will give them the breakeven very quickly. They have got good pipelines growing and we would like to continue to add in those markets and we are looking for other opportunities in other markets. I think that’s one of the things that we need to focus on here when you talk about what’s happening to us from the regulatory over size issue and all the new Dodd-Frank rules that are still being formulated today. And that has really changed our game plan. Our game plan is to continue to do exactly what we’ve been doing for the last year and that’s focused on growth. We want to grow our company, one customer at a time on relationship at the time we want to do that in markets that we’re already in and we want to do that in the new markets that where we found – produces to join our team like Houston and Lake Charles.

Emlen Harmon - Jefferies & Company

And the production that comes out of those LPOs, I mean, does it differ from kind what you guys are doing in footprint at all?

James D. Rollins

I don’t think so. Words taken – I think it’s the standard small business CNI, commercial real-estate standard is something we’re doing everywhere all on the same markets. Now those two markets that you are talking about, they are both pretty good growth markets today and from our standpoint there is real opportunity there. So, when you find good people -- we're in the people business. Good people make a difference. And so I think when we find good folks, we want to add onto our team.

Emlen Harmon - Jefferies & Company

And then what…

James D. Rollins

One of the things I’d add to that Emlen you are just talking about people. When you look at our headcount from today versus you know looking back, we are down 90 something people year-over-year. But during that same year we announced our early retirement program in the second quarter of last year by the end of the second quarter the majority of those folks were gone. But since then we are down 90 something people. But over that same time period we’ve added just a shade under a 100 additional people to the team that are revenue producers, front side of the house producing folks that includes the team that we added in the mortgage business in Austin, Texas; that includes the two insurance acquisitions. That includes the LPOs. So, we are actively pursuing adding revenue producers onto our team anywhere we can.

Emlen Harmon - Jefferies & Company

Got it. And then on the margin, I guess a couple of questions there. Could you give us a sense just kind of the direction of the margin from here, given that you've kind of taken the liquidity down to a much smaller portion of the balance sheet? And just kind of how are you thinking about funding loan growth from here?

James D. Rollins

Well, clearly, core deposits is what we’re funded with today. We don’t have any hot-money. We don’t have any extra borrowed money of any kind, but as you’ve said, we’ve moved the liquidity number down so we need to be focused on continuing to pursue that deposit growth number. We have multiple opportunities to funding sources to continue to grow; I’m going to let Bill specifically speak to the margin question.

William Lloyd Prater

Yeah. Yes. Emlen, I think we have a fairly stable outlook on the margin. We still have some repricing opportunity particularly in the CD portfolio. One pretty good slug I mentioned in the prepared remarks on that promotional CD money that will rollout in the fourth quarter, early fourth quarter. We need to grow deposits. Gordon spend some time discussing that and its fair to say that we’re not getting the lift – we shouldn’t get the lift going forward out of the excess reserves we have, but we got significant borrowing capacity to kind of offset that some with overnight funding without taking unacceptable level of interest rate risk. So I think we’ll able to managed margin fairly steady going forward.

Emlen Harmon - Jefferies & Company

Great. Thanks for taking the questions, guys.

Operator

Our next question is from Steve Moss of Evercore. Please go ahead.

Steve Moss - Evercore Asset Management

Good morning, guys. I just wanted to touch -- ask on with regard to the gain on sale of margin here, how should we think about it going forward, given the change in methodology and the change in sale practice as well? Is it 2% gain on sale margin reasonable?

James D. Rollins

I think you're asking a couple of things, so I'm going to let Bill jump in here on this specific numbers but the couple of things we’re working on, James and the Mortgage teams has got -- I think he runs our mortgage group. We brought some folks in that have some great experience on best delivery practices. In our past we delivered everything the single place regardless what that price was and just in the last month or two we have finally turned the ability to do what Scott tells me is called best delivery, which should improve our margin. Some time that’s improvement maybe a basis point or two, some types of loans, that improvement may be 30 or 40 basis points. So on average we don’t have a numbers to what that should be. But we do believe we can get better margin on the sale on product coming through that improved delivery process that Scott and his team put into the place. As far as kind of where we think the margin is on a look forward basis, Bill, I am going to let you jump in.

