What a difference a quarter made for BancorpSouth Inc.
BancorpSouth was punished by investors three months ago after announcing a surprise first-quarter loss, even drawing suggestions from some analysts that management should seriously consider selling the Tupelo, Miss., company.
On Tuesday, BancorpSouth shares jumped sharply a day after it reported an impressive financial turnaround, reporting second-quarter earnings of $12.8 million. To some industry observers, the impressive performance calmed fears that the $13.3 billion-asset company might have to go back to the markets for a dilutive capital raise.
BancorpSouth's shares rose 12.8% Tuesday, to close at $14.27 a share.
Still, the specter of deteriorated credit remained the biggest uncertainty as analysts sized up the overall performance, along with BancorpSouth's future.
"While we feel much more optimistic with regards to management's ability to navigate through its credit issues without requiring a capital raise, we remain somewhat cautious" given a large portfolio of nonperforming assets, Ebrahim Poonawala, an analyst at Regions Financial Corp.'s Morgan Keegan & Co. wrote in a Tuesday note to clients.
Aubrey Patterson Jr., BancorpSouth's chairman and chief executive, dodged the question of capital during a Tuesday morning conference call to discuss the results. "Obviously we're very pleased with the improvement that we're showing here," he said when asked about raising more capital. "We recognize that there is economic uncertainty and a lot of headwinds … and specifically in areas that directly affect us, and we're going to monitor that to make sure we maintain a strong capital structure."
Patterson also sounded like a CEO focused on long-term strategy rather than a seller. He discussed an interest in acquiring more insurance agencies, which has been a hallmark of BancorpSouth's expansion plans. The company, which is closing 23 branches starting next month, for now seems focused on identifying other areas where it can cut costs.
"We will continue to evaluate other alternatives on a going-forward basis, and certainly we intend to leave no stone unturned," Patterson said. "We have an active program under way."
Kevin Reynolds, an analyst at Wunderlich Securities Inc. who suggested in May that management consider selling, touted the quarter during the call. "I wanted to say good quarter, guy," he told Patterson when his turn came up to ask a question. "We are encouraged by the progress … but remain on the sidelines as we await more clarity with respect to a more evident trend in credit quality and capital levels over the next few quarters," Reynolds wrote in an ensuing note to clients.
The quarterly earnings contrasted sharply a $949,000 first-quarter loss and a $12.8 million loss a year earlier. At 15 cents a share, the results topped the average estimate of analysts by 11 cents, according to Thomson Reuters. The company largely attributed the rebound to improved credit quality.
Nonperforming loans fell by almost 11% from a year earlier, to $380 million. BancorpSouth was able to cut its loan-loss provision by 40% from the first quarter and roughly in half year over year, to $32.2 million. Almost as important was Patterson's disclosure that most distressed loan sales were pricing close to their carrying values, as BancorpSouth avoided deeply discounted bulk sales.
Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP, wrote in a note to clients that BancorpSouth seemed to boost its capital levels, estimating a tangible common equity ratio of 7.32% compared with 6.95% at March 31.
Still, analysts said more work must be done on the credit side and that BancorpSouth must find ways to increase revenue before investors can feel comfortable with the company over the long term. "A combination of an improving growth outlook and a steady decline in the NPA portfolio is needed in order to drive sustainable outperformance in shares," Poonawala wrote.
