10-Q 1 q101-10q.txt MARCH 31, 2001 10-Q FILING SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------------------- FORM 10-Q (Mark One) / X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 -------------- OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ---------------- to ---------------- ---------------------------------------- Commission file number 1-12991 ---------------------------------------- BancorpSouth, Inc. (Exact name of registrant as specified in its charter) Mississippi 64-0659571 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) One Mississippi Plaza, Tupelo, Mississippi 38804 (Address of principal executive offices) (Zip Code) (662) 680-2000 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address, and former fiscal year, if changed since last year) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes-X No- On May 8, 2001, the Registrant had outstanding 83,548,125 shares of common stock, par value $2.50 per share. BANCORPSOUTH, INC. CONTENTS PART I. Financial Information Page ITEM 1. Financial Statements Consolidated Condensed Balance Sheets (Unaudited) March 31, 2001 and December 31, 2000 3 Consolidated Condensed Statements of Income (Unaudited) Three Months Ended March 31, 2001 and 2000 4 Consolidated Condensed Statements of Cash Flows (Unaudited) Three Months Ended March 31, 2001 and 2000 5 Notes to Consolidated Condensed Financial Statements (Unaudited) 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 17 PART II. Other Information ITEM 6. Exhibits and Reports on Form 8-K 18 FORWARD-LOOKING STATEMENTS Certain statements contained in this Report may not be based on historical facts and are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may be identified by reference to a future period(s) or by the use of forward-looking terminology, such as "anticipate," "believe," "estimate," "expect," "may," "might," "will," "intend" and "would." These forward-looking statements include, without limitation, those relating to the Company's liquidity, allowance for credit losses, equipment expense, stock repurchase program and capital resources. We caution you not to place undue reliance on the forward-looking statements contained in this Report, in that actual results could differ materially from those indicated in such forward-looking statements due to a variety of factors. These factors include, but are not limited to, changes in economic conditions, prevailing interest rates and government fiscal and monetary policies, effectiveness of the Company's interest rate hedging strategies, changes in laws and regulations affecting financial institutions, ability of the Company to effectively service loans, ability of the Company to identify and integrate acquisitions and investment opportunities, manage its growth and effectively serve an expanding customer and market base, changes in the Company's operating or expansion strategy, geographic concentrations of assets, availability of and costs associated with obtaining adequate and timely sources of liquidity, dependence on existing sources of funding, changes in consumer preferences, competition from other financial services companies, and other risks detailed from time to time in the Company's press releases and filings with the Securities and Exchange Commission. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date of this Report. PART I FINANCIAL INFORMATION Item 1. Financial Statements
BANCORPSOUTH, INC. Consolidated Condensed Balance Sheets (Unaudited) March 31, December 31, 2001 2000 ------------- ------------- (In thousands) ASSETS Cash and due from banks $298,663 $314,888 Interest bearing deposits with other banks 7,871 11,687 Held-to-maturity securities, at amortized cost 1,224,997 1,189,129 Available-for-sale securities, at fair market value 973,847 857,400 Federal funds sold and securities purchased under agreement to resell 520,399 212,925 Loans 6,021,043 6,161,082 Less: Unearned discount 60,181 65,767 Allowance for credit losses 80,461 81,730 ------------- ------------- Net loans 5,880,401 6,013,585 Mortgages held for sale 50,953 27,820 Premises and equipment, net 202,539 197,898 Other assets 224,408 218,702 ------------- ------------- TOTAL ASSETS $9,384,078 $9,044,034 ============= ============= LIABILITIES Deposits: Demand: Non-interest bearing $1,032,551 $1,009,808 Interest bearing 1,828,324 1,682,278 Savings 895,771 924,591 Time 4,028,981 3,864,243 ------------- ------------- Total deposits 7,785,627 7,480,920 Federal funds purchased and securities sold under repurchase agreements 502,749 503,427 Long-term debt 151,778 152,049 Other liabilities 139,839 118,062 ------------- ------------- TOTAL LIABILITIES 8,579,993 8,254,458 ------------- ------------- SHAREHOLDERS' EQUITY Common stock 214,484 214,484 Capital surplus 70,581 70,841 Accumulated other comprehensive income 22,933 15,202 Retained earnings 525,383 515,599 Less cost of shares held in treasury (29,296) (26,550) ------------- ------------- TOTAL SHAREHOLDERS' EQUITY 804,085 789,576 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $9,384,078 $9,044,034 ============= ============= See accompanying notes to consolidated condensed financial statements.
