BancorpSouth Loss Is Narrow, But Calls for It to Sell Are Widespread

There are lists you want to be on, say, Santa's for presents. And there are lists you don't, such as the informal one Wall Street puts together of banks that may be compelled to sell under duress.

The latter is the list that BancorpSouth Inc. now finds itself on, having posted a surprise quarterly loss. Though a small loss — just $494,000 caused by a larger-than-expected spike in credit problems — it may be a big setback for the company's image.

After hearing the results, several analysts quickly pegged BancorpSouth as an area seller similar to Whitney Holding Corp. in New Orleans and Sterling Bancshares Inc. in Houston. The suggestion could find a sympathetic audience with the bank's investors.

"It was a disappointing quarter all the way around," said Kevin Reynolds, an analyst at Wunderlich Securities Inc. BancorpSouth could raise capital, but selling "to someone else could serve a lot of purposes," he said.

The $13.5 billion-asset company's loss, even though it was small, occurred at a time when many other banks are returning to the black. Add higher nonperforming assets followed by a dividend cut and lingering succession issues, and analysts had ample reasons to doubt BancorpSouth's ability to remain independent. (Analysts on average expected a profitable quarter.)

"The fact that they cut dividends again probably implies the company is still guarded and that credit cost expectations are still going to be relatively high," said David Bishop, an analyst at Stifel Nicolaus & Co.

A call to BancorpSouth was not immediately returned.

Aubrey Patterson, the Tupelo, Miss., company's chairman and chief executive, tried to put a positive spin on credit during a quarterly conference call last week. "We certainly believe that our credit issues have been well identified," he said. "They've been dealt with and there are a lot of improvements being made."

Patterson specifically pointed to a slower growth rate for nonperforming loans, which rose nearly $16 million during the past six months, compared with a $223 million increase over the first nine months of 2010.

"We certainly have a considerable amount of history as being a strong-credit-quality company, so the spotlight may be a little more on us as we come to this later than some of our peers," Patterson added.

Analysts who cover the Southeast said that, largely because of a persistent increase in problem loans, BancorpSouth has emerged as the biggest laggard in its district. The company stands out even more now that there are some improvements in credit quality in the industry overall.

BancorpSouth "has been playing catch-up the past few quarters … and the market is a little less patient in situations like this, because a lot of institutions got through this point in the cycle," said Bill Young, an analyst at Macquarie Equities Research.

Analysts including Jeff Davis at Guggenheim Securities LLC said that the reappearance of problems could stem in part from the company's collateral-based lending. In some instances the collateral took longer to be reappraised, delaying asset writedowns. Regulatory examinations may have also caused further reclassifications.

The other faux pas that caused concern among analysts at this point in the credit cycle is a perceived lack of transparency, particularly in the company's credit metrics.

BancorpSouth indicated in its 2010 annual report that there was a "material weakness in its internal control" regarding its accounting for allowance for credit losses.

The company also surprised analysts early last year by restating results for the fourth quarter and full-year 2009 after credit deterioration caused it to increase its loan-loss provision and led to lower earnings. "Analysts and investors are a little less patient where there is volatility" or projections are off, Young said.

This makes companies like BancorpSouth, which has not completed any large bulk loan sales, stand out.

Management indicated during last week's quarterly conference call that it would consider selling some packaged loans but it would not do a "big" bulk sale. This also raised some concerns among analysts given that other companies, such as Whitney, sold off a chunk of nonperforming assets.

"The Street would prefer a cathartic flushing out" of bad loans but doing so would require more capital, Davis said. BancorpSouth "has historically been a very conservative company and very methodical … they don't do anything rash."