-----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, MhyCbzEnqD8QynYfGvAp3XQ4o10ejch1QQs/U8AECeEwyqstf10QbtQrZ1TE0aNc h2Qh8ubOJcDAkQv4grL/cA== 0000950144-98-003691.txt : 19980401 0000950144-98-003691.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950144-98-003691 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE 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: 98579977 BUSINESS ADDRESS: STREET 1: ONE MISSISSIPPI PL CITY: TUPELO STATE: MS ZIP: 38801 BUSINESS PHONE: 6016802000 MAIL ADDRESS: STREET 1: PO BOX 789 CITY: TUPELO STATE: MS ZIP: 38802-0789 FORMER COMPANY: FORMER CONFORMED NAME: BANCORP OF MISSISSIPPI INC DATE OF NAME CHANGE: 19920703 10-K 1 BANCORPSOUTH, INC. FORM 10-K 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, 1997 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from to ------------ ---------- Commission file number 0-10826 ------- BancorpSouth, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Mississippi 64-0659571 - ------------------------------------ ------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One Mississippi Plaza Tupelo, Mississippi 38801 - ------------------------------------ ------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (601) 680-2000 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered - ------------------------------------ ------------------------------------- Common stock, $2.50 par value New York Stock Exchange Common stock purchase rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $2.50 PAR VALUE COMMON STOCK PURCHASE RIGHTS - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ] (Cover Page Continues on Next Page) 1 2 (Continued from Cover Page) The aggregate market value of the voting stock held by non-affiliates of the registrant as of January 31, 1998, was approximately $906,901,000 based on the closing sale price as reported on the New York Stock Exchange on January 31, 1998. On March 16, 1998, the registrant had outstanding 22,330,782 shares of Common Stock, par value $2.50 per share. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement used in connection with Registrant's Annual Meeting of Shareholders to be held April 21, 1998, are incorporated by reference into Part III of this Report. 2 3 BANCORPSOUTH, INC. FORM 10-K For the Fiscal Year Ended December 31, 1997 CONTENTS PART I Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
3 4 PART I Item 1. - Business General The Company is a bank holding company with financial services operations in Mississippi and Tennessee. Its principal subsidiary is BancorpSouth Bank ("the Bank"). The Company's principal office is located at One Mississippi Plaza, Tupelo, Mississippi 38801 and its telephone number is (601) 680-2000. Description of Business The Bank operates under the trade names Bank of Mississippi in Mississippi and Volunteer Bank in Tennessee. The Bank has its principal office in Tupelo, Lee County, Mississippi, and conducts a commercial banking and trust business through 134 offices in 68 municipalities or communities in 44 counties throughout Mississippi and western Tennessee. The Bank has grown through the acquisition of other banks, the purchase of assets from federal regulators and through the opening of new branches and offices. In addition, the Bank operates consumer finance, credit life insurance and insurance agency subsidiaries. At December 31, 1997, the Bank had total deposits of approximately $3.54 billion and total assets of approximately $4.18 billion. The Company, through its subsidiaries, provides a range of financial services and products to individuals and small-to-medium size businesses. Various types of checking accounts, both interest bearing and non-interest bearing, are available. Savings accounts and certificates of deposit with a range of maturities and interest rates are available to meet the needs of customers. Other services include safe deposit and night depository facilities. Limited 24-hour banking with automated teller machines is provided in most of its principal markets. The Bank is an issuing bank for MasterCard and overdraft protection is available to approved MasterCard holders maintaining checking accounts with the Bank. The Company offers a variety of services through the Bank's trust department, including personal trust and estate services, certain employee benefit accounts and plans, including individual retirement accounts, and limited corporate trust functions. At December 31, 1997, the Company and its subsidiaries employed 2,030 persons. The Company and its subsidiaries are not a party to any collective bargaining agreements, and the Company believes employee relations are good. Competition Vigorous competition exists in all major areas where the Company is engaged in business. The Bank competes for available loans and depository accounts not only with state and national commercial banks in its service areas but also with savings and loan associations, insurance companies, credit unions, money market mutual funds, automobile finance companies and financial services companies. None of these competitors is dominant in the whole area served by the Bank. The principal areas of competition in the banking industry center on a financial institution's ability and willingness to provide credit on a timely and competitively priced basis, to offer a sufficient range of deposit and investment opportunities at a competitive price and maturity, and to offer personal and other services of sufficient quality 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 with the Board of Governors of the Federal Reserve System (the "FRB") and is subject to regulation and supervision by the FRB. The Company is required to file with the FRB annual reports and such other information as they may require. The FRB may also conduct examinations of the Company. 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 its subsidiary, which are subject to approval by the applicable regulatory authority. The Bank is incorporated under the banking laws of the State of Mississippi and is subject to the applicable provisions of Mississippi banking laws rather than the National Bank Act. The Bank is subject to the supervision of the Mississippi Department of Banking and Consumer Finance and to regular examinations by that department. The deposits in the Bank are insured by the Federal Deposit Insurance Corporation (the "FDIC") and, therefore, the Bank is subject to the provisions of the Federal Deposit Insurance Act and to examination by the FDIC. The Bank is not a member of the Federal Reserve System. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") permits among other things the acquisition by bank holding companies of savings associations, irrespective of their financial condition, and increased the deposit insurance premiums for banks and savings associations. FIRREA also provides that commonly controlled federally insured financial institutions must reimburse the FDIC for losses incurred by the FDIC in connection with the default of another commonly controlled financial institution or in connection with the provision of FDIC assistance to such a commonly controlled financial institution in danger of default. Reimbursement liability under FIRREA is superior to any obligations to shareholders of such federally insured institutions (including a bank holding company such as the Company if it were to acquire another federally insured financial institution), arising as a result of their status as a shareholder of a reimbursing financial institution. The Company and the Bank are subject to the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). This statute provides for increased funding for the FDIC's deposit insurance fund and expanded the regulatory powers of federal banking agencies to permit prompt corrective actions to resolve problems of insured depository institutions through the regulation of banks and their affiliates, including bank holding companies. The provisions are designed to minimize the potential loss to depositors and to FDIC insurance funds if financial institutions default on their obligations to depositors or become in danger of default. Among other things, FDICIA provides a framework for a system of supervisory actions based primarily on the capital levels of financial institutions. FDICIA also provides for a risk-based deposit insurance premium structure. The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to its deposit insurance fund. While most of the Bank's deposits are in the Bank Insurance Fund (BIF), certain other of the Bank's deposits which were acquired from thrifts over the years remain in the Savings Association Insurance Fund (SAIF). The Company is required to comply with the risk-based capital guidelines established by the FRB, and to other tests relating to capital adequacy which the FRB adopts from time to time. See Note 18 of Notes to Consolidated Financial Statements included herein. In September 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA") was signed into law. Beginning September 29, 1996, 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. Beginning June 1, 1997, 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. 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 5 6 officers, present savers and borrowers, builders, attorneys, walk-in customers and, in some instances, other lenders. The Company has established disciplined and systematic procedures for approving and monitoring loans that vary depending on the size and nature of the loan. Commercial Lending The Company offers a variety of commercial loan services including term loans, lines of credit, equipment and receivable financing and agricultural loans. A broad range of short-to-medium term commercial loans, both secured and unsecured are made available to businesses for working capital (including inventory and receivables), business expansion (including acquisition and development of real estate and improvements), and the purchase of equipment and machinery. At times, the Company also makes construction loans to real estate developers for the acquisition, development and construction of residential subdivisions. Commercial loans are granted based on the borrower's ability to generate cash flow to support its debt obligations and other cash related expenses. A borrower's ability to repay commercial loans is substantially dependent on the success of the business itself and on the quality of its management. As a general practice, the Company takes as collateral a security interest in any available real estate, equipment, inventory, receivables or other personal property although such loans may also be made infrequently on an unsecured basis. Generally, the Company requires personal guaranties of its commercial loans to offset the risks associated with such loans. The Company has very little exposure as an agricultural lender. Crop production loans are either fully supported by the collateral and financial strength of the borrower or else a 90% loan guaranty is obtained through the Farmers Home Administration on such loans. Residential Consumer Lending A portion of the Company's lending activities consists of the origination of fixed and adjustable rate residential mortgage loans secured by owner-occupied property located in the Company's primary market areas. Home mortgage lending is unique in that a broad geographic territory may be serviced by originators working from strategically placed offices either within the Company's traditional banking facilities or from affordable storefront locations in commercial buildings. In addition, the Company offers construction loans, second mortgages home improvement loans and home equity lines of credit. The Company's banking subsidiary has received an "outstanding" CRA rating from the Federal Deposit Insurance Company after its most recent examination. The company finances the construction of individual, owner-occupied houses on the basis of written underwriting and construction loan management guidelines. First mortgage construction loans are made to solvent and competent contractors on bother a pre-sold and a "speculation" basis. Such loans are also made to qualified individual borrowers and are generally supported by a take-out commitment from a permanent lender. The Company makes residential construction loans to individuals who intend to erect owner occupied housing on a purchased parcel of real estate. The construction phase of these loans have certain risks, including the viability of the contractor, the contractor's ability to complete the project and changes in interest rates. In most cases, the Company will sell its mortgage loans of 15 or more years in term in the secondary market. The sale to the secondary market allows the Company to hedge against the interest rate risks related to such lending operations. This brokerage arrangement allows the Company to accommodate its clients' demands while eliminating the interest rate risk for the 15 to 30 year period generally associated with such loans. After the sale of a loan, the Company's only involvement is to act as a servicing agent. The Company in most cases requires title, fire, extended casualty insurance, and, where required by applicable regulations, flood insurance to be obtained by the borrower. The Company maintains its own errors and omissions insurance policy to protect against loss in the event of failure of a mortgagor to pay premiums on fire and other hazard insurance policies. Mortgage loans originated by the Company customarily include a "due on sale" clause giving the Company the right to declare a loan immediately due and payable in the event, among other matters, that the borrower sells or otherwise disposes of the real property subject to a mortgage. In general, the Company enforces due on sales clauses. Borrowers are typically permitted to refinance or repay loans at their option without penalty. 6 7 Non-Residential Consumer Lending Non-residential consumer loans made by the Company include loans for automobiles, recreation vehicles, boats, personal (secured and unsecured) and deposit account secured loans. In addition, the Company provides federally insured or guaranteed student loans to students at major universities and community colleges in the Company's market areas. The Company also conducts various indirect lending activities through established retail companies in its market areas. Non-residential consumer loans are attractive to the Company because they typically have a shorter term and carry higher interest rates than that charged on other types of loans. Non-residential consumer loans, however, do pose additional risks of collectability when compared to traditional types of loans granted by commercial banks such as residential mortgage loans. The Company also issues credit cards solicited on the basis of applications received through referrals from the Company's bank branch networks. The Company generally has a small portfolio of credit card receivables outstanding. Credit card lines are underwritten using conservative credit criteria, including past credit history and debt-to-income rations, similar to the credit policies applicable to other personal consumer loans. Historically, the Company believes that its credit card losses have been well-below industry norms. Consumer loans are granted based on employment and financial information solicited from prospective borrowers as well as credit records collected from various reporting agencies. Stability of the borrower, willingness to pay and credit history are the primary factors to be considered. The availability of collateral is also a factor considered in making such a loan. The Company seeks collateral that can be assigned and has good marketability with a clearly adequate margin of value. The geographic area of the borrower is another consideration with preference given to borrowers in the Company" market area. Asset Quality Management seeks to maintain a high quality of assets through conservative underwriting and sound lending practices. Management intends to follow this policy even though it may result in foregoing the funding of higher yielding loans. While there is no assurance that the Company will not suffer losses on its loans, management believes that the Company has in place adequate underwriting and loan administration policies and personnel to manage the associated risks prudently. In an effort to maintain the quality of the loan portfolio, management seeks to minimize higher risk types of lending. Undesirable loans include loans to provide initial equity and working capital to new businesses with no other capital strength, loans secured by unregistered stock, loans for speculative transactions in stock, land or commodity markets, loans to borrowers or the taking of collateral outside the Company's market area, loans dependent on secondary liens as primary collateral, and non-recourse loans. To the extent risks are identified, additional precautions are taken in order to reduce the Company's risk of loss. Commercial loans entail certain additional risks since they usually involve large loan balances to single borrowers or a related group of borrowers, resulting in a more concentrated loan portfolio. Further, since their payment is usually dependent upon the successful operation of the commercial enterprise, they also are subject to adverse conditions in the economy. The Board of Directors of the Company concentrates its efforts and resources, and that of its management and lending officials, on loan review and underwriting policies. Loan status and monitoring is handled through the Company's Loan Administration Department. Weak financial performance is identified and monitored using past due reporting, the internal loan rating system, loan review reports, the various loan committee functions, and periodic Asset Quality Rating Committee meetings. Senior loan officers have established a review process with the objective of quickly identifying, evaluating, and initiating necessary corrective action for substandard loans. The results of loan reviews are reported to the audit committee of the Board of Directors. Combined, these components are integral elements of the Company's loan program, which has resulted in its loan portfolio performance to date. Nonetheless, management maintains a cautious outlook in anticipating the potential effects of uncertain economic conditions (both locally and nationally) and the possibility of more stringent regulatory standards. 7 8 Selected Statistical Information Set forth below is certain selected statistical information relating to the Company's business. Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differentials Net Interest Revenue, the difference between Interest Revenue and Interest Expense, is the most significant component of the Company's earnings. For internal analytical purposes, management adjusts Net Interest Revenue to a "taxable equivalent" basis using an effective tax rate of 35% on tax exempt items (primarily interest on municipal securities). Another significant statistic in the analysis of Net Interest Revenue is the effective interest differential, also called the net yield on earning assets. The net yield on earning assets is net interest divided by total interest-earning assets. Recognizing the importance of interest differential to total earnings, management places great emphasis on managing interest rate spreads. Although interest differential is affected by national, regional and local economic conditions, including the level of credit demand and interest rates, there are significant opportunities to influence interest differential through appropriate loan and investment policies which are designed to maximize interest differential while maintaining sufficient liquidity and availability of "incremental funds" for purposes of meeting existing commitments and for investment in lending and other investment opportunities that may arise. The following table sets forth the average balances of assets and liabilities and the average rates earned and paid for the three years ended December 31, 1997. The table shows the various components of earning assets and the sources used to fund these assets which are included in the effective interest differential. 8 9 Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential
1997 1996 1995 ------------------------------ ----------------------------- ----------------------------- (Taxable equivalent basis) Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate ------- -------- ----- ------- -------- ----- ------- -------- ----- ASSETS (Dollars in thousands) Interest bearing deposits in other banks $ 8,018 $ 422 5.26% $ 12,313 $ 646 5.25% $ 15,974 $ 857 5.36% Held-to-maturity securities: U.S. treasury and agencies 417,029 27,366 6.56% 361,649 23,823 6.59% 398,194 28,152 7.07% State and political subdivisions (1) 155,673 11,226 7.21% 118,458 9,709 8.20% 118,493 10,517 8.88% Other securities 15 0 0.00% 84 2 2.38% 4,228 168 3.97% Available-for-sale securities (2) 315,620 19,884 6.30% 231,040 14,400 6.23% 183,396 8,902 4.85% Federal funds sold 82,724 4,410 5.33% 60,868 3,289 5.40% 39,451 2,205 5.59% Loans (net of unearned discount) (3) (4) (6) 2,598,315 245,652 9.45% 2,410,746 227,920 9.45% 2,146,967 204,397 9.52% Mortgages held for sale 28,870 2,068 7.16% 27,729 1,917 6.91% 20,805 1,433 6.89% ---------- --------- ---------- ------- ---------- -------- Total interest earning assets and revenue 3,606,264 311,028 8.62% 3,222,887 281,706 8.74% 2,927,508 256,631 8.77% Other assets 286,369 266,537 256,363 Less: allowance for credit losses (38,815) (36,503) (32,574) ---------- ---------- ---------- Total $3,853,818 $3,452,921 $3,151,297 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand - interest bearing $ 783,499 $ 24,550 3.13% $ 700,863 $ 20,426 2.91% $ 654,151 $ 17,733 2.71% Savings 485,072 20,789 4.29% 371,514 14,930 4.02% 300,278 11,916 3.97% Time 1,687,071 93,951 5.57% 1,526,564 83,390 5.46% 1,416,901 77,516 5.47% Federal funds purchased and securities under repurchase agreements 32,070 1,594 4.97% 40,880 1,954 4.78% 40,845 2,084 5.10% Other short-term borrowings (5) 1,892 116 6.13% 3,359 158 4.70% 4,706 299 6.35% Long term debt 51,220 3,055 5.96% 80,619 5,647 7.00% 68,452 4,909 7.17% ---------- --------- ---------- -------- ---------- -------- Total interest bearing liabilities and expense 3,040,824 144,055 4.74% 2,723,799 126,505 4.64% 2,485,333 114,457 4.61% Demand deposits - non-interest bearing 413,012 383,897 361,120 Other liabilities 55,816 45,476 36,449 ---------- ---------- ---------- Total liabilities 3,509,652 3,153,172 2,882,902 Shareholders' equity 344,166 299,749 268,395 ---------- ---------- ---------- Total $3,853,818 $3,452,921 $3,151,297 ========== ========== ========== Net interest revenue $ 166,973 $155,201 $142,174 ========= ======== ======== Net yield on interest earning assets 4.64% 4.81% 4.86% ==== ==== ====
1. Includes taxable equivalent adjustments of $2,756,000, $2,755,000 and $3,026,000 in 1997, 1996 and 1995, respectively, using an effective tax rate of 35%. 2. Includes taxable equivalent adjustment of $406,000, $281,000 and $581,000 in 1997, 1996 and 1995 using an effective tax rate of 35%. 3. Includes taxable equivalent adjustment of $773,000, $751,000 and $597,000 in 1997, 1996 and 1995, respectively, using an effective tax rate of 35%. 4. Interest expense includes interest paid on liabilities not included in averages. 5. Non-accrual loans are immaterial for each of the years presented. 9 10 Analysis of Changes in Effective Interest Differential Net interest revenue may also be analyzed by segregating the rate and volume components of interest revenue and interest expense. The table which follows presents an analysis of rate and volume change in net interest from 1996 to 1997 and 1995 to 1996. Changes, which are not solely due to volume or rate, are allocated to volume.