Bill Prater

I think somewhere in that 250 range is probably very realistic, which James said that the margin this quarter had we not made the election would have been 243. So that’s a fairly – that range to slightly above that would be what I would expect. But I will tell you this – the gain on sale margins are very strongly impacted by the bond market itself, and the coupon rate on the bonds that those pools are being sold into, and if you look back what was a year, 18 months ago, when rates just bottomed, Scott is with us – Scott, was a 3% Fannie securities the lowest that they ever pooled into, and the mortgage rates were significantly below that. So we sold some very high gain on sale margins at that time. You come out of the shoot with 4 points on the bond, volatility in those rates can affect that but I think if interest rates stay reasonably within the range of what we are seeing today, that, that margin should be fairly consistent. The big improvement on making this election is it will take a lot of that volatility out where we had a mismatch on the mark to market on the hedge versus the loans. Those will be very closely correlated, we shouldn’t have that volatility.

Dan Rollins

Again, I think the thing that I would want to point out to you Steve, on the mortgage side of the producers, we’re growing the producer base. When you look at the purchase money loans, loans that were originated for the purchase of real estate, this was the best quarter in our company history as far as purchase money loans. And I think that speaks well for the production team and the producers that we have out in front of us and the overall mortgage team. So I think we are doing the right things to grow in that area and certainly margin can get moved all around depending upon what’s happening with rates. But if we have our producers out there producing good business, we’ll be able to grow.

Steve Moss - Evercore Asset Management

Okay, thanks for that. And then just circling back to a question about timing of the deals. Do you have to go -- undergo a full in-house regulatory review by your regulators, once you've completed your system upgrades, before getting approval -- before being able to move forward and close the deals?

Dan Rollins

Well, that’s a good question. We have to ask them – I do not believe the answer to that question is yes. I think the answer is that they’re going to continue to work with us and review that. We are on a continuous cycle all the time. So we’ve got folks in our house, all the time looking at our information. So when you say a full review cycle, that, that means a full calendar year because we’ve got people here all the time. That’s not how the process is working out, I believe but that’s a regulatory question.

Operator

Our next question is from Ken Zerbe, Morgan Stanley.

Ken Zerbe - Morgan Stanley

Can you tell us what your assumptions are regarding customer attrition at the acquired banks? And has that changed, given this delay? And are you guys protected if the deal -- in the deal if the attrition is worse than you expect?

Dan Rollins

That’s a good question, Ken. I think that when we talk about the two merger partners, both the merger partners are doing very well. The merger partner in the Central Texas area is growing customer base and growing on many fronts. The group in Louisiana, their loan portfolio, I think, is a little higher today than it was, when we account for the transaction, and their deposits are basically flat, so I think when you talk about the producers and the people that are on our two partners team, I think we’ve got great confidence that those are good folks and they’re going to be able to fit well within our organization and their business and their customer base will fit well within our organization. So I don’t think we have a lot of concern about that.

Ken Zerbe - Morgan Stanley

And do you have -- is there anything in place that actually prevents those producers from jumping ship to go to some of the other Texas banks, given -- I guess, given the disruption in the delay in the deals?

Dan Rollins

We have some employment agreements with the majority of the producers in both of those organizations.

Operator

Our next question is from David Bishop of Drexel Hamilton.

David Bishop - Drexel Hamilton

I saw that loan yields came in a little bit this quarter 10 basis points. I wonder if you could maybe speak to what you're seeing in terms of current market [ph] production in terms of loan yields versus the last quarter? And what are you seeing in the marketplace overall?

Dan Rollins

Let’s see, who wants to raise their hands to jump on that, but let me just take a high level, I think some of that is – we are producing loans at the same rates we’ve been producing at. I think you saw some significant growth in the C&I portfolio in the quarter, and remember that C&I portfolio is typically floating rate, lower current rate but all floating. So when you are putting more floating rate loans on the balance sheet, that will bring down your overall portfolio yield and I think that’s part of what we expect most of it is, Ron, do you want to add anything to that?

