BancorpSouth Reports Record Quarterly Earnings

TUPELO, Miss., Oct. 17, 2018 /PRNewswire/ -- BancorpSouth Bank (NYSE: BXS) (the "Company") today announced financial results for the quarter ended September 30, 2018.

Highlights for the third quarter of 2018 included:

• Record quarterly net income of $66.7 million, or $0.67 per diluted share, which represents an increase of 56 percent on a per share basis compared with the third quarter of 2017.

• Recognized a one-time tax benefit of $11.3 million, or $0.11 per diluted share, as a result of a voluntary contribution to the Company's pension plan as well as a tax accounting method change related to the recognition of certain software development costs.

• Earnings benefited from a positive pre-tax mortgage servicing rights ("MSR") valuation adjustment of $1.5 million.

• Net operating income – excluding MSR – of $55.0 million, or $0.56 per diluted share.

• Net interest margin – excluding accretable yield – of 3.62 percent remained stable compared with the second quarter of 2018.

• Continued focus on expense control reflected by a $1.8 million decline in total operating expense compared with the second quarter of 2018.

• Repurchased 166,721 shares of outstanding common stock at a weighted average price of $33.38 per share.

• Completed the acquisition of Icon Capital Corporation effective October 1, 2018, which will add over $600 million in both loans and deposits to the Company's presence in Houston, Texas in the fourth quarter.

The Company reported net income of $66.7 million, or $0.67 per diluted share, for the third quarter of 2018 compared with net income of $39.5 million, or $0.43 per diluted share, for the third quarter of 2017 and net income of $54.0 million, or $0.55 per diluted share, for the second quarter of 2018.  The Company reported net operating income – excluding MSR – of $55.0 million, or $0.56 per diluted share, for the third quarter of 2018 compared with $39.6 million, or $0.43 per diluted share, for the third quarter of 2017 and $55.6 million, or $0.56 per diluted share, for the second quarter of 2018. 

Net operating income – excluding MSR – is a non-GAAP financial measure used by management to assess the core operating performance of the Company.  This measure excludes items such as recognized securities gains and losses, MSR valuation adjustments, restructuring charges, merger-related expenses, and other one-time charges. 

"Our results for the quarter are highlighted by continued strong credit quality, a decline in total operating expense, and a stable core net interest margin," remarked Dan Rollins, Chairman and Chief Executive Officer.  "We continue to experience a very competitive lending environment as well as upward pressure on deposit costs.  We are pleased to have maintained a stable net interest margin – excluding accretable yield – at 3.62 percent despite these rising deposit costs and slower than anticipated balance sheet growth.  We are also proud of our ability to continue to challenge expenses and realize cost savings from our previous mergers, which is evidenced by the $1.8 million decline in total operating expense."

"Additionally, our third quarter income tax expense includes a one-time income tax benefit totaling $11.3 million, or $0.11 per diluted share, as a result of a voluntary pension contribution as well as a tax method change related to the recognition of software development costs.  This benefit is the result of our ability to deduct these items on the Company's 2017 federal income tax return at the prior statutory rate of 35 percent."

"Finally, we are pleased to have recently completed our merger with Icon Bank of Texas and its parent company in Houston, Texas.  We are excited about the experience and leadership Mark Reiley and John Green and their team can provide in our efforts to grow in the Houston market.  We anticipate completing the operational integration of Icon during the fourth quarter of this year."

Net Interest Revenue

Net interest revenue was $142.1 million for the third quarter of 2018, an increase of 17.9 percent from $120.6 million for the third quarter of 2017 and flat compared with the second quarter of 2018.  The fully taxable equivalent net interest margin was 3.67 percent for the third quarter of 2018 compared with 3.58 percent for the third quarter of 2017 and 3.71 percent for the second quarter of 2018.  Yields on net loans and leases were 4.72 percent for the third quarter of 2018 compared with 4.33 percent for the third quarter of 2017 and 4.67 percent for the second quarter of 2018, while yields on total interest earning assets were 4.21 percent for the third quarter of 2018 compared with 3.89 percent for the third quarter of 2017 and 4.15 percent for the second quarter of 2018.  The net interest margin, excluding accretable yield, was 3.62 percent for the third quarter of 2018 compared with 3.63 percent for the second quarter of 2018 while yields on net loans and leases, excluding accretable yield, were 4.64 percent for the third quarter of 2018 compared with 4.57 percent for the second quarter of 2018.  Purchase accounting accretion did not impact the net interest margin or net loan and lease yields for the third quarter of 2017.  The average cost of deposits was 0.43 percent for the third quarter of 2018 compared with 0.26 percent for the third quarter of 2017 and 0.34 percent for the second quarter of 2018.