1997 OVER 1996 - INCREASE (DECREASE) 1996 OVER 1995 - INCREASE (DECREASE) -------------------------------------- --------------------------------------- (Taxable equivalent basis) Volume Rate Total Volume Rate Total --------- --------- -------- -------- -------- --------- (In thousands) INTEREST REVENUE Due from banks - interest bearing $ (226) $ 2 $ (224) $ (192) $ (19) $ (211) Held-to-maturity securities: U.S. Government agencies 3,634 (91) 3,543 (2,407) (1,922) (4,329) State and political subdivisions 2,684 (1,167) 1,517 (3) (805) (808) Other securities -- (2) (2) (99) (67) (166) Available-for-sale securities 5,329 155 5,484 2,970 2,528 5,498 Federal funds sold 1,165 (44) 1,121 1,157 (73) 1,084 Loans (net of unearned discount) 17,733 (1) 17,732 24,939 (1,416) 23,523 Mortgages held for sale 82 69 151 479 5 484 -------- -------- -------- -------- -------- -------- Total 30,401 (1,079) 29,322 26,841 (1,766) 25,075 -------- -------- -------- -------- -------- -------- INTEREST EXPENSE Demand deposits - interest bearing 2,589 1,535 4,124 1,361 1,332 2,693 Savings deposits 4,867 992 5,859 2,863 151 3,014 Time deposits 8,938 1,623 10,561 5,990 (116) 5,874 Federal funds purchased and securities under repurchase agreements (438) 78 (360) 2 (132) (130) Other short-term borrowings (90) 48 (42) (63) (78) (141) Long-term debt (1,753) (839) (2,592) 852 (114) 738 -------- -------- -------- -------- -------- -------- Total 14,113 3,437 17,550 11,005 1,043 12,048 -------- -------- -------- -------- -------- -------- Increase (Decrease) in Effective Interest Differential $ 16,288 $ (4,516) $ 11,772 $ 15,836 $ (2,809) $ 13,027 ======== ======== ======== ======== ======== ========
10 11 Investment Portfolio Held-to-Maturity Securities The following table shows the amortized cost of held-to-maturity securities at December 31, 1997, 1996 and 1995:
December 31 -------------------------------------------- 1997 1996 1995 -------- -------- -------- (In thousands) U. S. Treasury securities $109,012 $ 91,340 $ 33,355 U. S. Government agency securities 259,527 292,930 293,831 Taxable obligations of states and political subdivisions 1,295 1,375 500 Tax exempt obligations of states and political subdivisions 163,570 144,406 110,830 Other securities 15 15 787 -------- -------- -------- TOTAL $533,419 $530,066 $439,303 ======== ======== ========
The following table shows the maturities and weighted average yields as of the end of the latest period for each investment category presented above:
----------------------------------------------------------------------------------------- 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 $ 12,087 $ 94,413 $ 16,865 $ -- 6.55% Maturing after one year but within five years 94,939 154,908 104,525 -- 6.86% Maturing after five years but within ten years 1,986 8,702 34,192 -- 6.97% Maturing after ten years -- 1,504 9,283 15 7.86% -------- -------- -------- -------- TOTAL $109,012 $259,527 $164,865 $ 15 ======== ======== ======== ========
The yield on tax-exempt obligations of states and political subdivisions has been adjusted to a taxable equivalent basis using a 35% tax rate. 11 12 Available-for-Sale Securities The following table shows the book value of available-for-sale securities at December 31, 1997, 1996 and 1995:
December 31 ---------------------------------------------------------- 1997 1996 1995 ----------------- ------------------ ----------------- (In thousands) U. S. Treasury securities $105,373 $ 43,864 $ 51,241 U. S. Government agency securities 240,040 129,515 127,488 Taxable obligations of states and political subdivisions 228 503 3,337 Tax exempt obligations of states and political subdivisions 11,258 12,567 20,000 Other securities 49,313 44,290 37,689 -------- -------- -------- TOTAL $406,212 $230,739 $239,755 ======== ======== ========
The following table shows the maturities and weighted average yields as of the end of the latest period for each investment category presented above:
--------------------------------------------------------------------------------------------------- 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 $ 24,953 $ 78,240 $ 1,961 $ 21,001 5.94% Maturing after one year but within five years 75,161 121,400 4,348 11,875 6.40% Maturing after five years but within ten years 5,259 67 3,722 13,552 6.57% Maturing after ten years -- 40,333 1,455 2,885 6.46% -------- -------- -------- -------- TOTAL $105,373 $240,040 $ 11,486 $ 49,313 ======== ======== ======== ========
The yield on tax-exempt obligations of states and political subdivisions has been adjusted to a taxable equivalent basis using a 35% tax rate. 12 13 Loan Portfolio The Company's loans are widely diversified by borrower and industry. The following table shows the composition of loans by collateral type of the Company at December 31 for each of the years indicated.
DECEMBER 31 -------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- (In thousands) Commercial & agricultural (1) $ 266,112 $ 238,246 $ 223,225 $ 211,988 $ 203,798 Consumer & installment 823,356 744,456 695,127 633,692 510,538 Real estate mortgage (2) 1,571,137 1,407,841 1,314,935 1,151,666 1,013,446 Lease financing 172,436 149,104 121,617 81,816 60,781 Other 19,844 14,471 16,780 11,913 52,692 ---------- ---------- ---------- ---------- ---------- Total gross loans $2,852,885 $2,554,118 $2,371,684 $2,091,075 $1,841,255 ========== ========== ========== ========== ==========
(1) Including $13,550,000, $14,580,000, $17,388,000, $15,247,000 and $15,588,000 in 1997, 1996, 1995, 1994 and 1993, respectively, of loans classified as agricultural. (2) Including $35,831,000, $38,406,000, $36,054,000, $29,838,000 and $27,048,000 in 1997, 1996, 1995, 1994 and 1993, 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, 1997.
ONE YEAR ONE TO AFTER OR LESS FIVE YEARS FIVE YEARS ---------- -------------- ----------- (In thousands) Commercial & agricultural $ 142,260 $ 99,116 $ 24,736 Consumer & installment 199,325 593,119 30,912 Real estate mortgages 556,246 762,772 252,119 Lease financing 58,748 110,729 2,959 Other 14,581 4,990 273.00 ---------- ---------- ---------- Total gross loans $ 971,160 $1,570,726 $ 310,999 ========== ========== ==========
13 14 Sensitivity of Loans to Changes in Interest Rates The interest sensitivity of the Company's loans is important in the management of effective interest differential. The Company attempts to manage the relationship between the rate sensitivity of its assets and liabilities to produce an effective interest differential that is not significantly impacted by the level of interest rates. The following table shows the interest sensitivity of the Company's gross loans as of December 31, 1997.
December 31, 1997 FIXED VARIABLE RATE RATE ---------- --------- (In thousands) Loan Portfolio Due after one year $1,544,384 $337,341 ========== ========
Nonaccrual, Past Due and Restructured Loans Non-performing loans consist of both non-accrual loans and loans which have been restructured (primarily in the form of reduced interest rates) because of the borrower's weakened financial condition. The aggregate principal balance of non-accrual loans was $4,008,000, $3,940,000, $1,592,000, $3,029,000 and $4,072,000 at December 31, 1997, 1996, 1995, 1994 and 1993, respectively. The aggregate principal balance of restructured loans was $659,000, $77,000, $7,000, $1,448,000 and $4,018,000 at December 31, 1997, 1996, 1995, 1994 and 1993, respectively. The total amount of interest earned on non-performing loans was approximately $37,000, $13,000, $70,000, $214,000 and $277,000 in 1997, 1996, 1995, 1994 and 1993, respectively. The gross interest income that would have been recorded under the original terms of those loans amounted to $128,000, $167,000, $105,000, $353,000 and $611,000 in 1997, 1996, 1995, 1994 and 1993. Accruing loans which were contractually past due 90 days or more for years ended December 31, 1997, 1996, 1995, 1994 and 1993, amounted to $7,465,000, $4,811,000, $5,148,000, $3,614,000 and $4,277,000, respectively. Loans considered impaired, under SFAS No. 114, as amended by SFAS No. 118, are loans which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company's recorded investment in loans considered impaired at December 31, 1997 and 1996 was $2,928,000 and $3,306,000, respectively, with a valuation reserve of $927,000 and $995,000, respectively. The average recorded investment in impaired loans during 1997 and 1996 was $2,523,000 and $2,603,000, 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, 1997, no loans were known to be potential problem loans. At December 31, 1997, the Company did not have any concentration of loans in excess of 10% of total loans outstanding. Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities, which would cause them to be similarly impacted by economic or other conditions. However, the Company does conduct business in a geographically concentrated area. The ability of the Company's borrowers to repay loans is to some extent dependent upon the economic conditions prevailing in the market area. 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 14 15 predict loan losses with any certainty, management constantly reviews the characteristics of the loan portfolio to determine its overall risk profile and quality. Constant attention to the quality of the loan portfolio is achieved by a formal loan review process. The Board of Directors of the Company has appointed a Loan Loss Reserve Valuation Committee (the Committee) which is responsible for ensuring that the allowance for loan and leases losses (ALLL) provides coverage of both known and inherent losses. The Committee considers estimates of loss for individually-analyzed credits as well as factors such as historical experience, changes in economic and business conditions and concentrations of risk in determining the level of ALLL. The Committee meets a least quarterly to the determine the amount of additions to the ALLL. The Committee is composed of senior management from the Company's Loan Administration, Lending and Finance Departments. In each period, the Committee bases the ALLL on its loan classification system as well as an analysis of general economic and business trends in the Company's geographic region and nationally. A key input for determining the amount of the ALLL is the Company's loan classification system. The Company has a disciplined approach for assigning credit ratings and classifications to individual credits. Each credit is assigned a grade by the loan officer at origination that serves as a basis for the credit analysis of the entire portfolio. Periodically, loan officers review the status of each credit and update its grading. An independent Loan Review Department (Loan Review) reviews the gradings assigned by the loan officer. Loan Review is responsible for reviewing the credit rating and classification of individual credits. They also assess trends in the overall portfolio, adherence to internal credit policies and Loan Administration procedures and other factors that may affect the overall adequacy of the ALLL. Throughout this on-going process, management and the Committee are advised of the condition of individual loans and of the quality profile of the entire loan portfolio for consideration in establishing the ALLL. Any loan or portion thereof which is classified as "loss" by regulatory examiners or which is determined by management to be uncollectible because of such factors as the borrower's failure to pay interest or principal, the borrower's financial condition, economic conditions in the borrower's industry, or the inadequacy of underlying collateral, is charged off. The provision for credit losses charged to operating expense is an amount which, in the judgment of management, is necessary to maintain the allowance for credit losses at a level that is adequate to meet the 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 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. Management does not believe the allowance for credit losses can be fragmented by category of loans with any precision that would be useful to investors but is doing so in this report only in an attempt to comply with disclosure requirements of regulatory agencies. The breakdown of the allowance by loan category is based in part on evaluations of specific loans' past history and on economic conditions within specific industries or geographical areas. Accordingly, since all of these conditions are subject to change, the allocation is not necessarily indicative of the breakdown of any future losses. 15 16 The following table presents (a) the breakdown of the allowance for credit losses by loan category and (b) the percentage of each category in the loan portfolio to total loans at December 31 for each of the years presented:
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ALLOWANCE % OF LOANS ALLOWANCE % OF LOANS ALLOWANCE % OF LOANS ALLOWANCE % OF LOANS ALLOWANCE % OF LOANS FOR TO TOTAL FOR TO TOTAL FOR TO TOTAL FOR TO TOTAL FOR TO TOTAL CREDIT LOSS LOANS CREDIT LOSS LOANS CREDIT LOSS LOANS CREDIT LOSS LOANS CREDIT LOSS LOANS ----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- ----- (In thousands) Commercial & agricultural $ 2,985 9.33% $ 3,570 9.33% $ 3,290 9.41% $ 3,100 10.14% $ 3,020 11.07% Consumer & installment 14,760 28.86% 11,100 29.15% 10,413 29.31% 9,350 30.30% 7,620 27.73% Real estate mortgage 19,415 55.07% 20,532 55.12% 19,500 55.44% 17,090 55.08% 16,123 55.04% Lease financing 2,592 6.04% 2,070 5.84% 1,433 5.13% 1,290 3.91% 705 3.30% Other 125 0.70% -- 0.56% -- 0.71% -- 0.57% -- 2.86% ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ TOTAL $39,877 100.00% $37,272 100.00% $34,636 100.00% $30,830 100.00% $27,468 100.00% ======= ====== ======= ====== ======= ====== ======= ====== ======= ======
16 17 The following table sets forth certain information with respect to the Company's loans (net of unearned discount) and the allowance for credit losses for the five years ended December 31, 1997.