Ron Hodges

No.

Dan Rollins

Gordon, you want to – I think that’s what we believe that, the issue is we’re putting loans on the books today at basically the same rate we’ve been putting on last quarter, just the mix was very different this quarter with the large increase in the C&I side.

David Bishop - Drexel Hamilton

And then circling back to the change in accounting for the gain on sale of margin, will that flow through anywhere else on the income statement? Or is it just consolidated to the mortgage income section there on the revenue side?

Bill Prater

It’s in the mortgage origination line.

Dan Rollins

One time change.

Bill Prater

Yeah, I mean we will have that – we will do the same accounting convention going forward, but it won’t have an impact.

Dan Rollins

Yeah, no future catch up.

Bill Prater

Right, this was – when you look back at the mortgage David, you saw that mortgage line gets moved up and down quarter to quarter, three or four quarters ago we were under 1%. And all of that was because of the mismatch in the mark to market on the accounting. So by fixing that, or having now just the same accounting on both sides, I can’t tell you what the margins are going to be but it shouldn’t be varying as widely as it has.

Operator

Our next question is from Blair Brantley of BB&T Capital Markets.

Blair Brantley - BB&T Capital Markets

I had a question on credit in terms of -- obviously costs have been pretty low. What is kind of the outlook in terms of sustainability at these lower levels?

Dan Rollins

We certainly have our methodology that we follow and I think as you continue to see the problem assets dwindle, and frankly on the other side of the house, we’re growing loans, I don’t think you can expect to see a zero provision into perpetuity. Mr. Hodges, do you want to add anything into that?

Ron Hodges

I’ll echo that. I mean there is going to come a time when our decreasing in our problem assets is going to slow down considerably and if we have continued loan growth like we have for the last couple of quarters, we will see the reserve – a need for reserve addition.

Dan Rollins

Loan growth is a good thing but it will cause us to provision.

Blair Brantley - BB&T Capital Markets

But in terms of a loss content, you feel pretty comfortable with what you're seeing right now?

Dan Rollins

I will put in a different way – I am not sure, the loss content on what?

Blair Brantley - BB&T Capital Markets

Just from a net charge-off perspective.

Dan Rollins

Oh, future forward looking net charge off number.

Blair Brantley - BB&T Capital Markets

Yes. Just kind of your thoughts there. I mean, obviously, your problem asset levels are getting to a point now where they are obviously down a big chunk. I'm just trying to get a sense in terms of loss content relative to problem asset levels.

Dan Rollins

We re-appraise all of the real estate on an annual basis that’s in there. We are certainly marking some of that. You saw $2 million in writedown in the quarter on the ORE that we had. We continue to assess that. So by and large we believe that, the valuation on ORE has stopped shrinking at this pace that it was over the past years but I think we feel very confident that we are in the right spot.

Bill Prater

We are comfortable with the loan trends and the loss trends in our portfolio now.

Blair Brantley - BB&T Capital Markets

And then just to kind of change subjects, going back to the merger agreements, it looks like the minimum deal values have been adjusted or increased, and that it looks like there's a termination agreement based on the average closing price. Can you give any more details there in terms of what that average price is and –

Dan Rollins

Well, I don’t have that in my head at this moment but certainly the merger agreement will get filed with the SEC here shortly. There is some downside protection obviously, they want to make sure that if the market goes – falls apart, we are all protected. And so all that is – it’s a long way down though. I am confident that these deals are going to happen.

Blair Brantley - BB&T Capital Markets

Okay, thank you.

Operator

Our next question is from Kevin Reynolds of Wunderlich Securities. Please go ahead.

Kevin Reynolds - Wunderlich Securities

Thank you, good morning Dan.

James D. Rollins

Hi, good morning Kevin, how are you?

