BancorpSouth Inc. ( BXS - Snapshot Report ) came out with impressive results in the third quarter of 2012. The company reported earnings of 25 cents per share, surpassing the Zacks Consensus Estimate of 22 cents. Results also compared favorably with earnings per share of 22 cents in the prior quarter and 14 cents in the year-ago period.

Earnings benefited from higher mortgage production volume, which was over $600 million in the quarter. Moreover, loan loss provision levels stabilized in the quarter with a number of credit quality metrics exhibiting a favorable trend. However, the pressure on net interest margin continued and acted as dampeners. The company also incurred a negative pre-tax mortgage servicing rights (MSR) valuation adjustment of $3.2 million.

Provision for credit losses was $6.0 million in the reported quarter, flat sequentially and significantly down from $25.1 million recorded in the year-ago quarter.

Quarter in Detail

BancorpSouth’s net interest revenue came in at $103.4 million, descending 1.3% sequentially and 4.4% year over year. The company experienced a fall in fully taxable equivalent net interest margin, which declined to 3.55%, registering a drop of 10 basis points (bps) sequentially and 11 bps year over year. The decrease was mainly driven by continued pressure on asset yields, specifically yields on loans and leases.

However, non-interest revenue at BancorpSouth ascended to 5.9% sequentially and 13.4% year over year to $70.4 million. The company experienced an augmentation in non-interest revenue on the back of a surge in mortgage lending volume

Excluding the MSR valuation adjustments, net mortgage lending revenue stood at $16.8 million in the reported quarter, up from $14.9 million in the prior quarter and $10.2 million in the year-ago quarter.

On the other hand, BancorpSouth’s non-interest expense reported was $133.8 million. This reflected a decrease of 2.0% from the prior quarter. However, it rose 2.4% from the comparable prior-year period as salaries and employee benefits cost as well as foreclosed property expense moved up year over year.

Credit Quality

BancorpSouth’s credit quality improved from the prior-year period but exhibited slight sequential decline.

In the reported quarter, net charge-offs were $12.8 million, compared with $11.9 million in the prior quarter and $23.1 million in the year-ago quarter. Annualized net charge-offs were 0.59% of average loans and leases in the quarter under review, compared with 0.55% in the last quarter and 1.01% in the prior-year period.

As of September 30, 2012, BancorpSouth’s nonperforming loans were $247.3 million, or 2.85% of net loans and leases, compared with $266.9 million, or 3.06% of net loans and leases as of June 30, 2012 and $362.8 million, or 4.01% of net loans and leases as of September 30, 2011.

Moreover, as of September 30, 2012, BancorpSouth’s allowance for credit losses was $169.0 million, or 1.95% of net loans and leases, compared with $175.8 million, or 2.01% of net loans and leases, as of June 30, 2012 and $199.7 million, or 2.21% of net loans and leases, as of September 30, 2011.

Capital Position

Capital ratios continued to rise at BancorpSouth, with Tier I leverage and Total risk-based capital ratios advancing to 10.21% and 14.81%, from 8.66% and 12.62%, respectively, reported a year ago. Moreover, as defined by federal regulations, BancorpSouth remains a "well capitalized" financial holding company.

Its Tier 1 risk-based capital of 13.55% as of September 30, 2012 and total risk based capital of 14.81%, were above the required minimum levels of 6% and 10%, respectively, considered for "well capitalized" classification.

Its equity capitalization is 100% common stock and ratio of shareholders' equity to assets increased to 10.93% as of September 30, 2012 from 10.79% as of June 30, 2012 and 9.60% as of September 30, 2011. Moreover, the ratio of tangible shareholders' equity to tangible assets advanced to 8.91% from 8.80% as of June 30, 2012 and 7.58% as of September 30, 2011.

Our Take

We are encouraged by the better-than-expected results at BancorpSouth. Along with the robust backing of its mortgage lending business performance, the company also benefited from the acquisition of the assets of The Securance Group Inc., which closed in early July. While concerns remain over the continuation of the low interest rate environment and its adverse impact on net interest margin, we believe that the improvement in the company’s fee-based business would help it navigate through the current cycle.

BancorpSouth currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. One of BancorpSouth’s peers, Cardinal Financial Corp. ( CFNL - Snapshot Report ) has a Zacks #1 Rank, implying a short-term Buy rating.