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In thousands) LOANS Average loans for the period $ 2,598,315 $ 2,410,746 $ 2,146,967 $ 1,881,922 $ 1,675,048 =========== =========== =========== =========== =========== ALLOWANCE FOR CREDIT LOSSES Balance, beginning of period $ 37,272 $ 34,636 $ 30,830 $ 27,468 $ 24,116 Loans charged off: Commercial & agricultural (678) (1,197) (448) (1,479) (374) Consumer & installment (7,107) (5,969) (3,550) (3,146) (5,030) Real estate mortgage (994) (808) (715) (1,217) (2,128) Lease financing (48) (30) (1) (19) (144) ----------- ----------- ----------- ----------- ----------- Total loans charged off (8,827) (8,004) (4,714) (5,861) (7,676) ----------- ----------- ----------- ----------- ----------- Recoveries: Commercial & agricultural 214 427 99 1,539 169 Consumer & installment 1,205 1,163 1,084 1,271 1,326 Real estate mortgage 352 241 366 412 325 Lease financing 57 5 18 55 176 ----------- ----------- ----------- ----------- ----------- Total recoveries 1,828 1,836 1,567 3,277 1,996 ----------- ----------- ----------- ----------- ----------- Net charge-offs (6,999) (6,168) (3,147) (2,584) (5,680) Provision charged to operating expense 9,008 8,804 6,206 5,946 9,032 Acquisitions 596 -- 747 -- -- ----------- ----------- ----------- ----------- ----------- Balance, end of period $ 39,877 $ 37,272 $ 34,636 $ 30,830 $ 27,468 =========== =========== =========== =========== =========== RATIOS Net charge-offs to average loans 0.27% 0.26% 0.15% 0.14% 0.34% =========== =========== =========== =========== ===========
17 18 Deposits Deposits represent the principal source of funds for the Company. The distribution and market share of deposits by type of deposit and by type of depositor are important considerations in the Company's assessment of the stability of its funds sources and its access to additional funds. Furthermore, management shifts the mix and maturity of the deposits depending on economic conditions and loan and investment policies in an attempt, within set policies, to minimize cost and maximize effective interest differential. The following table shows the classification of deposits on an average basis for the three years ended December 31, 1997.
YEARS ENDED DECEMBER 31 ---------------------------------------------------------------------- 1997 1996 1995 ---------------------------------------------------------------------- Average Average Average Average Average Average Amount Rate Amount Rate Amount Rate (Dollars in thousands) Non-interest bearing demand deposits $ 413,012 - $ 383,897 - $ 361,120 - Interest bearing demand deposits 783,499 3.13% 700,863 2.91% 654,151 2.71% Savings 485,072 4.29% 371,514 4.02% 300,278 3.97% Time 1,687,071 5.57% 1,526,564 5.46% 1,416,901 5.47% ---------- --------- ---------- TOTAL DEPOSITS $3,368,654 $2,982,838 $2,732,450 ========== ========== ==========
Time deposits of $100,000 and over including certificates of deposits of $100,000 and over at December 31, 1997, had maturities as follows:
DECEMBER 31, 1997 ----------------- (In thousands) Three months or less $116,503 Over three months through six months 134,074 Over six months through twelve months 75,416 Over twelve months 129,967 -------- TOTAL $455,960
18 19 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, 1997, as presented below:
YEARS ENDED DECEMBER 31, ------------------------ 1997 1996 1995 ---- ---- ---- Return on average common equity 13.18% 14.31% 13.23% Return on average assets 1.18 1.24 1.13 Dividend payout ratio 38.92 34.65 34.37
The Company's average common equity as a percent of average assets was 8.93%, 8.68% and 8.52% for 1997, 1996 and 1995, respectively. Short-Term Borrowings Time Deposits and Short-Term Debt Certificates of deposit and other time deposits of $100,000 or more amounting to approximately $455,960,000 and $399,123,000 were outstanding at December 31, 1997 and 1996, respectively. Total interest expense relating to certificate and other time deposits of $100,000 or more totaled approximately $24,939,000, $19,728,000, and $17,386,000 for the years ended December 31, 1997, 1996 and 1995, respectively. For time deposits with a remaining maturity of more than one year at December 31, 1997, the aggregate amount of maturities for each of the following five years is presented in the following table:
MATURING IN AMOUNT ----------- ------ (In thousands) 1999 $229,092 2000 200,386 2001 41,791 2002 44,960 2003 398 Thereafter -------- Total $518,976 ========
19 20 Presented below is information relating to short-term debt for the years ended December 31, 1997 and 1996:
END OF PERIOD DAILY AVERAGE MAXIMUM ------------------- ------------------- OUTSTANDING INTEREST INTEREST OF ANY BALANCE RATE BALANCE RATE MONTH END ------------------- ------------------- ----------- (Dollars in thousands) 1997: Federal funds $152,450 6.9% $ 3,004 6.3% $152,450 purchased Securities sold under repurchase agreements 25,000 5.3% 29,066 4.8% 32,554 -------- ------- -------- Total $177,450 $32,070 $185,005 ======== ======= ======== 1996: Federal funds purchased $ 1,750 5.8% $ 4,266 5.0% $ 5,950 Securities sold under 31,886 4.8% 36,654 4.8% 40,030 -------- ------- -------- Total $ 33,636 $40,880 $ 45,980 ======== ======= ========
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, 1997, the Bank had established informal federal funds borrowing lines of credit aggregating $584,000,000. Item 2. - Properties The physical properties of the Registrant 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 75% of the rentable space with the remainder leased to various unaffiliated tenants. The Bank owns 111 of its 134 branch banking facilities. The remaining 23 branch banking facilities are occupied under leases varying in length from one to 9 years. The Bank also owns several buildings in the Hattiesburg, Mississippi area (which provide space for certain of the its Southern Region activities including warehouse requirements, mortgage lending, trust services, lease servicing and central operations), an operations center near the Tupelo, Mississippi Municipal Airport, an office building in downtown Jackson, Mississippi (which has approximately 86,000 square feet of space, of which the Bank uses approximately two-thirds for banking activities while leasing or holding for lease the remaining 28,000 square feet) and an office building in downtown Gulfport, Mississippi (which has approximately 85,000 square feet of space, of which the Bank uses approximately 7,500 square feet for banking activities while leasing or holding for lease the remaining portion of the building). The Bank considers all its buildings and leased premises to be in good condition. The Bank also owns several parcels of property acquired under foreclosure. Ownership of and rentals on other real property by the Bank are not material. b. Personal Finance Company - This wholly-owned subsidiary of the Bank occupies 46 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 with average annual rent of approximately $8,200. All these premises are considered to be in good condition. 20 21 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 1997. Executive Officers of the Registrant For information regarding executive officers of the Company, see "Item 10 Directors and Executive Officers of the Registrant" in this Report. 21 22 PART II Item 5. - Market for the Registrant's Common Stock and Related Stockholder Matters Market for Common Stock The common stock of the Company trades on the New York Stock Exchange under the symbol BXS. The following table sets forth, for the periods indicated, the range of sale prices of the Company's common stock as reported on the New York Stock Exchange from May 15, 1997 and as reported on the Nasdaq Stock Market prior to May 15, 1997. The prices have been restated to reflect a two-for-one stock split of the Company's common stock effected in the form of a 100% stock dividend paid November 20, 1996.
1997: High Low ----- --- 4th quarter $48.3750 $35.1875 3rd quarter 36.0000 29.0000 2nd quarter 29.5000 26.5000 1st quarter 30.0000 26.5000 1996: 4th quarter $28.5000 $23.7500 3rd quarter 24.0000 21.5000 2nd quarter 25.7500 21.3750 1st quarter 25.5000 22.5000
Holders of Record As of February 28, 1998, there were 7,697 shareholders of record of the Company's common stock. Dividends The Company declared cash dividends totaling $0.79 per share during 1997, $0.70 during 1996 and $0.62 during 1995. Future dividends, if any, will vary depending on the Company's profitability and anticipated capital requirements. See "Item 1 Business - Regulation and Supervision". 22 23 Item 6. - Selected Financial Data SELECTED FINANCIAL INFORMATION (UNAUDITED) (Dollars in thousands, except per share amounts)
YEARS ENDED DECEMBER 31 ------------------------------------------------------------------------------ 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- Earnings Summary: Interest revenue $ 307,094 $ 277,919 $ 252,427 $ 207,895 $ 193,869 Interest expense 144,055 126,505 114,457 85,029 78,715 ---------- ---------- ---------- ---------- ---------- Net interest revenue 163,039 151,414 137,970 122,866 115,154 Provision for credit losses 9,008 8,804 6,206 5,946 9,032 ---------- ---------- ---------- ---------- ---------- Net interest revenue, after provision for credit losses 154,031 142,610 131,764 116,920 106,122 Other revenue 43,667 40,745 31,240 26,012 26,776 Other expense 131,988 118,472 111,750 99,372 93,176 ---------- ---------- ---------- ---------- ---------- Income before income taxes and effect of accounting change 65,710 64,883 51,254 43,560 39,722 Income taxes 20,360 22,000 15,750 12,832 10,216 ---------- ---------- ---------- ---------- ---------- Income before effect of accounting change 45,350 42,883 35,504 30,728 29,506 Cummulative effect of change in accounting for income taxes -- -- -- -- 3,429 ---------- ---------- ---------- ---------- ---------- Net income $ 45,350 $ 42,883 $ 35,504 $ 30,728 $ 32,935 ========== ========== ========== ========== ========== Per Share Data: Net income: Basic $ 2.04 $ 2.04 $ 1.70 $ 1.51 $ 1.66 Diluted 2.03 2.03 1.69 1.51 1.65 Cash dividends 0.79 0.70 0.62 0.555 0.54 Book value 16.18 15.01 13.72 12.44 11.82 Balance Sheet - Averages: Total assets $3,853,818 $3,452,921 $3,151,297 $2,884,539 $2,659,785 Held-to-maturity securities 572,717 480,191 516,919 427,759 509,996 Available-for-sale securities 315,620 231,040 183,396 266,370 141,496 Loans, net of unearned discount 2,598,315 2,410,746 2,146,967 1,881,922 1,675,048 Total deposits 3,368,654 2,982,838 2,732,450 2,513,493 2,342,137 Long-term debt 47,539 55,778 73,625 67,416 24,508 Total shareholders' equity 344,166 299,749 268,395 240,929 218,504 Selected Ratios: Return on average assets 1.18% 1.24% 1.13% 1.07% 1.24% Return on average shareholders' equity 13.18% 14.31% 13.23% 12.75% 15.07%
23 24 Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations BancorpSouth, Inc. is a bank holding company with commercial banking operations in Mississippi and Tennessee. BancorpSouth Bank, the Company's banking subsidiary is headquartered in Tupelo, Mississippi. The Bank operates under the trade names Bank of Mississippi in Mississippi and Volunteer Bank in Tennessee. The Bank and its consumer finance, credit life insurance and insurance agency subsidiaries provide commercial banking, leasing, mortgage origination and servicing, life insurance and trust services to corporate customers, local governments, individuals and other financial institutions through an extensive network of branches and offices located throughout Mississippi and west Tennessee. 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, 1997 RESULTS OF OPERATIONS Summary The table below summarizes the Company's net income and returns on average assets and average shareholders' equity for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 ---- ---- ---- (In thousands, except per share amounts) Net income $45,350 $42,883 $35,504 Net income per share: Basic $ 2.04 $ 2.04 $ 1.70 Diluted $ 2.03 $ 2.03 $ 1.69 Return on average assets 1.18% 1.24% 1.13% Return on average shareholders' equity 13.18% 14.31% 13.23%
NET INTEREST REVENUE Net interest revenue, principally interest earned on assets less interest costs on liabilities, provides the Company with its principal source of income. Since net interest revenue is affected by changes in the levels of interest rates and the amount and composition of interest earning assets and interest bearing liabilities, one of management's primary tasks is to balance these interest sensitive components of assets and liabilities for the purpose of maximizing net interest revenue while at the same time minimizing interest rate risk to the Company. 24 25 The following table presents the average components of interest earning assets and interest bearing liabilities for each year and their change, expressed as a percentage, from each of the prior years:
1997 1996 1995 ---------------------- ---------------------- ---------------------- AVERAGE % AVERAGE % AVERAGE % BALANCE CHANGE BALANCE CHANGE BALANCE CHANGE ------- ------ ------- ------ ------- ------ (DOLLARS IN THOUSANDS) Interest earning assets: Deposits with other banks $ 8,018 -34.9% $ 12,313 -38.3% $ 19,970 +79.7% Held-to-maturity securities 572,717 +19.3 480,191 -7.1 516,919 +20.8 Available-for-sale securities 315,620 +36.6 231,040 +26.0 183,396 -31.1 Federal funds sold 82,724 +35.9 60,868 +54.3 39,451 -9.2 Loans and leases, net of unearned 2,598,315 +7.8 2,410,746 +12.3 2,146,967 +14.1 Mortgages held for sale 28,870 +4.1 27,729 +33.3 20,805 -38.1 ---------- ---------- ---------- Total interest earning assets $3,606,264 +11.9% $3,222,887 +10.1% $2,927,508 +9.9% ========== ========== ========== Interest bearing liabilities: Deposits $2,955,642 +13.7% $2,598,941 +9.6% $2,371,330 +10.3% Federal funds purchased and securities sold under repurchase agreements 32,070 -21.6 40,880 +0.1 40,845 +11.3 Long-term debt 51,220 -36.5 80,619 +17.8 68,452 +17.6 Other 1,892 -43.7 3,359 -28.6 4,706 +29.7 ---------- ---------- ---------- Total interest bearing liabilities $3,040,824 +11.6% $2,723,799 +9.6% $2,485,333 +10.6% ========== ========== ========== Non-interest bearing deposits $ 413,012 +7.6% $ 383,897 +6.3% $ 361,120 -0.9% ========== ========== ==========
In 1997 the growth of loans and leases slowed as compared to prior years. Loans and leases grew at faster rates than interest bearing deposits in 1996 and 1995; however, the Company's other funding sources, non-interest bearing deposits, federal funds purchased and Federal Home Loan Bank advances, were adequate to fund its asset growth during such periods. The changes in the components of interest earning assets, interest bearing liabilities, and non-interest bearing deposits resulted in the following tax equivalent net interest revenue expressed as a percentage of average earning assets for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 ---- ---- ---- Net interest margin 4.64% 4.81% 4.86%
The Company experienced a decrease in net interest margin in 1997 and 1996 as interest rates stabilized and volume growth in loans and leases slowed in 1997. As short-term interest rates began to rise in 1995, the net interest margin stabilized and then increased. The Company utilizes short-term, intermediate-term and long-term borrowings from the Federal Home Loan Bank for the purpose of funding asset growth. The Company has sought to lengthen the maturity of deposits by actively seeking four and five-year certificates of deposit with interest rates slightly above the relative market for such funds, thereby reducing the net interest margin in all three years presented. 25 26 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, 1997:
1997 INTEREST RATE SENSITIVITY DECEMBER 31, 1997 MATURING OR REPRICING ------------------------------------------------------------------- 91 DAYS OVER 1 0 TO 90 TO YEAR TO OVER DAYS 1 YEAR 5 YEARS 5 YEARS -------------- -------------- --------------- ------------- (IN THOUSANDS) Interest earning assets: Interest bearing deposits due from banks $ 6,465 $ -- $ -- $ -- Held-to-maturity securities 50,172 73,195 328,211 81,841 Available-for-sale securities 68,494 57,661 212,061 67,996 Loans & leases, net of unearned 850,002 376,642 1,401,788 130,595 Mortgages held for sale 39,134 -- -- -- ----------- ----------- ----------- ----------- Total interest earning assets 1,014,267 507,498 1,942,060 280,432 ----------- ----------- ----------- ----------- Interest bearing liabilities: Interest bearing demand deposits & savings 611,267 232,624 544,801 -- Time deposits 418,043 760,055 502,754 2,749 Federal funds purchased & securities sold under repurchase agreements 177,450 -- -- -- Long-term debt 807 2,413 34,916 9,403 Other 405 9 144 289 ----------- ----------- ----------- ----------- Total interest bearing liabilities 1,207,972 995,101 1,082,615 12,441 ----------- ----------- ----------- ----------- Interest sensitivity gap $ (193,705) $ (487,603) $ 859,445 $ 267,991 =========== =========== =========== =========== Cumulative interest sensitivity gap $ (193,705) $ (681,308) $ 178,137 $ 446,128 =========== =========== =========== ===========
In the event interest rates decline after 1997, it is likely that the Company will experience a slightly positive effect on net interest income in the following one year period, as the cost of funds will decrease at a more rapid rate than interest income on interest bearing assets. Conversely, in periods of increasing interest rates, based on the current interest sensitivity gap, the Company will experience decreased net interest income. PROVISIONS FOR CREDIT LOSSES The Company has an asset quality review staff which, with a committee of senior officers, reviews the adequacy of the allowance for credit losses in each accounting period. An amount is provided as a charge against current income, based on this group's recommendation and senior management's approval, to maintain the allowance for credit losses at a level sufficient to absorb possible losses inherent in the existing loan and lease portfolios. This provision is determined after examining potential losses in specific credits and considering the general risks associated with lending functions such as current and anticipated economic conditions, historical experience as related to losses, changes in the mix of the loan portfolio and credits which bear substantial risk of loss but which cannot be readily quantified. The process of determining the adequacy of the provision requires that management make material estimates and assumptions, which are particularly susceptible to significant change in the near-term. 26 27 The provision for credit losses, the allowance for credit losses as a percentage of loans and leases outstanding at the end of each year and net charge offs are shown in the following table:
1997 1996 1995 --------- ---------- ---------- (DOLLARS IN THOUSANDS) Provision for credit losses $ 9,008 $ 8,804 $ 6,206 Allowance for credit losses as a percent of loans and leases outstanding at year end 1.45% 1.51% 1.51% Net charge offs $ 6,999 $ 6,168 $ 3,147 Net charge offs as a percent of average loans 0.27% 0.26% 0.15%
The provision for credit losses for 1997 increased 2.3% as compared to the provision for 1996, principally as a result of the slower rate of growth in the loan portfolio and an increase in losses in consumer based loans. The 1996 provision for credit losses increased from 1995's level by 41.9% as a result of the growth in loans and an increase in loan losses, primarily in consumer based loans. The 1995 provision for credit losses increased 4.4% from 1994's level as a result of the growth in the loan portfolio. OTHER REVENUE The components of other revenue for the years ended December 31, 1997, 1996 and 1995 and the percentage change from the prior year are shown in the following table:
1997 1996 1995 -------------------- -------------------- --------------------- AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE ------ -------- ------ -------- ------ -------- (DOLLARS IN THOUSANDS) Mortgage lending $ 7,596 -10.2% $ 8,460 +127.2% $ 3,723 +333.9% Service charges 19,050 +6.9 17,828 +11.7 15,965 +10.6 Life insurance premiums 3,772 -13.0 4,337 +29.7 3,345 +1.4 Trust income 2,744 +5.3 2,606 +16.5 2,237 +19.4 Securities gains (losses), net 1,251 +377.5 262 +134.2 (765) -161.1 Other revenue 9,254 +27.6 7,252 +7.7 6,735 +15.4 -------- -------- -------- Total other revenue $ 43,667 +7.2% $ 40,745 +30.4% $ 31,240 +20.1% ======== ======== ========
Mortgage lending revenue decreased in 1997 principally as a result of a decline in revenue related to mortgage servicing. Revenue from mortgage servicing was $2,198,000 in 1997 compared to $3,097,000 in 1996. The decrease is attributable to increased amortization of capitalized mortgage servicing rights along with changes in the valuation allowance for impairment. Capitalized mortgage servicing rights are evaluated for impairment based on the excess of the carrying amount of the mortgage servicing rights over their fair value. Revenue from mortgage origination and secondary marketing was $5,398,000 in 1997 compared to $5,363,000 in 1996. The revenue produced by mortgage lending activities increased in 1996 primarily as a result of declining interest rates and growth in servicing income. In 1995, mortgage lending revenue rebounded from the prior year's level as a result of stable interest rates and growth in servicing income.
