BancorpSouth in Tupelo, Miss., is well on its way to getting its compliance operations in order with hopes of getting two acquisitions back on track in coming months.
The $13 billion-asset company, hit last month with a regulatory order tied to Bank Secrecy Act and anti-money laundering concerns, invested more than $3 million in the third quarter to beef up oversight. And management expects to spend $3 million annually to maintain the systems and practices it is putting in place.
Overall, executives said they believe BancorpSouth is about 80% done with the process required to appease regulators. The next big step will come within the next 90 days, when examiners return to evaluate the bank's progress.
"We've got to give regulators time to do what they need to do," Dan Rollins, BancorpSouth's chairman and chief executive, said during a conference call Tuesday. "We are looking forward to having the [regulators] back in here."
BancorpSouth entered into a consent order with the Federal Deposit Insurance Corp. and the Mississippi Department of Banking and Consumer Finance in early September. A month prior, BancorpSouth withdrew applications for two acquisitions Ouachita Bancshares in Monroe, La., and Central Community Corp. in Temple, Texas after the Federal Reserve Board said it would not review the paperwork until the company had addressed the FDIC's issues.
Rollins pointed to the regulatory process when asked about the decision to pull the applications when the company seemed to be making significant process on the consent order. "We work with regulators the way they ask us to work with them," he said.
The "lion's share" of added compliance cost is tied to personnel, with staffing jumping from less than 10 employees to 35 dedicated workers, Rollins said. All but one of the new compliance hires already worked at the company. The company has also been working with an outside vendor to validate its model and test the compliance program.
A companywide BSA risk assessment "has led to significant enhancements to internal controls with respect to customer due diligence and transaction monitoring," Chris Bagley, BancorpSouth's president and chief operating officer, said. "While we still have work to do to reach our goals of exceeding examiner expectations, the results of the recent independent testing have identified our overall framework as compliant."
It also helped that BancorpSouth had already been running a particular type of software for a year and a half, Rollins said.
The company's estimated annual expenses tied to BSA compliance were lower than the $10 million Catherine Mealor, an analyst at Keefe, Bruyette & Woods, had been expecting. She wrote in a note to clients that the $3 million amount "is certainly lower than other BSA/AML remediation costs we have seen at other regional banks."
"The fact that BancorpSouth was able to give a hard estimate on total one-time costs as well as the resulting ongoing costs, is probably a good sign that management is confident most of the heavy lifting has been completed," Kevin Fitzsimmons, an analyst at Hovde Group, wrote in his note. Still, "it's difficult to say how quickly the regulators will move on granting approval for the deals."
Executives said during the conference call that, while their primary focus is the consent order, they are finding ways to expand without bank acquisitions. The company this year has opened loan-production offices in Lake Charles, La.; Houston; and Chattanooga, Tenn. BancorpSouth is also free to pursue insurance agency deals without regulatory approval.
Those investments are slowly helping improve the company's bottom line. Profit increased 16% from a year earlier, to $28.8 million, though earnings per share of 30 cents were 3 cents below the average estimate of analysts polled by Bloomberg.
While the lending offices "contributed only marginally in terms of net loan growth during this quarter, our new bankers are making meaningful progress in expanding some of their long-standing banking relationships, and building a pipeline of loans to be funded as we move forward," Bagley said.
Net interest income rose 5.4%, to $105.6 million. Total loans increased by nearly 9%, to $9.5 million, and the net interest margin widened by 17 basis points, to 3.62%. Management said it has another opportunity to reduce funding costs because $50 million in five-year CDs with nearly 4% interest rates are set to roll off this month.
Noninterest income rose 11%, to $69.3 million, largely because of a 23% spike in insurance commission revenue.
Cost-cutting remains a focus for BancorpSouth, even though operating expenses rose 3% from a year earlier, to $133.7 million. (Rollins earned a reputation while serving as president at Prosperity Bancshares in Houston for keeping a tight grip on expenses.)
The BSA issue contributed to the increase, along with technology investment, annual performance reviews that led to higher salaries, and the addition of roughly 100 lenders over the past year. Still, BancorpSouth managed to reduce its net headcount by 43 positions during the third quarter.
Rollins, meanwhile, said he is continuing to make structural and cultural changes that should provide more opportunities to cut costs. "We still believe we've got lots of nice nuggets that we can harvest that will ultimately reduce our expense cost," he said.
"The primary focus on fixing our efficiency ratio is paying attention to where we're spending money on, and what we're spending money on every day," Rollins added. "We continue to believe that we've got expenses that we can pull out. The issue becomes, how do you do that? How long does it take to do that, and what are the processes involved?"
Evan Nemeroff contributed to this report.