Cadence Bank
NYSE:CADE
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Cadence Bank
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Good day, and welcome to the BancorpSouth's First Quarter 2018 Webcast and Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Will Fisackerly, Senior Vice President and Director of Corporate Finance. Please go ahead, sir.
Good morning, and thank you for being with us. I will begin by introducing the members of the senior management team participating today. We have Chairman and Chief Executive Officer, Dan Rollins; President and Chief Operating Officer, Chris Bagley; and Senior Executive Vice President and Chief Financial Officer, John Copeland.
Before the discussion begins, I will remind you of certain forward-looking statements that may be made regarding the company's future results or future financial performance. Actual results could differ materially from those indicated in these forward-looking statements due to a variety of factors and/or risks. Information concerning certain of these factors can be found in BancorpSouth's 2017 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 first quarter 2018 earnings release.
Our speakers will be referring to prepared slides during the discussion. You can find the slides by going to bancorpsouth.com and clicking on our Investor Relations page, where you'll find them on the link to our webcast or you can view them at the exhibit to the 8-K that we filed earlier this morning.
And now, I'll turn to Dan Rollins for his comments on our financial results.
Thank you, Will. Good morning. Thank you for joining us today for BancorpSouth's First Quarter 2018 Conference Call. I will begin by making a few brief comments regarding the highlights for the first quarter. John will discuss the financial results, and Chris will provide more color on our business development activities. After we conclude our prepared comments, our executive management team will be happy to answer questions.
Before we discuss the quarter, I'd like to make a few brief comments regarding last night's announcement, regarding our merger with Icon Capital Corporation, the parent company of Icon Bank of Texas. First and foremost, I want to welcome Mark Reiley, John Green and their experienced team of bankers to the BancorpSouth Bank family.
Mark and John cofounded Icon in 2007 in Houston, and have now grown the bank to almost $800 million organically. They currently operate 7 offices across the Houston Metropolitan area, with an 8th office currently in the works. Upon closing, Mark will serve as our Houston area Chairman, while John will become our Houston Division President.
When you look at what we desire in a partnership, this transaction checks all the boxes. First, strategically, it's a great opportunity for us to meaningfully expand our presence and market share in a dynamic, high-growth market. Today, we operate 2 full-service branches in Houston. On a pro forma basis, we will have approximately $1 billion in loans in the Houston market and over $700 million in deposits.
Second, we believe it's a great cultural fit. Mark and John have built a great team of community bankers that pride themselves on taking care of customers and being actively engaged in the community.
Finally, and most importantly, we believe this transaction adds value for our shareholders and further enhances our ability to grow. We are pleased with all of the various financial metrics. The estimated pro forma impact to our tangible book value per share and regulatory capital metrics is minimal. We expect to achieve cost savings of approximately 20% of their non-interest expense base, which will allow the transaction to be accretive to earnings in the first full year as well as provide a reasonable earn back on the tangible book value dilution of less than 3.5 years.
We anticipate the transaction could close during the second half of 2018, subject to regulatory approval and other customary closing conditions.
Again, this is a big win for our company. Expanding further into Houston, where I've spent the better part of my life, living and working, is exciting for us. Mark and John and the Icon team provide us a solid foundation, upon which we can grow and develop our presence.
Let's now turn to the slide presentation and discuss the first quarter. Slide 2 contains our customary Safe Harbor statement, with respect to certain forward-looking information in the presentation.
Slide 3 covers the financial highlights for the first quarter, which was a record quarter for our company. We reported an all-time record-high net income for the quarter of $53.5 million or $0.54 per diluted share, also a new quarterly record for our company. On a per share basis, this represents an increase of 32% compared to both the first and fourth quarters of 2017.
While the tax law changes certainly contributed to earnings improvement, we also achieved several other milestones in the quarter that contributed to our record performance. The most notable highlight for the quarter was the completion of the mergers with Central Community Corporation and Ouachita Bancshares Corporation, effective January 15.
Since we discussed these -- this item on our fourth quarter call, I won't go into a lot of detail, but I would like to provide a brief update.
We completed the operational integration of OIB on the I-20 corridor in North Louisiana in February. This integration went very well, and our teammates are focused on making the transition as seamless as possible for our customers. We expect to complete the First State Bank integration later this quarter. Accordingly, most of the cost savings from these 2 transactions will be harvested in the quarters to come.
Reported GAAP earnings were impacted in the quarter by a few nonoperating items, including merger related expenses of $5.7 million in the first quarter related to the 2 completed transactions, along with a positive pretax mortgage servicing rights valuation adjustment of $5.5 million as a result of continued rising interest rates.
