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BancorpSouth Bank (NYSE:BXS)
Q3 2020 Earnings Call
Oct 20, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the BancorpSouth Third Quarter 2020 Earnings Conference Call and Webcast. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Will Fisackerly. Please go ahead, sir.

Will Fisackerly -- Executive Vice President and 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'll 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 2019 Annual Report on Form 10-K. Also during the call, certain non-GAAP financial measures may be discussed regarding the company's performance. If so, you can find the reconciliation of these measures in the company's third quarter 2020 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 yesterday afternoon.

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

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Thank you, Will. Good morning, everyone. Thank you for joining us today to discuss BancorpSouth's third quarter 2020 financial performance. I will begin by providing an update on our third quarter financial performance. John will discuss the financial results in more detail and Chris will provide some color on credit quality and our business development efforts. After we conclude our prepared comments, our executive management team will be happy to answer questions.

Let's turn to the slide presentation. Slide 2 contains all the legal reminders that Will has already talked to you about. Before we get into the financial highlights, let me make a few general comments about the continued impact of COVID-19 on our company and the markets we serve. As a company, our team mate case count continues to rise. Fortunately, most of our team mates have recovered without serious complications from the virus.

While most of our operational support staff who have the capability to do so are continuing to work remotely, our retail branches are open and available for walk-in traffic, which has continued to be fairly light. From a footprint perspective, the economies are open and most of our markets appear to be fairly healthy. There are, however, certain business segments, including hospitality that have obviously been more adversely impacted than others. Chris will speak to this more in a moment.

Loan deferrals have come down considerably since we last spoke to only 0.3% of the portfolio at quarter end. We are pleased to have most of our customers back on a normal C&I schedule and virtually all of our customers back on a payment schedule of some type. We will continue to actively monitor credit quality and we'll work with customers on a one-by-one basis as needed for assistance.

Let's now discuss the results for the quarter. Slide 3 contains our financial highlights for the third quarter. Outside of the impact of the pandemic is having on our provision for credit losses, we continue to report strong financial performance quarter after quarter. We generated record PPNR for the quarter totaling $110 million or 1.88% of average assets on an annualized basis. This represents a slight increase from 1.87% in the third quarter of last year and 1.81% in the second quarter of this year. I'll remind you that we adjust for non-operating items in our calculation of this metric, which is defined and reconciled in our earnings release.

We also reported record GAAP net income available to common shareholders for the third quarter of $71.5 million or $0.69 per common diluted share. Both the MSR fair value adjustment and other non-operating items were immaterial for the quarter. So accordingly, our net operating income, excluding MSR, was $71.2 million, which also is $0.69 per diluted common share.

Earnings were adversely impacted by the provision for credit losses of $15 million. This provision is the result of the lengthening of the projected time horizon for economic recovery and the forecast that we utilized for our CECL modeling. While the assumptions around the economic indicators themselves are within the ranges of the estimates as of the end of the second quarter, the duration of the forecasted recovery has been extended, which resulted in additional provisioning under our modeling process. This provision, combined with a very low net charge-off number of $1.4 million or 4 basis points annualized, resulted in our allowance coverage increasing to 1.78% of net loans and leases, excluding PPP loans, at the end of the quarter.

Let's review our balance sheet activity for the quarter. While most of our PPP activity occurred in the second quarter, we completed the origination and funding of some of these loans as the program expired in early August. We funded over 15,000 loans totaling over $1.2 billion. I would again like to thank our relationship managers and operational support staff for their effort in making this program a success for us on over a very compressed period of time. This truly was an all hands on deck exercise for our bank and our team was up to the challenge. I think it's important to point out that over 5,000 of these loans are roughly a third were the new customers of our bank. We believe this will provide tremendous benefit for our company as we consistently strive to cultivate new relationships and are having some success in bringing in new deposits from these customers.

We had another solid quarter of deposit growth as deposits and customer repos increased almost $175 million for the quarter or 3.5% annualized. While loan growth has been difficult to achieve outside of the PPP program, liquidity continues to increase quarter-after-quarter. While we have continued to grow net interest income in dollars, this earning asset mix dynamic continues to pressure our net interest margin. John will go over those details in just a minute.

As we continue the discussion around our business development activities, our mortgage team had another standout quarter. Production volume totaled $938 million, which contributed to production and servicing revenue of $26.7 million for the quarter. Refinance volume continues to remain elevated, but purchase money production is holding strong as well, representing 61% of the total volume for the quarter. Chris will provide additional color on our mortgage activity again in just a second.

Finally, we continue to improve our cost structure and drive our efficiency ratio down. Our operating efficiency, excluding MSR, was 58.4% for the quarter. This marks the first time that our quarterly efficiency ratio has been below 60% since well before the last economic cycle.

Let me now stop and let John take over and he'll discuss our financial results in a little more detail. John?

John G. Copeland -- Senior Executive Vice President, Treasurer and Chief Financial Officer

Thanks, Dan. Let's drill down in the numbers a little bit. If you turn to Slide 4, you'll see our summary income statement. And reviewing the statement to net income available to common shareholders was $71.5 million or $0.69 per diluted common share for the third quarter. As Dan mentioned earlier, the MSR valuation adjustment and all other non-operating items were immaterial for the quarter, netting to less than $500,000. Accordingly, we reported net operating income, excluding MSR available to common shareholders of $71.2 million for the quarter, also $0.69 per diluted common share compared to $60.9 million or $0.59 per diluted common share for the second quarter of '20 and $69.7 million or $0.69 -- also $0.69 per diluted common share for the third quarter of 2019.