1997 1996 1995 ------------------ ------------------- ---------------- AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE ------ -------- ------ -------- ------ -------- (DOLLARS IN MILLIONS) Mortgage loans serviced at year-end $1,324.0 +13.5% $1,166.8 +33.2% $876.0 +8.0%
Service charges on deposit accounts increased in 1997, 1996 and 1995 because of higher volumes of items processed as a result of increased economic activity and growth in the number of demand deposit accounts. Trust income increased 5.3% in 1997, 16.5% in 1996 and 19.4% in 1995. The trust business experienced steady growth as evidenced by increases in the number 27 28 of trust accounts and the value of assets under care (either managed or in custody). Other revenue increased 27.6%, 7.7% and 15.4% in 1997, 1996 and 1995, respectively. The increase in other revenue in 1997 was attributable to increases in gains on the sale of equipment and facilities and fees relating to greater usage of the Bank's debit card. The increases in 1996 and 1995 were principally as a result of increases in fees for non-deposit related services. OTHER EXPENSE The components of other expense for the years ended December 31, 1997, 1996 and 1995 and the percentage change from the prior year are shown in the following table:
1997 1996 1995 ---------------------- --------------------- --------------------- AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE ------ -------- ------ -------- ------ -------- (DOLLARS IN THOUSANDS) Salary and employee benefits $ 65,761 +13.8% $ 57,806 +5.6% $ 54,739 +13.1% Occupancy net of rental income 8,479 +1.8 8,331 +3.9 8,022 +5.3 Equipment 12,099 +24.1 9,752 +10.1 8,860 +18.7 Deposit insurance 488 -81.2 2,601 -23.8 3,412 -39.3 Other 45,161 +13.0 39,982 +8.9 36,717 +21.3 ======== ======== ======== Total other expense $131,988 +11.4% $118,472 +6.0% $111,750 +12.5% ======== ======== ========
Increases in salary and employee benefits are primarily attributable to incentives and salary increases, additional employees to staff the banking locations added in each of the three years and the increased cost of employee health care benefits. The Company's stock option plans contain a provision for stock appreciation rights (SARs) which requires the recognition of expense for stock price appreciation. In 1997 the Company's common stock price increased approximately 75% which resulted in SARs expense of $6.1 million, as compared to $1.9 million and $0.9 million in 1996 and 1995, respectively. In the event that the market price of the Company's common stock continues to increase, additional expense related to SARs could be incurred, which could have a material adverse effect on the Company's results of operations. Occupancy and equipment expenses have increased principally as a result of additional branch offices and upgrades to the Company's internal operating systems. Deposit insurance premiums decreased substantially in 1997, 1996 and 1995 as a result of lower insurance rates assessed by the Federal Deposit Insurance Corporation (FDIC). Deposit insurance premiums are based upon the risk assessment classification assigned to a bank by the FDIC. In 1996, a one-time assessment on SAIF insured deposits was imposed which resulted in a pre-tax payment of $1.9 million and reduced 1996 after-tax net income per share $0.05. Other expense increased 13.0% in 1997 as a result of the out-sourcing of certain computer programming expense, other equipment and software expense and system enhancements. Other expense increased 8.9% in 1996 as a result of expanded telecommunications, systems enhancements, and credit card interchange fees, all of which related to providing higher levels of convenient consumer oriented banking services. Additionally, approximately $500,000 of unamortized expense relating to the issuance of the Company's 9% Subordinated Capital Debentures was charged against 1996 earnings as a result of the early extinguishment of the debt issue in December 1996. Other expense increased 21.3% in 1995 principally as a result of merger expenses related to the Company's acquisitions. The expansion of the Company's branch banking network also contributed to increases in all years presented. 28 29 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:
1997 1996 1995 ------------------- --------------------- ---------------- AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE ------ -------- ------ -------- ------ -------- (DOLLARS IN MILLIONS) Loans, net of unearned - average $2,598 +7.8% $2,411 +12.3% $2,147 +14.1% Loans, net of unearned - year end 2,759 +11.7 2,469 +7.6 2,295 +13.3
The Company's loan portfolio continues to grow. The Company strives to maintain a high-quality loan portfolio, forsaking growth for quality. 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:
1997 1996 1995 ---- ---- ---- (IN THOUSANDS) Foreclosed properties $ 1,971 $ 1,835 $ 2,662 Non-accrual loans 4,008 3,940 1,592 Loans 90 days or more past due 7,465 4,811 5,148 Restructured loans 659 77 7 ------- ------- ------- Total non-performing assets $14,103 $10,663 $ 9,409 ======= ======= ======= Total non-performing assets as a percent of net loans 0.51% 0.43% 0.41% ======= ======= =======
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, 1997, 1996 and 1995, 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 is to some extent dependent upon the economic conditions prevailing in the market area. Included in non-performing assets above were loans the Company considered impaired totaling $2,928,000, $3,306,000, and $1,774,000 in 1997, 1996 and 1995, respectively. SECURITIES AND OTHER EARNING ASSETS The securities portfolio is used to make various term investments, provide a source of liquidity and to serve as collateral to secure certain types of deposits. A portion of the Company's securities portfolio continues to be tax-exempt. Investments in tax-exempt securities totaled $174.9 million at December 31, 1997, compared to $157.0 million at the end of 1996. The Company invests only in investment grade securities, with the exception of obligations of Mississippi and Tennessee counties and municipalities, and avoids other high yield non-rated securities and investments. At December 31, 1997, the Company's available-for-sale securities totaled $406.2 million. These securities, which are subject to possible sale, are recorded at fair value. At December 31, 1997, the Company held no securities whose decline in fair value was considered other than temporary. Net unrealized gains on investment securities as of December 31, 1997 totaled $15.2 million. Net unrealized gains on held-to-maturity securities comprised $7.9 million of that total, while net unrealized gains on available-for-sale securities were $7.3 million. 29 30 Net unrealized gains on investment securities as of December 31, 1996, amounted to $10.7 million. Of that total, $7.0 million was attributable to held-to-maturity securities and $3.7 to million available-for-sale securities. These unrealized gains were a direct result of relatively stable intermediate term interest rates during 1997 and 1996. Because the average maturity of securities owned is relatively short, market value fluctuations due to interest rate changes are softened and the impact of foregone earnings is reduced. DEPOSITS The following table presents the Company's average deposit mix and percentage change for the years indicated:
1997 1996 1995 --------------------- --------------------- --------------------- AVERAGE % AVERAGE % AVERAGE % BALANCE CHANGE BALANCE CHANGE BALANCE CHANGE ------- ------ ------- ------ ------- ------ (DOLLARS IN MILLIONS) Interest bearing deposits $2,955.6 +13.7% $2,598.9 +9.6% $2,371.3 +10.3% Non-interest bearing deposits 413.0 +7.6 383.9 +6.3 361.1 -0.9
The Company's deposit mix continued to experience change in 1997. By year end 1997, other time deposits showed an increase of 6.7% from the end of 1996, while interest bearing demand deposits increased by 15.9% and other short-term savings accounts increased 34.4%. Non-interest bearing demand deposits increased 3.9% from year end 1996 to year end 1997. Management is of the opinion that the low interest rates paid on deposit accounts in 1996 and 1995 caused depositors to reduce the period over which they were willing to commit their funds and shifted their deposits from longer term, fixed rate instruments to daily savings and demand accounts, or even to seek alternative non-bank investments. While that trend continued into 1997, the Company has countered with a strategy of paying slightly above market rates for intermediate term deposits. Deposits are the Company's primary source of funds to support its earning assets. The Company's primary market areas provide the sources of substantially all deposits for all periods presented. LIQUIDITY The Company's goal is to provide adequate funds to meet changes in loan demand or any potential increase in the normal level of deposit withdrawals. This goal is accomplished primarily by maintaining sufficient short-term liquid assets coupled with consistent growth in core deposits in order to fund earning assets and to maintain the availability of unused capacity to acquire funds in national and local capital markets. The Company's traditional sources of maturing loans, investment securities, mortgages held for sale, purchased federal funds and base of core deposits seem adequate to meet 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 maturities. The matching of these assets and liabilities has had the effect of reducing the Company's net interest margin. On October 23, 1996 the Company announced that it would call for redemption all of its outstanding 9% Subordinated Capital Debentures due in 1999. On December 30, 1996 the Company extinguished the debt by irrevocably depositing with the trustee $24,508,000 in cash plus accrued and unpaid interest from November 1, 1996 to redeem the debentures, which were redeemed on January 15, 1997. CAPITAL RESOURCES The Company is required to comply with the risk-based capital guidelines established by the Board of Governors of the Federal Reserve System (FRB). These guidelines apply a variety of weighting factors, which vary according to the level of risk associated with the assets. Capital is measured in two "Tiers": Tier I consists of paid-up share capital, including common stock and disclosed reserves (retained earnings and related surplus in the case of common stock), and Tier II consists of general allowance for losses on loans and leases, "hybrid" debt capital instruments, and all or a portion of other subordinated capital debt, depending upon remaining term to maturity. The Company's Tier I capital and total capital, as a percentage of total risk-adjusted assets, was 12.49% and 13.74%, respectively at December 31, 1997, compared to 12.14% and 13.39%, respectively at December 31, 1996. Both ratios exceed the required minimum levels for these ratios of 4% and 8%, respectively. In addition, the Company's leverage capital ratio (Tier I capital divided by total assets, less goodwill) was 8.82% at December 31, 1997 and 8.56% at December 31, 1996, 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 30 31 Tier I risk-based capital, total risk-based capital and leverage capital ratios must be at least 6%, 10% and 5%, respectively. The Company's bank subsidiary met the criteria for the "well capitalized" category at December 31, 1997. The Company has determined to pursue acquisition transactions of depository institutions and businesses closely related to banking which further the Company's business strategies. The Company anticipates that the consideration for substantially all of these transactions, if completed, will be shares of the Company's common stock; however, transactions involving cash consideration or other forms of consideration will not be excluded. On August 28, 1996 the Company announced that it would purchase up to $2.5 million of its outstanding common stock within the next year. As of December 31, 1996 the Company had purchased 43,566 shares at a cost of $1.2 million. An additional 47,038 shares were purchased in the first quarter of 1997 at a cost of $1.3 million completing the announced purchase. YEAR 2000 The Company is aware of the issues associated with the programming code in existing computer systems as the millennium (Year 2000) approaches. The "Year 2000" problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company is utilizing both internal and external resources to identify, correct or reprogram, and test the systems for the Year 2000 compliance. During 1997, the Company developed a plan to deal with the Year 2000 problem and established a Year 2000 committee that consists of representatives from the major functional areas of the Company. The committee has conducted a comprehensive review of the Company's computer systems to identify the systems that could be affected by the Year 2000 issue and has developed an implementation plan to resolve potential problems. We have reviewed our core mainframe systems and application subsystems and have obtained the Year 2000 compliant releases and are developing the installation and testing plan for each of these applications. We have corresponded with our third party service providers and other providers of software and hardware for certification of their compliance with Year 2000 issues. It is anticipated that all reprogramming efforts will be completed by December 31, 1998, allowing adequate time for testing. Management has assessed the Year 2000 compliance expense and believe that the related potential effect on the Company's business, financial condition and results of operations should be immaterial. The Company is expensing all costs associated with the Year 2000 as the costs are incurred. FORWARD-LOOKING STATEMENTS Statements contained in this Annual Report which are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include without limitation, those relating to the Company's future revenue, earnings and profitability, growth, acquisition strategy, liquidity, loan loss experience, competition, net interest income, capital resources and "Year 2000" compliance. Such forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from anticipated results. These risks and uncertainties include regulatory constraints, changes in interest rates, competition from other financial services companies, changes in the Company's operating or expansion strategy, the general economy of the United States and the specific markets in which the Company operates, ability to successfully integrate acquisitions, ability to continue to attract and retain quality personnel and other factors as may be identified from time to time in the Company's filings with the Securities and Exchange Commission or in the Company's press releases. 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 maturites, 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 31 32 gap position. In this situation, net interest revenue would increase if market interest rates rose or decrease if market interest rates fell. If, alternatively, more liabilities than assets will reprice, the Company is in a liability-sensitive position. Accordingly, net interest revenue would decline when rates rose and increase when rates fell. These examples assume that interest-rate changes for assets and liabilities are of the same magnitude, whereas actual interest-rate changes generally differ in magnitude for assets and liabilities. Management seeks to manage interest-rate risk through the utilization of various tools that include matching repricing periods for new assets and liabilities and managing the composition and size of the investment portfolio so as to reduce the risk in the deposit and loan portfolios while at the same time maximizing the yield generated from the portfolio. The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates as of December 31, 1997. 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 values 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. 32 33