Accordingly, our net operating income, excluding MSR, was $53.6 million or $0.54 per diluted share. This represents an increase of 32% compared to the fourth quarter of last year and 38% compared to the first quarter of last year.
Consistent with our historical seasonal trends, the first quarter was a great deposit growth quarter for our company, while organic loan growth was nominal. Excluding the balances acquired with the transaction closings, we generated deposit growth of $240 million or 8% on an annualized basis and organic loan growth of approximately $50 million or 2% annualized. While some of the seasonal public fund and tax balances will flow out in the second quarter, we were extremely pleased with our team's efforts on deposit growth. Chris will discuss loan and deposit activity further in a moment, including some commentary on interest-rate competition in our markets.
I'm also pleased to report continued improvement in our net interest margin. Our core margin, which excludes accretable yield was 3.6% for the quarter compared to 3.58% for the fourth quarter of 2017. The margin benefited primarily from rising loan yields. John will discuss the margin in more detail in a moment.
Finally, we were active in our share repurchase program during the quarter, repurchasing just over 2 million shares of our common stock at a weighted average price of $32.32. The increase in the repurchase volume compared to previous quarters was the result of movement in the market, combined with certain triggers set forth in our 10b5-1 plan. We have just under 4 million shares remaining in our current authorization.
I will now turn to John and allow him to discuss our financial results in more detail. John?
Thanks, Dan, and thanks to everyone for dialing in this morning. If you'll turn to Slide 4, you'll see our summary income statement. As Dan mentioned earlier, the 2 merger transactions closed effective January 15. So accordingly, the financial results that we will discuss will include 2.5 months of activity from those 2 banks. This additional activity will impact the comparability of all of our financial results shown on the next several slides.
In reviewing the summary income statement, net income was $53.5 million or $0.54 per diluted share for the first quarter. We did have one meaningful nonoperating item during the quarter, the $5.7 million in merger related expenses.
Additionally, as Dan mentioned, we had a positive MSR valuation adjustment for the first quarter of $5.5 million. Accordingly, we reported net operating income, excluding MSR, of $53.6 million for the quarter or $0.54 per diluted share compared to $36.8 million or $0.41 per diluted share for the fourth quarter of '17 and $36.9 million or $0.39 per diluted share for the first quarter of 2017.
Net interest revenue increased 13.8% compared to the fourth quarter of '17 and 20.5% compared to the first quarter of 2017. In addition to the incremental net interest revenue associated with the acquisition, we also saw continued expansion in our net interest margin, both as a result of core spread increase as well as purchase accounting accretion.
Our reported net interest margin for the first quarter was 3.67%, while our net interest margin excluding accretable yield was 3.60%. This compares to a net interest margin of 3.58% for the fourth quarter of 2017 and 3.46% for the first quarter of 2017, neither of which were impacted by purchase accounting accretion.
And looking at our core margin, the pickup in loan yields continues to outpace the increase in deposit rates. Our loan yield, excluding accretion, increased by 15 basis points compared to the fourth quarter of '17, while the total cost of deposits increased by 4 basis points.
If you turn to Slide 5, you'll see a detail of our noninterest revenue streams. The total noninterest revenue was $78.9 million for the quarter compared to $63.1 million for the fourth quarter of '17 and $70.9 million for the first quarter of '17.
As Dan mentioned earlier, we had a positive MSR valuation adjustment of $5.5 million. This adjustment was primarily responsible for the increase in mortgage lending revenue compared to the first quarter of 2017.
Second, I would like to discuss the accounting change related to insurance commission revenue recognition. Our contingent commissions have historically been recognized at the time of cash received, which is heavily weighted toward the first quarter of the year. The new revenue recognition accounting standards require that we estimate and accrue for these commissions throughout the year in which the commissions are earned. In the transition to the new standard, we were required to make a balance sheet entry in January to implement the standard. We recorded $5.9 million less applicable deferred taxes directly to equity as an estimate of 2017 contingent commissions to be received in 2018.
Additionally, we began to accrue estimated 2018 contingent commissions to earnings during the first quarter.
In summary, our contingent commissions will now be estimated and recognized over the course of the year rather than in the period of receipt. This accounting treatment resulted in our insurance commission revenue being an estimated $3.7 million less for the first quarter than it would have been under the prior accounting convention.
Finally, I would like to mention the increase in other noninterest revenue during the first quarter. This increase was driven to a large extent by a legal settlement totaling $3 million. While legal items are a part of operating earnings, we certainly wouldn't expect settlements of this magnitude to be reoccurring in future periods.
