BancorpSouth’s earnings impacted by litigation costs

TUPELO — BancorpSouth Inc. has released financial results for the quarter ended March 31.

Highlights for the first quarter included:

• Net income of $20.8 million or $0.22 per diluted share

• Mortgage production of $425.9 million and mortgage sales of $445.9 million, which contributed to mortgage lending revenue of $12.3 million for the quarter, including a positive mortgage servicing rights (“MSR”) valuation adjustment of $1.0 million

• Insurance commission revenue increased $3.5 million, or 15.1 percent, on a comparable quarter basis

• Excluding an increase in our litigation reserve of $6.8 million relating to various legal matters, total noninterest expense declined $7.1 million, or 5.2 percent, on a comparable quarter basis and $14.6 million, or 10.2 percent, on a sequential quarter basis

• Non-performing loans and leases (“NPLs”) declined $26.5 million, or 11.4 percent, compared to the fourth quarter of 2012 while non-performing assets (“NPAs”) decreased $33.5 million, or 9.9 percent, over the same period.  Both metrics have declined to balances that are approximately one half of their respective peaks, which occurred during the first quarter of 2011

• Cash collections on nonaccrual loans totaled $23.6 million for the quarter.  At the end of the quarter, 56.3 percent of nonaccrual loans were paying in accordance with their contractual terms

• Capital ratios continued to rise, with Tier 1 leverage and Total risk-based capital ratios increasing to 10.33 percent and 15.31 percent, respectively.

The company reported net income of $20.8 million, or $0.22 per diluted share, for the first quarter of 2013 compared with net income of $22.9 million, or $0.25 per diluted share, for the first quarter of 2012 and net income of $17.0 million, or $0.18 per diluted share, for the fourth quarter of 2012.

“Results for the first quarter reflect solid performance from our noninterest lines of business, particularly mortgage and insurance,” remarked Dan Rollins, CEO. “Mortgage production for the quarter was $425.9 million, which exceeds production for the first quarter of last year. Due to slightly declining margins, production and servicing revenue was relatively flat on a comparable quarter basis. Our insurance group produced a very strong quarter as well, reporting double-digit revenue growth compared to the first quarter of 2012. We are also making meaningful progress in several areas of the core bank. Credit-related costs, specifically the provision for credit losses and foreclosed property expense, are trending in a favorable direction. NPAs and classified assets continued to decline.”

Earnings for the quarter were adversely impacted by a litigation reserve increase of $6.8 million related to various legal matters. Excluding the impact of this charge, total noninterest expense declined $7.1 million, or 5.2 percent, compared to the first quarter of 2012 and $14.6 million, or 10.2 percent compared to the fourth quarter of 2012. Rollins added, “A significant component of the decrease in noninterest expense is related to comparable and sequential quarter reductions in foreclosed property expense, which could continue to exhibit some level of volatility.  I challenged our team early on to evaluate the benefit of every dollar that we spend.  We are beginning to see the results of these efforts in certain areas that are easier to impact quickly, such as public relations and advertising.  We continue to work diligently on specific projects that will have a more meaningful impact.  We look forward to sharing additional details regarding these initiatives at the appropriate time.”

Earnings for the quarter reflect a provision for credit losses of $4.0 million, which is a decrease from $10.0 million for the first quarter of 2012 and $6.0 million for the fourth quarter of 2012.  NPLs declined $26.5 million, or 11.4 percent, during the first quarter of 2013 to $207.0 million compared with $233.6 million at December 31, 2012 and declined $78.2 million, or 27.4 percent, from $285.2 million at March 31, 2012.  In addition, total NPAs declined $33.5 million, or 9.9 percent, to $303.3 million compared with $336.8 million at December 31, 2012 and declined $149.7 million, or 33.0 percent, from $453.0 million at March 31, 2012.  Net charge-offs declined to $5.9 million for the first quarter of 2013 compared with $10.6 million for the fourth quarter of 2012 and $23.3 million for the first quarter of 2012.  Net charge-offs during the first quarter of 2013 included $2.3 million of charge-offs of loans which had been identified and reported as impaired and were reserved for in previous quarters.

Net Interest Revenue

Net interest revenue was $98.1 million for the first quarter of 2013, a decrease of 7.1 percent from $105.6 million for the first quarter of 2012 and a decrease of 2.8 percent from $100.9 million for the fourth quarter of 2012.  The fully taxable equivalent net interest margin declined to 3.37 percent for the first quarter of 2013 from 3.66 percent for the first quarter of 2012 and 3.44 percent for the fourth quarter of 2012.  Declines in the net interest margin were primarily due to continued pressure on asset yields, particularly yields on loans and leases, which declined to 4.70 percent for the first quarter of 2013 compared with 5.02 percent for the first quarter of 2012 and 4.76 percent for the fourth quarter of 2012.  Rollins added, “Loan growth is clearly the key to addressing the declining margin.  At the end of the first quarter, we had almost $1 billion of liquidity in our overnight position earning 25 basis points.  We are undertaking necessary measures to ensure that our team is focused on converting this liquidity into loans that meet our policies.”