BANCORPSOUTH, INC. Consolidated Condensed Statements of Income (Unaudited) Three months ended March 31, --------------------------- 2001 2000 ------------- ------------- (In thousands, except for per share amounts) INTEREST REVENUE: Loans $136,123 $123,375 Deposits with other banks 176 340 Interest on federal funds sold and securities purchased under agreement to resell 5,601 1,447 Held-to-maturity securities: U. S. Treasury 328 860 U. S. Government agencies & corporations 12,672 10,463 Obligations of states & political subdivisions 3,050 4,015 Other 0 71 Available-for-sale securities 15,576 17,173 Mortgages held for sale 614 985 ------------- ------------- Total interest revenue 174,140 158,729 ------------- ------------- INTEREST EXPENSE: Deposits 83,944 70,536 Interest on federal funds purchased and securities sold under agreement to repurchase 6,313 3,164 Other 2,284 3,701 ------------- ------------- Total interest expense 92,541 77,401 ------------- ------------- Net interest revenue 81,599 81,328 Provision for credit losses 4,097 4,615 ------------- ------------- Net interest revenue, after provision for credit losses 77,502 76,713 ------------- ------------- OTHER REVENUE: Mortgage lending (1,333) 3,422 Trust income 1,684 1,644 Service charges 10,342 9,098 Life insurance income 1,094 1,020 Security gains (losses), net 2,884 177 Insurance service fees 4,608 3,499 Other 8,670 7,814 ------------- ------------- Total other revenue 27,949 26,674 ------------- ------------- OTHER EXPENSE: Salaries and employee benefits 38,721 33,933 Net occupancy expense 5,129 4,449 Equipment expense 7,032 5,546 Telecommunications 2,182 1,575 Other 19,768 18,617 ------------- ------------- Total other expense 72,832 64,120 ------------- ------------- Income before income taxes 32,619 39,267 Income tax expense 10,300 12,622 ------------- ------------- Net income $22,319 $26,645 ============= ============= Earnings per share: Basic $0.27 $0.31 ============= ============= Diluted $0.27 $0.31 ============= ============= Dividends declared per common share $0.14 $0.13 ============= ============= See accompanying notes to consolidated condensed financial statements.
BANCORPSOUTH, INC. Consolidated Condensed Statements of Cash Flows (Unaudited) Three Months Ended March 31, -------------------------- 2001 2000 ---------- ---------- (In thousands) Net cash provided by operating activities $16,523 $40,424 ---------- ---------- Investing activities: Proceeds from calls and maturities of held-to-maturity securities 136,221 108,147 Proceeds from calls and maturities of available-for-sale securities 62,937 48,682 Proceeds from sales of available-for-sale securities 79,657 1,984 Purchases of held-to-maturity securities (340,526) (156,688) Purchases of available-for-sale securities (73,844) (48,146) Net increase in short-term investments (307,474) (14,494) Net (increase) decrease in loans 67,111 (165,791) Proceeds from sale of student loans 61,878 90,483 Purchases of premises and equipment (13,309) (6,124) Proceeds from sale of premises and equipment 1,945 2,646 Other, net (5,184) 26,781 ---------- ---------- Net cash used by investing activities (330,588) (112,520) ---------- ---------- Financing activities: Net increase in deposits 304,707 179,180 Net (decrease) increase in short-term borrowings and other liabilities 5,108 (23,276) Repayment of long-term debt (271) (80,657) Acquisition of treasury stock (3,948) (12,386) Payment of cash dividends (11,750) (10,615) Exercise of stock options 178 136 ---------- ---------- Net cash provided by financing activities 294,024 52,382 ---------- ---------- Decrease in cash and cash equivalents (20,041) (19,714) Cash and cash equivalents at beginning of period 326,575 341,611 ---------- ---------- Cash and cash equivalents at end of period $306,534 $321,897 ========== ========== See accompanying notes to consolidated condensed financial statements.
