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BancorpSouth, Inc. (NYSE:BXS)

Q1 2008 Earnings Call

April 22, 2008 11:00 am ET

Executives

Randy Burchfield – Senior Vice President, Director of Marketing

Aubrey B. Patterson - Chairman and Chief Executive Officer

James V. Kelley - President and Chief Operating Officer

L. Nash Allen, Jr. - Chief Financial Officer

Gregg Cowsert - Chief Lending Officer

James Threadgill -Vice Chairman of Financial Services

Analysts

Kevin Fitzsimmons - Sandler O’Neil

Charlie Ernst - Sandler O’Neill

Brian Klock-Keefe, Bruyette & Woods

Analyst for Barry McCarver - Stephens Inc.

Operator

Welcome to the Bankcorp first quarter conference all. (Operator Instructions) I would now like to turn the call over to Mr. Randy Burchfield.

Randy Burchfield

On our call from our corporate offices in Tupelo this morning are our BancorpSouth Chairman and CEO, Aubrey Patterson; Jim Kelley, President and Chief Operating Officer; Nash Allen, Chief Financial Officer; Gregg Cowsert, Chief Lending Officer; and James Threadgill, Vice Chairman of Financial Services, which includes our branch insurance operations.

As we usually do, 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 on BancorpSouth’s annual report on Form TM-K for the year ended December 31, 2007.

Also during the call, certain non-GAAP financial measures may be discussed regarding BancorpSouth’s performance. If so, you can find a reconciliation of these measures, GAAP financial measures, on the investor relations portion of our website at www.bancorpsouth.com. Now, Aubrey Patterson.

Aubrey Patterson

Thanks to each of you for being with us today to discuss Bancorp’s financial results for the first quarter. I’ll provide a brief overview of our highlights for the quarter and then other members of the senior management team and I will address any questions you may have.

The primary message I wanted to deliver today is that BancorpSouth continues to perform well in a challenging environment. Our solid operating and financial results stand in direct contrast to much of the news we hear daily about the financial services industry. BancorpSouth is, of course, subject to the pressures of the economic cycle.

Nonetheless, our first quarter results are differentiated from many of our peers, not only because we produced double-digit growth in both our traditional banking business and our non-interest revenues, but also because we have maintained our historically strong credit quality, our ample liquidity, and we have further strengthened our capital ratios.

As our first quarter acquisitions demonstrated, this strong capital structure gives us substantial flexibility in continuing to thoughtfully implement our expansion strategy, a competitive advantage that again distinguishes BancorpSouth from our peers and supports our prospects for additional earnings growth.

Those of you who have followed us regularly are well aware that our strong performance in today’s uncertain environment is primarily the result of a disciplined commitment to a conservative operating philosophy. The value of our business model is readily apparent in industry conditions like those we’ve experienced for at least the last two quarters and which are likely to continue for the next several.

With that overview, let’s discuss our quarterly results in more detail. We’re very pleased with the 11.6% growth in net interest revenue for the first quarter, following growth of 11.9% for the third quarter last year and 13.9% for the fourth quarter. Well a solid 5.6% organic expansion in comparable quarters total loans contributed to growth in net interest revenue, our 2.3% annualized growth on a sequential quarter basis reflected slowing loan demand in our region, reflecting national trends.

With this moderate expansion of total loans during the first quarter, we continue to fund new loans primarily with proceeds from maturing lower yield investment securities, even as we experienced a slight increase in yields for the quarter in our investment portfolios. As a result, we generated a 1.8% increase in interest revenue for the quarter from the first quarter last year, in spite of the substantial decline in interest rates during the past year.

The increase in interest revenue compared favorably with our experience with interest expense, which declined 9.1% for the quarter from the first quarter of last year. In part this decline reflects the falling interest rates. It was also driven by our more conservative pricing of public one time deposits, which resulted in four consecutive sequential quarter reductions and other [inaudible]. As we discussed in pervious quarters, we replaced much of the CD decline with lower rate Federal Home Loan Bank borrowings, which totaled $430 million at the end of the latest quarter, up from zero at the same time last year.

