-----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, QVUz9eCVdTLDL9lb2P3sGniNG9sFisH/YzuptToKBLZVWdP9NN/HkAxIg0FfnoZ5 z/YKlr4S/3CVQqUZ+g450A== 0000950144-00-003925.txt : 20000411 0000950144-00-003925.hdr.sgml : 20000411 ACCESSION NUMBER: 0000950144-00-003925 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 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: 582023 BUSINESS ADDRESS: STREET 1: ONE MISSISSIPPI PL CITY: TUPELO STATE: MS ZIP: 38801 BUSINESS PHONE: 6626802000 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, 1999 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 38804 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (662) 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 Continued on Next Page) 2 (Continued from Cover Page) The aggregate market value of the voting stock held by non-affiliates of the registrant as of January 31, 2000, was approximately $821,846,000 based on the closing sale price as reported on the New York Stock Exchange on such date. On January 31, 2000, the registrant had outstanding 57,204,183 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 May 2, 2000, are incorporated by reference into Part III of this Report. 2 3 BANCORPSOUTH, INC. FORM 10-K For the Fiscal Year Ended December 31, 1999 CONTENTS PART I Item 1. Business............................................................................... 4 Item 2. Properties............................................................................. 17 Item 3. Legal Proceedings ..................................................................... 18 Item 4. Submission of Matters to a Vote of Security Holders.................................... 18 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters............... 18 Item 6. Selected Financial Data................................................................ 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation... 21 Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 31 Item 8. Financial Statements and Supplementary Data............................................ 33 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 57 PART III Item 10. Directors and Executive Officers of the Registrant..................................... 58 Item 11. Executive Compensation................................................................. 59 Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 59 Item 13. Certain Relationships and Related Transactions......................................... 59 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 60
3 4 PART I Item 1. - Business General BancorpSouth, Inc. (the "Company") is a bank holding company with commercial banking and 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 38804 and its telephone number is (662) 680-2000. Description of Business The Bank has its principal office in Tupelo, Lee County, Mississippi, and conducts a general commercial banking and trust business through 167 offices in 87 municipalities or communities in 50 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 investment services, consumer finance, credit life insurance and insurance agency subsidiaries. At December 31, 1999, the Bank had total deposits of approximately $4.82 billion and total assets of approximately $5.78 billion. The Company, through its subsidiaries, provides a range of financial services 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 of its subsidiary bank, including personal trust and estate services, certain employee benefit accounts and plans, including individual retirement accounts, and limited corporate trust functions. At December 31, 1999, the Company and its subsidiaries employed 2,606 persons. The Company and its subsidiaries are not a party to any collective bargaining agreements, and employee relations are considered to be 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 with state and national commercial banks as well as 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 entire 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 and 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 regulation specifically mentioned herein. The Company is a bank holding company and is registered as such under the Bank Holding Company Act of 1956 with the Board of Governors of the Federal Reserve System (the "Federal Reserve") and is subject to regulation and supervision by the Federal Reserve. The Company is required to file with the Federal Reserve annual reports and such other information as it may require. The Federal Reserve may also conduct examinations of the Company. 4 5 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 regulation by the Mississippi Department of Banking and Consumer Finance (the "Mississippi Department"). The Bank is incorporated under the banking laws of the State of Mississippi and is subject to the applicable provisions of Mississippi banking laws. The Bank is subject to the supervision of the Mississippi Department 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. 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 Company's deposits are in the Bank Insurance Fund (BIF), certain other of the Company'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 Federal Reserve adopts from time to time. See Note 19 of Notes to Consolidated Financial Statements included in this report. In September 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA") was signed into law. 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 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. 5 6 The federal Gramm-Leach-Bliley Act of 1999 (the "GLBA") was signed into law on November 12, 1999. Under the GLBA, banks are no longer prohibited by the Glass-Steagall Act from associating with a company engaged principally in securities activities. The GLBA also permits bank holding companies to elect to become a "financial holding company," which would expand the powers of the bank holding company. Financial holding company powers relate to financial activities that are determined by the Federal Reserve to be financial in nature, incidental to an activity that is financial in nature, or complementary to a financial activity (provided that the complementary activity does not pose a safety and soundness risk). The GLBA itself defines certain activities as financial in nature, including lending activities, underwriting and selling insurance, providing financial or investment advice, underwriting, dealing and making markets in securities and merchant banking. In order to qualify as a financial holding company, a bank holding company's depository subsidiaries must be both well capitalized and well managed, and must have at least a satisfactory rating under the Community Reinvestment Act. The bank holding company must also declare its intention to become a financial holding company to the Federal Reserve and certify that its depository subsidiaries meet the capitalization and management requirements. The repeal of the Glass-Steagall Act provisions and the availability of financial holding company powers became effective on March 11, 2000. The GLBA establishes the Federal Reserve as the umbrella regulator of financial holding companies, with subsidiaries of the financial holding company being more specifically regulated by other regulatory authorities, such as the Securities and Exchange Commission, the Commodity Futures Trading Commission and state securities and insurance regulators, based upon the subsidiaries' particular activities. The GLBA also provides for minimum federal standards of privacy to protect the confidentiality of the personal financial information of customers and to regulate use of such information by financial institutions. A bank holding company that does not elect to become a financial holding company remains subject to the Bank Holding Company Act. Management believes that the Company currently meets the requirements to make an election to become a financial holding company under the GLBA; however, management is considering the operational flexibility and other benefits, and the increased regulation, expense and other disadvantages, associated with becoming a financial holding company, and has not yet determined whether the Company will make an election to become a financial holding company. The Community Reinvestment Act of 1997 ("CRA") and its implementing regulations are intended to encourage regulated financial institutions to meet the credit need of their local community or communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of such financial institutions. The regulations provide that the appropriate regulatory authority will assess CRA reports in connection with applications for establishment of domestic branches, acquisitions of banks or mergers involving bank holding companies. An unsatisfactory CRA rating may serve as a basis to deny an application to acquire or establish a new bank, to establish a new branch or to expand banking services. At December 31, 1999, the Company had a "satisfactory" CRA rating. The Equal Credit Opportunity Act requires non-discrimination in banking services. The federal enforcement agencies have recently cited institutions for red-lining (refusing to extend credit to residents of a specific geographic area known to be comprised predominantly of minorities) or reverse red-lining (extending credit to minority applicants on terms less favorable than those offered to non-minority applicants). Violations can result in the assessment of substantial civil penalties. The Bank's insurance subsidiaries are regulated by the insurance regulatory authorities and applicable laws and regulations of the states in which they operate. 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 Bank 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 6 7 (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 Bank 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 Bank requires personal guaranties of its commercial loans to offset the risks associated with such loans. The Bank 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 Bank's lending activities consists of the origination of fixed and adjustable rate residential mortgage loans secured by owner-occupied property located in the Bank'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 Bank's traditional banking facilities or from affordable storefront locations in commercial buildings. In addition, the Bank offers construction loans, second mortgages home improvement loans and home equity lines of credit. The Bank has received an "outstanding" CRA rating from the FDIC Company after its most recent examination. The Bank 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 Bank 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 Bank will sell its mortgage loans of 15 or more years in term in the secondary market. The sale to the secondary market allows the Bank to hedge against the interest rate risks related to such lending operations. This brokerage arrangement allows the Bank 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 Bank's only involvement is to act as a servicing agent. The Bank in most cases requires title, fire, extended casualty insurance, and, where required by applicable regulations, flood insurance to be obtained by the borrower. The Bank 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 Bank customarily include a "due on sale" clause giving the Bank 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 Bank 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 Bank include loans for automobiles, recreation vehicles, boats, personal (secured and unsecured) and deposit account secured loans. In addition, the Bank provides federally insured or guaranteed student loans to students at major universities and community colleges in the Bank's market areas. The Bank also conducts various indirect lending activities through established retail companies in its market areas. Non-residential consumer loans are attractive to the Bank because they typically have a shorter term and carry higher interest rates than 7 8 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 Bank also issues credit cards solicited on the basis of applications received through referrals from the Bank's branch networks. The Bank 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 ratios, similar to the credit policies applicable to other personal consumer loans. Historically, the Bank 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 Bank 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 Bank's market area. Other Financial Services The Bank's consumer finance subsidiaries extend consumer loans to individuals and entities that may not satisfy the Bank's lending standards, and operate in 51 offices located in 51 communities in Mississippi, Tennessee and Alabama. The Bank's insurance service subsidiaries serve as agents in the sale of title, life, automobile, homeowners, farmowners and other commercial insurance policies, and operate in 94 offices in Mississippi, Tennessee and Alabama. On June 30, 1999, Stewart Sneed Hewes, Inc. and its affiliated companies merged with one of the Bank's insurance services subsidiaries. Founded in 1905, Stewart Sneed Hewes specialized in commercial lines of insurance and offered a full line of property and casualty, life, health and employee benefits products and services. Stewart Sneed Hewes was one of the largest insurance brokerage organizations in Mississippi. Headquartered in Gulfport, Mississippi, Stewart Sneed Hewes operated in 6 communities in Mississippi. The Bank's investment services subsidiary provides brokerage, investment advisory and asset management services, and operates in 8 communities in Mississippi, Tennessee and Alabama. See Note 20 to the Company's Consolidated Financial Statements included elsewhere in the Report for financial information about each segment of the Company, as defined by generally accepted accounting principles. 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. 8 9 The Board of Directors of the Bank 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 Bank'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 Company's and the Bank's Board of Directors. Combined, these components are integral elements of the Bank'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 in this section below is certain selected statistical information relating to the Company's business. Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differentials See "Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations" under the caption "Net Interest Revenue" included herein for information regarding the distribution of assets, liabilities and shareholders' equity, and interest rates and interest differentials. Analysis of Changes in Effective Interest Differential See "Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations" under the caption "Net Interest Revenue" included herein for information regarding the analysis of changes in effective interest differential. 9 10 Investment Portfolio Held-to-Maturity Securities The following table shows the amortized cost of held-to-maturity securities at December 31, 1999, 1998 and 1997:
December 31, ------------------------------------ 1999 1998 1997 -------- -------- -------- (In thousands) U. S. Treasury securities $ 60,971 $103,012 $109,013 U. S. Government agency securities 560,350 333,866 288,711 Taxable obligations of states and political subdivisions 6,041 2,295 8,131 Tax exempt obligations of states and political subdivisions 213,392 212,408 169,037 Other securities -- -- 15 -------- -------- -------- TOTAL $840,754 $651,581 $574,907 ======== ======== ========
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, 1999 ------------------------------------------------------ U.S. U.S. GOVERMENT STATES & WEIGHTED TREASURY AGENCY POLITICAL AVERAGE SECURITIES SECURITIES SUBDIVISIONS YIELD ---------- ---------- ------------ ----- (In thousands) PERIOD TO MATURITY: Maturing within one year $38,955 $ 48,564 $ 21,898 6.08% Maturing after one year but within five years 22,016 384,367 113,412 5.94% Maturing after five years but within ten years -- 117,531 60,529 6.68% Maturing after ten years -- 9,888 23,594 7.29% ------- -------- -------- TOTAL $60,971 $560,350 $219,433 ======= ======== ========
The yield on tax-exempt obligations of states and political subdivisions has been adjusted to a taxable equivalent basis using a 35% tax rate. 10 11 Available-for-Sale Securities The following table shows the book value of available-for-sale securities at December 31, 1999, 1998 and 1997:
December 31, ------------------------------------ 1999 1998 1997 -------- -------- -------- (In thousands) U. S. Treasury securities $ 66,024 $106,225 $143,948 U. S. Government agency securities 195,990 335,506 318,963 Taxable obligations of states and political subdivisions 6,415 5,739 1,229 Tax exempt obligations of states and political subdivisions 32,330 38,696 18,034 Other securities 44,525 97,574 55,306 -------- -------- -------- TOTAL $345,284 $583,740 $537,480 ======== ======== ========
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, 1999 --------------------------------------------------------------- U.S. U.S. GOVERMENT STATES & WEIGHTED TREASURY AGENCY POLITICAL OTHER AVERAGE SECURITIES SECURITIES SUBDIVISIONS SECURITIES YIELD ---------- ---------- ------------ ---------- ----- (In thousands) PERIOD TO MATURITY: Maturing within one year $12,235 $ 20,933 $ 1,017 $ 5,843 6.16% Maturing after one year but within five years 48,510 94,000 4,577 13,521 6.22% Maturing after five years but within ten years 5,279 61,842 15,021 23,461 6.64% Maturing after ten years -- 19,215 18,130 1,700 6.95% ------- -------- ------- ------- TOTAL $66,024 $195,990 $38,745 $44,525 ======= ======== ======= =======
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 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 the years indicated.
