BancorpSouth Announces Second Quarter 2019 Financial Results

TUPELO, Miss., July 17, 2019 /PRNewswire/ -- BancorpSouth Bank (NYSE: BXS) (the "Company") today announced financial results for the quarter ended June 30, 2019.

Highlights for the second quarter of 2019 included:

• Reported quarterly net income of $53.1 million, or $0.53 per diluted share.
• Completed the acquisitions of Casey Bancorp, Inc. and Merchants Trust, Inc. effective April 1, 2019; recorded merger-related expenses of $3.1 million for the second quarter.
• Earnings were impacted by a negative pre-tax mortgage servicing rights ("MSR") valuation adjustment of $8.8 million.
• Record net operating income – excluding MSR – of $62.0 million, or $0.61 per diluted share, which represents an increase of 8.9 percent on a per share basis, compared with both the second quarter of 2018 and the first quarter of 2019.
• Generated net organic loan growth for the quarter totaling approximately $170 million, or 5.2 percent on an annualized basis.
• Net interest margin – excluding accretable yield – increased to 3.79 percent, compared with 3.74 percent for the first quarter of 2019.
• Continued strong credit quality reflected by provision for credit losses of $0.5 million for the quarter; improvement in non-performing and classified asset levels.
• Repurchased 611,821 shares of outstanding common stock at a weighted average price of $28.21 per share.

The Company reported net income of $53.1 million, or $0.53 per diluted share, for the second quarter of 2019, compared with net income of $54.0 million, or $0.55 per diluted share, for the second quarter of 2018 and net income of $51.6 million, or $0.52 per diluted share, for the first quarter of 2019.  The Company reported net operating income – excluding MSR – of $62.0 million, or $0.61 per diluted share, for the second quarter of 2019, compared with $55.6 million, or $0.56 per diluted share, for the second quarter of 2018 and $55.9 million, or $0.56 per diluted share, for the first quarter of 2019. 

Net operating income – excluding MSR – is a non-GAAP financial measure used by management to assess the core operating performance of the Company.  This measure excludes items such as recognized securities gains and losses, MSR valuation adjustments, restructuring charges, merger-related expenses, and certain other charges.  

"We are pleased to report record net operating income – excluding MSR – for the second quarter of 2019," remarked Dan Rollins, Chairman and Chief Executive Officer.  "While the negative MSR asset valuation adjustment adversely impacted our GAAP earnings, strong organic balance sheet results contributed to record net operating income – excluding MSR – of $62.0 million, or $0.61 per diluted share, for the second quarter.  We are particularly proud of the efforts of our bankers on both sides of the balance sheet.  We reported organic loan growth of approximately $170 million, or 5.2 percent annualized, while deposits were essentially flat on an organic basis in a quarter that typically experiences significant runoff of public fund balances.  Despite the MSR headwind, our mortgage team had a great quarter as well.  The current rate environment as well as seasonal increases in home purchase activity contributed to mortgage production and servicing revenue of $9.2 million for the quarter."

"We continue to see quality performance in other areas as well.  Our credit quality remains strong, reflected by the provision for credit losses of $0.5 million for the quarter.  We saw continued improvement in our net interest margin – excluding accretable yield – which increased to 3.79 percent for the quarter.  Finally, we continue to deploy capital as we successfully completed the acquisitions of Grand Bank of Texas and Merchants Bank in Alabama during the quarter while also repurchasing approximately 612,000 shares of our common stock."

