BancorpSouth, Inc. - Zacks Investment Research

[Pages:8]December 22, 2014

BancorpSouth, Inc.

Current Recommendation Prior Recommendation Date of Last Change

Current Price (12/19/14) Target Price

NEUTRAL

Outperform 09/23/2013

$22.12 $23.00

SUMMARY DATA

52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh)

Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%)

Annual Cash Dividend Dividend Yield (%)

5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%)

P/E using TTM EPS

P/E using 2014 Estimate P/E using 2015 Estimate

Zacks Rank *: Short Term 1 3 months outlook

* Definition / Disclosure on last page

$25.90 $19.62 -10.80

1.31 615,243

96 $2,124

9.96 66 6

$0.30 1.36

-4.7 23.1 -31.3

17.8 17.8 15.4

3 - Hold

? 2014 Zacks Investment Research, All Rights reserved.

(BXS-NYSE)

SUMMARY

BancorpSouth s third-quarter 2014 earnings lagged the Zacks Consensus Estimate. Earnings were impacted by higher expenses, partially offset by higher net interest income and absence of provisions. With continued improvement in asset quality and opportunistic acquisitions, the company seems well positioned for long-term growth. Also, the recent announcement of the new share repurchase program boosts investors confidence in the stock. Nevertheless, inconsistent loan and deposit growth, the prevalent low interest rate environment and stringent regulatory landscape remain concerns. Moreover, absence of credible improvement in the mortgage market as well as interruption in the merger deals keeps us wary.

Risk Level *

Type of Stock Industry Zacks Industry Rank *

Below Avg.,

Mid-Value Banks-Southeast

101 out of 267

ZACKS CONSENSUS ESTIMATES

Revenue Estimates

(In millions of $)

Q1

Q2

(Mar)

(Jun)

2012 198 A

190 A

2013 184 A

188 A

2014 177 A

181 A

2015

Q3 (Sep)

191 A 174 A 183 A

Q4 (Dec)

188 A 178 A 176 E

Year (Dec)

767 A 724 A 717 E 776 E

Earnings Per Share Estimates

(EPS is operating earnings before non-recurring items, but including employee stock options expenses)

Q1

Q2

Q3

Q4

Year

(Mar)

(Jun)

(Sep)

(Dec)

(Dec)

2012 $0.25 A

$0.22 A

$0.25 A

$0.18 A

$0.90 A

2013 $0.19 A

$0.22 A

$0.29 A

$0.29 A

$0.99 A

2014 $0.30 A

$0.33 A

$0.32 A

$0.29 E

$1.24 E

2015

$1.44 E

Projected EPS Growth - Next 5 Years %

N/A



10 S. Riverside Plaza, Chicago IL 60606

OVERVIEW

Founded in 1982 and based in Tupelo, MS, BancorpSouth, Inc. operates as a financial holding company for BancorpSouth Bank. The company specializes in providing commercial banking and financial services to individuals and small-to-medium businesses. Additionally, the company operates investment services and insurance agency subsidiaries, which engage in investment brokerage services and the sale of other insurance products.

The company offers its services through more than 290 offices in Mississippi, Tennessee, Alabama, Arkansas, Texas, Louisiana, Florida, Missouri and Illinois.

BancorpSouth has traditionally focused on a strategy that includes expanding and diversifying its franchise in terms of revenues, profitability and asset size, while maintaining a relationship-based approach to banking. This strategy encompasses both organic growth and acquisitions of banks and financial services companies.

The company primarily operates through the Community Banking segment (71% of total revenue in 2013), which provides a full range of deposit products, commercial loans and consumer loans.

Another segment Insurance Agencies (15% of total revenues) provides agents in the sale of commercial lines of insurance and full lines of property and casualty, life, health and employee benefits products and services.

The General Corporate and Other segment (14% of total revenue) includes mortgage lending, trust services, credit card activities, investment services and other activities not allocated to the other segments.

General Corporate and

Other 14%

Full Ye ar 2013 Re ve nue (Bus ine s s Se gm e nts )

Insurance Agencies

15%

Community Banking 71%

On Jul 2, 2012, the company acquired The Securance Group, Inc., an independent insurance agency, for roughly $6.75 million.

On Dec 18, 2013, BancorpSouth announced that its insurance service wing BancorpSouth Insurance Services, Inc. acquired the assets of GEM Insurance Agencies, LP. The deal included a payment of $20.7 million in cash to GEM Insurance Agencies.

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In Apr 2014, BancorpSouth Insurance Services, Inc. ( BXSI ), a subsidiary of BancorpSouth acquired the assets of Lafayette, LA-based Knox Insurance Group, LLC (Knox). The financial terms of the deal were not divulged.

As of Sep 30, 2014, BancorpSouth had total assets of $13.1 billion, loans and leases (net of unearned income) of $9.5 billion, total deposits of $10.7 billion and total shareholders equity of $1.6 billion.

