Oct 22, 2013
Executives
Will Fisackerly - Senior Vice President and Director of Corporate Finance James D. Rollins - Chief Executive Officer, Director, Member of Executive Committee and Chief Executive Officer of Bancorpsouth Bank William Lloyd Prater - Chief Financial Officer, Treasurer, Chief Financial Officer of BancorpSouth Bank and Executive Vice President of BancorpSouth Bank W.
James Threadgill - Executive Vice President and Vice Chairman of BancorpSouth Bank Gordon R. Lewis - Executive Vice President, Vice Chairman of Bancorpsouth Bank and Director of Bancorpsouth Bank James Ronald Hodges - Vice Chairman and Chief Lending Officer
Analysts
Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division Stephen Scouten - Keefe, Bruyette, & Woods, Inc., Research Division Matt Olney - Stephens Inc., Research Division Jonathan Dane - Jefferies LLC, Research Division Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division Preeti S.
Dixit - JP Morgan Chase & Co, Research Division Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division Blair C.
Brantley - BB&T Capital Markets, Research Division
Operator
Good morning, and welcome to the BancorpSouth Third Quarter Conference Call. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to BancorpSouth's Will Fisackerly, Senior Vice President and Director of Corporate Finance.
Will Fisackerly
Good morning, and thank you for being with us. I will begin by introducing the members of our senior management participating today.
We have CEO, Dan Rollins; Jim Kelley, President and Chief Operating Officer; Bill Prater, Executive Vice President and Chief Financial Officer; Ron Hodges, Executive Vice President and Chief Lending Officer; James Threadgill, Executive Vice President and Head of the Financial Services Division; and Gordon Lewis, Executive Vice President, responsible for the general bank. Before the discussion begins, I'll remind you certain forward-looking statements that may be made regarding the company's future results or future financial performance.
Actual results could differ materially from those indicated in these forward-looking statements due to a variety of risks and/or factors. Information concerning these factors can be found in BancorpSouth's 2012 annual report on Form 10-K.
Also during the call, certain non-GAAP financial measures may be discussed regarding the company's performance. If so, you can find a reconciliation of these measures and the company's Q3 2013 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 earlier this morning.
And now, I'll turn to Dan Rollins for his comments on the quarter.
James D. Rollins
Thank you, Will, and good morning. Welcome to BancorpSouth's conference call for the third quarter of 2013, and thank you, all, for joining us today.
During the third quarter, I, along with several members of our senior management team, conducted a tour of our footprint. We made almost 20 stops over the course of 3 weeks and had the opportunity to visit a significant number of our teammates.
All of our mortgage, insurance, and wealth management producers were included, as well as our lending force and other members of management. We had a very productive conversations about the direction of our company.
These meetings further solidify my confidence in our team as their desire to -- and their desire to succeed. I believe the actions that we've have taken during the first of the year, and the focus that we've demonstrated on our growth is starting to bear fruit in our financial results.
I will first provide some brief comments regarding the highlights of the quarter and then Bill will discuss the financial results in more detail. James will share some insights into our fee income; Gordon will provide some color on our loan production efforts and the portfolio; and finally, Ron will discuss highlights regarding credit quality.
After we conclude our prepared comments, our executive management team will be happy to address any questions you may have. Let's turn to our slide presentation.
Slide 2 contains our customary Safe Harbor statement with respect to certain forward-looking information in the presentation. The next slide begins our review of the third quarter.
I would like to focus on some key highlights for the quarter. Our net income increased 19.8% to $24.9 million from $20.8 million last quarter.
Diluted earnings per share increased 18.2% to $0.26 per share on a linked quarter basis. Bill will discuss the components of net income in more detail shortly.
We reported net loan growth of $94.4 million or 4.3% on an annualized basis. This marks the second consecutive quarter that we've reported net loan growth.
Combined with the Trust Preferred redemption and our ability to continue to reduce our cost of deposits, the net interest margin improved during the quarter to 3.45% from 3.36% for the second quarter of this year. Our results for the quarter also demonstrate tangible results from our efforts to improve efficiency.
Specifically, the results of the early retirement program and the overall diligent focus to monitor our head count can be seen in the salary and benefit expense line, which declined $4.8 million or 6.1% on a sequential quarter basis. Total headcount FTEs has declined from 4,249 at the end of 2012 to 3,994 at the end of the third quarter, a drop of 255 during the first part of -- during so far in 2013.
Additionally, our credit quality continues to improve. Ron will be here to discuss that in more detail shortly.
We had several items impact earnings this quarter that we consider to be nonroutine or outside the normal course of business. One of those relates to the previously announced redemption of $125 million of the 8.15% Trust Preferred Securities on August 12.