Net Interest Revenue

Net interest revenue was $160.0 million for the second quarter of 2019, an increase of 12.6 percent from $142.1 million for the second quarter of 2018 and an increase of 4.9 percent from $152.6 million for the first quarter of 2019.  The fully taxable equivalent net interest margin was 3.87 percent for the second quarter of 2019, compared with 3.71 percent for the second quarter of 2018 and 3.86 percent for the first quarter of 2019.  Yields on net loans and leases were 5.12 percent for the second quarter of 2019, compared with 4.67 percent for the second quarter of 2018 and 5.09 percent for the first quarter of 2019, while yields on total interest earning assets were 4.61 percent for the second quarter of 2019, compared with 4.15 percent for the second quarter of 2018 and 4.57 percent for the first quarter of 2019.  The net interest margin, excluding accretable yield, was 3.79 percent for the second quarter of 2019, compared with 3.63 percent for the second quarter of 2018 and 3.74 percent for the first quarter of 2019 while yields on net loans and leases, excluding accretable yield, were 5.02 percent for the second quarter of 2019, compared with 4.57 percent for the second quarter of 2018 and 4.95 percent for the first quarter of 2019.  The average cost of deposits was 0.68 percent for the second quarter of 2019, compared with 0.34 percent for the second quarter of 2018 and 0.63 percent for the first quarter of 2019.

Balance Sheet Activity

Loans and leases, net of unearned income, increased $587.5 million during the second quarter of 2019.  This includes loans totaling $415.0 million acquired as a part of the Grand Bank and Merchants Bank mergers on April 1, 2019.  Excluding acquired loans, total loans increased approximately $170.0 million during the second quarter or, 5.2% on an annualized basis. 

Deposits increased $444.0 million during the second quarter of 2019.  This includes deposits totaling $529.0 million acquired as a part of the Grand Bank and Merchants Bank mergers on April 1, 2019.  Excluding acquired deposits, total deposits declined approximately $85.0 million during the quarter. Deposits have increased $1.07 billion since December 31, 2018.  Excluding acquired deposits, total deposits increased approximately $540.0 million during the first six months of the year, or, 7.7% on an annualized basis.

Provision for Credit Losses and Allowance for Credit Losses

Earnings for the second quarter of 2019 reflect a provision for credit losses of $0.5 million, compared with a provision of $2.5 million for the second quarter of 2018 and $0.5 million for the first quarter of 2019.  Net charge-offs for the second quarter of 2019 were $1.3 million, compared with net charge-offs of $2.0 million for the second quarter of 2018 and net charge-offs of $4.1 million for the first quarter of 2019.  The allowance for credit losses was $115.7 million, or 0.85 percent of net loans and leases, at June 30, 2019, compared with $119.9 million, or 0.97 percent of net loans and leases, at June 30, 2018 and $116.5 million, or 0.89 percent of net loans and leases, at March 31, 2019.  The allowance for credit losses coverage metrics were impacted by loans acquired in the acquisitions that closed during the fourth quarter of 2018 and the second quarter of 2019.

Total non-performing assets were $96.0 million, or 0.70 percent of net loans and leases, at June 30, 2019, compared with $81.2 million, or 0.65 percent of net loans and leases, at June 30, 2018, and $97.0 million, or 0.74 percent of net loans and leases, at March 31, 2019.  Other real estate owned was $6.2 million at June 30, 2019, compared with $7.8 million at June 30, 2018 and $9.7 million at March 31, 2019.

Noninterest Revenue

Noninterest revenue was $66.3 million for the second quarter of 2019, compared with $72.5 million for the second quarter of 2018 and $64.2 million for the first quarter of 2019.  These results include a negative MSR valuation adjustment of $8.8 million for the second quarter of 2019, compared with a negative MSR valuation adjustment of $0.2 million for the second quarter of 2018 and a negative MSR valuation adjustment of $4.9 million for the first quarter of 2019.  Valuation adjustments in the MSR asset are driven primarily by fluctuations in interest rates period over period.   

Excluding the MSR valuation adjustment, mortgage banking revenue was $9.2 million for the second quarter of 2019, compared with $7.1 million for the second quarter of 2018 and $6.9 million for the first quarter of 2019.  Mortgage origination volume for the second quarter of 2019 was $495.5 million, compared with $523.7 million for the second quarter of 2018 and $291.7 million for the first quarter of 2019.  Of the total mortgage origination volume for the second quarter of 2019, $153.7 million was portfolio loans, compared with $209.3 million for the second quarter of 2018 and $54.1 million for the first quarter of 2019.