DECEMBER 31, -------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (In thousands) Commercial & agricultural (1) $ 371,169 $ 395,514 $ 369,427 $ 322,658 $ 299,920 Consumer & installment 978,013 930,698 898,348 818,091 774,012 Real estate mortgage (2) 2,514,573 2,113,380 1,819,396 1,640,755 1,519,718 Lease financing 254,868 210,559 172,821 149,582 122,290 Other 12,795 26,393 26,005 20,483 23,062 ---------- ---------- ---------- ---------- ---------- Total gross loans $4,131,418 $3,676,544 $3,285,997 $2,951,569 $2,739,002 ========== ========== ========== ========== ==========
(1) Including $11,731,000, $16,864,000, $16,691,000, $18,731,000 and $19,637,000 in 1999, 1998, 1997, 1996 and 1995, respectively, of loans classified as agricultural. (2) Including $63,038,000, $49,214,000, $44,249,000, $42,672,000 and $36,448,000 in 1999, 1998, 1997, 1996 and 1995, 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, 1999.
ONE YEAR ONE TO AFTER OR LESS FIVE YEARS FIVE YEARS ---------- ---------- ---------- (In thousands) Commercial & agricultural $ 191,841 $ 152,194 $ 27,134 Consumer & installment 430,284 538,472 9,257 Real estate mortgages 842,592 1,269,488 402,493 Lease financing 80,047 162,011 12,810 Other 10,073 2,467 255 ---------- ---------- -------- Total gross loans $1,554,837 $2,124,632 $451,949 ========== ========== ========
12 13 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, 1999.
December 31, 1999 -------------------------- FIXED VARIABLE RATE RATE ---------- -------- (In thousands) Loan Portfolio Due after one year $2,330,022 $246,559
---------- -------- Non-accrual, 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 $5,150,000, $6,629,000, $5,179,000, $6,593,000 and $3,696,000 at December 31, 1999, 1998, 1997, 1996 and 1995, respectively. The aggregate principal balance of restructured loans was $91,000, $713,000, $1,097,000, $1,812,000 and $281,000 at December 31, 1999, 1998, 1997, 1996 and 1995, respectively. The total amount of interest earned on non-performing loans was approximately $126,000, $153,000, $58,000, $42,000 and $70,000 in 1999, 1998, 1997, 1996 and 1995, respectively. The gross interest income that would have been recorded under the original terms of those loans amounted to $361,000, $385,000, $263,000, $373,000 and $112,000 in 1999, 1998, 1997, 1996 and 1995, respectively. Accruing loans which were contractually past due 90 days or more for years ended December 31, 1999, 1998, 1997, 1996 and 1995, amounted to $14,378,000, $10,308,000, $8,659,000, $6,687,000 and $6,203,000, respectively. Loans considered impaired, under Statement of Financial Accounting Standards ("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, 1999 and 1998 was $5,790,000 and $8,643,000, respectively, with a valuation reserve of $2,176,000 and $3,223,000, respectively. The average recorded investment in impaired loans during 1999 and 1998 was $6,207,000 and $9,187,000, 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, 1999, no loans were known to be potential problem loans. At December 31, 1999, 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 Company's market area. 13 14 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 certainty, management continuously 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 Bank 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 a least quarterly to determine the amount of additions to the ALLL. The Committee is composed of senior management from Loan Administration, Lending and Finance. 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 our 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. The gradings assigned by the loan officer are reviewed by an independent Loan Review Department (Loan Review). 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 present and potential risks of 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 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. 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. 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 the years presented: 14 15
1999 1998 1997 1996 1995 ----------------- ----------------- ----------------- ----------------- ----------------- ALLOW % OF ALLOW % OF ALLOW % OF ALLOW % OF ALLOW % OF FOR LOANS TO FOR LOANS TO FOR LOANS TO FOR LOANS TO FOR LOANS TO CREDIT TOTAL CREDIT TOTAL CREDIT TOTAL CREDIT TOTAL CREDIT TOTAL LOSS LOANS LOSS LOANS LOSS LOANS LOSS LOANS LOSS LOANS ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (Dollars in thousands) Commercial & agricultural $3,932 8.98% $ 3,924 10.76% $ 3,294 11.24% $ 4,003 10.93% $ 3,461 10.95% Consumer & installment 19,586 23.67% 19,105 25.31% 16,653 27.34% 13,163 27.72% 11,443 28.26% Real estate mortgage 28,761 60.87% 25,102 57.48% 21,559 55.37% 22,467 55.59% 22,462 55.49% Lease financing 3,196 6.17% 2,802 5.73% 2,592 5.26% 2,070 5.07% 1,433 4.46% Other 82 0.31% 150 0.72% 140 0.79% 3 0.69% -- 0.84% ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- TOTAL $55,557 100.00% $51,083 100.00% $44,238 100.00% $41,706 100.00% $38,799 100.00% ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
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, 1999.
1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ----------- (Dollars in thousands) LOANS Average loans for the period $ 3,799,799 $ 3,424,008 $ 3,004,058 $ 2,787,794 $ 2,478,363 =========== =========== =========== =========== =========== ALLOWANCE FOR CREDIT LOSSES Balance, beginning of period $ 51,083 $ 44,238 $ 41,706 $ 38,799 $ 34,806 Loans charged off: Commercial & agricultural (520) (1,493) (1,307) (1,919) (1,445) Consumer & installment (10,438) (9,749) (8,477) (7,031) (5,305) Real estate mortgage (1,326) (2,130) (1,304) (845) (742) Lease financing (66) (75) (48) (30) (1) ----------- ----------- ----------- ----------- ----------- Total loans charged off (12,350) (13,447) (11,136) (9,825) (7,493) ----------- ----------- ----------- ----------- ----------- Recoveries: Commercial & agricultural 304 422 634 771 471 Consumer & installment 1,595 2,315 1,499 1,502 1,319 Real estate mortgage 177 303 366 254 381 Lease financing 59 20 57 5 18 ----------- ----------- ----------- ----------- ----------- Total recoveries 2,135 3,060 2,556 2,532 2,189 ----------- ----------- ----------- ----------- ----------- Net charge-offs (10,215) (10,387) (8,580) (7,293) (5,304) Provision charged to operating expense 14,689 16,080 10,516 10,200 7,183 Acquisitions -- 1,152 596 -- 2,114 ----------- ----------- ----------- ----------- ----------- Balance, end of period $ 55,557 $ 51,083 $ 44,238 $ 41,706 $ 38,799 =========== =========== =========== =========== =========== RATIOS Net charge-offs to average loans 0.27% 0.30% 0.29% 0.26% 0.21% =========== =========== =========== =========== ===========
15 16 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, 1999.
YEARS ENDED DECEMBER 31 --------------------------------------------------------------------------- 1999 1998 1997 --------------------------------------------------------------------------- Average Average Average Average Average Average Amount Rate Amount Rate Amount Rate ---------- -------- ---------- ------- ---------- -------- (Dollars in thousands) Non-interest bearing demand deposits $ 603,545 -- $ 554,450 -- $ 485,542 -- Interest bearing demand deposits 1,098,270 2.41% 997,007 2.63% 912,813 3.17% Savings deposits 818,375 4.78% 715,368 4.85% 576,464 4.20% Time deposits 2,159,454 5.26% 2,136,382 5.56% 1,931,880 5.57% ---------- ---------- ---------- TOTAL DEPOSITS $4,679,644 $4,403,207 $3,906,699 ========== ========== ==========
Time deposits of $100,000 and over including certificates of deposits of $100,000 and over at December 31, 1999, had maturities as follows:
DECEMBER 31, 1999 -------- (In thousands) Three months or less $328,278 Over three months through six months 178,105 Over six months through twelve months 186,278 Over twelve months 147,757 -------- TOTAL $840,418 ========
16 17 Return on Equity and Assets Return on average common equity, average assets, and the dividend payout ratio are based on net income for the three years ended December 31, 1999, as presented below:
YEARS ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 ----- ----- ----- Return on average common equity 14.47% 13.16% 13.89% Return on average assets 1.24 1.12 1.20 Dividend payout ratio 40.83 44.55 39.90
The Company's average common equity as a percent of average assets was 8.57%, 8.51% and 8.65% for 1999, 1998 and 1997, respectively. Short-Term Borrowings See Note 9 of Notes to Consolidated Financial Statements included herein for information about short-term borrrowings. 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 80% of the rentable space, with the remainder leased to various unaffiliated tenants. The Bank owns 136 of its 154 branch banking facilities. The remaining 18 branch banking facilities are occupied under leases varying in length from one to eight 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 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 Corporation - This wholly-owned subsidiary of the Bank occupies 38 leased offices, with the unexpired terms varying in length from one to five years. The average size of these leased offices is approximately 1,000 square feet. All these premises are considered to be in good condition. c. BancorpSouth Insurance Services of Mississippi, Inc. - This wholly-owned subsidiary of the Bank owns four of the six offices it occupies. It leases two offices that have unexpired terms varying in length from five months to one year. 17 18 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 1999. Executive Officers of the Company 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. The prices have been restated to reflect the effect of the two-for-one stock split effected in the form of a 100% stock dividend paid May 15, 1998.
High Low ----- --- 1999: 4th quarter $17.5000 $16.3125 3rd quarter 19.3750 15.3750 2nd quarter 19.1250 15.8125 1st quarter 19.4375 15.7500 High Low ----- --- 1998: 4th quarter $21.5625 $17.7500 3rd quarter 22.4375 16.8125 2nd quarter 23.0625 20.3125 1st quarter 24.0000 20.6250
Holders of Record As of February 29, 2000, there were 9,149 shareholders of record of the Company's common stock. Dividends The Company declared cash dividends totaling $0.49 per share during 1999, $0.45 during 1998 and $0.395 during 1997. Future dividends, if any, will vary depending on the Company's profitability and anticipated capital requirements and applicable federal and state regulations. See "Item 1. - Business - Regulation and Supervision". 18 19 Item 6. - Selected Financial Data
SELECTED FINANCIAL INFORMATION (UNAUDITED) YEARS ENDED DECEMBER 31, -------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (Dollars in thousands, except per share amounts) Earnings Summary: Interest revenue $ 414,187 $ 398,003 $ 353,774 $ 322,410 $ 294,901 Interest expense 196,686 194,309 167,606 148,999 135,938 ---------- ---------- ---------- ---------- ---------- Net interest revenue 217,501 203,694 186,168 173,411 158,963 Provision for credit losses 14,689 16,080 10,516 10,200 7,183 ---------- ---------- ---------- ---------- ---------- Net interest revenue, after provision for credit losses 202,812 187,614 175,652 163,211 151,780 Other revenue 79,331 66,242 59,679 56,529 48,485 Other expense 183,000 166,514 156,574 142,039 136,649 ---------- ---------- ---------- ---------- ---------- Income before income taxes 99,143 87,342 78,757 77,701 63,616 Income tax expense 30,190 29,369 24,891 26,350 19,041 ---------- ---------- ---------- ---------- ---------- Net income $ 68,953 $ 57,973 $ 53,866 $ 51,351 $ 44,575 ========== ========== ========== ========== ========== Per Share Data: Net income: Basic $ 1.21 $ 1.02 $ 1.00 $ 1.00 $ 0.87 Diluted 1.20 1.01 0.99 0.99 0.87 Cash dividends 0.49 0.45 0.395 0.35 0.31 Book value 8.70 8.18 7.45 6.91 6.23 Balance Sheet - Averages: Total assets $5,563,010 $5,177,846 $4,481,933 $4,055,489 $3,711,949 Held-to-maturity securities 784,372 723,981 612,308 512,958 559,217 Available-for-sale securities 475,929 555,978 437,748 360,821 307,732 Loans, net of unearned discount 3,799,799 3,424,008 3,004,058 2,787,794 2,478,363 Total deposits 4,679,644 4,403,207 3,906,699 3,509,474 3,226,575 Total shareholders' equity 476,453 440,659 387,675 335,356 304,628 Selected Ratios: Return on average assets 1.24% 1.12% 1.20% 1.27% 1.20% Return on average shareholders' equity 14.47% 13.16% 13.89% 15.31% 14.63%
19 20 SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
QUARTER ENDED ---------------------------------------------- MAR 31 JUN 30 SEPT 30 DEC 31 ------- -------- -------- -------- (In thousands, except per share amounts) 1999 Interest revenue $99,414 $101,199 $104,323 $109,251 Net interest revenue 52,305 53,493 54,666 57,037 Provision for credit losses 3,063 3,607 4,112 3,907 Income before income taxes 23,440 24,298 26,523 24,882 Net income 16,865 16,450 17,580 18,058 Earnings per share: Basic 0.29 0.29 0.31 0.32 Diluted 0.29 0.29 0.31 0.31 Dividends per share 0.12 0.12 0.12 0.13 1998 Interest revenue $96,806 $100,412 $100,837 $ 99,948 Net interest revenue 49,793 51,020 51,315 51,566 Provision for credit losses 3,731 3,443 5,089 3,817 Income before income taxes 23,167 24,542 22,320 17,313 Net income 15,422 16,281 14,561 11,709 Earnings per share: Basic 0.27 0.28 0.26 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 $84,224 $ 87,726 $ 89,888 $ 91,936 Net interest revenue 44,747 46,645 46,702 48,074 Provision for credit losses 1,740 2,481 2,804 3,491 Income before income taxes 20,604 21,832 20,262 16,059 Net income 13,762 14,640 13,849 11,615 Earnings per share: Basic 0.25 0.27 0.26 0.21 Diluted 0.25 0.27 0.25 0.21 Dividends per share 0.095 0.095 0.095 0.11
20 21 ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company is a bank holding company with commercial banking operations in Mississippi, Tennessee and Alabama. The Bank, the Company's banking subsidiary, is headquartered in Tupelo, Mississippi. The Bank and its consumer finance, credit life insurance, insurance agency and brokerage subsidiaries provide commercial banking, leasing, mortgage origination and servicing, life insurance, brokerage 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, 1999 RESULTS OF OPERATIONS Summary The table below summarizes the Company's net income, return on average assets and return on average shareholders' equity for the years ended December 31, 1999, 1998 and 1997.