Slide 6 presents the detail of noninterest expense. Total noninterest expense for the first quarter was $147.7 million compared with $125.9 million for the fourth quarter and $127.1 million for the first quarter of '17.
As I mentioned earlier, the only nonoperating item that impacted noninterest expense was the $5.7 million of merger related expenses. Additionally, we had a single large fraud loss totaling $2.3 million, which is reflected in other miscellaneous expense. Otherwise, trends within our expense base were consistent with expectations given the merger closings.
Our operating efficiency ratio, excluding MSR, was 66.8% for the quarter compared to 68.2% for the fourth quarter and 68.4% for the first quarter of 2017. This metric showed continued improvement despite the large fraud loss.
That concludes our review of the financials. Chris will now provide some color on our business development activities.
Thank you, John. Before I discuss the business development activity for the quarter, I would like to briefly reiterate Dan's comments on the Icon opportunity.
I too spent a lot of my career over 30 years in Houston, and I'm excited about what this partnership means for our company. When I look at Icon, I see 2 tremendous strengths. The first is clearly the people. I've had the opportunity to work personally with several of their lenders in my career, which has provided me the opportunity to see firsthand what kind of bankers they are. I'm very optimistic about what they can do for our company, particularly when equipped with the additional product offerings, services and scale that we can offer to their customers.
Second, Icon has a nice branch network across the Houston market. Houston is a big place. And the addition of the Icon footprint, combined with our current locations will provide a platform -- excuse me -- to better serve the entire community as we continue to build our presence in the Houston market.
Including my comments on Icon, I would like to mention our Houston mortgage and insurance teams. We currently have 50 insurance professionals in the Houston market and over 20 mortgage professionals. These teams will be yet another resource at the fingertips of the Icon team as they currently do not offer mortgage or insurance products.
Moving on to our quarterly results. Slide 7 reflects our funding mix as of March 31 compared to both the fourth quarter of 2017 and the first quarter of 2017. The balance increases here are largely attributable to the 2 transaction closings that Dan discussed earlier. However, we also experienced strong organic growth during the quarter in our deposit and customer repos, totaling approximately $240 million or 8% annualized.
Our first quarter is always seasonally high as a result of tax revenues and public funds. We are extremely proud of this accomplishment.
Before we discuss the geographical performance on deposits, I'd like to make a few brief comments on the deposit pricing environment in our footprint.
In recent weeks, we've started to see more of our competitors adjusting posted deposit rates in response to the rising rate environment. In an effort to remain competitive and take care of our customers, we have followed suit and raised the posted rates on certain of our product offerings. While we still believe there is upside in our net interest margin, we won't be immune to the competitive environment on the deposit pricing as rates continue to rise.
As we look at geographical performance relating to deposits, we had 6 community bank divisions stand out this quarter for deposit growth. Our East Central Mississippi, Memphis Metro, Missouri, Northeast Arkansas and Mid Mississippi and South Louisiana divisions all reported excellent results this quarter. Looking forward, core deposit growth will continue to be a top priority across our entire footprint.
Moving to Slide 8, you will see our loan portfolio as of March 31 compared to the fourth quarter of 2017 and the first quarter of 2017. As with deposits, our prior period comparisons are impacted by the merger closings. On an organic basis, our team [ produced ] net loan growth of approximately $50 million for the quarter or 2% annualized. While not robust, this growth does compare favorably when compared to previous first quarter numbers as the first quarter has typically been a slower production quarter for us.
As we look at our first quarter lending efforts from a geographical perspective, we had several divisions produce meaningful loan growth. Stand out divisions for the quarter were our Dallas, Texas; East Central Mississippi; Missouri; and West South Arkansas divisions.
Slide 9 contains credit quality highlights. I'd like to touch briefly on a couple of these bullets. We had a provision for credit losses of $1 million for the first quarter compared with a provision of $500,000 for the fourth quarter of 2017 and a provision of $1 million for the first quarter of 2017. We actually reported a nominal net recovery for the quarter of $200,000.
Finally, the remainder of our credit quality indicators continue to trend in a positive direction despite the addition of loans and ORE from the 2 acquisitions. In reviewing year-over-year trends, total NPLs to net loans and leases have declined to 66 basis points (sic) [ 0.66% ] from 76% (sic) [ 0.76% ] a year ago, while NPAs to net loans and leases have declined from 0.83% to 0.74% over the same time period.
