-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LMHpy9QkmnpcjDsVIDgZOQxZqs2znBoKxViUDtx1RjAvGZqCf4FLAM6oa3Dstde4 LFW4tqW5yCMGyDnaVp8lWg== 0000950144-99-003446.txt : 19990331 0000950144-99-003446.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950144-99-003446 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANCORPSOUTH INC CENTRAL INDEX KEY: 0000701853 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 640659571 STATE OF INCORPORATION: MS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12991 FILM NUMBER: 99577147 BUSINESS ADDRESS: STREET 1: ONE MISSISSIPPI PL CITY: TUPELO STATE: MS ZIP: 38801 BUSINESS PHONE: 6016802000 MAIL ADDRESS: STREET 1: PO BOX 789 CITY: TUPELO STATE: MS ZIP: 38802-0789 FORMER COMPANY: FORMER CONFORMED NAME: BANCORP OF MISSISSIPPI INC DATE OF NAME CHANGE: 19920703 10-K 1 BANCORPSOUTH INC 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended December 31, 1998 or ----------------- [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from __________ to ___________ Commission file number 0-10826 ----------- BancorpSouth, Inc. ---------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Mississippi 64-0659571 -------------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One Mississippi Plaza Tupelo, Mississippi 38801 - ---------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (601) 680-2000 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered - ---------------------------------------- ----------------------------------- Common stock, $2.50 par value New York Stock Exchange Common stock purchase rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $2.50 PAR VALUE COMMON STOCK PURCHASE RIGHTS - ------------------------------------------------------------------------------ (Title of Class) 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 periods 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ] (Cover Page Continues on Next Page) 1 2 (Continued from Cover Page) The aggregate market value of the voting stock held by non-affiliates of the registrant as of January 31, 1999, was approximately $869,667,000 based on the closing sale price as reported on the New York Stock Exchange on January 29, 1999. On March 18, 1999, the registrant had outstanding 55,942,375 shares of Common Stock, par value $2.50 per share. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement used in connection with Registrant's Annual Meeting of Shareholders to be held April 27, 1999, are incorporated by reference into Part III of this Report. 2 3 BANCORPSOUTH, INC. FORM 10-K For the Fiscal Year Ended December 31, 1998 CONTENTS PART I Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 3 4 PART I Item 1. - Business General The BancorpSouth, Inc. (the "Company") is a bank holding company with financial services operations in Mississippi, Tennessee and Alabama. Its principal subsidiary is BancorpSouth Bank ("the Bank"). The Company's principal office is located at One Mississippi Plaza, Tupelo, Mississippi 38801 and its telephone number is (601) 680-2000. Description of Business The Bank has its principal office in Tupelo, Lee County, Mississippi, and conducts a commercial banking and trust business through 157 offices in 82 municipalities or communities in 49 counties throughout Mississippi, western Tennessee and parts of Alabama. The Bank has grown through the acquisition of other banks, the purchase of assets from federal regulators and through the opening of new branches and offices. In addition, the Bank operates consumer finance, credit life insurance and insurance agency subsidiaries. At December 31, 1998, the Bank had total assets of approximately $5.20 billion and total deposits of approximately $4.44 billion. The Company, through its subsidiaries, provides a range of financial services and products to individuals and small-to-medium size businesses. Various types of checking accounts, both interest bearing and non-interest bearing, are available. Savings accounts and certificates of deposit with a range of maturities and interest rates are available to meet the needs of customers. Other services include safe deposit and night depository facilities. Limited 24-hour banking with automated teller machines is provided in most of its principal markets. The Bank is an issuing bank for MasterCard and overdraft protection is available to approved MasterCard holders maintaining checking accounts with the Bank. The Company offers a variety of services through the Bank's trust department, including personal trust and estate services, certain employee benefit accounts and plans, including individual retirement accounts, and limited corporate trust functions. At December 31, 1998, the Company and its subsidiaries employed 2,338 persons. The Company and its subsidiaries are not a party to any collective bargaining agreements, and the Company believes employee relations are good. Competition Vigorous competition exists in all major areas where the Company is engaged in business. The Bank competes for available loans and depository accounts not only with state and national commercial banks in its service areas but also with savings and loan associations, insurance companies, credit unions, money market mutual funds, automobile finance companies and financial services companies. None of these competitors is dominant in the whole area served by the Bank. The principal areas of competition in the banking industry center on a financial institution's ability and willingness to provide credit on a timely and competitively priced basis, to offer a sufficient range of deposit and investment opportunities at a competitive price and maturity and to offer personal and other services of sufficient quality at competitive prices. The Company and its subsidiaries believe they can compete effectively in all these areas. Regulation and Supervision The following is a brief summary of the regulatory environment in which the Company and its subsidiaries operate and is not designed to be a complete discussion of all statutes and regulations affecting such operations, including those statutes and regulations specifically mentioned herein. 4 5 The Company is a bank holding company and is registered as such with the Board of Governors of the Federal Reserve System (the "FRB") and is subject to regulation and supervision by the FRB. The Company is required to file with the FRB annual reports and such other information as they may require. The FRB may also conduct examinations of the Company. The Company is a legal entity which is separate and distinct from its subsidiaries. There are various legal limitations on the extent to which the Bank may extend credit, pay dividends or otherwise supply funds to the Company or its affiliates. In particular, the Bank is subject to certain restrictions imposed by federal law on any extensions of credit to the Company or, with certain exceptions, other affiliates. Dividends to shareholders are paid from dividends paid to the Company by the Bank, which are subject to approval by the applicable regulatory authorities. The Bank is incorporated under the banking laws of the State of Mississippi and is subject to the applicable provisions of Mississippi banking laws rather than the National Bank Act. The Bank is subject to the supervision of the Mississippi Department of Banking and Consumer Finance and to regular examinations by that department. The deposits in the Bank are insured by the Federal Deposit Insurance Corporation (the "FDIC") and, therefore, the Bank is subject to the provisions of the Federal Deposit Insurance Act and to examination by the FDIC. The Bank is not a member of the Federal Reserve System. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") permits among other things the acquisition by bank holding companies of savings associations, irrespective of their financial condition, and increased the deposit insurance premiums for banks and savings associations. FIRREA also provides that commonly controlled federally insured financial institutions must reimburse the FDIC for losses incurred by the FDIC in connection with the default of another commonly controlled financial institution or in connection with the provision of FDIC assistance to such a commonly controlled financial institution in danger of default. Reimbursement liability under FIRREA is superior to any obligations to shareholders of such federally insured institutions (including a bank holding company such as the Company if it were to acquire another federally insured financial institution), arising as a result of their status as a shareholder of a reimbursing financial institution. The Company and the Bank are subject to the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). This statute provides for increased funding for the FDIC's deposit insurance fund and expanded the regulatory powers of federal banking agencies to permit prompt corrective actions to resolve problems of insured depository institutions through the regulation of banks and their affiliates, including bank holding companies. The provisions are designed to minimize the potential loss to depositors and to FDIC insurance funds if financial institutions default on their obligations to depositors or become in danger of default. Among other things, FDICIA provides a framework for a system of supervisory actions based primarily on the capital levels of financial institutions. FDICIA also provides for a risk-based deposit insurance premium structure. The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to its deposit insurance fund. While most of the Bank's deposits are in the Bank Insurance Fund (BIF), certain other of the Bank's deposits which were acquired from thrifts over the years remain in the Savings Association Insurance Fund (SAIF). The Company is required to comply with the risk-based capital guidelines established by the FRB, and to other tests relating to capital adequacy which the FRB adopts from time to time. See Note 18 of Notes to Consolidated Financial Statements included herein. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA") permits adequately capitalized and managed bank holding companies to acquire control of banks in states other than their home states, subject to federal regulatory approval, without regard to whether such a transaction is prohibited by the laws of any state. IBBEA permits states to continue to require that an acquired bank have been in existence for a certain minimum time period, which may not exceed five years. A bank holding company may not, following an interstate acquisition, control more than 10% of the nation's total amount of bank deposits or 30% of bank deposits in the relevant state (unless the state enacts legislation to raise the 30% limit). States retain the ability to adopt legislation to effectively lower the 30% limit. Federal banking regulators may approve merger transactions involving banks located in different states, without regard to laws of any state prohibiting such transactions; except that, mergers may 5 6 not be approved with respect to banks located in states that, prior to June 1, 1997, enacted legislation prohibiting mergers by banks located in such state with out-of-state institutions. Federal banking regulators may permit an out-of-state bank to open new branches in another state if such state has enacted legislation permitting interstate branching. Affiliated institutions are authorized to accept deposits for existing accounts, renew time deposits and close and service loans for affiliated institutions without being deemed an impermissible branch of the affiliate. Lending Activities The Company's lending activities include both commercial and consumer loans. Loan originations are derived from a number of sources including real estate broker referrals, mortgage loan companies, direct solicitation by the Company's loan officers, present savers and borrowers, builders, attorneys, walk-in customers and, in some instances, other lenders. The Company has established disciplined and systematic procedures for approving and monitoring loans that vary depending on the size and nature of the loan. Commercial Lending The Company offers a variety of commercial loan services including term loans, lines of credit, equipment and receivable financing and agricultural loans. A broad range of short-to-medium term commercial loans, both secured and unsecured are made available to businesses for working capital (including inventory and receivables), business expansion (including acquisition and development of real estate and improvements) and the purchase of equipment and machinery. At times, the Company also makes construction loans to real estate developers for the acquisition, development and construction of residential subdivisions. Commercial loans are granted based on the borrower's ability to generate cash flow to support its debt obligations and other cash related expenses. A borrower's ability to repay commercial loans is substantially dependent on the success of the business itself and on the quality of its management. As a general practice, the Company takes as collateral a security interest in any available real estate, equipment, inventory, receivables or other personal property although such loans may also be made infrequently on an unsecured basis. Generally, the Company requires personal guaranties of its commercial loans to offset the risks associated with such loans. The Company has very little exposure as an agricultural lender. Crop production loans are either fully supported by the collateral and financial strength of the borrower or else a 90% loan guaranty is obtained through the Farmers Home Administration on such loans. Residential Consumer Lending A portion of the Company's lending activities consists of the origination of fixed and adjustable rate residential mortgage loans secured by owner-occupied property located in the Company's primary market areas. Home mortgage lending is unique in that a broad geographic territory may be serviced by originators working from strategically placed offices either within the Company's traditional banking facilities or from affordable storefront locations in commercial buildings. In addition, the Company offers construction loans, second mortgages, home improvement loans and home equity lines of credit. The Company's banking subsidiary has received an "outstanding" Community Reinvestment Act ("CRA") rating from the Federal Deposit Insurance Company after its most recent examination. The Company finances the construction of individual, owner-occupied houses on the basis of written underwriting and construction loan management guidelines. First mortgage construction loans are made to solvent and competent contractors on both a pre-sold and a "speculation" basis. Such loans are also made to qualified individual borrowers and are generally supported by a take-out commitment from a permanent lender. The Company makes residential construction loans to individuals who intend to erect owner-occupied housing on a purchased parcel of real estate. The construction phase of these loans have certain risks, including the viability of the contractor, the contractor's ability to complete the project and changes in interest rates. In most cases, the Company will sell its mortgage loans of 15 or more years in term in the secondary market, which allows the Company to hedge against the interest rate risks related to such lending operations. This 6 7 brokerage arrangement allows the Company to accommodate its clients' demands while eliminating the interest rate risk for the 15 to 30 year period generally associated with such loans. After the sale of a loan, the Company's only involvement is to act as a servicing agent. The Company in most cases requires title, fire, extended casualty insurance and, where required by applicable regulations, flood insurance to be obtained by the borrower. The Company maintains its own errors and omissions insurance policy to protect against loss in the event of failure of a mortgagor to pay premiums on fire and other hazard insurance policies. Mortgage loans originated by the Company customarily include a "due on sale" clause giving the Company the right to declare a loan immediately due and payable in the event, among other matters, that the borrower sells or otherwise disposes of the real property subject to a mortgage. In general, the Company enforces due on sales clauses. Borrowers are typically permitted to refinance or repay loans at their option without penalty. Non-Residential Consumer Lending Non-residential consumer loans made by the Company include loans for automobiles, recreation vehicles, boats, personal (secured and unsecured) and deposit account secured loans. In addition, the Company provides federally insured or guaranteed student loans to students at major universities and community colleges in the Company's market areas. The Company also conducts various indirect lending activities through established retail companies in its market areas. Non-residential consumer loans are attractive to the Company because they typically have a shorter term and carry higher interest rates than that charged on other types of loans. Non-residential consumer loans, however, do pose additional risks of collectability when compared to traditional types of loans granted by commercial banks such as residential mortgage loans. The Company also issues credit cards solicited on the basis of applications received through referrals from the Company's bank branch networks. The Company generally has a small portfolio of credit card receivables outstanding. Credit card lines are underwritten using conservative credit criteria, including past credit history and debt-to-income rations, similar to the credit policies applicable to other personal consumer loans. Historically, the Company believes that its credit card losses have been well-below industry norms. Consumer loans are granted based on employment and financial information solicited from prospective borrowers as well as credit records collected from various reporting agencies. Stability of the borrower, willingness to pay and credit history are the primary factors to be considered. The availability of collateral is also a factor considered in making such a loan. The Company seeks collateral that can be assigned and has good marketability with a clearly adequate margin of value. The geographic area of the borrower is another consideration with preference given to borrowers in the Company's market area. Asset Quality Management seeks to maintain a high quality of assets through conservative underwriting and sound lending practices. Management intends to follow this policy even though it may result in foregoing the funding of higher yielding loans. While there is no assurance that the Company will not suffer losses on its loans, management believes that the Company has in place adequate underwriting and loan administration policies and personnel to manage the associated risks prudently. In an effort to maintain the quality of the loan portfolio, management seeks to minimize higher risk types of lending. Undesirable loans include loans to provide initial equity and working capital to new businesses with no other capital strength, loans secured by unregistered stock, loans for speculative transactions in stock, land or commodity markets, loans to borrowers or the taking of collateral outside the Company's market area, loans dependent on secondary liens as primary collateral, and non-recourse loans. To the extent risks are identified, additional precautions are taken in order to reduce the Company's risk of loss. Commercial loans entail certain additional risks since they usually involve large loan balances to single borrowers or a related group of borrowers, resulting in a more concentrated loan portfolio. Further, since their payment is usually dependent upon the successful operation of the commercial enterprise, they also are subject to adverse conditions in the economy. 7 8 The Board of Directors of the Company concentrates its efforts and resources, and that of its management and lending officials, on loan review and underwriting policies. Loan status and monitoring is handled through the Company's Loan Administration Department. Weak financial performance is identified and monitored using past due reporting, the internal loan rating system, loan review reports, the various loan committee functions and periodic Asset Quality Rating Committee meetings. Senior loan officers have established a review process with the objective of quickly identifying, evaluating, and initiating necessary corrective action for substandard loans. The results of loan reviews are reported to the Audit Committee of the Board of Directors. Combined, these components are integral elements of the Company's loan program, which has resulted in its loan portfolio performance to date. Nonetheless, management maintains a cautious outlook in anticipating the potential effects of uncertain economic conditions (both locally and nationally) and the possibility of more stringent regulatory standards. Selected Statistical Information Set forth below is certain selected statistical information relating to the Company's business. Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differentials Net interest revenue, the difference between interest revenue and interest expense, is the most significant component of the Company's earnings. For internal analytical purposes, management adjusts Net Interest Revenue to a "taxable equivalent" basis using an effective tax rate of 35% on tax exempt items (primarily interest on municipal securities). Another significant statistic in the analysis of net interest revenue is the effective interest differential, also called the net yield on earning assets. The net yield on earning assets is net interest divided by total interest-earning assets. Recognizing the importance of interest differential to total earnings, management places great emphasis on managing interest rate spreads. Although interest differential is affected by national, regional and local economic conditions, including the level of credit demand and interest rates, there are significant opportunities to influence interest differential through appropriate loan and investment policies which are designed to maximize interest differential while maintaining sufficient liquidity and availability of "incremental funds" for purposes of meeting existing commitments and for investment in lending and other investment opportunities that may arise. The following table sets forth the average balances of assets and liabilities and the average rates earned and paid for the three years ended December 31, 1998. The table shows the various components of earning assets and the sources used to fund these assets which are included in the effective interest differential. 8 9
1998 1997 1996 --------------------------------- ---------------------------- ------------------------------ (Taxable equivalent basis) Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate ------- -------- ---- ------- -------- ---- ------- -------- ---- ASSETS Interest bearing deposits in other banks $ 7,919 $ 394 4.98% $ 8,570 $ 426 4.97% $ 12,967 $ 689 5.31% Held-to-maturity securities: U.S. treasury and agencies 528,222 32,234 6.10% 444,605 28,981 6.51% 383,723 25,258 6.58% State and political subdivisions(1) 191,641 12,842 6.70% 162,976 11,806 7.24% 124,567 10,228 8.21% Other securities -- -- -- 15 -- -- 84 -- -- Available-for-sale securities(2) 529,480 32,561 6.15% 411,612 26,269 6.38% 331,758 20,017 6.03% Federal funds sold 70,122 3,691 5.26% 94,970 5,074 5.34% 70,715 4,071 5.76% Loans (net of unearned discount)(3)(5) 3,312,635 303,417 9.16% 2,896,305 269,814 9.32% 2,691,996 250,652 9.31% Mortgages held for sale 52,634 3,470 6.59% 29,409 2,102 7.15% 27,729 1,956 7.05% ---------- -------- ---------- -------- ---------- -------- Total interest earning assets and revenue 4,692,653 388,609 8.28% 4,048,462 344,422 8.51% 3,643,539 312,871 8.59% Other assets 361,919 318,091 302,252 Less: allowance for credit losses (46,681) (41,989) (39,583) ---------- ---------- ---------- Total $5,007,891 $4,324,564 $3,906,208 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand-interest bearing $ 966,884 $ 29,883 3.09% $ 883,654 $ 30,332 3.43% $ 797,366 $ 25,957 3.29% Savings 702,566 29,515 4.20% 564,257 21,426 3.80% 433,581 15,600 3.60% Time 2,059,637 114,318 5.55% 1,863,105 103,629 5.56% 1,716,887 93,026 5.42% Federal funds purchased and securities under repurchase agreements 62,728 2,853 4.55% 46,382 2,270 4.89% 52,168 2,330 4.47% Other short-term borrowings(4) 2,794 192 6.87% 4,942 308 6.23% 4,013 360 8.97% Long-term debt 179,928 10,651 5.92% 55,339 3,305 5.97% 80,619 5,647 7.00% ---------- -------- ---------- -------- ---------- -------- Total interest bearing liabilities and expense 3,974,537 187,412 4.72% 3,417,679 161,270 4.72% 3,084,634 142,920 4.63% Demand deposits--non-interest bearing 534,432 466,346 436,308 Other liabilities 67,055 59,926 53,575 ---------- ---------- ---------- Total liabilities 4,576,024 3,943,951 3,574,517 Shareholders' equity 431,867 380,613 331,691 ---------- ---------- ---------- Total $5,007,891 $4,324,564 $3,906,208 ========== ========== ========== Net interest revenue $201,197 $183,152 $169,951 ======== ======== ======== Net yield on interest earning assets 4.29% 4.52% 4.66% ==== ==== ====
1. Includes taxable equivalent adjustments of $3,226,000, $2,922,000 and $2,755,000 in 1998, 1997 and 1996, respectively, using an effective tax rate of 35%. 2. Includes taxable equivalent adjustment of $828,000, $1,027,000 and $283,000 in 1998, 1997 and 1996 using an effective tax rate of 35%. 3. Includes taxable equivalent adjustment of $1,036,000, $772,000 and $751,000 in 1998, 1997 and 1996, respectively, using an effective tax rate of 35%. 4. Interest expense includes interest paid on liabilities not included in averages. 5. Non-accrual loans are immaterial for each of the years presented. 9 10 Analysis of Changes in Effective Interest Differential Net interest revenue may also be analyzed by segregating the rate and volume components of interest revenue and interest expense. The table which follows presents an analysis of rate and volume change in net interest from 1997 to 1998 and 1996 to 1997. Changes, which are not solely due to volume or rate, are allocated to volume.
1998 OVER 1997 - INCREASE (DECREASE) 1997 OVER 1996 - INCREASE (DECREASE) ------------------------------------ ------------------------------------ (Taxable equivalent basis) Volume Rate Total Volume Rate Total ------ ---- ----- ------ ---- ----- (In thousands) INTEREST REVENUE Due from banks - interest bearing $ (32) $ 0 $ (32) $ (219) $ (44) $ (263) Held-to-maturity securities: U.S. government agencies 5,103 (1,800) 3,303 3,962 (289) 3,673 State and political subdivisions 1,921 (885) 1,036 2,782 (1,204) 1,578 Other securities -- -- -- -- -- -- Available-for-sale securities 7,248 (956) 6,292 5,096 1,156 6,252 Federal funds sold (1,308) (75) (1,383) 1,296 (293) 1,003 Loans (net of unearned discount) 38,133 (4,530) 33,603 19,033 129 19,162 Mortgages held for sale 1,531 (163) 1,368 120 26 146 ------- ------- ------- ------- ------- ------- Total 52,597 (8,410) 44,187 32,069 (518) 31,551 ------- ------- ------- ------- ------- ------- INTEREST EXPENSE Demand deposits - interest bearing 2,572 (3,021) (449) 2,962 1,413 4,375 Savings deposits 5,810 2,279 8,089 4,962 864 5,826 Time deposits 10,908 (219) 10,689 8,133 2,470 10,603 Federal funds purchased and securities under repurchase agreements 743 (160) 583 (283) 223 (60) Other short-term borrowings (148) 32 (116) 58 (110) (52) Long-term debt 7,375 (29) 7,346 (1,510) (832) (2,342) ------- ------- ------- ------- ------- -------- Total 27,262 (1,120) 26,142 14,322 4,028 18,350 ------- ------- ------- ------- ------- -------- Increase (Decrease) in Effective Interest Differential $25,335 $(7,290) $18,045 $17,747 $(4,546) $ 13,201 ======= ======= ======= ======= ======= ========
10 11 Investment Portfolio Held-to-Maturity Securities The following table shows the amortized cost of held-to-maturity securities at December 31, 1998, 1997 and 1996:
December 31 ------------------------------------ 1998 1997 1996 ---- ---- ---- (In thousands) U.S. Treasury securities $103,012 $109,012 $ 91,340 U.S. Government agency securities 333,866 288,711 314,635 Taxable obligations of states and political subdivisions 2,295 1,295 1,375 Taxable exemption obligations of states and political subdivisions 208,673 171,298 150,471 Other securities -- 15 15 -------- -------- -------- TOTAL $647,846 $570,331 $557,836 ======== ======== ========
The following table shows the maturities and weighted average yields as of the end of the latest period for each investment category presented above:
December 31, 1998 --------------------------------------------------------------- U.S. U.S. GOVERNMENT STATES & WEIGHTED TREASURY AGENCY POLITICAL OTHER AVERAGE SECURITIES SECURITIES SUBDIVISIONS SECURITIES YIELD ---------- ---------- ------------ ---------- ----- (In thousands) PERIOD TO MATURITY: Maturing within one year $ 57,144 $ 60,262 $ 13,812 $ -- 6.35% Maturing after one year but within five years 43,881 155,328 103,781 -- 6.29% Maturing after five years but within ten years 1,987 104,309 80,652 -- 6.57% Maturing after ten years -- 13,967 12,723 -- 7.28% -------- -------- -------- ------ TOTAL $103,012 $333,866 $210,968 $ -- ======== ======== ======== ======
The yield on tax-exempt obligations of states and political subdivisions has been adjusted to a taxable equivalent basis using a 35% tax rate. 11 12 Available-for-Sale Securities The following table shows the book value of available-for-sale securities at December 31, 1998, 1997 and 1996:
December 31 ----------------------------------- 1998 1997 1996 ---- ---- ---- (In thousands) U.S. Treasury securities $106,226 $109,944 $ 57,663 U.S. Government agency securities 305,960 330,017 192,503 Taxable obligations of states and political subdivisions 5,739 3,940 1,893 Tax exempt obligations of states and political subdivisions 38,696 19,155 16,663 Other securities 93,146 48,351 46,603 -------- -------- -------- TOTAL $549,767 $511,407 $315,325 ======== ======== ========
The following table shows the maturities and weighted average yields as of the end of the latest period for each investment category presented above:
December 31, 1998 --------------------------------------------------------------- U.S. U.S. GOVERNMENT STATES & WEIGHTED TREASURY AGENCY POLITICAL OTHER AVERAGE SECURITIES SECURITIES SUBDIVISIONS SECURITIES YIELD ---------- ---------- ------------ ---------- ----- (In thousands) PERIOD TO MATURITY: Maturing within one year $ 42,841 $ 45,809 $ 3,337 $55,450 5.17% Maturing after one year but within five years 58,154 166,060 8,399 11,691 6.27% Maturing after five years but within ten years 5,231 71,286 17,095 23,028 6.22% Maturing after ten years -- 22,805 15,604 2,977 6.94% -------- -------- ------- ------- TOTAL $106,226 $305,960 $44,435 $93,146 ======== ======== ======= =======
The yield on tax-exempt obligations of states and political subdivisions has been adjusted to a taxable equivalent basis using a 35% tax rate. 12 13 Loan Portfolio The Company's loans are widely diversified by borrower and industry. The following table shows the composition of loans by collateral type of the Company at December 31 for each of the years indicated.