1999 1998 1997 ---- ---- ---- (Dollars in thousands, except per share amounts) Net income $ 68,953 $ 57,973 $ 53,866 Net income per share: Basic $ 1.21 $ 1.02 $ 1.00 Diluted $ 1.20 $ 1.01 $ 0.99 Return on average assets 1.24% 1.12% 1.20% Return on average shareholders' equity 14.47% 13.16% 13.89%
NET INTEREST REVENUE Net interest revenue is the difference between interest revenue earned from earning assets such as loans, leases and securities, and interest expense paid on liabilities such as deposits and borrowings, and continues to provide the Company with its principal source of revenue. Net interest revenue is affected by the general level of interest rates, changes in interest rates and by changes in the amount and composition of interest earning assets and interest bearing liabilities. The Company's long-term objective is to manage those assets and liabilities to maximize net interest revenue, while balancing interest rate, credit, liquidity and capital risks. The relative performance of the lending and deposit-raising functions is frequently measured by two calculations - net interest margin and net interest rate spread. Net interest margin is determined by dividing fully-taxable equivalent net interest revenue by average earning assets. Net interest rate spread is the difference between the average fully-taxable equivalent yield earned on interest earning assets and the average rate paid on interest bearing liabilities. Net interest margin is generally greater than the net interest rate spread due to the additional income earned on those assets funded by non-interest bearing liabilities, or free funding, such as demand deposits and shareholders' equity. The Company has shown significant growth in average interest earning assets and average interest bearing liabilities during the three years ended December 31, 1999. Average interest earning assets increased by 7.4% during 1999, 15.6% during 1998 and 11.0% during 1997. Average interest bearing liabilities for increased 7.3% during 1999, 16.0% during 1998 and 10.6% during 1997. Net interest margin for 1999 was 4.28%, a decline of three basis points from 4.31% for 1998, which represented a decline of 25 basis points from 4.56% for 1997. 21 22 The following table presents average interest earning assets, average interest bearing liabilities, net interest income, net interest margin and net interest rate spread for the three years ended December 31, 1999. Each of the measures is reported on a fully-taxable equivalent basis.
1999 1998 1997 ------------------------------- ------------------------------- --------------------------------- (Taxable equivalent basis) Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate ---------- -------- ---- ---------- -------- ---- ---------- -------- ---- (Dollars in thousands) ASSETS Interest bearing deposits in other banks $ 10,081 $ 556 5.52% $ 10,250 $ 598 5.83% $ 10,778 $ 578 5.36% Held-to-maturity securities: U.S. treasury and agencies 555,822 33,856 6.09% 528,222 32,234 6.10% 444,605 28,931 6.51% State and political subdivisions (1) 228,550 13,770 6.02% 195,758 12,842 6.56% 167,688 12,042 7.18% Other securities -- -- -- 1 -- -- 15 -- -- Available-for-sale securities(2) 475,929 28,683 6.03% 555,978 34,344 6.18% 437,748 27,901 6.37% Federal funds sold 80,340 3,974 4.95% 77,606 4,090 5.27% 95,521 5,102 5.34% Loans (net of unearned discount) (3) (5) 3,799,799 335,121 8.82% 3,424,008 315,515 9.21% 3,004,058 281,839 9.38% Mortgages held for sale 51,664 3,638 7.04% 52,634 3,470 6.59% 29,409 2,103 7.15% ---------- -------- ---------- -------- ---------- -------- Total interest earning assets and revenue 5,202,185 419,598 8.07% 4,844,457 403,093 8.32% 4,189,822 358,496 8.56% Other assets 414,308 381,425 335,480 Less: allowance for credit losses (53,483) (48,036) (43,369) ---------- ---------- ---------- Total $5,563,010 $5,177,846 $4,481,933 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand - interest bearing $1,098,270 $ 26,453 2.41% $ 997,007 $ 26,210 2.63% $ 912,813 $ 28,965 3.17% Savings 818,375 39,090 4.78% 715,368 34,697 4.85% 576,464 24,228 4.20% Time 2,159,454 113,686 5.26% 2,136,382 118,761 5.56% 1,931,880 107,520 5.57% Federal funds purchased and securities sold under repurchase agreements 103,258 4,403 4.26% 62,796 2,861 4.56% 47,026 2,342 4.98% Other short-term borrowings(4) 57,803 3,421 5.92% 13,622 906 6.65% 12,943 1,130 8.73% Long-term debt 170,377 9,633 5.65% 183,815 10,874 5.92% 61,202 3,421 5.59% ---------- -------- ---------- -------- ---------- -------- Total interest bearing liabilities and expense 4,407,537 196,686 4.46% 4,108,990 194,309 4.73% 3,542,328 167,606 4.73% Demand deposits - non-interest bearing 603,545 554,450 485,542 Other liabilities 75,475 73,747 66,388 ---------- ---------- ---------- Total liabilities 5,086,557 4,737,187 4,094,258 Shareholders' equity 476,453 440,659 387,675 ---------- ---------- ---------- Total $5,563,010 $5,177,846 $4,481,933 ========== ========== ========== Net interest revenue $222,912 $208,784 $190,890 ======== ======== ======== Net interest margin 4.28% 4.31% 4.56% Net interest rate spread 3.60% 3.59% 3.82% Interest bearing liabilities to interest earning assets 84.72% 84.82% 84.55%
(1) Includes taxable equivalent adjustments of $3,345,000, $3,226,000 and $2,922,000 in 1999, 1998 and 1997, respectively, using an effective tax rate of 35%. (2) Includes taxable equivalent adjustment of $854,000, $828,000 and $1,027,000 in 1999, 1998 and 1997, respectively, using an effective tax rate of 35%. (3) Includes taxable equivalent adjustment of $1,212,000, $1,036,000 and $772,000 in 1999, 1998 and 1997, 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. 22 23 Net interest revenue may also be analyzed by segregating the rate and volume components of interest revenue and interest expense. The table that follows presents an analysis of rate and volume change in net interest revenue from 1997 to 1998 and from 1998 to 1999. Changes, which are not solely due to volume or rate, are allocated to volume.
1999 OVER 1998 - 1998 OVER 1997 - INCREASE (DECREASE) INCREASE (DECREASE) -------------------------------- ------------------------------- (Taxable equivalent basis) Volume Rate Total Volume Rate Total -------- -------- -------- -------- ------- -------- (In thousands) INTEREST REVENUE Due from banks - interest bearing $ (9) $ (33) $ (42) $ (31) $ 51 $ 20 Held-to-maturity securities: U.S. Government agencies 1,681 (59) 1,622 5,103 (1,800) 3,303 State and political subdivisions 1,976 (1,048) 928 1,841 (1,041) 800 Available-for-sale securities (4,824) (837) (5,661) 7,303 (860) 6,443 Federal funds sold 135 (251) (116) (944) (68) (1,012) Loans (net of unearned discount) 33,143 (13,537) 19,606 38,697 (5,021) 33,676 Mortgages held for sale (68) 236 168 1,531 (164) 1,367 -------- -------- -------- -------- ------- -------- Total 32,034 (15,529) 16,505 53,500 (8,903) 44,597 -------- -------- -------- -------- ------- -------- INTEREST EXPENSE Demand deposits - interest bearing 2,439 (2,196) 243 2,213 (4,968) (2,755) Savings deposits 4,920 (527) 4,393 6,737 3,732 10,469 Time deposits 1,215 (6,290) (5,075) 11,368 (127) 11,241 Federal funds purchased and securities sold under repurchase agreements 1,725 (183) 1,542 718 (199) 519 Other short-term borrowings 2,615 (100) 2,515 45 (269) (224) Long-term debt (760) (481) (1,241) 7,253 200 7,453 -------- -------- -------- -------- ------- -------- Total 12,154 (9,777) 2,377 28,334 (1,631) 26,703 -------- -------- -------- -------- ------- -------- Increase (decrease) in effective interest differential $ 19,880 $ (5,752) $ 14,128 $ 25,166 $(7,272) $ 17,894 ======== ======== ======== ======== ======= ========
23 24 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, 1999.
INTEREST RATE SENSITIVITY 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 with banks $ 5,411 $ -- $ -- $ -- Federal funds sold 65,000 -- -- -- Held-to-maturity securities 83,815 187,474 482,671 86,794 Available-for-sale securities 17,277 46,727 178,497 102,783 Loans & leases, net of unearned 1,012,232 515,689 2,215,564 310,047 Mortgages held for sale 37,521 -- -- -- ----------- ----------- ---------- -------- Total interest earning assets 1,221,256 749,890 2,876,732 499,624 ----------- ----------- ---------- -------- Interest bearing liabilities: Interest bearing demand deposits & savings 909,199 282,167 683,803 -- Time deposits 727,039 1,076,899 518,253 3,488 Federal funds purchased & securities sold under repurchase agreements 153,989 -- -- -- Long-term debt 657 1,971 8,425 127,507 Other 80,539 9,195 352 2,868 ----------- ----------- ---------- -------- Total interest bearing liabilities 1,871,423 1,370,232 1,210,833 133,863 ----------- ----------- ---------- -------- Interest sensitivity gap $ (650,167) $ (620,342) $1,665,899 $365,761 =========== =========== ========== ======== Cumulative interest sensitivity gap $ (650,167) $(1,270,509) $ 395,390 $761,151 =========== =========== ========== ========
In the event interest rates decline after 1999, 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 earning 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 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 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 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 24 25 factors that may affect the overall adequacy of the allowance. The loan review department is supplemented by regulatory agencies that provide an additional level of review. The loss factors assigned to each classification are based upon the attributes (loan to collateral values, borrower creditworthiness, etc.) of the loans typically assigned to each grade. Management periodically reviews the loss factors assigned in light of the general economic environment and overall condition of the loan portfolio and modifies the loss factors assigned to each classification as deemed appropriate. 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 analyses intended to insure that the allowance is adequate to cover other probable losses inherent in the portfolio. This component considers 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 1999, 1998 and 1997 and net charge-offs for those years are shown in the following table:
1999 1998 1997 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Provision for credit losses $ 14,689 $ 16,080 $ 10,516 Allowance for credit losses as a percentage of loans and leases outstanding at year end 1.37% 1.43% 1.39% Net charge offs $ 10,215 $ 10,387 $ 8,580 Net charge offs as a percent of average loans 0.27% 0.30% 0.29%
The provision for credit losses for 1999 decreased 8.7% from the provision for 1998, primarily due to a decrease in net charge-offs and the improvement in the internal credits ratings and classifications of the Company's overall loan portfolio at December 31, 1999. The provision for credit losses for 1998 increased 52.9% from the provision for 1997, principally as a result of faster growth in the loan portfolio, an increase in losses and differences in underwriting standards at acquired institutions. The 1997 provision for credit losses increased 3.1% from the provision for 1996 as a result of slower 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, 1999, 1998 and 1997 and the percentage change from the prior year are shown in the following table:
1999 1998 1997 ------------------ ------------------ ------------------ AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE ------- ------- ------- -------- ------- -------- (DOLLARS IN THOUSANDS) Mortgage lending $14,975 +38.6% $10,808 +36.6% $ 7,912 -9.0% Service charges 25,288 +5.3 24,006 +6.0 22,640 +5.8 Life insurance premiums 3,975 +8.8 3,655 -3.1 3,772 -16.6 Trust income 3,954 +7.4 3,682 +13.7 3,239 +7.1 Securities gains, net 4,176 +396.0 842 -34.4 1,283 +223.2 Insurance commissions 13,573 +8.8 12,475 +22.5 10,187 +7.3 Other revenue 13,390 +24.3 10,774 +1.2 10,646 +18.4 ------- ------- ------- Total other revenue $79,331 +19.8% $66,242 +11.0% $59,679 +5.6% ======= ======= =======
Mortgage lending revenue consists principally of revenue generated by originating loans and by servicing loans for others. The origination process, which includes secondary marketing of loans originated, produced revenue of $8,777,000, $11,869,000 and $5,644,000 for 1999, 1998 and 1997, respectively. Historically, origination volumes vary as mortgage interest rates change. Rising mortgage interest rates generally slow down originations, while falling mortgage interest rates generally result in increased originations. The servicing process includes the actual servicing of loans and the recognition of changes in the valuation of capitalized mortgage servicing rights. 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. The servicing process generated revenue of $6,198,000 in 1999, a loss of $1,061,000 in 1998 and revenue of $2,268,000 in 1997. The fluctuation in servicing revenue is primarily due to changes in the valuation of 25 26 capitalized mortgage servicing rights. Rising mortgage interest rates during 1999 resulted in the recovery of $3.3 million during 1999 of previously recorded impairment. This compares to the recognition of $4.1 million and $400,000 in impairment expense during 1998 and 1997, respectively. The following table presents the principal amount of mortgage loans serviced at December 31, 1999, 1998 and 1997 and the percentage change from the previous year end.