I'd like to remind you that the merger with Texas First, which closed January 1, will impact the comparability of the financial information shown on this slide, as well as the subsequent slides to the third quarter of 2019 -- excuse me, sir. Since the merger did close at the beginning of the year, sequential quarter comparisons this year are not going to be impacted. This slide also highlights the pre-tax pre-provision net revenue metrics that Dan mentioned earlier both in terms of dollars and as a percentage of average assets. As he mentioned, this was a record quarter for us from a pre-tax pre-provision net revenue standpoint. Given the boost provided by our mortgage revenue thus far in 2020, we do anticipate that improving this metric going forward will be -- will prove to be a real challenge as it's not really reasonable to expect that this level of mortgage revenue is sustainable.

In addition, the fourth quarter provides other headwinds each year, including some seasonality in our insurance book of business. Our net interest revenue increased by 3.1% compared to the second quarter of 2020 and increased by 5.6% compared to the third quarter of 2019. We continue to see an earning asset shift mix resulting from excess liquidity coupled with the lack of loan demand outside of the PPP program. Our loan to deposit ratio dropped to 79% in the third quarter, down from 88% a year ago. And our ability to grow deposits and deploy them in our securities portfolio has helped our net interest income. However, it does put pressure on our net interest margin, in addition to the already difficult rate environment. Our net interest margin, excluding accretable yield, declined to 3.23% for the quarter from 3.3% for the second quarter 2020. When you consider the impact of a full quarter of PPP, balance sheet mix changes and continued pressure on rates, the margin really has a lot of moving parts. Our loan yields, excluding PPP, declined from 4.67% for the second quarter to 4.55%. The pressure on asset yields was somewhat offset by considerable improvement in our deposit cost. Chris will discuss that more in a moment, but our total deposit cost -- total cost of deposits declined to 44 basis points from 50 basis points for the second quarter of the year.

Before we move on to non-interest revenue expense, you can see that the impact has a provision that Dan mentioned earlier on earnings. We had a provision for $15 million for the quarter compared to a provision of $20 million for the second quarter of 2020 and a provision of $500,000 for the third quarter of 2019. Chris can touch on credit quality in more detail in a moment.

If you turn to Slide 5, you'll see the detail of our non-interest revenue streams. Total non-interest revenue was $89.9 million for the quarter compared to $91.3 million for the second quarter of 2020 and $75.4 million for the third quarter of 2019. Again, mortgage revenue continues to be the largest driver of volatility in these totals across the quarters. Our mortgage team had another outstanding quarter following a record second quarter. Chris can discuss the dynamics of the mortgage business more in a moment, but production and servicing revenue was $26.7 million for the quarter.

You'll also notice that while they are certainly led back to pre-pandemic levels, we did see some improvement in our cards and service charge revenue line items. We believe each of our other revenue line items shown here are within expectations when considering typical seasonal trends. I would again remind you that as we look to the fourth quarter, as always, we expect the insurance revenue to be significantly lower as a result of the seasonal renewal cycle in that book of business.

Slide 6 presents the detail of non-interest expense. Total non-interest expense for the third quarter was $155.5 million compared with $162.5 million for the second quarter of 2020 and $159.6 million for the third quarter of 2019. Total operating expense, which excludes merger-related expenses and other one-time items, was $155.4 million for the quarter compared to $162 million for the second quarter of '20 and $155.6 million for the third quarter of 2019.

There are a couple of items worth noting. First of all, salaries and benefits declined $3.9 million on a sequential quarter basis. This decline is a result of a number of factors, including FICA limits being reached on the portion of our employees as well as seasonally lower producer commission payouts in our insurance agency. You'll also notice small credit balances in both foreclosed property expense and legal expense. We had an accrual reversal on one litigation matter that has had a positive outcome and we sold one large ORE property at a gain. Those items obviously aren't sustainable necessarily from a run rate perspective.

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

Chris A. Bagley -- President and Chief Operating Officer

Thank you, John. Good morning, everyone. Starting on Slide 7, you'll see our funding mix as of September 30th compared to the second quarter of 2020 and the third quarter of 2019. We reported $175 million in deposit and customer repo growth for the quarter or 3.5% on an annualized basis. Deposits and repos have grown $1.9 billion or 11.5% organically over the past year. We exclude acquired deposits as well as the additional liquidity generated from the PPP loan program from organic totals.

We had several geographic divisions standout this quarter from a deposit growth perspective. Those include our Missouri, Mid-Mississippi, North Central Alabama, Pine Belt, Heart of Texas and Texas Hill Country divisions. Kudos to our teams in these areas for a great quarter from a deposit growth standpoint. Our total cost of deposits declined to 44 basis points for the quarter from 50 basis points from the second quarter. And we believe we still have some runway to continue to improve our cost of deposits. For example, we have over $3.5 billion in CDs and other time deposits that were an average cost of 1.41% for the quarter and today those products are currently pricing in the 50 basis point range.