DECEMBER 31 ------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands) Commercial & agricultural(1) $ 365,716 $ 341,080 $ 299,522 $ 280,120 $ 252,725 Consumer & installment 905,413 870,823 792,559 747,520 686,902 Real estate mortgage(2) 2,054,143 1,758,636 1,584,967 1,472,172 1,280,921 Lease financing 210,559 172,821 149,582 122,290 82,577 Other 25,575 25,161 19,619 22,387 15,572 ---------- ---------- ---------- ---------- ---------- Total gross loans $3,561,406 $3,168,521 $2,846,249 $2,644,489 $2,318,697 ========== ========== ========== ========== ==========
(1) Including $15,878,000, $15,867,000, $17,514,000, $21,089,000 and $18,462,000 in 1998, 1997, 1996, 1995 and 1994, respectively, of loans classified as agricultural. (2) Including $48,871,000, $40,310,000, $43,512,000, $41,835,000 and $35,772,000 in 1998, 1997, 1996, 1995 and 1994, respectively, of loans secured by or relating to agricultural land. Maturity Distribution of Loans The maturity distribution of the Company's loan portfolio is one factor in management's evaluation of the risk characteristics of the loan portfolio. The following table shows the maturity distribution of gross loans of the Company as of December 31, 1998.
ONE YEAR ONE TO AFTER OR LESS FIVE YEARS FIVE YEARS ------- ---------- ---------- (In thousands) Commercial and agricultural $ 189,265 $ 139,690 $ 36,761 Consumer & installment 211,248 676,079 18,086 Real estate mortgages 720,842 1,006,269 327,032 Lease financing 66,299 140,321 3,939 Other 16,904 7,075 1,596 ---------- ---------- -------- Total gross loans $1,204,558 $1,969,434 $387,414 ========== ========== ========
13 14 Sensitivity of Loans to Changes in Interest Rates The interest sensitivity of the Company's loans is important in the management of effective interest differential. The Company attempts to manage the relationship between the rate sensitivity of its assets and liabilities to produce an effective interest differential that is not significantly impacted by the level of interest rates. The following table shows the interest sensitivity of the Company's gross loans as of December 31, 1998.
December 31, 1998 ----------------- FIXED VARIABLE RATE RATE ---- ---- (In thousands) Loan Portfolio Due after one year $2,044,561 $312,287 ========== ========
Nonaccrual, Past Due and Restructured Loans Non-performing loans consist of both non-accrual loans and loans which have been restructured (primarily in the form of reduced interest rates) because of the borrower's weakened financial condition. The aggregate principal balance of non-accrual loans was $6,152,000, $5,047,000, $6,227,000, $3,556,000 and $4,709,000 at December 31, 1998, 1997, 1996, 1995 and 1994, respectively. The aggregate principal balance of restructured loans was $713,000, $1,097,000, $493,000, $281,000 and $1,751,000 at December 31, 1998, 1997, 1996, 1995 and 1994, respectively. The total amount of interest earned on non-performing loans was approximately $153,000, $58,000, $42,000, $70,000 and $214,000 in 1998, 1997, 1996, 1995 and 1994, respectively. The gross interest income that would have been recorded under the original terms of those loans amounted to $366,000, $257,000, $353,000, $105,000 and $353,000 in 1998, 1997, 1996, 1995 and 1994, respectively. Accruing loans which were contractually past due 90 days or more for years ended December 31, 1998, 1997, 1996, 1995 and 1994, amounted to $9,654,000, $8,148,000, $5,501,000, $5,366,000 and $3,800,000, respectively. Loans considered impaired, under SFAS No. 114, as amended by SFAS No. 118, are loans which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company's recorded investment in loans considered impaired at December 31, 1998 and 1997 was $8,166,000 and $7,181,000, respectively, with a valuation reserve of $3,151,000 and $2,862,000, respectively. The average recorded investment in impaired loans during 1998 and 1997 was $9,187,000 and $7,536,000, respectively. The Company's policy provides that loans, other than installment loans, are generally placed in 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. 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 problem loans. Historically, some of these loans are ultimately restructured or placed in non-accrual status. At December 31, 1998, no loans were known to be potential problem loans. At December 31, 1998, the Company did not have any concentration 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, which 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 market area. 14 15 Summary of Loan Loss Experience In the normal course of business, the Company assumes risks in extending credit. The Company manages these risks through its lending policies, loan review procedures and the diversification of its loan portfolio. Although it is not possible to predict loan losses with any certainty, management constantly reviews the characteristics of the loan portfolio to determine its overall risk profile and quality. Constant attention to the quality of the loan portfolio is achieved by a formal loan review process. The Board of Directors of the Company has appointed a Loan Loss Reserve Valuation Committee (the Committee) which is responsible for ensuring that the allowance for loan and leases losses (ALLL) provides coverage of both known and inherent losses. The Committee considers estimates of loss for individually-analyzed credits as well as factors such as historical experience, changes in economic and business conditions and concentrations of risk in determining the level of ALLL. The Committee meets at least quarterly to determine the amount of additions to the ALLL. The Committee is composed of senior management from the Company's Loan Administration, Lending and Finance Departments. In each period, the Committee bases the ALLL on its loan classification system as well as an analysis of general economic and business trends in the Company's geographic region and nationally. A key input for determining the amount of the ALLL is the Company's loan classification system. The Company has a disciplined approach for assigning credit ratings and classifications to individual credits. Each credit is assigned a grade by the loan officer at origination that serves as a basis for the credit analysis of the entire portfolio. Periodically, loan officers review the status of each credit and update its grading. An independent Loan Review Department (Loan Review) reviews the gradings assigned by the loan officer. Loan Review is responsible for reviewing the credit rating and classification of individual credits. They also assess trends in the overall portfolio, adherence to internal credit policies and Loan Administration procedures and other factors that may affect the overall adequacy of the ALLL. Throughout this on-going process, management and the Committee are advised of the condition of individual loans and of the quality profile of the entire loan portfolio for consideration in establishing the ALLL. Any loan or portion thereof which is classified as "loss" by regulatory examiners or which is determined by management to be uncollectible because of such factors as the borrower's failure to pay interest or principal, the borrower's financial condition, economic conditions in the borrower's industry or the inadequacy of underlying collateral, is charged off. The provision for credit losses charged to operating expense is an amount which, in the judgment of management, is necessary to maintain the allowance for credit losses at a level that is adequate to meet the probable losses inherent in the Company's current portfolio of loans. Management's judgment is based on a variety of factors which include the Company's experience related to loan balances, charge-offs and recoveries, scrutiny of individual loans and risk factors, results of regulatory agency reviews of loans and present economic assumptions of the Company's market area. 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. Such agencies may require the Company to recognize additions 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 breakdown of the 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 losses. 15 16 The following table presents (a) the breakdown of the allowance for credit losses by loan category and (b) the percentage of each category in the loan portfolio to total loans at December 31 for each of the years presented:
1998 1997 1996 1995 ---- ---- ---- ---- ALLOWANCE % OF LOANS ALLOWANCE % OF LOANS ALLOWANCE % OF LOANS ALLOWANCE % OF LOANS FOR TO TOTAL FOR TO TOTAL FOR TO TOTAL FOR TO TOTAL CREDIT LOSS LOANS CREDIT LOSS LOANS CREDIT LOSS LOANS CREDIT LOSS LOANS ----------- ----- ----------- ----- ----------- ----- ----------- ----- Commercial & agricultural $ 3,865 10.27% $ 3,172 10.76% $ 3,796 10.52% $ 3,395 10.59% Consumer & installment 18,926 25.42% 16,304 27.49% 12,963 12.85% 10,942 28.27% Real estate mortgage 23,875 57.68% 20,782 55.51% 21,538 55.69% 21,762 55.67% Lease financing 2,802 5.91% 2,592 5.45% 2,070 5.25% 1,433 4.62% Other 150 0.72% 138 0.79% -- 0.69% -- 0.85% ------- ------ ------- ------ ------- ------ ------- ------ TOTAL $49,618 100.00% $42,988 100.00% $40,367 100.00% $37,532 100.00% ======= ====== ======= ====== ======= ====== ======= ====== 1998 ---- ALLOWANCE % OF LOANS FOR TO TOTAL CREDIT LOSS LOANS ----------- ----- Commercial & agricultural $ 3,238 10.90% Consumer & installment 11,403 29.62% Real estate mortgage 17,836 55.25% Lease financing 1,290 3.56% Other -- 0.67% ------- ------ TOTAL $33,767 100.00% ======= ======
16 17 The following table sets forth certain information with respect to the Company's loans (net of unearned discount) and the allowance for credit losses for the five years ended December 31, 1998.
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in thousands) LOANS Average loans for the period $3,312,635 $2,896,305 $2,691,996 $ 2,394,571 $2,090,998 ========== ========== ========== =========== ========== ALLOWANCE FOR CREDIT LOSSES Balance beginning of period $ 42,988 $ 40,367 $ 37,532 $ 33,767 $ 30,281 Loans charged off: Commercial & agricultural (1,462) (1,307) (1,769) (1,445) (1,894) Consumer & installment (8,657) (7,503) (6,443) (4,448) (3,481) Real estate mortgage (1,738) (1,129) (817) (725) (1,224) Lease financing (75) (48) (30) (1) (72) ---------- ----------- ---------- ----------- ---------- Total loans charged off (11,932) (9,987) (9,059) (6,619) (6,671) ---------- ----------- ---------- ----------- ---------- Recoveries: Commercial & agricultural 422 607 771 470 1,649 Consumer & installment 1,790 1,382 1,339 1,253 1,446 Real estate mortgage 164 359 254 377 422 Lease financing 20 57 5 18 91 ---------- ----------- ---------- ----------- ---------- Total recoveries 2,396 2,405 2,369 2,118 3,608 ---------- ----------- ---------- ----------- ---------- Net charge-offs (9,536) (7,582) (6,690) (4,501) (3,063) Provision charged to operating expense 15,014 9,607 9,525 6,418 6,432 Acquisitions 1,152 596 -- 1,848 117 ---------- ----------- ---------- ----------- ---------- Balance, end of period $ 49,618 $ 42,988 $ 40,367 $ 37,532 $ 33,767 ========== =========== ========== =========== ========== RATIOS Net charge-offs to average loans 0.29% 0.26% 0.25% 0.19% 0.15% ========== =========== ========== =========== ==========
17 18 Deposits Deposits represent the principal source of funds for the Company. The distribution and market share of deposits by type of deposit and by type of depositor are important considerations in the Company's assessment of the stability of its funds sources and its access to additional funds. Furthermore, management shifts the mix and maturity of the deposits depending on economic conditions and loan and investment policies in an attempt, within set policies, to minimize cost and maximize effective interest differential. The following table shows the classification of deposits on an average basis for the three years ended December 31, 1998.
YEARS ENDED DECEMBER 31 -------------------------------------------------------------------- 1998 1997 1996 -------------------------------------------------------------------- Average Average Average Average Average Average Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- (Dollars in thousands) Non-interest bearing demand deposits $ 534,432 -- $ 466,346 -- $ 436,308 -- Interest bearing demand deposits 966,884 3.09% 883,654 3.43% 797,366 3.26% Savings 702,566 4.20% 564,257 3.80% 433,581 3.60% Time 2,059,637 5.55% 1,863,105 5.56% 1,716,887 5.42% ---------- ---------- ---------- TOTAL DEPOSITS $4,263,519 $3,777,362 $3,384,142 ========== ========== ==========
Time deposits of $100,000 and over including certificates of deposits of $100,000 and over at December 31, 1998, had maturities as follows:
DECEMBER 31, 1998 ----------------- (In thousands) Three months or less $214,515 Over three months through six months 145,987 Over six months through twelve months 124,559 Over twelve months 155,178 -------- TOTAL $640,239 ========
18 19 Return on Equity and Assets Return on average equity, average assets and the dividend payout ratio are based on net income for the three years ended December 31, 1998, as presented below: YEARS ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ---- ---- ---- [S] [C] [C] [C] Return on average equity 12.61% 13.19% 14.27% Return on average assets 1.09 1.16 1.21 Dividend payout ratio 44.55 40.31 35.71 The Company's average equity as a percent of average assets was 8.62%, 8.80% and 8.49% for 1998, 1997 and 1996, respectively. Short-Term Borrowings Time Deposits and Short-Term Debt Certificates of deposit and other time deposits of $100,000 or more amounting to approximately $640,239,000 and $531,243,000 were outstanding at December 31, 1998 and 1997, respectively. Total interest expense relating to certificate and other time deposits of $100,000 or more totaled approximately $36,579,000, $28,282,000, and $21,663,000 for the years ended December 31, 1998, 1997 and 1996, respectively. For time deposits with a remaining maturity of more than one year at December 31, 1998, the aggregate amount of maturities for each of the following five years is presented in the following table:
MATURING IN AMOUNT ----------- ------ (In thousands) 2000 $424,473 2001 95,433 2002 76,056 2003 31,431 2004 210 Thereafter 2,808 -------- Total $630,411 ========
19 20 Presented below is information relating to short-term debt for the years ended December 31, 1998 and 1997:
END OF PERIOD DAILY AVERAGE MAXIMUM --------------------- ------------------ OUTSTANDING INTEREST INTEREST AT ANY BALANCE RATE BALANCE RATE MONTH END ---------------------- ----------------- ----------- (Dollars in thousands) 1998: Federal funds purchased $ 3,051 4.6% $ 6,172 5.2% $ 12,600 Securities sold under repurchase agreements 61,503 3.7% 56,556 4.5% 70,678 -------- ------- -------- Total $ 64,554 $62,728 $ 83,278 ======== ======= ======== 1997: Federal funds purchased $152,449 6.9% $ 3,616 6.2% $152,449 Securities sold under repurchase agreements 36,922 5.1% 42,766 4.8% 48,274 -------- ------- -------- Total $189,371 $46,382 $200,723 ======== ======= ========
Federal funds purchased generally mature the day following the date of purchase while securities sold under repurchase agreements generally mature within 30 days from the date of sale. At December 31, 1998, the Bank had established informal federal funds borrowing lines of credit aggregating $153,000,000. Item 2. - Properties The physical properties of the Company are held in its subsidiaries as follows: a. BancorpSouth Bank - The main office is located at One Mississippi Plaza in the central business district of Tupelo, Mississippi in a seven-floor modern glass, concrete and steel office building owned by the Bank. The Bank occupies approximately 85% of the rentable space with the remainder leased to various unaffiliated tenants. The Bank owns 128 of its 147 branch banking facilities. The remaining 19 branch banking facilities are occupied under leases varying in length from one to nine years. The Bank also owns several buildings in the Hattiesburg, Mississippi area (which provide space for certain of its Southern Region activities including warehouse requirements, mortgage lending, trust services, lease servicing and central operations), an operations center near the Tupelo, Mississippi Municipal Airport, an office building in downtown Jackson, Mississippi (which has approximately 86,000 square feet of space, of which the Bank uses approximately two-thirds for banking activities while leasing or holding for lease the remaining 28,000 square feet) and an office building in downtown Gulfport, Mississippi (which has approximately 85,000 square feet of space, of which the Bank uses approximately 7,500 square feet for banking activities while leasing or holding for lease the remaining portion of the building). The Bank considers all its buildings and leased premises to be in good condition. The Bank also owns several parcels of property acquired under foreclosure. Ownership of and rentals on other real property by the Bank are not material. b. Personal Finance Company - This wholly-owned subsidiary of the Bank occupies 37 leased offices, with the unexpired terms varying in length from one to five years. The average size of 20 21 these leased offices is approximately 1,000 square feet with average annual rent of approximately $9,000. All these premises are considered to be in good condition. Item 3. - Legal Proceedings The Company and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. In the opinion of management, after consultation with outside legal counsel, the outcome of these actions should not have a material adverse effect on the financial condition of the Company and its subsidiaries, taken as a whole. Item 4. - Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders during the fourth quarter of 1998. Executive Officers of the Registrant For information regarding executive officers of the Company, see "Item 10 - Directors and Executive Officers of the Registrant" in this Report. PART II Item 5. - Market for the Registrant's Common Equity and Related Stockholder Matters Market for Common Stock The common stock of the Company trades on the New York Stock Exchange under the symbol BXS. The following table sets forth, for the periods indicated, the range of sale prices of the Company's common stock as reported on the New York Stock Exchange from May 15, 1997 and as reported on the Nasdaq Stock Market prior to May 15, 1997. The prices have been restated to reflect a two-for-one stock split of the Company's common stock effected in the form of a 100% stock dividend paid May 15, 1998.