Asset, Deposit and Loan Activity

Total assets were $17.2 billion at September 30, 2018 compared with $14.8 billion at September 30, 2017.  Loans and leases, net of unearned income, were $12.4 billion at September 30, 2018 compared with $11.1 billion at September 30, 2017.  Total deposits were $13.3 billion at September 30, 2018 compared with $11.8 billion at September 30, 2017.  These balance sheet comparisons include the impact of the acquisitions of Central Community Corporation and Ouachita Bancshares Corp., each of which closed effective January 15, 2018, but do not include the impact of the acquisition of Icon, which closed effective October 1, 2018.  Balance sheet totals for these two banks at the time of closing are disclosed in the "Transactions" section of this news release.

Provision for Credit Losses and Allowance for Credit Losses

Earnings for the third quarter of 2018 reflect no provision for credit losses, compared with a provision of $0.5 million for the third quarter of 2017 and a provision of $2.5 million for the second quarter of 2018.  Net recoveries for the third quarter of 2018 were $1.1 million, compared with net charge-offs of $2.6 million for the third quarter of 2017 and net charge-offs of $2.0 million for the second quarter of 2018.  The allowance for credit losses was $121.0 million, or 0.97 percent of net loans and leases, at September 30, 2018, compared with $119.5 million, or 1.08 percent of net loans and leases, at September 30, 2017 and $119.9 million, or 0.97 percent of net loans and leases, at June 30, 2018.  The allowance for credit losses coverage metrics were impacted by loans acquired in the acquisitions that closed during the first quarter of 2018.

Total non-performing assets were $70.3 million, or 0.56 percent of net loans and leases, at September 30, 2018 compared with $71.0 million, or 0.64 percent of net loans and leases, at September 30, 2017, and $81.2 million, or 0.65 percent of net loans and leases, at June 30, 2018.  Other real estate owned was $4.3 million at September 30, 2018 compared with $6.0 million at September 30, 2017 and $7.8 million at June 30, 2018.

Noninterest Revenue

Noninterest revenue was $71.6 million for the third quarter of 2018, compared with $66.0 million for the third quarter of 2017 and $72.5 million for the second quarter of 2018.  These results include a positive MSR valuation adjustment of $1.5 million for the third quarter of 2018, compared with an immaterial MSR valuation adjustment for the third quarter of 2017 and a negative MSR valuation adjustment of $0.2 million for the second quarter of 2018.  Valuation adjustments in the MSR asset are driven primarily by fluctuations in interest rates period over period.   

Excluding the MSR valuation adjustment, mortgage banking revenue was $5.0 million for the third quarter of 2018, compared with $7.0 million for the third quarter of 2017 and $7.1 million for the second quarter of 2018.  Mortgage origination volume for the third quarter of 2018 was $384.8 million, compared with $342.4 million for the third quarter of 2017 and $523.7 million for the second quarter of 2018.  Of the total mortgage origination volume for the third quarter of 2018, $95.4 million was portfolio loans, compared with $61.4 million for the third quarter of 2017 and $209.3 million for the second quarter of 2018.

Credit and debit card fee revenue was $9.9 million for the third quarter of 2018, compared with $9.3 million for the third quarter of 2017 and $10.5 million for the second quarter of 2018.  Deposit service charge revenue was $11.3 million for the third quarter of 2018, compared with $10.4 million for the third quarter of 2017 and $10.8 million for the second quarter of 2018.  Wealth management revenue was $6.0 million for the third quarter of 2018, compared with $5.4 million for the third quarter of 2017 and $5.7 million for the second quarter of 2018.  Other noninterest revenue was $6.3 million for the third quarter of 2018, compared with $5.3 million for the third quarter of 2017 and $5.5 million for the second quarter of 2018.

Insurance commission revenue was $31.7 million for the third quarter of 2018, compared with $28.6 million for the third quarter of 2017 and $33.0 million for the second quarter of 2018.  New accounting guidance, which became effective January 1, 2018, impacted the Company's accounting for insurance commission revenue.  Previously, contingent commissions were recognized as revenue in the period of receipt; however, under the new guidance, the Company is required to estimate and accrue for contingent commissions throughout the year.