Asset, Deposit and Loan Activity

Total assets were $13.4 billion at March 31, 2013 compared with $13.3 billion at March 31, 2012.  Total deposits were $11.2 billion at March 31, 2013, an increase of 0.75 percent from $11.1 billion at March 31, 2012.  Loans and leases, net of unearned income, were $8.6 billion at March 31, 2013, a decrease of 1.8 percent from $8.7 billion at March 31, 2012.  The construction, acquisition, and development (“CAD”) loan portfolio, which decreased $130.0 million, or 15.2 percent, from March 31, 2012 to March 31, 2013, accounted for 83.1 percent of the decline in net loans and leases over the period.

The decrease in time deposits of $328.5 million, or 11.5 percent, at March 31, 2013 compared to March 31, 2012 was offset by significant growth in noninterest bearing demand deposits, which increased $322.8 million, or 14.3 percent, over the same period.  Additionally, savings deposits increased $145.5 million, or 13.6 percent, while interest bearing demand deposits declined $57.3 million, or 1.2 percent, over the same period.  As of March 31, 2013, $816.9 million of time deposits were scheduled to mature during the following two quarters at a weighted average rate of 0.65 percent.

Provision for Credit Losses and Allowance for Credit Losses

For the first quarter of 2013, the provision for credit losses was $4.0 million, compared with $10.0 million for the first quarter of 2012 and $6.0 million for the fourth quarter of 2012.  Net charge-offs for the first quarter of 2013 were $5.9 million, compared with $23.3 million for the first quarter of 2012 and $10.6 million for the fourth quarter of 2012.  Recoveries of previously charged-off loans were $3.9 million for the first quarter of 2013, compared with $5.5 million for the first quarter of 2012 and $9.2 million for the fourth quarter of 2012.  Annualized net charge-offs were 0.27 percent of average loans and leases for the first quarter of 2013, compared with 1.06 percent for the first quarter of 2012 and 0.49 percent for the fourth quarter of 2012.

NPLs were $207.0 million, or 2.41 percent of net loans and leases, at March 31, 2013, compared with $285.2 million, or 3.26 percent of net loans and leases, at March 31, 2012, and $233.6 million, or 2.70 percent of net loans and leases, at December 31, 2012.  The allowance for credit losses was $162.6 million, or 1.89 percent of net loans and leases, at March 31, 2013 compared with $181.8 million, or 2.08 percent of net loans and leases, at March 31, 2012 and $164.5 million, or 1.90 percent of net loans and leases, at December 31, 2012.

NPLs at March 31, 2013 consisted primarily of $188.2 million of nonaccrual loans, compared with $207.2 million of nonaccrual loans at December 31, 2012.  Included in the reduction of nonaccrual loans during the first quarter of 2013 were payments received on nonaccrual loans of $23.6 million, compared with payments received on such loans of $31.6 million during the fourth quarter of 2012.  NPLs at March 31, 2013 also included $1.1 million of loans 90 days or more past due and still accruing, compared with $1.2 million of such loans at December 31, 2012, and included restructured loans still accruing of $17.7 million at March 31, 2013, compared with $25.1 million of such loans at December 31, 2012.  Early stage past due loans, representing loans 30-89 days past due, declined to $24.4 million at March 31, 2013 from $28.2 million at December 31, 2012.

At March 31, 2013, $30.1 million of NPLs were residential CAD loans, $28.8 million were other CAD loans, $56.5 million were commercial real estate loans and $41.3 million were consumer mortgages.  NPLs from all other loan types totaled $50.3 million at March 31, 2013.  Included in nonaccrual loans at March 31, 2013 were $105.9 million of loans, or 56.3 percent of total nonaccrual loans, that were paying as agreed, compared with $115.4 million, or 55.7 percent, at December 31, 2012.  These loans were generally placed on nonaccrual status because the collateral values were less than the outstanding balances, and because of uncertainty as to whether the borrowers possessed adequate liquidity or would be able to generate sufficient cash flow to satisfy the debt given the short-fall in collateral values.  Such loans are generally deemed to be impaired, with a specific reserve established for the difference in the balance owed and the disposition value of the collateral.