We expect this redemption to reduce annual interest expense by $9.1 million or $0.06 per share net of tax and to result in net interest margin improvement of approximately 9 basis points. Given the timing of the redemption, we received about half of the quarter's benefits during the third quarter.
We recorded a pretax charge of $2.9 million during the quarter to a write-off unamortized issuance costs associated with the Trust Preferred, which leads into our next discussion point regarding non-operating items, which we consider to be either nonroutine in nature or outside the normal course of business. As we are now on the backside of the down credit cycle, we continue to work through a very litigious business environment.
In addition to the Trust Charge, we recorded a charge of $2.8 million to increase our legal accrual related to certain ongoing legal proceedings. $1.8 million of that, we believe relates to matters outside the normal course of our business.
Finally, we recorded a benefit to tax expenses of $1.3 million related to the resolution of our uncertain tax position. I will now turn our call over to Bill for his comments on our performance during the quarter.
William Lloyd Prater
Thanks, Dan. If you'll turn to Slide 4, you'll see the summary income statement presented on a sequential and comparable quarter basis.
Net income was $24.9 million for the third quarter or $0.26 per diluted share for the third quarter, compared to $23.8 million or $0.25 per diluted share for the third quarter of last year and $20.8 million or $0.22 per diluted share for the second quarter of this year. Dan covered the items that we consider to be nonroutine or nonoperating.
I'd like to speak in more detail about the $1.3 million tax expense benefit. The uncertain tax position related to the review of the tax treatment of items during the tax years of 2007 through 2009.
This review was resolved in our favor during the third quarter, resulting in the reversal of the FIN 48 reserve for that matter. This particular item resulted in a lower effective tax rate, which would have otherwise been approximately 28.5%.
Also as a remainder, for comparative purposes, the second quarter included a pretax charge of $10.9 million associated with the voluntary early retirement program that we announced earlier this year. You'll also notice on this slide the improvement in our net interest revenue quarter-over-quarter.
As Dan mentioned, our net interest margin increased to 3.45% from 3.36% for the second quarter of this year. We believe several factors will continue to contribute to the improvement in the net interest margins.
First, as Dan mentioned, we've received only about half the quarter's benefit related to the Trust Preferred redemption. Second, the loan growth reported over the last 2 quarters has allowed us to convert overnight money into higher yielding earning assets.
And third, we still have some opportunity on the cost of funds. We have approximately $150 million of 5-year CDs at a weighted average rate of 3.97% that will roll off beginning in the fourth quarter of this year through the later part of next year.
Slide 5, shows a detail of our noninterest lines of business. Total noninterest revenues were $62.5 million for this quarter, compared to $76.1 million for the second quarter of this year and $70.4 million for the third quarter of last year.
The comparable and sequential quarter declines were driven primarily by volatility and mortgage lending revenue. If you'll turn to Slide 6, James will spend a few moments discussing mortgage lending, as well as insurance, which are the 2 largest contributors to noninterest revenue.
W. James Threadgill
Thanks Bill. The tables on Slide 6 provide a 5-quarter look at both mortgage and insurance.
Our mortgage lending operation produced origination volume for the quarter totaling $341.9 million. Mortgage lending revenue totaled $5.1 million for the quarter, which included an MSR valuation charge of $200,000.
This compares to revenue of $17.9 million during the second quarter of this year, which included a positive MSR valuation adjustment of $5.3 million. Of total production volume for the quarter, 33% was refinancing the existing mortgages, while 67% represented purchase money financing, which is an increase from the 52% purchase money financing during the second quarter of this year.
You'll notice on the chart the consistency with which we've been able to grow the core purchased money component of total volume. The increase in purchase money volume in an otherwise lower production market demonstrates our ability to continue to grow market share.
You will notice a meaningful decline in the mortgage -- in the margin on production for the third quarter. Origination revenue was adversely impacted by approximately $3 million, related to $120 million decline in the pipeline.
In addition, our mortgage pipeline hedge was adversely impacted by interest rate volatility during the quarter, and accounted for an additional $2 million of the margin decline. We expect the production margin to improve next quarter to more normal levels as the pipeline and interest rates have stabilized.
Also remember, we calculate our mortgage origination income net of direct cost to originate, which results in differences in the margin calculation when compared to others who report the revenues on a gross basis. Moving onto insurance, total commission revenue for the third quarter was $23.8 million.
As a reminder, quarterly comparisons are impacted by seasonality in our revenue stream. The first quarter of each year is seasonally the highest quarter, and the fourth quarter of each year is always the lowest.
And we expect that trend to continue in fourth quarter of this year. Our insurance production team continues to win new business and to drive comparable quarter growth while looking for opportunities to expand our presence in new and existing markets.
Now, I'll turn it over to Gordon who will spend a few minutes discussing the loan portfolio.
Gordon R. Lewis
Thanks, James. Slide 7 presents a comparable and sequential quarter comparison of our loan portfolio, broken down by classification.