Credit card, debit card, and merchant fee revenue was $10.2 million for the second quarter of 2019, compared with $10.5 million for the second quarter of 2018 and $8.9 million for the first quarter of 2019.  Deposit service charge revenue was $11.1 million for the second quarter of 2019, compared with $10.8 million for both the second quarter of 2018 and the first quarter of 2019.  Wealth management revenue was $5.9 million for the second quarter of 2019, compared with $5.7 million for the second quarter of 2018 and $5.6 million for the first quarter of 2019.  Other noninterest revenue was $4.8 million for the second quarter of 2019, compared with $5.5 million for the second quarter of 2018 and $6.7 million for the first quarter of 2019.  Insurance commission revenue was $34.0 million for the second quarter of 2019, compared with $33.0 million for the second quarter of 2018 and $30.2 million for the first quarter of 2019. 

Noninterest Expense

Noninterest expense for the second quarter of 2019 was $157.7 million, compared with $145.2 million for the second quarter of 2018 and $150.0 million for the first quarter of 2019.  Salaries and employee benefits expense was $101.0 million for the second quarter of 2019, compared with $91.5 million for the second quarter of 2018 and $97.2 million for the first quarter of 2019.  Occupancy expense was $12.0 million for the second quarter of 2019, compared with $11.1 million for the second quarter of 2018 and $11.6 million for the first quarter of 2019.  Other noninterest expense was $38.1 million for the second quarter of 2019, compared with $35.7 million for the second quarter of 2018 and $34.6 million for the first quarter of 2019.  Additionally, merger-related expense for the second quarter of 2019 was $3.1 million, compared with merger-related expense of $1.9 million for the second quarter of 2018 and $0.9 million for the first quarter of 2019. 

Capital Management

The Company's equity capitalization is comprised entirely of common stock.  The Company's ratio of shareholders' equity to assets was 12.29 percent at June 30, 2019, compared with 12.03 percent at June 30, 2018 and 12.16 percent at March 31, 2019.  The ratio of tangible shareholders' equity to tangible assets was 8.42 percent at June 30, 2019, compared with 8.71 percent at June 30, 2018 and 8.41 percent at March 31, 2019.

During the second quarter of 2019, the Company repurchased 611,821 shares of its outstanding common stock at a weighted average price of $28.21 per share pursuant to its share repurchase program, which is intended to comply with Rules 10b-18 and 10b5-1 promulgated under the Securities and Exchange Act of 1934, as amended (the "Exchange Act").  During the first quarter of 2019, the Company repurchased 1,000,000 shares of its outstanding common stock at a weighted average price of $27.60 per share.  As of June 30, 2019, the Company had 1,388,179 remaining shares available for repurchase under its current share repurchase authorization, which expires on December 31, 2019.  

Estimated regulatory capital ratios at June 30, 2019 were calculated in accordance with the Basel III capital framework.  The Company is a "well capitalized" bank, as defined by federal regulations, at June 30, 2019, with Tier 1 risk-based capital of 10.52 percent and total risk-based capital of 11.28 percent, compared with required minimum levels of 8 percent and 10 percent, respectively, in order to qualify for "well capitalized" classification. 

Summary

Rollins concluded, "We are very pleased with our second quarter financial results.  We reported meaningful organic loan growth while our deposit results were better than anticipated given the normal second quarter seasonal headwind for deposits.   We also reported growth in many of our other product offerings as well.  Our mortgage production benefitted from the rate environment while our insurance and wealth management teams also reported revenue growth on both a sequential and comparable quarter basis.  This balance sheet and revenue growth, combined with continued disciplined expense management, resulted in our operating efficiency ratio – excluding MSR – declining to its lowest level in several years.   Finally, we are pleased to have closed the transactions with Grand Bank and Merchants Bank.  The operational integrations for these two banks were completed late in the second quarter."