BANCORPSOUTH, INC. Notes to Consolidated Condensed Financial Statements (Unaudited) NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION AND PRINCIPALS OF CONSOLIDATION The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the accounting policies in effect as of December 31, 2000, as set forth in the annual consolidated financial statements of BancorpSouth, Inc. (the "Company"), as of such date. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated condensed financial statements have been included and all such adjustments were of a normal recurring nature. The results of operations for the three-month period ended March 31, 2001 are not necessarily indicative of the results to be expected for the full year. The consolidated condensed financial statements include the accounts of the Company and its wholly-owned subsidiary, BancorpSouth Bank (the "Bank"), and the Bank's wholly-owned subsidiaries, Century Credit Life Insurance Company, Personal Finance Corporation, Eagle Premium Assistance Corporation, BancorpSouth Insurance Services, Inc., BancorpSouth Insurance Services of Alabama, Inc. and BancorpSouth Investment Services, Inc. NOTE 2 - LOANS The composition of the loan portfolio by collateral type is detailed below:
March 31, December 31, ------------------------- ------------ 2001 2000 2000 ----------- ----------- ------------ (In thousands) Commercial and agricultural $644,796 $656,128 $757,885 Consumer and installment 939,878 1,106,846 1,065,324 Real estate mortgage: 1-4 Family 1,748,815 1,527,925 1,724,636 Other 2,337,140 2,054,273 2,303,115 Lease financing 263,984 267,188 288,884 Other 86,430 86,244 21,238 ----------- ----------- ------------ Total $6,021,043 $5,698,604 $6,161,082 =========== =========== ============
The following table presents information concerning non-performing loans:
March 31, December 31, 2001 2000 --------- ------------ (In thousands) Non-accrual loans $12,116 $15,572 Loans 90 days or more past due 22,338 25,732 Restructured loans 1,542 879 -------- --------- Total non-performing loans $35,996 $42,183 ======== =========
NOTE 3 - ALLOWANCE FOR CREDIT LOSSES The following schedule summarizes the changes in the allowance for credit losses for the periods indicated:
Three month periods Year ended ended March 31, December 31, --------------------------- ------------ 2001 2000 2000 ---------- --------- ------------ (In thousands) Balance at beginning of period $81,730 $74,232 $74,232 Provision charged to expense 4,097 4,615 26,166 Recoveries 1,364 1,043 4,972 Loans charged off (6,730) (3,528) (24,606) Acquisitions - - 966 ---------- --------- ------------ Balance at end of period $80,461 $76,362 $81,730 ========== ========= ============
NOTE 4 - PER SHARE DATA The computation of basic earnings per share is based on the weighted average number of common shares outstanding. The computation of diluted earnings per share is based on the weighted average number of common shares outstanding plus the shares resulting from the assumed exercise of all outstanding stock options using the treasury stock method. The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the periods as shown.
Three Months Ended March 31, ------------------------------------------------------------------------------ 2001 2000 --------------------------------------- ------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ----------- ------------- --------- (In thousands, except per share amounts) Basic EPS Income available to common shareholders $22,319 83,808 $0.27 $26,645 85,313 $0.31 ========= ========= Effect of dilutive stock options 392 391 ----------- ------------- ----------- ------------- Diluted EPS Income available to common shareholders plus assumed exercise $22,319 84,200 $0.27 $26,645 85,704 $0.31 =========== ============= ========= =========== ============= =========
NOTE 5 - COMPREHENSIVE INCOME The following table presents the components of other comprehensive income and the related tax effects allocated to each component for the periods indicated.
Three months ended March 31, --------------------------------------------------------- 2001 2000 ----------------------------- --------------------------- Before Tax Net Before Tax Net tax (expense) of tax tax (expense) of tax amount benefit amount amount benefit amount --------- --------- --------- -------- --------- -------- ( In thousands) Unrealized gains on securities Unrealized gains (losses) arising during holding period $14,975 ($5,727) $9,248 $4,633 ($1,772) $2,861 Less: Reclassification adjustment for gains realized in net income (2,456) 939 (1,517) (171) 65 (106) --------- --------- -------- -------- --------- -------- Other comprehensive income (loss) $12,519 ($4,788) 7,731 $4,462 ($1,707) $2,755 ========= ========= ======== ========= Net income 22,319 26,645 -------- -------- Comprehensive income $30,050 $29,400 ======== ========