1999 1998 1997 ------------------ -------------------- ------------------- AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE ------ -------- ------ -------- ------ -------- (DOLLARS IN MILLIONS) Mortgage loans serviced $1,951.1 +14.7% $1,701.7 +28.5% $1,324.0 +13.5%
Service charges on deposit accounts increased in 1999, 1998 and 1997 because of higher volumes of items processed as a result of greater economic activity, growth in the number of deposit accounts and rate increases. Life insurance premium revenue increased 8.8% in 1999 over 1998, reversing the trend of declining revenue from insurance underwriting, which declined 3.1% during 1998 and 16.6% during 1997. Trust income increased 7.4% in 1999, 13.7% in 1998 and 7.1% in 1997, as a result of increases in the number of trust accounts and the value of assets under care (either managed or in custody). The Company established a charitable foundation in 1999 and contributed appreciated equity securities to initially fund the foundation. This transaction resulted in one-time securities gains of approximately $4.14 million, which are reflected in the results for 1999. Revenue from insurance commissions and fees shows steady growth over the three-year periods ended December 31, 1999, as the Company continued to expand those products and services. Other revenue increased 24.3%, 1.2% and 18.4% in 1999, 1998 and 1997, respectively. The increases in other revenue in 1999 and 1998 were primarily attributable to increased analysis charges and increased debit card net interchange. The increase in other revenue in 1997 was attributable to increases in gains on the sale of equipment and facilities and increases in debit card net interchange. OTHER EXPENSE The components of other expense for the years ended December 31, 1999, 1998 and 1997 and the percentage change from the prior year are shown in the following table.
1999 1998 1997 ------------------ -------------------- ------------------- AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE ------ -------- ------ -------- ------ -------- (Dollars in thousands) Salaries and employee benefits $ 88,278 +10.1% $ 80,207 -2.3% $ 82,126 +13.9% Occupancy, net 12,118 +9.7 11,042 +8.4 10,183 -0.2 Equipment 16,940 +7.3 15,784 +12.5 14,025 +28.0 Telecommunications 5,918 +21.4 4,876 +16.2 4,195 +4.2 Contributions 4,146 N/A -- -- -- -- Other 55,600 +1.8 54,605 +18.6 46,045 +2.9 -------- -------- -------- Total other expense $183,000 +9.9% $166,514 +6.3% $156,574 +10.2% ======== ======== ========
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 previously granted SARs to certain of its employees, which requires the Company to recognize an expense in the event of an increase in the market price of the Company's common stock or a reduction of expense in the event of a decline in the market price of the Company's common stock. In 1999, the Company's common stock price declined by approximately 9.7% and in 1998 the Company's common stock price declined by approximately 24%. As a result of these declines in value, a reduction in expense of $956,000 was recorded in 1999 and a reduction of expense of $2.7 million was recorded in 1998. In 1997, the Company's common stock price increased approximately 75%, which resulted in expense of $6.1 million. At December 31, 1999, the Company had approximately 552,000 SARs outstanding. Based on that amount, a dollar increase in the Company's stock price would result in $552,000 in SAR expense while a dollar decrease in the Company's stock price would result in an $552,000 reduction in SAR expense. Occupancy and equipment expenses have increased in each of the three years presented principally as a result of additional branch offices and upgrades to the Company's internal operating systems. Telecommunications expense increased significantly during 1999 and 1998 as a result of expanded voice and data networks and expansion of the Bank's call center, all of which related to providing higher levels of convenient, 26 27 consumer oriented banking services. Contribution expense of $4.14 million during 1999 represents the aggregate market value of appreciated equity securities used to fund the charitable foundation established by the Company in 1999. In 1999, as a direct result of the Company's mergers with HomeBanc Corporation and the Stewart Sneed Hewes Insurance Group, the Company recorded merger-related costs of approximately $1.1 million ($976,000 after tax) as other operating expense. In 1998, as a direct result of the Company's mergers with Alabama Bancorp., Inc., Merchants Capital Corporation and The First Corporation, the Company recorded merger-related costs of approximately $5 million ($4.1 million after tax) as other operating expense. 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.
1999 1998 1997 ----------------- ----------------- ------------------ AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE ------ -------- ------ -------- ------ -------- (DOLLARS IN MILLIONS) Loans, net of unearned - average $3,799.8 +11.0% $3,424.0 +14.0% $3,004.1 +7.8% Loans, net of unearned - year end 4,053.5 +13.2 3,582.4 +12.4 3,187.3 +11.4
Despite significant increases 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.
1999 1998 1997 ------- ------- ------- (DOLLARS IN THOUSANDS) Foreclosed properties $ 7,764 $ 7,131 $ 3,153 Non-accrual loans 5,150 6,629 5,179 Loans 90 days or more past due 14,378 10,308 8,659 Restructured loans 91 713 1,097 ------- ------- ------- Total non-performing assets $27,383 $24,781 $18,088 ======= ======= ======= Total non-performing assets as a percent of net loans 0.68% 0.69% 0.57% ======= ======= =======
The increase in loans 90 days or more past due at December 31, 1999, when compared to December 31, 1998, is primarily the result of delinquent mortgage loans being repurchased from investors. These repurchased loans are government guaranteed and do not indicate an overall deterioration of the loan portfolio. 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, 1999, 1998 and 1997, 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. 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 $5,790,000, $8,643,000 and $7,181,000 in 1999, 1998 and 1997, respectively. 27 28 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 and borrowings. A portion of the Company's securities portfolio continues to be tax-exempt. Investments in tax-exempt securities totaled $245.7 million at December 31, 1999, compared to $251.1 million at the end of 1998. 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, 1999, the Company's available-for-sale securities totaled $345.3 million. These securities, which are subject to possible sale, are recorded at fair value. At December 31, 1999, the Company held no securities whose decline in fair value was considered other than temporary. Net unrealized losses on investment securities as of December 31, 1999 totaled $18.6 million. Net unrealized losses on held-to-maturity securities comprised $18.5 million of that total, while net unrealized losses on available-for-sale securities were $154,000. Net unrealized gains on investment securities as of December 31, 1998 totaled $29.4 million. Of that total, $11.6 million was attributable to held-to-maturity securities and $17.9 million to available-for-sale securities. DEPOSITS Deposits are the Company's primary source of funds to support its earning assets. The Company has been able to effectively compete for deposits as its primary market areas provide the sources of substantially all deposits for all periods presented. The following table presents the Company's average deposit mix and percentage change for the years indicated.
1999 1998 1997 ------------------- ------------------- -------------------- AVERAGE % AVERAGE % AVERAGE % BALANCE CHANGE BALANCE CHANGE BALANCE CHANGE -------- ------ -------- ------ -------- ------ (Dollars in millions) Interest bearing deposits $4,076.1 +5.9% $3,848.8 +12.5% $3,421.2 +12.0% Non-interest bearing deposits 603.5 +8.8 554.5 +14.2 485.5 +6.4 -------- -------- -------- Total average deposits $4,679.6 +6.3 $4,403.3 +12.7 $3,906.7 +11.3 ======== ======== ========
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. 28 29 CAPITAL RESOURCES The Company is required to comply with the risk-based capital guidelines established by the Federal Reserve. 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 11.49% and 12.80%, respectively, at December 31, 1999, compared to 11.56% and 12.82%, respectively at December 31, 1998. Both ratios exceeded the required minimum levels for these ratios of 4% and 8%, respectively, for each period. In addition, the Company's leverage capital ratio (Tier I capital divided by total assets, less goodwill) was 8.38% at December 31, 1999 and December 31, 1998, 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 Bank the criteria for the "well capitalized" category at December 31, 1999. The Company may 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 any, would be shares of the Company's common stock; however, transactions involving cash consideration or other forms of consideration may also be considered. YEAR 2000 Prior to January 1, 2000, the Company conducted significant testing, planning and system upgrades to address potential malfunctions by computer systems and embedded computer chips related to calendar dates after December 31, 1999. The Company has not experienced any material Year 2000 disruptions or malfunctions, and has not been informed of any material Year 2000 disruptions or malfunctions experienced by any of its significant vendors or customers, or by any of the municipal agencies that provide services to the Company. The Company will continue to monitor its internal operations and its significant vendors and customers with respect to Year 2000 problems, and intends to take appropriate measures to prevent or alleviate any malfunction or failures identified. Based upon the Company's successful operation during the Year 2000, the Company does not anticipate that it will experience any material problems related to the Year 2000; however, no assurance can be given that this will be the case. BUSINESS RISKS Certain statements contained in the 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 Exchange Act of 1934, as amended. These forward-looking statements may be identified by reference to a future period(s) or by the use of forward-looking terminology, such as "anticipate," "estimate," "expect," "foresee," "may," "might,""will," "would," or "intend" 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, assets, profitability and customer service, Year 2000 issues, net interest revenue, interest rate sensitivity, loan loss experience, liquidity, capital resources, market risk, earnings, effect of pending litigation, acquisition strategy and competition. We caution you not to place undue reliance on the forward-looking statements contained in this Report in that actual results could differ materially from those indicated in such forward-looking statements, due to a variety of factors. These factors include, but are not limited to, changes in the Company's operating or expansion strategy, availability of and costs associated with obtaining adequate and timely sources of liquidity, possible adverse rulings, judgements, settlements and other outcomes of pending litigation, Year 2000 compliance, 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. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date of this Report. 29 30 Our Operations are Subject to Extensive Governmental Regulation. BancorpSouth, Inc. 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 we operate, including the amount of loans we can originate, interest we can charge on loans and fees we can charge for certain services. We cannot predict whether, or the extent to which, the government and governmental organizations may change any of these laws or controls. BancorpSouth also cannot predict how any of these changes would adversely affect the our business and prospects. We Compete with Other Bank Holding Companies, Banks and Financial Services Companies. The banking business is extremely competitive in our service areas in Mississippi, Tennessee and Alabama. We compete, and will compete, with well established banks, credit unions and other 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 we may pay interest on our customers' interest-bearing deposits and our other liabilities at higher rates than the interest rates paid to us by our 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 our earnings. This adverse effect would increase if interest rates continued to rise while we had outstanding loans payable at fixed interest rates that could not be adjusted to a higher interest rate. Our Growth Strategy Includes Risks That Could Have an Adverse Effect on Financial Performance. A material element of the our growth strategy is the acquisition of additional banks and bank holding companies in order to achieve greater economies of scale. We cannot assure you that the current level of growth opportunities will continue to exist, that we will be able to acquire banks and bank holding companies that satisfy the our criteria or that any such acquisition will be on terms favorable to the us. Further, our growth strategy will require that we continue to hire qualified personnel, while concurrently expanding our managerial and operational infrastructure. We cannot assure you that we will be able to hire and retain qualified personnel or that we will be able to successfully expand our infrastructure to accommodate future acquisitions or growth. As a result of these factors, we may not realize the expected economic benefits associated with our acquisitions. This could have a material adverse effect on the our financial performance. Our 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 our revenues 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 our common stock. Issuing Additional Shares of Its Common Stock to Acquire Other Banks and Bank Holding Companies May Result in Dilution for Existing Shareholders. In connection with our growth strategy, we have issued, and may issue in the future, shares of our 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 our common stock and impair our ability to raise additional capital through the sale of equity securities. We usually must pay an acquisition premium above the fair market value of acquired assets 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 our common stock. Monetary Policies and Economic Factors May Limit the Our 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 our service area and the United States generally, affect the our ability to attract deposits and extend loans. We cannot predict either the nature and timing of any changes in these monetary policies and economic conditions, or their impact on our 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 30 31 such periods, foreclosures generally increase, and such conditions also could lead to a potential decline in deposits and demand for loans. Diversification in Types of Financial Services May Adversely Affect Our Financial Performance. As part of our business strategy, we have in the past diversified, and may further diversify, our lines of business into areas that are not traditionally associated with the banking business. We now offer insurance and investment services through wholly-owned subsidiaries of BancorpSouth Bank. As a result, we must now manage the development of new business lines in which we have not previously participated. Each new business line requires the investment of additional capital and the significant involvement of our senior management to develop and integrate the insurance and investment services subsidiaries with our traditional banking operations. We can offer no assurances that we will be able to develop and integrate these new services without adversely effecting our financial performance. Our Ability to Declare and Pay Dividends is Limited by Law. We derive our income solely from dividends received from owning BancorpSouth 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 our ability to declare and pay dividends on our common stock. Anti-Takeover Provisions May Prevent A Change of Our Control. Our governing documents and certain agreements to which we are a party contain several provisions which make a change-in-control 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 our common stock. Limited Geographic Area Increases Our Risk From Economic Downturn. We conduct 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 our financial performance, particularly our ability to attract deposits and extend loans. In evaluating an investment in shares of our common stock, the factors set forth in this section should be carefully considered, along with other matters discussed in reports and other filings that we have made with the Securities and Exchange Commission. It should not be assumed that we have listed or described the only risks that could affect our future performance or the market price of our 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 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. 31 32 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, 1999. 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.
