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Bancorpsouth Inc  (NYSE:BXS)
Q3 2018 Earnings Conference Call
Oct. 18, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the BancorpSouth's Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions).

After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note, this event is being recorded. I would now like to turn the conference over to Will Fisackerly, former Senior Vice President and Director of Corporate Finance. Please go ahead.

Will Fisackerly -- Senior Vice President & Director of Corporate Finance

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 third quarter 2018 earnings release. Our speakers will be referring to prepared slides during the discussion.

You can find these slides by going to bancorpsouth.com and clicking on our Investor Relations page, where you'll find them on the link to our webcast or you can view them at the exhibit to the 8-K that we filed yesterday afternoon.

And now, I'll turn to Dan Rollins for his comments on our results.

James D. Rollins -- Chairman, CEO & Director

Thank you, Will. Good morning. Thank you for joining us today for BancorpSouth third quarter 2018 conference call. I will make a few brief comments regarding the highlights from the third 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 I spend time talking about our company performance, I want to recognize some of our team and their efforts. Just a few weeks ago, Hurricane Michael landed in the Florida Panhandle.

Thankfully, our branch in Florida and our people are all safe and unharmed. However the storm damage was very close and we have friends and customers that have been impacted. And just this week, the flooding in Central Texas has put our teammates and customers in harm's way there.

Several of our locations in Central Texas are operating on limited services and with a limited staff. I know our team will do our best in adverse conditions and we are all hoping and praying for the best for those areas.

Now let's turn to the slide presentation and discuss our third quarter results. 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 third quarter, which was the third consecutive quarter for which we reported record earnings. We reported a new all-time record net income for the quarter of $66.7 million or $0.67 per diluted share. On a per share basis, this represents an increase of well over 50% compared to the third quarter of 2017.

Our earnings improvement is the result of continued progress in several areas which I will discuss more in a moment, as well as the one-time tax benefit of just over $11 million or $0.11 per diluted share which was disclosed in an 8-K filing late last month.

This benefit is the result of the contribution to our pension plan as well as our tax method -- as well as a tax method change related to recognition of software development cost. John Glover, our Tax Director and his team are to be commended for the job they have done in helping us identify and execute strategic decisions to maximize the benefits available to our company as a result of the tax law changes that occurred late last year. Given the unique nature of this item, we consider it to be non-operating.

Other non-operating items included in our third quarter results are a positive mortgage servicing rights valuation adjustment of $1.5 million and merger related expenses of $900,000. Accordingly, after adjusting for these items, our net operating income excluding MSR valuation adjustments was $55 million or $0.56 per diluted share. On a per share basis, this represents an increase of just over 30% compared to the third quarter of 2017 while it is flat compared to the second quarter of '18.

Our core margin which excludes accretable yield was stable at 3.62%. The 1 basis point decline compared to the second quarter is attributable to the day count change. We were pleased to be able to hold our margin given lower than anticipated balance sheet growth, combined with the expected increase in our cost of deposits.

John will further address the components of our margin while Chris will give additional color on our business development activities and markets. We are also pleased to report continued progress toward improving efficiency and harvesting cost saving opportunities from the previous transactions.

Total operating expenses declined $1.8 million compared to the second quarter of this year. This decline was achieved despite our annual compensation adjustments being effective on July 1st. Finally, the last two bullets on this slide relate to capital deployment. We were active in our share repurchase program again in this quarter, repurchasing over 166,000 shares of our common stock.

As of September 30th, we had 3 million shares remaining in our current authorization. As we may have indicated in the past, we have a 10b5 plan in place that is price sensitive. Accordingly, given the recent move in the market, we would anticipate accelerated share repurchase activity in the fourth quarter.

As you know, we completed our acquisition of Icon Bank of Texas and its parent company which had approximately $800 million in assets in the Houston, Texas market on October 1st. This transaction increases our total loans to approximately $1 billion in that market, while total deposits increased to approximately $750 million.