NOTE 6 - BUSINESS COMBINATIONS On August 31, 2000, First United Bancshares, Inc., a $2.7 billion bank holding company headquartered in El Dorado, Arkansas, merged with and into the Company. Pursuant to the merger, First United Bancshares' subsidiary banks and trust company merged into the Bank. The Company issued approximately 28.5 million shares of common stock in the merger that was accounted for as a pooling of interests. The Company's financial statements for all periods presented include the consolidated accounts of First United Bancshares. On October 10, 2000, Kilgore, Seay and Turner, Inc., a general insurance agency based in Jackson, Mississippi, merged into BancorpSouth Insurance Services, Inc., a subsidiary of the Bank, in exchange for cash totaling $2.2 million. The transaction was accounted for as a purchase. On October 10, 2000, Pittman Insurance and Bonding, Inc., a general insurance agency based in Jackson, Mississippi, merged into BancorpSouth Insurance Services, Inc., in exchange for 95,000 shares of the Company's common stock and cash totaling $865,000. The transaction was accounted for as a purchase. On October 31, 2000, Texarkana First Financial Corporation, a single thrift holding company based in Texarkana, Arkansas, merged into the Company in exchange for cash totaling $37.5 million, and its subsidiary, First Federal Savings and Loan Association of Texarkana, a federally chartered stock savings and loan association, merged into the Bank. The transaction was accounted for as a purchase. NOTE 7 - RECENT PRONOUNCEMENTS Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, established accounting and reporting standards for derivative instruments and hedging activities and requires recognition of all derivatives as either assets or liabilities measured at fair value. This statement was adopted effective January 1, 2001, with no material impact to the financial position of the Company. The Company reclassified securities totaling $170.5 million from held-to-maturity into the available-for-sale portfolio as of January 1, 2001. At March 31, 2001, the derivatives held by the Company were commitments to fund fixed-rate mortgage loans to customers and forward commitments to sell individual fixed-rate mortgage loans. The Company's objective in obtaining the forward commitments is to mitigate the interest rate risk associated with the commitments to fund the fixed-rate mortgage loans. Both the rate-lock commitments and the forward commitments are reported at fair value, with adjustments being recorded in current period earnings, and are not accounted for as hedges. NOTE 8 - SEGMENT REPORTING The Company's principal activity is community banking, which includes providing a full range of deposit products, commercial loans and consumer loans. General corporate and other includes leasing, mortgage lending, trust services, credit card activities, insurance services, investment services and other activities not allocated to community banking. Results of operations and selected financial information by operating segment for the three-month periods ended March 31, 2001 and 2000 are presented below:
General Community Corporate Banking and Other Total ----------- --------- -------- (In thousands) Three Months Ended March 31, 2001 Results of Operations Net interest revenue $67,187 $14,412 $81,599 Provision for credit losses 3,221 876 4,097 --------------------------------------------------------------------------------------------------------- Net interest income after provision for credit losses 63,966 13,536 77,502 Other revenue 17,508 10,441 27,949 Other expense 58,303 14,529 72,832 --------------------------------------------------------------------------------------------------------- Income before income taxes 23,171 9,448 32,619 Income taxes 8,953 1,347 10,300 --------------------------------------------------------------------------------------------------------- Net income $14,218 $8,101 $22,319 Selected Financial Information Identifiable assets $8,605,709 $778,369 $9,384,078 Depreciation & amortization 6,337 464 6,801 Three Months Ended March 31, 2000 Results of Operations Net interest revenue $67,355 $13,973 $81,328 Provision for credit losses 4,241 374 4,615 --------------------------------------------------------------------------------------------------------- Net interest income after provision for credit losses 63,114 13,599 76,713 Other revenue 13,981 12,693 26,674 Other expense 51,045 13,075 64,120 --------------------------------------------------------------------------------------------------------- Income before income taxes 26,050 13,217 39,267 Income taxes 12,019 603 12,622 --------------------------------------------------------------------------------------------------------- Net income $14,031 $12,614 $26,645 Selected Financial Information Identifiable assets $8,007,241 $553,332 $8,560,573 Depreciation & amortization 4,702 425 5,127
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides certain information concerning the consolidated financial condition and results of operations of the Company. This discussion should be read in conjunction with the unaudited consolidated condensed financial statements for the periods ended March 31, 2001 and 2000, found in Item 1. "Financial Statements" of this Report. Financial information for all prior periods presented has been restated to include the results of operations and financial condition of First United Bancshares, Inc., which merged into the Company on August 31, 2000 in a transaction accounted for as a pooling of interests. See Note 6 to the Company's consolidated condensed financial statements included in Item 1. "Financial Statements" of this Report for additional information about this merger. RESULTS