1998: High Low ---- ---- 4th quarter $21.5625 $17.7500 3rd quarter 22.4375 16.8125 2nd quarter 23.0625 20.3125 1st quarter 24.0000 20.6250 1997: 4th quarter $24.1875 $17.5938 3rd quarter 18.0000 14.5000 2nd quarter 14.7500 13.2500 1st quarter 15.0000 13.2500
Holders of Record As of February 28, 1999, there were 8,519 shareholders of record of the Company's common stock. Dividends The Company declared quarterly cash dividends totaling $0.45 per share during 1998, $0.395 during 1997 and $0.35 during 1996. Future dividends, if any, will vary depending on the Company's profitability and anticipated capital requirements. See "Item 1 - Business - Regulation and Supervision". 21 22 ITEM 6. -- SELECTED FINANCIAL DATA SELECTED FINANCIAL INFORMATION (UNAUDITED) (Dollars in thousands, except per share amounts)
YEARS ENDED DECEMBER 31 ----------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- Earnings Summary: Interest revenue $ 383,519 $ 339,701 $ 308,965 $ 282,422 $ 231,191 Interest expense 187,412 161,270 142,920 130,474 96,123 ---------- ---------- ---------- ---------- ---------- Net interest revenue 196,107 178,431 166,045 151,948 135,068 Provision for credit losses 15,014 9,607 9,525 6,418 6,432 ---------- ---------- ---------- ---------- ---------- Net interest revenue, after provision for credit losses 181,093 168,824 156,520 145,530 128,636 Other revenue 53,018 47,903 45,422 35,264 29,264 Other expense 152,084 143,618 130,211 123,663 109,914 ---------- ---------- ---------- ---------- ---------- Income before income taxes 82,027 73,109 71,731 57,131 47,986 Income tax expense 27,550 22,907 24,396 17,494 14,176 ---------- ---------- ---------- ---------- ---------- Net income $ 54,477 $ 50,202 $ 47,335 $ 39,637 $ 33,810 ========== ========== ========== ========== ========== Per Share Data: Net income: Basic $ 1.02 $ 0.99 $ 0.98 $ 0.83 $ 0.72 Diluted 1.01 0.98 0.98 0.82 0.72 Cash dividends 0.45 0.395 0.35 0.31 0.2775 Book value 8.48 7.79 7.21 6.62 5.96 Balance Sheet - Averages: Total assets $5,007,891 $4,324,564 $3,906,208 $3,574,545 $3,258,782 Held-to-maturity securities 719,863 607,596 508,374 554,896 481,569 Available-for-sale securities 529,480 411,612 331,758 278,654 335,361 Loans, net of unearned discount 3,312,635 2,896,305 2,691,996 2,394,571 2,090,998 Total deposits 4,263,519 3,777,362 3,384,142 3,112,036 2,848,710 Total shareholders' equity 431,867 380,613 331,691 296,570 266,743 Selected Ratios: Return on average assets 1.09% 1.16% 1.21% 1.11% 1.04% Return on average shareholders' equity 12.61% 13.19% 14.27% 13.37% 12.68%
22 23 ITEM 7. -- Management's Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BancorpSouth, Inc. (the Company) is a bank holding company with commercial banking operations in Mississippi, Tennessee and Alabama. BancorpSouth Bank (the Bank), the Company's banking subsidiary is headquartered in Tupelo, Mississippi. The Bank operated prior to December 1998, under the trade names Bank of Mississippi in Mississippi, Volunteer Bank in Tennessee and BancorpSouth in Alabama. In December, 1998 the Bank's name was changed to BancorpSouth Bank in all areas of operations. The Bank and its consumer finance, credit life insurance and insurance agency subsidiaries provide commercial banking, leasing, mortgage origination and servicing, life insurance and trust services to corporate customers, local governments, individuals and other financial institutions through an extensive network of branches and offices located throughout Mississippi, west Tennessee and certain Alabama markets. The following discussion provides certain information concerning the consolidated financial condition and results of operations of the Company. For a complete understanding of the following discussion, reference is made to the Consolidated Financial Statements and Notes thereto presented elsewhere in this Annual Report. THREE YEARS ENDED DECEMBER 31, 1998 RESULTS OF OPERATIONS SUMMARY The table below summarizes the Company's net income and returns on average assets and average shareholders' equity for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 ---- ---- ---- (In thousands, except per share amounts) Net income $54,477 $50,202 $47,335 Net income per share: Basic $ 1.02 $ 0.99 $ 0.98 Diluted $ 1.01 $ 0.98 $ 0.98 Return on average assets 1.09% 1.16% 1.21% Return on average shareholders' equity 12.61% 13.19% 14.27%
NET INTEREST REVENUE Net interest revenue, principally interest earned on assets less interest costs on liabilities, provides the Company with its principal source of income. Since net interest revenue is affected by changes in the levels of interest rates and the amount and composition of interest earning assets and interest bearing liabilities, one of management's primary tasks is to balance these interest sensitive components of assets and liabilities for the purpose of maximizing net interest revenue while at the same time minimizing interest rate risk to the Company. 23 24 The following table presents the average components of interest earning assets and interest bearing liabilities for each year and their change, expressed as a percentage, from each of the prior years:
1998 1997 1996 ------------------------ ------------------------- -------------------------- AVERAGE % AVERAGE % AVERAGE % BALANCE CHANGE BALANCE CHANGE BALANCE CHANGE ---------- ------ ---------- ------ ---------- ------- INTEREST EARNING ASSETS: (DOLLARS IN THOUSANDS) Deposits with other banks $7,919 -7.6% $8,570 -33.9% $12,967 -36.6% Held-to-maturity securities 719,863 +18.5 607,596 +19.5 508,374 -8.4 Available-for-sale securities 529,480 +28.6 411,612 +24.1 331,758 +19.1 Federal funds sold 70,122 -26.2 94,970 +34.3 70,715 +36.7 Loans and leases, net of unearned 3,312,635 +14.4 2,896,305 +7.6 2,691,996 +12.4 Mortgages held for sale 52,634 +79.0 29,409 +6.1 27,729 +33.3 ---------- ---------- ---------- Total interest earning assets $4,692,653 +15.9% $4,048,462 +11.1% $3,643,539 +9.7% ========== ========== ========== Interest bearing liabilities: Deposits $3,729,087 +12.6% $3,311,016 +12.3% $2,947,834 +9.1% Federal funds purchased and securities sold under repurchase agreements 62,728 +35.2 46,382 -11.1 52,168 +7.3 Long-term debt 179,928 +225.1 55,339 -31.4 80,619 +17.8 Other 2,794 -43.5 4,942 +23.1 4,013 -14.7 ---------- ---------- ---------- Total interest bearing liabilities $3,974,537 +16.3% $3,417,679 +10.8% $3,084,634 +9.3% ========== ========== ========== Non-interest bearing deposits $534,432 +14.6% $466,346 +6.9% $436,308 +6.3% ========== ========== ==========
In 1998 the growth of loans and leases increased as compared to 1997. In 1996 loans and leases grew at a faster rate than interest bearing deposits; however, the Company's other funding sources, non-interest bearing deposits, federal funds purchased and Federal Home Loan Bank advances, were adequate to fund its asset growth during such periods. The bank's leasing operation provides lease financing for equipment for commercial accounts as well as municipal governments in its primary market area. The changes in the components of interest earning assets, interest bearing liabilities, and non-interest bearing deposits resulted in the following tax equivalent net interest revenue expressed as a percentage of average earning assets for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 ---- ---- ---- Net interest margin 4.29% 4.52% 4.66%
The Company experienced a decrease in net interest margin in 1998 and 1997 as a result of increased deposit costs and a decline in asset yields in 1998 and a reduced growth rate in loans and leases in 1997. Increased loans and lease growth rates in 1996 resulted in a more favorable net interest margin experience. The Company utilizes short-term, intermediate-term and long-term borrowings from the Federal Home Loan Bank for the purpose of funding asset growth. In years prior to 1998, the Company sought to lengthen the maturity of deposits by actively seeking four and five-year certificates of deposit with interest rates slightly above the relative market for such funds, thereby reducing the net interest margin in 1997 and 1996. In 1998, competitive pressures, which show no signs of abating, lengthened loan maturities and, coupled with declining loan yields, further reduced net interest margin. In 1998, from February to August, the Company was the depository for $175 million of State of Mississippi funds as a result of a successful competitive bid for the funds. These funds were invested in short term instruments which provided a nominal interest spread which further contributed to the narrowing of net interest margins for the year. The Company does not expect a reoccurrence of this one-time transaction. 24 25 INTEREST RATE SENSITIVITY The interest sensitivity gap is the difference between the maturity or repricing scheduling of interest sensitive assets and interest sensitive liabilities for a given period of time. A prime objective of asset/liability management is to maximize net interest margin while maintaining a reasonable mix of interest sensitive assets and liabilities. The following table sets forth the Company's interest rate sensitivity at December 31, 1998:
INTEREST RATE SENSITIVITY DECEMBER 31, 1998 MATURING OR REPRICING ----------------------------------------------------------- 91 DAYS OVER 1 0 TO 90 TO YEAR TO OVER DAYS 1 YEAR 5 YEARS 5 YEARS ----------- ----------- ---------- -------- (IN THOUSANDS) Interest earning assets: Interest bearing deposits due from banks $ 6,632 $ -- $ -- $ -- Federal funds sold 115,040 -- -- -- Held-to-maturity securities 79,601 157,160 313,276 97,809 Available-for-sale securities 126,665 110,793 205,191 107,118 Loans & leases, net of unearned 946,584 473,024 1,807,786 241,307 Mortgages held for sale 63,354 -- -- -- ----------- ----------- ---------- -------- Total interest earning assets 1,337,876 740,977 2,326,253 446,234 ----------- ----------- ---------- -------- Interest bearing liabilities: Interest bearing demand deposits & savings 889,456 294,269 661,412 -- Time deposits 519,844 845,383 614,012 3,018 Federal funds purchased & securities sold under repurchase agreements 64,554 -- -- -- Long-term debt 804 2,420 42,159 132,935 Other 694 9 145 255 ----------- ----------- ---------- -------- Total interest bearing liabilities 1,475,352 1,142,081 1,317,728 136,208 ----------- ----------- ---------- -------- Interest sensitivity gap $ (137,476) $ (401,104) $1,008,525 $310,026 =========== =========== ========== ======== Cumulative interest sensitivity gap $ (137,476) $ (538,580) $ 469,945 $779,971 =========== =========== ========== ========
In the event interest rates decline after 1998, it is likely that the Company will experience a slightly positive effect on net interest income in the following one year period, as the cost of funds will decrease at a more rapid rate than interest income on interest bearing assets. Conversely, in periods of increasing interest rates, based on the current interest sensitivity gap, the Company will experience decreased net interest income. PROVISIONS FOR CREDIT LOSSES AND ALLOWANCE FOR CREDIT LOSSES The provision for credit losses is the annual cost of providing an allowance or reserve for estimated probable future losses on loans. The amount for each year 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. When determining the adequacy of the allowance for credit losses, management considers changes in the size and character of the loan portfolio, changes in non-performing and past due loans, historical loan loss experience, the existing risk of individual loans, concentrations of loans to specific borrowers or industries and existing and prospective economic conditions. The allowance for credit losses for commercial loans is based principally upon the Company's loan classification system. The Company has a disciplined approach for assigning credit ratings and classifications to individual credits. Each credit is assigned a grade by the loan officer that serves as a basis for the credit analysis of the entire portfolio. The grade assigned considers the borrower's creditworthiness, collateral values, cash flows and other 25 26 factors. An independent loan review department is responsible for reviewing the credit rating and classification of individual credits and assessing trends in the portfolio, adherence to internal credit policies and procedures and other factors that may affect the overall adequacy of the allowance. The loan review department is supplemented by regulatory agencies that provide and additional level of review. The allowance for credit losses for the consumer loan portfolio is based upon delinquencies and historic loss rates. The overall allowance includes a component representing the results of other analysis intended to insure that the allowance is adequate to cover other probable losses inherent in the portfolio. This component considers our analyses of changes in credit risk resulting from the differing underwriting criteria in acquired loan portfolios, industry concentrations, changes in the mix of loans originated, overall credit criteria and other economic indicators. The provision for credit losses, the allowance for credit losses as a percentage of loans and leases outstanding at the end of each year and net charge-offs are shown in the following table:
1998 1997 1996 ---------- --------- --------- (DOLLARS IN THOUSANDS) Provision for credit losses $ 15,014 $ 9,607 $ 9,525 Allowance for credit losses as a percent of loans and leases outstanding at year end 1.43% 1.40% 1.46% Net charge offs $ 9,536 $ 7,582 $ 6,690 Net charge offs as a percent of average loans 0.29% 0.26% 0.25%
The provision for credit losses for 1998 increased 56.3% as compared to the provision for 1997, principally as a result of the faster rate of growth in the loan portfolio, an increase in losses and differences in underwriting standards at acquired institutions. The 1997 provision for credit losses increased from 1996's level by 0.9% as a result of the slower growth in loans and an increase in loan losses. The 1996 provision for credit losses increased 48.4% from 1995's level as a result of the growth in the loan portfolio and increases in loan losses. In all years presented, increases in consumer based loans were the principal contributors to the higher levels of net charge-offs. OTHER REVENUE The components of other revenue for the years ended December 31, 1998, 1997 and 1996 and the percentage change from the prior year are shown in the following table:
1998 1997 1996 ---------------------- ----------------------- --------------------- AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE ------ -------- ------ -------- ------ -------- (DOLLARS IN THOUSANDS) Mortgage lending $10,808 +36.6% $7,912 -9.0% $8,694 +133.5% Service charges 23,291 +5.7 22,030 +5.9 20,808 +15.2 Life insurance premiums 3,655 -3.1 3,772 -13.0 4,337 +29.7 Trust income 3,682 +13.7 3,239 +7.1 3,023 +14.8 Securities gains, net 867 -32.4 1,283 +462.7 228 +133.6 Other revenue 10,715 +10.8 9,667 +16.0 8,332 +1.8 ------- ------- ------- Total other revenue $53,018 +10.7% $47,903 +5.5% $45,422 +28.8% ======= ======= =======
Mortgage lending revenue, which consists principally of revenue generated by originating loans and by servicing loans for others, increased in 1998. The increase in mortgage loan originations was spurred by lower interest rates in 1998. Mortgage lending revenue decreased in 1997 principally as a result of a decline in revenue related to mortgage servicing. The revenue produced by mortgage lending activities increased in 1996 primarily as a result of declining interest rates and growth in servicing income. Mortgage servicing resulted in a loss of $1,276,000 in 1998, with income of $2,198,000 in 1997, compared to income of $3,097,000 in 1996. The decrease is attributable to increased amortization of capitalized mortgage servicing rights along with changes in the valuation allowance for impairment. Capitalized mortgage servicing rights are evaluated for impairment based on the excess of the carrying amount of the mortgage servicing rights over their fair value. Revenue from mortgage origination and secondary marketing was $11,885,000 in 1998 as compared to $5,398,000 in 1997 and $5,363,000 in 1996. The following table presents the principal amount of mortgage loans serviced at December 31, 1998, 1997 and 1996 and the percentage change from the previous year: 26 27
1998 1997 1996 ------------------- --------------------- ------------------- AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE ------- -------- ------- -------- ------- -------- (DOLLARS IN MILLIONS) Mortgage loans serviced $1,701.7 +28.5% $1,324.0 +13.5% $1,166.8 +33.2%
Service charges on deposit accounts increased in 1998, 1997 and 1996 because of higher volumes of items processed as a result of greater economic activity and growth in the number of demand deposit accounts. Trust income increased 13.7% in 1998, 7.1% in 1997 and 14.8% in 1996, as a result of increases in the number of trust accounts and the value of assets under care (either managed or in custody). Other revenue increased 10.8%, 16.0% and 1.8% in 1998, 1997 and 1996, respectively. The increase in 1998 was primarily attributable to commissions and fees derived from the sale of annuities and other life insurance products. This service was added to the Company's financial offerings in late 1997 but only began to contribute revenue in 1998. These commissions and fees were approximately $1 million in 1998. The increase in other revenue in 1997 was attributable to increases in gains on the sale of equipment and facilities and fees relating to greater usage of the Bank's debit card. The increase in 1996 was principally as a result of increases in fees for non-deposit related services. OTHER EXPENSE The components of other expense for the years ended December 31, 1998, 1997 and 1996 and the percentage change from the prior year are shown in the following table:
1998 1997 1996 ------------------------- -------------------------- -------------------------- AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE --------- --------- ---------- ---------- ---------- -------- (DOLLARS IN THOUSANDS) Salaries and employee benefits $70,937 -3.6% $73,620 +13.2% $65,056 +5.8% Occupancy, net 10,417 +8.6 9,594 +2.3 9,380 +4.8 Equipment 15,023 +12.2 13,390 +22.2 10,953 +9.5 Telecommunications 4,602 +16.7 3,943 +3.9 3,796 +21.7 Other 51,105 +18.7 43,071 +5.0 41,026 +2.3 -------- -------- -------- Total other expense $152,084 +5.9% $143,618 +10.3% $130,211 +5.3% ======== ======== ========
While regular salaries and employee benefits increased in each of the three years presented due to the hiring of employees to staff the banking locations added during those years, stock appreciation rights (SARs) expense, which is included in employee benefits, fluctuated significantly during the three year period. The Company's stock option plans contain a provision for SARs which requires the recognition of expense for stock price appreciation or a reduction of expense in the event of a decline in the stock price. In 1998, the Company's common stock declined by approximately 24% from year end 1997. As a result of this decline in value, a reduction in expense of $2.7 million was recorded. In 1997, the Company's common stock price increased approximately 75%, which resulted in SARs expense of $6.1 million, as compared to expense of $1.9 million in 1996. At December 31, 1998, the Company had approximately 587,000 SARs outstanding. Each dollar increase in the Company's stock price will result in $587,000 in SAR expense while each dollar decrease in the Company's stock price will result in an $587,000 reduction in SAR expense. Occupancy and equipment expenses have increased principally as a result of additional branch offices and upgrades to the Company's internal operating systems. Equipment, telecommunications and all other expenses recorded double-digit percentage increases in 1998. These expenses increased in all periods as a result of expanded telecommunications, increased computer programming expense, systems enhancements, and credit card interchange fees, all of which related to providing higher levels of convenient consumer oriented banking services. Additionally, approximately $500,000 of unamortized expense relating to the issuance of the Company's 9% Subordinated Capital Debentures was charged against 1996 earnings as a result of the early extinguishment of the debt issue in December 1996. In 1998, as a direct result of the mergers with Alabama Bancorp., Inc. on October 30, 1998, Merchants Capital Corporation on December 4, 1998 and The First Corporation on December 31, 1998, the Company recorded mergerrelated costs of approximately $5 million $(4.1 million after tax) as other operating expense. Of the merger-related costs, $4.6 million $(3.7 million after tax) was recorded as other operating expense in the fourth quarter of 1998. The charge to operating expense consisted of termination and change of control payments $(2.4 million), costs to eliminate duplicate headquarters facilities $(0.5 million), professional fees $(2.0 million) and miscellaneous $(0.1 million). Substantially all of the termination and change of control payments were made during the fourth quarter of 1998 at consummation of the 27 28 mergers. The Company had formulated, documented and approved plans of termination with respect to termination payments that had not been paid at December 31, 1998, and expects to make those payments by the second quarter of 1999. Included in the cost is a loss in the fourth quarter of 1998 for abandonment of a duplicate headquarters facility in Vicksburg, Mississippi. The loss amount was determined based upon third party appraisals of the property. Professional fees consist of investment banking, legal and accounting fees substantially all of which were paid during 1998. FINANCIAL CONDITION LOANS The Company's loan portfolio represents the largest single component of its earning asset base. The following table indicates the average loans, year end balances of the loan portfolio and the percentage increases for the years presented:
1998 1997 1996 ----------------------- ------------------------ ------------------------ AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE ------- -------- ------- -------- ------- -------- (DOLLARS IN MILLIONS) Loans, net of unearned - average $3,312.6 +14.4% $2,896.3 +7.6% $2,692.0 +12.4% Loans, net of unearned - year end 3,468.7 +12.9 3,073.0 +11.4 2,759.2 +7.5
Despite significant levels of increase in the Company's loan portfolio, quality is stressed in its lending policy as opposed to growth. The Company's non-performing assets which are carried either in the loan account or other assets on the consolidated balance sheets, were as follows at the end of each year presented:
1998 1997 1996 ---- ---- ---- (IN THOUSANDS) Foreclosed properties $6,766 $2,711 $ 2,119 Non-accrual loans 6,152 5,047 6,227 Loans 90 days or more past due 9,654 8,148 5,501 Restructured loans 713 1,097 539 ------- ------- ------- Total non-performing assets $23,285 $17,003 $14,386 ======= ======= ======= Total non-performing assets as a percent of net loans 0.67% 0.55% 0.52% ======= ======= =======
The Company has not, as a matter of policy, participated in any highly leveraged transactions nor made any loans or investments relating to corporate transactions such as leveraged buyouts or leveraged recapitalizations. At December 31, 1998, 1997 and 1996, the Company did not have any concentration of loans in excess of 10% of loans outstanding. Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. However, the Company does conduct business in a geographically concentrated area, which was expanded into Alabama in 1998. The ability of the Company's borrowers to repay loans also is dependent upon the economic conditions prevailing in the market area. Included in non-performing assets above were loans the Company considered impaired totaling $8,166,000, $7,181,000, and $7,808,000 in 1998, 1997 and 1996, respectively. 28 29 SECURITIES AND OTHER EARNING ASSETS The securities portfolio is used to make various term investments, provide a source of liquidity and to serve as collateral to secure certain types of deposits. A portion of the Company's securities portfolio continues to be tax-exempt. Investments in tax-exempt securities totaled $247.4 million at December 31, 1998, compared to $190.5 million at the end of 1997. The Company invests only in investment grade securities, with the exception of obligations of Mississippi, Tennessee and Alabama counties and municipalities, and avoids other high yield non-rated securities and investments. At December 31, 1998, the Company's available-for-sale securities totaled $549.8 million. These securities, which are subject to possible sale, are recorded at fair value. At December 31, 1998, the Company held no securities whose decline in fair value was considered other than temporary. Net unrealized gains on investment securities as of December 31, 1998 totaled $25.4 million. Net unrealized gains on held-to-maturity securities comprised $11.4 million of that total, while net unrealized gains on available-for-sale securities were $14.0 million. Net unrealized gains on investment securities as of December 31, 1997, amounted to $15.8 million. Of that total, $7.5 million was attributable to held-to-maturity securities and $8.3 million to available-for-sale securities. These unrealized gains were a direct result of relatively stable to lower intermediate term interest rates during 1998 and 1997. Because the average maturity of securities owned is relatively short, market value fluctuations due to interest rate changes are softened and the impact of foregone earnings is reduced. DEPOSITS The following table presents the Company's average deposit mix and percentage change for the years indicated:
1998 1997 1996 ------------------------ ---------------------------- --------------------- AVERAGE % AVERAGE % AVERAGE % BALANCE CHANGE BALANCE CHANGE BALANCE CHANGE ------- ------ ------- ------ ------- ------ (DOLLARS IN MILLIONS) Interest bearing deposits $3,729.1 +12.6% $3,311.0 +12.3% $2,947.8 +9.1% Non-interest bearing deposits 534.4 +14.6 466.3 +6.9 436.3 +6.3