As I've said many times, the co-founders of Icon, Mark Reiley and John Green have done an incredible job of building this franchise over the past 10 plus years. We are excited about the value their team and infrastructure will add to our company. An announce(ph)to close timeline of just over 5 months is admirable in today's environment and certainly much faster than the 2 transactions we completed earlier this year.

As we look forward, we expect to complete the operational integration of Icon before the end of 2018 and are excited about the future growth prospects in this market. I'll now turn the call to John and allow him to discuss our financial results in more detail.

John G. Copeland -- CFO, Senior Executive Vice President & Treasurer

Thanks, Dan. If you will turn to Slide 4, you'll see our summary income statement. As we reminded you each quarter of this year, the two mergers that closed in January do impact the comparability of prior information shown on this slide.

In reviewing the summary income statement, net income was $66.7 million or $0.67 per diluted share for the third quarter. As Dan mentioned earlier, we did have 3 non-operating items in our third quarter results. We had the tax related benefit of $11.3 million, a pre-tax positive MSR valuation adjustment of $1.5 million and the merger related expense of $900,000.

Accordingly, we reported net operating income, excluding MSR of $55 million for the quarter or $0.56 per diluted share compared to $55.6 million, also $0.56 per diluted share for the second quarter of 2018 and $39.6 million or $0.43 per diluted share for the third quarter of 2017.

Our net interest revenue was flat compared to the second quarter of '18 and increased 17.9% compared to the third quarter of '17. Our reported net interest margin for the third quarter was 3.67%, while our net interest margin excluding accretable yield was 3.62%.

Comparable metrics for the second quarter of 2018 were 3.71% and 3.63% respectively. We reported a net interest margin of 3.58% for the third quarter of 2017, which as you will recall, was not impacted by purchase accounting accretion. The decline in our reported margin is related to the decline in the accretable yield recognized which wasn't anticipated and an increase in deposit rates.

Day count for the quarter also contributed to a 1 basis point decline in both our reported margin and core margin. And looking at the components of our core margin, our loan yield excluding accretion, increased by 7 basis points compared to the second quarter of '18. We saw an acceleration this quarter in the movement in our deposit rates.

Our total cost of deposits increased by 9 basis points from 34 basis points in the second quarter to 43 basis points in the third quarter. While this movement is primarily rate driven, we also saw a slight shift in deposit mix, our non-interest bearing deposits declined by just over $100 million during the quarter while our interest bearing deposits collectively remained flat.

As Dan mentioned earlier, Chris will speak in some more detail about our deposit sales efforts and pricing. Before we move to non-interest revenue and non-interest expense, I'd like to just briefly mention credit quality.

We had no recorded provision for the quarter compared to the provision of $2.5 million for the second quarter of '18 and a provision of $500,000 for the third quarter last year. Several factors contributed to the lack of a provision for the quarter including slow loan growth, elevated recoveries and positive movement in other credit quality indicators.

Now if you'll turn to Slide 5, you'll see a detail of our non-interest revenue streams. Total non-interest revenue was $71.6 million for the quarter compared to $72.5 million for the second quarter of '18 and $66 million for the third quarter of '17.

Outside of the movement in the MSR asset valuation, most of our non-interest revenue streams were fairly stable for the quarter. While there are some seasonal fluctuations, there are no unusual or one-time items in our third quarter non-interest income. We did see some compression in our mortgage gain on sale origin resulting from a seasonal pipeline decline as well as elevated competitive pressures. Chris will speak further to this in a moment.

Slide 6 presents the detail of non-interest expense. Total non-interest expense for the third quarter was a $142.4 million compared with $145.2 million for the second quarter of 2018 and $126.9 million for the third quarter last year. The quarter-over-quarter decline was primarily attributable to a $1.8 million decline in salaries and benefits expense.

