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BancorpSouth Inc. (NYSE:BXS)

Q3 2007 Earnings Call

October 24, 2007 11:00 am ET


Randy Burchfield - IR

Aubrey Patterson - Chairman & CEO

John Lotz - EVP, Loan Administration

Jim Kelley - President and COO

Nash Allen – CFO

James Threadgill - Vice Chairman, Financial Services


Shelby Norman - Stephens Inc.

David Grayson - SunTrust Robinson Humphrey

Dave Bishop - Stifel Nicolaus


(Operator Instructions) I am now turning the call over to Randy Burchfield of BancorpSouth. Thank you, sir; you may begin.

Randy Burchfield

Good morning. On our call this morning, as usual from our corporate offices in Tupelo are: BancorpSouth Chairman and CEO Aubrey Patterson; Jim Kelley, President and Chief Operating Officer; Nash Allen, Chief Financial Officer; John Lotz, Executive Vice President, Loan Administration; and James Threadgill, Vice Chairman, Financial Services, which includes our bank's insurance operations.

As usual, let me remind you that during today's call representatives of BancorpSouth may make certain forward-looking statements regarding future results or future financial performance of BancorpSouth. We caution you that 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 annual report on Form 10-K for the year ended December 31, 2006.

During the call, certain non-GAAP financial measures may be discussed regarding BancorpSouth's performance. If so, you can find the reconciliation of these measures to GAAP financial measures on the investor relations portion of the website at

Now, Aubrey Patterson.

Aubrey Patterson

Thank you, Randy and good morning to you all. Thanks for being with us today to discuss our results from the third quarter. As you know from our press release yesterday afternoon, BancorpSouth produced good results for the quarter, especially good in the context of issues that dominate today's headlines. This morning I will discuss the highlights of the quarter, and then I and other members of our senior management team will address any questions you might have.

The first highlight I will mention for the third quarter is the double-digit growth we produced in both net interest revenue and non-interest revenue. The last time we achieved double-digit growth in both primary revenue streams was the second quarter of 2005, the last full quarter before Hurricane Katrina.

Turning to our business segments, growth in our traditional banking business was driven by the acquisition of Missouri-based Signature Bank in March of this year; by solid organic growth for the third quarter and the latest 12 months; and, by a focused and consistent asset liability management strategy.

While the interest rate environment was relatively stable over the past year until the Fed funds rate cut in mid-September, the steady rise in interest rates for the two-year period between June of '04 and June of '06 continues to be felt. Rather than fund our loan growth primarily with deposit liabilities that quickly reflect a rising interest rate environment, we have continued to redeploy proceeds from maturing, lower yield investments into new loans at the current higher rates.

This strategy has not only enabled us to improve our asset yield, but also has restrained growth of interest expense by deemphasizing public fund timed deposits. We have been able to price our retail deposits with greater precision, while still serving our core customer base well. As a result, the 16.5% year-over-year growth in our loans as of September 30, 2007 produced a 21.6% comparable quarter increase in third quarter loan interest revenues.

Demand deposits and savings and other timed deposits increased 8.3% and 6.5% respectively at the end of the third quarter of '07 from the year before. From the end of the second quarter this year, they are down 0.8% and 3.8% respectively and from the end of the first quarter, demand deposits in savings and other timed deposits are down 3.9% and 4.9% respectively.

Through this repositioning of assets, liabilities and interest rates, our asset and liability and management strategy fully funded loan growth while lowering our interest-rate risk. One measure of our success is the stability of our net interest margin, which at 3.66% for the latest quarter, was even with the third quarter of last year and in the middle of a 5 basis point range we have maintained for the last five quarters. Of course, the recent 0.5 point cut in the Fed fund rate and the possibility of another cut to come add new variables to our management of net interest margin.

In addition, the slowing sequential quarter growth rate of our loan portfolio to 1.0% for the third quarter versus 2.6% for the second quarter is a trend we are working to reverse in the fourth quarter.

So as we have said before, asset liability management is both a challenge and an opportunity. In the face of interest rate volatility, we continue to believe that our conservative philosophy is conducive to long-term growth and profit stability. We take a similar stance when it comes to credit quality enabling us to continue to maintain high standards in the face of current conditions. Our credit quality is demonstrated by low annualized net charge-offs for the third quarter at 13 basis points of total loans and leases; by non-performing loans at 35 basis points of total loans and leases; and by maintaining our allowance for credit losses at 1.24% of total loans and leases.

Because our mortgage origination business has never pursued the sub-prime market, we continue to have only nominal exposure to the issues affecting this market, said exposure amounting to less than $500,000.

During the third quarter, our provision for credit losses more than doubled from the third quarter last year, although it declined 27% from the second quarter of this year. As you know from prior conference calls, much of this increase is simply related to higher loan volume.

Our non-performing loans increased by $6 million from the third quarter last year or 3 basis points as a percent of total loans. As is standard for the great majority of all of our lending, we're well collateralized on non-performing loans.