Those borrowings had declined nearly $300 million during the first quarter from the end of 2007 due to a 5.3% sequential quarter increase in demand deposits, which further reduced interest expense for the quarter. Our balance sheet management efforts in this declining rate environment produced the second consecutive quarterly increase in net interest margin to 3.79%. This is the high point since the first quarter of 2003.

Turning to credit quality, BancorpSouth continues to maintain strong credit quality in spite of the increased pressure of the slowing economic environment. This pressure is evident in the increase in non-performing loans and net charge offs compared with both the first quarter of 2007 and the fourth quarter of 2007. We continue to monitor our credit quality, which remains consistent with our conservative credit operations. We’re not unduly concerned about the increases we experienced for the first quarter, nor with the absolute levels for annualized net charge offs of 0.29% of average loans and for non-performing loans of 0.42% of loans.

Net charge offs and NPLs have recently been at historic and unsustainably low levels. The current quarter metrics compare favorably with our long-term trends. We are all aware, however, that risk has increased with the weakening of the national economy. We’ll move decisively to address any emerging credit issues and remain well reserved against expected credit losses. Our allowance for credit losses, of 1.29% of loans at the end of the first quarter, is slightly more than 3x non-performers.

Although the length and intensity of the economic down turn is an uncontrollable variable, we maintain confidence that BancorpSouth’s credit quality will continue to favorable differentiate us within the financial services industry. Strong growth in net interest revenue for the first quarter was complimented by a 13.5% increase in non-interest revenue. Among other positive factors, this growth was driven by a 24.6% increase in insurance commission revenue to a new quarterly record of $24.7 million. Our results for the quarter included the acquisition of two insurance agencies during the first quarter and another acquisition during the third quarter last year.

Our first acquisition this year was of the property and casualty line of a major insurance broker in Springfield, Missouri. This transaction expands the growing presence we created in the Springfield market through the previous acquisition of the Signature Bank in March 2007. We also acquired the Joe Max Green/Insurance Concepts Insurance Agency headquartered in Nacogdoches, Texas, a major agency which also operates other East Texas offices in Livingston, Tyler, Henderson in Athens as well as in Houston and in Itasca, Illinois.

Both of these transactions are consistent with our strategy of acquiring proven, leading market agencies that can leverage our established presence in existing markets or introduce us into attractive contiguous markets. They’re also representative of the on going potential to further expand this business through additional acquisitions.

The growth in non-interest revenue also benefited by a 16% increase in fee revenue from our credit and debit card business. In addition, key staff additions and favorable interest rates have expanded mortgage originations and refinancing, driving a 37.7% increase in mortgage lending revenue for the first quarter, excluding charges in the valuation of the mortgage-servicing asset.

Also consistent with declining interest rates, the valuation of our mortgage-servicing asset declined $4.3 million for the first quarter of 2008 compared to a comparable decline in the amount of 1.8 million for the first quarter of last year. Other non-interest revenue increased 13% for the quarter due to a $2.8 million gain from the sale of Visa stock in connection with its initial public offering.

Non-interest expense increased 7.4% for the first quarter, primarily due to operations of the Signature Bank, which was acquired on March 1 of last year. Also the opening of several new loan production offices and full service bank offices in the past year, and the acquisition of the three insurance agencies discussed earlier.

Non-interest expense also includes the positive effect of a $1.1million reversal of a portion of the $2.3 million charge in the fourth quarter of 2007, which related to a guarantee of Visa’s obligation for certain litigation.

To conclude my remarks today, BancorpSouth remains committed to its long-term growth strategy and to maximizing shareholder value. We do expect the current economic environment to continue challenging the financial services industry. We seek to increase penetration of our current customer base by serving an increasing portion of their financial needs, to build our presence in existing growth markets by attracting new customers and to expand into contiguous markets either in our current eight state franchises or in neighboring states.