OF OPERATIONS --------------------- Net Income ---------- The Company's net income for the first quarter of 2001 was $22.32 million, a decrease of 16.24% from $26.65 million in the first quarter of 2000. Basic and diluted earnings per common share for the first quarter of 2001 were $0.27, compared to basic and diluted earning per common share of $0.31 for the same period of 2000. The annualized returns on average assets for the three months ended March 31, 2001 and 2000 were 0.99% and 1.26%, respectively. Net Interest Revenue -------------------- Net interest revenue is the difference between interest revenue earned on assets, such as loans, leases and securities, and interest expense paid on liabilities such as deposits and borrowings, and continues to provide the Company with its principal source of revenue. Net interest revenue is affected by the general level of interest rates, changes in interest rates and by changes in the amount and composition of interest earning assets and interest bearing liabilities. The Company's long-term objective is to manage those assets and liabilities to maximize net interest revenue, while balancing interest rate, credit, liquidity and capital risks. For purposes of this discussion, revenue from tax-exempt loans and investment securities has been adjusted to a fully taxable equivalent basis using an effective tax rate of 35%. Net interest revenue was $84.51 million for the three months ended March 31, 2001, compared to $84.31 million for the same period in 2000, representing an increase of $200,000, or 0.24%. Interest revenue increased $15.34 million, or 9.71%, to $177.05 million for the three months ended March 31, 2001 from $161.71 million for the three months ended March 31, 2000. This increase was attributable to a $620.01 million, or 7.83%, increase in average interest earning assets to $8.54 billion for the first quarter of 2001 from $7.92 billion for the first quarter of 2000, and an increase in the yield of those assets of 20 basis points to 8.41% for the first quarter of 2001 from 8.21% for the first quarter of 2000. Interest expense increased $15.14 million, or 19.56%, to $92.54 million for the three months ended March 31, 2001 from $77.40 million for the three months ended March 31, 2000. This increase was due to a $600.52 million, or 8.98%, increase in average interest bearing liabilities to $7.29 billion for the first quarter of 2001 from $6.68 billion for the first quarter of 2000, and an increase in the average rate paid on those liabilities of 49 basis points to 5.15% for the first quarter of 2001 from 4.66% for the first quarter of 2000. The relative performance of the asset deployment and deposit raising functions is frequently measured by two calculations - net interest margin and net interest rate spread. Net interest margin is determined by dividing fully taxable equivalent net interest revenue by average earning assets. Net interest rate spread is the difference between the average fully taxable equivalent yield earned on interest earning assets and the average rate paid on interest bearing liabilities. Net interest margin for the first quarter of 2001 was 4.01%, a decline of 27 basis points from 4.28% for the same period of 2000. Net interest rate spread for the first quarter of 2001 was 3.26%, a decline of 30 basis points from 3.56% for the same period of 2000. The decline in net interest margin and net interest rate spread in the first quarter of 2001 when compared to the same period of 2000 was due to the significant increase in the average rate paid on interest bearing liabilities that was not offset by the increase in the average yield on earning assets, as variable rate loans and other loans with repricing options were generally repriced more rapidly in response to declines in prevailing interest rates than were interest bearing deposits. Provision for Credit Losses --------------------------- The provision for credit losses is the cost of providing an allowance or reserve for estimated probable losses on loans. The amount for each accounting period is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of loan portfolio quality, the value of collateral and general economic factors. The process of determining the adequacy of the provision requires that management make material estimates and assumptions that are particularly susceptible to significant change. Future additions to the allowance for credit losses may be necessary based upon changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for credit losses. These agencies may require the Company to recognize changes to the allowance based on their judgments about information available to them at the time of their examination. The provision for credit losses totaled $4.10 million for the first quarter of 2001 compared to $4.62 million for the same period of 2000, representing a decrease of 11.22%. Loans charged off, net of recoveries, increased in the first quarter of 2001 due primarily to the deterioration in general economic conditions of the region serviced by the Company. Consumer and installment loans, which include indirect automobile, consumer finance and credit card loans, were most affected by the economic slow down and reflect the most significant increase in net charge-offs. While net charge-offs increased during