Moving on to mortgage and insurance, the tables on Slide 10 provide a 5-quarter look at our results for each product offering. Our mortgage banking operation produced origination volume for the quarter totaling $292 million. Home purchase money volume was $205 million or 70% of our total volume for the quarter. I would like to commend our mortgage team for growth in both total production volume and purchase money production compared to the first quarter of last year despite the rising rate environment.
Deliveries in the quarter were $215 million compared to $267 million in the fourth quarter of 2017 and $260 million in the first quarter of 2017. Production and servicing revenue, which excludes the MSR adjustment, totaled $7.7 million for the quarter compared to $4.9 million for the fourth quarter of 2017 and $8.1 million for the first quarter of 2017.
Our margin was 2.44% for the quarter, representing an increase from 1.06% for the fourth quarter of 2017. This margin increase is common during the first quarter each year as our pipeline increase as we move into the spring selling season. Our pipeline was $260 million at March 31 compared to $194 million at December 31, 2017.
Finally, as Dan mentioned earlier, the MSR valuation adjustment during the quarter was $5.5 million.
Moving on to Insurance. Total commission revenue for the quarter was $29.1 million compared to $25.8 million for the fourth quarter of 2017 and $32.9 million for the first quarter of 2017. John walked through the mechanics of the accounting revenue recognition change earlier. This change resulted in our insurance commission revenue being an estimated $3.7 million lower for the quarter than it would have been otherwise.
Despite some recent industry commentary that might suggest otherwise, our team is still seeing an overall soft premium market, which puts pressure on revenue growth. With that said, our producers are out there battling every day to defend their current customer base and to win new customers as opportunities arise.
Now I'll turn it back over to Dan for his concluding remarks.
Thank you, Chris. 2018 is off to a great start for our company. All of our financial metrics continue to improve quarter-after-quarter, including return on assets, return on equity, efficiency and net interest margin, just to name a few.
As we look forward, the message to our team remains the same. We must continue to leverage our structure and expense base by growing our company both organically and through strategic opportunities. We must also do this while maintaining strong credit quality. This simple approach has delivered continued performance improvement for our company for some time now and I'm confident there is a long runway ahead for this trend to continue.
With that, operator, we'd now be happy to answer any questions. If you can help us with that.
[Operator Instructions] And our first question comes from Michael Rose with Raymond James.
Just wanted to touch on the acquisition. So if I look at Slide 8, it looks like you guys clearly have some opportunities to deploy some of your products into their franchise. You're obviously bolstering your Houston market presence, the market that you noted, you have a lot of experience in. What are your expectations, kind of, short and longer term for Houston and can we expect some potential revenue synergies from this deal?
Sure, appreciate that question. Well, Houston is a great market, I think you know that. The dynamics, the economy there, the resilience of the economy. It's been a good market for us for some time in non-bank products as you can see, you referenced Slide 8 on the Icon presentation. We already had a little less than $400 million in loans there. While we just recently opened the 2 full-service branches, we've got a little less than $50 million in deposits there. But the insurance team, we gen up and have been genning up approximately 10% of our insurance revenue out of the Houston market. Ed Schreiber runs insurance for us down there and does a great job there. And on the mortgage side, while we've got the 10 originators, we have a total of 20 people on the mortgage team down there. Icon does not offer long-term fixed rate mortgages, 15-year, 30-year, mortgage products. So I think our mortgage team and their bankers, I think, are excited about the opportunity to partner those 2 together along with the referrals that can come into our insurance team. So clearly, there's opportunities for us to marry what we're doing together. The 7 offices that they operate today, they've got 1 that's about ready to kick off construction soon, gives them 8, along with our 2 gives us 10 locations. I would expect that we will continue to look for opportunities to expand further in that market and leverage the economy there for growth. That's a growth market, and again in the same slide deck, you can see some of the population growth numbers, the household income growth numbers, the deposit growth numbers, all of those things are very favorable for us when we compare to the rest of the footprint. So it's a real opportunity for us in Houston.
That's great color, maybe another way to answer -- ask the question is, how should we think about the size of the Texas franchise in proportion to the overall size of the company. I mean, I assume it's something you want to get bigger but is there any upper bounds to how big you'd let that grow? Or could we expect, as your friends across the street have said, that maybe you might move the headquarters down to Houston at some point? I'm just kidding.