REASONS TO BUY

We remain encouraged by BancorpSouth s focus on expense management. Non-interest expenses remained almost stable during the nine months ended Sep 2014. Further in 2013, the company witnessed a year-over-year decline of 2.6% in non interest expenses after experiencing a continuous rise over the previous two years. Though the company is expected to incur ongoing and recurring costs related to BSA and AML programs of around $3 million annually, management noted that expected decline in other real estate (ORE) expense in the long term will support earnings. We believe prudent cost control will boost the company s bottom-line growth.

BancorpSouth has complied with the requirements for regulatory ratios since its inception. It has also been able to generate positive cash flow amid an increasingly difficult operating environment. Further, BancorpSouth has enhanced shareholders value from time to time. Notably in Jul 2014, the company declared a 50% hike in its quarterly cash dividend. Further, the company recently announced a new share buyback program for the purchase of roughly 5.8 million shares or 6% of the company s outstanding shares. Such a shareholder friendly approach is expected to boost investors confidence in the stock.

Despite the macroeconomic pressure, BancorpSouth s credit quality continues to normalize as evident from the trailing four quarters. We are impressed with the overall improving trend in the company s credit metrics including total non-performing assets, non-performing loans and leases and allowance for loan losses. Notably, the company recorded no provision for credit losses in the last four quarters. We anticipate the asset quality to be relatively stable or modestly improve in the near term, given the company s consistent efforts to reduce problem assets.

Driven by its solid liquidity position, BancorpSouth is making strategic investments through mergers and acquisitions (M&A). Following the acquisition of the assets of GEM Insurance Agencies, LP in Dec 2013, the company again struck two cash cum stock merger deals in Jan 2014 and an asset acquisition deal in Apr 2014. This reflects the company s strategic expansion through inorganic routes.

REASONS TO SELL

Though NIM showed improvement during the nine months ended Sep 2014, BancorpSouth has been experiencing a shrinking NIM over the past few years driven by a persistent low interest rate environment. Notably, NIM reflected a downward trend with 3.43% in 2013, 3.57% in 2012 and 3.69% in 2011. The decline was primarily due to a greater amount of lower yields from earnings assets than interest bearing liabilities. Given such a trend and the sluggish economic recovery, we expect the company s top-line growth to remain limited in the near future.

BancorpSouth has experienced a volatile trend in loans and deposits growth over the past 5 years (2009-2013). While loans balances recorded growth during the nine months ended Sep 2014, deposit balances declined. We believe an absence of steady growth in its loan and deposit balances will pose a hindrance in the company s organic growth strategy.

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The macroeconomic environment is recovering at a slow pace, with uncertain prospects. This is compounded by changes within the financial services industry as well as regulatory actions such as the Dodd-Frank Wall Street Reform and Consumer Protection Act. These are expected to adversely affect revenues and increase costs of business for BancorpSouth. Moreover, we believe that the company s flexibility with regard to business investments will be somewhat limited in the medium term, given the stricter regulatory requirements that the company must adhere to with respect to capital.

RECENT NEWS

BancorpSouth Misses on Q3 Earnings, Revenues Rise Y/Y Oct 20, 2014

BancorpSouth s adjusted operating earnings for third-quarter 2014 came in at $0.32 per share, missing the Zacks Consensus Estimate by $0.01. However, earnings came in 10.3% higher than the prior-year quarter.

Results during the quarter were impacted by higher non-interest expenses, partly offset by elevated revenues. Improved credit quality, a healthy capital position and absence of provision for credit losses acted as the positives.

Including merger-related and other non-operating expenses, the company s net income was $28.8 million or $0.30 per share, up from the year-ago quarter figure of $24.9 million or $0.26 per share.

Quarter in Detail

BancorpSouth s total revenue came in at $183.2 million, up 5% year over year. Also, it surpassed the Zacks Consensus Estimate of $179 million.

BancorpSouth s net interest revenue came in at $105.6 million, up 5.4% year over year. Fully taxable equivalent net interest margin (NIM) climbed 17 basis points (bps) year over year to 3.62%. The rise was mainly due to lower interest expenses, partially offset by a fall in yields on loans and leases.

Non-interest revenues grew 10.8% year over year to $69.3 million. The rise was mainly due to higher mortgage lending revenues and insurance commissions, partially offset by a fall in deposit service charges, wealth management revenues and other revenues.

Excluding the MSR valuation adjustments, net mortgage lending revenue was $6.3 million, up from $5.4 million in the year-ago quarter.

BancorpSouth s non-interest expense was $133.7 million, up 3.3% year over year. This was mainly due to higher salaries and employee benefits costs and other expenses, partially offset by a decline in writeoff and amortization of bond issue costs.

As of Sep 30, 2014, total deposits stood at $10.7 billion, inching down 0.2% year over year, while net loans and leases rose 8.4% to $9.5 billion.

Credit Quality

BancorpSouth witnessed a significant improvement in its credit quality. Provision for credit losses was nil in the reported quarter. Annualized net charge-offs, as a percent of average loans and leases, declined 22 bps year over year to 0.13%.

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Further, as of Sep 30, 2014, BancorpSouth s nonperforming loans and leases were $68.9 million or 0.72% of net loans and leases, down from $144.3 million or 1.65% as of Sep 30, 2013.