Moving to Slide 8, you will see our loan portfolio at September 30th compared to the second quarter of 2020 and the third quarter of 2019. Dan mentioned, loan demand has been challenging following the completion of the P3 program. Total loans declined $100 million for the third quarter. We view the ability to hold our portfolio this close to flat as a win in light of the current economic environment. While we are seeing pipeline activity and opportunities, many borrowers have shared term sheets at rates below 2% and we simply have not been willing to compete at those rates. When you look at our pipeline of opportunities, Texas is still generating the largest amount of opportunities with almost 50% of our total bank pipeline. Despite the nominal decline in total, our Houston Texas, Dallas Texas and Northeast Arkansas divisions experienced good growth in the quarter.

Slide 9 covers P3 in more detail. I won't spend a lot of time on this slide as most of this information is it, but we completed the program and, as Dan mentioned, with just over 15,000 loans originated for $1.3 billion. And as Dan mentioned, 5,000 or roughly one-third of these loans were new customers to the bank. This program has provided a tremendous opportunity to develop and deepen relationships in the communities we serve that we believe will benefit us for years to come.

I'd like to briefly mention the projected yield on the loans in this portfolio now that the program is complete. And we have final settlements from the SBA as well as vendor invoices we've updated the projected yield on these loans to closer to 3% rather than the 2.5% we initially estimated at the end of the second quarter. Again, this estimate doesn't include the impact of the forgiveness program and timing of other prepayments, which will create lumpiness in the yield moving forward.

Finally, I'd like to point out a few statistics on the forgiveness process. The SBA and treasury recently announced a simplified forgiveness threshold of $50,000 and under. Of the loans we originated, 69% are under this threshold by loan count and 15% of the total dollar balance. We started the process and we received applications for forgiveness on 169 loans totaling $56 million. Of those, 35 are been submitted to the SBA, six of which of been actually approved in the funds received by the bank. We mentioned this to enforce the point that the process is beginning to move forward and the SBA is actively approving applications as we speak.

Moving to Slide 10, we can cover some credit quality highlights for the quarter. We recorded a provision for credit losses of $15 million for the quarter. Forecasted economic recovery period has been linked in and the forecast that we use in our allowance modeling process necessitated a provision for this quarter. Otherwise, our credit metrics are holding up well considering the environment, our net charge-offs for the quarter remained low at 4 basis points or $1.4 million. The provisioning for the quarter combined with the low net charge-offs increased our allowance coverage ratio to 1.78%. Excluding PPP loans from 1.67% at the end of the first quarter. We will continue to actively monitor the segments of the loan portfolio that have been -- that we've identified as higher risk as a result of the pandemic.

As shown on Slide 12, as Dan mentioned earlier, our deferrals are essentially back to zero with only 0.3% of the total portfolio. And that's a good barometer of how most of our borrowers are faring. We continue to work with our borrowers and we've converted a small number of credits -- excuse me -- to interest only. And these credits are concentrated in the hotel book. These loans totaled $110 million at September 30th, $88 million of which was in the hotel portfolio. You may have noticed in the last investor deck that we filed that we removed oil and gas as well as medical from our high-risk disclosures. Currently these portfolios are performing quite well and were not presenting a concern to us at this time.

Slide 13 through 15 provide an updated view of the more granular information we provided last quarter to the higher risk portfolios. Given the amount of time we spent on these slides in the past calls, combined with the relative significance of these loans in deferral at this time, I won't spend additional time discussing these but didn't want to provide updated versions of this information for those of you who desire to look through it.

Moving on, the mortgage and insurance tables on Slide 16 provide a five-quarter look at our results for each product offering. Our mortgage banking operation had another impressive quarter following a record-setting quarter producing $937 million in mortgage loans for the quarter, contributing to $26.7 million in production and servicing revenue.

Our team continues to work at full capacity that process the volume that's coming our way. While we continue to see elevated refi activity of the purchase money market hailed quite strong totaling $568 million or 61% of the total volume for the quarter. Although our pipeline declined slightly compared to the end of the second quarter, $630 million is unprecedented level heading into the fourth quarter, which is generally a seasonally lower quarter. This decline contributed to the margin decline that you will see compared in the second quarter. While the margins lower rate still elevated and the margins continue to remain at levels that we feel are not sustainable from a long-term perspective.

Moving on to insurance. Total commission revenue for the quarter was $33.8 million compared to $33.1 million for the second quarter of 2020 and $31.5 million for the third quarter of 2019. As we mentioned each quarter, we typically benchmark to the same quarter in the prior year, given the seasonality in our renewal cycle. We're very pleased with the 4% revenue growth we generated on a comparable quarter basis.

You may have recently seen the announcement regarding our acquisition of the Alexander & Sanders Insurance Agency in Baton Rouge. While this transaction is not material from a financial perspective at approximately $2 million in annual revenue, we're excited about the book of business and skills that they will bring to our team. This agency specializes in construction as well as professional practice liability, which will match very well with our activities in the construction space. We believe that we can really leverage their team's expertise in this area with our current customer base. And we would like to again welcome Wyatt Sanders and Justin Sanders and their team to the BXSI family.

Now, I'll turn it back over to you, Dan, for some concluding remarks.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Thanks, Chris. Appreciate all that. While we have continued to report strong financial performance quarter-after-quarter, we won't be immune to the industry and economic headwinds that are in front of us. We realized that the mortgage volume and revenue that we produced in 2020 is probably not sustainable for the long-term. In addition, as more time passes, there may be customers who experienced financial difficulties as a result of the prolonged nature of this pandemic. Our relationship managers and credit administrators are working diligently to assist our customers and working through this difficult time, while appropriately monitoring and managing our credit quality.

