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BancorpSouth Inc. (BXS - Analyst Report) reported impressive results in the second quarter of 2013. The company’s earnings came in at 22 cents per share, surpassing the Zacks Consensus Estimate of 20 cents. However, results were in line with 22 cents earned in the prior-year quarter.

Earnings benefited from higher non-interest revenues. Mortgage production totaled $435.0 million for the quarter, which contributed to mortgage lending revenues of $17.9 million, including a positive MSR valuation adjustment of $5.3 million. Moreover, loan loss provision levels stabilized in the quarter with a number of credit quality metrics exhibiting a favorable trend. However, persistent pressure on net interest margin was a dampener.

Provision for credit losses was $3.0 million, down 50% year over year.

Quarter in Detail

BancorpSouth’s net interest revenue came in at $98.2 million, down 6.2% year over year. The company experienced a fall in fully taxable equivalent net interest margin, which declined to 3.36%, registering a fall of 29 basis points from the prior-year quarter. The decrease was mainly driven by continued pressure on asset yields, especially yields on loans and leases, partly offset by a fall in the average cost of interest bearing liabilities.

However, non-interest revenues at BancorpSouth increased 14.4% year over year to $76.1 million. The rise came on the back of a surge in credit and debit card fee revenues as well as insurance commission revenues. Non-interest revenues included a positive MSR valuation adjustment of $5.3 million for the second quarter of 2013, compared with a negative adjustment of $3.8 million for second-quarter 2012.

Excluding the MSR valuation adjustments, net mortgage lending revenue was $12.6 million, down from $14.9 million in the year-ago quarter.

On the other hand, BancorpSouth’s non-interest expense was $142.3 million. This reflected a 4.2% increase from the comparable prior-year period as salaries and employee benefits cost rose year over year. Non-interest expense for the second quarter of 2013 included a pre-tax charge of $10.9 million related to additional benefits offered under the VERO.

Credit Quality

BancorpSouth’s credit quality improved in the reported quarter.

Net charge-offs were $4.6 million, compared with $11.9 million in the year-ago quarter and $5.9 million in the prior quarter. Annualized net charge-offs were 0.21% of average loans and leases, compared with 0.55% in the prior-year period and 0.27% in the past quarter.

As of Jun 30, 2013, BancorpSouth’s nonperforming loans were $167.9 million, or 1.94% of net loans and leases, compared with $266.9 million, or 3.06% of net loans and leases as of Jun 30, 2012 and $207.0 million, or 2.41% of net loans and leases as of Mar 31, 2013.

Moreover, as of Jun 30, 2013, the company’s allowance for credit losses was $161.0 million, or 1.86% of net loans and leases, compared with $175.8 million, or 2.01% of net loans and leases, as of Jun 30, 2012 and $162.6 million, or 1.89% of net loans and leases, as of Mar 31, 2013.  

Capital Position

Capital ratios continued to rise at BancorpSouth, with Tier I leverage and Total risk-based capital ratios advancing to 10.58% and 15.47%, from 10.07% and 14.66%, respectively, in the past year and 10.33% and 15.31% in the prior quarter. Moreover, as defined by federal regulations, BancorpSouth remains a "well capitalized" financial holding company.

Its Tier 1 risk-based capital of 14.21% as of Jun 30, 2013 and total risk based capital of 14.81% were above the minimum required levels of 6% and 10%, respectively, which are considered to be "well capitalized".

Its equity capitalization is 100% common stock and ratio of shareholders' equity to assets increased to 11.04% as of Jun 30, 2013 from 10.79% as of Jun 30, 2012 and 10.94% as of Mar 31, 2013. Moreover, the ratio of tangible shareholders' equity to tangible assets advanced to 9.04% from 8.80% as of Jun 30, 2012 and 8.96% at Mar 31, 2013.

Our Take

We are encouraged by better-than-expected results at BancorpSouth. Along with its robust mortgage lending business performance, the company benefited from numerous opportunistic acquisitions. While concerns remain over the continuation of the low interest rate environment and its adverse impact on NIM, we believe that the improvement in the company’s fee-based business would help it navigate through the current cycle.

BancorpSouth currently carries a Zacks Rank #3 (Hold). Some other Southeast banks that are worth a look include Home Bancshares, Inc. (Conway, AR) (HOMB - Snapshot Report), WesBanco Inc. (WSBC - Snapshot Report) and Pinnacle Financial Partners Inc. (PNFP - Snapshot Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

 

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