Allowance for credit losses to net loans and leases edged down to 1.51% from 1.76% in the prior-year quarter. Also, non-performing assets stood at $111.6 million, down 49.5% from $221.2 million in the prioryear quarter.

Capital Position

BancorpSouth exhibited a robust capital position. Tier I capital and tier I leverage capital stood at 13.18% and 10.47%, respectively, compared with 13.25% and 9.93% at the end of the prior-year quarter.

The ratio of total shareholders' equity to total assets increased to 12.32% at the end of the quarter from 11.46% as of Sep 30, 2013. Moreover, the ratio of tangible shareholders' equity to tangible assets advanced 71 bps to 10.14%.

Dividend Update

On Oct 22, BancorpSouth s board of directors declared a quarterly cash dividend of $0.075 per share. The dividend will be paid on Jan 2, 2015 to shareholders of record at the close of business on Dec 15, 2014.

BancorpSouth Announces 5.8 Million Share Buyback Program Dec 11, 2014

BancorpSouth recently announced a new share buyback program for the purchase of roughly 5.8 million shares or 6% of the company s outstanding shares. The company s board of directors has approved the buyback program, wherein shares can be repurchased from the open market under favorable conditions to maximize returns to the company s shareholders.

Each share can be repurchased for $2.50, to be held in treasury for future use in stock option plans, compensation programs and other corporate purposes. The program is valid till Nov 30, 2016.

Delay in Ouachita and Central Community Merger Deals Jul 21, 2014

Concurrent with the earnings release, BancorpSouth stated that the merger agreements entered with Central Community Corp. and Ouachita Bancshares Corp. have been postponed until Jun 30, 2015 due to certain compliance issues with the regulatory requirements.

Background

On Jan 22, 2014, BancorpSouth had announced a definitive agreement with the Central Community, according to which, the company will issue around 7.25 million shares of its common stock along with $28.5 million cash to acquire Central Community s stake in First State Bank, Central Community Capital Trust 1, and First Central Union Capital Trust 1.

Previously, on Jan 8, 2014, BancorpSouth had penned a merger agreement with Ouachita, the parent company of Ouachita Independent Bank, headquartered in Monroe, LA. Per the deal, the company will issue a maximum of 3.675 million shares of its common stock along with $22.875 million cash to acquire all outstanding shares of Ouachita s capital stock.

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To obtain the necessary regulatory approvals for both the deals, BancorpSouth needs to fulfill certain regulatory conditions, thus, causing this holdup. However, completion of these mergers will likely be beneficial for the company s growth in the future.

VALUATION

BancorpSouth s shares on a price-to-book (P/B) basis, trade at 1.3x, in-line with the industry average. The valuation looks attractive on a price-to-earnings (P/E) basis, as shares currently trade at 17.8x the Zacks Consensus Estimate for 2014, a 12.3% discount to the industry average of 20.3x.

BancorpSouth has a trailing 12-month ROE of 7.6%, compared to the industry average of 5.2%. This implies that the company reinvests its earnings more efficiently than its industry peers.

Our 6-month target price of $23.00 per share equates to about 18.5x the Zacks Consensus Estimate for 2014. Combined with an annual dividend of $0.30 per share, this target price implies an expected return of about 4.7% over that period. This is consistent with our long-term Neutral recommendation on the shares.

Currently, BancorpSouth carries a Zacks Rank #3 (Hold).

Key Indicators

BancorpSouth, Inc. (BXS)

P/E F1

17.8

P/E F2

15.4

Est. 5-Yr EPS Gr%

NA

P/CF (TTM)

15.5

P/E (TTM)

17.8

P/E 5-Yr High (TTM)

96.6

Industry Average S&P 500

20.3 15.1

8.5

17.6 16.4

10.7

14.8 19.8

NA

15.7 18.9 19.6

Hancock Holding Company (HBHC)

13.1 12.9

8.0

9.0

13.3 25.6

First Citizens Bancshares Inc. (FCNCA)

NA NA

NA

19.9 23.9 23.8

First Bancorp (FBP)

13.9 12.8

NA

7.7

14.9 36.5

IberiaBank Corp. (IBKC)

17.3 14.4

8.0

14.7 18.1

NA

TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow

P/E 5-Yr Low (TTM)

15.0

15.4 12.0

12.5 10.5 2.8 14.2

BancorpSouth, Inc. (BXS)

Industry Average S&P 500

P/B Last Qtr.

1.3

P/B 5-Yr High

1.6

P/B 5-Yr Low

0.6

ROE (TTM)

7.6

D/E Last Qtr.

0.1

Div Yield Last Qtr.

1.4

EV/EBITDA (TTM)

10.9

1.3

1.3

1.3

5.2

0.6

1.2

3.5

7.2

9.8

3.2

23.3

NA

1.9

NA

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Earnings Surprise and Estimate Revision History

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DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of BXS. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1139 companies covered: Outperform - 16.1%, Neutral - 77.6%, Underperform 6.0%. Data is as of midnight on the business day immediately prior to this publication.

Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.

Coverage Team QCA Lead Analyst Analyst Copy Editor Content Ed.

11B Kalyan Nandy Priti Dhanuka Anindita Chaudhury Ishani Mukherjee Priti Dhanuka

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