Let's turn now to the performance of non-interest revenues for the third quarter. This category increased 17.6% from the third quarter last year, driven by a $4.6 million or a 56.8% increase in our other non-interest revenue line item. About half came from a $2.4 million gain on sales of MasterCard stock. In addition, we produced significant growth in fees from credit and debit cards and merchant fees, which rose 18.9% from the third quarter of 2006.

We also remain very pleased with the strong organic growth produced by BancorpSouth Insurance Services, which accounted for virtually all of the 9.8% increase in insurance commission revenue for the third quarter. This increase follows five consecutive quarters since Hurricane Katrina in which this business expanded at a double-digit pace, the first four of which were at a rate greater than 18%. While we never expected to sustain that pace, the 9.8% growth for the third quarter is still impressive, especially considering softening business conditions during the third quarter.

During the quarter, we completed the acquisition of Insurance Network of Jonesboro, Arkansas. That acquisition provides an additional channel to expand our financial services for our existing customer base in Northeast Arkansas.

We experienced an 11% decline in revenue from mortgage originations for the third quarter. Total mortgage lending revenue as reported in our earnings news release also reflects a $3.2 million decline in the value of our mortgage servicing assets during the third quarter, compared with a $3.7 million decline for the third quarter last year.

We experienced a 7.8% increase in non-interest expense for the third quarter. Given the expansion of our banking and insurance operations since the third quarter of last year, we are pleased with this level. Most of this increase occurred in the first quarter, which included the Signature acquisition, driving sequential quarter growth in non-interest expenses for that quarter of 5.5%. Our colleagues have since done an outstanding job of managing expenses as we have integrated Signature and second quarter non-interest expense was just 0.3% above the first quarter and the third quarter's increase just 0.4% above the second.

I need to mention that our income taxes for the third quarter last year included a $6.8 million amount due to statutory limitations preventing us from recovering excess tax paid in prior years. The 32.5% tax rate for the latest quarter is more consistent with the rate we would expect for the fourth quarter of this year.

You may recall in our last conference call we indicated that economic activity in our markets was reasonably strong, despite national issues related to the sub-prime market. As we have discussed on previous calls with you, BancorpSouth is strategically well-positioned in key markets throughout our eight-state area. Our Community Bank network is made up of a mix of some of the fastest growing markets in the country, complemented by our core legacy markets. Those markets have traditionally been good sources of lower cost, stable funding and have a loyal retail and small business following.

Those of you who have followed us regularly are familiar with our plans for continuous strategic growth, especially in our non-interest revenue businesses. Our array of initiatives includes continuing to expand our products and services, taking full advantage of cross-selling opportunities within our existing customer base, and expanding that customer base within existing growth markets and attractive new markets, as well within our current eight-state footprint and in contiguous states. We also will continue to evaluate both organic growth and acquisition opportunities in those markets.

Our third quarter results demonstrated again that whether we are in the positive expansionary phase of the economic cycle or in a slowdown, BancorpSouth is strengthened by our long term, tested and proven commitment to conservative operating philosophies. Whether the issue is capitalization, asset qualities, sound asset liability management or lending criteria, BancorpSouth will be consistent in its adherence to best practices designed to create sustained, long-term growth and shareholder value.

Thank you again for your interest in BancorpSouth. Operator, we would now be happy to answer any questions.

Question-and-Answer Session


Your first question comes from Shelby Norman - Stephens Inc.

Shelby Norman - Stephens

I was just wondering if you could give us a little bit more color on what you see going on with the margin over the next couple of quarters? I noticed it was flat to slightly down this quarter. Where did you see that going?

Aubrey Patterson

I tried to touch on this in general terms. I will be a little more specific. We have maintained a range of 5 basis points for an extended period through five quarters and that has been the result of what I referred to as asset redeployment and controlled growth in our deposit structure, and slowing loan growth has enabled us to continue that process even beyond just the normal redeployment of assets.

I am sure we are not unique. Our business model gives us the best case scenario by pretty much stable interest rates; but we manage that risk up and down, we think very credibly. Where I see it is staying in the same range, frankly. That is a function of a lot of those factors that we have already discussed, but we believe we are well-prepared for another modest downturn in rates that would have a salutary effect on deposit costs. If rates stay about where they are, that is a good case for us as well. So I don't see a big change from where we are.

Shelby Norman - Stephens

How about your markets? Have you seen any sort of asset quality deterioration that it sounds like the Florida markets are experiencing? Have you seen any of that start to occur?

Aubrey Patterson

Well as you know, we have had a minor nominal increase in non-performers. They were not in that market. They relate specifically to two individual loans in the Alabama market. We are a relative latecomer to Florida and as a result of that, we were able to be very selective in the risks that we have taken on, anticipating in proximity what has been happening. So we deserve no special credit for being clairvoyant, but I think from timing, we were able to manage our exposure there better than others who had made a bigger bet on those markets. So surely we are seeing the same thing you are seeing in those banks that have greater exposure in that kind of market, but we do not.