the first quarter of 2001, loans outstanding declined by approximately $140 million and non-performing loans declined by $6.19 million, thus allowing the Company to reduce the provision for credit losses for the first quarter of 2001. The Company's allowance for credit losses as a percentage of loans outstanding was 1.35% at March 31, 2001 compared to 1.34% at December 31, 2000. Other Revenue ------------- Other revenue for the quarter ended March 31, 2001 totaled $27.95 million, compared to $26.67 million for the same period of 2000, an increase of 4.78%. A loss of $1.33 million from mortgage lending activities was reported for the three months ended March 31, 2001, a decrease of $4.76 million from $3.42 million of revenue from mortgage lending activities reported for the same period of 2000. The decrease was primarily due to impairment in the value of the Company's mortgage servicing asset, which represents the present value of the future stream of mortgage servicing revenue. Declining interest rates, both mortgage and short-term, resulted in a $4.32 million non-cash charge to mortgage revenue to record the impairment of the mortgage servicing asset. To some extent, this charge for impairment of the mortgage servicing asset was offset by increased fees from mortgage origination activity stimulated by lower interest rates. Service charge revenue increased 13.67%, from $9.10 million for the first quarter of 2000 to $10.34 million, for the first quarter of 2001. Insurance service fees increased 31.69%, from $3.50 million for the first quarter of 2000 to $4.61 million, for the first quarter of 2001. Net security gains of $2.88 million were reported in the first quarter of 2001 compared to net gains of $177,000 in the first quarter of 2000, as certain securities were sold from the available-for-sale portfolio. Other revenue for the first three months of 2001 includes a $1.7 million gain from the sale of $61.1 million in student loans, continuing a practice begun in the first quarter of 2000 when $85.7 million in student loans were sold at a gain of $2.6 million. The Bank continues to originate student loans and intends to rebuild its portfolio of student loans, which may result in subsequent periodic sales. Other Expense ------------- Other expense totaled $72.83 million for the first quarter of 2001, a 13.60% increase from $64.12 million for the same period of 2000. Salaries and employee benefits expense for the first quarter of 2001 was $38.72 million, a 14.11% increase from $33.93 million for the first quarter of 2000. The increase is attributable to increases in employee salaries and the cost of employee health care and other benefits, the addition of employees for locations added since the first quarter of 2000, an increase in stock appreciation rights expense associated with increases in the market price of the Company's common stock and reduced deferral of salary expense which is capitalized as loan origination costs. Occupancy expense increased 15.28%, to $5.13 million for the first quarter of 2001 from $4.45 million for the first quarter of 2000. The increase was primarily due to additional locations opened since March 31, 2000 and increases in operating costs, particularly maintenance and utilities. Equipment expense of $7.03 million for the first quarter of 2001 represented an increase of 26.79% when compared to equipment expense of $5.55 million for the first quarter of 2000. The primary reason for the increase in equipment expense is the acceleration in depreciation of equipment that will be abandoned when the former First United Bancshares banks are converted to the Company's operating systems during 2001. Telecommunications expense of $2.18 million for the first quarter of 2001 represented an increase of 38.54% when compared to telecommunications expense of $1.58 million for the first quarter of 2000. The increase is primarily attributable to increased voice and data transmission expense. The other components of other expense reflect normal increases and general inflation in the cost of services and supplies purchased by the Company. Income Tax ---------- Income tax expense was $10.30 million and $12.62 million for the first quarter of 2001 and 2000, respectively, representing a decrease of 18.40%. The decrease is a function of reduced income in the first quarter of 2001 when compared to the first quarter of 2000. The effective tax rates for the first quarter of 2001 and 2000 were 31.58% and 32.14%, respectively. FINANCIAL CONDITION ------------------- Earning Assets -------------- The percentage of earning assets to total assets measures the effectiveness of management's efforts to invest available funds into the most efficient and profitable uses. Earning assets at March 31, 2001 were $8.74 billion, or 93.13% of total assets, compared with $8.39 billion, or 92.82% of total assets, at December 31, 2000. The securities portfolio is used to make various term investments, to provide a source of liquidity and to serve as collateral to secure certain types of deposits. Held-to-maturity securities at March 31, 2001 were $1.22 billion, compared with $1.19 billion at the end of 2000, a 3.02% increase. Available-for-sale securities were $973.85 million at March 31, 2001, compared to $857.40 million at December 31, 2000, a 13.58% increase. With