In light of the stressed economic environment, as we work on our 2021 strategic plan and budgeting process, we have constantly reminded our team that we have to continue to find ways to be more efficient in order to maintain our financial performance. We continue to work toward optimizing our branch structure through opening new locations and high growth areas, while closing branches that are either underperforming or have other locations in close proximity. During this year, during 2020, we've actually opened five new locations and we've identified 11 locations that have either closed or will be closed before the end of the year.

We also continue to actively monitor our head count and, through our succession planning process through all layers of the organization, we've identified a number of team mates who have either decided to retire later this year or early in 2021. Many of these teammates have already been grooming replacements, who are on our staff today. Through this process, we expect we could see a net full [Phonetic] FTE reduction of approximately 75 people over the next few quarters. These are just a couple of examples of the efficiency opportunities that we're working through as a part of our strategic planning process. While the earnings outlook for the industry is challenging, I'm proud of our team and I'm confident that we have the balance sheet strength and adequate capital to work through this economic cycle.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question will come from Brett Rabatin of the Hovde Group. Please go ahead.

Brett Rabatin -- Hovde Group -- Analyst

Hey. Good morning, everyone.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Good morning.

Brett Rabatin -- Hovde Group -- Analyst

First, congrats on getting the efficiency ratio below 60, Dan. I'm curious you mentioned you're opening -- you opened five and you're going to close 11 by the end of the year. Will that continue into 2021? And just could maybe you can talk about the branch network. I realize that there's quite a few rural locations, but you've got about a third of the network with less than $30 million in deposits. Is that a plan to continue for 2021?

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Yeah. We've continued to do that for the last several years. So I don't think that 2020 is that much different than the last several years. We continue to look for opportunities to consolidate where we can. You're exactly right, we're in lots of small communities where we only have one office in those communities. We can run those locations in a very efficient way. They're just never going to grow to be significant size. That's what the true community bank is. So I don't see us vacating some of those markets altogether. That's what it would take to reduce the margin to reduce the branch count in those locations. Where we have had success and what some of the lessons that we've learned through this pandemic is to some of the markets that we're in with multiple locations where we thought we needed more of those locations, we've decided we don't need as many locations. So there is opportunity for us to continue to whittle down on our branch count. I don't think you're talking about any significant number.

So, again, as we've opened the branches in the big metropolitan markets that we've moved into in order to continue to be able to use the capital funding that we have and the low cost funding that we have in higher growth markets. I think we will continue to look for opportunities to expand in those high-growth markets. So, net-net, we'll be down six it looks like this year. I think last year we were down two, net-net in '19. So, I think we will continue to try and play that game.

Brett Rabatin -- Hovde Group -- Analyst

Okay. And as a follow-up, maybe you can talk about what you did in the securities portfolio in terms of purchases. And it looks like the core margin, you have to hope it gets to a floor here at some point, maybe now look for the margin.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Sure. John or Will, I'll let you guys jump in on that. We were looking for securities that yielded over 5%. And I don't think we were able to find them, John [Phonetic]. So, what did we do with that money?

John G. Copeland -- Senior Executive Vice President, Treasurer and Chief Financial Officer

Well, we continue to have pressure, obviously, as everyone does on investing excess cash and putting it to work in the portfolio in the 130 to 140 range. So that does tend to dilute the margin somewhat. The margin has eroded it, if I can use that phrase over the last -- I guess, the average drop over the last three quarters in the core net interest margin has been 15 basis points. The current quarter dropped only 7 basis points. So, we do feel like I'm personally optimistic that we may have reached close to the bottom in the margin. We do have over, gosh, the next year, I guess -- next 12 months, we've got about $2.5 billion, maybe $2.6 billion in loans fixed and variable rate loans repricing. They're rolling off at 4.62%. The most recent numbers, loans come, new and new and renewed loans at 4.53%. So not that much of a drop in repricing there. So I'm opportunistic about that. Of course, the ability to hold the margin up or prevent significant declines does depend a lot on what we can do with the deposit costs and the cost historically. If you look at those maybe over the last several years, deposit costs were low.

I guess, the lowest point for total deposit cost -- we've been talking about 30 basis points as being the low point. It was around 30 basis points at the end of the fourth quarter of 2017, first quarter of '18. If you go back a couple of years before that, it did reach a bottom of about 21 basis points, a little bit different interest rate environment then. But still we have some room in deposit costs to push those down, I do believe. Loan yields interestingly peaked -- gosh, they peaked back in the second quarter of last year. Core, excluding accretion loan yields, our loan yields peaked at 5.02%. So we had 4.44% this month. And that's not that far below the peak. So I'm optimistic there as well. And plus, we do have a good portion of our variable rate portfolio, about $2.8 million -- billion -- sorry, $2.8 billion of the $6.6 billion portfolio at rate floors. And then, we have a floating rate loans of $2.8 billion, and $1.6 billion of that are at floors. So that gives us a little bit of protection too. So I'm optimistic that the margin should level off pretty quick.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Thanks, Brett. That help you?

Brett Rabatin -- Hovde Group -- Analyst

Yeah. That was great. Thanks for the color.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

All right. Thanks much. Appreciate your interest.

Operator

Our next question will come from Jon Arfstrom with RBC Capital Markets. Please go ahead.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Hey, Jon. Good morning.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Hey, good morning. Question on the provision. You talked about extending the duration of the recovery. I wonder if you could talk a little bit about the magnitude of that. And then, any changes on how you want us to think about the fourth quarter provision drivers?