Our employee full-time equivalent number at September 30 was approximately 100 less than at June 30. This decline is partially the result of a seasonal decline coming out of the vacation months, but it's also the result of lower support FTE given the completion of the First State Bank operational integration laid in the second quarter.

As Dan mentioned we are pleased to achieve this decline in salary and benefits despite our annual compensation adjustments being effective at the beginning of July. The other expense lines on the slide are relatively stable which is certainly a positive. Other than the merger related expense of $900,000, there are no material unusual or one-time expense items in our third quarter results.

That concludes my review of the financials. Chris will now provide some color on our other business development activities.

Chris A. Bagley -- President & COO

Thank you, John. Turning to Slide 7, it reflects our funding mix as of September 30th compared to both second quarter of 2018 and the third quarter of 2017. Again as a reminder, the mergers with Central Community Corp., and Ouachita Bancshares Corp. closed January 15th.

Thus loan and deposit comparisons to quarters in the prior years should be viewed accordingly. Deposits and customer repos declined to $133 million compared to the second quarter of 2018. This decline was primarily driven by decline in non-interest-bearing accounts and is similar to the seasonal decline we experienced in the same quarter in 2017 of just over $141 million.

We did experience a rise in deposit cost that John alluded to earlier as there is pressure across our footprint on deposit pricing. We continue to refine our rate structures, offerings and to ensure that our teammates have all the tools necessary to retain and protect customers and to attract new ones.

As we look at geographical performance relating to deposits, we had five community bank divisions stand out this quarter for deposit growth. Our Dallas, Texas, Houston, Texas, Missouri, Central Arkansas divisions and East Texas divisions all reported excellent results this quarter.

Moving to Slide 8, you will see our loan portfolio as of September 30th compared to the second quarter of 2018, and the third quarter of 2017. We reported net loan growth of $32 million or 1% annualized for the third quarter. The bankers who joined us via our January acquisitions in our Louisiana and Central Texas markets continue to compete in what we can only call hand-to-hand combat on a daily basis, but they're successfully defending their books of business from the intensified competition that typically comes post-merger.

We're also continuing to see many competitors continue to offer longer term fixed rate loans that we -- what we would consider very low rates despite the rising rate environment. We've been unwilling to participate in those type of deals from an interest rate risk management perspective.

As we look at our third quarter lending efforts from a geographical perspective, we had several divisions produce meaningful loan growth. Stand-out divisions for the quarter were Dallas, Texas, Northeast Mississippi, Northeast Arkansas, Mid-Mississippi and Northwest Louisiana divisions.

Slide 9 contains our credit quality highlights. I'd like to touch briefly on a couple of these bullets. As John mentioned earlier, we had no provision for credit losses for the third quarter compared with a provision of $2.5 million for the second quarter of 2018 and a provision of $500,000 for the third quarter of 2017. We had elevated recoveries of previously charged-off (inaudible) loans during the quarter which contributed net recoveries of $1.1 million for the quarter.

The allowance as a percentage of net loans and leases were stable at 97 basis points or 1.04%(ph)net of acquired loans accounted for under purchase money accounting.

Interviewing other trends, total non-performing loans to net loans and leases have declined to 53 basis points from 59 basis points in the second quarter while non-performing assets to net loans and leases have declined to 56 basis points from 65 basis points over the same time period.

Other real estate owned declined to $4.3 million at the end of the quarter. We are very proud of our overall asset quality and I'm confident there are very few of our teammates who can recall the last time our ORE was at this level or below.

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 $384.8 million. Home purchase money volume was $304.1 million or 79% of our total volume for the quarter.

Our total volume increased just over 12% compared to the third quarter of 2017 volume of $342.4 million. Deliveries in the quarter were $309 million compared to $303 million in the second quarter of 2018 and $314 million in the third quarter of 2017.