the adoption of SFAS No. 133 on January 1, 2001, the Company reclassified securities totaling $170.5 million from held-to-maturity into the available-for-sale portfolio. The Bank's loan portfolio makes up the largest single component of the Company's earning assets. The Bank's lending activities include both commercial and consumer loans. Loan originations are derived from a number of sources, including direct solicitation by the Bank's loan officers, real estate broker referrals, mortgage loan companies, current savers and borrowers, builders, attorneys, walk-in customers and, in some instances, other lenders. The Bank has established disciplined and systematic procedures for approving and monitoring loans that vary depending on the size and nature of the loan. Loans, net of unearned discount, totaled $5.96 billion at March 31, 2001, which represents a 2.21% decrease from the December 31, 2000 total of $6.10 billion. The decrease in loans is primarily the result of the sale of $61.1 million of student loans sold in the first quarter of 2001, which is discussed previously in this Report under the caption "Other Revenue." At March 31, 2001, the Company did not have any concentrations of loans in excess of 10% of total loans outstanding. Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. However, the Company does conduct business in a geographically concentrated area. The ability of the Company's borrowers to repay loans is to some extent dependent upon the economic conditions prevailing in the Company's market area. In the normal course of business, management becomes aware of possible credit problems in which borrowers exhibit potential for the inability to comply with the contractual terms of their loans, but which do not currently meet the criteria for disclosure as potential problem loans because management currently does not have serious doubt as to the borrowers' ability to comply with the loan terms. Historically, some of these loans are ultimately restructured or placed in non-accrual status. The Company's policy provides that loans, other than installment loans, are generally placed on non-accrual status if, in management's opinion, payment in full of principal or interest is not expected, or when payment of principal or interest is more than 90 days past due, unless the loan is both well secured and in the process of collection. Non-performing loans were 0.60% of all loans outstanding at March 31, 2001 and 0.69% of all loans outstanding at December 31, 2000. Allowance for Credit Losses --------------------------- The Company attempts to maintain the allowance for credit losses at a level that, in the opinion of management, is adequate to meet the estimated probable losses on its current portfolio of loans. Management's judgement is based on a variety of factors that include examining probable losses in specific credits and considering the current risks associated with lending functions, such as current economic conditions, business trends in the Company's region and nationally, historical experience as related to losses, changes in the mix of the loan portfolio and credits which bear substantial risk of loss, but which cannot be readily quantified. Material estimates that are particularly susceptible to significant change in the near term are a necessary part of this process. Future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for credit losses. These agencies may require the Company to record changes to the allowance based on their judgments about information available to them at the time of their examination. Management does not believe the allowance for credit losses can be fragmented by category of loans with any precision that would be useful to investors, but is doing so in this report only in an attempt to comply with disclosure requirements of regulatory agencies. The allocation of allowance by loan category is based, in part, on evaluations of specific loans' past history and on economic conditions within specific industries or geographical areas. Accordingly, since all of these conditions are subject to change, the allocation is not necessarily indicative of the breakdown of any future allowance or losses. The following table presents (a) the allocation of the allowance for credit losses by loan category and (b) the percentage of total loans for each category in the loan portfolio for the dates indicated.
March 31, December 31, ------------------------------------- ----------------- 2001 2000 2000 ------------------ ------------------ ----------------- ALLOWANCE ALLOWANCE ALLOWANCE FOR % OF FOR % OF FOR % OF CREDIT TOTAL CREDIT TOTAL CREDIT TOTAL LOSSES LOANS LOSSES LOANS LOSSES LOANS --------- ------- --------- ------- --------- ------- (Dollars in thousands) Commercial and agricultural $12,960 10.71% $11,709 11.51% $12,259 12.30% Consumer and installment 27,091 15.61% 24,181 19.42% 23,702 17.29% Real estate mortgage 32,760 67.86% 32,899 62.86% 37,279 65.38% Lease financing 2,500 4.38% 2,163 4.69% 3,290 4.69% Other 5,150 1.44% 5,410 1.52% 5,200 0.34% --------- ------- -------- ------- -------- ------- Total $80,461 100.00% $76,362 100.00% $81,730 100.00% --------- ------- -------- ------- -------- -------
The following table provides an analysis of the allowance for credit losses for the periods indicated.