Kevin Reynolds - Wunderlich Securities

Doing great. So I wanted to ask maybe a conceptual question here, sort of the assumption being that these acquisitions hadn't been announced, so just focus on your Company's operating results right now. Efficiency ratio is around 72% or so, thereabouts, down from 80% when you stepped into your role. Loan growth seems to be picking up. And with that, you should probably see some provisioning, as you just said, that would creep back in at some point over the next few quarters.

But if I heard you correctly, 72% on the efficiency ratio is not an acceptable level. That number probably has a 6 in front of it at worst, before you would say that you are in a comfortable place. So if we continue to experience loan growth with relatively stable to maybe slightly higher margin as you reprice some of the deposits and all of that, and the efficiency ratio continues to get worked down, is there any reason to think that sort of standalone BancorpSouth couldn't see its ROA go from a 9500 basis point level up to maybe a 1.15%, 1.20%, just on focusing on the things that you can control internally?

James D. Rollins

I think you were listening to my conversation inside the bank this morning, Kevin. You know when you look at us today, we certainly are committed to the merger partners that are out there and we intend to close these mergers. I think this is the – you got the train coming by, so we got to look at the train for a minute here. We got a [detour] in where we are going on the merger side, but I think your logic is exactly what we talked about here this morning. As of standalone entity, if the mergers had never happened, we are going to continue to be able to improve our operating performance. So I see the mergers as an added plus. When we get there, again, whenever the roadmap gets us to that spot, those mergers will be adding a value to our company and we believe it’s the right thing for us and our partners.

But until we get there, we’ve got a long runway in front of us to continue to improve our overall operating performance is just exactly the way you said. We’ve got to be a growth focused organization, we’ve got to be an efficient organization, we’ve got to be a place that people look forward to working for and I think we have those strengths in place today, we just need to continue to look over and growing and knocking the cost out and we’re doing all of that.

Kevin Reynolds - Wunderlich Securities

Okay. And then I guess with respect to the costs, I know I heard you talk about earlier that, in response to some questions, that this process that led to these delays will require some time and effort and some expenses. Do you think -- and I don't want this to sound like I'm asking you to pinpoint a date when it's all over, but how long -- how much time do you think there will be in terms of the expenses that you'll need to report or the investments that you'll need to make, the costs that you'll absorb, to -- as you work through the process with the regulators? Is this a -- do you think it's sort of a one to two-quarter timeframe where you've done everything? Whether the deal is closed at that point or not is a different question. It's the investment in the activities that you need to do to get there. Is that one or two quarters of expenses?

James D. Rollins

Yeah, I understand your question and I wish I could answer with some great certainty as to what you are asking us. I believe investors before -- that what they are asking us to do and the requirements that are placed upon us are achievable and are achievable relatively quickly. So I would believe that you know I think we can accomplish this in the one or two quarter time period. The caveat is I don’t know how 100% confident I am in that only because this is all new, this is all recent news to us. We think we know all that they are asking us to do, and we think we can do that very quickly. But until we get the little water under the bridge here, I’m not standing here with a 100% certainty telling you that one or two quarters its going to be here.

Kevin Reynolds - Wunderlich Securities

Okay, fair enough. That’s all I had this morning.

James D. Rollins

Thank you.

Operator

Our next question is from Steven Alexopoulos of JPMorgan. Please go ahead.

Steven Alexopoulos - JPMorgan

Hey good morning, everyone.

James D. Rollins

Hi, Steve.

Steven Alexopoulos - JPMorgan

So, a couple of years ago, the Company had a regulatory mandate regarding reporting and monitoring. And now you have additional concerns in AML BSA, CFPB. Dan, I know you've been there a relatively short time. Right? You've done a lot over the past year-and-a-half. But do you think somewhat this is symptomatic of the overall state of the systems and processes at the Bank? And maybe you're overdue for a bit of an overhaul?

James D. Rollins

No, I don’t think I would go there at all, Steve. I think that the credit again, I’m not sure, you’re talking about the accounting weakness that was here a couple of years ago. You are talking about the credit side which is really all in one. And again I wasn’t here for some of that. I believe the regulatory burns that are out there, I think you are seeing this and lots of entities. I don’t think that our systems are that much different than anybody else’s. I think we’ve got good processes in place. I think the regulator sometimes you can find some things that become the flavor of the week and I think we are going to deal with whatever those regulatory requirements are.

