BancorpSouth Could Use Acquisition to Cut Its Own Costs

Call it subtraction by addition.

BancorpSouth in Tupelo, Miss., recently agreed to buy Ouachita Bancshares in Monroe, La., marking the $12.9 billion-asset company's first bank acquisition since the financial crisis.

Management has been mum on cost-cutting, but some analysts think the deal will give Dan Rollins, BancorpSouth's chief executive, a chance to trim some of his own company's costs.

That would be helpful given the pressure Rollins has faced to find efficiencies since becoming CEO in late 2012. It could also serve as a template for future deals. BancorpSouth has lathed costs here and there, but has avoided any large-scale cuts.

Analysts already expect Rollins to cut 25% of the $664 million-asset Ouachita's expenses.

It will likely take a year to cut all costs tied to buying Ouachita, says Rollins, who provided scant detail on where cuts could be made.

"It takes several quarters after the operational integration," he adds. "It will take the remainder of this year [to eliminated expenses], and maybe even some more will fall over into 2015."

BancorpSouth will likely close up to five overlapping branches in the Louisiana cities of Monroe and Shreveport, says Andrew Stapp, an analyst at Merion Capital Group.

Surprisingly, analysts showed scant concern over BancorpSouth's radio silence on finding efficiencies. They point to Rollins' reputation, at BancorpSouth and previous employer Prosperity Bancshares (PB), for managing expectations.

"For those who have been around Dan and understand how his model operates, it's usually under promise and over deliver," says Jon Arfstrom, an analyst at RBC Capital Markets.

Rollins "doesn't put out a target that says, 'I'm going to be at 65% efficiency ratio by a certain date,'" says John Rodis, an analyst at FIG Partners. "That's just not his style."

A big cost-cutting effort, announced in tandem with the Ouachita acquisition, could also hurt employee morale.

"You take the risk of rocking the boat," Rodis says. "You put some big grand cost-cutting initiative out there, that's going to affect the culture."

Since Rollins joined BancorpSouth as heir-apparent to Aubrey Patterson, the company's efficiency ratio has risen by 191 basis points, to 77.62% at Sept. 30.

The efficiency ratio "has not been good and Dan would be the first one to tell you that," says Clyde White, Ouachita's chairman. "He's working on getting that to where it needs to be."

BancorpSouth was also in a position to pursue its first bank deal sine 2007 because its stock has appreciated 67% in the past year. "If you've got strong currency right now, you might as well use it," Stapp says.

BancorpSouth is paying 2.2 times tangible book value for Ouachita, which Rodis calls "a relatively low-risk deal."

Rollins is likely on the hunt for more acquisitions, given BancorpSouth's stock price and financial resurgence, industry observers say. "They definitely have the capacity to do more deals," Rodis says.

BancorpSouth could pursue deals in the eight states it is already in, Rodis says, adding that Rollins does not need to venture into new markets. BancorpSouth is well represented in Mississippi, but other states are on the table.

Texas, where Rollins orchestrated acquisitions for Prosperity in Houston, would be a natural, though "pricing is higher there," Rodis says.

BancorpSouth will likely continue to chip away at costs. In June, Rollins announced an early retirement program that should save the company about $9 million annually. He has also reduced the company's corporate committees by two-thirds, to eight, and the number of market presidents by 60%, to four, Stapp says.

"We've got an infrastructure that's much larger than our company is today," Rollins says. "We need to grow into our infrastructure."

Investors have been pressing Rollins to get more aggressive with expenses. At KBW's annual banking conference in Boston last February, an attendee told Rollins that there "is no essential reason for" BancorpSouth's high costs.

"We're going to have a sequester," Rollins responded, referring to the federal government's 10% across-the-board cost-cutting mandate. During an October conference call, he told analysts that, "If you're looking for some magic pixie dust that is going to [improve efficiency] quickly, I don't think that is the way it works."

White and Douglas Wood Jr., a Monroe lawyer and an Ouachita director, are the seller's biggest shareholders. White says each own about 6% of Ouachita, which has no private equity or institutional investors.

Ouachita had not been looking to sell. Rather, it had hired the investment bank Sheshunoff & Co. to help it identify acquisition targets, White says. But Sheshunoff told White that Ouachita fit the profile of what Rollins was looking for in a target.

"We have an obligation to listen to any good offer," White says.

BancorpSouth wasn't necessarily looking for an acquisition, Rollins says, though Ouachita contacted him at a good time.

"We've been talking to Clyde White and his team for the better part of the last year," Rollins says. "When someone that fits what you're looking for is available, you have to be ready to go."