Production and servicing revenue, which excludes the MSR adjustment, totaled $5 million for the quarter compared to $7.1 million for the second quarter of 2018 and $7 million for the third quarter of 2017. Our margin was 1.02% for the quarter, representing a decrease to 1.75% for the second quarter of 2018. This declining margin is common during the third quarter as we move out of the peak selling season into a slower time of the year.

The seasonality is reflected in this quarter-over-quarter pipeline decline of $41 million. In addition to the seasonality component, we are also experiencing pressure in this quarter from an extremely competitive mortgage environment as the market is competing in a rising rate environment.

We continue to evaluate and refine our pricing in an effort to not only compete, but to maintain profitable production. Including the seasonality component, we estimate the margin for the quarter would have been in the mid-150 range compared to our historical 170 range. Finally, as Dan mentioned earlier, the MSR valuation adjustment during the quarter was a positive $1.5 million.

Moving to insurance, total commission revenue for the quarter was $31.7 million compared to $33 million for the second quarter of 2018 and $28.6 million for the third quarter of 2017. As we always emphasize, comparable quarter -- year comparisons are more relevant due to the seasonality in the insurance book of business.

However, that comparison for this year is impacted as a result of the accounting change that we have discussed in prior quarter calls. Contingent commissions are now estimated and recognized -- excuse me -- throughout the year rather than the period of cash receipt. These commissions are included within the other component of insurance commission revenue, which is up $2.3 million compared to third quarter of 2017.

All that to say, the property-casualty and life and health commissions are up 3.1% in aggregate over the same time period last year. This growth rate is consistent with what we've reported for several quarters given the combined soft insurance premium environment, we're very pleased that our team is continuing to find ways to defend their customer base and also produce meaningful revenue growth. Customer retention is an important metric that we monitored from an insurance perspective, and our team continues to achieve a very high policy renewal rate among our existing customers.

While it's not shown on this slide, I'd like to touch briefly on our success by our wealth management team, Terry Mobley and his team have done a commendable job of enhancing our wealth management process and growing assets under management. These efforts are reflected in our numbers for the quarter. Wealth management revenue was up over 4% compared to the second quarter of this year and over 11% compared to the third quarter of last year.

We are pleased to see the team's progress paying off in our earnings for the quarter. Now I'll turn it back over to Dan for his concluding remarks.

James D. Rollins -- Chairman, CEO & Director

Thank you, Chris. We have a lot to be proud of. Our mortgage team continues to report strong origination volume and a very competitive rising rate environment. Our insurance team is steadily growing despite pricing headwinds, and our wealth management team crossed the $6 million mark in quarterly revenues.

On the bank side, we continue to maintain a steady net interest margin, strong credit quality and a stable expense base. As we look forward, our bankers must continue to cultivate relationships that will help us grow both sides of the balance sheet. We will also continue to look for other strategic opportunities that is(ph)of the right organizational and cultural fit.

Finally, we hope to be able to continue growing our dividend and utilizing our share repurchase program in a prudent manner to maximize value for our shareholders.

With that, operator, we'd now be happy to answer any questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Catherine Mealor with KBW. Go ahead, Catherine.

Catherine Mealor -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Thanks, good morning.

James D. Rollins -- Chairman, CEO & Director

Hi, Catherine.

Catherine Mealor -- Keefe, Bruyette, & Woods, Inc. -- Analyst

I want to first start on growth. Could you just give us a little bit of color as to what is driving the slower than expected growth, and what your outlook is for growth going into next quarter and into next year?

James D. Rollins -- Chairman, CEO & Director

Sure. You know, I think we see lots of different moving parts out there. I think Chris talked about the deposit side of the balance sheet. You know, third quarter, we actually shrank a little less this year than we did last year. So we knew coming into the third quarter that we would experience that.