FAIR VALUE PRINCIPAL AMOUNT MATURING/REPRICING IN: DECEMBER 31, 2000 2001 2002 2003 2004 THEREAFTER TOTAL 1999 ---------- -------- -------- -------- -------- -------- ---------- ---------- (Dollars in thousands) RATE-SENSITIVE ASSETS: Fixed interest rate loans $ 916,751 $408,989 $566,263 $534,810 $705,502 $310,047 $3,442,362 $3,593,203 Average interest rate 9.40% 10.71% 9.01% 8.98% 8.80% 9.31% 9.30% Variable interest rate loans $ 648,691 -- -- -- -- -- $ 648,691 $ 654,946 Average interest rate 8.82% -- -- -- -- -- 8.82% Fixed interest rate securities $ 335,295 $313,005 $143,985 $109,765 $ 94,884 $189,104 $1,186,038 $1,167,567 Average interest rate 6.06% 6.06% 6.23% 6.12% 6.65% 6.73% 6.24% Other interest bearing assets $ 70,833 -- -- -- -- -- $ 70,833 $ 70,833 Average interest rate 5.94% -- -- -- -- -- 5.94% Mortgage servicing rights (1) -- -- -- -- -- -- $ 22,666 $ 22,666 RATE-SENSITIVE LIABILITIES: Savings & interest bearing checking $1,191,366 $140,852 $140,859 $201,044 $201,048 -- $1,875,169 $2,031,653 Average interest rate 3.96% 2.95% 2.95% 2.92% 2.92% -- 3.59% Fixed interest rate time deposits $1,803,937 $275,462 $176,678 $ 45,737 $ 20,376 $ 3,488 $2,325,678 $2,345,746 Average interest rate 5.28% 5.48% 6.06% 5.68% 6.49% 9.21% 5.39% Fixed interest rate borrowings $ 91,906 $ 1,542 $ 5,827 $ 753 $ 655 $130,375 $ 231,058 $ 219,281 Average interest rate 5.23% 6.39% 5.84% 6.40% 6.47% 5.96% 5.67% Variable interest rate borrowings $ 154,445 -- -- -- -- -- $ 154,445 $ 154,445 Average interest rate 4.56% -- -- -- -- -- 4.56% RATE-SENSITIVE OFF BALANCE SHEET ITEMS: Commitments to extend credit for single family mortgage loans $ 19,735 -- -- -- -- -- $ 19,735 $ 19,508 Average interest rate 7.94% -- -- -- -- -- 7.94% Forward contracts $ 14,644 -- -- -- -- -- $ 14,644 $ 14,438 Average interest rate 7.98% -- -- -- -- -- 7.98%
(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. - Management's Discussion and Analysis of Financial Condition and Results of Operations" that are captioned "Interest Rate Sensitivity" and "Securities and Other Earning Assets". 32 33 Item 8. - Financial Statements and Supplementary Data 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, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. /S/ KPMG LLP Memphis, Tennessee January 18, 2000 33 34 CONSOLIDATED BALANCE SHEETS BANCORPSOUTH, INC. AND SUBSIDIARIES
DECEMBER 31 ---------------------------- 1999 1998 ----------- ----------- (In thousands) ASSETS Cash and due from banks (Note 21) $ 217,270 $ 179,909 Interest bearing deposits with other banks 5,411 8,357 Held-to-maturity securities (Note 4) (fair value of $822,283 and $663,140) 840,754 651,581 Available-for-sale securities (Note 5) (amortized cost of $345,438 and $565,850) 345,284 583,740 Federal funds sold 65,000 123,210 Loans (Notes 6, 7 and 17) 4,131,418 3,676,544 Less: Unearned discount 77,886 94,147 Allowance for credit losses 55,557 51,083 ----------- ----------- Net loans 3,997,975 3,531,314 Mortgages held for sale 37,521 63,354 Premises and equipment, net (Note 8) 129,054 128,071 Accrued interest receivable 48,766 45,816 Other assets (Notes 11 and 18) 89,891 67,862 ----------- ----------- TOTAL ASSETS $ 5,776,926 $ 5,383,214 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand: Non-interest bearing $ 614,567 $ 636,427 Interest bearing 1,075,252 1,077,828 Savings 799,917 814,924 Other time (Note 9) 2,325,679 2,058,153 ----------- ----------- Total deposits 4,815,415 4,587,332 Federal funds purchased and securities sold under repurchase agreements (Note 9) 153,989 64,554 Short-term borrowings (Note 9) 89,000 -- Accrued interest payable 22,083 21,166 Other liabilities (Notes 11 and 12) 60,479 59,915 Long-term debt (Note 10) 138,560 182,720 ----------- ----------- TOTAL LIABILITIES 5,279,526 4,915,687 ----------- ----------- SHAREHOLDERS' EQUITY (NOTES 2 AND 15) Common stock, $2.50 par value Authorized - 500,000,000 shares; Issued - 57,304,252 shares at December 31, 1999 and 1998 143,261 143,261 Capital surplus 90,990 91,094 Accumulated other comprehensive income (95) 11,174 Retained earnings 264,707 223,353 Treasury stock at cost (106,733 and 118,773 shares at December 31, 1999 and 1998, respectively) (1,463) (1,355) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 497,400 467,527 ----------- ----------- Commitments and contingent liabilities (Note 21) -- -- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,776,926 $ 5,383,214 =========== ===========
See accompanying notes to consolidated financial statements. 34 35 CONSOLIDATED STATEMENTS OF INCOME BANCORPSOUTH, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31 ---------------------------------- 1999 1998 1997 -------- -------- -------- (In thousands, except per share amounts) INTEREST REVENUE Loans receivable $333,907 $314,479 $281,066 Deposits with other banks 556 598 578 Federal funds sold 3,974 4,090 5,102 Held-to-maturity securities: U.S. Treasury 5,316 6,653 7,159 U.S. Government agencies and corporations 28,541 25,581 21,772 Obligations of states and political subdivisions 10,425 9,616 9,120 Available-for-sale securities 27,830 33,516 26,874 Mortgages held for sale 3,638 3,470 2,103 -------- -------- -------- Total interest revenue 414,187 398,003 353,774 -------- -------- -------- INTEREST EXPENSE Deposits 179,229 179,668 160,713 Federal funds purchased and securities sold under repurchase agreements 4,403 2,861 2,342 Other 13,054 11,780 4,551 -------- -------- -------- Total interest expense 196,686 194,309 167,606 -------- -------- -------- Net interest revenue 217,501 203,694 186,168 Provision for credit losses (Note 7) 14,689 16,080 10,516 -------- -------- -------- Net interest revenue, after provision for credit losses 202,812 187,614 175,652 -------- -------- -------- OTHER REVENUE Mortgage lending 14,975 10,808 7,912 Service charges 25,288 24,006 22,640 Life insurance premiums 3,975 3,655 3,772 Trust income 3,954 3,682 3,239 Securities gains, net (Note 1) 4,176 842 1,283 Insurance commissions 13,573 12,475 10,187 Other 13,390 10,774 10,646 -------- -------- -------- Total other revenue 79,331 66,242 59,679 -------- -------- -------- OTHER EXPENSE Salaries and employee benefits (Notes 12 and 14) 88,278 80,207 82,126 Occupancy net of rental income 12,118 11,042 10,183 Equipment 16,940 15,784 14,025 Telecommunications 5,918 4,876 4,195 Contribution to charitable foundation (Note 1) 4,146 -- -- Other 55,600 54,605 46,045 -------- -------- -------- Total other expense 183,000 166,514 156,574 -------- -------- -------- Income before income taxes 99,143 87,342 78,757 Income tax expense (Note 11) 30,190 29,369 24,891 -------- -------- -------- Net Income $ 68,953 $ 57,973 $ 53,866 ======== ======== ======== NET INCOME PER SHARE (NOTE 15): BASIC $ 1.21 $ 1.02 $ 1.00 ======== ======== ======== DILUTED $ 1.20 $ 1.01 $ 0.99 ======== ======== ========
See accompanying notes to consolidated financial statements. 35 36 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME BANCORPSOUTH, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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, 1996 25,824,884 $ 64,941 $ 85,290 $ 3,322 $ 204,755 $(2,224) $ 356,084 Net income -- -- -- -- 53,866 -- 53,866 Net unrealized change in investment securities net of tax effect of ($2,008) (Note 16) -- -- -- 3,241 -- -- 3,241 - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive income 57,107 Shares issued: Business combination (Note 3) 1,231,710 3,079 12,635 -- 962 -- 16,676 Other shares issued 142,881 164 837 -- (7,407) 1,352 (5,054) Recognition of stock compensation -- -- -- -- 83 -- 83 Purchase of treasury stock (51,207) -- -- -- -- (1,447) (1,447) Cash dividends declared: BancorpSouth, $0.395 per share -- -- -- -- (17,566) -- (17,566) Pooled acquisitions -- -- -- -- (1,420) -- (1,420) - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 27,148,268 68,184 98,762 6,563 233,273 (2,319) 404,463 Net income -- -- -- -- 57,973 -- 57,973 Net unrealized change in investment securities net of tax effect of ($2,856) (Note 16) -- -- -- 4,611 -- -- 4,611 - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive income 62,584 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) 28,331,240 70,964 (16,400) -- (54,564) -- -- Other shares issued 137,866 118 951 -- (2,644) 1,566 (9) Recognition of stock compensation -- -- -- -- 278 -- 278 Purchase of treasury stock (30,000) -- -- -- -- (602) (602) Cash dividends declared: BancorpSouth, $0.45 per share -- -- -- -- (21,266) -- (21,266) Pooled acquisitions -- -- -- -- (1,334) -- (1,334) - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 57,185,479 143,261 91,094 11,174 223,353 (1,355) 467,527 Net income -- -- -- -- 68,953 -- 68,953 Net unrealized change in investment securities net of tax effect of $7,118 (Note 16) -- -- -- (11,269) -- -- (11,269) - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive income 57,684 Other shares issued 64,540 -- (104) -- 65 749 710 Recognition of stock compensation -- -- -- -- 70 -- 70 Purchase of treasury stock (52,500) -- -- -- -- (857) (857) Cash dividends declared: BancorpSouth, $0.49 per share -- -- -- -- (27,734) -- (27,734) - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 57,197,519 $143,261 $ 90,990 $ (95) $ 264,707 $(1,463) $ 497,400 ========== ======== ======== ======== ========= ======= =========
See accompanying notes to consolidated financial statements. 36 37 CONSOLIDATED STATEMENTS OF CASH FLOWS BANCORPSOUTH, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31 ----------------------------------- 1999 1998 1997 --------- --------- --------- (In thousands) OPERATING ACTIVITIES: Net income $ 68,953 $ 57,973 $ 53,866 Adjustment to reconcile net income to net cash provided by operating activities: Provision for credit losses 14,689 16,080 10,516 Depreciation and amortization 15,988 14,327 12,509 Deferred taxes (639) 3,772 (959) Amortization of intangibles 1,280 865 811 Amortization of debt securities premium and discount, net (499) (8,372) (305) Security gains, net (4,176) (842) (1,283) Net deferred loan origination expense (5,016) (3,366) (3,179) Increase in interest receivable (2,950) (3,898) (3,846) Increase in interest payable 917 2,232 1,834 Proceeds from mortgages sold 565,687 772,583 328,847 Origination of mortgages for sale (539,854) (796,476) (342,448) Other, net 6,471 (3,613) (971) --------- --------- --------- Net cash provided by operating activities 120,851 51,265 55,392 --------- --------- --------- INVESTING ACTIVITIES: Proceeds from calls and maturities of held- to-maturity securities 177,739 578,131 246,022 Proceeds from calls and maturities of available- for-sale securities 398,249 259,788 266,874 Proceeds from sales of held-to-maturity securities 9,040 -- -- Proceeds from sales of available-for-sale securities 66,617 42,294 31,498 Purchases of held-to-maturity securities (380,250) (646,263) (209,414) Purchases of available-for-sale securities (238,622) (339,174) (482,486) Net (increase) decrease in short-term investments 58,210 (108,198) 102,768 Net increase in loans (476,334) (400,961) (302,391) Purchases of premises and equipment (18,039) (20,786) (25,814) Proceeds from sale of premises and equipment 1,246 1,463 3,043 Other, net (19,487) (9,798) (13,291) --------- --------- --------- Net cash used in investing activities (421,631) (643,504) (383,191) --------- --------- --------- FINANCING ACTIVITIES: Net increase in deposits 228,083 474,609 318,216 Net (decrease) increase in short-term debt and other liabilities 89,485 (109,542) 147,594 Advances on long-term debt 145,000 125,600 12,836 Repayment of long-term debt (100,160) (10,849) (10,185) Issuance of common stock 74 472 383 Purchase of treasury stock (857) (602) (1,447) Payment of cash dividends (26,430) (21,729) (17,852) --------- --------- --------- Net cash provided by financing activities 335,195 457,959 449,545 --------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 34,415 (134,280) 121,746 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 188,266 322,546 200,800 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 222,681 $ 188,266 $ 322,546 ========= ========= =========