As Dan mentioned earlier, we reported net loan growth for the second consecutive quarter after experiencing declining loan balances for more than 3 years. Total loans increased almost $100 million, which represents a 4.3% annualized increase.
We reported growth in almost all major loan categories, with the exception of commercial and industrial. The decline in C&I is primarily the result of borrowers using their excess liquidity to reduce operating lines of credit, and some term debt.
Even so, we continue to see new C&I lending opportunities and close loans which will be funded over multiple calendar quarters. You'll notice a slight uptick in our construction acquisition and development portfolio.
This is particularly encouraging as run-off in the CAD portfolio has provided a tremendous headwind to growing loans over the last several quarters. We've reiterated throughout the credit cycle that despite significant run-off due to problem assets in certain markets, CAD lending will be -- will continue to be a part of our business.
We're encouraged that loan growth is occurring across our footprint. Each of our 4 community banking regions reported gains over the second quarter and our loan pipeline indicates improving activity in all regions.
We believe these increases reflect the impact of sustained efforts by our banking team throughout the economic downturn. We're sensing a slow, but steady recovery in many market economies.
And our bankers are now free to spend more time helping customers capitalize on emerging opportunities. The reinforcement of the strength and consistency of the BancorpSouth banking model through these past few difficult years is also enabling us forge new relationships in our legacy markets and providing us greater access to attractive relationships in the growth markets we entered in recent years.
I'll now turn it over to Ron Hodges to spend a few minutes discussing credit quality.
James Ronald Hodges
Thanks, Gordon. Slide 8 presents some highlights of credit quality for the third quarter.
The company's third quarter provision of $500,000 declined from $3.0 million for the second quarter of 2013 and $6 million for the third quarter of 2012. Total nonperforming loans declined by $23.6 million or 14% during the quarter and total nonperforming assets declined $35.2 million or 14% as well.
Other real estate owned decreased $11.6 million or 13% from $88.4 million at June 30, 2013, to $76.9 million at September 30, 2013. Total dispositions for the third quarter were $19.3 million, resulting in a net loss on sale of only $400,000.
We continue to be pleased with our ability to move ORE properties at near their respective carrying values. Foreclosures and write-downs were $9.5 million and $1.8 million respectively.
The percentage of non-accrual loans paying as agreed increased from 48% of total non-accrual loans at June 30, 2013, to 51% at September 30, 2013. Cash payments on non-accrual loans continue to be the largest contributor to the reduction in total NPLs.
We received cash payments of $27.7 million on non-accrual loans during the third quarter, compared with $27.5 million during the second quarter of this year. Near-term delinquencies representing loans 30 to 89 days past due reflect a modest increase of $7.7 million to $28.9 million or 0.33% of total loans at September 30, 2013, after having been $21.2 million at June 30, 2013, which represents the lowest level since pre-2009.
We also had continued improvement in classified asset totals with substandard loans declining $45.8 million or 11% during the second quarter. Now let's take a closer look at credit quality starting with Slide 9 which breaks down NPLs by loan category.
While decreases in nonperforming loans have occurred across the whole portfolio, the majority of the year-over-year decrease was achieved through a reduction of $64.8 million of NPLs in the CAD segment. NPLs represented 1.65% of net loans and leases at September 30, 2013, compared to 1.94% at June 30, 2013, and 2.85% at September 30, 2012.
Slide 9 provides a visual of the significant improvement in NPLs, ORE and total NPAs over the past several quarters. I've covered the quarter-over-quarter activity for each of these metrics in earlier slides.
We continue to be pleased with the pace at which we are working through the remaining problem assets. The next slide presents as visual of net charge-offs and annualized net charge-offs as a percentage of average loans for the last several quarters.
Net charge-offs for the third quarter of 2013 were $7.6 million, compared to $12.8 million for the third quarter of last year and $4.6 million for the second quarter this year. Of the $7.6 million of total current quarter charge-offs, $3.4 million were loans that had been identified and reported as impaired and which were specifically reserved for in previous quarters.
Additionally, recoveries on our previously charged-off loans continue to have a meaningful impact on net charge-offs. Recoveries for the third quarter were $4.3 million, compared with $6.1 million for the third quarter of last year and $7.7 million for the second quarter this year.
Annualized net charge-offs for the third quarter of 2013 were 0.35% of average loans. That concludes my review of credit and financial results.
I'll turn it back over to Dan for a few closing remarks.
James D. Rollins
Thank you, Ron. As we look to the fourth quarter, we've got some headwinds that James discussed regarding mortgage and the seasonality of our insurance business.
However, I'm extremely encouraged by the progress that our team has made during the 10 months that I've been here and the foundation that we've laid to continue to improve our performance. After battling through a very difficult credit cycle, our people have proven they are ready to compete.