Twelve months ended Three months ended March 31, December 31, ---------------------------- 2001 2000 2000 ------------ ----------- ------------ (Dollars in thousands) Balance, beginning of period $81,730 $74,232 $74,232 Loans charged off: Commercial and agricultural (789) (452) (5,974) Consumer & installment (5,105) (2,494) (14,203) Real estate mortgage (836) (490) (4,082) Lease financing - (92) (347) ------------ ----------- ------------ Total loans charged off (6,730) (3,528) (24,606) ------------ ----------- ------------ Recoveries: Commercial and agricultural 335 296 1,843 Consumer & installment 744 570 2,443 Real estate mortgage 269 174 646 Lease financing 16 3 40 ------------ ----------- ------------ Total recoveries 1,364 1,043 4,972 ------------ ----------- ------------ Net charge-offs (5,366) (2,485) (19,634) Provision charged to operating expense 4,097 4,615 26,166 Acquisitions - - 966 ------------ ----------- ------------ Balance, end of period $80,461 $76,362 $81,730 ============ =========== ============ Average loans for period $6,025,742 $5,559,943 $5,791,569 ============ =========== ============ RATIOS: Net charge offs to average loans-annualized 0.36% 0.18% 0.34% ============ =========== ============
Deposits and Other Interest-bearing Liabilities ----------------------------------------------- Deposits originating within the communities served by the Bank continue to be the Company's primary source of funding its earning assets. Total deposits at March 31, 2001 were $7.79 billion as compared to $7.48 billion at December 31, 2000, representing a 4.07% increase. Non-interest bearing demand deposits increased by $22.74 million, or 2.25%, from $1.01 billion to $1.03 billion, while interest bearing demand, savings and time deposits grew $281.96 million, or 4.36%, from $6.47 billion to $6.75 billion, from December 31, 2000 to March 31, 2001. LIQUIDITY --------- Liquidity is the ability of the Company to fund the needs of its borrowers, depositors and creditors. The Company's traditional sources of liquidity include maturing loans and investment securities, purchased federal funds and its base of core deposits. Management believes these sources are adequate to meet the Company's liquidity needs for normal operations for at least the remainder of 2001. The Company continues to pursue a lending policy stressing adjustable rate loans, in furtherance of its strategy for matching interest sensitive assets with an increasingly interest sensitive liability structure. CAPITAL RESOURCES ----------------- The Company is required to comply with the risk-based capital requirements of the Board of Governors of the Federal Reserve System. These requirements apply a variety of weighting factors, which vary according to the level of risk associated with the particular assets. At March 31, 2001, the Company's Tier 1 capital and total capital, as a percentage of total risk-adjusted assets, were 10.13% and 11.52%, respectively. Both ratios exceed the required minimum levels for these ratios of 4.0% and 8.0%, respectively. In addition, the Company's Tier 1 leverage capital ratio (Tier 1 capital divided by total assets, less goodwill) was 7.75% at March 31, 2001, compared to the required minimum Tier 1 leverage capital ratio of 3%. The Company's current capital position continues to provide it with a level of resources available for the acquisition of depository institutions and businesses closely related to banking in the event opportunities arise. On March 5, 2001, the Company announced the commencement of a stock repurchase program whereby the Company may acquire up to 4.2 million shares of the Company's common stock, or approximately 5% of the common shares currently outstanding. The shares will be repurchased from time to time in the open market at prevailing market prices or in privately negotiated transactions. The extent and timing of any repurchases will depend on market conditions and other corporate considerations. As of March 31, 2001, 254,700 shares of the Company's common stock had been repurchased under this repurchase program. The repurchase program is expected to be completed within 18 months from its commencement date of March 9, 2001. Repurchased shares will be held as treasury stock and will be available for use in connection with the Company's stock option plans and other compensation programs, or for other corporate purposes as determined by the Company's Board of Directors. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK During the three months ended March 31, 2001, there were no material changes to the quantitative and qualitative disclosures about market risks presented in the Annual Report on Form 10-K for the year ended December 31, 2000. PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (3.1) Restated Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Company's Registration Statement on Form S-4 (Registration No. 33-88274) filed on January 5, 1995, and incorporated herein by reference) (3.2) Amendment to Restated Articles of Incorporation of the Company (filed as Exhibit 3.2 to the Company's Registration Statement on Form S-4 (Registration No. 33-88274) filed on January 5, 1995, and incorporated herein by reference) (3.3) Amended and Restated Bylaws of the Company (filed as Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (file No. 1-12991) and incorporated herein by reference) (3.4) Amendment to Amended and Restated Bylaws (filed as Exhibit 3(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (file No. 1-12991) and incorporated herein by reference) (4.1) Specimen Common Stock Certificate (filed as Exhibit 4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 (file number 0-10826) and incorporated herein by reference) (4.2) Rights Agreement, dated as of April 24, 1991 including as Exhibit A the forms of Rights Certificate and of Election to Purchase and as Exhibit B the summary of Rights to Purchase Common Shares (filed as Exhibit 1 to the Company's registration statement on Form 8-A filed April 24, 1991 and incorporated herein by reference) (4.3) First Amendment to Rights Agreement, dated as of March 28, 2001 (filed as Exhibit 2 to the Company's amended registration statement on Form 8-A/A filed March 28, 2001 and incorporated herein by reference) (b) Reports on Form 8-K A report on Form 8-K was filed March 28, 2001, reporting under Item 5,"Other Events" and Item 7, "Financial Statements and Exhibits." SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BancorpSouth, Inc. --------------------------- (Registrant) DATE: May 11, 2001 /S/ L. Nash Allen, Jr. --------------------------- L. Nash Allen, Jr. Treasurer and Chief Financial Officer