See accompanying notes to consolidated financial statements. 37 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BANCORPSOUTH, INC. AND SUBSIDIARIES DECEMBER 31, 1999, 1998 AND 1997 (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 (the Bank). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain 1998 and 1997 amounts have been reclassified to conform with the 1999 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 $195,801,000, $194,277,000 and $163,060,000 and income taxes of $20,461,000, $27,453,000 and $28,680,000 for the years ended December 31, 1999, 1998 and 1997, 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, 1999 and 1998. 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. 38 39 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. SECURITIES GAINS/CONTRIBUTION TO CHARITABLE FOUNDATION During 1999, the Company established a charitable foundation. Appreciated equity securities with an aggregate market value of approximately $4.15 million were contributed by the Company to initially fund the foundation. This transaction resulted in securities gains of $4.14 million and contributions expense of $4.15 million during 1999. 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. Prior to 1998, certain of the Company's stock option plans contained provisions for Stock Appreciation Rights (SARs). Accounting rules for SARs require the recognition of expense for appreciation in the market value of the Company's common stock or a reduction of expense in the event of a decline in the market value of the Company's common stock. See Note 14 for further disclosures regarding SARs. RECENT PRONOUNCEMENT 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 2001 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 the Bank'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. 39 40 (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 28,331,240 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 the Bank. Pursuant to the merger, the Company issued 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 all periods presented. 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 the Bank. The Company issued 3,604,394 shares of common stock to the shareholders of Alabama Bancorp. 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 the Bank. The Company issued 2,798,022 shares of common stock to the shareholders of Merchants Capital Corporation. 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 the Bank. The Company issued 2,265,444 shares of common stock to the shareholders of The First Corporation. 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. On February 26, 1999, HomeBanc Corporation, a $160 million bank holding company headquartered in Guntersville, Alabama, was merged with and into the Company. Pursuant to the merger, HomeBanc Corporation's subsidiary bank, The Home Bank, was merged into the Bank. Each share of stock of HomeBanc Corporation was converted into 1.5747417 shares of the Company's common stock, or a total of 2,099,971 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 HomeBanc Corporation. On June 30, 1999, Stewart Sneed Hewes, Inc. and subsidiaries, TSH Rentals, Inc. and Stewart Sneed Hewes II, Inc., a group of interrelated commercial insurance agencies, were merged with and into BancorpSouth Insurance Services of Mississippi, Inc., a subsidiary of the Bank. A total of 1,252,806 shares of the Company's common stock were issued to effect this transaction. This transaction was accounted for as a pooling of interests and the Company's financial statements for all periods presented include the accounts of Stewart Sneed Hewes, Inc. and subsidiaries, TSH Rentals, Inc. and Stewart Sneed Hewes II, Inc. 40 41 (4) HELD-TO-MATURITY SECURITIES A comparison of amortized cost and estimated fair values of held-to-maturity securities as of December 31, 1999 and 1998 follows:
1999 ---------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE -------- ------- ------- -------- (In thousands) U.S. Treasury $ 60,971 $ 277 $ 405 $ 60,843 U.S. Government agencies and corporations 560,350 95 17,073 543,372 Tax exempt obligations of states and political subdivisions 213,392 1,896 3,024 212,264 Other 6,041 -- 237 5,804 -------- ------- ------- -------- Total $840,754 $ 2,268 $20,739 $822,283 ======== ======= ======= ========
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 212,408 7,824 802 219,430 Other 2,295 86 -- 2,381 -------- ------- ------- -------- Total $651,581 $13,133 $ 1,574 $663,140 ======== ======= ======= ========
Gross gains of $183,000 and gross losses of $17,000 were recognized in 1999, gross gains of $371,000 and gross losses of $64,000 were recognized in 1998 and gross gains of $640,000 and gross losses of $30,000 were recognized in 1997 on held-to-maturity securities. Except for 1999, these gains and losses were the result of held-to-maturity securities being called prior to maturity. Included in the 1999 amounts is a gross gain of $21,000 related to the sale of held-to-maturity securities with amortized cost of $6,016,000. 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 $629,000,000 at December 31, 1999 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, 1999 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. Securities that reprice periodically are considered as maturing on the first repricing date subsequent to December 31, 1999.
1999 ---------------------- ESTIMATED AMORTIZED FAIR COST VALUE -------- -------- (In thousands) Due in one year or less $271,289 $265,708 Due after one year through five years 504,056 491,513 Due after five years through ten years 55,719 54,346 Due after ten years 9,690 10,716 -------- -------- Total $840,754 $822,283 ======== ========
41 42 (5) AVAILABLE-FOR-SALE SECURITIES A comparison of amortized cost and estimated fair values of available-for-sale securities as of December 31, 1999 and 1998 follows:
1999 ---------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE -------- ------- ------- -------- (In thousands) U.S. Treasury $ 65,852 $ 359 $ 187 $ 66,024 U.S. Government agencies and corporations 200,957 226 5,193 195,990 Tax exempt obligations of states and political subdivisions 32,798 538 1,006 32,330 Other 45,831 5,564 455 50,940 -------- ------- ------- -------- Total $345,438 $ 6,687 $ 6,841 $345,284 ======== ======= ======= ========
1998 ---------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE -------- ------- ------- -------- (In thousands) U.S. Treasury $103,575 $ 2,652 $ 2 $106,225 U.S. Government agencies and corporations 331,587 4,185 266 335,506 Tax exempt obligations of states and political subdivisions 36,815 1,909 28 38,696 Preferred stock 55,320 3,243 -- 58,563 Other 38,553 6,273 76 44,750 -------- ------- ------- -------- Total $565,850 $18,262 $ 372 $583,740 ======== ======= ======= ========
Gross gains of $4,423,000 and gross losses of $413,000 were recognized in 1999, gross gains of $624,000 and gross losses of $89,000 were recognized in 1998 and gross gains of $718,000 and gross losses of $45,000 were recognized in 1997 on available-for-sale securities. Available-for-sale securities with a carrying value of approximately $217,000,000 at December 31, 1999 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, 1999 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, 1999.
1999 ---------------------- ESTIMATED AMORTIZED FAIR COST VALUE -------- -------- (In thousands) Due in one year or less $ 64,808 $ 64,006 Due after one year through five years 216,954 218,620 Due after five years through ten years 48,839 47,212 Due after ten years 14,837 15,446 -------- -------- Total $345,438 $345,284 ======== ========
42 43 (6) LOANS A summary of loans classified by collateral type at December 31, 1999 and 1998 follows:
1999 1998 ---------- ---------- (In thousands) Commercial and agricultural $ 371,169 $ 395,514 Consumer and installment 978,013 930,698 Real estate mortgage 2,514,573 2,113,380 Lease financing 254,868 210,559 Other 12,795 26,393 ---------- ---------- Total $4,131,418 $3,676,544 ========== ==========
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 $5,150,000 and $6,629,000 at December 31, 1999 and 1998, respectively. Restructured loans totaled $91,000 and $713,000 at December 31, 1999 and 1998, respectively. The total amount of interest earned on non-performing loans was approximately $126,000, $153,000 and $58,000 in 1999, 1998 and 1997, respectively. The gross interest income which would have been recorded under the original terms of those loans amounted to $361,000, $385,000 and $263,000 in 1999, 1998 and 1997, 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, 1999 and 1998 was $5,790,000 and $8,643,000, respectively, with a valuation reserve of $2,176,000 and $3,223,000, respectively. The average recorded investment in impaired loans during 1999 and 1998 was $6,207,000 and $9,187,000, respectively. (7) ALLOWANCE FOR CREDIT LOSSES The following summarizes the changes in the allowance for credit losses for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 -------- -------- -------- (In thousands) Balance at beginning of year $ 51,083 $ 44,238 $ 41,706 Provision charged to expense 14,689 16,080 10,516 Recoveries 2,135 3,060 2,556 Loans charged off (12,350) (13,447) (11,136) Acquisitions -- 1,152 596 -------- -------- -------- Balance at end of year $ 55,557 $ 51,083 $ 44,238 ======== ======== ========
43 44 (8) PREMISES AND EQUIPMENT A summary by asset classification at December 31, 1999 and 1998 follows:
ESTIMATED USEFUL LIFE YEARS 1999 1998 ----------- -------- -------- (In thousands) Cost: Land N/A $ 18,883 $ 17,760 Buildings and improvements 20-50 95,259 90,647 Leasehold improvements 10-20 2,578 1,947 Equipment, furniture and fixtures 3-12 93,740 84,534 Construction in progress N/A 9,172 13,607 -------- -------- 219,632 208,495 Accumulated depreciation and amortization 90,578 80,424 -------- -------- Premises and equipment, net $129,054 $128,071 ======== ========
(9) TIME DEPOSITS AND SHORT-TERM DEBT Certificates of deposit and other time deposits of $100,000 or more amounting to approximately $840,418,000 and $667,363,000 were outstanding at December 31, 1999 and 1998, respectively. Total interest expense relating to certificate and other time deposits of $100,000 or more totaled approximately $35,403,000, $37,802,000, and $29,211,000 for the years ended December 31, 1999, 1998 and 1997, respectively. For time deposits with a remaining maturity of more than one year at December 31, 1999, the aggregate amount of maturities for each of the following five years is presented in the following table:
MATURING IN AMOUNT ----------- -------- (In thousands) 2001 $290,468 2002 176,709 2003 45,752 2004 20,376 2005 1,466 Thereafter 2,021 -------- Total $536,792 ========