They are out every day doing what they do best, taking care of customers and winning new business. Our team has also embraced the ideas and focus that we've shared regarding efficiency.
Our people continue to bring new ideas to the table daily on ways that we can grow our company and improve our operating efficiencies. Many of these ideas have already been implemented and others are in the works.
Early efforts are now visible, particularly related to the salaries and benefits. Other efforts will be more transparent in the result as we move forward.
Our entire team is committed to continue our efforts to grow shareholder value. Thank you for your time and attention this morning, and for your interest in BancorpSouth.
Operator, we're now happy to answer questions.
Operator
[Operator Instructions] Our first question comes from Kevin Fitzsimmons at Sandler O'Neill.
Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division
Just a couple of questions, Dan. I hear your commitment on expenses and efficiency.
Just wondering how you -- what your outlook on the efficiency ratio is? I think in past quarters you've kind of given a message that not to expect big expense programs and more incremental improvement to that ratio is going to depend more on revenues.
Is that still how you're thinking about it? And then just on the expense run rate, if I pull out OREO and if we pull out the $1.8 million of litigation charges that you've characterized as elevated, I think that gets us to like $121.5 million.
Is that a decent quarterly run rate for expenses we should be taking going forward?
James D. Rollins
Okay, let me try to remember those. Kevin, I think that the -- your first question was about efficiency.
And we've not given any guidance on efficiency ratio. The way you characterized that, that the improvement was going to come off of revenue, almost exclusively, I don't know that I would agree with.
I think that the improvement on efficiency comes from both sides of the equation. I think what we've said is, is that we had the big-ticket announcement from the early retirement program, and you can certainly see the benefit of that in this quarter.
I think there are lots of other items that are not, in and of themselves, worthy of a press release to say that we're going to save $40,000 on this item or $35,000 on some other item. But I can tell you, the entire team continues to be focused on ways to be more efficient and to spend our money wisely to make sure that we're spending money that's going to help grow our company.
At the same time, you're correct, we need to grow the operating -- we need to grow the income side of the house. We need to -- if we can grow the income side or the gross revenue side, that also will improve that efficiency ratio, I think that if you're looking for some magic pixie dust that's going to fix it all quickly, I don't think that's the way it works.
I think this is just heavy lifting and we're going to spend day-after-day, week-after-week, month-after-month, and quarter-after-quarter, working to improve our efficiency ratio by working on both sides of the equation, the expense side and the income side. On the run rate item, I don't know that -- we have Bill sitting here next to me.
I'm going to let him jump in here if he wants to. I don't know that we have an answer that would tell you whether or not that's a perfect run rate.
I would tell you that we continue to look at the expense base that we're operating under. I think that on a salary base, I think we're comfortable that we continue to find ways to manage our headcount and to challenge our folks to do more with less.
So, my gut tells me that, I don't know if there's anything in there that would be unusually low that would cause us to have some spike and expense running forward.
William Lloyd Prater
No. Nothing of any significance, Dan.
The headcount number is driving a good chunk of that. We've said in the past we want to manage the headcount down, but that being said, if we get opportunities to hire producers, be it in the insurance area or lenders or lift the team out of more of the lines of business, like mortgages or something, we certainly would do that, and that's why I'm a little bit reluctant to kind of give a forward-looking statement and put a stake in the ground on an expense number.
If you are incurring expenses that are likely to produce revenue, you need to incur them.
James D. Rollins
Yes, I think that would be a real good -- important comment. As we sit today, all things else being equal, we'd probably agree that the expense run rate's a good number.
But as we look forward, certainly things can change that.
Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division
Yes. I've recognized the point about not wanting to give guidance on efficiency.
I guess I'm just -- I think a lot of investors are -- look at efficiency as a key part of the story, and are wondering if we're in this environment that we're in for a while and I think you've said it and we all agree, the efficiency ratio in the upper '70s is too high, but what kind of goal or what is realistic to take that ratio to over a reasonable period of time if we -- provided we don't see higher rates and we don't see some of surge in the economy, and I think that's what -- that's kind of the point of the question but...
James D. Rollins
And the way I would want to answer that Kevin, is to say, you're exactly right, 78% is way too high. We have to do better than that.
The answer is, when you talk about where can we get to, my answer would be, let's talk about a group of peers that you think are similar peers to us. Let's talk about how they're doing business and I see no reason why we can’t be as good or better than similar peers to us.
Operator
Our next question comes from Stephen Scouten at KBW.
Stephen Scouten - Keefe, Bruyette, & Woods, Inc., Research Division
Quick one on your mortgage origination. Was there any shift in terms of what you're seeing, fixed rate versus variable rate, on the originations.
And if so, did that have any impact on the higher amount of consumer mortgages held on balance sheet this quarter?