TRANSACTIONS

Van Alstyne Financial Corporation & Summit Financial Enterprises, Inc.

On March 5, 2019, the Company announced the signing of definitive merger agreements with Van Alstyne Financial Corporation and its wholly owned subsidiary, Texas Star Bank, (collectively referred to as "Texas Star"), pursuant to which Texas Star agreed to be merged with and into the Company and with Summit Financial Enterprises, Inc. and its wholly owned subsidiary, Summit Bank, (collectively referred to as "Summit"), pursuant to which Summit agreed to be merged with and into the Company.  Texas Star operates 7 full-service banking offices in Collin and Grayson counties in Texas, and one loan production office in Durant, Oklahoma, while Summit operates 4 offices located in Panama City, Panama City Beach, Fort Walton Beach, and Pensacola, Florida.  As of June 30, 2019, Texas Star and Summit collectively reported total assets of $905.6 million, total loans of $610.7 million and total deposits of $799.8 million.  Under the collective terms of the agreements, the Company expects to issue approximately 4,600,000 shares of the Company's common stock plus $40.5 million in cash for all outstanding shares of each institution.  For more information regarding these transactions, see our Current Report on Form 8-K that was filed with the Federal Deposit Insurance Corporation ("FDIC") on March 5, 2019.  Subject to the satisfaction of all closing conditions, including the receipt of all required regulatory approvals, these mergers are expected to be completed during the second half of 2019, although the Company can provide no assurance that the mergers will close during this time period or at all.

Casey Bancorp, Inc. & Merchants Trust, Inc.

On April 1, 2019, the Company completed the merger with Casey Bancorp, Inc. and its wholly owned subsidiary, Grand Bank of Texas, (collectively referred to as "Grand Bank"), pursuant to which Grand Bank was merged with and into the Company and with Merchants Trust, Inc. and its wholly owned subsidiary, Merchants Bank (collectively referred to as "Merchants"), pursuant to which Merchants was merged with and into the Company.  Grand Bank operated 4 full-service banking offices in the cities of Dallas, Grand Prairie, Horseshoe Bay and Marble Falls, all in Texas, while Merchants, which was based in Jackson, Alabama, operated 6 full-service banking offices in Clarke and Mobile counties in Alabama.  As of April 1, 2019, Grand Bank and Merchants collectively reported total assets of $566.0 million, total loans of $415.0 million and total deposits of $529.0 million.  Under the collective terms of agreements, the Company issued approximately 2,225,000 shares of the Company's common stock plus $24.2 million in cash for all outstanding shares of each institution.  For more information regarding these transactions, see our Current Report on Form 8-K that was filed with the FDIC on April 1, 2019.  The purchase accounting for these transactions is considered provisional as management continues to identify and assess information regarding the nature of the acquired assets and liabilities and reviews the associated valuation assumptions and methodologies.

Icon Capital Corporation

Effective October 1, 2018, the Company completed the merger with Icon Capital Corporation and its wholly owned subsidiary, Icon Bank of Texas, National Association (collectively referred to as "Icon"), pursuant to which Icon was merged with and into the Company (the "Icon Merger").  Icon was headquartered in Houston, Texas and operated 7 full-service banking offices in the Houston, Texas metropolitan area.  As of October 1, 2018, Icon, on a consolidated basis, reported total assets of $760.4 million, total loans of $650.4 million and total deposits of $675.8 million.  Under the terms of the definitive merger agreement, the Company issued approximately 4,125,000 shares of the Company's common stock plus $17.5 million in cash, $7 million of which was placed in a separate non-interest bearing escrow account that is to be paid if certain conditions are met, as described in the Current Report on Form 8-K filed with the FDIC on October 1, 2018, for all outstanding shares of Icon Capital Corporation's capital stock.  For more information regarding the Icon Merger, see our Current Report on Form 8-K that was filed with the FDIC on October 1, 2018.  The purchase accounting for this transaction is considered provisional as management continues to identify and assess information regarding the nature of the acquired assets and liabilities and reviews the associated valuation assumptions and methodologies.