The Company's deposit mix continued to experience change in 1998. By year end 1998, other time deposits showed an increase of 6.2% from the end of 1997, while interest bearing demand deposits increased by 10.0% and other short-term savings accounts increased 26.8%. Non-interest bearing demand deposits increased 5.3% from year end 1997 to year end 1998. Management is of the opinion that the low interest rates paid on deposit accounts in 1997 and 1996 caused depositors to reduce the period over which they were willing to commit their funds and shifted their deposits from longer term, fixed rate instruments to daily savings and demand accounts, or even to seek alternative non-bank investments. That trend continued into 1998 and the Company has countered with a strategy of paying slightly above market rates for intermediate term deposits. Deposits are the Company's primary source of funds to support its earning assets. The Company's primary market areas provide the sources of substantially all deposits for all periods presented. LIQUIDITY The Company's goal is to provide adequate funds to meet changes in loan demand or any potential increase in the normal level of deposit withdrawals. This goal is accomplished primarily by maintaining sufficient short-term liquid assets coupled with consistent growth in core deposits in order to fund earning assets and to maintain the availability of unused capacity to acquire funds in national and local capital markets. Management believes that the Company's traditional sources of maturing loans, investment securities, mortgages held for sale, purchased federal funds and base of core deposits are adequate to meet the Company's liquidity needs for normal operations. The Company maintains a relationship with the Federal Home Loan Bank, which provides an additional source of liquidity to fund term loans with borrowings of matched or longer maturities. The matching of these assets and liabilities has had the effect of reducing the Company's net interest margin. On October 23, 1996, the Company announced that it would call for redemption all of its outstanding 9% Subordinated Capital Debentures due in 1999. On December 30, 1996 the Company extinguished the debt by irrevocably depositing with the trustee $24,508,000 in cash plus accrued and unpaid interest from November 1, 1996 to redeem the debentures, which were redeemed on January 15, 1997. 29 30 CAPITAL RESOURCES The Company is required to comply with the risk-based capital guidelines established by the Board of Governors of the Federal Reserve System (FRB). These guidelines apply a variety of weighting factors which vary according to the level of risk associated with the assets. Capital is measured in two "Tiers": Tier I consists of paid-up share capital, including common stock and disclosed reserves (retained earnings and related surplus in the case of common stock), and Tier II consists of general allowance for losses on loans and leases, "hybrid" debt capital instruments, and all or a portion of other subordinated capital debt, depending upon remaining term to maturity. Total capital is the sum of Tier I and Tier II capital. The Company's Tier I capital and total capital, as a percentage of total risk-adjusted assets, was 11.74% and 12.99%, respectively at December 31, 1998, compared to 12.13% and 13.38%, respectively at December 31, 1997. Both ratios exceed the required minimum levels for these ratios of 4% and 8%, respectively. In addition, the Company's leverage capital ratio (Tier I capital divided by total assets, less goodwill) was 8.49% at December 31, 1998 and 8.52% at December 31, 1997, compared to the required minimum leverage capital ratio of 3%. The FDIC's capital-based supervisory system for insured financial institutions categorizes the capital position for banks into five categories, ranging from well capitalized to critically undercapitalized. For a bank to classify as "well capitalized", the Tier I risk-based capital, total risk-based capital and leverage capital ratios must be at least 6%, 10% and 5%, respectively. The Company's bank subsidiary met the criteria for the "well capitalized" category at December 31, 1998. The Company has determined to pursue acquisition transactions of depository institutions and businesses closely related to banking which further the Company's business strategies. The Company anticipates that the consideration for substantially all of these transactions, if completed, will be shares of the Company's common stock; however, transactions involving cash consideration or other forms of consideration will not be excluded. The Company has announced that it may repurchase annually up to $3 million of its outstanding common stock for the purpose of providing liquidity to a Company employee benefit plan. During 1998, approximately $600,000 of common stock was repurchased from the employee benefit plan. YEAR 2000 The Company is addressing the issues associated with the programming code in existing computer systems as the millennium (Year 2000) approaches. The "Year 2000" problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company is utilizing both internal and external resources to identify, correct or reprogram, and test its systems for the Year 2000 compliance. During 1997, the Company developed a plan to deal with the Year 2000 problem and established a Year 2000 committee that consists of representatives from the major functional areas of the Company. The committee has conducted a comprehensive review of the Company's computer systems to identify the systems that could be affected by the Year 2000 issue. The project includes reviews of internal and external factors. The Company's internal efforts address information technology systems and functions with embedded computer chips. Functions with embedded computer chips include such things as vaults, security systems, elevators and heating and cooling systems have been reviewed and remediation should be completed by June 30, 1999. External efforts deal with critical business partners including customers, vendors, suppliers and utility providers. The Company is actively communicating with third party providers of software and hardware for certification of their compliance with Year 2000 issues. We are conducting our efforts in accordance with Federal Financial Institutions Examination Council (FFIEC) guidelines. Reports are given to senior management and to the Board of Directors. The Company met the FFIEC guidelines for financial institutions by substantially completing testing of its in-house mission critical systems by December 31, 1998 and will meet the March 31, 1999 guideline for testing third party service bureau systems. We will continue testing throughout 1999. The Company completed a major systems upgrade in 1998 of our core mainframe systems and application subsystems that brought Year 2000 compliance to these in-house mission critical applications. This systems upgrade will add approximately $850,000 in additional annual software maintenance. It is projected that the Company has or will incur a total of approximately $700,000 in additional external costs related to Year 2000 issues. Such cost is primarily related to third party programming resources that are used for all mainframe based application modifications. The Company does not separately track the internal cost incurred related to Year 2000 compliance efforts. Such costs are principally the related payroll costs for our information systems group. The Company 30 31 believes that with the modifications of existing systems and the conversion to new systems as discussed above, the remaining Year 2000 compliance issues will be resolved on a timely basis and any related costs will not have a material impact on the Company's operations, cash flows or financial condition in future periods. The risks associated with the Company's Year 2000 compliance include those related to critical business partners, such as customers, vendors, suppliers and utility providers, and their ability to effectively address their own Year 2000 issues. These risks include a failure of voice and data communication systems, failure of utility providers such as water, gas and electricity, excessive cash withdrawals at year-end 1999, out of service ATMs, delayed cash couriers and inaccessibility of external data sources. Risks associated with the Company's internal operations include inability to access and process data and information, failure of time locks and security systems, inability to meet customers demands for cash and the inability to process electronic transactions for the Company and its customers. The Company continues to refine and test its contingency plans and evaluate the most reasonable likely worst case scenario. Contingency plans will include items such as having an alternative source of power for our corporate operations center in the event that commercial power sources experience outages, providing paper based reports to our network of branches to allow customer service in the event of telephone or data line outages, and the use of remote item processing sites in dispersed geographical areas to allow for continued processing of customer transactions. BUSINESS RISKS Certain statements contained in this Annual Report may not be based on historical facts and are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities 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," "estimate," "expect," "foresee," "may," "will," "would," future or conditional verb tenses, and variations or negatives of such terms. These forward-looking statements include, without limitation, those relating to the Company's future growth, revenue, profitability and customer service, Year 2000 compliance, net interest revenue, loan loss experience, liquidity, capital resources, market risk, earnings, acquisition strategy and competition. 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 the Company's operating or expansion strategy, availability of and costs associated with obtaining adequate and timely sources of liquidity, changes in consumer preferences and the risk factors that are described in greater detail in this section below. Other relevant risk factors may be detailed from time to time in the Company's press releases and filings with the Securities and Exchange Commission. Governmental Organizations Extensively Regulate the Company and the Bank. The Company is a registered bank holding company under the Bank Holding Company Act of 1956, and the Bank is a Mississippi state banking corporation. Accordingly, both are subject to extensive governmental regulation, legislation and control. These laws limit the manner in which the Company and the Bank operate, including the amount of loans they can originate, interest they can charge on loans and fees they can charge for certain services. The Company cannot predict whether, or the extent to which, the government and governmental organizations may change any of these laws or controls. The Company also cannot predict how any of these changes would adversely affect the Company's business and prospects. Other Bank Holding Companies and Banks Compete with the Company. The banking business is extremely competitive in the Company's service areas in Mississippi, Tennessee and Alabama. The Company competes, and will compete, with well established financial institutions, several of which have significantly greater resources and lending limits. Some of these competitors provide certain services that the Company does not provide. Rising Interest Rates May Result in Higher Interest Rates Being Paid on Interest Bearing Deposits Than Are Charged on Outstanding Loans. If interest rates rise, the Company may pay interest on its customers' interest-bearing deposits and other liabilities of the Company at higher rates than the interest rates paid to the Company by its customers on outstanding loans that were made when interest rates were at a lower level. This situation would result in a negative interest rate spread with respect to those loans and cause an adverse effect on the Company's earnings. This adverse effect would 31 32 increase if interest rates continued to rise while the Company had outstanding loans payable at fixed interest rates that could not be adjusted to a higher interest rate. The Company's Growth Strategy Includes Risks That Could Have an Adverse Effect on Financial Performance. A material element of the Company's growth strategy is the acquisition of additional banks and bank holding companies in order to achieve greater economies of scale. The Company cannot assure you that the current level of growth opportunities will continue to exist, that it will be able to acquire banks and bank holding companies that satisfy the Company's criteria or that any such acquisition will be on terms favorable to the Company. Further, the Company's growth strategy will require that it continue to hire qualified personnel, while concurrently expanding its managerial and operational infrastructure. The Company cannot assure you that it will be able to hire and retain qualified personnel or that it will be able to successfully expand its infrastructure to accommodate future acquisitions or growth. As a result of these factors, the Company may not realize the expected economic benefits associated with its acquisitions. This could have a material adverse effect on the Company's financial performance. The Company's Stock Price May Fluctuate. The stock market has, from time to time, experienced extreme price and volume fluctuations, which often have been unrelated to the operating performance of particular companies. Any announcement with respect to the banking industry, market conditions or any variance in the Company's revenue or earnings from levels generally expected by securities analysts for a given period could have an immediate and significant effect of the trading price of the Company's common stock. Dilutive Effect of the Company Issuing Additional Shares of Its Common Stock to Acquire Other Banks and Bank Holding Companies. In connection with the Company's growth strategy, the Company has issued, and may issue in the future, shares of its common stock to acquire additional banks and bank holding companies. Resales of substantial amounts of common stock in the public market and the potential of such sales could adversely affect the prevailing market price of the Company's common stock and impair the Company's ability to raise additional capital through the sale of equity securities. The Company usually must pay an acquisition premium for the acquisition of banks and bank holding companies. Paying this acquisition premium, in addition to the dilutive effect of issuing additional shares, may also adversely affect the prevailing market price of the Company's common stock. Monetary Policies and Economic Factors May Limit the Bank's Ability to Attract Deposits or Make Loans. The monetary policies of federal regulatory authorities, particularly the Board of Governors of the Federal Reserve System, and economic conditions in the Company's service area and the United States generally, affect the Bank's ability to attract deposits and extend loans. The Company cannot predict either the nature and timing of any changes in these monetary policies and economic conditions, or their impact on the Company's financial performance. The banking business is subject to various material business risks, which may become more acute in periods of economic slowdown or recession. During such periods, foreclosures generally increase, and such conditions also could lead to a potential decline in deposits and demand for loans. Year 2000 Could Result in Computer System Malfunctions. Many software applications and operational programs were not designed to recognize calendar dates beginning in the Year 2000. The failure of these applications or systems to recognize properly the dates beginning in the Year 2000 could result in miscalculations or system failures. The Company's business depends in part upon its ability to store, retrieve, process and manage significant databases. While the Company does not expect its computer systems to malfunction upon the occurrence of the Year 2000 and believes that it has allowed adequate time for testing, unforeseen problems may arise with its computer systems that could cause a material adverse effect on its business. The Company can only speculate as to the potential problems, delays or loss of business, or lack thereof, that may result from the occurrence of the Year 2000. The Company has developed contingency plans to handle computer system malfunctions due to the occurrence of the Year 2000 and will continue to refine and test its contingency plans. However, the Company cannot assure you that these contingency plans will prevent a computer system malfunction due to the occurrence of the Year 2000 from having a material adverse effect on its business. The Year 2000 issue may affect the systems of various entities with which the Company interacts, including depositors, vendors and those to which it has extended loans. The Company has corresponded with its primary 32 33 vendors and customers regarding their compliance with Year 2000 issues. However, the Company cannot assure you that the systems of these or other companies on which its systems rely will be Year 2000 compliant. Also, the Company cannot assure you that a failure by any of these companies to be Year 2000 compliant will not have a material adverse effect on its business. Diversification in Financial Services Provided by Subsidiaries of the Bank May Adversely Effect the Company's Financial Performance. As part of its business strategy, the Company has in the past diversified, and may in the future diversify, its lines of business into areas that are not traditionally associated with the banking business. The Company now offers insurance and investment services through wholly-owned subsidiaries of the Bank, a wholly-owned subsidiary of the Company. As a result, the Company and the Bank must now manage the development of new business lines in which it has not previously participated. Each new business line requires the investment of additional capital and the significant involvement of senior management of the Company and the Bank to develop and integrate the insurance and investment services subsidiaries with the Company's traditional banking operations. The Company can offer no assurances that it will be able to develop and integrate these new services without adversely effecting the Company's financial performance. Legal Limits on the Ability to Declare and Pay Dividends. The Company derives its income solely from dividends received from owning the Bank's common stock. Federal and state law limits the Bank's ability to declare and pay dividends. In addition, the Board of Governors of the Federal Reserve System may impose restrictions on the Company's ability to declare and pay dividends on its common stock. Anti-Takeover Provisions May Prevent A Change of Control. The Company's governing documents and certain agreements to which the Company is a party contain several provisions which make a change-in-control of the Company difficult to accomplish, and may discourage a potential acquirer. These include a shareholder rights plan or "poison pill," a classified or "staggered" Board, change-in-control agreements with members of management and supermajority voting requirements. These anti-takeover provisions may have an adverse effect on the market for the Company's securities. Limited Geographic Area Increases Risk From Economic Downturn. The Company conducts business in the limited geographic area of Mississippi, Tennessee and Alabama. An economic downturn in the economies of these states or the southern portion of the United States could adversely affect the Company's financial performance, particularly its ability to attract deposits and extend loans. In evaluating an investment in shares of the Company's common stock, the factors set forth in this section should be carefully considered, along with other matters discussed in reports and other filings that the Company has made with the Securities and Exchange Commission. It should not be assumed that the Company has listed or described the only risks that could affect its future performance or the market price of the Company's common stock. Item 7A. - Quantitative and Qualitative Disclosures About Market Risk Market risk reflects the risk of economic loss resulting from changes in interest rates and market prices. This risk of loss can be reflected in either reduced potential net interest revenue in future periods or diminished market values of financial assets. The Company's market risk arises primarily from interest rate risk that is inherent in its lending, investment and deposit taking activities. Financial institutions derive their income primarily from the excess of interest collected over interest paid. The rates of interest the Company earns on its assets and owes on its liabilities are established contractually for a period of time. Since market interest rates change over time, the Company is exposed to lower profit margins (or losses) if it cannot adapt to interest-rate changes. Several techniques might be used by a financial institution to minimize interest-rate risk. One approach used by the Company is to periodically analyze its assets and liabilities and make future financing and investing decisions based on payment streams, interest rates, contractual maturities, repricing opportunities and estimated sensitivity to actual or potential changes in market interest rates. Such activities fall under the broad definition of asset/liability management. The Company's primary asset/liability management technique is the measurement of its asset/liability gap, that is, the difference between the amounts of 33 34 interest-sensitive assets and liabilities that will be refinanced (repriced) during a given period. If the asset amount to be repriced exceeds the corresponding liability amount for a certain day, month, year or longer period, the Company is in an asset-sensitive gap position. In this situation, net interest revenue would increase if market interest rates rose or decrease if market interest rates fell. If, alternatively, more liabilities than assets will reprice, the Company is in a liability-sensitive position. Accordingly, net interest revenue would decline when rates rose and increase when rates fell. These examples assume that interest-rate changes for assets and liabilities are of the same magnitude, whereas actual interest-rate changes generally differ in magnitude for assets and liabilities. Management seeks to manage interest-rate risk through the utilization of various tools that include matching repricing periods for new assets and liabilities and managing the composition and size of the investment portfolio so as to reduce the risk in the deposit and loan portfolios while at the same time maximizing the yield generated from the portfolio. The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates as of December 31, 1998. The expected maturity categories take into account repricing opportunities as well as contractual maturities. For core deposits without contractual maturities (interest-bearing checking, savings and money market accounts), the table presents cash flows based on management's judgement concerning their most likely runoff or repricing behaviors. The fair value of loans, deposits and other borrowings are based on the discounted value of expected cash flows using a discount rate which is commensurate with the maturity. The fair value of securities is based on market prices or dealer quotes.
PRINCIPAL AMOUNT MATURING/REPRICING IN: 1999 2000 2001 2002 2003 THEREAFTER ---- ---- ---- ---- ---- ---------- RATE-SENSITIVE ASSETS: (DOLLARS IN THOUSANDS) Fixed interest rate loans $1,482,454 $408,138 $484,605 $396,669 $517,767 $241,307 Average interest rate 8.71% 10.55% 9.04% 9.44% 8.89% 9.33% Variable interest rate loans $ 1,115 -- -- -- -- -- Average interest rate 8.74% -- -- -- -- -- Fixed interest rate securities $ 474,219 $233,218 $181,458 $ 56,251 $ 47,540 $204,927 Average interest rate 6.01% 6.21% 6.38% 6.81% 6.31% 6.50% Other interest bearing assets $ 6,632 -- -- -- -- -- Average interest rate 4.59% -- -- -- -- -- Mortgage servicing rights (1) -- -- -- -- -- -- Rate-sensitive liabilities: Savings & interest bearing checking $1,183,725 $146,936 $146,928 $183,776 $183,772 -- Average interest rate 3.75% 2.60% 2.60% 1.75% 1.75% -- Fixed interest rate time deposits $1,365,228 $411,124 $ 95,424 $ 76,033 $ 31,431 $ 3,017 Average interest rate 5.16% 5.80% 6.03% 6.27% 5.65% 9.35% Fixed interest rate borrowings $ 3,256 $ 22,282 $ 1,987 $ 16,532 $ 1,503 $133,190 Average interest rate 5.98% 6.07% 6.20% 5.96% 6.28% 5.94% Variable interest rate borrowings $ 65,225 -- -- -- -- -- Average interest rate 4.37% -- -- -- -- -- Rate-sensitive off balance sheet items: Commitments to extend credit for single family mortgage loans $ 41,944 -- -- -- -- -- Average interest rate 6.67% -- -- -- -- Forward contracts $ 14,545 -- -- -- -- -- Average interest rate 6.15% -- -- -- -- -- FAIR VALUE TOTAL 1998 ----- ---- RATE-SENSITIVE ASSETS: Fixed interest rate loans $3,530,940 $3,875,610 Average interest rate 9.12% Variable interest rate loans $ 1,115 $ 1,115 Average interest rate 8.74% Fixed interest rate securities $1,197,613 $1,209,055 Average interest rate 6.24% Other interest bearing assets $ 6,632 $ 6,632 Average interest rate 4.59% Mortgage servicing rights (1) $ 22,666 $ 22,666 Rate-sensitive liabilities: Savings & interest bearing checking $1,845,137 $1,885,141 Average interest rate 3.17% Fixed interest rate time deposits $1,982,257 $2,003,442 Average interest rate 5.39% Fixed interest rate borrowings $ 178,750 $ 181,375 Average interest rate 5.96% Variable interest rate borrowings $ 65,225 $ 65,225 Average interest rate 4.37% Rate-sensitive off balance sheet items: Commitments to extend credit for single family mortgage loans $ 41,944 $ 41,854 Average interest rate 6.67% Forward contracts $ 14,545 $ 14,505 Average interest rate 6.15%
(1) Mortgage servicing rights represent a non-financial asset that is rate-sensitive in that its value is dependent upon the underlying mortgage loans being serviced that are rate-sensitive. In addition, please see the discussion in this Report under the section of Item 1 - Business captioned "Investment Portfolio" and the sections of Item 7 - - Managements Discussion and Analysis of Financial Condition and Results of Operations that are captioned "Interest Rate Sensitivity" and "Securities and Other Earning Assets". 34 35 Item 8. Financial Statements and Supplementary Data CONSOLIDATED BALANCE SHEETS BANKCORPSOUTH, INC. AND SUBSIDIARIES
DECEMBER 31 ----------------------------- 1998 1997 ----------- ----------- (In thousands) ASSETS Cash and due from banks (Note 21) $ 175,354 $ 307,845 Interest bearing deposits with other banks 6,632 6,621 Held-to-maturity securities (Note 4) (fair value of $659,288 and $577,868) 647,846 570,331 Available-for-sale securities (Note 5) (amortized cost of $535,729 and $503,153) 549,767 511,407 Federal funds sold 115,040 14,132 Loans (Notes 6, 7 and 17) 3,561,406 3,168,521 Less: Unearned discount 92,705 95,473 Allowance for credit losses 49,618 42,988 ----------- ----------- Net loans 3,419,083 3,030,060 Mortgages held for sale 63,354 39,788 Premises and equipment, net (Note 8) 120,446 111,013 Accrued interest receivable 44,572 40,501 Other assets (Notes 11 and 18) 61,647 54,987 ----------- ----------- TOTAL ASSETS $ 5,203,741 $ 4,686,685 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand: Non-interest bearing $ 614,529 $ 531,271 Interest bearing 1,043,780 949,301 Savings 801,357 632,126 Other time (Note 9) 1,982,257 1,866,741 ----------- ----------- Total deposits 4,441,923 3,979,439 Federal funds purchased and securities sold under repurchase agreements (Note 9) 64,554 189,371 Accrued interest payable 19,902 17,785 Other liabilities (Notes 11 and 12) 42,687 46,860 Long-term debt (Note 10) 178,318 56,539 ----------- ----------- TOTAL LIABILITIES 4,747,384 4,289,994 ----------- ----------- SHAREHOLDERS' EQUITY (NOTES 2 AND 15) Common stock, $2.50 par value Authorized - 500,000,000 shares; Issued - 53,951,475 and 25,597,229 shares at December 31, 1998 and 1997, respectively 134,879 63,993 Capital surplus 104,620 112,219 Accumulated other comprehensive income 8,669 5,097 Retained earnings 209,544 217,701 Treasury stock at cost (118,773 and 125,350 shares at December 31, 1998 and 1997, respectively) (1,355) (2,319) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 456,357 396,691 ----------- ----------- Commitments and contingent liabilities (Note 21) -- -- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,203,741 $ 4,686,685 =========== ===========
See accompanying notes to consolidated financial statements. 35 36 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME BANCORPSOUTH, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31 --------------------------------------------- 1998 1997 1996 --------- --------- --------- (In thousands, except per share amounts) INTEREST REVENUE Loans receivable $ 302,381 $ 269,042 $ 249,901 Deposits with other banks 394 426 689 Federal funds sold 3,691 5,074 4,071 Held-to-maturity securities: U.S. Treasury 6,653 7,159 4,268 U.S. Government agencies and corporations 25,581 21,772 20,990 Obligations of states and political subdivisions 9,616 8,884 7,356 Available-for-sale securities 31,733 25,242 19,734 Mortgages held for sale 3,470 2,102 1,956 --------- --------- --------- Total interest revenue 383,519 339,701 308,965 --------- --------- --------- INTEREST EXPENSE Deposits 173,716 155,387 134,583 Federal funds purchased and securities sold under repurchase agreements 2,853 2,270 2,330 Other 10,843 3,613 6,007 --------- --------- --------- Total interest expense 187,412 161,270 142,920 --------- --------- --------- Net interest revenue 196,107 178,431 166,045 Provision for credit losses (Note 7) 15,014 9,607 9,525 --------- --------- --------- Net interest revenue, after provision for credit losses 181,093 168,824 156,520 --------- --------- --------- OTHER REVENUE Mortgage lending 10,808 7,912 8,694 Service charges 23,291 22,030 20,808 Life insurance premiums 3,655 3,772 4,337 Trust income 3,682 3,239 3,023 Securities gains, net 867 1,283 228 Other 10,715 9,667 8,332 --------- --------- --------- Total other revenue 53,018 47,903 45,422 --------- --------- --------- OTHER EXPENSE Salaries and employee benefits (Notes 12 and 14) 70,937 73,620 65,056 Occupancy net of rental income 10,417 9,594 9,380 Equipment 15,023 13,390 10,953 Telecommunications 4,602 3,943 3,796 Other 51,105 43,071 41,026 --------- --------- --------- Total other expense 152,084 143,618 130,211 --------- --------- --------- Income before income taxes 82,027 73,109 71,731 Income tax expense (Note 11) 27,550 22,907 24,396 --------- --------- --------- NET INCOME 54,477 50,202 47,335 Other comprehensive income (loss) (Note 16) 3,572 2,578 (469) --------- --------- --------- Comprehensive income $ 58,049 $ 52,780 $ 46,866 ========= ========= ========= NET INCOME PER SHARE (NOTE 15): BASIC $ 1.02 $ 0.99 $ 0.98 ========= ========= ========= DILUTED $ 1.01 $ 0.98 $ 0.98 ========= ========= =========
See accompanying notes to consolidated financial statements. 36 37 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY BANCORPSOUTH, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