I think our team is competing well. Fourth quarter is historically a pretty good growth quarter for us. So we certainly hope that we can show that again this year. On the loan side of the balance sheet, there's a lot of competition out there. I think we've made the decision that we will protect margin and protect our income flow versus buying the business, and there are still some folks out there that are buying business, because some of the folks on -- an year-to-year(ph)value that growth over profitability. So I think we've taken a profitability stance and we've said we're not going to put on long term fixed rate loans in today's interest rate environment. So that's certainly impacting the loan growth side.

Chris, you want to add anything to that?

Chris A. Bagley -- President & COO

Yeah. I mean, you know, it's a rising rate environment and I think you're just seeing a lot of noise combat issues on both the deposit and the loan side. So we're trying to state as Dan said, we're staying disciplined in our approach and trying to maintain our pricing and structuring discipline so that we don't do anything too crazy on the rate side.

James D. Rollins -- Chairman, CEO & Director

As you called it, hand-to-hand combat earlier.

Chris A. Bagley -- President & COO

That's the way it feels like sometimes.

Catherine Mealor -- Keefe, Bruyette, & Woods, Inc. -- Analyst

And so is there anything as you look out to next year that you believe could be a catalyst to growth improving? Particularly the Icon deal, how do you think having a bigger presence in that market could potentially help your growth rates?

James D. Rollins -- Chairman, CEO & Director

Yeah. I think you have to look at the markets that we serve and that's exactly what I would have said, Catherine, is when you look at what's out there today, you know, we've not been experiencing growth in some of the market that we cover, some of the states that we cover are slower growth states as a whole.

There's less opportunity for growth in some of those markets, and then when you've got competitors that are willing to buy the credit at low cost, you know, we've been willing to not play in that game. When you look at a market like Houston and Dallas, Chris talked about Dallas on both sides of the balance sheet for progress there, the addition of the Houston folks is a big plus for us.

We continue to be able to add lenders in that market or those markets we continue to see growth in those markets. I think that's a positive. When you look at the Central Texas market, again I've talked about it earlier with the flooding that's going on up there, but overall that market has stayed very vibrant market. We completed our integration here just a few months ago, and I think the team will shift from playing more defense to playing more offense.

So we're excited a lot about those growth markets and what they can do for us as we look forward.

Catherine Mealor -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay, great. Maybe one follow-up on the Icon deal. Icon carries a higher margin than you currently have. Have you thought about what you expect for the incremental impact for Icon to be in your net interest margin next quarter?

James D. Rollins -- Chairman, CEO & Director

It's going to be up. You probably wanted more than that, yeah, it does see a larger margin, there will be some moving parts in there. They've got a little bit higher cost of deposits than we do. So I think you're going to see funding costs go up in the quarter, you should see loan yields go up. We do not have a number to put out to you at all on that.

But yes, there's a higher margin. Again I think when we look at what we're seeing today, we've said it before, we seem to be able to get better pricing in major metropolitan markets than we can in some of the rural markets, and so that, that growth in that market is a plus for us.

Catherine Mealor -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay, great. Very helpful, thank you.

James D. Rollins -- Chairman, CEO & Director

Thank you.

Operator

Our next question comes from Matt Olney with Stephens. Go ahead, Matt.

Matthew Olney -- Stephens Inc. -- Analyst

Hey, thanks. Good morning, guys.

James D. Rollins -- Chairman, CEO & Director

Hi Matt, how are you?

Matthew Olney -- Stephens Inc. -- Analyst

I am well, thank you. Wanted to ask about the operating expenses, that was a nice positive story this quarter. Can you talk more about the operating expenses and were the cost saves, were those from your legacy expenses or from the recent acquisitions that were closed over this year?

James D. Rollins -- Chairman, CEO & Director

Well, the answer is both. But they are going to be weighted into the acquisitions and you saw that in headcount, John talked about headcount when he was talking. So when we look at the progress that's been made, the former OIB offices in North Louisiana came on to our system in February, and we've made great progress, Kevin Koh and the leadership that he's shown. That team is getting very close if they're not already playing offense, we're seeing some wins in that market. And I think we've made progress in -- you know, kind of winding down all of the integration related activities that go on there.