We have ongoing opportunities for gains in market share through all three of these avenues for growth and we have a demonstrated capability to achieve our objectives both organically and through acquisition. With an increase in our capital to assets ratio to 9.30% at the end of the first quarter, from 8.69% a year earlier, we continue to strengthen our capital position.

This improvement enhances our ability to take advantage of developing opportunities and there by enhance long-term shareholder value. As a result of our solid performance, our proven expansion strategies and the expertise, capital and other resources that support our execution of these strategies, we remain optimistic about BancorpSouth’s prospects for 2008 and beyond.

Thank you again for being with us today and for your interest in BancorpSouth.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Kevin Fitzsimmons with Sandler O’Neil.

Kevin Fitzsimmons - Sandler O’Neil

I was wondering if you could give a little more color just in terms of the credit deterioration you did see, specifically the non-performers. By loan type we’ve been hearing a lot about residential construction related credits and some consumer related and then by geography. Is there any, over concentration, not over concentration, but how would you characterize it? Then I have quick follow up after that.

Aubrey Patterson

Gregg Cowsert our chief lending officer can certainly respond to that, both with respect to the segmentation of both dimensions that you described.

Gregg Cowsert

Let me give you an idea of what we added to other real estate and non-accrual loans in the first quarter by category and I’ll give you a flavor for that. In the first quarter we added to other real estate and residential real estate. 15% of our editions were in residential real estate, 7% was in commercial real estate, 48% was in acquisition and development and construction and 30% was land. In the non-accrual area, of the additions to non-accruals in the first quarter 25% was represented by residential real estate, 9.7% was represented by construction, 39% was C&I, 8.5% was land and 175 was ag/land related credits. I might also mention that, in looking at our non-performing assets, or non-performing loans, which came in at 0.42% in the first quarter, looking back over a six year period, our average non-performing loans as a percent of net loans was 0.49%. Our credit losses, well let me say that we’re seeing basically continued weakness in the residential real estate market, it’s not confined to any one place, obviously some markets are feeling the crunch a little worse than others that might have a more vibrant local economy, but it’s pretty much across the board. I hope that gives you a flavor for our additions of non-performers.

Aubrey Patterson

On Greg’s closing comment there, you can take that, I think, as the appropriate response to the question you asked about geographic concentration, there really isn’t any. You had a follow up Kevin?

Kevin Fitzsimmons - Sandler O’Neil

Just quickly Aubrey, there is a lot of people been talking about M&A opportunities at some point. How do you look at that? Do you look at it as an opportunity, do you feel it’s too early and it’d be difficult to really assess the credit difficulties within a potential target and when do you think some of those might play out? Thank you.

Aubrey Patterson

I think those are all really good questions and I think they’ll be answered in the fullness of time, Kevin. We’re intent on maintaining a fortress balance sheet, dealing with the issues that face us at this stage of the cycle. I think we, hopefully, have very clearly demonstrated that our quality metrics are sound, especially in a historic context. We’re very focused on keeping that that way. We want to be sure our capital asset ratio prepares us to take advantage of any opportunities that might appear at a later point in the cycle, but I certainly think that, as you suggested, that it’s early.

Operator

Your next question is from Charlie Ernst - Sandler O’Neill.

Charlie Ernst - Sandler O’Neill

Aubrey, I’m just adding back the expense reversal and it looks like other expenses are a little bit higher in the quarter. Can you just add a little bit of color there if there is any to be added?

Nash Allen, Jr.

Charlie, our expenses in the quarter are basically the results of acquisitions. We have significantly more under management than we had a year ago. We’ve acquired, last year in the first quarter we only had one month’s operation of Signature Bank, it was merged in March of last year. We also have the additional insurance agencies that are impacting expenses in the first quarter. Other than that there really hasn’t been any change. It’s more of an expense laden quarter because of payroll tax increases, annual salary increases and things of that nature that impact the first quarter, relative to the fourth quarter of last year.

Charlie Ernst - Sandler O’Neill

Can you give any color as to how much the latest insurance deal added in both revenues and expenses?