ACCUMULATED COMMON STOCK OTHER ---------------------- CAPITAL COMPREHENSIVE RETAINED TREASURY SHARES AMOUNT SURPLUS INCOME EARNINGS STOCK TOTAL ---------- --------- --------- ------------- --------- ------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) BALANCE, DECEMBER 31, 1995 24,069,252 $ 60,445 $ 98,865 $ 2,988 $ 157,321 $(1,034) $ 318,585 Shares issued 125,193 305 1,205 -- (1,146) 52 416 Recognition of stock compensation -- -- -- -- 83 -- 83 Purchase of treasury stock (45,950) -- -- -- -- (1,242) (1,242) Comprehensive income -- -- -- (469) 47,335 -- 46,866 Cash dividends declared: BancorpSouth, $0.35 per share -- -- -- -- (14,719) -- (14,719) Pooled acquisitions -- -- -- -- (1,652) -- (1,652) ---------- --------- --------- ------- --------- ------- --------- BALANCE, DECEMBER 31, 1996 24,148,495 60,750 100,070 2,519 187,222 (2,224) 348,337 Shares issued: Business combination(Note 3) 1,231,710 3,079 12,635 -- 962 -- 16,676 Other shares issued 142,881 164 (486) -- (1,237) 1,352 (207) Recognition of stock compensation -- -- -- -- 83 -- 83 Purchase of treasury stock (51,207) -- -- -- -- (1,447) (1,447) Comprehensive income -- -- -- 2,578 50,202 -- 52,780 Cash dividends declared: BancorpSouth, $0.395 per share -- -- -- -- (17,566) -- (17,566) Pooled acquisitions -- -- -- -- (1,965) -- (1,965) ---------- --------- --------- ------- --------- ------- --------- BALANCE, DECEMBER 31, 1997 25,471,879 63,993 112,219 5,097 217,701 (2,319) 396,691 Shares issued: Business combination(Note 3) 1,106,532 2,766 -- -- 11,637 -- 14,403 Purchase of minority interest(Note 3) 491,573 1,229 7,781 -- -- -- 9,010 Stock split(Note 2) 26,654,852 66,773 (16,400) -- (50,373) -- -- Other shares issued 137,866 118 1,020 -- (1,576) 1,566 1,128 Recognition of stock compensation -- -- -- -- 278 -- 278 Purchase of treasury stock (30,000) -- -- -- -- (602) (602) Comprehensive income -- -- -- 3,572 54,477 -- 58,049 Cash dividends declared: BancorpSouth, $0.45 per share -- -- -- -- (21,266) -- (21,266) Pooled acquisitions -- -- -- -- (1,334) -- (1,334) ---------- --------- --------- ------- --------- ------- --------- BALANCE, DECEMBER 31, 1998 53,832,702 $ 134,879 $ 104,620 $ 8,669 $ 209,544 $(1,355) $ 456,357 ========== ========= ========= ======= ========= ======= =========
See accompanying notes to consolidated financial statements. 37 38 CONSOLIDATED STATEMENTS OF CASH FLOWS BANCORPSOUTH, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31 ---------------------------------------------- 1998 1997 1996 --------- --------- --------- (In thousands) OPERATING ACTIVITIES: Net income $ 54,477 $ 50,202 $ 47,335 Adjustment to reconcile net income to net cash provided by operating activities: Provision for credit losses 15,014 9,607 9,525 Depreciation and amortization 13,890 12,222 10,664 Deferred taxes 3,887 (1,029) 1,005 Amortization of intangibles 865 760 1,355 Amortization of debt securities premium and discount, net (8,435) (254) (209) Security gains, net (867) (1,283) (228) Net deferred loan origination expense (3,366) (3,318) (3,138) Increase in interest receivable (4,071) (3,753) (2,688) Increase in interest payable 2,117 1,834 631 Proceeds from mortgages sold 772,583 328,847 258,062 Origination of mortgages for sale (796,476) (342,448) (258,815) Other, net 823 (517) (3,812) --------- --------- --------- Net cash provided by operating activities 50,441 50,870 59,687 --------- --------- --------- INVESTING ACTIVITIES: Proceeds from calls and maturities of held- to-maturity securities 577,117 245,607 106,957 Proceeds from calls and maturities of available- for-sale securities 248,546 261,106 227,921 Proceeds from sales of held-to-maturity securities -- -- 756 Proceeds from sales of available-for-sale securities 42,057 31,498 75,080 Purchases of held-to-maturity securities (646,087) (209,110) (196,696) Purchases of available-for-sale securities (321,643) (479,046) (267,974) Net (increase) decrease in short-term investments (100,908) 102,768 (47,010) Net increase in loans (400,671) (288,246) (197,161) Purchases of premises and equipment (20,488) (23,331) (22,744) Proceeds from sale of premises and equipment 1,439 2,893 1,095 Other, net 5,310 (13,404) (4,808) --------- --------- --------- Net cash used in investing activities (615,328) (369,265) (324,584) --------- --------- --------- FINANCING ACTIVITIES: Net increase in deposits 462,484 314,845 298,925 Net (decrease) increase in short-term debt and other liabilities (125,776) 144,679 8,633 Advances on long-term debt 125,000 9,000 10,565 Repayment of long-term debt (8,221) (8,481) (28,353) Issuance of common stock 472 383 217 Purchase of treasury stock (602) (1,447) (1,242) Payment of cash dividends (20,950) (18,705) (15,549) --------- --------- --------- Net cash provided by financing activities 432,407 440,274 273,196 --------- --------- --------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (132,480) 121,879 8,299 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 314,466 192,587 184,288 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 181,986 $ 314,466 $ 192,587 ========= ========= =========
See accompanying notes to consolidated financial statements. 38 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BANCORPSOUTH, INC. AND SUBSIDIARIES DECEMBER 31, 1998, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of BancorpSouth, Inc. (the Company) have been prepared in conformity with generally accepted accounting principles and prevailing practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period reported. Actual results could differ significantly from those estimates. The Company and its subsidiaries are engaged in the business of banking and activities closely related to banking. The Company and its subsidiaries are subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory agencies. The following is a summary of the more significant accounting and reporting policies. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, BancorpSouth Bank (BSB). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain 1997 and 1996 amounts have been reclassified to conform with the 1998 presentation. CASH FLOW STATEMENTS Cash equivalents include cash and amounts due from banks including interest bearing deposits with other banks. The Company paid interest of $185,294,000, $159,436,000 and $142,289,000 and income taxes of $25,699,000, $26,092,000 and $22,587,000 for the years ended December 31, 1998, 1997 and 1996, respectively. SECURITIES Securities are classified as either held-to-maturity, trading or available-for-sale. Held-to-maturity securities are debt securities that the Company has the ability and management has the positive intent to hold to maturity. They are reported at amortized cost. Trading securities are debt and equity securities that are bought and held principally for the purpose of selling them in the near term. They are reported at fair value, with unrealized gains and losses included in earnings. The Company had no trading securities at December 31, 1998 and 1997. Available-for-sale securities are debt and equity securities not classified as either held-to-maturity securities or trading securities. They are reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of tax, as a separate component of shareholders'equity until realized. Gains and losses on securities are determined on the identified certificate basis. Amortization of premium and accretion of discount are computed using the interest method. Changes in the valuation of securities which are considered other than temporary are recorded as losses in the period recognized. LOANS Loans are recorded at the face amount of the notes reduced by collections of principal. Loans include net unamortized deferred origination costs. Unearned discount on discount-basis consumer loans is recognized as income using a method which approximates the interest method. Interest is recorded monthly as earned on all other loans. Where doubt exists as to the collectibility of the loans, interest income is recorded as payment is received. PROVISION AND ALLOWANCE FOR CREDIT LOSSES The provision for credit losses charged to expense is an amount which, in the judgment of management, is necessary to maintain the allowance for credit losses at a level that is adequate based on estimated probable losses on the Company's current portfolio of loans. Management's judgment is based on a variety of factors which include the Company's experience related to loan balances, charge-offs and recoveries, scrutiny of individual loans and risk factors, results of regulatory agency reviews of loans, and present and future economic conditions of the Company's market area. 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. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. 39 40 MORTGAGES HELD FOR SALE Mortgages held for sale are recorded at lower of aggregate cost or market as determined by outstanding commitments from investors or current investor yield requirements. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation and amortization. Provisions for depreciation and amortization, computed using straight-line and accelerated methods, are charged to expense over the shorter of the lease term or the estimated useful lives of the assets. Costs of major additions and improvements are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. OTHER REAL ESTATE OWNED Real estate acquired in settlement of loans is carried at the lower of cost or fair value, less selling cost. Fair value is based on independent appraisals and other relevant factors. At the time of acquisition, any excess of cost over fair value is charged to the allowance for credit losses. Gains and losses realized on sale are included in other revenue. PENSION EXPENSE The Company maintains a non-contributory defined benefit pension plan that covers all employees who qualify as to age and length of service. Net periodic pension expense is actuarially determined. STOCK BASED COMPENSATION The Company elected to continue to account for stock based compensation to employees using the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", as allowed by Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based Compensation". See Note 14 for disclosure of pro forma net income and pro forma net income per share as required under SFAS No. 123. RECENT PRONOUNCEMENTS SFAS No. 130, "Reporting Comprehensive Income," was adopted for 1998. The statement requires additional reporting of items that affect comprehensive income but not net income. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. See Note 16 for additional disclosure required by this statement. SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," was adopted for 1998. The statement requires financial disclosure and descriptive information about reportable operating segments. See Note 20 for disclosure required by this statement. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," 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 will be adopted for the year 2000 and is not expected to have a material effect on the Company's financial condition or results of operations. INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company, with the exception of BSB's credit life insurance subsidiary, files a consolidated federal income tax return. OTHER Trust income is recorded on the cash basis as received, which does not differ materially from the accrual basis. 40 41 (2) STOCK SPLIT On May 15, 1998, the Company's two-for-one stock split effected in the form of a 100% stock dividend resulted in the issuance of 26,654,852 new shares of common stock. Information relating to earnings per share, dividends per share and other share data has been retroactively adjusted to reflect this stock split. (3) ACQUISITIONS On March 28, 1997, Iuka Guaranty Bank, a $117 million bank headquartered in Iuka, Mississippi, was merged with and into BancorpSouth Bank. Pursuant to the merger, each share of common stock of Iuka Guaranty Bank was converted into 1,642.297334 shares of the Company's common stock, or a total of 2,463,420 shares of common stock. This transaction was accounted for as a pooling of interests and Iuka Guaranty Bank's results of operations are included in the Company's financial statements for 1997. The financial statements for periods prior to 1997 were not restated because the impact of the Iuka Guaranty Bank acquisition was not material. On October 30, 1998, Alabama Bancorp., Inc., a $280 million bank holding company headquartered in Birmingham, Alabama, was merged with and into the Company. Pursuant to the merger, Alabama Bancorp's subsidiary banks, Highland Bank and First Community Bank of the South, were merged into BancorpSouth Bank. Each share of common stock of Alabama Bancorp was converted into 173.30087 shares of the Company's common stock, or a total of 3,604,394 shares of common stock. In addition, a total of 491,573 shares of the Company's common stock were issued to the minority shareholders of Highland Bank and First Community Bank of the South. This transaction was accounted for as a pooling of interests, except for the acquisition of the minority interest, which was accounted for as a purchase. The purchase of the minority interest resulted in the recognition of an intangible asset of $6.9 million that is being amortized over a period of 15 years. The Company's financial statements for all periods presented include the consolidated accounts of Alabama Bancorp. On December 4, 1998, Merchants Capital Corporation, a $220 million bank holding company headquartered in Vicksburg, Mississippi, was merged with and into the Company. Pursuant to the merger, Merchants Capital Corporation's subsidiary bank, Merchants Bank, was merged into BancorpSouth Bank. Each share of stock of Merchants Capital Corporation was converted into 3.768 shares of the Company's common stock, or a total of 2,798,022 shares of common stock. This transaction was accounted for as a pooling of interests and the Company's financial statements for all periods presented include the consolidated accounts of Merchants Capital Corporation. On December 31, 1998, The First Corporation, a $150 million bank holding company headquartered in Opelika, Alabama, was merged with and into the Company. Pursuant to the merger, The First Corporation's subsidiary bank, The First National Bank of Opelika, was merged into BancorpSouth Bank. Each share of stock of The First Corporation was converted into 9.5758 shares of the Company's common stock, or a total of 2,265,444 shares of common stock. This transaction was accounted for as a pooling of interests and the Company's financial statements for 1998 include the consolidated accounts of The First Corporation. The financial statements for periods prior to 1998 were not restated because the impact of The First Corporation acquisition represented a change of less than 3% to the Company's financial results. 41 42 (4) HELD-TO-MATURITY SECURITIES A comparison of amortized cost and estimated fair values of held-to-maturity securities as of December 31, 1998 and 1997 follows:
1998 --------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- --------- (In thousands) U.S. Treasury $ 103,012 $ 2,013 $ 10 $ 105,015 U.S. Government agencies and corporations 333,866 3,210 762 336,314 Tax exempt obligations of states and political subdivisions 208,673 7,707 802 215,578 Other 2,295 86 -- 2,381 --------- ---------- ---------- --------- Total $ 647,846 $ 13,016 $ 1,574 $ 659,288 ========= ======== ======= ========= 1997 --------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- (In thousands) U.S. Treasury $ 109,012 $ 1,533 $ 2 $ 110,543 U.S. Government agencies and corporations 288,711 2,314 870 290,155 Tax exempt obligations of states and political subdivisions 171,298 5,434 883 175,849 Other 1,310 26 15 1,321 --------- ---------- ---------- --------- Total $ 570,331 $ 9,307 $ 1,770 $ 577,868 ========= ======== ======= =========
Gross gains of $371,000 and gross losses of $64,000 were recognized in 1998, gross gains of $640,000 and gross losses of $30,000 were recognized in 1997 and gross gains of $267,000 and gross losses of $90,000 were recognized in 1996 on held-to-maturity securities. Except for 1996, these gains and losses were the result of held-to-maturity securities being called prior to maturity. Included in the 1996 amounts is a gross gain of $1,000 and a gross loss of $67,000 related to the sale of held-to-maturity securities with amortized cost of $822,000. The decision to sell these securities was based on the deteriorating credit quality of the issuer. Held-to-maturity securities with a carrying value of approximately $379,000,000 at December 31, 1998 were pledged to secure public and trust funds on deposit and for other purposes. The amortized cost and estimated fair value of held-to-maturity securities at December 31, 1998 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
1998 ------------------------- ESTIMATED AMORTIZED FAIR COST VALUE --------- --------- (In thousands) Due in one year or less $ 131,218 $ 132,151 Due after one year through five years 302,990 307,384 Due after five years through ten years 186,948 191,295 Due after ten years 26,690 28,458 --------- --------- Total $ 647,846 $ 659,288 ========= =========
42 43 (5) AVAILABLE-FOR-SALE SECURITIES A comparison of amortized cost and estimated fair values of available-for-sale securities as of December 31, 1998 and 1997 follows:
1998 --------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- --------- (In thousands) U.S. Treasury $ 103,576 $ 2,652 $ 2 $ 106,226 U.S. Government agencies and corporations 302,615 3,540 195 305,960 Tax exempt obligations of states and political subdivisions 36,815 1,909 28 38,696 Preferred stock 55,000 -- -- 55,000 Other 37,723 6,238 76 43,885 --------- -------- ------ --------- Total $ 535,729 $ 14,339 $ 301 $ 549,767 ========= ======== ====== ========= 1998 --------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- --------- (In thousands) U.S. Treasury $ 108,468 $ 1,488 $ 12 $ 109,944 U.S. Government agencies and corporations 328,754 1,600 337 330,017 Tax exempt obligations of states and political subdivisions 18,842 348 35 19,155 Preferred stock 21,000 -- -- 21,000 Other 26,089 5,273 71 31,291 --------- -------- ------ --------- Total $ 503,153 $ 8,709 $ 455 $ 511,407 ========= ======== ====== =========
Gross gains of $624,000 and gross losses of $64,000 were recognized in 1998, gross gains of $718,000 and gross losses of $45,000 were recognized in 1997 and gross gains of $581,000 and gross losses of $530,000 were recognized in 1996 on available-for-sale securities. Available-for-sale securities with a carrying value of approximately $306,000,000 at December 31, 1998 were pledged to secure public and trust funds on deposit and for other purposes. The amortized cost and estimated fair value of available-for-sale securities at December 31, 1998 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Equity securities are considered as maturing after 10 years unless they have a repricing feature. Securities that reprice periodically are considered as maturing on the first repricing date subsequent to December 31, 1998.
1998 ------------------------- ESTIMATED AMORTIZED FAIR COST VALUE --------- --------- (In thousands) Due in one year or less $ 147,028 $ 147,437 Due after one year through five years 239,283 244,304 Due after five years through ten years 109,573 116,640 Due after ten years 39,845 41,386 --------- --------- Total $ 535,729 $ 549,767 ========= =========
43 44 (6) LOANS A summary of loans classified by collateral type at December 31, 1998 and 1997 follows:
1998 1997 ------------ ------------ (In thousands) Commercial and agricultural $ 365,716 $ 341,080 Consumer and installment 905,413 870,823 Real estate mortgage 2,054,143 1,758,636 Lease financing 210,559 172,821 Other 25,575 25,161 ------------ ------------ Total $ 3,561,406 $ 3,168,521 ============ ============
Non-performing loans consist of both non-accrual loans and loans which have been restructured (primarily in the form of reduced interest rates) because of the borrower's weakened financial condition. The aggregate principal balance of non-accrual loans was $6,152,000 and $5,047,000 at December 31, 1998 and 1997, respectively. Restructured loans totaled $713,000 and $1,097,000 at December 31, 1998 and 1997, respectively. The total amount of interest earned on non-performing loans was approximately $153,000, $58,000 and $42,000 in 1998, 1997 and 1996, respectively. The gross interest income which would have been recorded under the original terms of those loans amounted to $366,000, $257,000 and $353,000 in 1998, 1997 and 1996, respectively. Loans considered impaired, under SFAS No.114, as amended by SFAS No. 118, are loans which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company's recorded investment in loans considered impaired at December 31, 1998 and 1997 was $8,166,000 and $7,181,000, respectively, with a valuation reserve of $3,151,000 and $2,862,000, respectively. The average recorded investment in impaired loans during 1998 and 1997 was $9,187,000 and $7,536,000, respectively. (7) ALLOWANCE FOR CREDIT LOSSES The following summarizes the changes in the allowance for credit losses for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 -------- -------- -------- (In thousands) Balance at beginning of year $ 42,988 $ 40,367 $ 37,532 Provision charged to expense 15,014 9,607 9,525 Recoveries 2,396 2,405 2,369 Loans charged off (11,932) (9,987) (9,059) Acquisitions 1,152 596 -- -------- -------- -------- Balance at end of year $ 49,618 $ 42,988 $ 40,367 ======== ======== ========
44 45 (8) PREMISES AND EQUIPMENT A summary by asset classification at December 31, 1998 and 1997 follows:
ESTIMATED USEFUL LIFE YEARS 1998 1997 ----------- --------- --------- (In thousands) Cost: Land $ 16,270 $ 15,094 Buildings and improvements 20-50 85,076 79,194 Leasehold improvements 10-20 1,764 1,869 Equipment, furniture and fixtures 3-12 81,318 75,182 Construction in progress 13,403 9,513 --------- --------- 197,831 180,852 Accumulated depreciation and amortization 77,385 69,839 --------- --------- Premises and equipment, net $ 120,446 $ 111,013 ========= =========
(9) TIME DEPOSITS AND SHORT-TERM DEBT Certificates of deposit and other time deposits of $100,000 or more amounting to approximately $640,239,000 and $531,243,000 were outstanding at December 31, 1998 and 1997, respectively. Total interest expense relating to certificate and other time deposits of $100,000 or more totaled approximately $36,579,000, $28,282,000, and $21,663,000 for the years ended December 31, 1998, 1997 and 1996, respectively. For time deposits with a remaining maturity of more than one year at December 31, 1998, the aggregate amount of maturities for each of the following five years is presented in the following table:
MATURING IN AMOUNT ----------- --------- (In thousands) 2000 $ 424,473 2001 95,433 2002 76,056 2003 31,431 2004 210 Thereafter 2,808 --------- Total $ 630,411 =========
45 46 Presented below is information relating to short-term debt for the years ended December 31, 1998 and 1997:
END OF PERIOD DAILY AVERAGE MAXIMUM ------------------ ------------------ OUTSTANDING INTEREST INTEREST AT ANY BALANCE RATE BALANCE RATE MONTH END ------------------- ------------------ ----------- (Dollars in thousands) 1998: Federal funds purchased $ 3,051 4.6% $ 6,172 5.2% $ 12,600 Securities sold under repurchase agreements 61,503 3.7% 56,556 4.5% 70,678 --------- -------- --------- Total $ 64,554 $ 62,728 $ 83,278 ========= ======== ========= 1997: Federal funds purchased $ 152,449 6.9% $ 3,616 6.2% $ 152,449 Securities sold under repurchase agreements 36,922 5.1% 42,766 4.8% 48,274 --------- -------- --------- Total $ 189,371 $ 46,382 $ 200,723 ========= ======== =========
Federal funds purchased generally mature the day following the date of purchase while securities sold under repurchase agreements generally mature within 30 days from the date of sale. At December 31, 1998, the Company's subsidiary bank had established informal federal funds borrowing lines of credit aggregating $153,000,000. (10) LONG-TERM DEBT SUBORDINATED CAPITAL DEBENTURES On November 22, 1989, the Company issued $25,000,000 of 9% subordinated capital debentures due November 1, 1999. On December 30, 1996, the Company extinguished the $24,508,000 of outstanding 9% debentures by transferring the funds to an irrevocable trust for the repayment of principal and interest on the debentures. The $489,000 loss on early extinguishment of this debt is included in other expense for 1996. Included in interest expense for 1996 is $2,291,000 related to the debentures. FEDERAL HOME LOAN BANK ADVANCES BSB has entered into a blanket floating lien security agreement with the Federal Home Loan Bank (FHLB) of Dallas. Under the terms of this agreement, BSB is required to maintain sufficient collateral to secure borrowings in an aggregate amount of the lesser of 75% of the book value (unpaid principal balance) of the borrower's first mortgage collateral or 35% of the borrower's assets. BSB has also entered into a blanket floating lien security agreement with the FHLB of Cincinnati. Under the terms of this agreement, BSB is required to maintain unencumbered, quality first mortgage loans in an amount equal to 150% of outstanding advances as collateral for those advances. BSB has advances from the FHLB of Atlanta which are secured by securities pledged at 97% of market value. 46 47 At December 31, 1998, the following FHLB fixed term advances were repayable in monthly as follows:
FINAL DUE DATE INTEREST RATE AMOUNT -------------- ------------- --------- (In thousands) 2000 5.28% - 6.55% $ 19,000 2001 5.21% - 7.03% 3,662 2002 5.66% - 5.75% 15,000 2003 -- -- Thereafter 5.66% - 8.95% 140,656 --------- Total $ 178,318 =========
(11) INCOME TAXES Total income taxes for the years ended December 31, 1998, 1997 and 1996 were allocated as follows:
1998 1997 1996 -------- -------- -------- (In thousands) Income from continuing operations $ 27,550 $ 22,907 $ 24,396 Shareholders' equity for other comprehensive income 2,212 1,594 (251) Shareholders' equity for stock option plans (678) (400) -- -------- -------- -------- Total $ 29,084 $ 24,101 $ 24,145 ======== ======== ========
The components of income tax expense (credit) attributable to continuing operations are as follows for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 -------- -------- -------- (In thousands) Current: Federal $ 20,570 $ 20,808 $ 20,333 State 3,093 3,128 3,058 Deferred: Federal 3,379 (875) 813 State 508 (154) 192 -------- -------- -------- Total $ 27,550 $ 22,907 $ 24,396 ======== ======== ========
47 48 Income tax expense differs from the amount computed by applying the U.S. federal income tax rate of 35% to income before income taxes due to the following:
1998 1997 1996 -------- -------- -------- (In thousands) Tax expense at statutory rate $ 28,709 $ 25,588 $ 25,106 Increase (reduction) in taxes resulting from: State income taxes net of federal tax benefit 2,340 1,933 2,112 Tax exempt interest revenue (3,787) (3,090) (2,838) Non-deductible merger expenses 1,077 -- -- Dividend received deduction (124) (118) (183) Other, net (665) (1,406) 199 -------- -------- -------- Total $ 27,550 $ 22,907 $ 24,396 ======== ======== ========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are as follows:
1998 1997 -------- -------- (In thousands) Deferred tax assets: Loans receivable, principally due to allowance for credit losses $ 20,157 $ 17,273 Deferred liabilities principally due to compensation arrangements and vacation accruals 5,234 6,349 Net operating loss carryforwards 769 263 -------- -------- Total gross deferred tax assets 26,160 23,885 Less: valuation allowance -- -- -------- -------- Deferred tax assets $ 26,160 $ 23,885 ======== ======== Deferred tax liabilities: Bank premises and equipment, principally due to differences in depreciation and lease transactions $ 12,660 $ 10,613 Deferred assets, principally due to expense recognition 1,767 1,244 Investments, principally due to interest income recognition 2,028 1,968 Capitalization of mortgage servicing rights 6,749 3,209 Unrealized gains on available-for-sale securities 5,369 3,157 Other, net -- 7 -------- -------- Total gross deferred liabilities 28,573 20,198 -------- -------- Net deferred tax (liabilities) assets $ (2,413) $ 3,687 ======== ========
Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences existing at December 31, 1998. At December 31, 1998 the Company had net operating loss carryforwards related to business combinations for federal income tax purposes of approximately $2,010,000 that were available to offset future federal taxable income, subject to various limitations, through 2009. 48 49 (12) PENSION AND PROFIT SHARING PLANS The Company maintains a noncontributory and trusteed defined benefit pension plan covering substantially all full-time employees who have at least one year of service and have attained the age of 21. Benefits are based on years of service and the employee's compensation. The Company's funding policy is to contribute to the pension plan the amount required to fund benefits expected to be earned for the current year and to amortize amounts related to prior years using the projected unit credit cost method. The difference between the pension cost included in current income and the funded amount is included in other assets or other liabilities, as appropriate. Actuarial assumptions are evaluated periodically. The BancorpSouth, Inc. Restoration Plan (Restoration Plan) provides for the payment of retirement benefits to certain participants in the BancorpSouth, Inc. Retirement Plan (Basic Plan). The Restoration Plan covers any employee whose benefit under the Basic Plan is limited by the provisions of the Internal Revenue Code of 1986 and any employee who elects to participate in the BancorpSouth, Inc. Deferred Compensation Plan, thereby reducing their benefit under the Basic Plan. A summary of the defined benefit retirement plans at and for the years ended December 31 follows:
