BancorpSouth Announces Second Quarter 2010 Financial Results

TUPELO, Miss., July 22 /PRNewswire-FirstCall/ -- BancorpSouth, Inc. (NYSE: BXS) today announced financial results for the quarter ended June 30, 2010.

The Company had a net loss for the quarter of $12.6 million, or $0.15 per diluted share, compared with net income of $33.9 million, or $0.41 per diluted share, for the second quarter of 2009.

Commenting on the second quarter results, Aubrey Patterson, Chairman and Chief Executive Officer of BancorpSouth, said, "The decline in BancorpSouth's bottom-line results for the second quarter was primarily attributable to the impact of increased credit costs.  Reported results for the second quarter of 2010 also included the negative impact of a reduction in the value of BancorpSouth's mortgage servicing rights (MSR) of $8.3 million ($0.06 per diluted share after tax).  The results of core operations were otherwise relatively stable on a comparable and sequential quarter basis.  Specifically, our provision for credit losses was $62.4 million for the second quarter of 2010, up from $17.6 million for the second quarter last year and $43.5 million for the first quarter of 2010.  Non-performing loans and leases (NPLs) increased by $66.6 million during the quarter, bringing total NPLs to $302.3 million at June 30, 2010.

"The bulk of credit quality issues are concentrated geographically, enhancing the focus of our resolution efforts.  The majority of NPLs at the quarter end were in Alabama and the Nashville and the greater Memphis, Tennessee areas.  Slowed housing starts coupled with an excess of lot inventory have combined to create an environment that has caused many borrowers to be unable to amortize their debt. This environment has also caused declines in real estate collateral values.

"At June 30, 2010, over 70 percent of our non-accrual loans had been determined to be collaterally dependent and had either been charged down or had a specific reserve to reflect values obtained from recent appraisals. As a result of these write-downs and reserves, the remaining net book balance of impaired loans was 61 percent of the unpaid principal balance. The allowance for credit losses that was not specifically allocated to impaired loans represented 212 percent of the remaining unimpaired non-accrual loan balance.

"We are encouraged that other areas of our business have remained relatively stable despite continued weakness in the economy.  This consistency, combined with continued expense control, produced pre-tax, pre-provision earnings of $46.4 million for the quarter ended June 30, 2010.

"For the second quarter of 2010, we continued to generate new loans that have effectively offset normal loan runoff.  This has been accomplished in an economic cycle that has seen the banking industry experience a year-to-year decline in loan balances of around 7 percent. Deposits continued to grow during the second quarter, with this growth coming in all major deposit categories and generally across our entire footprint. Continued deposit growth, combined with a lack of loan growth, resulted in an increase in average short-term investments of $125 million during the quarter. While this mix does not produce the highest short-term net interest margin in the current environment of historically low interest rates, it builds customer relationships and positions the Company better to manage interest rate risk.  This funding mix shift contributed to a reduction in net interest margin to 3.71 percent for the second quarter of 2010 from 3.75 percent and 3.88 percent for the comparable and sequential quarters, respectively.

"BancorpSouth's capital remains very strong, and we have ample liquidity.  In addition to supporting our continuing interest in industry consolidation opportunities that meet our strategic objectives, our strong capital enables us to manage our credit issues for the long-term benefit of the Company and our shareholders.

"In an environment that remains very stressful, our second quarter results demonstrate that we are dealing effectively with the challenges we face.  We do not discount the work required to return the Company's financial performance to more normal levels.  We remain confident that BancorpSouth is well positioned to do so."

Net Interest Revenue

Net interest revenue was $109.3 million for the second quarter of 2010, a decrease of 1.5 percent from $110.9 million for the second quarter of 2009 and 2.3 percent from $111.9 million for the first quarter of 2010.  The fully taxable equivalent net interest margin was 3.71 percent for the second quarter of 2010, compared with 3.75 percent for the second quarter of 2009 and 3.88 percent for the first quarter of 2010.

Over the past two years, the net interest margin has remained in a range of 3.67 percent to 3.88 percent, with the high end of the range having been achieved in the first quarter of 2010. Several factors contributed to the decrease of 17 basis points ("bps") from the first quarter of 2010.  The higher level of average NPLs reduced the margin by 4 bps, reversal of current year interest for loans placed on non-accrual status or charged-off in the quarter caused a decline of 6 bps, and the remainder of the change was primarily attributable to the changing mix of earning assets and interest-bearing liabilities.

Asset, Deposit and Loan Activity

Total assets at June 30, 2010 were $13.4 billion, compared with $13.3 billion at June 30, 2009. Total deposits were $11.2 billion at June 30, 2010, an increase of 10.5 percent from $10.2 billion at June 30, 2009.  Loans and leases, net of unearned income, were $9.6 billion at June 30, 2010, a decrease of 1.2 percent from $9.8 billion at June 30, 2009.