At the end of the first quarter, 73.2 percent of nonaccrual loans were determined to be collateral dependent, and after write-downs and specific reserves, the remaining book balance of these loans was 68.8 percent of the unpaid principal balance.  At March 31, 2013, coverage of unimpaired nonaccrual loans by the nonspecified allowance for credit losses was 299 percent and coverage of unimpaired NPLs by the nonspecified allowance for credit losses was 218 percent.

Other real estate owned (“OREO”) decreased $6.9 million to $96.3 million during the first quarter of 2013 from $103.2 million at December 31, 2012.  This net decrease reflected $2.2 million added through foreclosure, offset by sales of OREO of $7.8 million.  Write-downs in the value of existing properties were $1.3 million for the first quarter of 2013 compared to $5.5 million for the fourth quarter of 2012.  Sales of OREO during the first quarter of 2013 resulted in a net gain of $0.2 million compared to a net loss of $4.2 million for the fourth quarter of 2012.  At March 31, 2013, OREO was carried at 42.2 percent of the aggregate loan balances at the time of foreclosure, compared with 44.0 percent at December 31, 2012.

Noninterest Revenue

Noninterest revenue was $71.3 million for the first quarter of 2013, compared with $72.4 million for the first quarter of 2012 and $70.9 million for the fourth quarter of 2012.  These results included a positive MSR valuation adjustment of $1.0 million for the first quarter of 2013 compared with positive adjustments of $3.7 million for the first quarter of 2012 and $0.2 million for the fourth quarter of 2012.

Excluding the MSR valuation adjustments, net mortgage lending revenue was $11.3 million for the first quarter of 2013, compared with $11.4 million for the first quarter of 2012 and $17.0 million for the fourth quarter of 2012.  Mortgage origination volume for the first quarter of 2013 was $425.9 million, compared with $395.1 million for the first quarter of 2012 and $549.4 million for the fourth quarter of 2012.

Credit and debit card fee revenue was $7.5 million for both the first quarter of 2013 and the first quarter of 2012, compared with $8.1 million for the fourth quarter of 2012.  Service charge revenue was $12.8 million for the first quarter of 2013, compared with $15.1 million for the first quarter of 2012 and $13.9 million for the fourth quarter of 2012.  Insurance commission revenue was $26.6 million for the first quarter of 2013, compared with $23.2 million for the first quarter of 2012 and $20.5 million for the fourth quarter of 2012.  Insurance commission revenue is typically seasonally low during the fourth quarter of each year, as policy renewals are typically lower than other quarters.

Noninterest Expense

Noninterest expense for the first quarter of 2013 was $135.4 million, compared with $135.7 million for the first quarter of 2012 and $143.2 million for the fourth quarter of 2012.  Salaries and employee benefits expense increased to $79.4 million for the first quarter of 2013 from $74.9 million for the first quarter of 2012 and $77.2 million for the fourth quarter of 2012.    Foreclosed property expense declined to $2.4 million for the first quarter of 2013 from $8.4 million for the first quarter of 2012 and $12.0 million for the fourth quarter of 2012.  Deposit insurance assessments were $2.8 million for the first quarter of 2013 compared to $5.4 million for the first quarter of 2012 and $3.1 million for the fourth quarter of 2012.  Also included in noninterest expense for the first quarter was a charge of $6.8 million that was recorded to increase our litigation reserve related to various legal matters.

Capital Management

BancorpSouth remains a “well capitalized” financial holding company, as defined by federal regulations, with Tier 1 risk-based capital of 14.06 percent at March 31, 2013 and total risk based capital of 15.31 percent, compared with required minimum levels of 6 percent and 10 percent, respectively, for “well capitalized” classification.  The Company’s equity capitalization consists of 100 percent common stock.  BancorpSouth’s ratio of shareholders’ equity to assets was 10.94 percent at March 31, 2013, compared with 10.46 percent at March 31, 2012 and 10.82 percent at December 30, 2012.  The ratio of tangible shareholders’ equity to tangible assets was 8.96 percent at March 31, 2013, compared with 8.49 percent at March 31, 2012 and 8.83 percent at December 31, 2012.

Summary

Rollins concluded, “Our first quarter results reflect continued progress towards improving profitability.  Excluding the $6.8 million increase in the litigation reserve, this quarter is the most profitable quarter that the Company has had in over three years.  Additionally, we’ve been able to reduce NPA levels to almost one half of what they were at their peak two years ago.  While there is still additional work to be done, we believe the appropriate measures have been taken to address credit quality issues.  We continue to work daily on specific measures to help our Company achieve growth and improve operating efficiency.  Our team is focused on demonstrating consistent improvement in all areas of operating performance.”

 

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