Out in Central Texas, the guys out there, we've got 3 Division Presidents out there; Gerry Gamble, Randy Ramsey and Richard Proctor. They're all still playing more defense than they're playing offense. You know, we're now 60 days or 90 days out and there are still changes going on. So that's taking time, but the headcount has made progress. And so, we've still got some more harvesting to do in those markets, and then we continue to look for opportunities to reduce cost here in the core bank, we've had before.

As we're looking forward now, we're in the middle of our budgeting process for next year, and we're looking for ways to continue to lower our overall operating costs and our support cost behind the scenes, we allocate that cost out to the front line, and we're looking for ways to be more efficient in what we're doing.

Matthew Olney -- Stephens Inc. -- Analyst

And Dan, sticking with the expense side, it looks like Icon had been running about $7 million quarterly on operating expenses. Is that a good run rate as far as the incremental add from Icon into 4Q?

James D. Rollins -- Chairman, CEO & Director

Yeah, I think that you can take their number, we do the same thing. So, you know, take their number and bring it forward, we estimated that 20% cost save off of their number, we're working fast to try and get them onto our system here this year.

So hopefully we'll be able to recognize more of those cost saves quicker in this merger than we were in the first two that were scheduled to bring them onto our operating system here before the end of the year, and that should allow us to begin to knock some of those cost off here also.

Matthew Olney -- Stephens Inc. -- Analyst

Okay. And then, last one from me, going back to loan growth, I think some of your peers were talking about C&I utilization actually moving down over the last few months as some of the corporate borrowers take advantage of lower corporate tax rates and are paying down bank debt. Are you seeing anything on your utilizations either way, higher or lower, at this point?

James D. Rollins -- Chairman, CEO & Director

Yeah. You know, our -- we don't have big C&I lines like that. So it's hard for us to see some of that. Just anecdotally I would add in, Chris can jump in here in a second, you know, you see that the non-interest bearing deposit base was down in the quarter, I think we see that in corporate accounts.

So I think you've got corporate folks who have been building cash and they're using that cash, rates have moved up to where now they're willing to pay more attention to. It didn't matter if it was going to make one or two basis points. Now you can actually earn something off of that.

So I think you've got several things working on the deposit side and on the loan side. I think customers are spending some of their cash.

Chris A. Bagley -- President & COO

I think that's true. I mean our C&I totals stayed relatively flat, I mean from a total perspective, but I think there are some line utilizations, some of the larger credits that we have seen, they basically stayed low for the year, while they've used cash and rate environment has changed. I mean, if you look on the -- I think, what I kind of see from the loan production is, real estate side, rising rates impact investment decisions, and I think you're going to see that in CAD and CRE type credits where, you know, rates have -- rental rates have to adjust, investment decisions have to adjust because they're making new forecasts based on these higher rates they're having to deal with.

Matthew Olney -- Stephens Inc. -- Analyst

Got it. Okay, thanks guys.

James D. Rollins -- Chairman, CEO & Director

Alright. Appreciate it. Thanks, Matt.

Operator

(Operator Instructions). Our next question comes from David Feaster with Raymond James. Go ahead, David.

David P. Feaster, Jr -- Raymond James & Associates, Inc. -- Analyst

Hey good morning, guys.

James D. Rollins -- Chairman, CEO & Director

Hey, how are you?

David P. Feaster, Jr -- Raymond James & Associates, Inc. -- Analyst

Doing great.

James D. Rollins -- Chairman, CEO & Director

Good.

David P. Feaster, Jr -- Raymond James & Associates, Inc. -- Analyst

I'd like to stay on the expense topic. You know, we -- in the prepared remarks you talked about the First Texas conversion being late in the third quarter. Could you remind us how much of those savings are in the run rate and the timing of the remaining savings?