Yes. When you look at our footprint today, I think, we like where we are. I think we've got a great team of folks here across the Southeast. I don't see us making any structural moves in the company anytime soon, if at all. But clearly, from a growth perspective, 40% of our base is still here in our home. So this moves us to a little less than 20% in the Texas market. And I can't flip slides fast enough to find that slide but Louisiana and Arkansas are right behind that on deposit market share. We just completed the acquisition in North Louisiana, that I-20 corridor is a good market for us. We've got a good presence in Little Rock in the Arkansas markets. I think we like our entire footprint. And I think we can marry the strengths of each of those footprints together. Clearly, the growth prospects in Houston is a plus and again, you've got to look at our core low-cost sticky core funding base that comes from the spread that we have across the 8-state footprint that we have. I think we like where we are.
Okay, fair enough. Maybe one more for me. The organic loan growth this quarter was a little bit less than I was expecting. Any notable pay downs this quarter and then can you give any commentary around the pipelines and maybe expectations for the year.
Yes, I'll let some people get in here on that but my comment would be, your expectations are off. When you look at our first quarter for the last 5 years, this is one of the best first quarters we've had out of the last 5 years. So I'm not sure what was driving your expectations to be outsized in 1Q. But our first quarter performance for the last 5 years has been lighter, the lightest quarter of the year for us and I think we're pretty pleased with where we are. Pipeline, I think, is doing well. Chris, you want to add on any other color coming forward?
Yes, I don't -- no big pay downs that I can note or think about. I think the pipeline does remain good, we're competing on a lot of deals. Interest rates, that's part of the issue out there is we're all competing against deals and thinking about a prime rate increase that's coming up. So we're being disciplined on our pricing approach, and we feel good about our pipeline. But it's a competitive market, and we're going to stay disciplined on pricing.
We've seen many competitors pricing deals on a 10-year fixed at 4, and we're not playing in that game. So if there's banks out there wanting to give away money that way, we're happy to not make that loan.
Okay. So mid- to high single digit ex the deals is still a good way to think about it?
Yes, I think we feel good about our look forward.
The next question comes from Jennifer Demba with SunTrust.
Just curious staying on the acquisition topic. What's your appetite for future deals in 2018, given that you just closed 2 and you have another pending?
Well, depends on who you ask that question to. There's lots of constituents that would have an opinion on that. If you're asking our technology team, they may tell you that we need to be careful what we move forward with. If you're talking to others of us, some people have bigger appetites than others. Deals, Jenny, as you know are all opportunistic and so we have known Mark and John, we've been talking to them for several years. This was a perfect fit for us in many ways. That doesn't mean there's not other opportunities out there but we just need to keep looking at them and decide what the timeline could be -- and it looks like we're going to have a train come by our conference call today. That's right, the Tupelo train. I don't know that I see an answer to we will or we will not do something in the back half of the year. I think it would be -- I think we need to be careful that we don't overload the team in what we're doing. So I think we've got capacity to continue to grow, we've got to get past the second quarter integration of the First State Bank Central Texas team. We have got to get this transaction, we have got first file for applications, and we've got to get approval, we've got -- they have to have a shareholder meeting, and we've got to integrate that one. So I think as we get closer, and we can see some clarity on that timeline, then we can start talking about where the next one might come along.
The next question comes from Jon Arfstrom with RBC.
Is that the Dan Rollins acquisition freight train?
It is, there you go, there you go. The train is running, and it likes its horn, as you can tell.
Just a follow up on a couple of the acquisition questions. Can you talk a little about Central Community and Ouachita, how they're going in terms of -- versus your early expectations, are they growing, are you doing some back filling, what's going on there?
Well, clearly, when you take -- when you're in the middle of an integration, and you've got to change names, and you've got to change computer systems, and you've got to change how you login, and you've got to change everything else about what you're doing, that takes a focus off of growth for those teams. So did we grow in the first quarter? I think actually both of them did very well. One was up a little bit in loans, the other was down a little bit in loans. One was up a little bit in deposits -- well, they both were probably down just a little bit in deposits, I think. But when you look at the overall expectation, I think was your question, we are very pleased with what's happening there. I think the long delay that we went through in getting to the finish line allowed us to get to know each other. And so, while it just has kind of happened, and we just put them on our computer system, we've now known each other for over 4 years and so there's a comfort level that sometimes is not there in acquisitions that happen on a normal timeframe or a shorter timeframe and you would normally expect to see some shrinkage on the balance sheet. I think our teams are out there producing very well, like I said, the OIB, the Ouachita group on I-20 in North Louisiana, I couldn't be prouder of what's happened in their market. And the team in Texas is queuing up for -- to be next up in the batter's box and before the end of this quarter, we'll have them on our computer system also and I don't anticipate to see any problems there.