Non-GAAP Measures and Ratios

This news release presents certain financial measures and ratios that are not calculated in accordance with U.S. generally accepted accounting principles ("GAAP").  A discussion regarding these non-GAAP measures and ratios, including reconciliations of non-GAAP measures to the most directly comparable GAAP measures and definitions for non-GAAP ratios, appears under the caption "Reconciliation of Non-GAAP Measures and Other Non-GAAP Ratio Definitions"  beginning on page 21 of this news release.

Conference Call and Webcast

The Company will conduct a conference call to discuss its second quarter 2019 financial results on July 18, 2019, at 10:00 a.m. (Central Time).  This conference call will be an interactive session between management and analysts. Interested parties may listen to this live conference call via Internet webcast by accessing www.BancorpSouth.investorroom.com/Webcasts. The webcast will also be available in archived format at the same address.

About BancorpSouth Bank

BancorpSouth Bank (NYSE: BXS) is headquartered in Tupelo, Mississippi, with approximately $19 billion in assets.  BancorpSouth operates approximately 295 full service branch locations as well as additional mortgage, insurance, and loan production offices in Alabama, Arkansas, Florida, Louisiana, Mississippi, Missouri, Tennessee and Texas, including an insurance location in Illinois.  BancorpSouth is committed to a culture of respect, diversity, and inclusion in both its workplace and communities. To learn more, visit our Community Commitment page at www.bancorpsouth.com.  Like us on Facebook; follow us on Twitter: @MyBXS; or connect with us through LinkedIn.

Forward-Looking Statements

Certain statements contained in this news release may not be based upon 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 Exchange Act, 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," "could," "estimate," "expect," "foresee," "hope," "intend," "may," "might," "plan," "will," or "would" or future or conditional verb tenses and variations or negatives of such terms. These forward-looking statements include, without limitation, those relating to the benefits, costs, synergies and financial and operational impact of the Icon, Grand Bank, Merchants, Texas Star and Summit Mergers (referred to collectively as the "Mergers") on the Company, the acceptance by customers of Icon, Grand Bank, Merchants, Texas Star and Summit of the Company's products and services after the closing of the Mergers, the opportunities to enhance market share in certain markets and market acceptance of the Company generally in new markets, the Company's ability to operate its regulatory compliance programs consistent with federal, state and local laws, including its Bank Secrecy Act ("BSA") and anti-money laundering ("AML") compliance program and its fair lending compliance program, the Company's compliance with the consent order it entered into with the Consumer Financial Protection Bureau and the United States Department of Justice related to the Company's fair lending practices (the "Consent Order"), the impact of the Tax Cuts and Jobs Act of 2017 on the Company and its operations and financial performance, amortization expense for intangible assets, goodwill impairments, loan impairment, utilization of appraisals and inspections for real estate loans, maturity, renewal or extension of construction, acquisition and development loans, net interest revenue, fair value determinations, the amount of the Company's non-performing loans and leases, credit quality, credit losses, liquidity, off-balance sheet commitments and arrangements, valuation of mortgage servicing rights, allowance and provision for credit losses, early identification and resolution of credit issues, utilization of non-GAAP financial measures, the ability of the Company to collect all amounts due according to the contractual terms of loan agreements, the Company's reserve for losses from representation and warranty obligations, the Company's foreclosure process related to mortgage loans, the resolution of non-performing loans that are collaterally dependent, real estate values, fully-indexed interest rates, interest rate risk, interest rate sensitivity, the impact of interest rates on loan yields, calculation of economic value of equity, impaired loan charge-offs, diversification of the Company's revenue stream, the growth of the Company's insurance business and commission revenue, the growth of the Company's customer base and loan, deposit and fee revenue sources, liquidity needs and strategies, sources of funding, net interest margin, declaration and payment of dividends, the utilization of the Company's share repurchase program, the implementation and execution of cost saving initiatives, improvement in the Company's efficiencies, operating expense trends, future acquisitions, dispositions and other strategic growth opportunities and initiatives and the impact of certain claims and ongoing, pending or threatened litigation, administrative and investigatory matters.