FAIR PRINCIPAL AMOUNT MATURING/REPRICING IN: VALUE RATE-SENSITIVE ASSETS: 1998 1999 2000 2001 2002 THEREAFTER TOTAL 1997 - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Fixed interest rate loans $1,264,278 $325,477 $419,607 $272,911 $383,793 $130,595 $2,796,661 $2,844,759 Average interest rate 9.26% 11.87% 9.38% 9.78% 9.25% 10.80% 9.70% Variable interest rate loans $ 1,500 -- -- -- -- -- $ 1,500 $ 1,500 Average interest rate 8.54% -- -- -- -- -- 8.54% Fixed interest rate securities $ 238,158 $246,502 $130,279 $117,360 $ 41,812 $149,837 $ 923,948 $ 931,956 Average interest rate 6.31% 6.65% 6.40% 6.78% 7.07% 6.85% 6.60% Variable interest rate securities $ 11,364 -- $ 4,319 -- -- -- $ 15,683 $ 15,599 Average interest rate 4.85% -- 7.80% -- -- -- 5.66% Other interest bearing assets $ 6,465 -- -- -- -- -- $ 6,465 $ 6,465 Average interest rate 5.20% -- -- -- -- -- 5.20% Mortgage servicing rights (1) -- -- -- -- -- -- $ 14,071 $ 14,071 RATE-SENSITIVE LIABILITIES: - ------------------------------------------------------------------------------------------------------------------------------------ Savings & interest bearing checking $ 843,891 $116,112 $116,094 $156,296 $156,299 -- $1,388,692 $1,528,065 Average interest rate 4.00% 2.98% 2.98% 2.94% 2.94% -- 3.59% Fixed interest rate time deposits $1,178,098 $215,635 $200,379 $ 41,789 $ 44,951 $ 2,749 $1,683,601 $1,698,969 Average interest rate 5.41% 5.92% 6.22% 6.32% 6.53% 9.72% 5.63% Fixed interest rate borrowings $ 3,252 $ 8,256 $ 13,285 $ 6,987 $ 6,532 $ 9,692 $ 48,004 $ 47,701 Average interest rate 5.99% 5.77% 6.00% 5.92% 5.88% 6.25% 5.98% Variable interest rate borrowings $ 177,832 -- -- -- -- -- $ 177,832 $ 177,832 Average interest rate 7.49% -- -- -- -- -- 7.49% RATE-SENSITIVE OFF BALANCE SHEET ITEMS: - ------------------------------------------------------------------------------------------------------------------------------------ Commitments to extend credit for single family mortgage loans $ 28,033 -- -- -- -- -- $ 28,033 $ 27,971 Average interest rate 7.24% -- -- -- -- -- 7.24% Forward contracts $ 21,000 -- -- -- -- -- $ 21,000 $ 20,958 Average interest rate 6.86% -- -- -- -- -- 6.86%
(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. 33 34 Item 8. - Financial Statements and Supplementary Data CONSOLIDATED BALANCE SHEETS BANCORPSOUTH, INC. AND SUBSIDIARIES
DECEMBER 31 ----------------------------- 1997 1996 ----------- ----------- ASSETS (In thousands) Cash and due from banks (Note 19) $ 286,307 $ 153,148 Interest bearing deposits with other banks 6,465 18,715 Held-to-maturity securities (Note 4) (fair value of $541,343 and $537,119) 533,419 530,066 Available-for-sale securities (Note 5) (amortized cost of $398,953 and $227,044) 406,212 230,739 Federal funds sold -- 70,300 Loans (Notes 6, 7, 13 and 16) 2,852,885 2,554,118 Less: Unearned discount 93,858 84,784 Allowance for credit losses 39,877 37,272 ----------- ----------- Net loans 2,719,150 2,432,062 Mortgages held for sale 39,134 25,728 Premises and equipment, net (Note 8) 101,373 90,939 Accrued interest receivable 36,435 31,855 Other assets (Notes 11 and 17) 51,648 33,687 ----------- ----------- TOTAL ASSETS $ 4,180,143 $ 3,617,239 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand: Non-interest bearing $ 467,962 $ 450,470 Interest bearing 840,009 724,872 Savings 548,683 408,380 Other time (Note 9) 1,683,601 1,577,657 ----------- ----------- Total deposits 3,540,255 3,161,379 Federal funds purchased and securities sold under repurchase agreements (Note 9) 177,450 33,636 Accrued interest payable 16,082 14,488 Other liabilities (Notes 11 and 12) 38,395 36,634 Long-term debt (Note 10) 47,539 55,778 ----------- ----------- TOTAL LIABILITIES 3,819,721 3,301,915 ----------- ----------- SHAREHOLDERS' EQUITY (NOTES 2, 14, AND 15) Common stock, $2.50 par value Authorized - 500,000,000 shares; Issued - 22,396,021 and 21,164,265 shares at December 31, 1997 and 1996, respectively 55,990 52,911 Capital surplus 95,699 84,616 Unrealized gain on available-for-sale securities, net of tax 4,482 2,280 Retained earnings 206,570 177,741 Treasury stock at cost (125,350 and 150,784 shares at December 31, 1997 and 1996, respectively) (2,319) (2,224) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 360,422 315,324 ----------- ----------- Commitments and contingent liabilities (Notes 6 and 19) -- -- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,180,143 $ 3,617,239 =========== ===========
See accompanying notes to consolidated financial statements. 34 35 CONSOLIDATED STATEMENTS OF INCOME BANCORPSOUTH, INC. AND SUBSIDIARIES
Years Ended December 31 --------------------------------------- 1997 1996 1995 --------- --------- --------- INTEREST REVENUE (In thousands, except per share amounts) Loans receivable $ 244,880 $ 227,169 $ 203,800 Deposits with other banks 422 646 857 Federal funds sold 4,410 3,289 2,205 Held-to-maturity securities: U.S. Treasury 7,159 4,268 3,977 U.S. Government agencies and corporations 20,207 19,555 24,175 Obligations of states and political subdivisions 8,470 6,954 7,491 Other -- 2 168 Available-for-sale securities 19,478 14,119 8,321 Mortgages held for sale 2,068 1,917 1,433 --------- --------- --------- Total interest revenue 307,094 277,919 252,427 --------- --------- --------- INTEREST EXPENSE Deposits 139,290 118,746 107,165 Federal funds purchased and securities sold under repurchase agreements 1,594 1,954 2,084 Other 3,171 5,805 5,208 --------- --------- --------- Total interest expense 144,055 126,505 114,457 --------- --------- --------- Net interest revenue 163,039 151,414 137,970 Provision for credit losses (Note 7) 9,008 8,804 6,206 --------- --------- --------- Net interest revenue, after provision for credit losses 154,031 142,610 131,764 --------- --------- --------- OTHER REVENUE Mortgage lending 7,596 8,460 3,723 Service charges 19,050 17,828 15,965 Life insurance premiums 3,772 4,337 3,345 Trust income 2,744 2,606 2,237 Securities gains (losses), net 1,251 262 (765) Other 9,254 7,252 6,735 --------- --------- --------- Total other revenue 43,667 40,745 31,240 --------- --------- --------- OTHER EXPENSE Salaries and employee benefits (Notes 12 and 14) 65,761 57,806 54,739 Occupancy net of rental income 8,479 8,331 8,022 Equipment 12,099 9,752 8,860 Deposit insurance 488 2,601 3,412 Other 45,161 39,982 36,717 --------- --------- --------- Total other expense 131,988 118,472 111,750 --------- --------- --------- Income before income taxes 65,710 64,883 51,254 Income tax expense (Note 11) 20,360 22,000 15,750 --------- --------- --------- NET INCOME $ 45,350 $ 42,883 $ 35,504 ========= ========= ========= NET INCOME PER SHARE (NOTE 15): BASIC $ 2.04 $ 2.04 $ 1.70 ========= ========= ========= DILUTED $ 2.03 $ 2.03 $ 1.69 ========= ========= =========
See accompanying notes to consolidated financial statements. 35 36 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY BANCORPSOUTH, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
COMMON STOCK UNREALIZED ----------------------- CAPITAL GAINS RETAINED TREASURY SHARES AMOUNT SURPLUS (LOSSES), NET EARNINGS STOCK TOTAL ------------ --------- ---------- ------------ --------- --------- --------- (Dollars in thousands,except per share amounts) BALANCE, DECEMBER 31, 1994 10,163,104 $25,819 $79,008 $(1,702) $152,655 $ (2,928) $252,852 Shares issued: Employee stock bonus plan (Note 14) 15,000 37 476 -- (513) -- -- Purchase business acquisitions 259,285 370 4,530 -- -- 1,894 6,794 Other shares issued 61,883 154 404 -- -- -- 558 Recognition of stock compensation -- -- -- -- 436 -- 436 Fractional shares redeemed in poolings (797) (1) (21) -- -- -- (22) Purchase of stock warrants -- -- (6) -- -- -- (6) Change in market valuation of available-for-sale securities, net of tax -- -- -- 4,182 -- -- 4,182 Net income -- -- -- -- 35,504 -- 35,504 Stock split effected in the form of a stock dividend (Note 2) 10,498,805 26,385 -- -- (26,385) -- -- Cash dividends declared: BancorpSouth, $.62 per share -- -- -- -- (11,278) -- (11,278) Pooled acquisitions -- -- -- -- (925) -- (925) ----------- ------- ------- ------- -------- -------- -------- BALANCE, DECEMBER 31, 1995 20,997,280 52,764 84,391 2,480 149,494 (1,034) 288,095 Shares issued 62,151 147 225 -- -- 52 424 Recognition of stock compensation -- -- -- -- 83 -- 83 Purchase of treasury stock (45,950) -- -- -- -- (1,242) (1,242) Change in market valuation of available-for-sale securities, net of tax -- -- -- (200) -- -- (200) Net income -- -- -- -- 42,883 -- 42,883 Cash dividends declared, $.70 per share -- -- -- -- (14,719) -- (14,719) ----------- ------- ------- ------- -------- -------- -------- BALANCE, DECEMBER 31, 1996 21,013,481 $52,911 $84,616 $ 2,280 $177,741 $ $2,224) $315,324 Shares issued: Business combination (Note 3) 1,231,710 3,079 11,570 -- 962 -- 15,611 Other shares issued 76,687 -- (487) -- -- 1,352 865 Recognition of stock compensation -- -- -- -- 83 -- 83 Purchase of treasury stock (51,207) -- -- -- -- (1,447) (1,447) Change in market valuation of available-for-sale securities, net of tax -- -- -- 2,202 -- -- 2,202 Net income -- -- -- -- 45,350 -- 45,350 Cash dividends declared, $.79 per share -- -- -- -- (17,566) -- (17,566) ----------- ------- ------- ------- -------- -------- -------- BALANCE, DECEMBER 31, 1997 22,270,671 $55,990 $95,699 $ 4,482 $206,570 $ (2,319) $360,422 =========== ======= ======= ======= ======== ======== ========
See accompanying notes to consolidated financial statements. 36 37 CONSOLIDATED STATEMENTS OF CASH FLOWS BANCORPSOUTH, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31 ---------------------------------------- 1997 1996 1995 ----------- ----------- --------- (In thousands) OPERATING ACTIVITIES: Net income $ 45,350 $ 42,883 $ 35,504 Adjustment to reconcile net income to net cash provided by operating activities: Provision for credit losses 9,008 8,804 6,206 Depreciation and amortization 11,134 9,630 8,448 Deferred taxes (979) 1,016 74 Amortization of intangibles 638 1,232 726 Amortization of debt securities premium and discount, net 222 (47) (663) Security losses (gains), net (1,251) (262) 765 Net deferred loan origination expense (3,318) (3,138) (2,624) Increase in interest receivable (3,356) (2,863) (6,042) Increase in interest payable 951 793 4,072 Proceeds from mortgages sold 329,042 258,255 150,572 Origination of mortgages for sale (342,448) (258,815) (163,415) Other, net (1,084) (3,760) 4,457 --------- --------- --------- Net cash provided by operating activities 43,909 53,728 38,080 --------- --------- --------- INVESTING ACTIVITIES: Proceeds from calls and maturities of held- to-maturity securities 243,161 105,464 145,071 Proceeds from calls and maturities of available- for-sale securities 197,854 186,863 290,404 Proceeds from sales of held-to-maturity securities -- 755 931 Proceeds from sales of available-for-sale securities 17,444 26,855 11,708 Purchases of held-to-maturity securities (202,055) (196,696) (111,875) Purchases of available-for-sale securities (377,714) (203,969) (261,322) Net (increase) decrease in short-term investments 99,400 (34,850) (32,175) Net increase in loans (262,531) (177,198) (269,328) Purchases of premises and equipment (22,518) (20,877) (18,695) Proceeds from sale of premises and equipment 2,874 791 480 Other, net (13,447) (4,775) (5,268) --------- --------- --------- Net cash used in investing activities (317,532) (317,637) (250,069) --------- --------- --------- FINANCING ACTIVITIES: Net increase in deposits 277,090 297,766 264,943 Net increase (decrease) in short-term debt and other liabilities 143,717 4,702 (28,478) Advances on long-term debt -- 10,300 21,000 Repayment of long-term debt (8,239) (27,846) (14,792) Issuance of common stock 383 217 506 Purchase of treasury stock (1,447) (1,242) -- Purchase of stock warrants -- -- (6) Payment of cash dividends (16,972) (13,940) (10,062) --------- --------- --------- Net cash provided by financing activities 394,532 269,957 233,111 --------- --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 120,909 6,048 21,122 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 171,863 165,815 144,693 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 292,772 $ 171,863 $ 165,815 ========= ========= =========
See accompanying notes to consolidated financial statements. 37 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BANCORPSOUTH, INC. AND SUBSIDIARIES DECEMBER 31, 1997, 1996 AND 1995 (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. Prior to June 20, 1997, Volunteer Bank (VOL) was a wholly-owned subsidiary of the Company. On that date VOL was merged with and into Bank of Mississippi (BOM) and BOM's name was changed to BancorpSouth Bank (BSB). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain 1996 and 1995 amounts have been reclassified to conform with the 1997 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 $142,461,000, $125,712,000 and $110,385,000 and income taxes of $23,405,000, $20,277,000 and $15,480,000 for the years ended December 31, 1997, 1996 and 1995, 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, 1997 and 1996. 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 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 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 38 39 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. MORTGAGES HELD FOR SALE Mortgages held for sale are recorded at lower of aggregate cost or market as determined by outstanding commitments from investors or current investor yield requirements. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation and amortization. Provisions for depreciation and amortization, computed using straight-line and accelerated methods, are charged to expense over the shorter of the lease term or the estimated useful lives of the assets. Costs of major additions and improvements are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. OTHER REAL ESTATE OWNED Real estate acquired in settlement of loans is carried at the lower of cost or fair value, less selling cost. Fair value is based on independent appraisals and other relevant factors. At the time of acquisition, any excess of cost over fair value is charged to the allowance for credit losses. Gains and losses realized on sale are included in other revenue. PENSION EXPENSE The Company maintains a non-contributory defined benefit pension plan that covers all employees who qualify as to age and length of service. Net periodic pension expense is actuarially determined. INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company, with the exception of BSB's credit life insurance subsidiaries, 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. (2) STOCK SPLIT On November 20, 1995, the Company's two-for-one stock split effected in the form of a 100% stock dividend resulted in the issuance of 10,495,805 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 (IGB), a $117 million bank headquartered in Iuka, Mississippi, was merged with and into BancorpSouth Bank. Pursuant to the merger, each share of common stock of IGB was converted into 821.148667 shares of the Company's common stock. This transaction was accounted for as a pooling of interests and IGB's results of operations are included in the Company's financial statements for 1997. The financial statements for periods prior to 1997 were not restated because the impact of the IGB acquisition was not material. 39 40 (4) HELD-TO-MATURITY SECURITIES A comparison of amortized cost and estimated fair values of held-to-maturity securities as of December 31, 1997 and 1996 follows:
1997 ------------------------------------------------ GROSS GROS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- --------- (In thousands) U.S. Treasury $109,012 $ 1,533 $ 2 $110,543 U.S. Government agencies and corporations 259,527 2,263 306 261,484 Tax exempt obligations of states and political subdivisions 163,570 5,297 872 167,995 Other 1,310 26 15 1,321 -------- -------- -------- -------- Total $533,419 $ 9,119 $ 1,195 $541,343 ======== ======== ======== ========
1996 ------------------------------------------------ GROSS GROS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- -------- (In thousands) U.S. Treasury $ 91,340 $ 1,360 $ 3 $ 92,697 U.S. Government agencies and corporations 292,930 2,440 1,206 294,164 Tax exempt obligations of states and political subdivisions 144,406 5,075 612 148,869 Other 1,390 1 2 1,389 -------- -------- -------- -------- Total $530,066 $ 8,876 $ 1,823 $537,119 ======== ======== ======== ========
Gross gains of $640,000 and gross losses of $30,000 were recognized in 1997, gross gains of $267,000 and gross losses of $89,000 were recognized in 1996 and gross gains of $123,000 and gross losses of $389,000 were recognized in 1995 on held-to-maturity securities. Except for 1996, these gains and losses were the result of held-to-maturity securities being called prior to maturity. Included in the 1996 amounts is a gross gain of $1,000 and a gross loss of $67,000 related to the sale of held-to-maturity securities with amortized cost of $822,000. The decision to sell these securities was based on the deteriorating credit quality of the issuer. Held-to-maturity securities with a carrying value of approximately $273,000,000 at December 31, 1997, 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, 1997 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.
