(Operator Instructions) I am now turning the call over to RandyBurchfield of BancorpSouth. Thank you, sir; you may begin.
Good morning. On our call this morning, as usual from ourcorporate offices in Tupelo are: BancorpSouth Chairman and CEO AubreyPatterson; Jim Kelley, President and Chief Operating Officer; Nash Allen, ChiefFinancial Officer; John Lotz, Executive Vice President, Loan Administration;and James Threadgill, Vice Chairman, Financial Services, which includes ourbank's insurance operations.
As usual, let me remind you that during today's callrepresentatives of BancorpSouth may make certain forward-looking statementsregarding future results or future financial performance of BancorpSouth. Wecaution you that actual results could differ materially from those indicated inthese forward-looking statements due to a variety of factors and/or risks.Information concerning certain of these factors can be found in BancorpSouth'sannual report on Form 10-K for the year ended December 31, 2006.
During the call, certain non-GAAP financial measures may bediscussed regarding BancorpSouth's performance. If so, you can find thereconciliation of these measures to GAAP financial measures on the investorrelations portion of the website at www.BancorpSouth.com.
Now, Aubrey Patterson.
Thank you, Randy and good morning to you all. Thanks forbeing with us today to discuss our results from the third quarter. As you knowfrom our press release yesterday afternoon, BancorpSouth produced good resultsfor the quarter, especially good in the context of issues that dominate today'sheadlines. This morning I will discuss the highlights of the quarter, and thenI and other members of our senior management team will address any questionsyou might have.
The first highlight I will mention for the third quarter isthe double-digit growth we produced in both net interest revenue andnon-interest revenue. The last time we achieved double-digit growth in bothprimary revenue streams was the second quarter of 2005, the last full quarterbefore Hurricane Katrina.
Turning to our business segments, growth in our traditionalbanking business was driven by the acquisition of Missouri-based Signature Bankin March of this year; by solid organic growth for the third quarter and thelatest 12 months; and, by a focused and consistent asset liability managementstrategy.
While the interest rate environment was relatively stableover the past year until the Fed funds rate cut in mid-September, the steadyrise 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 withdeposit liabilities that quickly reflect a rising interest rate environment, wehave continued to redeploy proceeds from maturing, lower yield investments intonew loans at the current higher rates.
This strategy has not only enabled us to improve our assetyield, but also has restrained growth of interest expense by deemphasizingpublic fund timed deposits. We have been able to price our retail deposits withgreater precision, while still serving our core customer base well. As aresult, the 16.5% year-over-year growth in our loans as of September 30, 2007 produced a 21.6% comparablequarter increase in third quarter loan interest revenues.
Demand deposits and savings and other timed depositsincreased 8.3% and 6.5% respectively at the end of the third quarter of '07from the year before. From the end of the second quarter this year, they aredown 0.8% and 3.8% respectively and from the end of the first quarter, demanddeposits in savings and other timed deposits are down 3.9% and 4.9%respectively.
Through this repositioning of assets, liabilities andinterest rates, our asset and liability and management strategy fully fundedloan growth while lowering our interest-rate risk. One measure of our successis the stability of our net interest margin, which at 3.66% for the latestquarter, was even with the third quarter of last year and in the middle of a 5 basispoint range we have maintained for the last five quarters. Of course, therecent 0.5 point cut in the Fed fund rate and the possibility of another cut tocome add new variables to our management of net interest margin.
In addition, the slowing sequential quarter growth rate ofour loan portfolio to 1.0% for the third quarter versus 2.6% for the secondquarter is a trend we are working to reverse in the fourth quarter.
So as we have said before, asset liability management isboth a challenge and an opportunity. In the face of interest rate volatility,we continue to believe that our conservative philosophy is conducive tolong-term growth and profit stability. We take a similar stance when it comesto credit quality enabling us to continue to maintain high standards in the faceof current conditions. Our credit quality is demonstrated by low annualized netcharge-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 bymaintaining our allowance for credit losses at 1.24% of total loans and leases.
Because our mortgage origination business has never pursuedthe sub-prime market, we continue to have only nominal exposure to the issuesaffecting this market, said exposure amounting to less than $500,000.
During the third quarter, our provision for credit lossesmore 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 thethird quarter last year or 3 basis points as a percent of total loans. As isstandard for the great majority of all of our lending, we're wellcollateralized on non-performing loans.
Let's turn now to the performance of non-interest revenuesfor the third quarter. This category increased 17.6% from the third quarterlast year, driven by a $4.6 million or a 56.8% increase in our othernon-interest revenue line item. About half came from a $2.4 million gain onsales of MasterCard stock. In addition, we produced significant growth in feesfrom credit and debit cards and merchant fees, which rose 18.9% from the thirdquarter of 2006.