Steven Alexopoulos - JPMorgan

Okay. And maybe to follow-up, you're extending the deals by roughly a year from now, which would actually be relatively short compared to other banks that have had this issue. How long have you actually been at it already and getting after this issue? I know we are hearing about it today, but is it something you've already been working on for a couple of quarters or a couple of months?

James D. Rollins

No, this is all very recent news. As I said a minute ago, I still don’t know all the answers, this is all very very recent.

Steven Alexopoulos - JPMorgan

Okay. And Dan, maybe finally, I know you say in the release that these concerns are identified more in a routine exam. But are the regulators taking a deeper look at these areas for banks your size before approving a deal? Like, is that part of the equation here?

James D. Rollins

I wish I could answer what the regulators are doing. We are on a continuous exam cycle, regulators are here looking at our processes all the time. I think this is just a part of their everyday process, I can’t speak to how they are recruiting other banks or other folks, but they are here all the time with us and this is something that they have identified just recently.

Steven Alexopoulos - JPMorgan

Okay. And then, completely to change topic, some of the larger banks are steering away from construction and development loans, just given the haircuts in CCAR. Historically, that was a strength of your Company. How are you thinking about that? Because it's about 8% of total loans. Is there room to grow that from a risk management view? How are you viewing the opportunity there?

James D. Rollins

I think we look at every customer from a total relationship basis. And so, we are shying away from construction in general, I think you are exactly right. I think there are some of the big banks that are to use a regulatory term redlining product. So we don’t want any of this, we don’t care what the customer is or how strong the customer is. We on the other hand would rather look at the customer and say, this is the type of customer that we want to back. We like the financial stability of this company, we like the financial structure of this entity, we want to bank this customer and if they are in the construction business, that’s a good thing.

We are certainly looking at the credit quality of those relationships very carefully, but if the customer has the right quality, we’re not shying away from that. As far as the growth perspective; I think that’s going to be market specific. There’s not a whole lot of construction and development going on and parts of our – and other parts of our – then we have real opportunities to do that. So again, I think it’s more of an opportunistic basis that it is like you know absolutely focusing one on one or two types or excluding one or two types of loan. I would tell you again our process is more customer focus than product type focus.

Steven Alexopoulos - JPMorgan

Okay. Thanks for all the color.

Operator

Our next question is from Peyton Green of Sterne Agee. Please go ahead.

Peyton N. Green - Sterne Agee & Leach Inc

Hi guys good morning. Just a question maybe to think over a multiyear period. I mean, historically, I guess since the third-quarter 2011, I mean, you all have consistently posted negative average earning asset growth. And I guess it's certainly to be applauded that you all achieved the operating leverage that you did over the past year, with, again, kind of negative revenue and earning asset growth. When would be a good time to expect earning asset growth to start driving some of the operating leverage pieces of the puzzle?

James D. Rollins

That’s a great question, Peyton. Clearly what we’ve been doing is we’ve been making sure that we have the relationships in place. And I think sometimes maybe in the past with some of the things that were going on, we not as focused on a core relationship and we had single product customers. What you see on the shrinking overall earning assets is more of a deposit focus than anything else. And so as you look at the deposit base as Bill said we’ve had a large portion of high cost, single product, especial products on the CD side, but we had some 4% plus CD money that was five-year money. And that was the only product that those customers had with us.

We need to be focus on relationships and lead that special product stuff go away and we focus relationship side. But I think your premise is spot-on. We clearly can’t continue shrink the balance sheet. We’ve got to grow the balance sheet. So with loans growing for five quarters or four quarters with the best loan growth we’ve see in the Company’s history.

We’re clearly going to have to make sure that we’re growing on the funding side of the balance sheet. Also we need to make sure we’re doing that in a smart, prudent, core way and not in special hot-money, single-product customer one.