1997 -------------------------- ESTIMATED AMORTIZED FAIR COST VALUE --------- --------- (In thousands) Due in one year or less $123,365 $123,708 Due after one year through five years 354,372 359,127 Due after five years through ten years 44,880 46,035 Due after ten years 10,802 12,473 -------- -------- Total $533,419 $541,343 ======== ========
40 41 (5) AVAILABLE-FOR-SALE SECURITIES A comparison of amortized cost and estimated fair values of available-for-sale securities as of December 31, 1997 and 1996 follows:
1997 ------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- --------- (In thousands) U.S. Treasury $103,948 $ 1,437 $ 12 $105,373 U.S. Government agencies and corporations 238,995 1,253 208 240,040 Tax exempt obligations of states and political subdivisions 11,062 231 35 11,258 Preferred stock 21,000 -- -- 21,000 Other 23,948 4,664 71 28,541 -------- -------- -------- -------- Total $398,953 $ 7,585 $ 326 $406,212 ======== ======== ======== ========
1996 ------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- --------- (In thousands) U.S. Treasury $ 43,702 $ 229 $ 67 $ 43,864 U.S. Government agencies and corporations 129,620 413 518 129,515 Tax exempt obligations of states and political subdivisions 12,375 295 103 12,567 Preferred stock 22,000 -- -- 22,000 Other 19,347 3,459 13 22,793 -------- -------- -------- -------- Total $227,044 $ 4,396 $ 701 $230,739 ======== ======== ======== ========
Gross gains of $661,000 and gross losses of $20,000 were recognized in 1997, gross gains of $277,000 and gross losses of $193,000 were recognized in 1996 and gross gains of $900,000 and gross losses of $1,399,000 were recognized in 1995 on available-for-sale securities. Available-for-sale securities with a carrying value of approximately $165,000,000 at December 31, 1997, 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, 1997 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, 1997.
1997 ----------------------------- ESTIMATED AMORTIZED FAIR COST VALUE ------------ ----------- (In thousands) Due in one year or less $125,822 $126,155 Due after one year through five years 210,637 212,784 Due after five years through ten years 18,059 22,600 Due after ten years 44,435 44,673 -------- -------- Total $398,953 $406,212 ======== ========
41 42 (6) LOANS A summary of loans classified by collateral type at December 31, 1997 and 1996 follows:
1997 1996 ---------- ---------- (In thousands) Commercial and agricultural $ 266,112 $ 238,246 Consumer and installment 823,356 744,456 Real estate mortgage 1,571,137 1,407,841 Lease financing 172,436 149,104 Other 19,844 14,471 ---------- ---------- Total $2,852,885 $2,554,118 ========== ==========
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 $4,008,000 and $3,940,000 at December 31, 1997 and 1996, respectively. Restructured loans totaled $659,000 and $77,000 at December 31, 1997 and 1996, respectively. The total amount of interest earned on non-performing loans was approximately $37,000, $13,000 and $70,000 in 1997, 1996 and 1995, respectively. The gross interest income which would have been recorded under the original terms of those loans amounted to $128,000, $167,000 and $105,000 in 1997, 1996 and 1995, 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, 1997 and 1996 was $2,928,000 and $3,306,000, respectively, with a valuation reserve of $927,000 and $995,000, respectively. The average recorded investment in impaired loans during 1997 and 1996 was $2,523,000 and $2,603,000, respectively. (7) ALLOWANCE FOR CREDIT LOSSES The following schedule summarized the changes in the allowance for credit losses for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 ------- ------- ------- (In thousands) Balance at beginning of year $37,272 $34,636 $30,830 Provision charged to expense 9,008 8,804 6,206 Recoveries 1,828 1,836 1,567 Loans charged off (8,827) (8,004) (4,714) Acquisitions 596 - 747 ------- ------- ------- Balance at end of year $39,877 $37,272 $34,636 ======= ======= =======
(8) PREMISES AND EQUIPMENT A summary by asset classification at December 31, 1997 and 1996 follows: 42 43
ESTIMATED USEFUL LIFE YEARS 1997 1996 ---------- -------- -------- (In thousands) Cost Land $ 13,416 $ 12,273 Buildings and improvements 20-50 71,452 69,074 Leasehold improvements 10-20 1,686 1,720 Equipment, furniture and fixtures 3-12 68,035 55,939 Construction in progress 8,893 7,262 -------- -------- 163,482 146,268 Accumulated depreciation and amortization 62,109 55,329 -------- -------- Premises and equipment, net $101,373 $ 90,939 ======== ========
(9) TIME DEPOSITS AND SHORT-TERM DEBT Certificates of deposit and other time deposits of $100,000 or more amounting to approximately $455,960,000 and $399,123,000 were outstanding at December 31, 1997 and 1996, respectively. Total interest expense relating to certificate and other time deposits of $100,000 or more totaled approximately $24,939,000, $19,728,000, and $17,386,000 for the years ended December 31, 1997, 1996 and 1995, respectively. For time deposits with a remaining maturity of more than one year at December 31, 1997, the aggregate amount of maturities for each of the following five years is presented in the following table:
MATURING IN AMOUNT ----------- -------- (In thousands) 1999 $229,092 2000 200,386 2001 41,791 2002 44,960 2003 398 Thereafter 2,349 -------- Total $518,976 ========
43 44 Presented below is information relating to short-term debt for the years ended December 31, 1997 and 1996:
END OF PERIOD DAILY AVERAGE MAXIMUM ------------------- ----------------- OUTSTANDING INTEREST INTEREST AT ANY BALANCE RATE BALANCE RATE MONTH END ------------------- ------------------ ------------ (Dollars in thousands) 1997: Federal funds purchased $152,450 6.9% $ 3,004 6.3% $152,450 Securities sold under repurchase agreements 25,000 5.3% 29,066 4.8% 32,554 -------- ------- -------- Total $177,450 $32,070 $185,004 ======== ======= ======== 1996: Federal funds purchased $ 1,750 5.8% $ 4,226 5.0% $5,950 Securities sold under repurchase agreements 31,886 4.8% 36,654 4.8% 40,030 -------- ------- -------- Total $ 33,636 $40,880 $ 45,980 ======== ======= ========
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, 1997, the Company's subsidiary bank had established informal federal funds borrowing lines of credit aggregating $584,000,000. (10) LONG-TERM DEBT SUBORDINATED CAPITAL DEBENTURES On November 22, 1989, the Company issued $25,000,000 of 9% subordinated capital debentures due November 1, 1999. On December 30, 1996, the Company extinguished the $24,508,000 of outstanding 9% debentures by transferring the funds to an irrevocable trust for the repayment of principal and interest on the debentures. The $489,000 loss on early extinguishment of this debt is included in other expense for 1996. Included in interest expense is $2,291,000 for 1996 and $2,206,000 for 1995 related to the debentures. FEDERAL HOME LOAN BANK ADVANCES BSB has entered into a blanket floating lien security agreement with the Federal Home Loan Bank (FHLB) of Dallas. Under the terms of this agreement, BSB is required to maintain sufficient collateral to secure borrowings in an aggregate amount of the lesser of 75 percent of the book value (unpaid principal balance) of the borrower's first mortgage collateral or 35 percent of the borrower's assets. BSB has also entered into a blanket floating lien security agreement with the FHLB of Cincinnati. Under the terms of this agreement, BSB is required to maintain unencumbered, quality first mortgage loans in an amount equal to 150 percent of outstanding advances as collateral for those advances. At December 31, 1997, the following FHLB fixed term advances were repayable in monthly installments as follows:
FINAL DUE DATE INTEREST RATE AMOUNT -------------- ------------- ------ (In thousands) 1998 5.63% $ 5,000 2000 5.47% - 6.55% 15,000 2001 5.21% - 7.03% 5,149 2002 5.75% 5,000 Thereafter 5.65% - 8.95% 17,390 ------- Total $47,539 =======
44 45 (11) INCOME TAXES Total income taxes for the years ended December 31, 1997, 1996 and 1995 were allocated as follows:
1997 1996 1995 -------- -------- -------- (In thousands) Income from continuing operations $ 20,360 $ 22,000 $ 15,750 Shareholders' equity for unrealized gain on available-for-sale securities 1,362 49 2,395 Shareholders' equity for stock option plans (400) -- -- -------- -------- -------- Total $ 21,322 $ 22,049 $ 18,145 ======== ======== ========
The components of income tax expense attributable to continuing operations are as follows for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 -------- -------- -------- (In thousands) Current: Federal $ 17,992 $ 18,944 $ 14,118 State 3,347 2,040 1,558 Deferred: Federal (825) 824 13 State (154) 192 61 -------- -------- -------- Total $ 20,360 $ 22,000 $ 15,750 ======== ======== ========
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:
1997 1996 1995 -------- -------- -------- (In thousands) Tax expense at statutory rate $ 22,999 $ 22,709 $ 17,939 Increase (reduction) in taxes resulting from: State income taxes net of federal tax benefit 2,075 1,451 1,052 Tax exempt interest revenue (2,802) (2,556) (2,718) Dividend received deduction (118) (183) (378) Tax over book loss on security transactions (166) (132) (520) Other, net (1,628) 711 375 -------- -------- -------- Total $ 20,360 $ 22,000 $ 15,750 ======== ======== ========
45 46 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are as follows:
1997 1996 ------- ------- (In thousands) Deferred tax assets: Loans receivable, principally due to allowance for credit losses $16,578 $14,495 Deferred liabilities principally due to compensation arrangements and vacation accruals 6,251 3,839 Net operating loss carryforwards 263 328 ------- ------- Total gross deferred tax assets 23,092 18,662 Less: valuation allowance -- -- ------- ------- Deferred tax assets $23,092 $18,662 ======= ======= Deferred tax liabilities: Bank premises and equipment, principally due to differences in depreciation and lease transactions $10,613 $10,881 Deferred assets, principally due to the capitalization of excess servicing rights for financial reporting purposes 1,244 1,294 Investments, principally due to interest income recognition 1,888 1,723 Capitalization of mortgage servicing rights 3,209 -- Unrealized gains on available-for-sale securities 2,777 1,415 Other, net 7 12 ------- ------- Total gross deferred liabilities 19,738 15,325 ------- ------- Net deferred tax assets $ 3,354 $ 3,337 ======= =======
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, 1997. At December 31, 1997 the Company has net operating loss carryforwards for federal income tax purposes of approximately $751,000 that are available to offset future federal taxable income, subject to various limitations, through 2001. (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 twenty-one. 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. 46 47 Pension expense for the years ended December 31, 1997, 1996 and 1995 included the following components:
1997 1996 1995 -------- -------- ------- (In thousands) Service cost $ 1,271 $ 1,127 $ 785 Interest cost 1,297 1,290 1,001 Actual return on plan assets (4,662) (3,532) (3,637) Net amortization and deferral 2,856 1,983 2,510 Cost of special termination benefits -- -- 464 ------- ------- ------- Pension expense $ 762 $ 868 $ 1,123 ======= ======= =======
The funded status of the Company's plan at December 31, 1997 and 1996 was as follows:
1997 1996 -------- -------- (In thousands) Plan assets at fair value (primarily in listed bonds and commingled funds) $ 26,124 $ 20,982 Actuarial present value of projected benefit obligations 18,975 19,498 -------- -------- Plan assets in excess of projected benefit obligation 7,149 1,484 Unrecognized net gain (5,693) (1,213) Unrecognized prior service cost (1,164) (1,252) Unrecognized net asset at January 1 (7) (9) -------- -------- Prepaid (accrued) pension expense recorded in the financial statements $ 285 ($ 990) ======== ======== Actuarial present value of vested benefit obligations $ 10,871 $ 11,267 ======== ======== Accumulated benefit obligations $ 12,278 $ 12,478 ======== ========
The discount rates used in determining the actuarial present value of the projected benefit obligation were 6.5% and 7.5% at December 31, 1997 and 1996, respectively. The rates of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 4% and 5% at December 31, 1997 and 1996, respectively. The expected long-term rate of return on assets during 1997 and 1996 was 7.5%. 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 ten years. The amount accrued under the plan was $148,000 in 1997, $124,000 in 1996 and $111,000 in 1995. 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 five percent 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, 1997, 1996 and 1995 was $1,689,000, $1,555,000 and $1,495,000, respectively. 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 his benefit under the Basic Plan. Restoration Plan expense was $78,000 in 1997, $62,000 in 1996 and $48,000 in 1995. (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. 47 48 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, 1997 and 1996:
1997 1996 -------------------------- -------------------------- BOOK FAIR BOOK FAIR VALUE VALUE VALUE VALUE ---------- ---------- ---------- ---------- (In thousands) Commercial and agricultural $ 266,112 $ 256,550 $ 238,246 $ 235,086 Consumer and installment 823,356 824,054 744,456 760,947 Real estate mortgage 1,571,137 1,520,646 1,407,841 1,394,210 All other 19,844 17,336 14,471 14,233 ---------- ---------- ---------- ---------- Total $2,680,449 $2,618,586 $2,405,014 $2,404,476 ========== ========== ========== ==========
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. DEPOSIT LIABILITIES Under SFAS 107, the fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings, and NOW accounts, and money market and checking accounts, is equal to the amount payable on demand as of December 31, 1997 and 1996. 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, 1997 and 1996:
1997 1996 -------------------------- -------------------------- BOOK FAIR BOOK FAIR VALUE VALUE VALUE VALUE ---------- ---------- ---------- ---------- (In thousands) Certificates of deposit: Maturing or repricing in six months or less $ 743,583 $ 746,796 $ 704,344 $ 707,601 Maturing or repricing between six months and one year 434,519 436,910 278,496 280,089 Maturing or repricing between one and three years 86,812 87,962 438,806 445,561 Maturing or repricing beyond three years 418,687 427,301 156,011 159,455 ---------- ---------- ---------- ---------- Total $1,683,601 $1,698,969 $1,577,657 $1,592,706 ========== ========== ========== ==========