44 45 Presented below is information relating to short-term debt for the years ended December 31, 1999 and 1998:
END OF PERIOD DAILY AVERAGE MAXIMUM ----------------------- ------------------------ OUTSTANDING INTEREST INTEREST AT ANY BALANCE RATE BALANCE RATE MONTH END ---------- -------- --------- -------- ---------- (Dollars in thousands) 1999: Federal funds purchased $ 250 4.1% $ 7,588 5.1% $ 14,050 Securities sold under repurchase agreements 153,739 4.0% 37,195 4.2% 153,739 Short-term Federal Home Loan Bank advances 89,000 6.0% 57,236 5.1% 115,000 ---------- ---------- ---------- Total $ 242,989 $ 102,019 $ 282,789 ========== ========== ========== 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 ========== ========== ==========
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, 1999, the Bank had established informal federal funds borrowing lines of credit aggregating $747,000,000. (10) LONG-TERM DEBT FEDERAL HOME LOAN BANK ADVANCES The Bank has entered into a blanket floating lien security agreement with the Federal Home Loan Bank (FHLB) of Dallas. Under the terms of this agreement, the Bank 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. The Bank has advances from the FHLB of Atlanta which are secured by securities pledged at 97% of market value. 45 46 At December 31, 1999, the following FHLB fixed term advances were repayable as follows:
FINAL DUE DATE INTEREST RATE AMOUNT - -------------- ------------- ------ (In thousands) 2001 5.21% - 7.03% $2,088 2002 5.75% 5,000 2004 6.01% 206 2006 and beyond 5.86% - 7.69% 131,266 -------- Total $138,560 ========
(11) INCOME TAXES Total income taxes for the years ended December 31, 1999, 1998 and 1997 were allocated as follows:
1999 1998 1997 -------- -------- -------- (In thousands) Income from continuing operations $ 30,190 $ 29,369 $ 24,891 Shareholders' equity for other comprehensive income (7,118) 2,856 2,008 Shareholders' equity for stock option plans (268) (678) (400) -------- -------- -------- Total $ 22,804 $ 31,547 $ 26,499 ======== ======== ========
The components of income tax expense (credit) attributable to continuing operations are as follows for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 -------- ------- -------- (In thousands) Current: Federal $ 28,075 $22,288 $ 22,523 State 2,754 3,309 3,327 Deferred: Federal (585) 3,282 (825) State (54) 490 (134) -------- ------- -------- Total $ 30,190 $29,369 $ 24,891 ======== ======= ========
46 47 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:
1999 1998 1997 -------- -------- -------- (In thousands) Tax expense at statutory rate $ 34,700 $ 30,570 $ 27,565 Increase (reduction) in taxes resulting from: State income taxes net of federal tax benefit 1,755 2,469 2,075 Tax exempt interest revenue (4,230) (3,876) (3,195) Non-deductible merger expenses 255 1,077 -- Dividend received deduction (203) (124) (118) Charitable contribution (1,450) -- -- Other, net (637) (747) (1,436) -------- -------- -------- Total $ 30,190 $ 29,369 $ 24,891 ======== ======== ========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998 are as follows:
1999 1998 ------- -------- (In thousands) Deferred tax assets: Loans receivable, principally due to allowance for credit losses $24,271 $ 20,827 Deferred liabilities, principally due to compensation arrangements and vacation accruals 5,258 5,185 Unrealized losses on available-for-sale securities 190 -- Net operating loss carryforwards 698 769 ------- -------- Total gross deferred tax assets 30,417 26,781 Less: valuation allowance -- -- ------- -------- Deferred tax assets $30,417 $ 26,781 ------- -------- Deferred tax liabilities: Bank premises and equipment, principally due to differences in depreciation and lease transactions $21,577 $ 19,001 Deferred assets, principally due to expense recognition 1,085 700 Investments, principally due to interest income recognition 1,532 1,875 Capitalization of mortgage servicing rights 4,197 4,008 Unrealized gains on available-for-sale securities -- 6,843 ------- -------- Total gross deferred tax liabilities 28,391 32,427 ------- -------- Net deferred tax assets (liabilities) $ 2,026 $ (5,646) ======= ========
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, 1999. At December 31, 1999 the Company had net operating loss carryforwards related to business combinations for federal income tax purposes of approximately $1,826,000 that were available to offset future federal taxable income, subject to various limitations, through 2009. 47 48 (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:
1999 1998 1997 -------- -------- -------- (In thousands) Change in benefit obligation: Projected benefit obligation at beginning of year $ 19,658 $ 19,469 $ 19,889 Service cost 1,677 1,402 1,295 Interest cost 1,517 1,343 1,332 Actuarial (gain) loss (3,296) 444 (1,489) Benefits paid (1,669) (3,000) (1,558) -------- -------- -------- Projected benefit obligation at end of year $ 17,887 $ 19,658 $ 19,469 ======== ======== ======== Change in plan assets: Fair value of plan assets at beginning of year $ 28,376 $ 26,124 $ 20,982 Actual return on assets 3,462 5,223 4,663 Employer contributions -- 29 2,037 Benefits paid (1,669) (3,000) (1,558) -------- -------- -------- Fair value of plan assets at end of year $ 30,169 $ 28,376 $ 26,124 ======== ======== ======== Funded status: Benefit obligation $(17,887) $(19,658) $(19,469) Fair value of plan assets 30,169 28,376 26,124 Unrecognized transition amount (4) (6) (7) Unrecognized prior service cost (863) (941) (1,018) Unrecognized actuarial gain (12,725) (8,245) (5,570) -------- -------- -------- Net amount recognized $ (1,310) $ (474) $ 60 ======== ======== ======== Components of net periodic pension cost: Service cost $ 1,677 $ 1,402 $ 1,295 Interest cost 1,517 1,343 1,332 Expected return on assets (2,121) (1,950) (1,641) Amortization of unrecognized transition amount (2) (2) (2) Recognized prior service cost (78) (78) (78) Recognized net gain (157) (152) (66) -------- -------- -------- Net periodic pension cost $ 836 $ 563 $ 840 ======== ======== ========
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, 1999, 1998 and 1997 are presented in the following table. 48 49
1999 1998 1997 ---- ---- ---- Discount rate 7.75% 6.75% 6.50% Rate of compensation increase 4.00 4.00 4.00 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 $144,000 in 1999, $128,000 in 1998 and $148,000 in 1997. 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, 1999, 1998 and 1997 was $2,625,000, $2,519,000 and $2,445,000, 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, 1999 and 1998:
1999 1998 -------------------------- -------------------------- BOOK FAIR BOOK FAIR VALUE VALUE VALUE VALUE ---------- ---------- ---------- ---------- (In thousands) Commercial and agricultural $ 371,169 $ 406,420 $ 395,514 $ 405,607 Consumer and installment 978,013 1,051,009 930,698 995,133 Real estate mortgage 2,514,573 2,711,853 2,113,380 2,296,490 All other 12,795 13,091 26,393 30,539 ---------- ---------- ---------- ---------- Total $3,876,550 $4,182,373 $3,465,985 $3,727,769 ========== ========== ========== ==========
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. 49 50 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, 1999 and 1998. 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, 1999 and 1998:
1999 1998 ----------------------- ----------------------- BOOK FAIR BOOK FAIR VALUE VALUE VALUE VALUE ---------- ---------- ---------- ---------- (In thousands) Maturing or repricing in six months or less $1,197,383 $1,202,497 $ 979,376 $ 982,398 Maturing or repricing between six months and one year 606,553 610,327 457,181 460,518 Maturing or repricing between one and three years 452,140 453,021 139,880 143,859 Maturing or repricing beyond three years 69,603 79,901 481,716 492,967 ---------- ---------- ---------- ---------- Total $2,325,679 $2,345,746 $2,058,153 $2,079,742 ========== ========== ========== ==========
LONG-TERM DEBT The fair value of the Company's fixed-term 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, 1999 and 1998:
1999 1998 ----------------------- ----------------------- BOOK FAIR BOOK FAIR FINAL DUE DATE VALUE VALUE VALUE VALUE - -------------- -------- -------- -------- -------- (In thousands) 1999 $ -- $ -- $ 1,661 $ 1,661 2000 -- -- 19,185 19,237 2001 2,088 2,075 3,847 3,861 2002 5,000 4,940 17,186 17,242 2003 -- -- 185 185 Thereafter 131,472 123,266 140,656 143,160 -------- -------- -------- -------- Total $138,560 $130,281 $182,720 $185,346 ======== ======== ======== ========
(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 36,000 at December 31, 1999. 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 56,000 at December 31, 1999. 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 5,340 at December 31, 1999. 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 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 an exercise price equal to the market value on the date of the grant and are exercisable over periods of one to 50 51 ten years. At December 31, 1999, the Company had outstanding 552,453 SARs exercisable in conjunction with certain of the options outstanding. The Company recorded reductions in compensation expense of $956,000 and $2,709,000 in 1999 and 1998, respectively, and recorded additional compensation expense of $6,113,000 in 1997 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 at least 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 options outstanding as of December 31, 1999, 1998 and 1997, and changes during the years ended on those dates is presented below:
1999 1998 1997 -------------------- ---------------------- --------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE --------- --------- --------- --------- --------- --------- Outstanding at beginning of year 1,713,681 $12.53 1,663,335 $10.73 1,608,618 $ 8.53 Granted 276,000 17.23 341,526 15.90 276,557 20.36 Exercised (87,060) 4.59 (260,028) 6.02 (221,840) 6.78 Expired or cancelled (10,460) 9.88 (31,152) 8.11 -- -- --------- --------- --------- Outstanding at end of year 1,892,161 $13.59 1,713,681 $12.53 1,663,335 $10.73 --------- --------- --------- Exercisable at end of year 1,379,021 1,207,257 1,085,807 ========= ========= =========
The following table summarizes information about stock options at December 31, 1999:
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 29,552 0.3 years $ 0.72 29,552 $ 0.72 $2.47 to $3.58 7,484 3.6 3.29 7,484 3.29 $4.10 to $6.49 149,006 2.1 5.70 149,006 5.70 $7.45 to $9.38 428,250 4.2 8.67 418,650 8.68 $11.06 to $13.63 537,250 6.6 12.31 537,250 12.31 $16.63 to $22.50 740,619 9.0 19.57 237,079 21.34 --------- --------- $0.72 to $22.50 1,892,161 6.5 $13.59 1,379,021 $ 11.75 ========= =========
51 52 SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require, adoption of a fair-value based accounting method for employee stock-based compensation arrangements. As permitted by the statement, the Company has elected to disclose pro forma net income and earnings per share amounts as if the fair-value based method had been applied in measuring compensation cost. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1999, 1998 and 1997: expected options lives of 7 years for all three years; expected dividend yield of 3.18%, 2.84% and 3.0%; expected volatility of 23%, 22% and 22% and risk-free interest rates of 6%, 6% and 7%. 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, 1999, 1998 and 1997 are presented in the following table.