We also remain very pleased with the strong organic growthproduced by BancorpSouth Insurance Services, which accounted for virtually allof the 9.8% increase in insurance commission revenue for the third quarter.This increase follows five consecutive quarters since Hurricane Katrina in whichthis business expanded at a double-digit pace, the first four of which were ata rate greater than 18%. While we never expected to sustain that pace, the 9.8%growth for the third quarter is still impressive, especially consideringsoftening business conditions during the third quarter.
During the quarter, we completed the acquisition ofInsurance Network of Jonesboro, Arkansas. That acquisition provides anadditional channel to expand our financial services for our existing customerbase in Northeast Arkansas.
We experienced an 11% decline in revenue from mortgageoriginations for the third quarter. Total mortgage lending revenue as reportedin our earnings news release also reflects a $3.2 million decline in the valueof our mortgage servicing assets during the third quarter, compared with a $3.7million decline for the third quarter last year.
We experienced a 7.8% increase in non-interest expense forthe third quarter. Given the expansion of our banking and insurance operations sincethe third quarter of last year, we are pleased with this level. Most of thisincrease occurred in the first quarter, which included the Signatureacquisition, driving sequential quarter growth in non-interest expenses forthat quarter of 5.5%. Our colleagues have since done an outstanding job ofmanaging expenses as we have integrated Signature and second quarternon-interest expense was just 0.3% above the first quarter and the thirdquarter's increase just 0.4% above the second.
I need to mention that our income taxes for the thirdquarter last year included a $6.8 million amount due to statutory limitationspreventing us from recovering excess tax paid in prior years. The 32.5% taxrate for the latest quarter is more consistent with the rate we would expectfor the fourth quarter of this year.
You may recall in our last conference call we indicated thateconomic activity in our markets was reasonably strong, despite national issuesrelated to the sub-prime market. As we have discussed on previous calls withyou, BancorpSouth is strategically well-positioned in key markets throughoutour eight-state area. Our Community Bank network is made up of a mix of some ofthe fastest growing markets in the country, complemented by our core legacymarkets. 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 familiarwith our plans for continuous strategic growth, especially in our non-interestrevenue businesses. Our array of initiatives includes continuing to expand ourproducts and services, taking full advantage of cross-selling opportunitieswithin our existing customer base, and expanding that customer base withinexisting growth markets and attractive new markets, as well within our currenteight-state footprint and in contiguous states. We also will continue toevaluate both organic growth and acquisition opportunities in those markets.
Our third quarter results demonstrated again that whether weare in the positive expansionary phase of the economic cycle or in a slowdown,BancorpSouth is strengthened by our long term, tested and proven commitment toconservative operating philosophies. Whether the issue is capitalization, assetqualities, sound asset liability management or lending criteria, BancorpSouthwill be consistent in its adherence to best practices designed to createsustained, long-term growth and shareholder value.
Thank you again for your interest in BancorpSouth. Operator,we would now be happy to answer any questions.
Your first question comes from Shelby Norman - Stephens Inc.
Shelby Norman - Stephens
I was just wondering if you could give us a little bit morecolor 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 thatgoing?
I tried to touch onthis in general terms. I will be a little more specific. We have maintained arange of 5 basis points for an extended period through five quarters and thathas been the result of what I referred to as asset redeployment and controlledgrowth in our deposit structure, and slowing loan growth has enabled us tocontinue that process even beyond just the normal redeployment of assets.
I am sure we are not unique. Our business model gives us thebest case scenario by pretty much stable interest rates; but we manage thatrisk up and down, we think very credibly. Where I see it is staying in the samerange, frankly. That is a function of a lot of those factors that we havealready discussed, but we believe we are well-prepared for another modestdownturn in rates that would have a salutary effect on deposit costs. If ratesstay about where they are, that is a good case for us as well. So I don't see abig change from where we are.
Shelby Norman - Stephens
How about your markets? Have you seen any sort of assetquality deterioration that it sounds like the Floridamarkets are experiencing? Have you seen any of that start to occur?
Well as you know, we have had a minor nominal increase innon-performers. They were not in that market. They relate specifically to twoindividual loans in the Alabamamarket. We are a relative latecomer to Floridaand as a result of that, we were able to be very selective in the risks that wehave taken on, anticipating in proximity what has been happening. So we deserveno special credit for being clairvoyant, but I think from timing, we were ableto manage our exposure there better than others who had made a bigger bet onthose markets. So surely we are seeing the same thing you are seeing in thosebanks that have greater exposure in that kind of market, but we do not.