James D. Rollins -- Chairman, CEO & Director

I don't know that we have a percent. You know, that's not a precise measurement on our side. But the head count is in, so when you're looking at headcount, the majority of that was in at the end of the quarter. You know, those people have gone, but they -- those people all carried some cost into the quarter.

So, you know, I think we will continue to believe that there is some additional cost saves coming off of the First State Central Texas here in the fourth quarter. I don't have an amount or a percentage to plug in, but there's still some dollars to drop off the expense line.

David P. Feaster, Jr -- Raymond James & Associates, Inc. -- Analyst

Okay. And you mentioned some of the irrational pricing that you're seeing in the industry. You know, I'm glad to hear that you're not willing to sacrifice on that front. But, where are you seeing the most pressure? Is there a specific segment or region where it's more egregious, and was this partially what drove the shift from construction into CRE in the quarter, was there something else that drove that?

James D. Rollins -- Chairman, CEO & Director

No, I think you've got some big CRE projects that were completed and moved out of CRE and moved -- excuse me -- moved out of construction and moved into CRE. So some of that could just be big projects that were completed and shifted out of one bucket into another.

We're seeing competition across the footprint. Again I said earlier, more in a rural market than the major metropolitan markets surprisingly, but you know, when folks are willing to make you know, 4% fixed 10-year money, we're just not going to play in that game. And we would rather protect the margin and protect our interest rate modeling as opposed to grow at all cost.

And I think some people have decided they need to grow at all cost. Anything to add to that, Chris?

Chris A. Bagley -- President & COO

No, I'd just say we're approving -- when we look at our process and the loans we approve, the loans are coming through and have been approved or conditioned or however you want to say, we've committed to or are willing to make those loans. We see in that, we're losing some of those to folks that are willing to go longer and lower on a fixed rate basis than we are.

James D. Rollins -- Chairman, CEO & Director

Yeah. I think when we look at the production that's coming through the pipeline, we're very pleased. Our folks are out there winning business and taking care of customers every day. And they certainly get frustrated when we are willing to play at the same rate that some of our peers are willing to play out.

David P. Feaster, Jr -- Raymond James & Associates, Inc. -- Analyst

Okay. that's helpful. And could you just talk about this, the tax credit business that you started? You know, what was the genesis of this, and your thoughts on the contribution that's going forward?

James D. Rollins -- Chairman, CEO & Director

Well, I'll just say it will be small and we're not even beginning to get there yet, so you got to take some time to build up, but Chris you can jump in.

Chris A. Bagley -- President & COO

It's in the formative stages, and it's a business line or a product that's going to take a while to develop. But basically it's for us to participate and -- in all the components of the tax credit business, in terms of asking for or trying to get allocations, participating in investment tax credits, historical tax credit lending and low to moderate income tax credit lending.

So, both from a -- it's a loan business, it's a strategic business in terms of administrating the credits, maybe some tax benefit and also some CRE credit. But it's a -- we're looking down the pipe. This is a long term vision for us.

David P. Feaster, Jr -- Raymond James & Associates, Inc. -- Analyst

Okay. Thanks guys.

James D. Rollins -- Chairman, CEO & Director

Appreciate your time.

Operator

At this time there are no further questions in the queue.

James D. Rollins -- Chairman, CEO & Director

All right. I know we had conflicts today. Thank you all for joining us today. If you need any additional information or have further questions, please do not hesitate to call. Otherwise, we'll look forward to speaking to you again soon. Thank you all very much for calling.

Operator

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

Duration: 34 minutes

Call participants:

Will Fisackerly -- Senior Vice President & Director of Corporate Finance

James D. Rollins -- Chairman, CEO & Director

John G. Copeland -- CFO, Senior Executive Vice President & Treasurer

Chris A. Bagley -- President & COO

Catherine Mealor -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Matthew Olney -- Stephens Inc. -- Analyst

David P. Feaster, Jr -- Raymond James & Associates, Inc. -- Analyst

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