1999 1998 1997 ------- ------- ------- Net income (in thousands) As reported $68,953 $57,973 $53,866 Pro forma 68,201 57,294 53,315 Basic earnings per share As reported $ 1.21 $ 1.02 $ 1.00 Pro forma 1.19 1.01 0.98 Diluted earnings per share As reported $ 1.20 $ 1.01 $ 0.99 Pro forma 1.19 1.00 0.98
(15) EARNINGS PER SHARE AND DIVIDEND DATA The computation of basic earnings per share is based on the weighted average number of common shares outstanding. The computation of diluted earnings per share is based on the weighted average number of common shares outstanding plus the shares resulting from the assumed exercise of all outstanding stock options using the treasury stock method. The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ----------------------------------- ------------------------------------ ---------------------------------- 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 $68,953 57,108 $1.21 $ 57,973 56,638 $ 1.02 $ 53,866 54,122 $1.00 ===== ====== ===== Effect of dilutive stock options -- 416 -- 586 -- 422 ------- ------ -------- ------ ------- ------ DILUTED EPS: Income available to common shareholders plus assumed exercise $68,953 57,524 $1.20 $ 57,973 57,224 $ 1.01 $ 53,866 54,544 $0.99 ======= ====== ===== ======== ====== ====== ======== ====== =====
Dividends to shareholders are paid from dividends paid to the Company by the Bank which are subject to approval by the applicable state regulatory authority. At December 31, 1999, the Bank could have paid dividends to the Company of $144,000,000 under current regulatory guidelines. 52 53 (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, 1999, 1998 and 1997:
1999 1998 1997 --------------------------- --------------------------- ---------------------------- 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 (losses) arising during holding period $(14,377) $5,584 $ (8,793) $ 8,002 $(3,061) $ 4,941 $ 5,922 $(2,265) $ 3,657 Less: Reclassification adjustment for net gains realized in net income (4,010) 1,534 (2,476) (535) 205 (330) (673) 257 (416) -------- ------ -------- ------- ------- ------- ------- ------- ------- Other comprehensive income (loss) $(18,387) $7,118 $(11,269) $ 7,467 $(2,856) $ 4,611 $ 5,249 $(2,008) $ 3,241 ======== ====== ======== ======= ======= ======= ======= ======= =======
(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 (in thousands): Loans outstanding at December 31, 1998 $ 21,052 New loans 1,903 Repayments (3,443) -------- Loans outstanding at December 31, 1999 $ 19,512 ========
(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. 53 54 The following is a summary of capitalized mortgage servicing rights, net of accumulated amortization, and a valuation allowance for impairment:
1999 1998 ------- ------- (In thousands) Balance at beginning of year $27,343 $14,071 Mortgage servicing rights capitalized 11,779 16,376 Amortization expense (4,510) (3,104) ------- ------- Balance at end of year 34,612 27,343 Valuation allowance (1,368) (4,670) ------- ------- Fair value at end of year $33,244 $22,673 ======= =======
(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 Board of Governors of the Federal Reserve (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 I) of a least 4% of risk-weighted assets, total capital of at least 8% of risk-weighted assets and a minimum Tier I leverage ratio of 3% of adjusted average assets. The regulations also define well capitalized levels of Tier I, total capital and Tier I leverage as 6%, 10% and 5%, respectively. The Company had Tier I, total capital and leverage above the well capitalized levels at December 31, 1999 and 1998, respectively, as set forth in the following table:
1999 1998 ---------------------------- --------------------------- AMOUNT RATIO AMOUNT RATIO -------- ----- -------- ----- (Dollars in thousands) Total Capital (to Risk-Weighted Assets) $536,130 12.80% $486,978 12.82% Tier I Capital (to Risk-Weighted Assets) 481,440 11.49 439,435 11.56 Tier I Leverage Capital (to Average Assets) 481,440 8.38 439,435 8.38
54 55 (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, 1999, 1998 and 1997 are presented below:
GENERAL COMMUNITY CORPORATE BANKING AND OTHER TOTAL ------- --------- ---------- (In thousands) 1999 RESULTS OF OPERATIONS Net interest revenue $ 163,083 $ 54,418 $ 217,501 Provision for credit losses 11,690 2,999 14,689 - ------------------------------------------------------------------------------------- Net interest income after provision for credit losses 151,393 51,419 202,812 Other revenue 41,525 37,806 79,331 Other expense 140,169 42,831 183,000 - ------------------------------------------------------------------------------------- Income before income taxes 52,749 46,394 99,143 Income taxes 16,063 14,127 30,190 - ------------------------------------------------------------------------------------- Net income $ 36,686 $ 32,267 $ 68,953 SELECTED FINANCIAL INFORMATION Identifiable assets $5,152,645 $624,281 $5,776,926 Depreciation & amortization 14,408 1,580 15,988 1998 RESULTS OF OPERATIONS Net interest revenue $ 152,847 $ 50,847 $ 203,694 Provision for credit losses 13,333 2,747 16,080 - ------------------------------------------------------------------------------------- Net interest income after provision for credit losses 139,514 48,100 187,614 Other revenue 34,591 31,651 66,242 Other expense 127,273 39,241 166,514 - ------------------------------------------------------------------------------------- Income before income taxes 46,832 40,510 87,342 Income taxes 15,747 13,622 29,369 - ------------------------------------------------------------------------------------- Net income $ 31,085 $ 26,888 $ 57,973 SELECTED FINANCIAL INFORMATION Identifiable assets $4,799,100 $584,114 $5,383,214 Depreciation & amortization 12,901 1,426 14,327 1997 RESULTS OF OPERATIONS Net interest revenue $ 137,869 $ 48,299 $ 186,168 Provision for credit losses 6,209 4,307 10,516 - ------------------------------------------------------------------------------------- Net interest income after provision for credit losses 131,660 43,992 175,652 Other revenue 42,967 16,712 59,679 Other expense 128,986 27,588 156,574 - ------------------------------------------------------------------------------------- Income before income taxes 45,641 33,116 78,757 Income taxes 14,425 10,466 24,891 - ------------------------------------------------------------------------------------- Net income $ 31,216 $ 22,650 $ 53,866 SELECTED FINANCIAL INFORMATION Identifiable assets $4,335,974 $515,976 $4,851,950 Depreciation & amortization 11,351 1,158 12,509
55 56 (21) COMMITMENTS AND CONTINGENT LIABILITIES LEASES Rent expense was approximately $3,421,000 for 1999, $3,153,000 for 1998 and $3,064,000 for 1997. 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, 1999 (in thousands): 2000 $2,984 2001 2,166 2002 1,303 2003 903 2004 677 Thereafter 921 ------ Total future minimum lease payments $8,954 ======
MORTGAGE LOANS SERVICED FOR OTHERS The Company services mortgage loans for others which are not included in the accompanying financial statements. Included in the $1.95 billion of loans serviced for investors at December 31, 1999, is approximately $7.0 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, 1999, 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. 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, 1999, the contractual or notional amount of these forward contracts was approximately $38,000,000. 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, 1999, these included approximately $29,682,000 for letters of credit, and approximately $807,656,000 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 $8,000,000 were maintained to satisfy Federal regulatory requirements at December 31, 1999. 56 57 (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:
DECEMBER 31, ---------------------- 1998 1997 --------- --------- (In thousands) CONDENSED BALANCE SHEETS Assets Cash on deposit with subsidiary bank $ 11,877 $ 6,182 Securities -- 413 Investment in subsidiaries 490,597 461,860 Other assets 7,185 13,115 --------- --------- Total assets $ 509,659 $ 481,570 ========= ========= Liabilities and shareholders' equity Total liabilities $ 12,259 $ 14,043 Shareholders' equity 497,400 467,527 --------- --------- Total liabilities and shareholders' equity $ 509,659 $ 481,570 ========= =========
YEAR ENDED DECEMBER 31, ---------------------------------- 1999 1998 1997 -------- --------- --------- (In thousands) CONDENSED STATEMENTS OF INCOME Dividends from subsidiaries $ 31,100 $ 25,550 $ 17,937 Management fees from subsidiaries -- 1,739 1,419 Other operating income 120 809 456 -------- --------- --------- Total income 31,220 28,098 19,812 Operating expenses 1,561 4,543 7,324 -------- --------- --------- Income before equity in undistributed earnings of subsidiaries 29,659 23,555 12,488 Equity in undistributed earnings of subsidiaries 39,294 34,418 41,378 -------- --------- --------- Net income $ 68,953 $ 57,973 $ 53,866 ======== ========= =========
YEAR ENDED DECEMBER 31, ---------------------------------- 1999 1998 1997 -------- --------- --------- (In thousands) CONDENSED STATEMENTS OF CASH FLOWS Operating Activities: Net income $ 68,953 $ 57,973 $ 53,866 Adjustments to reconcile net income to net cash provided by operating activities (36,045) (20,367) (31,829) -------- --------- --------- Net cash provided by operating activities 32,908 37,606 22,037 Net cash used in financing activities (27,213) (43,588) (18,916) -------- --------- --------- Increase (decrease) in cash and cash equivalents 5,695 (5,982) 3,121 Cash and cash equivalents at beginning of year 6,182 12,164 9,043 -------- --------- --------- Cash and cash equivalents at end of year $ 11,877 $ 6,182 $ 12,164 ======== ========= =========
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. 57 58 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 2000 annual meeting of shareholders, 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 57 Directors and Chief Executive Officer of the Company and BancorpSouth Bank; Director of the Company L. Nash Allen, Jr. Treasurer, and Chief 55 Financial Officer of the Company; Executive Vice President, Chief Financial Officer and Cashier, BancorpSouth Bank Harry R. Baxter Executive Vice President of the Company 55 and Vice Chairman and Director of Marketing of the Company and BancorpSouth Bank Gary R. Harder Executive Vice President of the Company 55 and Executive Vice President, Audit and Loan Review of the Company and BancorpSouth Bank Michael W. Weeks Executive Vice President of the 51 Company and Vice Chairman of BancorpSouth Bank Michael L. Sappington Executive Vice President of the Company 50 and Vice Chairman of BancorpSouth Bank Gregg Cowsert Executive Vice President of the 52 Company and Vice Chairman and Chief Lending Officer of BancorpSouth Bank Cathy M. Robertson Executive Vice President of the 45 Company and BancorpSouth Bank
58 59 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 has served as Chairman of the Board and Chief Executive Officer of the Bank and the Company for at least the past five years. Mr. Allen has served as Executive Vice President of the Bank for at least the past five years. He has served as Treasurer and Chief Financial Officer of the Company during this same period. Mr. Baxter has served as Executive Vice President of the Company and Vice Chairman and Director of Marketing of the Bank for at least the past five years. Mr. Harder served as Senior Vice President and Executive Vice President-Loan Review of the Bank for at least the past five years. He is also Executive Vice President of the Company. Mr. Weeks served as Chairman of the Board and Chief Executive Officer of Volunteer Bank 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 for at least the past five years. 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 of the Company and Vice Chairman of the Bank for at least the past five years. Mr. Cowsert has served as Executive Vice President and Vice Chairman of the Bank for at least the past five years. He also is Executive Vice President of the Company. Mrs. Robertson has served as First Vice President, Senior Vice President and Executive Vice President of the Bank for at least 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 2000 annual meeting of shareholders, 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 2000 annual meeting of shareholders, 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 Management" in the Company's definitive Proxy Statement for its 2000 annual meeting of shareholders, 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 2000 annual meeting of shareholders, and is incorporated herein by reference. 59 60 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. (2) (4) Specimen Common Stock Certificate. (3) (10) (a) 1998 Directors Plan. (2)(8) (b) Form of deferred compensation agreement between Bancorp of Mississippi, Inc. and certain key executives. (4)(8) (c) 1994 Stock Incentive Plan. (3)(8) (d) 1995 Non-Qualified Stock Option Plan for Non-Employee Directors. (3)(7)(8) (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., dated 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-K for the year ended December 31, 1998 (file number 0-10826), and incorporated by reference thereto. (3) 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. (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 0-10826), 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 0-1-826), 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, 1999. 60 61 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 22, 2000 /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 March 22, 2000 - --------------------------------- Executive Officer Aubrey B. Patterson (Principal Executive Officer) and Director /s/ L. Nash Allen, Jr. Treasurer and Chief Financial March 22, 2000 - --------------------------------- Officer (Principal Financial and L. Nash Allen, Jr. Accounting Officer) /s/ S. H. Davis Director March 22, 2000 - --------------------------------- S. H. Davis /s/ Hassell H. Franklin Director March 22, 2000 - --------------------------------- Hassell H. Franklin /s/ Fletcher H. Goode Director March 22, 2000 - --------------------------------- Fletcher H. Goode, M.D. /s/ W. G. Holliman, Jr. Director March 22, 2000 - --------------------------------- W. G. Holliman, Jr. /s/ A. Douglas Jumper Director March 22, 2000 - --------------------------------- A. Douglas Jumper /s/ Turner O. Lashlee Director March 22, 2000 - --------------------------------- Turner O. Lashlee /s Alan W. Perry Director March 22, 2000 - --------------------------------- Alan W. Perry /s/ Travis E. Staub Director March 22, 2000 - --------------------------------- Travis E. Staub Director March , 2000 - --------------------------------- Andrew R. Townes, DDS /s/ Lowery A. Woodall Director March 22, 2000 - --------------------------------- Lowery A. Woodall
61 EX-11 2 STATEMENT RE COMPUTATION PER SHARE EARNINGS 1 EXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Year Ended December 31, ---------------------------------- 1999 1998 1997 -------- --------- --------- (In thousands except per share amounts) Basic Earning per Share Average shares outstanding 57,108 56,638 54,122 ======== ========= ========= Income available to common shareholders' $ 68,953 $ 57,973 $ 53,866 ======== ========= ========= Basic Earnings per Share $ 1.21 $ 1.02 $ 1.00 ======== ========= ========= Diluted Earnings per Share Average common shares outstanding 57,108 56,638 54,122 Effect of dilutive stock options 416 586 422 -------- --------- --------- Average diluted shares outstanding 57,524 57,224 54,544 ======== ========= ========= Income available to common shareholders' $ 68,953 $ 57,973 $ 53,866 ======== ========= ========= Diluted Earnings per Share $ 1.20 $ 1.01 $ 0.99 ======== ========= =========
EX-21 3 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 Valley Finance, Inc. Alabama 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. BancorpSouth Insurance Services Alabama BancorpSouth Bank of Alabama, Inc. BancorpSouth Investment Services, Inc. Mississippi BancorpSouth Bank
EX-23 4 CONSENT OF INDEPENDENT ACCOUNTANTS 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 18, 2000, relating to the consolidated balance sheets of BancorpSouth, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1999, which report is included in the 1999 annual report on Form 10-K of BancorpSouth, Inc. /S/ KPMG LLP Memphis, Tennessee March 27, 2000 EX-27 5 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 217,270 5,411 65,000 0 345,284 345,284 345,284 4,053,532 55,557 5,776,926 4,815,415 242,989 82,562 138,560 143,261 0 0 354,139 5,776,926 333,907 44,282 35,998 414,184 179,229 196,686 217,501 14,689 4,176 183,000 99,143 99,143 0 0 68,953 1.21 1.20 4.28 5,150 14,378 91 0 51,083 12,350 2,135 55,557 55,557 0 0
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