Peyton Green - Sterne, Agee & Leach, Inc

Okay. And then just in terms of loan to deposit ratio is up to about 87%, which is not all that crazy. But how high we let it go when I guess maybe Bill, what kind of cash do you expect of the securities portfolio and will you use -- I mean, is the preference still to use all of that to fund loan growth?

William Lloyd Prater

Well, we got -- I’ve got a schedule of maturities by month and they’ve kind of in that typically they are probably going to average in the $40 million range by monthly maturity zone investment portfolio. You can certainly use some of that. We’ve got some access collateral, but a lot of those securities are pledge, so its kind of six one and half dozen other where they use the money or you give up the deposit associated with it and I think we would -- on balance, most of these are core customers, even if they are municipality. So we will probably prefer to maintain the deposits and maintain the securities.

We don’t have a lot of -- we don’t have a lot of -- we experienced good bit of a downdraft for time in the margin, because the reinvestment rates on the securities were very low and we’ve seen most of that come out.

Peyton Green - Sterne, Agee & Leach, Inc

Okay. And I guess the taxable securities yield anyway continued to decline. I mean, would you expect to decline further here or was there -- or do you think it’s stabilized around 145?

William Lloyd Prater

On the rate.

Peyton Green - Sterne, Agee & Leach, Inc

Yeah.

William Lloyd Prater

The rate on the security portfolio, is that what you’re asking?

Peyton Green - Sterne, Agee & Leach, Inc

Just on the taxable side? Not the tax exempt?

William Lloyd Prater

That’s pretty representative.

Peyton Green - Sterne, Agee & Leach, Inc

Okay.

William Lloyd Prater

We usually buy kind of three to five year bullets to have an average maturity out there in the three-year range or is it very short.

Peyton Green - Sterne, Agee & Leach, Inc

How much access collateral do you have in the securities book, how much is unpledged I guess at June 30?

William Lloyd Prater

It’s about $600 million.

Peyton Green - Sterne, Agee & Leach, Inc

Okay. So there is some wiggle room for the continuation of current loan growth and maybe deposits take another couple of quarters to turn. You could…

William Lloyd Prater

Well, there is. And Fed fund rates are relatively low also, I mean, you can balance it out. You don’t have to do anything. You don’t have to do anything crazy. You don’t have to run out and sell securities. You can make -- we’ve got enough cash flow in the securities portfolio to make an informed decision day-to-day as a maturities kind of come along.

We’ve, in the past, if we see some weakness in the market we’ll jump in and may about the next couple of months of maturities. So that’s not a huge part of the equation, but it’s a fair. When you have $600 million, you can utilize some or all of that to do it. But honestly I like to maintain some level of excess collateral.

James D. Rollins

I don’t think we’re feeling stressed on any of those fronts today. We clearly need to do just what we started out talking about here. We need to be focused on making sure we’re growing both sides of the balance sheet. And I’m very confident that our team can do that.

Peyton Green - Sterne, Agee & Leach, Inc

Okay. Because, I guess, Dan, to put you on the spot here, I guess a little bit -- but intangible equities build 100 basis points year-over-year, your risk based capital ratio is up in similar fashion. I mean, at what point do you say, we’ll catch up on the deposit side in a quarter or two, but we’re going to grow earning assets to drive net interest income. Do you think we’re there or is it still maybe a couple of quarters out?

James D. Rollins

Well, you got a couple of things going on there. Clearly we’ve got plenty excess capital today and part of that capital ratio is because, as you said, the balance stagnant or flat or down little bit. I think we can continue to grow earning assets sequentially as we’re going to grow them and lever the balance sheet with some bond portfolio. I -- that's probably -- we need to continue to grow loans. We need to continue to grow core relationships. And if we continue to grow loans and relationships the way we’re growing now, I think we can grow both sides of the balance sheet. I think we can lever a capital that we have.

Peyton Green - Sterne, Agee & Leach, Inc

Okay. I’ll stop asking, but I guess, I mean, over the past year you had about $600 million drop in short-term overnight investments, and about $175 million – we’ll call it $200 million in the rest of securities book. I guess my question is, it gotten to the point where its -- where you want it from a mix perspective? Where you want it from a mix earning assets? And now if you get a dollar’s worth of loan growth, keep the bond book flat or liquidity flat and grow earnings assets?