Unknown Executive
There was really no shift in the variable versus fixed in our mortgage production.
James D. Rollins
I don't think that had any impact on what's holding on, on the balance sheet at all.
Unknown Executive
Yes.
Stephen Scouten - Keefe, Bruyette, & Woods, Inc., Research Division
Okay. Great.
And then one follow-up on the credit quality. Obviously, a decent amount of loan loss reserve released this quarter, about $0.05 by my calculations.
Is there a level that you guys would feel comfortable with kind of on an optimal basis as OREO continues to come down. I mean, I know you are in the 120, 130 range, pre-cycle.
But, I mean, is there kind of a number or range you guys have in your minds now in this kind of new environment once you get some of those assets off the books?
James Ronald Hodges
Steve, this is Ron. The short answer is we don't have a range that we'd get comfortable with.
I mean we review our ALLL every quarter and we've got a pretty extensive analysis that we go through and as the trends continue in our credit quality and our portfolio, I think you can see that continue to trickle down. But there again we hope also we will need to add to it for loan growth as the markets improve and economic conditions continue to improve.
William Lloyd Prater
Stephen, this is Bill. If I could add to that, you did mention the effect of ORE and you can’t use the allowance to absorb any losses in ORE.
So, I would be as little bit more focused on the metrics around the loan portfolio itself, the levels of criticized assets are certainly not directly, but indirectly a factor of that and levels of nonperforming loans, and particularly impaired loans. And I would kind of caution, if you look at the release number that you just looked at, sounds like you're taking the gross charge-offs and backing out the provision to arrive at the number that you gave and as Ron said in his script, about $3.4 million of that charge-offs this time were specific reserves.
So....
James D. Rollins
And you need to work off the net number.
James Ronald Hodges
You need to work off the net -- yes.
James D. Rollins
But I think your question is all around -- it's a good question around where we are on the loan loss reserve. Our methodology, we think, is good.
I think just the theory behind the methodology would leave you to believe that when problems are being identified, you're going to bulk up on your loan loss reserve, and you can see that we did that and as things improve, you should naturally expect to see that number kind of trickle back down as Ron said. And I think we're in the same boat with everybody else on that line.
I think we're still probably relatively high compared to many of our peers when you look at the raw number.
Operator
Our next question comes from Matt Olney at Stephens.
Matt Olney - Stephens Inc., Research Division
On the mortgage stuff, James, I believe you mentioned in your prepared remarks that the gain on sale margin was affected by a few unusual items in the third quarter. So it sounds like that margin should bounce back in the fourth quarter, but that in the last few quarters, that margin's been well north of 2%.
So given what spreads have done more recently, is a gain on sale of margins north of 2% realistic or should it be somewhere below that, you think?
W. James Threadgill
Well, Matt, there was a perfect storm of 3 significant events that impacted the third quarter mortgage margin. One, the significant drop in the pipeline that I mentioned compared to the second quarter.
Secondly, the mortgage rates rose throughout the first 10 weeks of the quarter, and then fell significantly and quickly during the last 2 weeks of the quarter. And as a result of that, the amount of fallout of locked loans that did not close due to those falling interest rates caused us to be over-hedged and created a negative mark on the fair value of the hedge.
So the combination of those events negatively impacted our mortgage revenue by about $5 million in the third quarter. But, to your question, specifically about our margin, we do anticipate the margins to return back to a more normal level in the fourth quarter.
Matt Olney - Stephens Inc., Research Division
And then as a follow-up, going back to that salaries expense line item, just clarify, I think in the past you've mentioned there were some portion of the employees that accepted the early retirement program, but would still be on payroll through the end of the year. Am I remembering that correctly?
James D. Rollins
You are, Matt. And I think that there are still a couple of folks on.
That's a -- we're virtually through with that. There's probably a handful of folks that are still here for whatever reason.
I know you see a couple of things in the salary line. Certainly, I would tell you I think we've done better at managing through the early retirement program than we initially thought we could.
And then just the focus we that we have, we've been challenging every open position to determine whether or not we need to fill that. So I think you've got kind of 2 things working for us on this quarter that we saw some significant benefit of, and that's, one, the early retirement program is a large part of what you see and then just our normal focus or our enhanced focus on challenging headcount.
Operator
[Operator Instructions] Our next question comes from Emlen Harmon at Jefferies.
Jonathan Dane - Jefferies LLC, Research Division
This is actually Jonathan Dane for Emlen. I was wondering if you could first talk a little bit about deposit growth trends.
They were about down 2% this quarter, a good portion non-interest bearing, and so are you starting to see companies draw on deposits for capital investments or what's really driving this?
James D. Rollins
I think there's probably a couple of things and Gordon may want to jump in here with me. One, we continue to have an elevated level of Fed funds sold on our balance sheet and so, we see no reason to chase to higher cost deposits.