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Yeah. I don't know that I have a whole lot of color on the magnitude of that. I'd have to -- so I'd have to dig deep into the data to figure that one out, I think. I think, we like you, we kind of thought that we were going to be closer after the second quarter. But as time continues to drag out and you look forward on to what could be happening in 2021 and out into 2022, I think that's the questions. And that's what the forecasters are showing us. I mean, when you look at our numbers, 4 basis points of net charge-offs, we just don't see any chinks in the armor today. But it's still early in the game.

We know that -- we know there are issues out there. But by converting most of our borrowers back to payment of some type, again, we're down to less than 1% in deferral. Everyone else is making a monthly payment or a regular payment, which allows us to manage that portfolio in a good way, even though we have converted some of the hospitality, a little bit of the others into interest only. I don't know that I have an easy answer for you on forward-looking provision because I don't know what the forecast will be at the end of the year. But I do think that we feel like we're well reserved today. We think our allowance for credit losses is in great shape.

Jon Arfstrom -- RBC Capital Markets -- Analyst

I guess, another way to ask this is, if things kind of stay the way they are from your point of view, from an economic point of view, it feels like we're at or near a peak in reserves. Is that fair?

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Absolutely. I think that -- yeah, if you want to go down that path. So if we get to the end of the year and the forecast stays where it is today, saying that, the duration hasn't gone out further and the economic numbers have not deteriorated further, then I would suspect we would see a much lower provision in the fourth quarter than we had in this quarter. The reverse of that would be true if the duration has extended further or the economic data appears worse than it is at this quarter.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Yeah. Okay, that's fair. Thanks a lot, Dan.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Thank you, Jon. Appreciate your interest.

Operator

Our next question will come from Catherine Mealor with KBW. Please go ahead.

Catherine Mealor -- KBW -- Analyst

Thanks. Good morning.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Hey. Good morning, Catherine. Good to hear from you.

Catherine Mealor -- KBW -- Analyst

John, you mentioned, I just want to circle back to expenses. And John, you mentioned a couple of credits in the legal line and with OREO. Is there any way to quantify within the personnel line how much was kind of a one-time accrual reversal just so we can get a good run rate for the personnel expenses going into next quarter?

John G. Copeland -- Senior Executive Vice President, Treasurer and Chief Financial Officer

I don't think I mentioned accrual reversal in the salary and benefits line.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

I think that's a good number, Catherine. So we were doing a couple of things there. You pick up some benefit late in the year off of the FICA taxes. So, our tax line obviously went down in 3Q and will go down further in 4Q. But I think the rest of the number in the 3Q was a good number.

Catherine Mealor -- KBW -- Analyst

Okay, great. And any day -- and any big swings within mortgage to be aware of what's going on in the expense line?

James D. Rollins -- Chairman of the Board and Chief Executive Officer

No. Surprisingly, in our mortgage, headcount has stayed basically flat. Those people are just working harder and longer hours. We have augmented that a little bit with them by moving some work out into other folks that had capacity to take on some additional work. But I don't know that we've seen an increase in expenses there. Obviously, we report net to you, so the cost of producing those loans through the commission to the producer and the cost is already taken out when we report the margin to you. But the fixed cost is basically the same as it's been for some time. So I don't see any big run up. We have seen some -- back to your salary question, there is certainly salary competition in the market for certain job types and mortgage would fall into that. We're seeing folks trying to hire people on a regular basis and willing to pay up for those folks. And so, we've seen some salary escalation in some parts of our footprint and in some parts of our jobs.

Catherine Mealor -- KBW -- Analyst

Okay, great. And then, one of the topic on just buybacks, I mean, the credit outlook seemed better. Your core earnings were really strong this quarter. When do you think you will be comfortable reengaging with the buyback?

James D. Rollins -- Chairman of the Board and Chief Executive Officer

That's a great question. And we certainly intend to have that discussion with our Board of Directors when we meet again next. I think we're still trying to figure out where the bottom is. And so, every time the numbers change, we want to make sure that we're safe. I do think that, like you just said, I think personally I feel like we're in pretty good shape on capital today. We're not seeing any issues to speak up from a credit perspective today. But I would hope it stays that way. But there's still a worry of what the future may bring. I don't have a quick answer for you. We intend to keep our buyback program active or available to us. I just don't know when we would jump back in the market and do that.

Catherine Mealor -- KBW -- Analyst

Okay. Makes sense. Thanks so much. Great quarter.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Thank you, Catherine.

Operator

[Operator Instructions] Our next question will come from Kevin Fitzsimmons with D.A. Davidson. Please go ahead.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Hey. Good morning, everyone.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Good morning, Kevin.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Dan, on the subject of deferrals, and I guess I kind of sense we're getting to the point where we're probably not even going to utter this word, maybe starting next quarter, but with how low they've gotten. But can you just compare contrast like the dollar amount that we see in deferral? I'm looking at Slide 12, the 0.3% of loans and then this $111 million that's been temporarily converted to interest only. So, this is separate and apart from deferral and is this just going to be a new balance you guys would report or is this some kind of subset of a larger amount of loans that are maybe paying, but not according to original terms?