The Company cautions readers 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 as a result of a variety of factors. These factors may include, but are not limited to, the Company's ability to operate its regulatory compliance programs consistent with federal, state and local laws, including its BSA/AML compliance program and its fair lending compliance program, the Company's ability to successfully implement and comply with the Consent Order, the ability of the Company to meet expectations regarding the benefits, costs, synergies, and financial and operational impact of the Mergers, the possibility that any of the anticipated benefits, costs, synergies and financial and operational improvements of the Mergers will not be realized or will not be realized as expected, the ability of the Company and Texas Star and Summit to complete the Texas Star Merger and Summit Merger, the ability of the Company and Texas Star and Summit to satisfy the conditions to the completion of the Texas Star Merger and Summit Merger, including the receipt of all regulatory approvals required for the Texas Star Merger and Summit Merger on the terms expected in the Texas Star Merger Agreement and the Summit Merger Agreement, the ability of the Company and Texas Star and Summit to meet expectations regarding the timing, completion and accounting and tax treatments of the Texas Star Merger and Summit Merger, the possibility that any of the anticipated benefits of the Texas Star Merger and Summit Merger will not be realized or will not be realized as expected, the failure of the Texas Star Merger or Summit Merger to close for any other reason, the effect of any announcements regarding the Texas Star Merger or Summit Merger on the Company's operating results, the possibility that the Texas Star Merger and Summit Merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events, the lack of availability of the Company's filings mandated by the Exchange Act from the Securities and Exchange Commission's publicly available website after November 1, 2017, the impact of any ongoing pending or threatened litigation, administrative and investigatory matters involving the Company, conditions in the financial markets and economic conditions generally, the adequacy of the Company's provision and allowance for credit losses to cover actual credit losses, the credit risk associated with real estate construction, acquisition and development loans, limitations on the Company's ability to declare and pay dividends, the availability of capital on favorable terms if and when needed, liquidity risk, governmental regulation, including the Dodd-Frank Act, and supervision of the Company's operations, the short-term and long-term impact of changes to banking capital standards on the Company's regulatory capital and liquidity, the impact of regulations on service charges on the Company's core deposit accounts, the susceptibility of the Company's business to local economic and environmental conditions, the soundness of other financial institutions, changes in interest rates, the impact of monetary policies and economic factors on the Company's ability to attract deposits or make loans, volatility in capital and credit markets, reputational risk, the impact of the Tax Cuts and Jobs Act of 2017 on the Company and its operations and financial performance, the impact of the loss of any key Company personnel, the impact of hurricanes or other adverse weather events, any requirement that the Company write down goodwill or other intangible assets, diversification in the types of financial services the Company offers, the growth of the Company's insurance business and commission revenue, the growth of the Company's loan, deposit and fee revenue sources, the Company's ability to adapt its products and services to evolving industry standards and consumer preferences, competition with other financial services companies, risks in connection with completed or potential acquisitions, dispositions and other strategic growth opportunities and initiatives, the Company's growth strategy, interruptions or breaches in the Company's information system security, the failure of certain third-party vendors to perform, unfavorable ratings by rating agencies, dilution caused by the Company's issuance of any additional shares of its common stock to raise capital or acquire other banks, bank holding companies, financial holding companies and insurance agencies, the utilization of the Company's share repurchase program, the implementation and execution of cost saving initiatives, other factors generally understood to affect the assets, business, cash flows, financial condition, liquidity, prospects and/or results of operations of financial services companies and other factors detailed from time to time in the Company's press and news releases, reports and other filings with the Federal Deposit Insurance Corporation. Forward-looking statements speak only as of the date that they were made, and, except as required by law, the Company does not undertake any obligation to update or revise forward-looking statements to reflect events or circumstances that occur after the date of this news release.

SOURCE BancorpSouth Bank