Shelby Norman - Stephens

But your core markets are still holding up pretty well then?

Aubrey Patterson


Shelby Norman - Stephens

As far as your expense management, you guys have done a great job over the last couple of quarters being able to keep that down. Do you see yourself being able to manage it similarly throughout the next few quarters?

Aubrey Patterson

We have an initiative going to really put some special attention to the routine, day-to-day blocking and tackling of controlling expenses as we build next year's budget. I think we will see some very productive efforts coming out of that, so I believe we will be able to do that. I referred in my prepared remarks to the really excellent work our team and our new Missouri colleagues have done in the integration of Signature and the numbers speak for themselves there. It has also been a very smooth transition I might add, again, thanks to our new colleagues and our experienced team working together very closely.

I think it behooves us all, recognizing that growth is slowing at this stage of the economic cycle, to pay special attention to expenses. We think we have done a credible job given the nature of our expanded geographic franchise and our retail base. We have focused a lot on non-interest revenue enhancement to balance us more so, and as we do that, we will continue to refine our work on just controlling day-to-day expenses. We don't anticipate draconian cuts in response to some special set of circumstances that we are frankly not being faced with. We are more in a mode of sharpening our efforts and we are doing that across the board.

Our Chief Operating Officer and President, Jim Kelley, is leading an initiative in that regard that has everyone very focused on it as we prepare next year's budget and I think we will see some meaningful results from that.


Your next question comes from David Grayson - SunTrust Robinson Humphrey.

David Grayson - SunTrust Robinson Humphrey

I was just curious if you could provide a little bit of guidance on future share repurchase activities. I see you have authorization for up to 3 million through early '09 and was curious, given this environment, if you intended to be a bit more aggressive on repurchasing or if you are just going to ride it out and have a smooth pattern of repurchase activity?

Aubrey Patterson

I really would prefer not to respond to that. That is a forward-looking statement. I think the best predictor of what we will do on repurchase activities is what our board has previously authorized and what we have historically engaged in. I appreciate the question, but I don't think we can respond to that one.


Your next question comes from Dave Bishop - Stifel Nicolaus.

Dave Bishop - Stifel Nicolaus

You alluded to some of the uptick in problem assets this quarter, a couple of credits in Alabama. Any color you can give there? Is that the increase in the loans 90-days past due that we are seeing?

Aubrey Patterson

Yes. I also made the point that this is a product of the law of small numbers, obviously. But let me have John Lotz, our EVP for Loan Administration, respond to that.

John Lotz

Dave, the $7 million increase was really the result of two loans in Alabama. One was a commercial office building; the other is retail land, about 48 acres. Unfortunately, the owners of these loans were in the residential construction business and have experienced some slowdowns within some of their markets. Some of them are in the southern part of Alabama.

We are seeing some weaknesses in the housing market, residential development market in just a few of our markets. We expect this trend to continue for the next few quarters and we believe our credit processes are still very strong. We are monitoring all of our construction lending groups and we feel we can manage ourselves through this slowing housing market.

Dave Bishop - Stifel Nicolaus

Was it one commercial office building and one residential construction?

John Lotz

Yes. The entities were involved in the residential construction business. So although we were not direct lenders to them on the residential construction side, we were a byproduct of the slowdown in that market.

Dave Bishop - Stifel Nicolaus

In terms of balance sheet interest rate management, it looked like borrowing shot up a little bit with the decline in deposits. Was that more just a rate play there with cheaper, short-term funding sources?

Aubrey Patterson

That is part of what I referred to as asset redeployment, yes. We have plenty of opportunity to move up in our short-term borrowings from the Home Loan Bank as an alternative to those public fund CDs. There is an advantage there in the net cost to us and it also give us the opportunity to manage our basic deposit cost structure a little tighter to get it back. Frankly, we still have room to continue that process without diminishing our liquidity.

Dave Bishop - Stifel Nicolaus

In terms of loan growth, in terms of the competitive landscape there especially on the commercial real estate side, any sort of improvement there in terms of either risk-adjusted pricing or just opportunities to pick up share, given some of the back down from some of the conduits and other insurance companies and Wall Street lenders?

Aubrey Patterson

In all candor, I think we've prepared for a slowdown. You have seen that demonstrated in the numbers that we have. We are not going to be engaging in a type of lending that is not within the scope of our expertise or our policy; we are not going to be plowing new fields, so to speak. I think we simply have to be prepared to tighten our belts on the expense side and recognize that in this stage of the cycle it is going to be slower growth.

Personally, I don't see any major new conduits of lending opening up to us that we are not already engaged in.


At this time, I show no further questions.

Aubrey Patterson

Thank you for all of your questions and for your interest in BancorpSouth. We appreciate your joining us today. If you need any additional information, don't hesitate to call me or Mr. Jim Kelley or Mr. Nash Allen. We would be happy to furnish it in a separate discussion. Thanks again.

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