BancorpSouth Bank
Q2 2008 Earnings Call Transcript

Published: 18 Jul 2008

[Operator:]

Welcome to BancorpSouth second quarter Conference call. (Operator Instructions) Now, I will turn the meeting over to BancorpSouth, Randy Burchfield.

[Randy Burchfield:]

On our call today from our corporate office in Tupelo are BancorpSouth Chairman and CEO Aubrey Patterson; Jim Kelley, our President and Chief Operating Officer; Nash Allen, our Chief Financial officer; Gregg Cowsert, our Chief Lending Officer; and James Threadgill, Vice Chairman of Financial Services, which includes our Bank’s Insurance operation. 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 the company. 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 risk. Information concerning certain of these factors can be found in BancorpSouth’s Annual Report on Form 10-K for the year ended December 31, 2007. During the call, certain non-GAAP financial measures may be discussed regarding the company’s performance. If so, you can find the reconciliation of these measures to the GAAP financial measures on the Investor Relations portion of our website at www.bancorpsouth.com. Now, Chairman Aubrey Patterson.

[Aubrey Patterson:]

Thank all of you for being with us today to discuss BancorpSouth’s financial results for the second quarter. I’ll provide a brief overview of our highlights for the quarter this morning and then other members of the Senior Management Team and I will address any questions you have. First, let me refer to a few key points from our press release. Just hitting the highlights

[Operator:]

(Operator Instructions) Your first question comes from John Pancari - J.P. Morgan.

[John Pancari:]

Can you give us some more detail on the drivers of the increases in your nonperformers and in delinquencies this quarter, just a little bit more granularity around how much is concentrated in real estate versus any other C&I areas or income producing commercial real estate and then industries within that there’s concentration?

[Aubrey Patterson:]

You’d like some distinction between the sources within the portfolio of any changes in those categories, and I’m going to refer that to Gregg Cowsert, our Chief Lending Officer.

[Gregg Cowsert:]

Most of our pressure on the quality of the portfolio obviously like most other people has come from the residential real estate sector. We still feel good about where we are in the performance level portfolios. Let me give you a few numbers here

[John Pancari:]

The increases that you saw in the quarter, they were largely concentrated in the resi real estate, in the construction A&D particularly?

[Aubrey Patterson:]

Yes.

[John Pancari:]

Can you give us an idea of how that MPL ratio of 88 basis points for the construction and A&D book changed this quarter?

[Aubrey Patterson:]

I don’t have that number. Let me just mention again, Gregg gave good insight into the details of this, John. But total nonperforming loans were at 0.49%, 49 basis points at the end of the quarter. At the end of the first quarter, they were at 0.42% of 42, so its 7 basis point change quarter-over-quarter.

[John Pancari:]

Then one other question there, just in light of the pressure you are seeing on the resi real estate side, can you give us an idea of that portion of your portfolio that you have reappraised about what portion have you done recent reappraisals? For those that you have, what amount of collateral depreciation have you seen on those properties?

[Gregg Cowsert:]

We do a lot of reappraisal at renewal times; and certainly on problem assets, we have properties reappraised. In the markets that we’re in, we haven’t seen the level of deterioration that a lot of hot markets have seen. I would say on the outside, most of our reappraisals may show 12% to 15% deterioration in values.

[John Pancari:]

You mentioned on the outside, you mean your outskirts markets or? You said on the outside, so you mean your outskirt markets or your core markets?

[Aubrey Patterson:]

He’s referring to the most extreme cases of deterioration. That was not a market reference.

[John Pancari:]

On the high side, oh okay; I’m sorry. Then lastly, can you just give us an idea of any contagion you’re seeing in the C&I book at all, any mounting weakness there given the economic slowdown?

[Gregg Cowsert:]

We’re really not seeing much at all in our portfolio. We’re diligent [inaudible] because obviously the more protracted that residential real estate sector weakness continues, then we’re likely to see some more deterioration in C&I and in CRE. But for our portfolio, we’re not seeing any marked deterioration in either one of those portfolios at this point.

[Aubrey Patterson:]

We should’ve said this at the front end, those are all good questions and you probably have asked questions that several other attendees will want to have answered to as well. We do have a large number of participants on this call morning, if the individuals could ask a question and then reenter the queue so that we can answer as many questions from as many participants as possible. Every one of your questions were great questions, John. They’re probably helpful to everybody; but if we could follow that practice, it’ll let everyone participate.

[Operator:]

Your next question comes from Kevin Fitzsimmons - Sandler O’Neil.