48 49 LONG-TERM DEBT The fair value of the Company's FHLB advances is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently available for advances of similar maturities. The following table presents information on the FHLB advances at December 31, 1997 and 1996:
1997 1996 ------------------- ------------------- BOOK FAIR BOOK FAIR FINAL DUE DATE VALUE VALUE VALUE VALUE - -------------- ------- ------- -------- -------- (In thousands) 1997 $ - $ - $ 5,000 $ 4,996 1998 5,000 4,985 5,000 4,968 2000 15,000 14,947 15,000 14,917 2001 5,149 5,112 6,554 6,486 Thereafter 22,390 22,191 24,224 23,490 ------- ------- ------- ------- Total $47,539 $47,235 $55,778 $54,857 ======= ======= ======= =======
(14) STOCK INCENTIVE AND STOCK OPTION PLANS During 1987, the Company issued 34,500 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. During 1994, the Company issued 50,000 shares of common stock to a key employee; 25,000 shares were awarded upon issuance and 25,000 shares were awarded on November 21, 1995. The stock bonus agreement provided for a cash bonus to the employee in an amount equal to the state and federal income and employment tax liabilities incurred by the employee as a result of this stock bonus award. The Company recorded compensation expense of $905,000 in 1995 with regard to this stock bonus. In 1995, the Company issued 30,000 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 24,000 at December 31, 1997. The compensation associated with this award is being recognized over the 10-year period. Key employees and directors of the Company and its subsidiaries have been granted stock options and stock appreciation rights (SARs) under the Company's 1990, 1994 and 1995 stock incentive plans. All options and SARs granted pursuant to these plans have been at market value on the date of the grant and are exercisable over periods of one to ten years. The Company recorded $6,113,000, $1,907,000 and $947,000 in compensation expense in 1997, 1996 and 1995, respectively, related to the SARs because of the increase in market value of its common stock. In 1995, 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. 49 50 A summary of the status of the Company's stock option plans as of December 31, 1997, 1996 and 1995, and changes during the years ended on those dates is presented below:
1997 1996 1995 --------------------------- ------------------------- ------------------------ WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE - ------- ----------- ------------- -------- ------------- --------- ------------- Outstanding at beginning of year 742,930 $18.24 677,219 $15.65 542,442 $13.28 Granted 136,300 41.05 150,991 26.14 178,000 20.83 Exercised (113,858) 13.78 (85,280) 11.68 (43,223) 7.17 -------- ------- ------- Outstanding at end of year 765,372 22.96 742,930 18.24 677,219 15.65 ======== ======= ======= Exercisable at year-end 481,059 479,268 424,852 ======== ======= =======
The following table summarizes information about stock options at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------- -------------------------------- RANGE OF NUMBER WEIGHTED-AVG WEIGHTED-AVG NUMBER WEIGHTED-AVG EXERCISE PRICES OUTSTANDING REMAINING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - --------------- ------------- ---------------- -------------- ------------ --------------- $ 4.94 to $ 7.16 5,742 5.4 years $ 6.00 5,742 $ 6.00 $ 8.21 to $12.99 120,378 4.0 11.15 120,378 11.15 $14.88 to $18.75 233,292 6.1 17.29 209,292 17.31 $22.13 to $27.25 293,651 8.5 24.60 145,647 23.74 $44.00 112,309 10.0 44.00 - - ------- ------- $ 4.94 to $44.00 765,372 7.3 22.96 481,059 17.58 ======= =======
As allowed by SFAS No. 123, "Accounting for Stock Based Compensation", the Company elected to continue to measure compensation cost relative to its stock based compensation plans using Accounting Principles Board Opinion No. 25. The pro forma net income and pro forma net income per share is not materially different from net income and net income per share as reported. (15) EARNINGS PER SHARE AND DIVIDEND DATA The Company adopted SFAS No. 128, "Earnings per Share", effective for financial statements for periods ending after December 15, 1997. All prior period EPS data has been restated to conform with the provisions of this Statement. The computation of basic earnings per share is based on the weighted average number of common shares outstanding. The computation of diluted earnings per share is based on the weighted average number of common shares outstanding plus the shares resulting from the assumed exercise of all outstanding stock options using the treasury stock 50 51 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, 1997, 1996 and 1995.
1997 1996 1995 ----------------------------------- ------------------------------------ ---------------------------------- 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 $45,350 22,213 $2.04 $42,883 20,995 $2.04 $35,505 20,874 $1.70 ===== ===== ===== Effect of dilutive stock options - 181 - 134 - 141 ------- ------ ------- ------ ------- ------ DILUTED EPS Income available to common shareholders plus assumed exercise $45,350 22,394 $2.03 $42,883 21,129 $2.03 $35,505 21,015 $1.69 ======= ====== ===== ======= ====== ===== ======= ====== =====
Dividends to shareholders are paid from dividends paid to the Company by its subsidiary bank which is subject to approval by the applicable state regulatory authority. At December 31, 1997, the Company's subsidiary bank could have paid dividends to the Company of $110,000,000 under current regulatory guidelines. (16) RELATED PARTY TRANSACTIONS The Company has made, and expects in the future to continue to make in the ordinary course of business, loans to directors and executive officers of the Company and their affiliates. In management's opinion, these transactions with directors and executive officers were made on substantially the same terms as those prevailing at the time for comparable transactions with other persons and did not involve more than normal risk of collectibility or present any other unfavorable features. An analysis of such outstanding loans is as follows:
AMOUNT ------------- (In thousands) Loans outstanding at December 31, 1996 $21,435 New loans 2,158 Repayments (4,622) Changes in directors and executive officers (179) ------- Loans outstanding at December 31, 1997 $18,792 =======
(17) 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 morgage 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 51 52 carrying amount must be stratified based on one or more predominant risk characteristics of the underlying loans. Impairment is recognized through a valuation allowance for each individual stratum. The following is a summary of capitalized mortgage servicing rights, net of accumulated amortization, and a valuation allowance for impairment:
1997 1996 -------- ------- (In thousands) Balance at beginning of year $ 9,276 $ 5,051 Mortgage servicing rights capitalized 7,222 5,721 Amortization expense (1,803) (1,496) ------- ------- Balance at end of year 14,695 9,276 Valuation allowance (624) (200) ------- ------- Fair value at end of year $14,071 $ 9,076 ======= =======
(18) REGULATORY MATTERS Deposit insurance expense for 1996 includes a special assessment of $1.9 million that was imposed by the Federal Deposit Insurance Corporation (FDIC) on the Company's deposits in the Savings Association Insurance Fund (SAIF). This non-recurring assessment was imposed by the Federal Deposit Insurance Act of 1996 and was designed to recapitalize the SAIF. Approximately 90% of the Company's deposits are in the Bank Insurance Fund (BIF) and approximately 10% of the Company's deposits which were acquired from thrifts over the years, remain in the SAIF. The Company is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by the Federal Reserve Board (FRB) to ensure capital adequacy require the Company to maintain minimum capital amounts and ratios (risk-based capital ratios). All banking companies are required to have core capital (Tier 1) of a least 4% of risk-weighted assets, total capital of at least 8% of risk-weighted assets and a minimum Tier 1 leverage ratio of 3% of adjusted average assets. The regulations also define well capitalized levels of Tier 1, total capital and Tier 1 leverage as 6%, 10% and 5%, respectively. The Company had Tier 1, total capital and leverage above the well capitalized levels at December 31, 1997 and 1996, respectively, as set forth in the following table:
1997 1996 ---------------------------- -------------------------- AMOUNT RATIO AMOUNT RATIO ------------ --------- --------- -------- (Dollars in thousands) Total Capital (to Risk-Weighted Assets) $388,165 13.74% $337,728 13.39% Tier 1 Capital (to Risk-Weighted Assets) 352,792 12.49 306,135 12.14 Tier 1 Leverage Capital (to Average Assets) 352,792 8.82 306,135 8.56
52 53 (19) COMMITMENTS AND CONTINGENT LIABILITIES LEASES Rent expense was approximately $2,591,000 for 1997, $1,841,000 for 1996 and $1,658,000 for 1995. 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, 1997:
AMOUNT ------------- (In thousands) 1998 $1,862 1999 1,632 2000 753 2001 428 2002 237 Thereafter 101 ------ Total future minimum lease payments $5,013 ======
MORTGAGE LOANS SERVICED FOR OTHERS The Company services mortgage loans for others which are not included in the accompanying financial statements. Included in the $1.2 billion of loans serviced for investors is approximately $15 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, 1997, the Company had obligations under forward contracts consisting of commitments to sell mortgage loans originated or purchased by the Company into the secondary market at a future date. These obligations are entered into by the Company in order to establish the interest rate at which it can offer mortgage loans to its customers. Changes in the values of mortgage loans held for sale by the Company for delivery into the secondary market are recorded at the lower of cost or market. As of December 31, 1997, the contractual or notional amount of these forward contracts was approximately $21,000,000. The Company's exposure under these commitments to sell mortgage loans in the future is not material. LENDING COMMITMENTS In the normal course of business, there are outstanding various commitments and other arrangements for credit which are not reflected in the consolidated balance sheets. As of December 31, 1997, these included approximately $30,609,000 for letters of credit, and approximately $574,693,000 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 and legal counsel, 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 $162,385,000 were maintained to satisfy Federal regulatory requirements at December 31, 1997. 53 54 (20) CONDENSED FINANCIAL STATEMENT INFORMATION OF BANCORPSOUTH, INC. (PARENT COMPANY ONLY) The following condensed unaudited financial information reflects the accounts and transactions of BancorpSouth, Inc. (parent company only) for the dates indicated:
CONDENSED BALANCE SHEETS DECEMBER 31 ---------------------- 1997 1996 ------- -------- (In thousands) Assets Cash on deposit with subsidiary banks $ 8,685 $ 8,209 Securities -- 1,210 Investment in subsidiaries 360,511 310,164 Other assets 5,717 3,717 -------- -------- Total assets $374,913 $323,300 ======== ======== Liabilities and shareholders' equity Total liabilities $ 14,491 $ 7,976 Shareholders' equity 360,422 315,324 -------- -------- Total liabilities and shareholders' equity $374,913 $323,300 ======== ========
YEARS ENDED DECEMBER 31 --------------------------------- CONDENSED STATEMENTS OF INCOME 1997 1996 1995 ------- --------- ------- (In thousands) Dividends from subsidiaries $17,937 $41,582 $14,665 Management fees from subsidiaries 530 628 603 Other operating income 24 57 60 ------- ------- ------- Total income 18,491 42,267 15,328 Operating expenses 5,591 4,280 3,243 ------- ------- ------- Income before equity in undistributed earnings of subsidiaries 12,900 37,987 12,085 Equity in undistributed earnings of subsidiaries 32,450 4,896 23,419 ------- ------- ------- Net income $45,350 $42,883 $35,504 ======= ======= =======
YEARS ENDED DECEMBER 31 --------------------------------- CONDENSED STATEMENTS OF CASHFLOWS 1997 1996 1995 -------- --------- ------- (In thousands) Operating Activities: Net income $ 45,350 $ 42,883 $35,504 Adjustments to reconcile net income to net cash provided by operating activities (26,919) (919) (22,592) ------- -------- ------- Net cash provided by operating activities 18,431 41,964 12,912 Net cash used in financing activities (17,955) (39,473) (9,649) -------- -------- ------- Increase in cash and cash equivalents 476 2,491 3,263 Cash and cash equivalents at beginning of year 8,209 5,718 2,455 -------- -------- ------- Cash and cash equivalents at end of year $ 8,685 $ 8,209 $ 5,718 ======== ======== =======
54 55 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, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Memphis, Tennessee January 20, 1998 55 56 SUMMARY OF QUARTERLY RESULTS (UNAUDITED) (In thousands, except per share amounts)
QUARTER ENDED ---------------------------------------------- MAR 31 JUN 30 SEP 30 DEC 31 ------- ------ ------- ------- 1997 Interest revenue $73,092 $76,176 $77,825 $80,001 Net interest revenue 39,189 40,830 40,558 42,462 Provision for credit losses 1,481 2,168 2,476 2,883 Income before income taxes 17,299 18,219 16,726 13,466 Net income 11,636 12,251 11,601 9,862 Earnings per share (1): Basic 0.52 0.55 0.52 0.44 Diluted 0.52 0.55 0.52 0.44 Dividends per share 0.19 0.19 0.19 0.22 1996 Interest revenue $66,814 $68,108 $70,237 $72,760 Net interest revenue 36,256 37,183 38,371 39,604 Provision for credit losses 1,444 3,060 2,500 1,800 Income before income taxes 14,002 17,402 15,594 17,885 Net income 9,449 11,200 10,564 11,670 Earnings per share (1): Basic 0.45 0.53 0.50 0.56 Diluted 0.45 0.53 0.50 0.55 Dividends per share 0.17 0.17 0.17 0.19 1995 Interest revenue $58,668 $62,514 $64,921 $66,324 Net interest revenue 33,060 33,783 35,061 36,066 Provision for credit losses 1,298 1,240 2,057 1,611 Income before income taxes 11,624 12,933 13,740 12,957 Net income 7,905 8,869 9,544 9,186 Earnings per share (1): Basic 0.38 0.43 0.46 0.44 Diluted 0.38 0.42 0.45 0.43 Dividends per share 0.15 0.15 0.15 0.17
(1) Earnings per share have been restated for the effect of implementing, in the quarter ended December 31, 1997, SFAS No. 128, "Earnings per Share". 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. 56 57 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 1998 annual meeting, and is incorporated herein by reference. Executive Officers of Registrant Information follows concerning the executive officers of the Company who are subject to the reporting requirements of Section 16 of the Securities Exchange Act of 1934.
