Mississippi's BancorpSouth could attract a swarm of suitors once interstate banking is fully implemented in the Magnolia State next year.

TUPELO, Miss. -- Aubrey B. Patterson holds up a road map of Mississippi, mounted on cardboard and sprinkled with green and blue pins. The green pins represent branches belonging to BancorpSouth, the blue are offices acquired in a recent acquisition. Most of the pins cluster in the northeastern and southeastern parts of the state, none in the southwestern quadrant.

"You'll notice there are no green pins in the delta," says Mr. Patterson, BancorpSouth's chairman and CEO. "And that is purely by design. There are no growth opportunities over there."

Mr. Patterson then traces his finger through the strong points in BancorpSouth's franchise: Whitehaven, a prosperous suburb of Memphis; Tupelo, the manufacturing center the bank calls home; Jackson, the state capital; Hattiesburg, another industrial area; and Biloxi, hot spot of the state's booming, casino-crazy Gulf coast.

"You really couldn't pick better markets to be in the state," he says. "We have the most attractive franchise in Mississippi."

Mr. Patterson isn't just whistling "Dixie." BancorpSouth, with $2.4 billion of assets, is only the fourth-largest bank in the state, but it's in all the right places. And that means a lot in Mississippi, whose extremes of poverty and wealth are reminiscent of the Third World.

The Magnolia State ranks low on most national indexes of family income, health standards, educational achievement, and economic growth. In terms of per-capita income, it's dead last among the 50 states.

But Mississippi's statistics would look a lot better without the impoverished, largely rural delta included in the mix. As Mr. Patterson says, the demographics of the northeastern third of the state, around Tupelo, "are more like the Carolinas."

Bank of Mississippi, BancorpSouth's major subsidiary, has no offices at all in the Delta except for Vicksburg, which is saved by tourism and major government installations. "They're not in any of the dead spots," says Henry J. Coffey Jr., banking analyst with J.C. Bradford & Co. "And they've also managed, since their base is the most profitable in the state, to avoid all the problems that their competitors have had to face."

Despite the attractions, BancorpSouth is a thinly traded stock, with only 7.9 million shares outstanding and a market capitalization of $270 million. Investors are more likely to watch the two larger Jackson-based banks, Deposit Guaranty Corp. and Trustmark Corp.

Hancock Holding Co., Gulfport, is another favorite because of its dominant presence on the Gulf coast.

What investors may overlook is that BancorpSouth could actually be a more logical point of entry into Mississippi for any out-of-state acquirer. "In terms of financial profile, I'd put them at the top of the list," says analyst Jon Burke, with the Robinson-Humphrey Co. in Atlanta. "It would be difficult to pay a major market premium for a Deposit Guaranty or a Trustmark. But it's doable and much more digestible in the case of BancorpSouth."

Although the recently passed interstate banking bill will open Mississippi to bank acquirers from every state in the union by next September, most analysts think interest will remain confined to large banks in Alabama, Tennessee, and Louisiana. One Memphis-based bank, Union Planters Corp., has already made its move into Mississippi by agreeing in July to acquire third-ranked Grenada Sunburst System Corp.

AmSouth Bancorp., Birmingham, has made no secret of the fact that it also scoped out the state, but couldn't find a willing seller. Mr. Patterson says he's not managing BancorpSouth for a sale -- quite the contrary -- but adds, "We want to be the one that an AmSouth would definitely want to own."

BancorpSouth's strategy is to keep its options open, but invest the dollars necessary to stay competitive. The company plans to spend $5.5 million this year on branch upgrades and technological improvements. "If we didn't do that, we could be earning more in the short run," Mr. Patterson says. "But you can't have it both ways. You either have to plan for the future or put yourself in a liquidation mode."

BancorpSouth's earnings have been mediocre so far this year. Net income was $11.1 million for the first six months, down 22% from $14.3 million in the year-earlier period. Most of this unfavorable comparison has to do with losses in the mortgage division and a one-time tax accounting benefit taken in 1993.

BancorpSouth's profitability exceeds its Mississippi peers in most years because of wider net interest margins and bigger loan-to-deposit ratios. It's the nature of the franchise. Where Deposit Guaranty and Trustmark are known as large corporate lenders, BancorpSouth earns higher returns from consumers and small business. Loans to the latter range in size from $250,000 to $1 million.

While many banks in the Southeast will report flat or contracting margins for the rest of this year, BancorpSouth expects the reverse. Treasurer and chief financial officer L. Nash Allen Jr. estimates the bank's second quarter margin of 4.76% could reach 5% by year end, as the short-term securities portfolio turns over at higher yields.

Another plus: increasing loan yields, which at BancorpSouth are tied to prime, have been outpacing the rise in the bank's cost of funds. The negative offset to BancorpSouth's wide margins is high overhead. At 64%, its efficiency ratio -- which measures the amount of operating revenues absorbed by noninterest expense -- exceeds peer levels.

"It comes from running a banking system in a state largely filled with small communities," says analyst Peter Tuz with Morgan Keegan in Memphis. "Your ability to have large branches is just not there."

Mr. Patterson admits that BancorpSouth's ratio of assets per employee, $1.5 million, is below a peer average of $2.5 million, the peer group being all commercial banks with assets of between $1 billion and $3 billion.

Since BancorpSouth has no intention of closing branches in small towns, Mr. Patterson's solution for gradually bringing the efficiency ratio down to a more acceptable 60% is to add assets.

The company made a first step in that direction in August when it purchased LF Bancorp, a $192 million-asset thrift based in Laurel. Mr. Patterson has his eye on further acquisition possibilities in Mississippi, northern Alabama, and Tennessee. BancorpSouth already has a foothold in the latter state, having acquired $400 million-asset Volunteer Bank of Jackson, Tenn., in 1992.

Mr. Patterson calculates that Volunteer Bank, which operates as a subsidiary of BancorpSouth, could more than double in size with very little growth in overhead. The same is true of Bank of Mississippi's tiny (3% of total deposits) franchise in Jackson, Miss., which has only $250 million of assets.

Mr. Patterson, 52, a career BancorpSouth employee who has run the company since 1990 says his five-year goal is to build a three-state operation with about $5 billion of assets. He believes a midsize bank such as BancorpSouth does have a viable future if it sticks to relationship banking.

"Those of us in the middle strata -- neither the little community bank nor the big superregional -- can't afford to be drawn into a competitive arena where our services are a commodity," he says. "Because if we are, we're going to lose out to the guys who are able to get the volume.

"We've got to have the value added that comes in the nature of high quality, personally-oriented service." BancorpSouth At a GlanceHeadquarters: Tupelo, Miss.Assets: $2.4 billionMajor subsidiaries Bank of Mississippi (Tupelo, Miss.), Volunteer Bank (Jackson, Tenn.)Return on assets: 0.94%Return on equity: 11.6%Branches: 114Employees: 1,676All statistics as of first half '94

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