[Kevin Fitzsimmons:]

Was wondering if you referenced the asset quality metrics and the fact that the nonperforming loan ratio was right around the average or the median for this long-term historical time period you’re talking about. Can you give us a sense on for nonperformers and for the pace of charge-offs, over this time period, over that time period you’re quoting, what is the high end historically for you all for BancorpSouth? Then secondly, what gives you with what we’re seeing in this market, what gives you comfort that we’re really just dealing with the historical norm here and we’re not dealing with something more that we would be going above and beyond where the nonperformers went over the last 5 or 6 years? I’m not sure what time period we’re using.

[Aubrey Patterson:]

I think the average that I was given to use for that was a 5- or 6-year average. It’s a really good question and Nash and Gregg, Nash Allen and Greg can probably, either one, give you a better answer than I can as to the range around that average charge-off figure and DL figure.

[Nash Allen:]

Actually I think the high was, correct me if I’m wrong, I think the high during that period was maybe 58 basis points.

[Gregg Cowsert:]

You’ve have to go back to the agents to get to those numbers. It was actually I think [inaudible] in the 40s, somewhere in the mid 40s has generally been where the high levels have come and recent history, that’s going back maybe ten years.

[Aubrey Patterson:]

That should respond to the question, Kevin. Generally it’s a fairly tight distribution around those numbers. If you go back to the ‘87/’88 period or the ‘90/’91 period, you’d be on the high end of that and it might be from what they’re saying, it might be 15 or 20 basis points above that average.

[Operator:]

Your next question comes from Brian Klock - KBW.

[Brian Klock:]

I think, I’m not sure if you have the information, Gregg, from the first quarter that you went over answering John’s question. The construction acquisition and development you said was 1.578 billion here at June 30?

[Gregg Cowsert:]

Yes.

[Brian Klock:]

From the investor’s slide deck you put out at March, was that relative to the 1.799 billion that was there at the end of the first quarter?

[Gregg Cowsert:]

Yes, that’s down 12.25% from the first quarter.

[Brian Klock:]

I guess maybe you can talk about how you’ve been able to work that portfolio down. Has it been through any note sale or has it been through pay downs or re-margining or maybe you can talk about how you’ve been able to work that portfolio exposure down.

[Gregg Cowsert:]

Well most of it’s been through pay downs and obviously as the markets have weakened, we’ve not had the demand to replenish that volume. So it’s a natural trend in what we’re seeing in the marketplace that there’s no real demand for acquisition certainly and development and residential construction and so we’re just seeing a pay down in that portfolio with no replenishing opportunities.

[Aubrey Patterson:]

Gregg, I think we made a comment in the press release that we [inaudible] to the fact that we’ve had pullbacks in certain markets for really since ’06.

[Gregg Cowsert:]

Yes, really in late ’05 and ’06 for instance in the Memphis market, which has experienced some significant weakness, we started pulling in that market and that portfolio up there is actually down about 12 basis points year-over-year. Some other markets are still good, but they are pulling back some. I would reference Nashville is still a good market, but it’s pulling back some. Baton Rouge is a good market, but it’s pulling back some as some of the dynamics in that market are stabilizing from the Katrina effect. But we have some new markets that we’ve put on. I would reference our LPOs that have developed over in East Texas that are giving us great opportunities for C&I business as well some residential real estate and commercial real estate opportunities. So we do have some bright sports in our existing markets and the new markets that we’ve put on. But we’ll see and anticipate certainly continued pullback generally in the residential acquisition and development construction portfolio as we’re seeing from the first quarter to the second.

[Brian Klock:]

It looks like you said that what was it, 13.9 million are the NPLs at the end of June and then construction and acquisition development portfolio, is that right?

[Gregg Cowsert:]

Yes.

[Brian Klock:]

So relative, it looks that it was 6.5 million at the end of the first quarter, so the lion share of the increase in NPLs was in this portfolio in the second quarter?

[Gregg Cowsert:]

That’s correct.

[Brian Klock:]

Do you have any other MasterCard stock still on your portfolio?

[Aubrey Patterson:]

Yes.

[Brian Klock:]

Do you have that amount?

[Aubrey Patterson:]

I haven’t disclosed that.

[Brian Klock:]

With the change in the MSR during the second quarter, how much of that was through decay versus change in fair value?

[Nash Allen:]

The servicing asset, the market adjustments was 6.2%. The pay downs or pay-offs was 1.3% for pay down, 2, 1.3 million.

[Brian Klock:]

So the change in the quarter was 6.2 million?

[Nash Allen:]

Right.

[Brian Klock:]

The 1.3 million was the change in fair value?

[Nash Allen:]

That was for pay downs.