Noninterest Expense

Noninterest expense for the third quarter of 2018 was $142.4 million, compared with $126.9 million for the third quarter of 2017 and $145.2 million for the second quarter of 2018.  Salaries and employee benefits expense was $89.6 million for the third quarter of 2018 compared with $80.5 million for the third quarter of 2017 and $91.5 million for the second quarter of 2018.  Occupancy expense was $11.7 million for the third quarter of 2018, compared with $10.3 million for the third quarter of 2017 and $11.1 million for the second quarter of 2018.  Other noninterest expense was $34.1 million for the third quarter of 2018, compared with $30.2 million for the third quarter of 2017 and $35.7 million for the second quarter of 2018.  Additionally, merger-related expense for the third quarter of 2018 was $0.9 million, compared with no merger-related expense for the third quarter of 2017 and $1.9 million for the second quarter of 2018.  Income tax expense for the third quarter of 2018 included a one-time tax benefit of $11.3 million as a result of a voluntary contribution to the Company's pension plan as well as a tax accounting method change related to the recognition of certain software development costs.  Income tax expense for the second quarter of 2018 was reduced by the tax benefit of the vesting of restricted stock during the quarter.

Capital Management

The Company's equity capitalization is comprised entirely of common stock.  The Company's ratio of shareholders' equity to assets was 12.27 percent at September 30, 2018, compared with 11.52 percent at September 30, 2017 and 12.03 percent at June 30, 2018.  The ratio of tangible shareholders' equity to tangible assets was 8.96 percent at September 30, 2018, compared with 9.56 percent at September 30, 2017 and 8.71 percent at June 30, 2018.

During the third quarter of 2018, the Company repurchased 166,721 shares of its outstanding common stock at a weighted average price of $33.38 per share pursuant to its share repurchase program which is intended to comply with Rules 10b-18 and 10b5-1 promulgated under the Securities and Exchange Act of 1934, as amended.  During the second quarter of 2018, the Company repurchased 785,877 shares of its outstanding common stock at a weighted average price of $31.39 per share.  As of September 30, 2018, the Company had 2,973,416 remaining shares available for repurchase under its current share repurchase authorization, which expires on December 31, 2019.  

Estimated regulatory capital ratios at September 30, 2018 were calculated in accordance with the Basel III capital framework.  The Company is a "well capitalized" bank, as defined by federal regulations, at September 30, 2018, with Tier 1 risk-based capital of 11.72 percent and total risk-based capital of 12.61 percent, compared with required minimum levels of 8 percent and 10 percent, respectively, in order to qualify for "well capitalized" classification. 

Summary

Rollins concluded, "As we look toward the remainder of the year and beyond, we will continue to focus on our initiatives of balance sheet growth, both organically and through strategic opportunities, strong credit quality, and diligent expense management.  We continue to emphasize to our bankers the importance of developing and mining customer relationships that can contribute growth to both sides of the balance sheet.  In addition to our growth efforts, we have also steadily increased our dividend and utilized our share repurchase program in an effort to maximize returns for our shareholders."

TRANSACTIONS

Icon Capital Corporation

Effective October 1, 2018, the Company completed the merger with Icon Capital Corporation and its wholly owned subsidiary, Icon Bank of Texas, National Association (collectively referred to as "Icon"), pursuant to which Icon was merged with and into the Company.  Icon was headquartered in Houston, Texas and operated 7 full-service banking offices in the Houston, Texas metropolitan area.  As of October 1, 2018, Icon, on a consolidated basis, reported total assets of $760.4 million, total loans of $650.4 million and total deposits of $675.8 million.  Under the terms of the definitive agreement, the Company issued approximately 4,125,000 shares of the Company's common stock plus $17.5 million in cash for all outstanding shares of Icon Capital Corporation's capital stock.  For more information regarding the Icon Merger, see our Current Report on Form 8-K that was filed with the Federal Deposit Insurance Corporation ("FDIC") on October 1, 2018. 

Central Community Corporation

Effective January 15, 2018, the Company completed the merger with Central Community Corporation ("CCC"), headquartered in Temple, Texas, pursuant to which CCC merged with and into the Company.  CCC was the parent company of First State Bank Central Texas ("First State Bank"), which was headquartered in Austin, Texas.  First State Bank operated 31 full-service banking offices in central Texas.  As of January 15, 2018, CCC, on a consolidated basis, reported total assets of $1.4 billion, total loans of $712.2 million and total deposits of $1.2 billion.  Under the terms of the definitive merger agreement, the Company issued approximately 7,250,000 shares of the Company's common stock plus $28.5 million in cash for all outstanding shares of CCC's capital stock.  For more information regarding the CCC merger, see our Current Report on Form 8-K that was filed with the FDIC on January 16, 2018.  The purchase accounting for this transaction is considered provisional as management continues to identify and assess information regarding the nature of the acquired assets and liabilities and reviews the associated valuation assumptions and methodologies.