Loan demand remained weak during the second quarter of 2010, with the Company essentially replacing normal loan runoff with new loan production.  Louisiana and East Texas provided most of the new loan production. During the twelve months ended June 30, 2010, loans and leases decreased $114.5 million. This decrease was primarily driven by a decrease in CAD loans of $270.5 million. This segment of the loan portfolio includes residential CAD loans, which had a number of problem loans.  Residential CAD loans at June 30, 2010 totaled $569.6 million, reflecting a decrease of $66.6 million from June 30, 2009. Other types of loans contained in this loan segment that experienced significant declines during the past twelve months were 1-4 family construction loans, which decreased $74.1 million, and commercial construction loans, which decreased $119.3 million from June 30, 2009. While 1-4 family and commercial construction loans have not experienced the credit deterioration that has been experienced in the residential CAD segment, the slow-down in construction has resulted in lower outstanding balances.  

Deposits grew to $11.2 billion or 10.5 percent over a year ago. The growth in deposits included a 7 percent increase in noninterest-bearing demand deposits, 19 percent growth in interest-bearing demand deposits, and a 4 percent increase in time deposits. The growth in deposit balances has been experienced broadly across the markets we serve.  We are encouraged with the opportunity that these new customer and deepened existing customer relationships reflect.

Provision for Credit Losses and Allowance for Credit Losses

For the second quarter of 2010, the provision for credit losses was $62.4 million, compared with $17.6 million for the second quarter of 2009 and $43.5 million for the first quarter of 2010. Annualized net charge-offs were 2.08 percent of average loans and leases for the second quarter of 2010, compared with 0.55 percent for the second quarter of 2009 and 1.26 percent for the first quarter of 2010. These increases reflect increased impairments of loans where the Company has determined that borrowers are not likely to be able to repay under the original contractual terms.

NPLs increased to $302.3 million, or 3.13 percent of net loans and leases, at June 30, 2010 from $97.7 million, or 1.00 percent of net loans and leases, at June 30, 2009 and $235.7 million, or 2.43 percent of net loans and leases, at March 31, 2010.  The allowance for credit losses increased to 2.08 percent of net loans and leases at June 30, 2010, compared with 1.42 percent at June 30, 2009 and 1.95 percent at March 31, 2010.

NPLs at June 30, 2010 included $263.8 million of loans on nonaccrual status, $17.7 million in loans 90 days or more past due and still accruing, and restructured loans still accruing of $20.8 million. Loans and leases 30-89 days past due decreased 8 percent from $142.8 million at March 31, 2010 to $130.9 million at June 30, 2010.

At the end of the second quarter, $102.9 million of NPLs, or 34.0 percent, were residential CAD loans, $60.9 million, or 20.1 percent, were other CAD loans, $46.5 million, or 15.4 percent, were commercial real estate mortgage loans, $44.4 million, or 14.7 percent, were consumer mortgages, and NPLs from all other loan types totaled $47.6 million, or 15.7 percent, of NPLs.

Noninterest Revenue

Noninterest revenue was $57.1 million for the second quarter of 2010, compared with $80.5 million for the second quarter of 2009 and $63.3 million for the first quarter of 2010.  In the second quarter of 2010, mortgage production and servicing income was $6.0 million.  This was offset by the $8.3 million negative MSR market valuation adjustment, resulting in negative net mortgage lending revenue of $2.3 million for the second quarter.  Mortgage origination volume during the quarter totaled $290.6 million, down from $507.5 million in the second quarter of 2009 when refinancing accounted for 71 percent of production. In the second quarter of 2010, refinancing accounted for just 40 percent of originations.

Other non-interest revenue, including credit and debit card fees, service charges and trust income continue to reflect an increased level of activity on both a year-over-year and sequential quarter basis. Insurance commissions totaled $21.7 million, consistent with the first quarter of 2010 and up $1.1 million over the second quarter of 2009.

Noninterest Expense

BancorpSouth continued to control noninterest expenses well during the second quarter of 2010. These expenses totaled $120.0 million for the quarter compared with $124.0 million for the second quarter of 2009 and $120.5 million for the first quarter of 2010.  Results for the second quarter of 2009 include the impact of a special FDIC assessment of $6.1 million.  Excluding this assessment, the FDIC premium increased $1.1 million for the second quarter of 2010 from the same quarter in 2009.  