[Brian Klock:]

The pay downs, gotcha. This is the last question and I’ll get off. Other fee income in the quarter, I know that you had $19 million in the first quarter, you had about $1.5 billion in student loan gains, so X that it looks like there’s about $2 million of an increase in the other fee income line in the second quarter. Anything in there that’s seasonal or anything that we should expect to go forward or maybe get some color on that line item?

[Aubrey Patterson:]

I’ll let Nash amplify this, but we didn’t have student loan gains in the first quarter.

[Nash Allen:]

No, we didn’t. I think that was probably the sale of some other credit card related stock. We have not sold any student loans materially this year so…

[Brian Klock:]

My misunderstanding.

[Operator:]

Your next question comes from Jennifer Demba - Suntrust Robinson Humphrey.

[Jennifer Demba:]

I was just wondering if you could give us some color on where most of your loan growth came from geographically and by category?

[Gregg Cowsert:]

Well, I mentioned some of our markets. To be specific, year-over-year, we’ve had about 10.5% growth in the Birmingham market, which is south, but still remains a good market for us. Huntsville, we’ve had about 19.7% growth in it. In our Nashville area, we’ve had considerable growth in that portfolio, although as I said it’s pulled back some. As I’ve mentioned the Memphis market is down almost 3%, and our Northwest banking region, which includes Memphis and the Northwest Mississippi area is down 11 basis points in total. We’ve had significant growth in our [Tyler] market of about $20 million. Our new LBO, LPO in Lafayette, Louisiana, has had about an $18 million growth. We’ve got a new LPO in Alexandria, Louisiana, which is going to produce some strong growth for us in that new market. Baton Rouge market is up about 20% over a year ago. Longview, Texas, is up 54%, Lufkin up 52%. So again, these new markets are really providing some good opportunity for us.

[Jennifer Demba:]

[Inaudible] if we looked sequentially.

[Aubrey Patterson:]

Jennifer, yes, if you look sequentially that you’d see the same trends. In fact, they’re probably accelerating in those new markets. This goes back to a theme that I made a passing reference to, but you’ve heard us speak to numerous times, we don’t have concentrated market dependency. We’ve got a number of good markets, a number of very diverse markets that have different economic drivers. Those have generally been very positive for us and sustainable growth levels but significantly Gregg spent several minutes of his time there answering that question talking about our new loan production officers and new full-service branches, which have their genesis in loan production offices. Notably in markets like Louisiana whether its Freeport, Baton Rouge, Lafayette, Alexandria or East Texas, Tyler, Longview, Lufkin, a number of locations where we’ve experienced high quality performance from our staff as we’ve made market entries through LPOs. We’ve obviously picked those kind of [micropolitian] areas with good growth demographics to make those investments and we’re seeing them move to profitability in a very short period of time.

[Jennifer Demba:]

Could you give a sense of geographically where the increase in nonperformers came from?

[Gregg Cowsert:]

Geographically, I would say the Alabama market was a driver in that and Missouri.

[Aubrey Patterson:]

That was primarily it.

[Operator:]

Your next question comes from Joe Steven - Steven Capital.

[Joe Steven:]

Big picture question because most of my detailed questions have been answered. We’ve heard some banks say that they’re seeing a true opportunity to honestly start pricing risk higher, where they’re simply going through all their annual loan renewal and just trying to move rates up on the lending side and also on the deposit side moving things down. On a big picture basis, is that something that you, number one, see as an opportunity and, number two, is it anything market-by-market that has let’s say a variance on that?

[Aubrey Patterson:]

That’s a really good question for the broader landscape. As I pointed out in looking in the rearview mirror, we’ve had five-year record margins that we’ve been able to maintain at the 3.79 and obviously that’s a combination of good loan growth replacing. It’s been a shift from lower yielding investments to higher yielding loans and on the other side from higher costing [inaudible) CDs to lower costing home loan bank advances. That stood us in good stead. What we have seen and I think we’ll be seeing less of it to the point of your question, we have seen some of the large regional banks be very aggressive in their CD yield offerings. I’m speculating but I’m assuming that that’s due to liquidity needs and some concerns about accessing debt markets. But in any case, we have seen that. We all, and our competitors, are likely seeing the need for what you’ve described as a strategy. All the markets are different, but I think the trend will logically be as you have described it. We may have seen the beginnings of that trend. Hopefully we’ll see more rational pricing on both sides of the balance sheet because it certainly called for under the circumstances. I can only respond to your question by saying, “We may be beginning to see that trend emerge, but it’s not substantial and it’s not broad-based yet.”