Years ended December 31 1998 1997 1996 -------- -------- -------- (In thousands) Change in benefit obligation: - ----------------------------- Projected benefit obligation at beginning of year $ 19,469 $ 19,889 $ 17,786 Service cost 1,402 1,295 1,145 Interest cost 1,343 1,332 1,318 Actuarial (gain) loss 444 (1,489) 2,359 Benefits paid (3,000) (1,558) (2,719) -------- -------- -------- Projected benefit obligation at end of year $ 19,658 $ 19,469 $ 19,889 ======== ======== ======== Change in plan assets: - ---------------------- Fair value of plan assets at beginning of year $ 26,124 $ 20,982 $ 19,234 Actual return on assets 5,223 4,663 3,532 Employer contributions 29 2,037 935 Benefits paid (3,000) (1,558) (2,719) -------- -------- -------- Fair value of plan assets at end of year $ 28,376 $ 26,124 $ 20,982 ======== ======== ======== Funded status: - -------------- Benefit obligation ($ 19,658) ($ 19,469) ($19,889) Fair value of plan assets 28,376 26,124 20,982 Unrecognized transition amount (6) (7) (9) Unrecognized prior service cost (941) (1,018) (1,095) Unrecognized actuarial (gain) loss (8,245) (5,570) (1,127) -------- -------- -------- Net amount recognized ($ 474) $ 60 ($ 1,138) ======== ======== ======== Components of net periodic pension cost: - ---------------------------------------- Service cost $ 1,402 $ 1,295 $ 1,145 Interest cost 1,343 1,332 1,318 Expected return on assets (1,950) (1,641) (1,429) Amortization of unrecognized transition amount (2) (2) (2) Recognized prior service cost (78) (78) (78) Recognized net (gain) loss (152) (66) (24) -------- -------- -------- Net periodic pension cost $ 563 $ 840 $ 930 ======== ======== ========
Plan assets consist primarily of listed bonds and commingled funds. The assumptions used for measuring net periodic pension cost for the years ended December 31, 1998, 1997 and 1996 are presented in the following table. 49 50
1998 1997 1996 ---- ---- ---- Discount rate 6.75% 6.50% 7.50% Rate of compensation increase 4.00 4.00 5.00 Expected return on plan assets 7.50 7.50 7.50
The Company has a non-qualified supplemental retirement plan for certain key employees. Benefits commence when the employee retires and are payable over a period of 10 years. The amount accrued under the plan was $128,000 in 1998, $148,000 in 1997 and $124,000 in 1996. The Company has a deferred compensation plan (commonly referred to as a 401(k) Plan), whereby employees may contribute a portion of their compensation, as defined, subject to the limitations as established by the Internal Revenue Code. Employee contributions (up to 5% of defined compensation) are matched dollar-for-dollar by the Company. Under the terms of the plan, contributions matched by the Company are used to purchase Company common stock at prevailing market prices. Plan expense for the years ended December 31, 1998, 1997 and 1996 was $2,222,000, $2,085,000 and $1,555,000, respectively. (13) FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS 107, "Disclosures about Fair Value of Financial Instruments", requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods and assumptions are set forth below for the Company's financial instruments. SECURITIES The carrying amounts for short-term securities approximate fair value because of their short-term maturity (90 days or less) and present no unexpected credit risk. The fair value of most longer-term securities is estimated based on market prices or dealer quotes. See Note 4, Held-to-Maturity Securities, and Note 5, Available-for-Sale Securities for fair values. LOANS Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, consumer and installment and real estate mortgage. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using rates currently available that reflect the credit and interest rate risk inherent in the loan. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information. The following table presents information for loans at December 31, 1998 and 1997:
1998 1997 --------------------------- --------------------------- BOOK FAIR BOOK FAIR VALUE VALUE VALUE VALUE ----------- ----------- ----------- ----------- (In thousands) Commercial and agricultural $ 365,716 $ 409,110 $ 341,080 $ 328,824 Consumer and installment 905,413 995,133 870,823 871,560 Real estate mortgage 2,054,143 2,296,490 1,758,636 1,702,119 All other 25,575 30,036 25,161 21,981 ----------- ----------- ----------- ----------- Total $ 3,350,847 $ 3,730,769 $ 2,995,700 $ 2,924,484 =========== =========== =========== ===========
Average maturity represents the expected average cash flow period, which in some instances is different than the stated maturity. Management has made estimates of fair value discount rates that are believed to be reasonable. However, because there is no market for many of these financial instruments, management has no basis to determine whether the fair value presented above would be indicative of the value negotiated in an actual sale. New loan rates were used as the discount rate on new loans of the same type, credit quality and maturity. 50 51 DEPOSIT LIABILITIES Under SFAS 107, the fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings, NOW accounts and money market checking accounts, is equal to the amount payable on demand as of December 31, 1998 and 1997. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar maturities. The following table presents information for certificates of deposit at December 31, 1998 and 1997:
1998 1997 --------------------------- --------------------------- BOOK FAIR BOOK FAIR VALUE VALUE VALUE VALUE ----------- ----------- ----------- ----------- (In thousands) Maturing or repricing in six months or less $ 930,704 $ 933,467 $ 842,126 $ 845,765 Maturing or repricing between six months and one year 434,523 437,739 465,965 468,529 Maturing or repricing between one and three years 135,681 139,638 134,210 135,988 Maturing or repricing beyond three years 481,349 492,598 424,440 433,172 ----------- ----------- ----------- ----------- Total $ 1,982,257 $ 2,003,442 $ 1,866,741 $ 1,883,454 =========== =========== =========== ===========
LONG-TERM DEBT The fair value of the Company's FHLB advances is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently available for advances of similar maturities. The following table presents information on the FHLB advances at December 31, 1998 and 1997:
1998 1997 ----------------------- --------------------- BOOK FAIR BOOK FAIR FINAL DUE DATE VALUE VALUE VALUE VALUE - -------------- --------- --------- -------- -------- (In thousands) 1998 $ -- $ -- $ 5,000 $ 4,989 2000 19,000 19,052 19,000 18,903 2001 3,662 3,676 5,149 5,112 2002 15,000 15,056 10,000 9,886 Thereafter 140,656 143,160 17,390 17,271 --------- --------- -------- -------- Total $ 178,318 $ 180,944 $ 56,539 $ 56,161 ========= ========= ======== ========
(14) STOCK INCENTIVE AND STOCK OPTION PLANS During 1987, the Company issued 69,000 shares of common stock to a key employee. The shares vested over a 10-year period subject to the Company meeting certain performance goals and the compensation associated with this award was recognized over the vesting period that ended during 1997. In 1995, the Company issued 60,000 shares of common stock to a key employee. The shares vest over a 10-year period subject to the Company meeting certain performance goals. The unearned shares are held in escrow and totaled 42,000 at December 31, 1998. The compensation associated with this award is being recognized over the 10-year period. In 1998, the Company issued 70,000 shares of common stock to a key employee. The shares vest over a 10-year period subject to the Company meeting certain performance goals. The unearned shares are held in escrow and totaled 63,000 at December 31, 1998. The compensation associated with this award is being recognized over the 10-year period. In 1998, the Company issued 8,000 shares to the directors of the Company. The shares vest over a 3-year period and the unearned shares are held in escrow and totaled 8,000 at December 31, 1998. The compensation associated with this award is being recognized over the 3-year period. Key employees and directors of the Company and its subsidiaries have been granted stock options and stock appreciation rights (SARs) under the Company's 1990, 1994 and 1995 stock incentive plans. The stock incentive plans were amended in 1998 to eliminate SARs and to allow a limited number of restricted stock awards. All options and SARs granted pursuant to these plans have been at market value on the date of the grant and are exercisable over periods of one to ten years. At December 31, 1998, the Company had outstanding 571,510 SARs exercisable in conjunction with certain of the options outstanding. The Company recorded a reduction in compensation expense of $2,709,000 in 1998 51 52 and recorded additional compensation expense of $6,113,000 and $1,907,000 in 1997 and 1996, respectively, related to the SARs because of the changes in market value of its common stock. In 1995 and 1998, pursuant to certain acquisitions, incentive and non-qualified stock options were granted to employees and directors of the companies being acquired in exchange for stock options that were outstanding at the time those mergers were consummated. The number of shares and option prices of shares authorized under the various stock option plans have been adjusted for the two-for-one stock split effected in the form of a dividend discussed in Note 2. In 1998, the Company adopted a stock plan through which 50% of the compensation payable to each director is paid in the form of stock effective January 1, 1999. Directors may elect under the plan to receive up to 100% of their compensation in the form of stock. A summary of the status of the Company's stock option plans as of December 31, 1998, 1997 and 1996, and changes during the years ended on those dates is presented below:
1998 1997 1996 ----------------------- ----------------------- ----------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE - ------- --------- --------- --------- --------- --------- --------- Outstanding at beginning of year 1,663,335 $ 10.73 1,608,618 $ 8.53 1,477,196 $ 7.29 Granted 341,526 15.90 276,557 20.36 301,982 13.07 Exercised (260,028) 6.02 (221,840) 6.78 (170,560) 5.84 Expired or cancelled (31,152) 8.11 -- -- -- -- --------- --------- --------- Outstanding at end of year 1,713,681 12.53 1,663,335 10.73 1,608,618 8.53 ========= ========= ========= Exercisable at end of year 1,207,257 1,085,807 1,072,394 ========= ========= =========
The following table summarizes information about stock options at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------- ------------------------------- RANGE OF NUMBER WEIGHTED-AVG WEIGHTED-AVG NUMBER WEIGHTED-AVG EXERCISE PRICES OUTSTANDING REMAINING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ----------------------------- ----------- -------------- -------------- ----------- -------------- $0.72 to $1.70 63,652 2.2 years $ 1.16 54,751 $ 1.16 $2.47 to $3.58 9,484 4.5 3.11 9,485 3.11 $4.10 to $6.49 192,826 3.1 5.68 192,826 5.68 $7.45 to $9.38 439,850 5.1 8.67 415,850 8.68 $11.06 to $13.63 541,250 7.6 12.32 459,480 12.15 $19.88 to $22.50 466,619 9.5 20.97 74,865 22.00 ----------- ----------- $0.72 to $22.50 1,713,681 6.8 12.53 1,207,257 9.96 =========== ===========
52 53 As allowed by SFAS No. 123, the Company elected to continue to measure compensation cost relative to its stock based compensation plans using APB No. 25. Pro forma net income and pro forma net income per share calculated under the provisions of SFAS No. 123 for the years ended December 31, 1998, 1997 and 1996 are presented in the following table.
1998 1997 1996 -------- -------- -------- Net income As Reported $ 54,477 $ 50,202 $ 47,335 Pro forma 53,798 49,651 47,056 Basic earnings per share As Reported $ 1.02 $ 0.99 $ 0.98 Pro forma 1.01 0.98 0.98 Diluted earnings per share As Reported $ 1.01 $ 0.98 $ 0.98 Pro forma 1.00 0.97 0.97
(15) EARNINGS PER SHARE AND DIVIDEND DATA The Company adopted SFAS No. 128, "Earnings per Share", effective for financial statements for periods ending after December 15, 1997. All prior period EPS data has been restated to conform with the provisions of this Statement. 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 years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 --------------------------------- --------------------------------- -------------------------------- INCOME SHARES PER SHARE INCOME SHARES PER SHARE INCOME SHARES PER SHARE (NUMERATOR)(DENOMINATOR) AMOUNT (NUMERATOR)(DENOMINATOR) AMOUNT (NUMERATOR)(DENOMINATOR) AMOUNT --------- ----------- --------- --------- ----------- --------- --------- ----------- --------- (In thousands, except per share amounts) BASIC EPS: Income available to common shareholders $54,477 53,285 $1.02 $50,202 50,769 $0.99 $47,335 48,218 $0.98 ===== ===== ===== Effect of dilutive stock options -- 586 -- 422 -- 329 ------- ------ ------- ------ ------- ------ DILUTED EPS: Income available to common shareholders plus assumed exercise $54,477 53,871 $1.01 $50,202 51,191 $0.98 $47,335 48,547 $0.98 ======= ====== ===== ======= ====== ===== ======= ====== =====
Dividends to shareholders are paid from dividends paid to the Company by its subsidiary bank which are subject to approval by the applicable state regulatory authority. At December 31, 1998, the Company's subsidiary bank could have paid dividends to the Company of $138,000,000 under current regulatory guidelines. 53 54 (16) OTHER COMPREHENSIVE INCOME The following table presents the components of other comprehensive income and the related tax effects allocated to each component for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 ---------------------------- --------------------------- -------------------------- BEFORE TAX NET BEFORE TAX NET BEFORE TAX NET TAX (EXPENSE) OF TAX TAX (EXPENSE) OF TAX TAX (EXPENSE) OF TAX AMOUNT BENEFIT AMOUNT AMOUNT BENEFIT AMOUNT AMOUNT BENEFIT AMOUNT -------- -------- ------ ------ -------- ------ ------ ------- ------ (In thousands) Unrealized gains on securities: Unrealized gains arising during holding period $6,344 $ (2,427) $3,917 $4,845 $(1,851) $2,994 $(669) $231 $(438) Less: Reclassification adjustment for gains realized in net income (560) 215 (345) (673) 257 (416) (51) 20 (31) -------- -------- ------ ------ ------- ------ ----- ---- ----- Other Comprehensive Income $5,784 $ (2,212) $3,572 $4,172 $(1,594) $2,578 $(720) $251 $(469) ======== ======== ====== ====== ======= ====== ===== ==== =====
(17) RELATED PARTY TRANSACTIONS The Company has made, and expects in the future to continue to make in the ordinary course of business, loans to directors and executive officers of the Company and their affiliates. In management's opinion, these transactions with directors and executive officers were made on substantially the same terms as those prevailing at the time for comparable transactions with other persons and did not involve more than normal risk of collectibility or present any other unfavorable features. An analysis of such outstanding loans is as follows:
AMOUNT -------- (In thousands) Loans outstanding at December 31, 1997 $ 18,792 New loans 9,419 Repayments (6,290) Changes in directors and executive officers (869) -------- Loans outstanding at December 31, 1998 $ 21,052 ========
(18) CAPITALIZED MORTGAGE SERVICING RIGHTS Originated mortgage servicing rights (OMSRs), as well as purchased mortgage servicing rights (PMSRs), are capitalized as assets by allocating the total cost incurred between the loan and the servicing rights based on their relative fair values. To determine the fair value of the servicing rights created, the Company uses a valuation model that calculates the present value of future cash flows. The significant assumptions utilized by the valuation model are prepayment assumptions based upon dealer consensus and discount rates based upon market indices at the date of determination. PMSRs and OMSRs are being amortized in proportion to and over the period of the estimated net servicing income. Capitalized mortgage servicing rights are evaluated for impairment based on the excess of the carrying amount of the mortgage servicing rights over their fair value. A quarterly value impairment analysis is performed using a discounted methodology that is disaggregated by predominant risk characteristics. The Company has determined those risk characteristics to include: note rate and term and loan type based on 1) loan guarantee (i.e. conventional or government) and 2) interest characteristic (i.e. fixed-rate or adjustable-rate). In measuring impairment, the carrying amount must be stratified based on one or more predominant risk characteristics of the underlying loans. Impairment is recognized through a valuation allowance for each individual stratum. The following is a summary of capitalized mortgage servicing rights, net of accumulated amortization, and a valuation allowance for impairment: 54 55
1998 1997 -------- -------- (In thousands) Balance at beginning of year $ 14,071 $ 9,276 Mortgage servicing rights capitalized 16,376 7,222 Amortization expense (3,104) (1,803) -------- -------- Balance at end of year 27,343 14,695 Valuation allowance (4,670) (624) -------- -------- Fair value at end of year $ 22,673 $ 14,071 ======== ========
(19) REGULATORY MATTERS The Company is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by the Federal Reserve Board (FRB) to ensure capital adequacy require the Company to maintain minimum capital amounts and ratios (risk-based capital ratios). All banking companies are required to have core capital (Tier 1) of a least 4% of risk-weighted assets, total capital of at least 8% of risk-weighted assets and a minimum Tier 1 leverage ratio of 3% of adjusted average assets. The regulations also define well capitalized levels of Tier 1, total capital and Tier 1 leverage as 6%, 10% and 5%, respectively. The Company had Tier 1, total capital and leverage above the well capitalized levels at December 31, 1998 and 1997, respectively, as set forth in the following table:
1998 1997 ------------------ ------------------ AMOUNT RATIO AMOUNT RATIO --------- ----- --------- ----- (Dollars in thousands) Total Capital (to Risk-Weighted Assets) $ 476,690 12.99% $ 421,896 13.38% Tier 1 Capital (to Risk-Weighted Assets) 430,770 11.74 382,451 12.13 Tier 1 Leverage Capital (to Average Assets) 430,770 8.49 382,451 8.52
55 56 (20) SEGMENTS 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 and other activities not allocated to community banking. Results of operations and selected financial information by operating segment for the three years ended December 31, 1998, 1997 and 1996 are presented below:
GENERAL COMMUNITY CORPORATE BANKING AND OTHER TOTAL -------- --------- ----------- (In thousands) 1998 RESULTS OF OPERATIONS Net interest revenue $ 150,639 $ 45,468 $ 196,107 Provision for credit losses 12,906 2,108 15,014 - ---------------------------------------------------------------------------------------------------- Net interest income after provision for credit losses 137,733 43,360 181,093 Other revenue 33,056 19,962 53,018 Other expense 123,398 28,686 152,084 - ---------------------------------------------------------------------------------------------------- Income before income taxes 47,391 34,636 82,027 Income taxes 15,917 11,633 27,550 - ---------------------------------------------------------------------------------------------------- Net income 31,474 23,003 54,477 SELECTED FINANCIAL INFORMATION Identifiable Assets 4,691,959 511,782 5,203,741 Depreciation & amortization 12,697 1,193 13,890 1997 RESULTS OF OPERATIONS Net interest revenue $ 138,273 $ 40,158 $ 178,431 Provision for credit losses 6,086 3,521 9,607 - ---------------------------------------------------------------------------------------------------- Net interest income after provision for credit losses 132,187 36,637 168,824 Other revenue 31,631 16,272 47,903 Other expense 118,140 25,478 143,618 - ---------------------------------------------------------------------------------------------------- Income before income taxes 45,678 27,431 73,109 Income taxes 14,312 8,595 22,907 - ---------------------------------------------------------------------------------------------------- Net income 31,366 18,836 50,202 SELECTED FINANCIAL INFORMATION Identifiable Assets 4,255,940 430,745 4,686,685 Depreciation & amortization 11,107 1,115 12,222 1996 RESULTS OF OPERATIONS Net interest revenue $ 129,407 $ 36,638 $ 166,045 Provision for credit losses 6,856 2,669 9,525 - ---------------------------------------------------------------------------------------------------- Net interest income after provision for credit losses 122,551 33,969 156,520 Other revenue 27,992 17,430 45,422 Other expense 106,247 23,964 130,211 - ---------------------------------------------------------------------------------------------------- Income before income taxes 44,296 27,435 71,731 Income taxes 15,065 9,331 24,396 - ---------------------------------------------------------------------------------------------------- Net income 29,231 18,104 47,335 SELECTED FINANCIAL INFORMATION Identifiable Assets 3,662,515 407,894 4,070,409 Depreciation & amortization 9,618 1,046 10,664
(21) COMMITMENTS AND CONTINGENT LIABILITIES 56 57 LEASES Rent expense was approximately $2,933,000 for 1998, $2,815,000 for 1997 and $1,932,000 for 1996. Future minimum lease payments for all non-cancelable operating leases with initial or remaining terms of one year or more consisted of the following at December 31, 1998:
AMOUNT ------- (In thousands) 1999 $ 2,675 2000 2,381 2001 2,060 2002 775 2003 212 Thereafter 176 ------- Total future minimum lease payments $ 8,279 =======
MORTGAGE LOANS SERVICED FOR OTHERS The Company services mortgage loans for others which are not included in the accompanying financial statements. Included in the $1.7 billion of loans serviced for investors at December 31, 1998, is approximately $10 million of primary recourse servicing where the Company is responsible for any losses incurred in the event of nonperformance by the mortgagor. The Company's exposure to credit loss in the event of such nonperformance is the unpaid principal balance at the time of default. This exposure is limited by the underlying collateral which consists of single family residences and either federal or private mortgage insurance. FORWARD CONTRACTS Forward contracts are agreements to purchase or sell securities at a future specific date at a specific price or yield. Risks arise from the possibility that counterparties may be unable to meet the term of their contracts and from movements in securities values and interest rates. At December 31, 1998, the Company had obligations under forward contracts consisting of commitments to sell mortgage loans originated or purchased by the Company into the secondary market at a future date. These obligations are entered into by the Company in order to establish the interest rate at which it can offer mortgage loans to its customers. Changes in the values of mortgage loans held for sale by the Company for delivery into the secondary market are recorded at the lower of cost or market. As of December 31, 1998, the contractual or notional amount of these forward contracts was approximately $63,000,000. The Company's exposure under these commitments to sell mortgage loans in the future is not material. LENDING COMMITMENTS In the normal course of business, there are outstanding various commitments and other arrangements for credit which are not reflected in the consolidated balance sheets. As of December 31, 1998, these included approximately $32,211,000 for letters of credit, and approximately $717,328,000 for interim mortgage financing, construction credit, credit card and revolving line of credit arrangements. No significant credit losses are expected from these commitments and arrangements. LITIGATION Various legal claims have arisen in the normal course of business, including claims against entities to which the Company is successor as a result of business combinations. In the opinion of management, the ultimate resolution of these claims will have no material effect on the Company's consolidated financial position. RESTRICTED CASH BALANCE Aggregate reserves (in the form of deposits with the Federal Reserve Bank) of $15,432,000 were maintained to satisfy Federal regulatory requirements at December 31, 1998. 57 58 (22) CONDENSED FINANCIAL STATEMENT INFORMATION OF BANCORPSOUTH, INC. (PARENT COMPANY ONLY) The following condensed unaudited financial information reflects the accounts and transactions of BancorpSouth, Inc. (parent company only) for the dates indicated:
CONDENSED BALANCE SHEETS DECEMBER 31 ------------------------- 1998 1997 --------- --------- (In thousands) Assets Cash on deposit with subsidiary bank $ 5,823 $ 11,565 Securities 413 859 Investment in subsidiaries 450,375 397,120 Other assets 12,596 6,815 --------- --------- Total assets $ 469,207 $ 416,359 ========= ========= Liabilities and shareholders' equity Total liabilities $ 12,850 $ 19,668 Shareholders' equity 456,357 396,691 --------- --------- Total liabilities and shareholders' equity $ 469,207 $ 416,359 ========= ========= YEARS ENDED DECEMBER 31 ----------------------------------------- CONDENSED STATEMENTS OF INCOME 1998 1997 1996 --------- --------- --------- (In thousands) Dividends from subsidiaries $ 25,550 $ 21,174 $ 44,143 Management fees from subsidiaries 1,739 530 628 Other operating income 941 1,583 1,416 --------- --------- -------- Total income 28,230 23,287 46,187 Operating expenses 4,621 7,485 6,440 --------- --------- -------- Income before equity in undistributed earnings of subsidiaries 23,609 15,802 39,747 Equity in undistributed earnings of subsidiaries 30,868 34,400 7,588 --------- --------- -------- Net income $ 54,477 $ 50,202 $ 47,335 ========= ========= ======== YEARS ENDED DECEMBER 31 ----------------------------------------- CONDENSED STATEMENTS OF CASH FLOWS 1998 1997 1996 --------- --------- --------- (In thousands) Operating Activities: Net income $ 54,477 $ 50,202 $ 47,335 Adjustments to reconcile net income to net cash provided by operating activities (36,868) (28,876) (3,281) --------- --------- -------- Net cash provided by operating activities 17,609 21,326 44,054 Net cash used in financing activities (23,351) (19,939) (41,332) --------- --------- -------- (Decrease) increase in cash and cash equivalents (5,742) 1,387 2,722 Cash and cash equivalents at beginning of year 11,565 10,178 7,456 --------- --------- -------- Cash and cash equivalents at end of year $ 5,823 $ 11,565 $ 10,178 ========= ========= ========
58 59 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders BancorpSouth, Inc.: We have audited the consolidated balance sheets of BancorpSouth, Inc., and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income and comprehensive income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BancorpSouth, Inc., and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP Memphis, Tennessee January 20, 1999 59 60 SUMMARY OF QUARTERLY RESULTS (UNAUDITED) (In thousands, except per share amounts)
QUARTER ENDED ---------------------------------------- MAR 31 JUN 30 SEP 30 DEC 31 ------- ------- ------- ------- 1998 Interest revenue $93,189 $96,819 $97,236 $96,275 Net interest revenue 47,868 49,176 49,506 49,557 Provision for credit losses 3,123 3,262 5,059 3,570 Income before income taxes 21,788 22,827 20,838 16,574 Net income 14,532 15,161 13,545 11,239 Earnings per share: Basic 0.27 0.29 0.25 0.21 Diluted 0.27 0.28 0.25 0.21 Dividends per share 0.11 0.11 0.11 0.12 1997 Interest revenue $80,870 $84,276 $86,320 $88,235 Net interest revenue 42,906 44,694 44,790 46,041 Provision for credit losses 1,626 2,318 2,626 3,037 Income before income taxes 18,899 19,958 18,616 15,636 Net income 12,686 13,445 12,751 11,320 Earnings per share: Basic 0.25 0.27 0.25 0.22 Diluted 0.25 0.26 0.25 0.22 Dividends per share 0.095 0.095 0.095 0.110 1996 Interest revenue $74,652 $76,008 $77,949 $80,356 Net interest revenue 40,026 40,918 41,999 43,102 Provision for credit losses 1,606 3,242 2,634 2,043 Income before income taxes 15,908 19,227 17,245 19,351 Net income 10,637 12,372 11,543 12,783 Earnings per share: Basic 0.22 0.26 0.24 0.26 Diluted 0.22 0.26 0.24 0.26 Dividends per share 0.085 0.085 0.085 0.095
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no disagreements with the Company's independent accountants and auditors on any matter of accounting principles or practices or financial statement disclosure. 60 61 PART III Item 10. - Directors and Executive Officers of the Registrant Information concerning the directors and nominees of the Company appears under the caption "Election of Directors" in the Company's definitive Proxy Statement for its 1999 annual meeting, and is incorporated herein by reference. Executive Officers of Registrant Information follows concerning the executive officers of the Company who are subject to the reporting requirements of Section 16 of the Securities Exchange Act of 1934.