James Threadgill

Charlie, good morning. In the first quarter, the two acquisitions that Aubrey mentioned added just under $4 million in revenue and in expense just a little over $3 million in revenue.

Charlie Ernst - Sandler O’Neill

And on the expense side most of that is in salaries I would assume or is it…

James Threadgill

It is commission paid to producer’s, that’s correct.

Charlie Ernst - Sandler O’Neill

Then the mortgage servicing rate write down or impairment, how much of that is sort of your normal amortization?

Aubrey Patterson

$1.3 million a quarter.

James Threadgill

And that will be there every quarter, as you know Charlie.

Randy Burchfield

It runs $250,000 a month or so.

James Threadgill

The relative change from one quarter to the next has to do with the valuation, but the amortization is a fairly constant factor.

Charlie Ernst - Sandler O’Neill

Could you just talk briefly about what you’re thinking on the margin and you had a little bit of expansion this quarter.

Aubrey Patterson

Well, a little bit more than a little bit, but it’s a combination, as I indicated in my comments, of letting our loan growth be financed by maturing securities, eschewing the opportunity to bid on high priced public funds, CDs that require securitization and the judicious use of Home Loan Bank financing to fund the net balance of loan growth, because we see that strategy as having been very effective as witness the five year high in net interest margin. We intend to continue pursuing it.

Charlie Ernst - Sandler O’Neill

So you would expect to see some more expansion in the next quarter or two?

Aubrey Patterson

I won’t give you a definitive answer on that, but except to say that we certainly aren’t predicting the shape of the yield curve, but if all the factors stayed the same as they have in this previous, most recent, quarter, than you could presume that.

Charlie Ernst - Sandler O’Neill

Then lastly, your capital is building and it doesn’t look like you brought back stock in the quarter. Can we just assume that you guys are kind of keeping your powder dry right now and possibly just waiting for a deal, or just being a little bit more conservative?

Aubrey Patterson

All of the above.

Operator

Your next question is from Brian Klock - KBW.

Brian Klock-Keefe, Bruyette & Woods

I think that, I just want to make sure I have my numbers right. The adds into NBA during the quarter, within the RE, 48% was in A&D, is that the correct number?

Aubrey Patterson

I’ll refer you back to Greg. Yes, that is correct.

Brian Klock-Keefe, Bruyette & Woods

Okay and the 7%$ was in the C&I portfolio or is that?

Aubrey Patterson

CRE.

Brian Klock-Keefe, Bruyette & Woods

CRE portfolio.

Brian Klock-Keefe, Bruyette & Woods

I guess is there any, within the A&D and commercial real estate portfolios, was there anything for those concentrated in one geography? I know you said overall there was, really spread across your footprint, but was there any concentration within A&D and commercial real estate weakness?

Aubrey Patterson

No really, in the first quarter it was not concentrated in any particular area.

Brian Klock-Keefe, Bruyette & Woods

I just want to ask you, on the securities portfolio, both held to maturity available for sale declined about 100 million on the held to maturity, about 30 million on the AFS. Is there any intention to continue to let the securities portfolio run off here in the next quarter or so?

Aubrey Patterson

To a degree. I was a bit reticent in my response to a related earlier question on that strategy going forward. We believe we have the opportunity to continue to pursue that strategy, but obviously it’s not totally open ended. We will at a point have to resume replacement of securities to maintain fledging requirements on public funds that are core deposits, so there are some limitations on it, but we are continuing to pursue that strategy at the present time.

Brian Klock-Keefe, Bruyette & Woods

Okay and just last question on the loan growth side. I guess, what’s your outlook or what’s the pipeline look like here for the next three to six months?

Aubrey Patterson

Well, I made a general comment about it having slowed in the most recent quarter, but we are seeing some signs of resumed increased activity in loan demand, but that may or may not be a trend. I’d be very reluctant to say that there’s any trend out there of expanded loan demand and I doubt that you’re seeing it anywhere else.

Operator

The next question is from Barry McCarver - Stephens Inc.