[Operator:]

Your next question comes from Matt Olney - Stephens Incorporated

[Matt Olney:]

Wanted to switch gears to the insurance commission, they were down a little bit linked quarter. How much of that is just a difficult price environment versus just normal seasonality? Then secondly, how does the pipeline look for insurance acquisitions in the second half of the year?

[Aubrey Patterson:]

James Threadgill’s with us, Matt, and I’ll refer that question to him.

[James Threadgill:]

Well, Matt, the first quarter and I think we reported we received our contingency revenues primarily in the first quarter, so that’s the reason for the drop from first quarter to second quarter. The landscape in the insurance industry obviously there’s a lot of pressure on premium pricing. Carries are reducing their premiums and that’s driving commissions down. Year-to-date, from our organic or three foundation agencies from last year, we are seeing about a 1% or 2% growth in revenue, about 21% of that growth that we reported came from the acquisitions we made in January. But you’re correct, it is a soft market. We’re challenged every day to grow new business and thus far this year we’ve been able to do that.

[Aubrey Patterson:]

The acquisitions have been exceeding our hurdle rate on ROI threshold for acquisitions, and they’re adding to the relative profitability, the organization. But this is a seasonal business. The first quarter doesn’t look like the second quarter for the reasons James said. The good comparison to compare the second quarter with the previous second quarter and that’s where we’re exceeding. We’ve got small organic growth because of the soft market, but we do have more than 20% growth in quarter-over-quarter numbers.

[Operator:]

Your next question comes from Charlie Ernst of Sandler O’Neill.

[Charlie Ernst:]

Can you just talk, give a little bit of attention to the recent attention to the growth in your acquisition and development portfolio and just remind us historically speaking how much the portfolio came through the acquisition of Signature? Also, if I remember correctly, there was a restatement a few years back, I believe it was from commercial real estate into that portfolio.

[Aubrey Patterson:]

Gregg, I know from recent conversations with him has those numbers at hand.

[Gregg Cowsert:]

The re-classification number from a good many quarters back was about $360 million. During the first quarter and during ’07, we had new loans into that portfolio of net $160 million and the Signature acquisition brought in $210 million. So those three components, those are the drivers for the increase from the latter part of ’06 through ’07 and those trends as I mentioned in that portfolio are trending, that volume is trending down from March 31st this year to June 30th this year. It’s down 12.25%. We see that trend continuing in that portfolio.

[Charlie Ernst:]

Then if I could just ask one more question. The margin, could you talk about where you think the sensitivity is these days? If I take the balance sheet mix from a year ago and I use this quarter rates that would imply that you could actually have a higher margin today. So that would say that you haven’t really been helped a lot by the decline in rates and historically speaking I think about you as being a little bit liability sensitive but the numbers don’t really suggest that. So can you just update us as to what your sensitivity is?

[Aubrey Patterson:]

Nash, would you like to comment on that?

[Nash Allen:]

Charlie, our goal, our practice is to keep our exposure within 10% of our earning assets as far as the gap that we have and we try to maintain that on a six-month to year basis. We think we’re going to manage through it. But to say that you’re going to see any upside or downside, we don’t forecast that. It’s dependent certainly on our markets and our competition. I think there’s going to be more pressure on the deposit side. Though going forward we’ve seen people talk about lowering rates, I think we’re going to see some pressure on our deposit pricing going forward.

[Aubrey Patterson:]

I certainly don’t think we’re immuned to that. I understand the jest of your question. It’s a little more fundamental to the structure of the balance sheet taking this year versus last year on the same mix. Nash is correct that we model that fairly tightly and we critique our modeling fairly tightly. The model would show you that as you suggest that there’s some slight liability sensitivity in the short-run that depending on the things that have been happening that maybe actually flattened out a little bit.

[Charlie Ernst:]

Then the CD rate, it’s 3.95, do you see much more flexibility in that rate?

[Aubrey Patterson:]

I’m sorry, would you clarify that?

[Charlie Ernst:]

The CD rate right now in your average balance sheet is around 3.95. Do you have much more room to cut those?

[Aubrey Patterson:]

Probably not. Realistically for the reason that I said, the markets are reflecting a fairly aggressive move by some of the large regionals to use that as a source of funding, and I think we’ll do well to hold it.

[Operator:]

Your next question comes from Dave Bishop - Stifel Nicolaus.

[David Bishop:]

Another macro level question following Joe’s, obviously Mississippi, Alabama, that regions benefited pretty handedly from some of the exodus from detouring the Rust Belt in terms of auto manufacturing jobs, putting aside the derivative energy effect and how that’s playing out through maybe more the Lafayette region. But are you seeing any announcement from, I don’t know if there’s any pullbacks in terms of auto jobs there or manufacturing plants that have been on the drawing board that have been cancelled given the rise in gas prices there? Does that have any derivative effect there in terms of the job outlook there in that sector of the economy within your footprint?