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Yeah. So that's a great question. We have been only reporting deferrals to you. And we didn't think that it would be appropriate to take these folks that were on deferral, that are now making a payment and just show that they've come off deferral if we converted something from a normal PMI payment to an interest-only payment. So what we've tried to do, Kevin, when we're working with our customer base is to talk with those customers, determine kind of what their needs are. And as you know, big chunk of this, $88 million of the $110 million is actually higher than that today because we're still working through that is in the hospitality piece. So those are hotels that would be normally scheduled to make PMI payments. And working with those borrowers, we said, let's look out forward.

And instead of just not making any payment at all, let's put you on an interest-only payment for the next six or nine months, get you into the middle of next year where hopefully things will have recovered and be better. And at that point, let the normal payment cycle come back on. So we could have just deferred those payments further and had the borrower not make any payments at all. We felt like it was a better idea to have the customer continue to be used to making some kind of payments. I think when you look at the hospitality numbers that are a couple of pages back, the occupancy quadrant of that page, Page 14, less of our hotels are in that zero to 25% occupancy today than they were a quarter ago. So, clearly there's some cash flow flowing in. And so, by putting them on interest only, they're continuing to make payments to us. And the goal would be obviously by the next summertime turn that back on.

The way it's set up today, it will automatically turn back on. So, when we go into deferral, you just stop making payments. What we've done here is, we've modified the note to say, now you're going to make six months of interest only followed by whatever the normal amortizing payments are. So, in my mind, I would add those two numbers together. So when you're looking at what we've done in our portfolio as a total and you're looking at how we've handled these credits, we now have 0.7% of the total portfolio that have been converted to interest only and 0.3% in deferral. So in total, 1% of our book of business has had some change made to it because of the pandemic. And there are no other, your question was, are there others out there or is this a subset of something bigger?

Chris, you want to add onto that in any way?

Chris A. Bagley -- President and Chief Operating Officer

Yeah, it's not a subset, so that would be at [Indecipherable] the universe. And like most banks, just to put back a little bit of time, the deferral activity initially was large. Most banks didn't know. None of us know exactly what the economic impact would be. So we took a flexible approach to the deferment process. But that deferment process was no payments. And so, as we worked through it and started collecting information that second round of deferrals became more challenging. We're able to better document the files. Found out that many customers were doing fine. We were able to move them back to their normal customary amortizing payment, became apparent that certain segments were more impacted, hospitality is the one, so the hotel book.

And remember, most of these loans are -- and virtually all of them are guaranteed and it's supporting some answers. And it was our philosophy that willingness and capacity to pay need to be measured in some way. And moving them on the interest only helped us. I think both of us reach a commitment level on the project. So I think that's a good indication of both how they're doing as they've improved their occupancy a little bit and also the willingness and capacity of the guarantors and investors to support the projects. But I agree with Dan. I would look at those as kind of a combination numbers that come off deferment. And interestingly that's the portfolio that's impacted.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Yeah. So, saying that a different way, we picked out at 20-plus-percent, almost 25% in total deferrals is 25% of the total book. The comparison to that today is the total book. 1% has had some change or some modification or some change made to it on a go forward basis. When you look at the subsets that we've been following, we put the slide out on CRE. We have virtually very little impact on our CRE book. We're not having any issues on that front. And frankly, the restaurant side has performed very well. As I've been across our footprint and talked to some of our folks across our footprint, while I personally have not been in to eat somewhere because my wife won't let me do that, we have certainly taken out. And every time I go into the takeout line, every restaurant I've been to has been full inside. So, we're seeing the restaurants and our part of the world at least come back pretty well.

So we're feeling good. So, when you look back at these, back for your Slide 12 question, I personally think that the stress is all in that hotel and accommodation line, whatever percolates up out of the retail CRE or the food services is probably no different than what's going to percolate up in all of the rest of the portfolio just through the normal economic cycles of the loan book. So, I'm very focused on those hotels and accommodation book and the rest we're feeling pretty good about.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

That's really helpful. Thanks, Dan. And just on that same subject, so how does that -- how is that change in looking at both of these together deferrals and change accommodations to interest only? How does that translate into your internal classification process? So, in other words, like we get the sense from us looking externally that a lot of banks are relying a little bit on the CARES Act of the provision that they don't really have to downgrade some of these loans, but now we're at a point where we're using the word deferral less, they're starting other accommodations are being made. And I notice that substandard loans went up this quarter in C&D and CRE. So, has there been some kind of effort, maybe not tied to this movement to interest only, but has there been an effort to -- all right, let's internally classify these things for what they look like today?

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Yeah. Remember, at the beginning of the pandemic, we moved all of our hotels and restaurants into a watch grade, which is a pass grade. So we moved them into a watch, which is the lowest pass grade. And then, through our normal process, when we're looking at these credits, as Chris said, when the borrower is showing the capacity and the willingness to pay, that would indicate to us that we're in OK shape and there would not be any big reason to make a movement to downgrade that credit. On the other hand, if the cash flow is not there and there's some concern that the borrower or the sponsor is not willing to support the project and we have moved credits into or are transitioned into some substandard credits.

Chris, I know you're in the middle of that for us, up to your elbows.

Chris A. Bagley -- President and Chief Operating Officer

Yeah. Dan mentioned, moving it to watch, what that does for us is, it increases the intensity and frequency of the monitoring. So, we're looking at the hotel book every 90 days on a credit by credit basis with the restaurant -- with the relationship managers and then our lending admin team. And so, from there, what you'll see is some loans get upgraded, some loan stay watch, some get downgraded and you'll see some of that, I think, migration as we work through the individual credits and their own unique circumstances. But -- I mean, I think your point is well taken.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

You're talking about a little over 300 total hotel loans, right. And let me tell you, they are they are getting talked about every day.