Ouachita Bancshares Corp.

Effective January 15, 2018, the Company completed the merger with Ouachita Bancshares Corp., parent company of Ouachita Independent Bank (collectively referred to as "OIB"), headquartered in Monroe, Louisiana, pursuant to which OIB was merged with and into the Company.  OIB operated 11 full-service banking offices along the I-20 corridor and had a loan production office in Madison, Mississippi.  As of January 15, 2018, OIB, on a consolidated basis, reported total assets of $707.1 million, total loans of $495.6 million and total deposits of $653.4 million.  Under the terms of the definitive merger agreement, the Company issued approximately 3,675,000 shares of the Company's common stock plus $22.875 million in cash for all outstanding shares of Ouachita Bancshares Corp.'s capital stock.  For more information regarding the OIB merger, see our Current Report on Form 8-K that was filed with the FDIC on January 16, 2018.  The purchase accounting for this transaction is considered provisional as management continues to identify and assess information regarding the nature of the acquired assets and liabilities and reviews the associated valuation assumptions and methodologies.

The Reorganization

Effective October 31, 2017, the merger of BancorpSouth, Inc. with and into BancorpSouth Bank was closed, with BancorpSouth Bank continuing as the surviving entity (the "Reorganization").  The Reorganization resulted in the elimination of the holding company structure.  The Reorganization is expected to improve efficiency through the elimination of redundant corporate infrastructure and duplicative regulatory oversight.  For more information regarding the Reorganization, see our Current Report on Form 8-K that was filed with the FDIC on November 1, 2017.

Non-GAAP Measures and Ratios

This news release presents certain financial measures and ratios that are not calculated in accordance with U.S. generally accepted accounting principles ("GAAP").  A discussion regarding these non-GAAP measures and ratios, including reconciliations of non-GAAP measures to the most directly comparable GAAP measures and definitions for non-GAAP ratios, appears under the caption "Reconciliation of Non-GAAP Measures and Other Non-GAAP Ratio Definitions"  beginning on page 21 of this news release.

Conference Call and Webcast

The Company will conduct a conference call to discuss its third quarter 2018 financial results on October 18, 2018, at 10:00 a.m. (Central Time).  This conference call will be an interactive session between management and analysts. Shareholders and other interested parties may listen to this live conference call via Internet webcast by accessing www.BancorpSouth.investorroom.com/Webcasts. The webcast will also be available in archived format at the same address.

About BancorpSouth Bank

BancorpSouth Bank (NYSE: BXS) is headquartered in Tupelo, Mississippi, with approximately $18 billion in assets.  BancorpSouth operates approximately 285 full service branch locations as well as additional mortgage, insurance, and loan production offices in Alabama, Arkansas, Florida, Louisiana, Mississippi, Missouri, Tennessee and Texas, including an insurance location in Illinois.  BancorpSouth is committed to a culture of respect, diversity, and inclusion in both its workplace and communities. To learn more, visit our Community Commitment page at www.bancorpsouth.com.  Like us on Facebook; follow us on Twitter: @MyBXS; or connect with us through LinkedIn.