So, we have intentionally kept our deposit rates on the low-end, certainly on the CD side of the aisle, and so you continue to see the CD book of business and I would classify the book of business that's leaving to be the CD-only customer predominantly. We have relationships with the customer.
We're going to work to try and retain all of their relationship because the CD-only customer, we're not doing the need to chase those funds, because we've got a large number of dollars that Fed funds invested at 25 basis points. But I think the direct question on the -- are we seeing people using their money from a working capital perspective basis, I think there are lots of companies that are managing their funds much closer or tighter than they have in the past.
I think the uncertainty that's out there, certainly in the last quarter causes companies to take a breath and step back, but I don’t know that we can point to any factual information that would lead us to have something to tell you that we can -- we could tell you that with any factual certainty. Gordon, do you have anything to add to that?
Gordon R. Lewis
No, I think that's certainly accurate. That we've seen customers, especially some of our larger customers, use their liquidity to pay down their lines of credit, as indicated in our loan comments.
And I think there's also a certain level of seasonality to our deposits that we generally see a rebound in the fourth quarter and the first quarter as some of our public fund customers start picking up deposits during that period of time.
Jonathan Dane - Jefferies LLC, Research Division
Okay, got it. And then just talking about the mortgage book a little bit, this is the first quarter where there was a meaningful contribution from the mortgage book-to-loan growth.
I was wondering if you could talk about nature of this growth in terms of product type, and then also from an ALCO perspective, what's your capacity or desire here to keep growing the consumer mortgage business?
James D. Rollins
I guess we're all fumbling for papers to see exactly what growth you're picking up. I don't think we saw the same level of increase maybe that you're seeing, Bill's putting the pages together there -- these are my consumer mortgages off the slide deck?
Jonathan Dane - Jefferies LLC, Research Division
Yes.
William Lloyd Prater
I can address the ALCO capacity. While -- and Gordon can probably do a better job of addressing the volumes.
We monitor that pretty carefully. And, I think one of your brethren out there had done an analysis on us some time back and showed that we were indeed fairly asset sensitive, and while it's important to remain in that position in an environment like this, when I think we all would expect, at some point in time, to see rates rise, there's opportunity to utilize some of that asset sensitivity to put some loans on the books that you might otherwise dispose of in a different fashion or passthrough.
So, we've begun to look at some things like that. We've not recorded a lot of volume in that area.
But, I don't -- the amount that we put in didn't have a real perceptible impact on our asset sensitivity and we've got some capacity to do this on a, I'll say a limited basis. We're not going to turn ourselves into a mortgage balance sheet by any means.
But, we've got the opportunity to go out a little bit longer in several of the asset categories and -- without doing ourselves any harm in an upright environment.
James D. Rollins
I think we're looking to grow loans in all categories, and I would put that one in that says we want to grow all categories. And when you look at the percentage of the portfolio, because of the decline in the C&I book, it changes the percentage of the portfolio.
But overall, I think we're excited to be growing loans.
Jonathan Dane - Jefferies LLC, Research Division
Okay. Yes, I appreciate that.
And then just one more question -- just on the special mention asset decline this quarter. I was wondering if -- how much of that contributed to the reserve release and just how should we be thinking about the level of problem assets -- the decline going forward?
James Ronald Hodges
This is Ron again, Jonathan, I don't think the special mention decline really contributed significantly to the ALLL level, and I would hope and we anticipate that the trend in the classified assets will continue what we've seen in -- over the last 1.5 years to 2 years, and that it will continue to decline. Although we're getting into the levels now, we're in our peer group range.
Operator
Our next question comes from Jennifer Demba at SunTrust Robinson Humphrey.
Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division
A question on revenue growth. I think you and I had talked a month or 2 ago about incentives and you had indicated you thought that they probably needed tweaking for the revenue producers.
I'm curious as to what, if anything, has been done to date? And if you could just give us some color there basically?
James D. Rollins
Sure. I think that we've talked a lot, internally and externally, about paying for performance.
We need to make sure that our incentive programs are directly tied to performance. You're talking about revenue growth in particular.
We're talking performance inside which basically is the same thing, but not everyone is a revenue producer. So, yes, I think that what we're working on internally is to make sure that our incentives are tied to individual performance, and we are -- while we're not 100% there, we are well down the road.
Many of our plans are already in place and others will be in place before the end of the year. So, I think we're making good progress on that, Jenny.
Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division
So maybe you're half way done and the rest will be done by year-end?
James D. Rollins
I would tell you we're more than halfway done. But the full implementation and the roll out of all this really is a 2014 event.
The design phase is what you're talking about. The implementation phase is a '14.
Operator
Our next question comes from Steven Alexopoulos at JPMorgan.