Okay. Okay, good. Maybe one for you, Chris, you talked about some of deposit repricing actions that you're taking. Can you just talk about how material that might be?
Well, we are in a diverse footprint in a lot of states, so you got a lot of different types of competitors that are doing it in different ways, but we have to think about it from top of the house and a total footprint perspective. So we're watching rates. We're taking selective approach to selective products where we need to and where we think to. It's hard to put a quantitive measure on it, I just -- I guess the color would be, there's definitely competition out there and some upward pressure on deposit pricing. Does that help?
Yes, it helps. I guess, one of the numbers that was disclosed was the yield's ex accretion up, I think, you said 15 basis points and deposits up 4 year-over-year if I heard that right?
Right.
Can that relationship still hold, as rate -- assuming rates march higher?
Yes, I would want to add into that. Also, when you look at the total deposit cost was up 4 bps, Jon, I going to make sure we're right. Total deposit cost is up 4 bps, that includes the 2 acquisitions. When we look at our -- like we were talking earlier about deposit growth and loan growth, ex acquisitions, if you look at the deposit cost of the old BXS part of the book, we were up 1 basis point and the bring-on of the other 2 banks, moved us up the other 3 to get us up a total of 4 basis point for the quarter. Chris, you wanted to add on that?
Yes, I don't think I can really predict what it's going to look like in terms of the spread between those 2 numbers but I think there's also in addition to the competitive pressure on the deposit side of the house, we still feel like we have upward pressure on the loan margin with the types of loans we have and the repricing schedules that we have. So I think there's upward pressure on both. What that does to the -- compare the 2 numbers together, that would be hard to answer.
And discipline on not putting out...
Right.
...crazy low price loan money.
The next question comes from Will Curtiss with Piper Jaffray.
I want to go back real quick to the loan growth side. It sounded like you still feel good about the mid- to high single digit loan growth range. And I think last quarter, there was some optimism about the benefits from tax reform, so I'm curious if you can kind of update us on, kind of, what you're seeing from your customers and if they still feel that the benefits will come through sooner or has that been you think maybe pushed out towards the latter half of the year?
Yes, I don't know how to answer that. From an economic standpoint -- John, I'm going to let you jump in here, from an economic standpoint, I think customers are feeling optimistic but there's still a whole lot of unknowns that are out there. I think when we compare ourselves to many of our peers in our market, I think we did as good or better than many of our peers on a loan growth situation. So again, when you aggregate all the numbers together, we certainly watch just like you do, Will. And then we compare to what our historical numbers have been. As I said a little while ago, I think we're proud of our team, we think there is opportunity out there for us on an economy basis, some markets are better than others but there is opportunity for us. John, you want to add on that?
Well, just anecdotally, I mean most of my business contacts are relatively small businesses and primarily in the Memphis and Nashville markets. But the people that I know, the small-business people I know are very optimistic, they feel very good about the tax reform, very...
Have they turned that into borrowings, yet?
No, they have not. But cash flow, yes. But they feel optimistic, so that's very anecdotal.
For me, I think it takes a while for that to grind through the system and start to -- for us to start to see benefits. But for optimism, yes, I think people are positive.
Okay, understood. And then kind of switching gears here. On the expense outlook, can you, kind of, help us, as we kind of progress through the course of the year, trying to get a sense for how the timing of the cost saves will flow through and just make sure that we're starting from the correct base?
Yes, the correct base is the hard one. So we tried to give you some color in press release. So there were several items that were in there, that were unusual, clearly, the fraud item was unusual on the expense side. The legal settlement was unusual on the income side. Remember, we also had some cost in our first quarter numbers that would be of a one-time nature in salaries, when you look at the decision that we made as a company to reward our staff as a part of the Jobs Act and Tax Saving Bill that started the year off. So we put out raises to the large majority of our team effective January 1, and some folks got a one-time bonus. That one-time bonus, I think, was a little less than $1 million on a pretax basis. What am I missing, John, on the one-time items in the expense base? Okay, so if you pull off the specials that we just talked about and I think that's a fair base to start from. And then your question is, where are we on a cost save? And we literally just finished the integration of OIB at the end of the quarter. We haven't done integration of First State Bank until the end of this quarter. So I would expect to see the cost savings that we've modeled in begin to impact us in 2Q and certainly 3Q and 4Q this year.
The next question comes from John Rodis with FIG Partners.
On the Icon acquisition, just -- if the numbers I'm looking at are right, it looks like their loans have sort of trended down the last couple of quarters. Can you maybe just talk about that, anything specific going on there?