Analyst for Barry McCarver - Stephens Inc.

This is actually Shelby for Barry McCarver, how are you?

Analyst for Barry McCarver - Stephens Inc.

First of all, what percentage of your salaries expenses is based off the commission? Do you guys have that?

Aubrey Patterson

You’re talking about mortgage commissions and insurance commissions or?

Analyst for Barry McCarver - Stephens Inc.

Right, both.

Aubrey Patterson

I don’t know that we’ve got that broken up that way. We can get it for you. It’s sort of a combination of a couple of the reporting groups that are here this morning.

Randy Burchfield

Would you restate that question?

Aubrey Patterson

What he’s saying is, is how much of our salary, total salary dollars are represented by commission revenue, commission payments. Let us get back with you on that.

Analyst for Barry McCarver - Stephens Inc.

Okay, that’s fine. Then I was noticing that your service charges were down and obviously there is a little bit of seasonality it looks like in there, but even when factoring that in, it still looks like they were down a little bit: I was just wondering if there was anything noteworthy there, or how to think about that?

Aubrey Patterson

I think it may have to do with the number of business days. I’m not getting any signals from our operations head here, Larry Bateman or from Nash…

Nash Allen, Jr.

There actually up from the same quarter last year, but…

Analyst for Barry McCarver - Stephens Inc.

Right.

Aubrey Patterson

I think it’s a seasonal thing.

Analyst for Barry McCarver - Stephens Inc.

Okay, so then just going forward that should just continue with normal seasonality, nothing abnormal there?

Aubrey Patterson

No, there is nothing abnormal.

Analyst for Barry McCarver - Stephens Inc.

I noticed in your press release you mentioned additional de novo branch development plans. I’m just wondering if you could talk about that a little bit.

Aubrey Patterson

There is nothing out of the norm. We have a regular practice of expanding our de novo and in market branches on a sustainable pace. We’ve followed that for years and the past is prolonging that case. We are on a continued basis; we’re not expanding our base or retarding it.

Analyst for Barry McCarver - Stephens Inc.

Okay, that’s good clarity there. Then, just one last thing; so, this was just one other house keeping question, sorry. I noticed that just only a portion of that litigation expense from the Visa was reversed. Is any more of that going to be reversed going forward, or is that, is that it?

Aubrey Patterson

It will be, the additional portion of it should be reversed as the litigation matters are settled.

Analyst for Barry McCarver - Stephens Inc.

Okay, so we can look forward to a couple more of those one time reversals?

Aubrey Patterson

That’s my assumption.

Operator

The next question is from Kevin Fitzsimmons - Sandler O’Neil.

Kevin Fitzsimmons - Sandler O’Neil

Can you go over the numbers again real quick on the percentages you added to non-accrual? I had 25% residential real estate, 9.7 construction development, 39 C&I and 8.5 land and they, it tailed off at the end. Then secondly, Aubrey is there any, is everything still on track with the Toyota plant and is that still looking like fall of ’09? Thanks.

Aubrey Patterson

Well it’s, I wish you’d come by and see; it’s quite an event to see what’s come out of the ground there, it’s a monumental facility. The construction phase is, as far as I know, on track, the numerous suppliers and it’s first tier and second and third tiers suppliers are locating in the region and I think the plant will be complete effectively in ’09 as you say, but I think the first production units are actually going to roll off the line in 2010 and that’s the original schedule. I know the origin of your question has to do with low demand for product. Toyota has recently reasserted their commitment to this plant and to making it a success and it obviously is producing a fuel-efficient vehicle that should be in high demand; so we see that as a continued positive for this particular region of the company. Greg, do you want to clarify those percentages?

Gregg Cowsert

The last category, all the ones you read out were correct, the last category was aggregated land, 17.1%.

Operator

At this time I show no more questions.

Aubrey Patterson

Thank you for your questions and for your support and interest. If you need any additional information or you have any further questions, don’t hesitate to call Nash Allen or myself. Otherwise, we look forward to speaking with you again at our second quarter conference call. Have a good day.

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