John G. Copeland -- Senior Executive Vice President, Treasurer and Chief Financial Officer

So, a lot of it is about accumulating the most current and relevant information. Most financial information is generated on an annual or quarterly basis. And we've migrated to more intense requests and getting update occupancy information up to-date financial and operating statements. So that's helping us grade the credit appropriately as we go forward, even to having our relationship managers drop by and look at the parking lot in the evenings just to see kind of what we're seeing and feeling.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Okay, great. Guys, thanks so much for the color. Thank you.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Thank you, Kevin.

Operator

Our next question will come from Miss Jennifer Demba with Truist Securities. Please go ahead.

Brandon King -- Truist Securities -- Analyst

Hey. This is Brandon King on for Jenny.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

You don't sound like Jenny. Brandon, how are you?

Brandon King -- Truist Securities -- Analyst

Good, good. How are you guys doing?

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Good.

Brandon King -- Truist Securities -- Analyst

Good. So I want to touch on mortgage. I know this quarter was -- had a very high volumes and also the gain on sale margins was pretty high as well, around 2.9%. And I wanted to watch your [Phonetic] expectations were as far as where that will trend toward going into obviously fourth quarter and into 2021. Are you expecting like an incremental decline or will it be a sharp drop to more normalized level?

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Yeah. You can see that when you're looking at our pipeline. So let me flip back there again. Where is that page? It's Page 18. So, when you're looking at what's coming through the system. So our pipeline at the end of the quarter was $629 million, which was down $70 million from the $691 million at the end of the last quarter. So, that would indicate these mortgages are on a 30, 45, 60-day turn process. So if we're coming into the quarter with over $600 million in the pipeline, my expectation would be that certainly we're going to see some reduced production volume in the fourth quarter, but we still ought to have a fairly good quarter when you're comparing it to past.

Brandon King -- Truist Securities -- Analyst

Okay. And I also want to touch on immunity, and it is that big deal announced last week. Has there been an increase in conversations or have you seen an increase in interest in tissue banks be acquired? What are you seeing? Has that changed over the last weeks or months?

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Yeah. Are there any things changed in the last quarter since we talked a quarter ago? The transaction that you're referencing is not in our footprint in any form or fashion. So I don't think that impacts us in any way. It certainly gets all the -- all of you guys talking and interested. But when you're talking about just the general conversations, banker to banker. As we said three months ago on this call, those bankers are talking to each other more to the pandemic than they have in my career, just because we're all talking to each other about what the situation is. It's unique. And most credit cycles, there are differences from footprint to footprint, from bank to bank, and how you're doing and what you're doing. And in this situation, all of us are experiencing the exact same pain points and we're all talking to each other. And that leads to more conversations around the things that could potentially lead to, do you want to partner up? I don't know that the conversation level has increased or decreased, but it's still going on.

Brandon King -- Truist Securities -- Analyst

Okay. Thanks so much, guys.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Our next question will come from Matt Olney with Stephens. Please go ahead.

Matt Olney -- Stephens, Inc. -- Analyst

Hey, thanks. Morning, guys.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Morning, Matt.

Matt Olney -- Stephens, Inc. -- Analyst

You guys have addressed most of my questions. Just wanted to follow-up on the small insurance deal that was announced a few weeks ago. Just remind us what the insurance growth strategy is, organic and M&A, and just remind us also how the insurance complements the bank and how these two different segments work together. Thanks.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Okay. I'll take off on that. Let Chris jump in. That's on Chris's team. Our insurance team is a really strong team. Mark McKnight is our CEO of our insurance team and he runs a great operation for us. We have historically been able to find partners, small agencies that are looking to partner up with somebody that can provide a little more breadth of product mix and expand and give the producer the chance to expand a little bit. That's what happened here in this case. This is an in-footprint partnership with some folks that are looking forward to being a part of a bigger organization where we can take care of their customers and provide more product to them. And they also have an expertise that we should then be able to utilize and spread across the rest of our footprint.

Chris, you want to tag onto that?

Chris A. Bagley -- President and Chief Operating Officer

Yeah. Just their expertise in underwriting liability coverage, especially around professional industry fits well with our construction look there in Louisiana. So it's a nice add on. It's not a big number obviously. He said in the comments, the insurance agency, as Dan has mentioned, is very important us. They worked really hard over the last years, especially with Dan's leadership here is to turn it from a number of small independent agencies across our footprint into one larger agency working and now pulling in the same direction. So they're doing a good job with that and able to synergize -- create synergies of all the individual producers and processors across the footprint. And at the same time, we've worked hard to try to pull them into the bank, but not -- we're not fortunate, as you guys know. We don't put us through the new accounts desk because these are P&C large ticket type insurance and employee benefits. But we've made great progress in bringing together so many of our insurance agents now operate within our bank facilities. And that's been a transition that's happened over the last three or four years. And as they work closer together, I think there's synergy going back and forth and referring going back and forth. That's been very positive, I think, for both business segments.

Matt Olney -- Stephens, Inc. -- Analyst

Okay. That's great. And then, I do want to go back to the previous question. I think it was Brett's question on the securities portfolio been pretty active there? Can you just highlight what you've been buying as far as duration and yields? And perhaps you missed this and I apologize, but I'm looking for duration and yields of the more recent purchases.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

John, you want to jump in on that a little bit, but we're trying to buy 5% earning assets that have a duration of under six months. But John has not been able to find any of those for us. So what are you doing?