Name Offices Held Age ---- ------------ --- Aubrey B. Patterson Chairman of the Board of 56 Directors and Chief Executive Officer of the Company and BancorpSouth Bank; Director of the Company L. Nash Allen, Jr. Treasurer, and Chief 54 Financial Officer of the Company; Executive Vice President, Chief Financial Officer and Cashier, BancorpSouth Bank Harry R. Baxter Executive Vice President of the 54 Company and Vice Chairman of BancorpSouth Bank Gary R. Harder Executive Vice President of the 54 Company and BancorpSouth Bank Michael W. Weeks Executive Vice President of the 50 Company and Vice Chairman of BancorpSouth Bank Michael L. Sappington Executive Vice President of the 49 Company and Vice Chairman of BancorpSouth Bank Gregg Cowsert Executive Vice President of the 51 Company and Vice Chairman and Chief Lending Officer of BancorpSouth Bank
61 62 Cathy M. Robertson Executive Vice President of the 44 Company and BancorpSouth Bank
None of the executive officers of the Company are related by blood, marriage or adoption. There are no arrangements or understandings between any of the executive officers and any other person pursuant to which the individual named above was or is to be selected as an officer. The executive officers of the Company are elected by the Board of Directors at its first meeting following the annual meeting of shareholders, and they hold office until the next annual meeting or until their successors are duly elected and qualified. Mr. Patterson served as President of the Bank from 1983 until April 1990 when he was named Chief Executive Officer of the Bank and the Company. He has served as Chairman of the Board and Chief Executive Officer of the Bank and the Company since April 1993. Mr. Allen has served as Senior Vice President and Executive Vice President of the Bank during the past five years. He has served as Treasurer and Chief Financial Officer of the Company during this same period. Mr. Baxter joined the Bank in July 1986 as Senior Vice President and Director of Marketing. He was named Executive Vice President and Director of Marketing in August 1989 and named Vice Chairman in August 1996. He is also Executive Vice President of the Company. Mr. Harder served as First Vice President, Senior Vice President-Loan Review and Executive Vice President of BancorpSouth Bank during the last five years. He is also Executive Vice President of the Company. Mr. Weeks served as Vice-Chairman of the Board and Chief Executive Officer of Volunteer Bank from January 24, 1995 to March 16, 1995 when he was named Chairman of the Board and Chief Executive Officer of Volunteer Bank. He continued in that role until June 1997 when Volunteer Bank was merged into BancorpSouth Bank and he was named Vice Chairman of BancorpSouth Bank. He has served as Executive Vice President of the Company since January 17, 1995. Prior to his employment by the Company, Mr. Weeks served as a partner in the accounting firm of KPMG LLP. Mr. Sappington has served as Executive Vice President and Vice Chairman of the Bank during the last five years. He is also Executive Vice President of the Company. Mr. Cowsert joined the Bank in 1990 as Senior Vice President. He has since served as Executive Vice President and was named Vice Chairman in August 1996. He also is Executive Vice President of the Company. Ms. Robertson has served as First Vice President, Senior Vice President and Executive Vice President of the Bank during the past five years. She is also Executive Vice President of the Company. Item 11. - Executive Compensation Information concerning the remuneration of executive officers of the Company appears under the caption "Executive Compensation" in the Company's definitive Proxy Statement for its 1999 annual meeting, and is incorporated herein by reference. Information concerning the remuneration of directors of the Company appears under the caption "Compensation of Directors" in the Company's definitive Proxy Statement for its 1999 annual meeting, and is incorporated herein by reference. Item 12. - Security Ownership of Certain Beneficial Owners and Management Information concerning the security ownership of certain beneficial owners and directors and executive officers of the Company appears under the caption "Security Ownership of Certain Beneficial Owners and 62 63 Management" in the Company's definitive Proxy Statement for its 1999 annual meeting, and is incorporated herein by reference. Item 13. - Certain Relationships and Related Transactions Information concerning certain relationships and related transactions with management and others appears under the caption "Certain Relationships and Related Transactions" in the Company's definitive Proxy Statement for its 1999 annual meeting, and is incorporated herein by reference. 63 64 PART IV Item 14. - Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)1. Consolidated Financial Statements: See Item 8. (a)2. Consolidated Financial Statement Schedules: All schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. (a)3. Exhibits: (3) (a) Articles of incorporation, as amended. (1) (b) Bylaws. (4) Specimen Common Stock Certificate. (2) (10) (a) 1998 Directors Stock Plan. (8) (b) Form of deferred compensation agreement between Bancorp of Mississippi, Inc. and certain key executives. (4)(8) (c) 1994 Stock Incentive Plan. (2)(8) (d) 1995 Non-Qualified Stock Option Plan for Non-Employee Directors. (2)(7) (e) Stock Bonus Agreement between BancorpSouth, Inc. and Michael W. Weeks, dated January 17, 1995 and Escrow Agreement between Bank of Mississippi and Michael W. Weeks dated January 17, 1995. (6)(8) (f) Stock Bonus Agreement between BancorpSouth, Inc. and Aubrey B. Patterson, Jr., dated January 20, 1998 and Escrow Agreement between BancorpSouth Bank and Aubrey B. Patterson, Jr., date March 20, 1998 (7)(8) (g) Information regarding Bancorp of Mississippi, Inc., amended and restated Salary Deferral-Profit Sharing Employee Stock Ownership Plan. (5)(8) (11) Statement re computation of per share earnings (21) Subsidiaries of the Registrant. (23) Consent of Independent Accountants. (27) Financial Data Schedule. (28) Information regarding Bancorp of Mississippi, Inc., amended and restated Salary Deferral-Profit Sharing Employee Stock Ownership Plan. (5)(8) (1) Filed as exhibits 3.1 and 3.2 to the Company's registration statement on Form S-4 filed on January 6, 1995 (Registration No. 33-88274) and incorporated by reference thereto. (2) Filed as an exhibit to the Company's Form 10-Q for the three months ended March 31, 1998 (file number 0-10826), and incorporated by reference thereto. (3) Filed as an exhibit to the Company's Form 10-K for the year ended December 31, 1987 (file number 0-10826), and incorporated by reference thereto. (4) Filed as an exhibit to the Company's Form 10-K for the year ended December 31, 1988 (file number 0-10826), and incorporated by reference thereto. (5) Filed as an exhibit to the Company's Form 10-K for the year ended December 31, 1990 (file number 0-10826), and incorporated by reference thereto. (6) Filed as an exhibit to the Company's Form 10-K for the year ended December 31, 1995 (file number 0-1-826), and incorporated by reference thereto. (7) Filed as an exhibit to the Company's Form 10-K for the year ended December 31, 1997 (file number 0-10826), and incorporated by reference thereto. (8) Compensatory plans or arrangements. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended December 31, 1998. 64 65 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. DATE: March 24, 1999 /s/ Aubrey B. Patterson ---------------------------------- Aubrey B. Patterson Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Aubrey B. Patterson Chairman of the Board, Chief - ---------------------------- Executive Officer (Principal Aubrey B. Patterson Executive Officer) and Director March 24, 1999 /s/ L. Nash Allen, Jr. Treasurer and Chief Financial - ---------------------------- Officer (Principal Financial L. Nash Allen, Jr. and Accounting Officer) March 24, 1999 /s/ S. H. Davis Director March 24, 1999 - ---------------------------- S. H. Davis /s/ Hassell H. Franklin Director March 24, 1999 - ---------------------------- Hassell H. Franklin /s/ Fletcher H. Goode Director March 24, 1999 - ---------------------------- Fletcher H. Goode, M.D. /s/ W. G. Holliman, Jr. Director March 24, 1999 - ---------------------------- W. G. Holliman, Jr. Director - ---------------------------- A. Douglas Jumper /s/ Turner O. Lashlee Director March 24, 1999 - ---------------------------- Turner O. Lashlee /s/ Alan W. Perry Director March 24, 1999 - ---------------------------- Alan W. Perry
65 66 /s/ Travis E. Staub Director March 24, 1999 - ---------------------------- Travis E. Staub Director - ---------------------------- Andrew R. Townes, DDS /s/ Lowery A. Woodall Director March 24, 1999 - ----------------------------- Lowery A. Woodall
66 EX-3.B 2 AMENDED AND RESTATED BYLAWS 1 EXHIBIT 3.b AMENDED AND RESTATED BYLAWS OF BANCORPSOUTH, INC. ARTICLE I. OFFICES The principal office of BancorpSouth, Inc. (the "Corporation") shall be located in the City of Tupelo, County of Lee, State of Mississippi. The Corporation may have such other offices either within or without the State of Mississippi, as the Board of Directors may designate or as the business of the Corporation may require from time to time. ARTICLE II. MEETINGS SECTION 1. General All meetings of the shareholders of the Corporation shall be held at such place (either within or without the state), date and time as may be set forth in these bylaws or as shall be determined from time to time by the Board of Directors; and the place, date and time of such meeting shall be stated in the notice and call of the meeting. SECTION 2. Annual Meeting An annual meeting of the shareholders of the Corporation shall be held during the third, fourth or fifth month following the end of the Corporation's fiscal year on such date as may be fixed by resolution of the Board of Directors. The business to be transacted at such meeting shall be the election of directors and such other business as shall be properly brought before the meeting. If the election of directors is not held on the date determined by the Board of Directors for any annual meeting, or at any adjournment of such meeting, the Board of Directors shall call a special meeting of the shareholders as soon as conveniently possible thereafter. At such special meeting the election of directors shall take place and such election and any other business transacted thereat shall have the same force and effect as if transacted at an annual meeting duly called and held. SECTION 3. Special Meeting Special meetings of the shareholders, unless otherwise required by law, may be called at any time by the Chief Executive Officer or Secretary and shall be called by the Chief Executive Officer or Secretary at the request in writing of a majority of the Board of Directors or of shareholders owning not less than a majority of the entire capital stock of the Corporation issued and outstanding and entitled to vote at such meeting. Such written request must state the purpose or purposes for which the meeting is called and the person or persons calling the meeting. SECTION 4. Notice of Meeting Written notice stating the place, day and hour of the meeting, and in case of special meeting the purpose or purposes for which the meeting is called, shall, unless otherwise prescribed by statute, be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the Chief Executive Officer and/or President, the Secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United 2 States mail addressed to the shareholder at his address as it appears on the stock transfer books of the Corporation with postage paid thereon. SECTION 5. Fixing of Record Date For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other purpose, the Board of Directors of the Corporation may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than fifty (50) days and, in case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If no record date is fixed for the determination of shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof unless the meeting is adjourned to a date more than one hundred twenty (120) days after the date fixed for the original meeting in which event the Board of Directors shall fix a new record date. SECTION 6. Voting List The officer or agent having charge of the stock transfer books for shares of the Corporation shall make a complete list of the shareholders entitled to notice of a meeting of shareholders or any adjournment thereof, arranged by voting group (and within each voting group by class or series of shares), and in alphabetical order, with the address of and the number of shares held by each shareholder. The list shall be available for inspection beginning two (2) business days after notice of the meeting is given for which the list was prepared and continuing through the meeting, at the principal office of the Corporation and shall be subject to inspection on written demand by any shareholder, his agent or attorney at any time during regular business hours. Such list shall also be available at the time and place of the meeting and shall be subject to the inspection of any shareholder, his agent or attorney during the time of the meeting or any adjournment. The original stock transfer books shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer book or to vote at any meeting of shareholders. SECTION 7. Quorum A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders, except that two-thirds of the shares entitled to vote shall constitute a quorum for the transaction of business at a special meeting of shareholders. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders, unless the Restated Articles of Incorporation of the Corporation or applicable law requires a greater number of affirmative votes. If less than a majority of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. The shareholders present at a duly organized meeting may continue to transact business for that meeting and for any adjournment thereof, unless a new record date must be set for that adjourned meeting, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. 3 SECTION 8. Proxies At all meetings of shareholders, a shareholder may vote his shares either in person or by proxy. A shareholder or his agent or attorney in fact may appoint a proxy to vote or otherwise act for the shareholder by signing an appointment form, by electronic transmission or by any other method or means permitted under the laws of the State of Mississippi. No proxy shall be valid after eleven (11) months from the date of execution, unless otherwise expressly provided in the appointment form, electronic transmission or other applicable method or means of appointment. SECTION 9. Voting of Shares Each outstanding share entitled to vote shall be entitled to one (1) vote upon each matter submitted to a vote at a meeting of the shareholders. SECTION 10. Voting of Shares by Certain Holders Shares standing in the name of another corporation may be voted by such officer, agent or proxy as the bylaws of such corporation may prescribe, or in the absence of such provision as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian, or conservator may be voted by him, either in person or by proxy without a transfer of such shares into his name. Shares standing in the name of a receiver may be voted by such receiver and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority so to do be contained in an appropriate order of the court by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. Shares of its own stock owned by the Corporation or by any other corporation, the majority of whose voting shares are owned, directly or indirectly, by the Corporation, shall not be voted at any meeting, and shall not be counted in determining the total number of outstanding shares at any given time, except for any shares of the Corporation which are held in a fiduciary capacity. SECTION 11. Nominations for Director At least forty-five (45) days prior to the date of the meeting of shareholders at which directors are to be elected, the Board of Directors, or a nominating committee appointed by the Board, shall nominate candidates for election to the Board of Directors to be elected at such meeting. Any shareholder who desires to recommend for nomination, intends to nominate or to cause to have nominated any candidate for election to the Board of Directors (other than the candidates proposed by the Board or a nominating committee thereof) shall deliver written notice to the Chief Executive Officer of the Corporation not less than ninety (90) days prior to the date of such meeting. Such written notice shall contain the following information to the extent known by the nominating shareholders: the name and address of each proposed nominee; the principal occupation of each proposed nominee; the name and residence address of the notifying shareholder; and the number of shares owned by the notifying shareholder. Any nomination for director by a shareholder not made in accordance with the provisions of this section shall be disregarded by the presiding officer of the meeting, and upon his instructions all votes cast for each such nominee shall be disregarded. 4 SECTION 12. Action by Shareholders Without Meeting Unless otherwise provided by law, any action required to be taken at a meeting of the shareholders may be taken without a meeting if a consent in writing, setting forth the actions so taken, shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof. SECTION 13. Presiding Officer Meetings of the shareholders shall be presided over by the Chief Executive Officer of the Corporation, or if he is not present, by an officer ranking at least as high as Vice President, or if neither the Chief Executive Officer nor such an officer is present, by a chairman to be chosen by a majority of the shareholders entitled to vote at such meeting. The Secretary of the Corporation or an Assistant Secretary as designated by the Secretary, shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present, the shareholders entitled to vote at such meeting shall choose any person present to act as secretary of the meeting. SECTION 14. Conduct of Meetings Meetings of shareholders generally shall follow accepted rules of parliamentary procedure subject to the following: (a) The chairman of the meeting shall have absolute authority over the matters of procedure, and there shall be no appeal from the ruling of the chairman. If, in his absolute discretion, the chairman deems it advisable to dispense with the rules of parliamentary procedure as to any one meeting of shareholders or part thereof, he shall so state and shall clearly state the rules under which the meeting or appropriate part thereof shall be conducted. (b) If disorder should arise which prevents the continuation of the legitimate business of the meeting, the chairman may quit the chair and announce the adjournment of the meeting; and upon his so doing, the meeting is immediately adjourned. (c) The chairman may ask or require that anyone not a bona fide shareholder or proxy leave the meeting. (d) A resolution or motion shall be considered for vote only if proposed by a shareholder or a duly authorized proxy and seconded by a shareholder or duly authorized proxy other than the individual who proposed the resolution or motion. (e) Subject to the provisions of Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor rule, and except as the chairman may permit, no matter shall be presented to the meeting which has not been submitted for inclusion in the agenda at least thirty (30) days prior to the meeting. ARTICLE III. BOARD OF DIRECTORS SECTION 1. General Powers The business and affairs of the Corporation shall be managed by the Board of Directors. SECTION 2. Number and Tenure of Directors and Qualifications 5 The number of directors of the Corporation shall be not less than nine (9) nor more than twenty-four (24) directors. Each director shall hold office for the term provided in the Restated Articles of Incorporation, and until his successor shall have been elected and qualified. At each annual meeting of shareholders, the shareholders shall elect directors to hold office for the term provided in the Restated Articles of Incorporation, and the Chairman, or the Secretary of the meeting shall notify the directors-elect of their election. Each and every director of this Corporation must be the owner, in his or her own right, of unencumbered stock therein in the amount of at least two hundred dollars ($200.00) par value. SECTION 3. Regular Meetings Following (but not necessarily on the same date as) the annual meeting of the shareholders, the Board of Directors shall convene, for the purpose of an organizational meeting, organizing the new Board and electing Board officers, electing the officers of the Corporation and transacting such other business as may properly come before the meeting. All meetings of the Board of Directors shall be held at such place, date and time as may be set forth in these bylaws or as shall be determined from time to time by the Board of Directors; and the place, date and time of such meeting shall be stated in the notice and call of the meeting, provided, however, that in any event, the Board of Directors shall meet at least quarterly, in the months of January, April, July and October, including the annual meeting to be held in April. SECTION 4. Special Meetings Special meetings of the Board of Directors shall be held at any time upon call of the Chief Executive Officer or on the written request of three (3) Directors or the Secretary. SECTION 5. Notice of Meetings Regular meetings of the Board of Directors may be held without notice at such places and times as shall be determined from time to time by resolution of the directors. Notice of special meetings of the Board of Directors shall be given verbally or in writing by the Secretary by mailing a copy of such notice to the known postal address of the director not less than two (2) days prior to the date of the meeting; and the place, date and time of the meeting shall be stated in the notice. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director at the beginning of the meeting objects to holding the meeting or to the transaction of any business at the meeting and thereafter does not vote for or assent to action taken at the meeting. The foregoing paragraphs of this Section 5 shall also apply to meetings of committees of the Board of Directors and their members, provided that notice of special meetings shall be given by or upon the authority of the chairman of such committee. SECTION 6. Quorum The presence of not less than a majority of the whole Board of Directors, excluding any vacancies which may exist, shall be required at all regular and special meetings to constitute a quorum. SECTION 7. Manner of Acting The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. 6 SECTION 8. Action Without a Meeting Any action that may be taken by the Board of Directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so to be taken shall be signed by all the directors. Any action taken by written consent shall be effective when the last director signs the consent, unless the consent specifies a different effective date. SECTION 9. Vacancies Any vacancies occurring in the Board of Directors or any directorship to be filled by reason of an increase of the number of directors shall be filled by election at an annual meeting of shareholders or a special meeting of the shareholders called for that purpose. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. SECTION 10. Removal from Office Directors may be removed from office only for cause (as defined in the Restated Articles of Incorporation) at a special meeting of the shareholders called expressly for that purpose. Such removal shall be in accordance with the statutes of the State of Mississippi which set forth the methods to be followed in said removal procedure. SECTION 11. Compensation No stated salary shall be paid to directors for their services, but each director shall receive compensation, as may be determined from time to time by the Board of Directors for services on said Board for attendance at regular and committee meetings of the Board. Each director may be paid his expenses, if any, as determined from time to time by the Board of Directors. SECTION 12. Presumption of Assent A director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action unless (a) he objects at the beginning of the meeting to holding it or to the transaction of business at the meeting, (b) his dissent shall be entered in the minutes of the meeting, or (c) he delivers his written dissent to such action to the presiding officer of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. SECTION 13. Appointment of Committees The Board of Directors, by resolution adopted by a majority of the full Board of Directors, may designate from among its members an executive committee and one or more other committees, each of which, to the extent provided in such resolution or in the Articles of Incorporation or the bylaws of the Corporation, shall have and may exercise all the authority of the Board of Directors, subject to such limitations as shall be prescribed by law. 7 ARTICLE IV. OFFICERS SECTION 1. Number The officers of the Corporation shall be a President, one or more Vice Presidents, a Secretary and a Treasurer, each of whom shall be elected by the Board of Directors. Such other officers (including Chairman of the Board) as may be deemed necessary may be elected from time to time by the Board of Directors. Any two (2) or more offices may be held by the same person, except the offices of President and Secretary. SECTION 2. Election and Term of Office The officers of the Corporation to be elected by the Board of Directors shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of the shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as conveniently may be done. Each officer shall hold office until his successor shall have been duly elected and shall have qualified or until his death or until he shall resign or be removed in the manner hereinafter provided. SECTION 3. Removal Any officer or agent may be removed by the Board of Directors, whenever in its judgment the best interest of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. SECTION 4. Vacancies A vacancy in any office because of death, resignation, removal, disqualification, or otherwise, may be filled by the Board of Directors for the unexpired portion of the term. SECTION 5. Chairman of the Board The Chairman of the Board of Directors shall preside at all meetings of the Board of Directors and at all meetings of the shareholders. The Chairman may direct the President or a senior officer to preside at any meeting of the Board or of the shareholders. The Chairman of the Board shall be an ex-officio member of all committees of the Board of Directors, except for any committee which administers an employee benefit plan pursuant to the provisions of Rule 16b-3 promulgated under the Exchange Act, where such officer is an employer of the Corporation or any subsidiary of the Corporation, or where membership of such committee is prohibited by or inconsistent with applicable law, regulation or rules. SECTION 6. Chief Executive Officer The Chief Executive officer (who shall be the Chairman of the Board if so designated by the Board of Directors or President) shall have general supervision of the policies and operations of the Corporation subject to the direction and control of the Board. The Chief Executive Officer shall direct the management of the Corporation and shall perform such other duties as may be assigned to him, from time to time, by the Board of Directors. He shall cause to be kept accurate books of account of the business of the Corporation which shall at all times be open to inspection of the directors. He shall render, or cause to be rendered, to the shareholders annual reports in writing of the business and condition of the Corporation, and similar reports to the Board of Directors at the regular meetings. The Chief Executive Officer shall have full power to sign, execute and deliver on behalf of the Corporation all papers necessary to be signed, executed and delivered in carrying on the business of the Corporation and such other papers as he may be directed to sign by the Board of Directors. The Chief Executive Officer shall be an ex-officio member of all committees of the Board of Directors, except for any committee which administers an employee benefit plan pursuant to the provisions of Rule 16b-3 promulgated under the Exchange Act, where such officer is an employer of the Corporation or any 8 subsidiary of the Corporation, or where membership of such committee is prohibited by or inconsistent with applicable law, regulation or rules. SECTION 7. President The President shall participate in the general supervision of the policies and operations of the Corporation subject to the direction and control of the Chief Executive Officer. He shall prescribe the duties of the other officers and employees and see to the proper performance thereof. The President shall have full power to sign, execute, and deliver on behalf of the Corporation all papers necessary to be signed, executed and delivered in carrying on the business of the Corporation and such other papers as he may be directed to sign by the Board of Directors. The President shall be a member of those committees of the Board of which he is appointed by the Board of Directors. SECTION 8. Vice President In the absence of the President or in event of his death, inability or refusal to act, unless the Board of Directors has designated by resolution another officer (by title or by name), the Vice President shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The Vice President shall perform such other duties as from time to time may be assigned to him by the Chief Executive Officer or by the Board of Directors. SECTION 9. Secretary The Secretary shall: (a) keep the minutes of the proceedings of the shareholders and of the Board of Directors in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these bylaws or as required by law; (c) be custodian of the corporate records and of the seal of the corporation and see that the seal of the corporation is affixed to all documents the execution of which on behalf of the corporation under its seal is duly authorized and required by law; (d) keep a register of the postal address of each shareholder which shall be furnished to the Secretary by such shareholder; (e) sign with the Chief Executive Officer and/or the President, certificates for shares of the Corporation, the issuance of which shall have been authorized by resolution of the Board of Directors; (f) have general charge of the stock transfer books of the Corporation; and (g) in general perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Chief Executive Officer or by the Board of Directors. SECTION 10. Treasurer The Treasurer shall: (a) have charge and custody of and be responsible for all funds and securities of the Corporation; (b) receive and give receipts for moneys due and payable to the Corporation from any source whatsoever, and deposit all such moneys in the name of the Corporation in such banks, trust companies or other depositaries as shall be selected in accordance with the provisions of Article VI of these bylaws; and (c) in general perform all of the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Chief Executive Officer or by the Board of Directors. If required by the Board of Directors, the Treasurer shall give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the Board of Directors shall determine. SECTION 11. Salaries The salaries of the Officers shall be fixed from time to time by the Board of Directors. 