Capital Management

BancorpSouth's commitment to a strong capital base is one of its fundamental strengths.  The Company's equity capitalization is 100 percent common stock.  This strong capital base has enabled BancorpSouth to forego participating in the Capital Purchase Program under TARP or raising new capital since the economic recession began. BancorpSouth's ratio of shareholders' equity to assets was 9.24 percent at June 30, 2010, compared with 9.59 percent at June 30, 2009.  The ratio of tangible equity to tangible assets was 7.23 percent at June 30, 2010, compared with 7.53 percent at June 30, 2009.  BancorpSouth remains a "well capitalized" financial holding company, as defined by federal regulations, with Tier 1 risk-based capital of 10.53 percent at June 30, 2010 and total risk based capital of 11.79 percent, compared with required minimum levels of 6 percent and 10 percent, respectively, to meet the definition of "well capitalized."  

Summary

Patterson concluded, "The second quarter of 2010 was a difficult one, focused on dealing with continuing credit issues. The challenge in dealing with these issues is to work through those problems, without neglecting areas that continue to present opportunities that will serve the Company well in the future. I am proud of our management team for the progress we have made on both fronts in the first half of 2010. As we have discussed throughout the recession, our credit quality was not immune to the impact of a severe and prolonged economic downturn.  That said, we believe that we are well-positioned and have made significant progress in addressing our credit issues.  We are - and intend to remain - well reserved against losses inherent in our loan portfolio.  In addition, our strong capital supports our ability to work with our borrowers appropriately to avoid unnecessarily costly resolutions.  We believe we have a good understanding of the specific markets primarily accountable for our increased NPLs, and we are taking appropriate action in resolving these problems.

"While the difficulties we have faced are not insignificant, they remain manageable, and we expect an improving economy to support a stronger performance within our core operations.  We are proud of the stability demonstrated by these operations throughout the recessionary economy.  We expect our culture of strong customer service, comprehensive financial products and services, and our strong capital position will continue to enable us to build long-term value for BancorpSouth's shareholders."

Conference Call

BancorpSouth will conduct a conference call to discuss its second quarter 2010 results tomorrow, July 23, 2010, at 10:00 a.m. (Central Time).  Investors may listen via the Internet by accessing BancorpSouth's website at http://www.bancorpsouth.com.  A replay of the conference call will be available at BancorpSouth's website for at least two weeks following the call.

Forward-Looking Statements

Certain statements contained in this news release may not be based on historical facts and are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  These forward-looking statements may be identified by their reference to a future period or periods or by the use of forward-looking terminology such as "anticipate," "believe," "estimate," "expect," "may," "might," "will," "would," "could" or "intend."  These forward-looking statements include, without limitation, statements relating to real estate values, our ability to manage through the current environment, our ability to remain well-reserved against losses in our loan portfolio, the ability of our borrowers to repay their loans, our ability to address credit issues, our understanding of and ability to resolve problems related to our NPLs, the number of new problem loans that we face, the impact of the economy on our core operations and the impact of our culture of strong customer service, sophisticated financial products and services and strong capital position.

We caution you not to place undue reliance on the forward-looking statements contained in this news release in that actual results could differ materially from those indicated in such forward-looking statements because of a variety of factors.  These factors may include, but are not limited to, changes in general business or economic conditions or government fiscal and monetary policies, volatility and disruption in national and international financial markets, fluctuations in prevailing interest rates and the ability of BancorpSouth to manage its assets and liabilities to limit exposure to changing interest rates, the ability of BancorpSouth to increase noninterest revenue and expand noninterest revenue business, the ability of BancorpSouth to maintain credit quality, changes in laws and regulations affecting financial service companies in general, the ability of BancorpSouth to compete with other financial services companies, the ability of BancorpSouth to provide and market competitive services and products, changes in BancorpSouth's operating or expansion strategy, BancorpSouth's business model, geographic concentration of BancorpSouth's assets, the ability of BancorpSouth to manage its growth and effectively serve an expanding customer and market base, the ability of BancorpSouth to achieve profitable growth and increase shareholder value, the ability of BancorpSouth to attract, train and retain qualified personnel, the ability of BancorpSouth to identify, close and effectively integrate potential acquisitions, the ability of BancorpSouth to expand geographically and enter growing markets, changes in consumer preferences, other factors generally understood to affect the financial results of financial services companies, and other factors described from time to time in BancorpSouth's filings with the Securities and Exchange Commission.  We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.

BancorpSouth, Inc. is a financial holding company headquartered in Tupelo, Mississippi, with $13.4 billion in assets.  BancorpSouth Bank, a wholly-owned subsidiary of BancorpSouth, Inc., operates approximately 314 commercial banking, mortgage, insurance, trust and broker/dealer locations in Alabama, Arkansas, Florida, Louisiana, Mississippi, Missouri, Tennessee and Texas.  BancorpSouth Bank also operates an insurance location in Illinois.

SOURCE BancorpSouth, Inc.