Not that I know of. I don't have an answer to that question. I think they've, like many in the Houston market, are dealing with the aftermath of the flooding last year and trying to figure out, kind of, what's there. I don't think they're feeling any pressure. I think they feel like they've got great opportunities in front of them, just economic wins in Houston.
Would you -- I guess all things considered, would you think that portfolio should grow higher than the leg -- than the core BancorpSouth portfolio, the better than the mid- to high single digits or how should we think about that?
Yes, I think when you look at the company as a whole, again, some markets, we don't have a whole lot of growth opportunity. So to grow the whole company, you've got to have some markets that are outperforming. And I think we've been seeing that already. Our presence in Houston, the $300 million, and almost $400 million in loans that we've put on over there, they started at $0. So if you're trying to make a percentage growth off of that market, well it's growing a lot faster than 5%, because they started at $0, 3 years ago. The Houston market has the ability, as does the Dallas market, as does the Austin market, as does the Nashville market, as does Little Rock and Saint Louis, the major metropolitan markets we're in have real opportunity for growth. And then we've got a big part of our footprint that's in the rural south that doesn't have that same opportunity for growth.
Okay, fair enough. John, maybe just a question for you, the yield accretion, you guys said, was roughly 7 basis points in the quarter, which I guess, equates to about $2.5 million. Would you say that's sort of the normal accretion that we should expect or be modeling going forward or were there any early payoffs?
I'm not aware of any significant early payoffs in that mix. But recall that, that was 2.5 months' worth since the deal was closed on the 15th, so...
Yes, there's a table in the press release, John, on this, kind of, accretion.
Page 17.
Page 17, that's right, Page 17 in the earnings release that maybe will help you with some of that.
My experience in that in the past is it can be lumpy. It's hard to predict when people pay off their loans and when they refinance.
Well, the payoff comes out of one bucket, the scheduled accretions out of the other, and we break that out for you on Page 17.
Okay, fair enough. And just one follow-up, the tax rate, I think last quarter, you said 23% to 25%. You came in a little bit better this quarter. How should we be thinking about that, given the acquisition and stuff?
Go ahead, John, I think -- go ahead.
Well, yes, we did say 23%, 25%, it's going to be closer to the 23%. We've got some tax benefits coming up that we didn't really include in our projection.
[ We're talking ] this quarter.
Yes, we had some tax benefits from the vesting of restricted stock in this quarter, we'll have that again next quarter. So that's going to improve the tax rate somewhat. But I think, 23% is probably a pretty good number going forward.
The next question comes from Catherine Mealor with KBW.
One follow up on the margin. The breakdown of the funding cost where your legacy funding costs were up 1 basis point and then the deals was up 3. That was super helpful. Can you help us break that down for the loan yields as well, how much the incremental loan yields [ tax ] accretion was just legacy BancorpSouth versus just impact from higher yielding acquired books.
I'll take that one, Catherine. I think total yield was up 24 basis points for the quarter. We were estimating that probably, I think, 9 bps of that was accretion. About 10 bps was the effect of FSB and OIB on the loan yields, excluding accretion. So that's 19 basis points. And then about 5 basis points of legacy loan improvement in the loan yields.
Okay, great. Really helpful. So then, kind of the question earlier, your legacy loans are increasing by 5 bps but your legacy deposit costs are only up 1, so you have a really nice spread there.
That's right.
Yes, and I'm looking, trying to do the math on the other side. Loan cost in the last quarter or loan -- yes, loan yield for us in the fourth quarter was 4.36% before anything was posted in, we posted 4.60%. We think that the core previous bank was somewhere in the 4.50% range. So the extra pickup came from the accretion and from the other banks.
Yes, that's the 24 basis points I gave you the details on, Catherine.
Got it. That's really helpful. And then, on the Icon deal, where does your capital -- where do your capital ratios go for that deal? And then, as we kind of think about capital deployment from here, your dividend payout ratio is going down just given you're making more money this year, so how do we think about your outlook for dividends given your higher earnings base this year?
Yes, I think that when you look at what our directors are going to want is that they like seeing increased dividends. We've got a lot of shareholders on the -- on our board, and I would expect us to continue on the same dividend payout process that we've been on now for some years. So I think that's certainly something that our directors look at and consider in our capital planning process. We see a capital planning and an update to capital planning in every one of our quarterly board meetings. When you look at share buyback, we still have capacity within our share buyback. Clearly, the transactions move the needle a little bit, it's probably 20 bps on capital ratios, which when you look at earnings capacity, we can repair that very quickly. Another way to look at it would be to look at our capital ratios from 12/31 to 3/31, the deals, as we've said all along, those 2 deals were 90 bps to 100 bps dilutive to capital, which means, we basically paid for all of the share buyback that we did this quarter with earnings because that's basically what we were down for the quarter.