Forward-Looking Statements

Certain statements contained in this news release may not be based upon historical facts and are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may be identified by their reference to a future period or periods or by the use of forward-looking terminology such as "anticipate," "believe," "could," "estimate," "expect," "foresee," "hope," "intend," "may," "might," "plan," "will," or "would" or future or conditional verb tenses and variations or negatives of such terms. These forward-looking statements include, without limitation, those relating to the benefits, costs, synergies and financial and operational impact of the Reorganization and the Icon, CCC and OIB mergers on the Company, the acceptance by customers of Icon, OIB and CCC of the Company's products and services after the closing of the mergers, the opportunities to enhance market share in certain markets and market acceptance of  the Company generally in new markets, the Company's ability to operate its regulatory compliance programs consistent with federal, state and local laws, including its Bank Secrecy Act ("BSA") and anti-money laundering ("AML") compliance program and its fair lending compliance program, the Company's compliance with the consent order it entered into with the Consumer Financial Protection Bureau and the United States Department of Justice related to the Company's fair lending practices (the "Consent Order"), the impact of the Tax Cuts and Jobs Act of 2017 on the Company and its operations and financial performance, amortization expense for intangible assets, goodwill impairments, loan impairment, utilization of appraisals and inspections for real estate loans, maturity, renewal or extension of construction, acquisition and development loans, net interest revenue, fair value determinations, the amount of the Company's non-performing loans and leases, credit quality, credit losses, liquidity, off-balance sheet commitments and arrangements, valuation of mortgage servicing rights, allowance and provision for credit losses, early identification and resolution of credit issues, utilization of non-GAAP financial measures, the ability of the Company to collect all amounts due according to the contractual terms of loan agreements, the Company's reserve for losses from representation and warranty obligations, the Company's foreclosure process related to mortgage loans, the resolution of non-performing loans that are collaterally dependent, real estate values, fully-indexed interest rates, interest rate risk, interest rate sensitivity, the impact of interest rates on loan yields, calculation of economic value of equity, impaired loan charge-offs, diversification of the Company's revenue stream, the growth of the Company's insurance business and commission revenue, the growth of the Company's customer base and loan, deposit and fee revenue sources, liquidity needs and strategies, sources of funding, net interest margin, declaration and payment of dividends, the utilization of the Company's share repurchase program, the implementation and execution of cost saving initiatives, improvement in the Company's efficiencies, operating expense trends, future acquisitions, dispositions and other strategic growth opportunities and initiatives and the impact of certain claims and ongoing, pending or threatened litigation, administrative and investigatory matters. 

The Company cautions readers not to place undue reliance on the forward-looking statements contained in this news release, in that actual results could differ materially from those indicated in such forward-looking statements as a result of a variety of factors. These factors may include, but are not limited to, the Company's ability to operate its regulatory compliance programs consistent with federal, state and local laws, including its BSA/AML compliance program and its fair lending compliance program, the Company's ability to successfully implement and comply with the Consent Order, the ability of the Company to meet expectations regarding the benefits, costs, synergies, and financial and operational impact of the Reorganization and the Icon, CCC and OIB mergers, the possibility that any of the anticipated benefits, costs, synergies and financial and operational improvements of the Reorganization and the Icon, OIB and CCC mergers will not be realized or will not be realized as expected, the possibility that the Icon merger integration may be more expensive to complete than anticipated, the lack of availability of the Company's filings mandated by the Exchange Act from the SEC's publicly available website after the closing of the Reorganization, the impact of any ongoing, pending or threatened litigation, administrative and investigatory matters involving the Company, conditions in the financial markets and economic conditions generally, the adequacy of the Company's provision and allowance for credit losses to cover actual credit losses, the credit risk associated with real estate construction, acquisition and development loans, limitations on the Company's ability to declare and pay dividends, the availability of capital on favorable terms if and when needed, liquidity risk, governmental regulation, including the Dodd-Frank Act, and supervision of the Company's operations, the short-term and long-term impact of changes to banking capital standards on the Company's regulatory capital and liquidity, the impact of regulations on service charges on the Company's core deposit accounts, the susceptibility of the Company's business to local economic and environmental conditions, the soundness of other financial institutions, changes in interest rates, the impact of monetary policies and economic factors on the Company's ability to attract deposits or make loans, volatility in capital and credit markets, reputational risk, the impact of the Tax Cuts and Jobs Act of 2017 on the Company and its operations and financial performance, the impact of the loss of any key Company personnel, the impact of hurricanes or other adverse weather events, any requirement that the Company write down goodwill or other intangible assets, diversification in the types of financial services the Company offers, the growth of the Company's insurance business and commission revenue, the growth of the Company's loan, deposit and fee revenue sources, the Company's ability to adapt its products and services to evolving industry standards and consumer preferences, competition with other financial services companies, risks in connection with completed or potential acquisitions, dispositions and other strategic growth opportunities and initiatives, the Company's growth strategy, interruptions or breaches in the Company's information system security, the failure of certain third-party vendors to perform, unfavorable ratings by rating agencies, dilution caused by the Company's issuance of any additional shares of its common stock to raise capital or acquire other banks, bank holding companies, financial holding companies and insurance agencies, the utilization of the Company's share repurchase program, the implementation and execution of cost saving initiatives, other factors generally understood to affect the assets, business, cash flows, financial condition, liquidity, prospects and/or results of operations of financial services companies and other factors detailed from time to time in the Company's press and news releases, reports and other filings with the FDIC.  Forward-looking statements speak only as of the date that they were made, and, except as required by law, the Company does not undertake any obligation to update or revise forward-looking statements to reflect events or circumstances that occur after the date of this news release.