Preeti S. Dixit - JP Morgan Chase & Co, Research Division
This is actually Preeti Dixit on for Steve. Most of my questions have been answered, but just to follow-up again on the compensation question, could you quantify how much of the $9 million annual benefit from the early retirement program is now in the run rate.
And then, second I can appreciate the comments you made on headcount reduction, but if we look at comp expense, it's down almost $5 million quarter-over-quarter, that still seems fairly aggressive. Maybe you could give some color on where the headcount reductions are coming from or is some of this is tied to that change in incentive comp?
James D. Rollins
Well, I'm not sure I followed all of that, but let me try to break that apart for you. We had originally projected about a $9 million savings in the early retirement program.
That was based upon our judgment of who we thought would take the retirement program, and who would need be replaced out of that process. Coming through and who actually took the retirement and how many people were replaced, we've done much better than that.
So, from that [ph] -- your direct question of how much of the $9 million is in the run rate? Well, all of it plus more is in the run rate.
So, and there still is, as Matt asked, I believe, there's still some more, there's a handful of folks that are still here; that are still in that program that can still drop off. So the early retirement program is going to produce better results than we had initially projected.
The rest of the savings and the headcount, again, I'm not exactly sure what you meant by the $5 million or -- and comp [ph] and fairly aggressive. Were you asking if that's a real number going forward or if there's something special in there, what was the -- what was your question?
Preeti S. Dixit - JP Morgan Chase & Co, Research Division
Yes, I guess if -- even you were at a $9 million savings and maybe that came in a bit better, if we look at $73.5 million of comp this quarter, and I think it was about $78.3 million last quarter, just seems like a fairly sharp reduction...
James D. Rollins
Well, remember, some of our -- on the mortgage side of the aisle, we're reporting to you net of comp. So, you're not seeing comp on the mortgage side, but the insurance side is a commission-based business.
So as those commission -- as those revenue dollars are higher in the first and second quarter, your comp is going to be higher in the first and second quarter. So, your insurance will drive a part of that.
But the rest of it is just focused on headcount.
Operator
And next question comes from John Arfstrom at RBC Capital Markets.
Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division
Can you give us a little more on loan growth? I know you talked about how the regions are, I guess, generally improving, but give us an idea of what's working well, what's a little bit more challenging?
James D. Rollins
Sure. Gordon can jump in here and so can Ron with me on this one.
I think that we're seeing positive momentum across our footprint. Clearly, not every market is as healthy as all.
Not everybody is created equally. But in all of our 4 operating regions, we've got some fairly healthy markets that are giving opportunities to grow.
From the East Texas, Louisiana markets to the Huntsville, Alabama, Nashville markets to the Coast markets, all of our operating regions have some fairly healthy markets that are providing growth opportunity for us. And we're seeing growth opportunity in almost all of our loan categories.
Again, while we didn't see C&I down in the quarter, I think our expectations are that our team is producing well in that category and we will see some benefit from that. Ron or Gordon, either one of you guys want to jump in on that.
James Ronald Hodges
Well. I think as Dan indicated, we have some markets where we've continued to grow even in the difficult times.
And now that we're seeing some rebound in some of the markets that were impacted most negatively, that's translating into our overall loan growth. It's encouraging to see that across the footprint, it's encouraging to see that in all the categories.
And if you look, there was a question earlier about consumer mortgages, that has traditionally been a big part of our business, especially in the smaller markets where we operate, and we have a lot of customers whose properties don’t really fit the traditional secondary market type loans. So, I think we'll continue to see some opportunities to grow there, and those are not 30-year fixed rate loans.
We're managing those and the interest rate risk accordingly. So, it's just a very encouraging story for us at this point.
Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division
Okay. I may have missed this but was there anything specific in C&I?
Was that a big pay-down or was there something else that drove that balance lower?
James D. Rollins
We had pay-downs in a handful of large lines of credit that were seasonal and as folks used their excess liquidity, those customers are still with us and they still draw up and down on their lines. It just happened that many of them had funds drawn on their lines at the end of June and were paid out at the end of the third quarter.
But we continue to see very good activity there.
Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division
Okay. So that's a really more of just a snapshot issue.
James D. Rollins
Yes.
Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division
Okay. And then I guess, a credit question on -- call it the worst of the worst in your OREO, maybe that's some of the stuff that's in Memphis or other markets, but what are you seeing in terms of values for some of the, call it the most problem projects that you have?
Are those bouncing as well or some of this improvement just kind of middle of the pack type credit problems?
James Ronald Hodges
Jon, this is Ron. You make a good point on the ORE, the values there, and even in our -- the problem, the most severe problem markets that we have, and you mentioned Memphis.
We've been pleasantly surprised that the markets are firming up and I think, and the most of the -- the large majority of the sales that we had in the third quarter are from the Memphis Metropolitan market, and I think the results speak for themselves. We had very little losses, $400,000 on almost $20 million in sales.