The next question comes from Blair Brantley with; Brean Capital.
Just a couple quick questions. First on the Icon deal, is there anything major you see from a restructuring perspective that will be needed?
Major from a restructuring -- what are you -- you mean from a cost perspective?
Well, I just look at -- they had a bunch of cash [ in their rural ] AFS portfolio. Just curious of any opportunities there or anything you can see really changing from the structure of the portfolio today?
Yes, they really don't have a portfolio today. They're fully loaned up. They're using all of the deposits that they have on the loan book. I think, their total investment portfolio was less than $1 million.
$900,000.
Yes, it's virtually nothing.
91% loaned up.
Yes. No. I don't see anything that's going to move the needle on it for now.
And then to switch gears, on the mortgage side, the gain on sale margins, is that what you were expecting or maybe just give a sense of what you're seeing out there right now because we're hearing a lot of competition and a lot of pressure on the gain on sale margins.
Yes, I think our team continues to perform well. When you look back and compare us year-over-year, I think our first quarter margin has been up consistently, first quarter over first -- first quarter to first quarter to first quarter and then you can see that margin wane throughout the year. We look at it on the full year run rate and first quarter is a big part of that. But I don't know that there was anything unusual here, Chris, do you?
No. That's not unusual. A lot of that is just accounting treatment and timing based on your pipeline. So, I don't...
[ Boils down ] to production.
That's right. But it is competitive but I think we're not seeing any pressure on that.
And then from the -- it looked like you guys sold about 70% of your production, is that a reasonable target going forward? Or how do you think about that?
That all comes back into what we're producing. So I think that's a fair number. But sometimes, we can produce more product that gets sold, sometimes we could produce more product that gets retained.
All right. And then, I'm sorry, I had one other quick question. In the other income line, is there anything else that kind of stands out for the quarter because it still seemed like it was pretty high relative to expectations.
Yes, I think that's a good catch. There is an item in there that's basically an early payoff fee that's not an interest on a transaction. And I can't remember what that was, John.
$2.5 million, we experienced a -- we liquidated an investment subsidiary and booked a gain of $2.5 million, that's also in that other income number.
That's right.
The next question comes from Casey Haire with Jefferies.
This is Elan Zanger on for Casey. Just going back to the insurance, is it fair to take the $3.7 million adjustment you guys had in this quarter and just kind of spread it across the remainder of the year?
Kind of, but that's not exactly how it works. So I think, we would look and say that we took in $1.7 million in the first quarter, and we would anticipate that all things being equal, unless we change estimates, that will would bring that same amount in, in the next 3 quarters.
Yes, this is John. Of course, we received in the first quarter $5.5 million roughly in contingency fee income, that normally, we would book it on a cash basis, which we did. But then when we adopted the new revenue recognition standard we had -- we reversed that out and booked that to retained earnings and then began accruing, I think, $1.7 million in the first quarter, and we would expect to accrue about the same amount in the subsequent quarters this year.
But at the end of the day, it's an estimate.
It's an estimate and it would be trued up then in 2019, when we actually receive the cash.
And we'll be estimating in 2020.
And then we'll be estimating in 2020.
So GAAP has told us instead of booking what we actually earn, we should make estimates and book off of the estimates and then true them up in another period. That's on Page 18, there's some disclosures on Page 18 at the bottom of the page. That falls into other, under the insurance commission line, and you can see we booked $6 million in other commissions in the first quarter of last year and $2.3 million in the first quarter of this year. And then that line will be up in the second, third and fourth quarter of this year because of the change in revenue recognition.
And I think we estimated the current accrual based on, I believe a 5-year run average of contingency fee income, so it's okay with that, but we had to reverse out what we received in the first quarter to capital to avoid double counting.
Does that help you, Casey? It's not Casey, I'm sorry, Elan.
Yes, that's helpful. And then so was there any impact on how you accrue for expenses or this is just on the top line?
It's just on revenue side. That's the new rule, it has nothing to do with the expense side.
And this concludes our question-and-answer session. I would like to turn the conference back over to Dan Rollins for any closing remarks.
Thank you all for joining us today, if you need any additional information or have any further questions, please don't hesitate to contact us. Otherwise, we'll look forward to speaking with you again soon as we're out on the road. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.