Shelby Norman - Stephens
But your core marketsare still holding up pretty well then?
Shelby Norman - Stephens
As far as your expense management, you guys have done agreat job over the last couple of quarters being able to keep that down. Do yousee yourself being able to manage it similarly throughout the next fewquarters?
We have an initiativegoing to really put some special attention to the routine, day-to-day blockingand tackling of controlling expenses as we build next year's budget. I think wewill see some very productive efforts coming out of that, so I believe we willbe able to do that. I referred in my prepared remarks to the really excellentwork our team and our new Missouricolleagues have done in the integration of Signature and the numbers speak forthemselves there. It has also been a very smooth transition I might add, again,thanks to our new colleagues and our experienced team working together veryclosely.
I think it behooves us all, recognizing that growth isslowing at this stage of the economic cycle, to pay special attention toexpenses. We think we have done a credible job given the nature of our expandedgeographic franchise and our retail base. We have focused a lot on non-interestrevenue enhancement to balance us more so, and as we do that, we will continueto refine our work on just controlling day-to-day expenses. We don't anticipatedraconian cuts in response to some special set of circumstances that we arefrankly not being faced with. We are more in a mode of sharpening our effortsand we are doing that across the board.
Our Chief Operating Officer and President, Jim Kelley, isleading an initiative in that regard that has everyone very focused on it as weprepare next year's budget and I think we will see some meaningful results fromthat.
Your next question comes from David Grayson - SunTrustRobinson Humphrey.
David Grayson - SunTrust Robinson Humphrey
I was just curious if you could provide a little bit ofguidance on future share repurchase activities. I see you have authorizationfor 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 justgoing to ride it out and have a smooth pattern of repurchase activity?
I really would prefernot to respond to that. That is a forward-looking statement. I think the bestpredictor of what we will do on repurchase activities is what our board haspreviously authorized and what we have historically engaged in. I appreciatethe 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 thisquarter, a couple of credits in Alabama.Any color you can give there? Is that the increase in the loans 90-days pastdue that we are seeing?
Yes. I also made the point that this is a product of the lawof small numbers, obviously. But let me have John Lotz, our EVP for Loan Administration,respond to that.
Dave, the $7 million increase was really the result of twoloans in Alabama. One was acommercial office building; the other is retail land, about 48 acres. Unfortunately, the ownersof these loans were in the residential construction business and have experiencedsome slowdowns within some of their markets. Some of them are in the southernpart of Alabama.
We are seeing some weaknesses in the housing market,residential development market in just a few of our markets. We expect thistrend to continue for the next few quarters and we believe our credit processesare still very strong. We are monitoring all of our construction lending groupsand we feel we can manage ourselves through this slowing housing market.
Dave Bishop - Stifel Nicolaus
Was it one commercial office building and one residentialconstruction?
Yes. The entities were involved in the residentialconstruction business. So although we were not direct lenders to them on theresidential construction side, we were a byproduct of the slowdown in thatmarket.
Dave Bishop - Stifel Nicolaus
In terms of balance sheet interest rate management, itlooked like borrowing shot up a little bit with the decline in deposits. Wasthat more just a rate play there with cheaper, short-term funding sources?
That is part of whatI referred to as asset redeployment, yes. We have plenty of opportunity to moveup in our short-term borrowings from the Home Loan Bank as an alternative tothose public fund CDs. There is an advantage there in the net cost to us and italso give us the opportunity to manage our basic deposit cost structure alittle tighter to get it back. Frankly, we still have room to continue thatprocess without diminishing our liquidity.
Dave Bishop - Stifel Nicolaus
In terms of loan growth, in terms of the competitivelandscape there especially on the commercial real estate side, any sort ofimprovement there in terms of either risk-adjusted pricing or justopportunities to pick up share, given some of the back down from some of theconduits and other insurance companies and Wall Street lenders?
In all candor, I think we've prepared for a slowdown. Youhave seen that demonstrated in the numbers that we have. We are not going to beengaging in a type of lending that is not within the scope of our expertise orour policy; we are not going to beplowing new fields, so to speak. I think we simply have to be prepared totighten our belts on the expense side and recognize that in this stage of thecycle it is going to be slower growth.
Personally, I don't see any major new conduits of lendingopening up to us that we are not already engaged in.
At this time, I show no further questions.
Thank you for all of your questions and for your interest inBancorpSouth. We appreciate your joining us today. If you need any additionalinformation, don't hesitate to call me or Mr. Jim Kelley or Mr. Nash Allen. Wewould be happy to furnish it in a separate discussion. Thanks again.
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