So we revalue our properties every quarter and look at them every quarter, and we revalue them every year on an annual basis or more often if needed, and we're positive in looking -- we think that we're getting the results of some good firming up in the markets.
James D. Rollins
I don't think, John, that we're seeing, when you look back, and Ron jump in here if I'm heading down the wrong path, but I think what we've experienced over the last several quarters has been where we had, in the past, been seeing appraisals -- reappraisals coming back in at lower values time and time again. That basically has stopped.
We've seen very few appraisals come in at lower values than where they were a year ago. Now, I don't know that they're jumping significantly, but at least we appear to have found the bottom in the markets where we have problems and that's a positive for us.
Operator
Our next question comes from Blair Brantley at BBT Capital Markets.
Blair C. Brantley - BB&T Capital Markets, Research Division
Question on the funding side with the CDs. What are the -- what's new production coming on at versus -- I know you mentioned in the press release, you had a large amount coming to you over the next 2 quarters on the top of the higher cost CDs?
James D. Rollins
I don't have a rate sheet in front of me, but I can tell you our rate structure today is going to be in the market with everybody else or on the low side like everybody else. So I'm going to tell you that it depends on term on the CDs, but we're in the 30, 40, 50 basis points on the new production coming in, and Bill's chart, where he was talking in the call, we've got $150 million, Bill, in CDs that are priced basically at 4% that will all roll off.
That's a longer time roll off. They don't finish rolling off until early '15, but we have some of that coming off starting in this quarter.
Blair C. Brantley - BB&T Capital Markets, Research Division
Okay. That's very helpful.
And then just kind of a bigger picture kind of question, given where we are in this operating environment and the fact that the rates are going to probably stay pretty low for a while, what is your view as to a kind of strong a ROA for a bank of your size? I mean, do you guys have a target out there?
Obviously, you probably have some internal target, but what are your thoughts on there in terms of ROAs for your size bank?
James D. Rollins
Yes, I think that -- do we have a public target that we put out? Absolutely not.
Do we have internal things that we talk about all the time? Well, sure.
That's how you have to drive any business I would hope. But, from an external target, I again would take you back to a peer group.
I think when you look at a bank like us, we've got a big community bank. We should be able to turn an ROA, equal to or certainly not any worse than any peer that you would want to attach that to.
And then in addition to the bank, we've got some fee income businesses that are really attractive to us. Our insurance business is a very good business for us, but not an efficient business.
So if you're taking about efficiency ratio, it doesn't help us. But from ROA perspective, when you lay on the insurance business, the trust and wealth management business, and the mortgage business, on top of the bank, I would tell you that our ROA should be a good ROA.
And I would encourage you to look for peers that have those fee generators and we should be equal to or better than them.
Operator
Our next question comes from Matt Olney at Stephens.
Matt Olney - Stephens Inc., Research Division
Dan, just a follow-up on capital. You're now paying a higher cash dividend than the past, but it still looks like to me you're going to be building capital in the next few quarters.
So what are your thoughts on capital today and where does M&A come into play as far as your overall capital thoughts?
James D. Rollins
Thanks, Matt. I think that's a good question.
I think that clearly, we need to be deploying capital in the most shareholder-friendly way we can. We need to make sure we were returning capital to our shareholders on a dividend.
We need to be looking to deploy that capital, in smart, accretive, business-building, customer building, acquisition or M&A activity, and I think we want to be like everybody else and we can look at stock buyback opportunities if we continue to grow capital. You're exactly right, we've got to deploy that capital.
I think on the M&A front, we have lots of opportunities in front of us. I think that what we've done in the last year to right [ph] those and pretty us up and get past some of the issues we've been dealing with, put us in a very good position for M&A activity on multiple fronts.
Whether it's a fee line of business, M&A activity, or whether it's a community bank line. I've said before, I think all things being equal, we would like to stay within our footprint, and we would like to find folks like us.
We'd like to find community banks that take care of customers on a similar format so that other cultures can mesh well, and we're going to see those opportunities, I believe that we will continue to see consolidation in our industry and that's a real opportunity for us, and I think we can take advantage on some of that. The history of our company is one where we've done lots.
I don't have a number in front of me, but many, many acquisitions have been done by our company over the last 10 or 15 or 20 years, and we've been out of that game for a while. I would expect that we will be back in that game.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Mr.
Rollins for any closing remarks.
James D. Rollins
All right. Thank you, all, very much for joining us today.
If you need additional information or have further questions, please don’t hesitate to contact us. Otherwise, we look forward to speaking with you as we travel again soon.
Thank you, all, very much.
Operator
The conference is now concluded. Thank you for attending today's presentation.
You may now disconnect.