[Aubrey Patterson:]

There are a lot of moving parts in that business as you well know. We’re extremely pleased in the nucleus of our footprint in Northeast Mississippi that Toyota has made the decision to forego using a plant, the major assembly plant that’s under construction here in Tupelo from the Highlander to the Prius which will be the first hybrid technology vehicle Toyota has built in this country, and it’ll be the new generation Prius at that. So we’re excited about the technological impact on not only North Mississippi but Northwest Alabama, South Central Tennessee, parts of our markets we expect to see continued expansion of the positive aspects of that. I know and you’re referring to a lot of the pullbacks in some of the major assembly plants, I recall Texas being one, San Antonio. Nissan is revamping their Mississippi plant to produce more small scale commercial vehicles as opposed to the large SUVs. That’ll have some temporary impact on the market. It’s one of our markets, but one of our major markets that they serve. So we’ll expect to see some diminution in employment for awhile, but then that’ll ramp back up later on. So the overall move to our part of the world continues. You saw the announcement just this week that Volkswagen is going to build their major assembly plant in Chattanooga. While we’re not in Chattanooga, we’re certainly in the neighborhood and we’ll benefit by that as well.

[David Bishop:]

Then maybe surfing back to the margin in the funding side of things, obviously you’ve been taking advantage of the flood window here. When we look at it from a marginal cost differential, what is that running at about these days in terms of the wholesale versus using some of these retailer and CD deposits?

[Aubrey Patterson:]

Well if you look at average numbers, our average advances is to home loan bank at the current rates are more than 100 basis points below CDs that would be alternatives for sources, so it’s a significant advantage.

[David Bishop:]

The average duration for those.

[Aubrey Patterson:]

Well, we have a fairly short-term duration for our home loan bank advances, but we evaluate that in the context of our interest rate risk model and we will probably be expanding our, extending our maturities on some of those as we already have to some degree.

[David Bishop:]

Then maybe one final question here

[Aubrey Patterson:]

We are focused on BancorpSouth. We think we have an extraordinary performance in maintaining our spreads and increasing our earnings at a 14% pace and building capital to now well above 9%, total capital and tangible capital above 7%. What’s that number? 7.12. We think that there may be better position to companies to deal with both this relatively weak economy and the opportunities that will present themselves. But at the moment, we’re focused on building this strength and continuing to perform as we have.

[Operator:]

Your next question comes from Brian Klock - KBW.

[Brian Klock:]

Aubrey and Nash, what capacity do you still have at the FHLB for further funding?

[Aubrey Patterson:]

It is tremendous capacity. Mr. Rodell is with us. He’s our [Alco] Chairman. We’ve utilized one, well one-sixth of the total, if that’s correct, excuse me, one-fifth. We have sizeable, I won’t say any exhaustible, but given the collateral that we have available, liquidity is not an issue.

[Brian Klock:]

So it’s more high cost CDs continue to roll down and you have the favorable funding, there should be or could be a benefit to your margin than as you connect at that funding source?

[Aubrey Patterson:]

It would be a continuation of what we’ve been doing for some time, yes. I would moderate that to say that obviously we’re going to continue to look at our GAAP analysis to make sure that we’re not overly dependent on short-term financing. Longer term financing is available, but obviously that diminishes the spread, the spread gain that we would achieve.

[Brian Klock:]

I know you don’t necessarily give guidance on this, but you did build the reserve to loan ratio in the quarter. When you look at coverage of MPLs, amount of accrual loans and then when you add in your 90 days past due level is a lot higher than a lot of your peers, plus you’ve got strong capital in the form of tangible common. I think if you go back historically through some of the numbers you talked about, I don’t think your reserve to loan ratio has grown to much higher than where it is currently. So would the expectation be that the reserve ratio may stay in the same range of 130 basis points or so?

[Aubrey Patterson:]

It actually has stayed in that range and it was up from quarter-to-quarter. Just to reiterate the numbers, the specificity of the numbers you indicated, the reserve is 2.65 times our MPLs and four and a third times are annualized charge-offs at the 30 basis point level. We feel that that’s where we need to be, and that’s about all we can say about that.

[Operator:]

At this time, we have no further questions.

[Aubrey Patterson:]

Thank you all for questions and for your support and interest in BancorpSouth. If you have any need for additional information or further discussion, don’t hesitate to call Nash Allen or Mr. Jim Kelley, our COO, or myself. Otherwise, we’ll look forward to speaking with you again in our third quarter conference call. Good day.