James D. Rollins

Okay. I think that’s fair. I think we clearly want to grow, I think you’re on the right spot. We got to grow both sides of the balance sheet.

Peyton Green - Sterne, Agee & Leach, Inc

Okay. All right, great. Thank you. I just want to make sure I had a right.

James D. Rollins

Okay. Thanks.

Operator

Your next question is a follow-up from Matt Olney of Stephens. Please go ahead.

Matt Olney - Stephens Inc.

Hey. All my questions have been address. Thank you.

William Lloyd Prater

Thank you, Matt. Appreciate it.

Operator

We have another follow-up from Jon Arfstrom of RBC Capital Markets. Please go ahead.

Jon Arfstrom - RBC Capital Markets

Thanks. Just a question on the loan pipeline, how does it compare to where you where say a quarter ago up down flat?

James D. Rollins

I think we’re up. I think the loan pipeline is big as it’s ever been no bigger. We’ve got – we’ve added number of – Jon, we’ve added revenue producers on the front side of the house pretty significantly out there and I think we’ve got great loan pipeline coming from all of that.

Jon Arfstrom - RBC Capital Markets

Okay. That’s helpful. How about mortgage, the mortgage pipeline?

James D. Rollins

I think mortgage pipeline we’ve had it and quite some time we also driven up the producers that we’ve added to the team and where we are again its purchase money not refund.

Jon Arfstrom - RBC Capital Markets

Okay. And then James just on the insurance commissions, maybe obvious, but we expect a bit of a step down in Q3 and Q4 that’s just typical seasonality, is that the way to look at it?

James D. Rollins

Yeah. I think that’s right. It’s not significantly down. Until -- this third quarter is usually pretty -- about even with the second. First quarter typically will come in a little bit weaker than the other quarters, but...

William Lloyd Prater

On a sequentially basis Jon, comparing back a year of course we’ve got acquisitions that we’ve changed from a year ago.

Jon Arfstrom - RBC Capital Markets

That’s right. So the run rate is up but there is still that seasonality in it somewhat?

James D. Rollins

Right.

Jon Arfstrom - RBC Capital Markets

And then Bill just earlier in your prepared comments you carved out OREO costs and legal costs of about $2.7 million of a headwind in the quarter. Would you say those are truly aberrations? Or is that something that you think needs to stay in the numbers?

William Lloyd Prater

You've got to divide and conquer there. The legal cost is different from OREO costs. Two different issues I think OREO, we’ve made some one-off decisions to move some properties, some of our, we’re down below $60 million now in our OREO, which is a fraction of where we were at the peak.

Some of those properties do have some age on them. We’re still aggressively marketing those, still aggressively looking at any offer that we get on them and get an opportunity to move one. We’re willing -- even though I think our marks are very, very fair, some of those particularly the older ones. You get an opportunity to move them. you’re going to seriously consider.

On the legal front is Dan kind of alluded to, there is some impact from some of the work that we’re working, some of the compliance issues in there. None of us tell you exactly how long that last, but aside from that, our number of legal issues that we are working through that came out of the credit cycle is coming down and will continue to come down over time.

We’re getting rid of some of those cases and there is cost associated with it. So, I think we’ve got a good opportunity to meaningfully reduce that number over time, but it’s impossible to tell you exactly when it’s going to happen. We’ve seen some improvement on the lending cases already, but there’s still some of those hanging out there.

Jon Arfstrom - RBC Capital Markets

Okay. All right. Thanks for the help.

William Lloyd Prater

Thank you, Jon.

Operator

This concludes our question-and-answer session. I’d like to turn the conference over to Mr. Rollins for any closing remarks.

James D. Rollins

Alright. Thank you all for joining us today. If you need any additional information or have further questions please don't hesitate to contact Bill and myself. Otherwise we look forward to speaking to you again soon, thank you all very much.

Operator

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

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