BancorpSouth, Inc. (NYSE: BXS) is a bank holding company headquartered in Tupelo, Mississippi. As of 2010 Quarter 1, the company has over $13 billion in total assets and generates almost 70% of its total revenues through loan interest. As of 2010 Q1, over three quarters of BancorpSouth's revenue-driving loan portfolio is composed of one-to-four family and other real estate loans.
BancorpSouth maintains a more conservative lending strategy than its peers by lending only to already-established businesses with good capital strength and by requiring especially strong collateral to secure all loans. While this conservative approach means BXS forgoes the funding of some higher-yielding loans, it caused the company's percentage of net loan charge-offs to continuously decline each year from 0.41% in 2002 to 0.14% 2007. Throughout 2008, however, increased loan defaults made this percentage spike up to 0.45% in Quarter 3 2008 - more than triple the percentage for Quarter 3 2007 - and annualized net charge-offs steadily rose to 0.76% by 2009. Although many banks have accepted TARP funding from the United States Treasury, BXS has decided not to receive TARP funds in spite of its consistently increasing percentage of net charge-offs and decreasing net income. Banks that did accept TARP funds saw much higher net charge-off rates than BXS; for example, Bank of America's net charge-offs to average loans climbed to 2.36% in 2008 Quarter 4.
BancorpSouth's presence in all five Gulf Coast states makes it particularly susceptible to trends associated with hurricane season. For example, the effects of Hurricane Katrina caused the company to add $7.6 million to its provision for credit losses in 2005, by itself greater than the $6.9 million gain from Katrina-related insurance proceeds for the year. Additionally, the aftermath of Katrina caused the company to make write downs all the way through 2007 for reasons ranging from credit losses to equipment depreciation.
BancorpSouth operates through its subsidiary, BancorpSouth Bank, in Mississippi, Tennessee, Alabama, Arkansas, Texas, Louisiana, Florida and Missouri. BXS focuses on generating interest revenue with its $9.7 billion loan portfolio but also generates some income through administrative fees and charges. The company follows conservative lending policies as evidenced by its historic net charge-offs as a percentage of average loans and leases, which dropped steadily from 2002 through 2007 before rising again in the wake of the 2007 credit crisis.
Interest income generated by the company's $9.8 billion loan portfolio is the company's most significant source of revenue. As of 2010 Quarter 1, real estate mortgage loans dominated the portfolio, totaling $7.5 billion and more than three quarters of all loans oustanding. Other loans in the portfolio were categorized as commercial or industrial ($1.5 billion), credit card debt ($101 million), and all other loans ($647 million).
In 2009, total interest revenue totaled $615.4 million (69% of total revenue) while the company's other operations accounted for only $275.2 million in revenue. BancorpSouth's net income decreased 45.5% from $120.4 million to $82.7 million as its total interest revenue slid by 14.6% between 2008 and 2009. While BXS's noninterest revenue steadily increased from 2007 to 2009, it totaled only $275 million in 2009 and was not enough to offset increased expenses and the weak credit market.
BancorpSouth is divided into two segments: its community banking segment is its primary revenue generator while its "general corporate and other" segment encompasses operations not associated with community banking. Each segment generates income from interest and noninterest sources.
Community Banking (75.4% of total revenue): As BancorpSouth's primary source of revenue, the community banking segment generated $543.7 million in 2007. This segment generates income through a full range of deposit products, commercial loans and consumer loans.
Insurance Agencies (11.3% of total revenue): BancorpSouth acquired one insurance agency in Quarter 3 2007 and two more in Quarter 1 2008. In 2009, these insurance agencies generated $81.3 million in revenue.
General Corporate and Other (13.2% of total revenue): This segment generated $95.2 million in 2009. Activities in this segment include leasing, mortgage lending, trust services, credit card activities, insurance services, investment services, personal finance lending and other services not related to community banking.
BXS uses notably conservative lending policies and has consequently avoided all but nominal exposure - approximately $329,000 at the end of 2007 - to to the credit issues affecting the subprime residential mortgage market. Nevertheless, as businesses and individuals across the country struggle to survive the credit crunch, a higher percentage of loans in general are losing value; BXS saw its net charge-offs to average loans hit an uncharacteristic 0.45% in the third quarter of 2008 after steadily decreasing from 0.23% in 2005 to 0.14% by 2007. These increased charge-offs coincide with a 17.0% decline in interest revenue and 21.8% drop in net income from Q3 2007 to Q3 2008. Annualized charge-offs have continued to rise and net income has continued to decrease as of 2010 Quarter 1.
Furthermore, $7.5 billion of BXS's $9.8 billion is composed of real estate mortgages. As pending home sales hit record lows in November 2008, the value of real estate used as collateral in mortgages is falling; this means less recovered value when BXS forecloses a home after default and decreased overall demand for mortgages. Furthermore, the U.S. unemployment rate hit a 26-year high of 4.5 million in January 2009; jobless Americans are less likely to pay off their loans, so rising unemployment potentially subjects BXS to an increase in family home mortgage defaults.
BancorpSouth reported that it would not request TARP funds from the United States Treasury, citing its good capitalization; in the third quarter of 2008 when TARP was launched, average total capital equaled 11.82% of total risk-adjusted assets. BXS remains confident that its business model and conservative lending policies will allow it to pursue acquisition opportunities and continue its income growth. If capital becomes less accessible, declining the Treasury's offer means a missed opportunity for BXS. The decision to keep operating as usual, however, promotes client confidence in BancorpSouth and stimulates business activity as consumers scrutinize banks for reliability.
BancorpSouth operates in all of the Gulf Coast states and is consequently particularly susceptible to problems created by hurricane season. In 2005, 13 of its banking locations along the Mississippi Gulf Coast were damaged; three branches and a loan office did not reopen until at least 2006. Hurricane Katrina's impact decreased BXS's net income by $2.2 million  in spite of a $6.9 million gain from related insurance coverage in 2005. Expecting that Katrina would increase the amount of loans charged off, BXS increased its provision for credit in 2005 losses by $7.6 million but reversed $5.9 million of that provision during 2006; Katrina's effect on BXS customers was not as strong as the company expected.
BancorpSouth competes for client deposits and loan sales with other nearby regional banks as well as larger banks that operate in its markets.
Major regional bank competitors are:
Although nationally-scaled banks do not have a strong presence in BancorpSouth's primary markets, the company may have to compete more with larger banks like Bank of America and Citigroup as they expand.