John G. Copeland -- Senior Executive Vice President, Treasurer and Chief Financial Officer

We've got about, I think, $1 billion rolling off in the next 12 months. And they're going to roll off at 2%. We're going to come back on at 1%. So pretty impressive, I think. It's tough, it's very difficult. We have invested recently in some bank subordinated debt in the 4% -- between 4% and 5% range.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

The rates are ugly. Let me help you put that in something that you can understand. This is like looking at the Oklahoma and Texas football teams this year. They're struggling.

John G. Copeland -- Senior Executive Vice President, Treasurer and Chief Financial Officer

We are saying -- we are staying short three to four years.

Matt Olney -- Stephens, Inc. -- Analyst

In terms of the overall size, I think we're now at around 25%, 26% of our assets are in securities. Do you see that migrating higher if the loan growth remains anemic as it is now?

James D. Rollins -- Chairman of the Board and Chief Executive Officer

I think that's dependent upon deposit growth. So, there's still a lot of questions out there. Deposits have ballooned up with the PPP money that flowed in. And there's still a lot of discussion around is that money going to stick or is that money going to begin to bleed out in some way? That's another reason for making sure that the duration is as short as there's an unknown around that deposit growth that the whole industry is seeing this year. So, if deposits continue to grow, then I think our security book is going to continue to grow with it because it's going to be difficult to grow the loan portfolio in any significant way. Our team is very focused on growing loans again. And we break it out by territory or by footprint for you. And once again, we had a couple of states that were growing in the quarter. Texas in particular grew right at 8% in the quarter. So, we have the ability to grow in some parts of our footprint. We just need to make sure that we're protecting the other parts of the footprint.

Matt Olney -- Stephens, Inc. -- Analyst

Got it. Okay. That's all for me. Thanks, guys.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

All right. Thank you, Matt.

Operator

Our next question will come from Jon Aastrom with RBC Capital Markets. Please go ahead.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Hello, Jon. Hello, Jon?

Operator

Your line is open.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Sorry about that. Just two quick ones, John, you talked about the -- some of the deposit service charges and customer fees starting to come back, but not fully there yet. But what do you think the -- that path looks like to get back to kind of where you were pre-pandemic?

James D. Rollins -- Chairman of the Board and Chief Executive Officer

He's flipping pages. Let me take a stab at just the overall economy, so there's multiple pieces of that. Card volume is a big piece of it, and card volume has come back, but not all the way. So, again, I think you've got to get people moving around more than they are to help some of that. And then just our normal deposit, these...

John G. Copeland -- Senior Executive Vice President, Treasurer and Chief Financial Officer

People flush with cash now. There's some of that in that number. They don't have to use the credit cards or the debit cards so that that pushes volumes down.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

And our average account balance is up, which is also pulling down just normal deposit charges.

John G. Copeland -- Senior Executive Vice President, Treasurer and Chief Financial Officer

Yeah. So we're down 16% -- the schedule says 16% quarter over -- 16% down quarter over -- I'm sorry, up quarter-over-quarter, but 25% down from this time last year. I don't know when that's going to come back fully. It depends a lot on our economic forecast, I think, to some extent.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

When it put in, it can come back a lot as soon as we have a vaccine for everyone.

John G. Copeland -- Senior Executive Vice President, Treasurer and Chief Financial Officer

I can't give you a good answer to that, because it's somewhat of an unknown.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

It's on its way back up, you're saying it's way back. We just don't know. Okay. That's right.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Yeah, OK. And then, on the insurance business, I just want to make sure I understand what you're saying. You're saying typical seasonality, but really nothing has changed in the business to make it more than typical. You just kind of saying flat up year-over-year, kind of like we saw this past quarter.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Yeah. So, remember, fourth quarter is always a low quarter or low watermark for us. So, 4Q should trail off. So I would look back at what we did in 4Q last year. And the revenue recognition rules that we implemented I guess in '19 have been in place for almost two years. So that spreads out the lumpiness of that revenue that we typically have recorded more in the first part of the year. But I would expect just to kind of continue to hang in there. The team is out building the book of business with new customers, and we've actually won some nice new business in the last quarter, but it's just a difficult environment when you can't get out and mix it up with customers like everybody can.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. All right. Thanks for the help.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

Thank you, Jon. Appreciate it.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Dan Rollins for any closing remarks. Please go ahead, sir.

James D. Rollins -- Chairman of the Board and Chief Executive Officer

All right. Thank you all very much for joining us today. If you need any additional information or have further questions, please don't hesitate to reach out to us. Otherwise, we'll look forward to speaking with you again soon. Thank you all very much for participating.

Operator

[Operator Closing Remarks]

Duration: 56 minutes

Call participants:

Will Fisackerly -- Executive Vice President and Director of Corporate Finance

James D. Rollins -- Chairman of the Board and Chief Executive Officer

John G. Copeland -- Senior Executive Vice President, Treasurer and Chief Financial Officer

Chris A. Bagley -- President and Chief Operating Officer

Brett Rabatin -- Hovde Group -- Analyst

Jon Arfstrom -- RBC Capital Markets -- Analyst

Catherine Mealor -- KBW -- Analyst

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Brandon King -- Truist Securities -- Analyst

Matt Olney -- Stephens, Inc. -- Analyst

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