9 ARTICLE V. INDEMNIFICATION SECTION 1. Indemnification Other Than in Actions by or in the Rights of the Corporation Any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee, or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall be indemnified by the Corporation against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding to the fullest extent provided in the Restated Articles of Incorporation and by law. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed, in the case of conduct in his official capacity, to be in the best interests of the Corporation and in all other cases, that his conduct was not opposed to the Corporation's best interests or, with respect to any criminal proceeding, that he had reasonable cause to believe that his conduct was unlawful. SECTION 2. Indemnification in Actions by or in Right of the Corporation Any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall be indemnified by the Corporation against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit except that no indemnification shall be made in respect of any claim, issue, or matter as to which such person shall have been adjudged to have breached his duty to the Corporation to discharge his duties in good faith and with the care which an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner he reasonably believes to be in the best interests of the Corporation, unless and only to the extent that the court in which such action or suit has been brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. SECTION 3. Expenses To the extent that a person specified in Section 2 of this Article V has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1 or 2 of this Article V hereof, or in defense of any claim, issue, or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. SECTION 4. Authorization of Indemnification Any indemnification under Section 1 or 2 of this Article V hereof (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification is proper in the circumstances because the indemnitee has met the standard of conduct set forth in the applicable section. Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (b) if such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel (who may be the regular counsel of the Corporation) in a written opinion, or (c) by the holders of a majority of each class of stock outstanding. 10 SECTION 5. Advancing of Expenses Expenses incurred by a party to a proceeding may be paid by the Corporation in advance of the final disposition of such action, suit, or proceeding as authorized by the Board of Directors in the manner provided in Section 4 of this Article V upon receipt of an undertaking by or on behalf of the payee to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized herein. SECTION 6. Indemnification hereunder Not Exclusive The indemnification provided herein shall not be deemed exclusive of any other rights to which a party seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent, and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 7. Insurance The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions hereof. SECTION 8. Mergers For the purposes of Sections 1-7 of this Article V hereof, references to the "Corporation" include all constituent corporations absorbed in a consolidation or merger, as well as the resulting or surviving corporation, so that any person who is or was a director, officer, employee, or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions hereof with respect to the resulting or surviving corporation in the same capacity. ARTICLE VI. CONTRACT, LOANS, CHECKS AND DEPOSITS SECTION 1. Contracts Any officer with the rank of Vice President or higher or as designated by the Board of Directors may enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances. SECTION 2. Loans No loans shall be contracted on behalf of the Corporation and no evidence of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances. 11 SECTION 3. Checks, Drafts, etc. All checks, drafts, or other orders for the payment of money, notes or other evidence of indebtedness issued in the name of the Corporation, shall be signed by the Chief Executive Officer, President, Treasurer of the Corporation or an officer designated by the Board of Directors and in such manner as shall from time to time be determined by resolution of the Board of Directors. SECTION 4. Deposits All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositaries as the Board of Directors may select. ARTICLE VII. CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION 1. Certificates for Shares Certificates representing shares of the Corporation shall be in such form as shall be determined by the Board of Directors. Such certificates shall be signed by the Chief Executive Officer and/or President and by the Secretary or by such other officers authorized by law and by the Board of Directors so to do, and sealed with the corporate seal. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Corporation. All certificates surrendered to the Corporation for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in case of a lost, destroyed or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the Corporation as the proper officers designated by the Board of Directors may prescribe. SECTION 2. Transfer of Shares Transfer of shares of the Corporation shall be made only on the stock transfer books of the Corporation by the holder of record thereof or by his legal representative, who shall furnish proper evidence of authority to transfer, or by his attorney thereunto authorized by power of attorney duly executed and filed with the transfer agent of the Corporation, and on surrender for cancellation of the certificate of such shares. The person in whose name shares stand on the books of the Corporation shall be deemed by the Corporation to be the owner thereof for all purposes. ARTICLE VIII. FISCAL YEAR The fiscal year of the Corporation shall begin on the first (1st) day of January and end on the thirty-first (31st) day of December in each year. ARTICLE IX. DIVIDENDS The Board of Directors may from time to time declare, and the Corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and its Restated Articles of Incorporation. 12 ARTICLE X. CORPORATE SEAL The Board of Directors shall provide a corporate seal which shall be circular in form and shall have inscribed thereon the name the Corporation and the State of incorporation and the words, "Corporate Seal". ARTICLE XI. WAIVER OF NOTICE Unless otherwise provided by law, whenever any notice is required to be given to any shareholder or director of the Corporation under the provisions of these bylaws or under the provisions of the Restated Articles of Incorporation or under the provisions of the Mississippi Business Corporation Act, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. ARTICLE XII. AMENDMENTS These bylaws may be altered, amended or repealed and new bylaws may be adopted by the Board of Directors at any regular or special meeting of the Board of Directors. ARTICLE XIII. REVISED PROCEDURES SECTION 1. Business to be Transacted at Meetings of Shareholders Notwithstanding ARTICLE II, SECTION 11, ARTICLE II, SECTION 14(d) and ARTICLE II, SECTION 14(e), upon completion of the annual meeting of shareholders to be held in April 1999, this ARTICLE XIII shall apply in place thereof and such sections shall thereafter be of no effect. (a) Director Nominations and Shareholder Business at Annual Meetings of Shareholders (1) No nominations of any person for election to the Board of Directors shall be made, and no business to be considered or acted upon by the shareholders of the Corporation shall be proposed, at any annual meeting of shareholders, except as shall be: (i) specified in the Corporation's notice of meeting (including shareholder proposals included in the Corporation's proxy materials under Rule 14a-8 of Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), (ii) otherwise brought before the meeting by or at the direction of the Board of Directors, or (iii) a proper subject for the meeting and which is timely submitted by a shareholder of the Corporation entitled to vote at such meeting who complies fully with the notice requirements set forth in this subsection (a) in addition to any other applicable law, rule or regulation applicable to such meeting. (2) For nominations of persons for election to the Board of Directors or other business to be properly submitted by a shareholder before any annual meeting under subsection (a)(1)(iii) above, a shareholder must give timely notice in writing of such business to the Secretary of the Corporation. To be considered timely, a shareholder's notice must be received by the Secretary at the principal office of the Corporation not earlier than the date which is one hundred twenty (120) calendar days nor later than the date which is ninety (90) calendar days before the first anniversary of the date on which the Corporation first mailed its proxy statement to shareholders in connection with the prior year's annual meeting of shareholders. However, if the Corporation did not hold an annual meeting during the previous year, or if the date of the applicable year's annual meeting has been changed by more than 13 thirty (30) calendar days from the first anniversary of the date of the previous year's meeting, then a shareholder's notice must be received by the Secretary not earlier than the date which is one hundred twenty (120) calendar days before the date on which the Corporation first mailed its proxy statement to shareholders in connection with the applicable year's annual meeting and not later than the date of the later to occur of (i) ninety (90) calendar days before the date on which the Corporation first mailed its proxy statement to shareholders in connection with the applicable year's annual meeting of shareholders or (ii) ten (10) calendar days after the Corporation's first public announcement of the date of the applicable year's annual meeting of shareholders. (3) A shareholder's notice to the Secretary to submit a nomination or other business to an annual meeting of shareholders shall set forth: (i) the name and address of the shareholder; (ii) the class and number of shares of stock of the Corporation held of record and beneficially owned by such shareholder; (iii) the name(s), including any beneficial owners, and address(es) of such shareholder(s) in which all such shares of stock are registered on the stock transfer books of the Corporation; (iv) a representation that the shareholder intends to appear at the meeting in person or by proxy to submit the business specified in such notice; (v) a brief description of the business desired to be submitted to the annual meeting of shareholders, the complete text of any resolutions intended to be presented at the annual meeting and the reasons for conducting such business at the annual meeting of shareholders; (vi) any personal or other material interest of the shareholder in the business to be submitted; (vii) as to each person whom the shareholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (viii) all other information relating to the nomination or proposed business which may be required to be disclosed under applicable law. In addition, a shareholder seeking to submit such nominations or business at the meeting shall promptly provide any other information reasonably requested by the Corporation. (b) Director Nominations and Shareholder Business at Special Meetings of Shareholders (1) No nominations of any person for election to the Board of Directors shall be made, and no business to be considered or acted upon by the shareholders of the Corporation shall be proposed, at any special meeting of shareholders, except as shall be: (i) specified in the notice of meeting or (ii) otherwise brought before the meeting by or at the direction of the Board of Directors. When the notice of meeting provides that directors will be elected at a special meeting of shareholders, nominations of persons for election to the Board of Directors may be made only (i) by or at the direction of the Board of Directors or the nominating committee appointed by the Board of Directors or (ii) by any shareholder of the Corporation who is a shareholder of record at the time of giving of notice provided for in this subsection (b), who is entitled to vote at the meeting and who complies with the notice procedures set forth in this subsection (b) in addition to any other applicable law, rule or regulation applicable to such meeting. (2) Nominations by shareholders of persons for election to the Board of Directors may be made at such a special meeting of shareholders if the shareholder's notice required by this section shall be delivered to the Secretary at the principal 14 office of the Corporation not earlier than the date which is one hundred twenty (120) calendar days before the date of such special meeting and not later than the date of the later to occur of (i) ninety (90) calendar days before the date of such special meeting of shareholders or (ii) ten (10) calendar days after the Corporation's first public announcement of the date of the special meeting of shareholders. (3) A shareholder's notice to the Secretary to nominate persons for election to the Board of Directors at a special meeting of shareholders shall set forth: (i) the name and address of the shareholder; (ii) the class and number of shares of stock of the Corporation held of record and beneficially owned by such shareholder; (iii) the name(s), including any beneficial owners, and address(es) of such shareholder(s) in which all such shares of stock are registered on the stock transfer books of the Corporation; (iv) a representation that the shareholder intends to appear at the meeting in person or by proxy to nominate the persons specified in such notice; (v) any personal or other material interest of the shareholder in the nomination of such persons for election to the Board of Directors; (vi) as to each person whom the shareholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (vii) all other information relating to the nomination of persons for election to the Board of Directors which may be required to be disclosed under applicable law. In addition, a shareholder seeking to submit such nomination at the meeting shall promptly provide any other information reasonably requested by the Corporation. (c) General (1) Only those persons who are nominated in accordance with the procedures set forth in this ARTICLE XIII shall be eligible for election as directors at any meeting of shareholders. Only business brought before the meeting in accordance with the procedures set forth in this ARTICLE XIII shall be conducted at a meeting of shareholders. The chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this ARTICLE XIII and, if any proposed nomination or business is not in compliance with this ARTICLE XIII, to declare that such defective proposal shall be disregarded. (2) For purposes of this ARTICLE XIII, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press, Business Wire or comparable news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to the Exchange Act. (3) In addition to the foregoing provisions of this ARTICLE XIII, a shareholder shall also comply with all applicable requirements of state law, the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this ARTICLE XIII. (4) In addition to the foregoing provisions of this ARTICLE XIII, a shareholder who seeks to have any proposal included in the Corporation's proxy materials shall comply with the requirements of Rule 14a-8 under the Exchange Act. 15 (5) Subject to the provisions of ARTICLE XIII, a resolution or motion shall be considered for vote only if proposed by a shareholder or a duly authorized proxy and seconded by a shareholder or duly authorized proxy other than the individual who proposed the resolution or motion. Amended by the Board of Directors as of February 26, 1999. EX-10 3 DIRECTOR OF STOCK PLAN 1 EXHIBIT 10 BANCORPSOUTH, INC. DIRECTOR STOCK PLAN FEBRUARY 14, 1998 1. PURPOSE OF PLAN. BancorpSouth, Inc. (the "Company") and BancorpSouth Bank, a wholly-owned subsidiary of the Company (the "Bank"), established the Deferred Directors' Fee Unfunded Plan of BancorpSouth, Inc. (the "Fee Deferral Plan") on November 25, 1980, and amended and restated the Plan effective July 1, 1994, through which a director of the Company or the Bank may elect to defer the receipt of cash compensation payable as consideration for service as a director. The Company now desires to establish this BancorpSouth, Inc. Directors Stock Plan (the "Plan") to provide for payment of at least 50% of a director's compensation in the form of common stock, $2.50 par value per share ("Common Stock"), of the Company, in order to more closely align the interests of the directors with those of the shareholders of the Company. In addition, the Company desires to enable directors to elect to receive all or a portion of the remaining 50% director compensation in the form of Common Stock. 2. PARTICIPATION. Each member of the board of directors of the Company (the "Company Board") who is not also an officer or employee of the Company (each such person, a "Company Director"), and each member of the board of directors of the Bank (the "Bank Board") who is not also an officer or employee of the Bank (each such person, a "Bank Director"), shall be eligible to participate in the Plan during the period in which they serve in such position (collectively, a "Director"). 3. AUTOMATIC GRANT. Beginning January 1, 1999, all fees payable to Company Directors and Bank Directors shall be paid pursuant to the terms of this Paragraph; provided, however, the receipt of any cash amounts elected hereunder may be deferred at the election of the Directors pursuant to the terms of the Fee Deferral Plan, as provided in Paragraph 0. (a) During the term of this Plan, 50% of the Company Director Fee and the Board Director Fee (each as defined below) payable from time to time to each Company Director and Bank Director for attendance at a meeting of the Company Board, the Bank Board, and committees thereof, shall be payable in shares of Common Stock, based upon the trading price of the Common Stock on the New York Stock Exchange (or the exchange on which the Common Stock is generally traded at that time) during the period in which the Common Stock is issued to the Company Director or Bank Director in payment of the respective fees. (b) For purposes of this Plan, "Company Director Fee" means the amount of director fees determined by the Company Board or the appropriate committee thereof to be payable to each Company Director for attendance at a meeting of the Company Board and committee thereof. For purposes of this Plan, "Bank Director Fee" means the amount of director fees determined by the Bank or the appropriate committee thereof to be payable to each Bank Director for attendance at a meeting of the Bank Board and committee thereof. 4. STOCK OR CASH ELECTION. The remainder of the Company Director Fee and the Bank Director Fee that is not paid pursuant to Paragraph 0 shall be paid in the form of Common Stock in the same manner described in Paragraph 0 or, if elected by the Director, in the form of cash. (a) With respect to the portion of the Company Director Fee and the Bank Director Fee that the Director elects to receive in the form of cash, the Director may elect to defer the receipt of such payment pursuant to the terms of the Fee Deferral Plan. (b) If a Director does not execute a written election to receive payment of the Company Director Fee and/or the Bank Director Fee in cash and in the manner specified by the Company, the Director will receive full payment of the same in the form of Common Stock. 5. SHARE ACCOUNTING AND STOCK ISSUANCE. Shares of Common Stock that are payable pursuant to Paragraphs 0 and 0 shall be issued subject to the terms and conditions of the Plan through the Company's transfer agent 2 in the name of the applicable Company Director or Bank Director after the date of each respective meeting in accordance with the administrative scheme that the Company shall establish for issuance of shares. Pending such issuance, shares earned hereunder shall be credited to a bookkeeping account ("Account") that is maintained by the Company (or its agents). At the time of issuance, whole shares of Common Stock will be delivered to Company Director or Bank Director and subtracted from the Account. Any fractional shares remaining in the Account shall be accumulated with future Account credits. The value of any fractional shares remaining in the Account at the time a person is no longer a Company Director or Bank Director shall be paid in cash. 6. SOURCE OF STOCK. Shares of Common Stock issued under the Plan may be authorized and unissued shares, issued shares held in or acquired for the treasury of the Company, or shares of Common Stock that are reacquired by the Company upon purchase in the open market or otherwise. Provided, however, that the Company may not deliver newly issued shares of Common Stock hereunder unless the shareholders of the Company have approved the use of newly issued shares under this Plan in a manner that complies with the rules of the New York Stock Exchange. If the Common Stock is not listed on the New York Stock Exchange, shareholder approval of using newly issued shares shall be required to the extent necessary and in the manner required under the rules of the exchange or system through which Common Stock is traded. 7. ADMINISTRATION OF THE PLAN. This Plan shall be administered by the compensation committee of the Board of Directors of the Company, or in the absence of appointment of such committee, by the Board of Directors. 8. SECURITIES LAWS MATTERS. The shares of Common Stock to be issued under this Plan may, or may not, be in the sole discretion of the Company, registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), or the securities act of any state. If such shares have not been so registered, no disposition of the shares may be made in the absence of an effective registration statement under the Act and compliance with applicable state securities laws or an opinion of counsel satisfactory to the Company to the effect that such disposition is in compliance with the Act and applicable state securities laws. The Company's obligation to deliver shares of Common Stock under the Plan shall be at all times subject to all approvals of any governmental authorities required in connection with the authorization, issuance, offer, sale or delivery of such stock and compliance with applicable state and federal securities laws. In order to comply with the requirements for an exemption under Rule 16b-3, promulgated under the Securities and Exchange Act of 1934, the Common Stock obtained under this Plan may not be disposed of for a period of six months after it is transferred to a Director pursuant to the terms of this Plan. Furthermore, all dispositions of Common Stock acquired hereunder shall be subject to the restrictions set forth in the Company's insider trading policy as it is adopted from time to time. 9. TERM OF THE PLAN. This Plan shall be effective as of February 14, 1998 and shall continue thereafter until terminated by the Company Board. The Company Board may amend or terminate this Plan at any time; provided, however, that any such amendment or termination shall not affect the rights of a Company Director or Bank Director with respect to Common Stock theretofore payable under the Plan. 10. MISCELLANEOUS. Any headings or subheadings in this Plan are inserted for convenience of reference only and are to be disregarded in the construction of any provisions hereof. This Plan shall be construed in accordance with the laws of the State of Mississippi, without regard to the principles of conflicts of law thereof, to the extent federal law does not supersede and preempt such law. 3 IN WITNESS WHEREOF, the undersigned has executed this Plan pursuant to authorization of the Board of Directors of the Company on this ____ day of February, 1998. BANCORPSOUTH, INC. By: --------------------------------------- Its: -------------------------------------- EX-11 4 COMPUTATION OF EARNINGS 1 EXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Year Ended December 31, ------------------------------------------------ (Dollars in thousands except per share amounts.) 1998 1997 1996 ------ ------ ------ Basic Earning per Share Average shares outstanding 53,285 50,769 48,218 ======= ======= ======= Income available to common shareholders $54,477 $50,202 $47,335 ======= ======= ======= Basic Earnings per Share $ 1.02 $ 0.99 $ 0.98 ======= ======= ======= Diluted Earnings per Share Average common shares outstanding 53,285 50,769 48,218 Effect of dilutive stock options 586 422 329 ------- ------- ------- Average diluted shares outstanding 53,871 51,191 48,547 ======= ======= ======= Income available to common shareholders $54,477 $50,202 $47,335 ======= ======= ======= Diluted Earnings per Share $ 1.01 $ 0.98 $ 0.98 ======= ======= =======
EX-21 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
Jurisdiction Holder of Name Of Incorporation Outstanding Stock ---- ---------------- ----------------- BancorpSouth Bank Mississippi BancorpSouth, Inc. Personal Finance Corporation Mississippi BancorpSouth Bank Century Credit Life Insurance Company Mississippi BancorpSouth Bank BancorpSouth Insurance Services Mississippi BancorpSouth Bank of Mississippi, Inc. BancorpSouth Insurance Services Tennessee BancorpSouth Bank of Tennessee, Inc.
EX-23 6 CONSENT OF KPMG LLP 1 EXHIBIT 23 ACCOUNTANTS' CONSENT The Board of Directors BancorpSouth, Inc.: We consent to incorporation by reference in the Registration Statement (No. 33-28081) on Form S-4 and the Registration Statement (No. 33-60699) on Form S-8 of BancorpSouth, Inc. of our report dated January 20, 1999, relating to the consolidated balance sheets of BancorpSouth, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income and comprehensive income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, which report is included in the 1998 annual report on Form 10-K of BancorpSouth, Inc. KPMG LLP Memphis, Tennessee March 29, 1999 EX-27 7 FINANCIAL DATA SCHEDULE
9 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 175,354 6,632 0 0 549,767 549,767 549,767 3,468,701 49,618 5,203,741 4,441,923 64,554 62,589 178,318 0 0 134,879 321,478 5,203,741 302,381 41,850 39,288 383,519 173,716 187,412 196,107 15,014 867 152,084 82,027 82,027 0 0 54,477 1.02 1.01 4.29 6,152 9,654 713 0 42,988 11,932 2,396 49,618 49,618 0 0
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