The wheeler-dealer who helped transform Houston-based Prosperity Bank into Texas’ third-largest banking company is now in Tupelo with what analysts expect is a much different mission: Slim down BancorpSouth’s expenses with a focus on profitability.
The appointment of James “Dan” Rollins III to head BancorpSouth’s multi-state banking operation makes sense for a bank in pursuit of “tightfisted expense control” and an increased focus on profits, analysts say.
As the number two man at Prosperity, Rollins had a key role in guiding Prosperity Bank toward becoming Houston’s largest bank holding company, going from $7 billion in assets in 2007 to $13.7 billion today. “Dan has certainly aligned the bank to be a major player in Texas,” said Eric Sandberg, president and CEO of the Texas Bankers Association, in an email.
Sandberg cited Rollins’ “management acumen” in evaluating and purchasing banks around the state.
That acumen is expected to initially be applied toward improving BancorpSouth’s profitability through expense reduction, analysts say. “Profitability could benefit from an outsider’s view of BXS’ structure” through 2014, analysts for the Sterne Agee Group said just after BancorpSouth’s Nov. 26 announcement that Rollins would take over for 22-year president & CEO Aubrey Patterson.
Profit progress is already under way at BancorpSouth, as shown by third quarter results described as “impressive” by Zacks’ analyst Mark Vickery, who noted the banking company’s reported earnings of 25 cents a share beat Zacks Consensus Estimate of 22 cents.
The encouraging third quarter marked a succession of improved earnings reports since the bank ended 2009 with a net loss of $2.1 million, or 3 cents s share.
Early on, the job of the 53-year-old Rollins will be to further improve on the net operating expense picture, say Sterne Agee analysts Peyton Green, Kenneth James and Zachary Wollam. They say they see potential on the expense side to increase earnings per share by 22 cents to 27 cents. To get there BancorpSouth must improve on its operating expense ratio by 25 to 30 basis points, they say. A basis point in financial terms is 1/100th of a percent.
Success on the operating expense ratio could provide a stock benefit of $2.64 to $3.24 per share, according to the Sterne Agee analysts.
The analysts say Rollins is “familiar with much more tightfisted expense control” than the previous BancorpSouth leadership. Prosperity Bank “operated with a net operating expense ratio of 0.92 percent vs. 1.76 percent for” BancorpSouth, they note.
Houston banker and Cadence Bancorp chairman Paul Murphy said he is a fan of what Rollins and Prosperity have accomplished in the Texas market. Prosperity has kept expenses down while growing aggressively, he noted. “Prosperity has a very conservative lending culture” that helped it to avoid problems other banks began encountering in 2007. “They came through with flying colors.”
Murphy, who led a banking investment group that acquired Starkville’s Cadence Bank nearly two years ago, noted that BancorpSouth has 263 branches and 4,200 employees and Prosperity has 33 fewer branches but only 2,300 employees. “Prosperity runs a tight ship. They are very cost-conscious,” Murphy said.
He said observers will be interested to see how much of that cost-consciousness Rollins will migrate into his cost strategy at BancorpSouth.
Rollins, in an interview last week, said the two regional banking companies are similar in size but their markets and scope of business are significantly different. Unlike Prosperity, BancorpSouth has insurance and wealth management divisions, does sizable lending through government-sponsored entities Fannie Mae and Freddie Mac and services a huge number of Fannie and Freddie loans it does not originate, Rollins said.
These additional functions require hundreds more employees than does Prosperity’s limited functions, he noted.
Rollins, on the job less than a week, said he expects BancorpSouth to expand its footprint but whether that is west toward Texas or deeper into Southeastern markets will require a closer look at opportunities and economic conditions. “Clearly, the bank needs to grow and we are going to look at where we can grow.”
He acknowledged, however, it would be a “valid assumption” to think further expansion in Texas could occur.
Cost control strategies will also require further study, Rollins said. He elaborated in an interview with Tupelo’s Northeast Mississippi Daily Journal: “My answer to expense control is that we need to be challenging all expenses, making sure if we spend shareholders’ dollars that we spend it in a way that it’s a return to our shareholders.”
Rollins, a native Texan, has ventured into an expanded market that the Sterne Agree analysts say will make it more to “mine the synergies” that he achieved at Prosperity. “On a weighted basis, BXS (BancorpSouth) operated in less attractive markets than PB (Prosperity Bank) as population and household income are projected to grow 3.3 percent and 17.4 percent, respectively, vs. 7.8 percent and 16.9 percent for PB’s footprint.”
Median household income was $39,060 in BancorpSouth’s eight-state market of Mississippi, Alabama, Tennessee, Louisiana, Arkansas, Missouri, Florida and Texas. In Prosperity Bank’s Texas footprint, median household income totaled $47,753, according to the analysts.
Like other bank executives around the country, Rollins is bracing for a new regulatory era, some of which has already arrived with the initial reforms of the Dodd-Frank Wall Street Reform and Consumer Protection Act. It’s getting difficult to see exactly what’s ahead, he said.
“When you look at the windshield here… the economic regulatory headwinds are strong,” said Rollins, a University of Texas graduate and son of an IBM computer salesman.
A year and a half after Dodd-Frank went into effect, regulators are still drawing up many of the rules and regulations behind the law. Until they finish their work, “It is hard to have answer on what it is going to look like,” he added.
The expansive but yet-to-be-clarified authority of a brand new regulator — the chief of the newly created Consumer Financial Protection Bureau — is another uncertainty on a growing list of uncertainties.
More immediately, there’s the fiscal cliff and trying to figure out what that means. “We’ll have the answer in the next 40 days,” Rollins said.
In assessing his Texas tenure, Rollins says he “was lucky to be in the right place at the right time.”
Now he’s banking on saying the same about his stay in Tupelo.