Name Offices Held Age - ---- ------------ --- Aubrey B. Patterson Chairman of the Board of 55 Directors and Chief Executive Officer of the Company and BancorpSouth Bank; Director of the Company Charles J. McKee Executive Vice President of 66 the Company; Vice Chairman and Director of BancorpSouth Bank L. Nash Allen, Jr. Treasurer, and Chief 53 Financial Officer of the Company; Executive Vice President, Chief Financial Officer and Cashier, BancorpSouth Harry R. Baxter Vice Chairman and 53 Director of Marketing of the Company and BancorpSouth Bank Gary R. Harder Senior Vice President, Audit and 53 Loan Review of the Company and BancorpSouth Bank Michael W. Weeks Executive Vice President of the 49 Company and Vice Chairman of BancorpSouth Bank Michael L. Sappington Vice Chairman of 48 BancorpSouth Bank Gregg Cowsert Executive Vice President of the 50 Company and Vice Chairman and Chief Lending Officer of BancorpSouth Bank Cathy M. Robertson Executive Vice President of the 43 Company and BancorpSouth Bank
57 58 Company and BancorpSouth Bank None of the executive officers of the Company are related by blood, marriage or adoption. There are no arrangements or understandings between any of the executive officers and any other person pursuant to which the individual named above was or is to be selected as an officer. The executive officers of the Company are elected by the Board of Directors at its first meeting following the annual meeting of shareholders, and they hold office until the next annual meeting or until their successors are duly elected and qualified. Mr. Patterson served as President of the Bank from 1983 until April 1990 when he was named Chief Executive Officer of the Bank and the Company. He has served as Chairman of the Board and Chief Executive Officer of the Bank and the Company since April 1993. Mr. McKee has served as Vice Chairman and as Executive Vice President of the Bank during the last five years and as Executive Vice President of the Company since April 1986. He has served as a director of BancorpSouth Bank since 1993. Mr. McKee retired from the Company as of December 31, 1997. Mr. Allen has served as Senior Vice President and Executive Vice President of the Bank during the past five years. He has served as Treasurer and Chief Financial Officer of the Company during this same period. Mr. Baxter joined the Bank in July 1986 as Senior Vice President and Director of Marketing. He was named Executive Vice President and Director of Marketing in August 1989 and named Vice Chairman in August 1996. Mr. Harder served as First Vice President and Senior Vice President--Loan Review, BancorpSouth Bank during the last five years. Since October 1992 he has also served as First Vice President and then Senior Vice President of the Company. Mr. Weeks served as Vice-Chairman of the Board and Chief Executive Officer of Volunteer Bank from January 24, 1995 to March 16, 1995 when he was named Chairman of the Board and Chief Executive Officer of Volunteer Bank. He continued in that role until June 1997 when Volunteer Bank was merged into BancorpSouth Bank and he was named Vice Chairman of BancorpSouth Bank. He has served as Executive Vice President of the Company since January 17, 1995. Prior to his employment by the Company, Mr. Weeks served as a partner in the accounting firm of KPMG Peat Marwick LLP. Mr. Sappington has served as Executive Vice President and Vice Chairman of the Bank during the last five years. Mr. Cowsert joined the Bank in 1990 as Senior Vice President. He has since served as Executive Vice President and was named Vice Chairman in August 1996. He also is Executive Vice President of the Company. Ms. Robertson has served as First Vice President, Senior Vice President and Executive Vice President of the Bank during the past five years. She is also Executive Vice President of the Company. Item 11. - Executive Compensation Information concerning the remuneration of executive officers of the Company appears under the caption "Executive Compensation" in the Company's definitive Proxy Statement for its 1998 annual meeting, and is incorporated herein by reference. Information concerning the remuneration of directors of the Company appears under the caption "Compensation of Directors" in the Company's definitive Proxy Statement for its 1998 annual meeting, and is incorporated herein by reference. Item 12. - Security Ownership of Certain Beneficial Owners and Management Information concerning the security ownership of certain beneficial owners and directors and executive officers of the Company appears under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Company's definitive Proxy Statement for its 1998 annual meeting, and is incorporated herein by reference. 58 59 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 1998 annual meeting, 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) Stock Bonus Agreement between Bancorp of Mississippi, Inc., and Aubrey B. Patterson, Jr., dated November 6, 1987 and Escrow Agreement between Bank of Mississippi and Aubrey B. Patterson, Jr., dated November 6, 1987. (4)(8) (b) Form of deferred compensation agreement between Bancorp of Mississippi, Inc. and certain key executives. (5)(8) (c) 1994 Stock Incentive Plan. (3)(8) (d) 1995 Non-Qualified Stock Option Plan for Non-Employee Directors. (3)(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 (7)(8) (f) Stock Bonus Agreement between BancorpSouth, Inc. and Aubrey B. Patterson, Jr., dated January 20, 1998 and Escrow Agreement between BancorpSouth Bank and Aubrey B. Patterson, Jr., date March 20, 1998 (8) (11) Statement re computation of per share earnings (21) Subsidiaries of the Registrant. (23) Consent of Independent Accountants. (27.1) Financial Data Schedule 1997. (27.2) Restated 1996 Financial Data Schedule. (27.3) Restated 1995 Financial Data Schedule. (28) Information regarding Bancorp of Mississippi, Inc., amended and restated Salary Deferral-Profit Sharing Employee Stock Ownership Plan. (6)(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 registration statement on Form 8-A filed on May 13, 1997, and incorporated by reference thereto. (3) Filed as an exhibit to the Company's Form 10-K for the year ended December 31, 1994 (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, 1987 (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, 1988 (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, 1990 (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, 1995 (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, 1997. 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 25, 1998 /s/ Aubrey B. Patterson -------------------------------------------- Aubrey B. Patterson Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Aubrey B. Patterson Chairman of the Board, Chief Executive - ------------------------------------- Officer (Principal Executive Officer) Aubrey B. Patterson and Director March 25, 1998 /s/ L. Nash Allen, Jr. Treasurer and Chief Financial - ------------------------------------- Officer (Principal Financial and L. Nash Allen, Jr. Accounting Officer) March 25, 1998 /s/ S. H. Davis Director March 25, 1998 - ------------------------------------- S. H. Davis /s/ Hassell H. Franklin Director March 25, 1998 - ------------------------------------- Hassell H. Franklin /s/ Fletcher H. Goode Director March 25, 1998 - ------------------------------------- Fletcher H. Goode, M.D. /s/ J. Louis Griffin, Jr. Director March 25, 1998 - ------------------------------------- J. Louis Griffin, Jr. /s/ W. G. Holliman, Jr. Director March 25, 1998 - ------------------------------------- W. G. Holliman, Jr. /s/ A. Douglas Jumper Director March 25, 1998 - ------------------------------------- A. Douglas Jumper /s/ Turner O. Lashlee Director March 25, 1998 - ------------------------------------- Turner O. Lashlee Director March 25, 1998 - ------------------------------------- Alan W. Perry
61 62 /s/ Frank A. Riley Director March 25, 1998 - ------------------------------------- Frank A. Riley /s/ Travis E. Staub Director March 25, 1998 - ------------------------------------- Travis E. Staub /s/ Andrew R. Townes Director March 25, 1998 - ------------------------------------- Andrew R. Townes, DDS /s/ Lowery A. Woodall Director March 25, 1998 - ------------------------------------- Lowery A. Woodall
62 EX-10.(F) 2 STOCK BONUS 1 EXHIBIT 10(f) STOCK BONUS AGREEMENT THIS AGREEMENT is entered into on this 30th day of January, 1998, by and between BancorpSouth, Inc. (the "Company") and AUBREY B. PATTERSON ("Patterson"), a resident of Tupelo, Mississippi, pursuant to the approval of the Agreement by the Company's board of directors (the "Board") on January 21, 1998. RECITALS: WHEREAS, the Company desires to retain the full-time, dedicated services of Patterson as chief executive officer of the Company, or other assigned positions, and to be assured of its right to his services in said capacity; WHEREAS, Patterson desires to continue to provide services in his role as chief executive officer of the Company, or in such other senior officer duties as may be assigned by the Board; WHEREAS, the Company has previously awarded shares of common stock of the Company, $2.50 par value, ("Common Stock") to Patterson under the terms of an agreement which expired April 1, 1997, and the parties desire to renew such arrangement in a manner that will provide the performance incentives to Patterson that are set forth herein; WHEREAS, in order to provide a performance incentive, the Board took action on January 21, 1998, to grant shares Common Stock to Patterson that are restricted and subject to a substantial risk of forfeiture which lapses upon the attainment of certain performance conditions; WHEREAS, the Company desires for this arrangement be approved by the shareholders of the Company at the annual meeting following the execution of this Agreement, and desires that the Common Stock awarded to Patterson hereunder be treated as performance based compensation as described in section 162(m) of the Internal Revenue Code of 1986 (the "Code"); NOW, THEREFORE, in consideration of the premises set forth herein and other mutual agreements and good and valuable consideration hereinafter set forth, the Company and Patterson hereby agree to the following: 1. Services to be Provided by Patterson. Patterson agrees to continue as the chief executive officer of the Company, or in any other senior officer capacity assigned by the Board, pursuant to his employment arrangement with the Company and agrees to devote substantially all his time to performing the responsibilities of the President, or other assignments, as set forth in the by-laws of the Company, to perform such other reasonable services and duties as may from time to time be assigned to him by the Board and to grant the Company his undivided loyalty as long as he continues to be employed by the Company. 2. Term. The term of this Agreement shall be from January 21, 1998, until April 1, 2007. This Agreement is not an employment contract. The existence of this Agreement shall not affect in any way the Company's right to discharge Patterson. 3. Bonus Compensation; Stock Ownership. The Company does hereby award to Patterson 35,000 shares of Common Stock in consideration for the performance of services to the Company, provided that such shares shall be subject to the restrictions and risks of forfeiture described herein. Such shares shall be held by the Company or by an escrow agent, which may be BancorpSouth Bank or another third-party that is acceptable to Company and Patterson (any of such entities shall be referred to herein as the "Escrow Agent"); provided that any agreement between the Company and the Escrow Agent shall be consistent with the terms of this Agreement and shall not impose any restrictions or risks of forfeiture that are not set forth herein. The Company shall transfer to the Escrow Agent shares of Common Stock that are either authorized but unissued shares or shares held in the treasury of the Company. From and after the date that shares are held for Patterson's benefit by the Escrow Agent, Patterson shall have no right to transfer the shares or any other right to the shares except that Patterson shall be entitled to receive notices of all meetings of shareholders and vote the shares at such meetings and to receive dividends paid with respect thereto. However, Patterson shall have full, nonforfeitable rights in such Common Stock upon the soonest of (i) the expiration of this Agreement pursuant to Section 2, (ii) the termination of this Agreement pursuant to Section 6(b), or (iii) the satisfaction of the performance criteria set forth in Section 3(a). 64 2 (a) The Common Stock held by the Escrow Agent shall become nonforfeitable and shall be released to Patterson on April 1 of each year at the rate of 3,500 shares per year, provided that the Company achieves either a .9% Return on Average Assets or a 12.825% Return on Average Equity for the prior fiscal year of the Company. If such performance incentives are not achieved for a fiscal year, the shares that would have been released shall be held by the Escrow Agent and continue to be held by the Escrow Agent until this Agreement terminates pursuant to Section 2 or Section 6. (b) In the event Patterson voluntarily terminates his employment with the Company other than as provided in Section 6(b) hereof or if this Agreement is terminated by the Company pursuant to Section 6(a)(i) hereof prior to April 1, 2007, Patterson shall retain full ownership of the shares of Common Stock that have been released to him by the Escrow Agent, but shall forfeit all right, title and interest in and to any shares of Common Stock still held by the Escrow Agent, which shares shall be delivered to the Company to be held in treasury or to be canceled as shall be determined by the Board. (c) In the event this Agreement is terminated pursuant to Section 6(b) hereof prior to April 1, 2007, Patterson shall be entitled to receive all shares of Common Stock held by the Escrow Agent as of such termination date and shall be entitled to retain full ownership of all such shares of Common Stock. 4. Covenants of Patterson. Patterson covenants that, as of the date of this Agreement, he is not in violation of any agreement, covenant, court order, consent decree, statute or other binding commitment of his to do, or refrain from doing, any act, and that by entering into this Agreement he will not thereby violate any such agreement, covenant, court order, consent decree, statute or other binding commitment. 5. Noncompetition. Patterson agrees not to compete with the Company or the Bank as follows: (a) Noncompetition. Patterson agrees that, upon termination of this Agreement for any cause whatsoever other than a "change in control" of the Company or of BancorpSouth Bank (the "Bank"), as defined in Section 6(b) hereof, he will not directly or indirectly, as principal, agent, employee or in any other capacity, for the term of two years from the date of such termination of employment, enter into or engage in the same business now being carried on by the Company or the Bank or as may be carried on by the Company or the Bank from the date hereof to the date of Patterson's termination, within the State of Mississippi, the State of Tennessee, or any other state in which the Company or the Bank is actively engaged in a business of the Company or the Bank, or within any state whose banks may conduct banking in any such state directly or through majority-owned subsidiaries. Furthermore, during that two-year period he will not, directly or indirectly, divert or attempt to divert business from the Company or the Bank. (b) Respect for employee relationships. Patterson agrees that upon termination of this Agreement, he will not, without the prior written consent of the Company, directly or indirectly, as principal, agent, employee or in any other capacity, for the term of two years from the date of such termination of employment, hire, entice away or in any other manner persuade any employee of the Company or the Bank to discontinue his relationship with the Company or the Bank. (c) Return of documents. Patterson agrees that, upon termination of this Agreement for any cause whatsoever, he shall deliver to the Company all correspondence, agreements, contracts, books of account, records, files, research, manuals or other documents, and all copies thereof, relating to, concerning or arising out of the business and operations of the Company and/or the Bank. (d) Reasonable nature of restrictions. Patterson represents and admits that, in the event of the termination of his employment for any reason whatsoever, his experience and capabilities are such that he can obtain employment in business not in competition with the Company and/or the Bank, and that enforcement of a remedy by way of injunction will not prevent him from earning a livelihood. Patterson further represents and admits that the period of two years following termination of his employment with the Company, during which time he may not compete with the Company and/or the Bank nor disturb the relationship between the Company and/or the Bank and its employees, is reasonably necessary to protect the interests of the Company and/or the Bank and would not unfairly or unreasonably restrict Patterson. 65 3 6. Termination and Severance. It is the contemplation of the parties hereto that this Agreement shall not be terminated prior to the expiration of the initial term set forth in Section 2 hereof. (a) Termination by the Company. Notwithstanding the foregoing, the Company shall have the immediate right to terminate this Agreement upon the happening of any of the following events: (i) an act, in the good faith judgment of the Board, of dishonesty, embezzlement or fraud against the Company and/or the Bank; Patterson's conviction of a misdemeanor involving dishonesty or breach of trust; Patterson's conviction of a felony; or the issuance of any order for Patterson's removal as an employee of the Company or the Bank by any state or federal regulatory agency or court of competent jurisdiction; or (ii) the death of Patterson or the mental or physical illness, disability or incapacity of Patterson which, in the reasonable and good faith judgment of the Board, prevents Patterson from performing his duties hereunder and the continuance of such illness, disability or incapacity for a period of 90 days. (b) Termination by Patterson. Notwithstanding the foregoing, Patterson shall have the immediate right to terminate this Agreement and become fully vested in the shares held by the Escrow Agent in the event there is a change in control of the Bank or the Company, as defined in (c) below. (c) Change in Control. Change in control of an entity shall be deemed to have occurred if: (i) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, other than a trustee or other fiduciary holding securities under an employee benefit plan of the entity or a corporation controlling the entity or owned directly or indirectly by the stockholders of the entity in substantially the same proportions as their ownership of stock of such entity, becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of such entity representing more than 25% of the total voting power represented by such entity's then outstanding Voting Securities (as defined below), or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of such entity and any new director whose election by the Board or nomination for election by such entity's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of such entity approve a merger or consolidation of such entity with any other corporation, other than a merger or consolidation which would result in the Voting Securities of such entity outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) more than 65% of the total voting power represented by the Voting Securities of such entity or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of such entity approve a plan of complete liquidation of such entity or an agreement for the sale or disposition by such entity of all or substantially all of its assets. For purposes of this section "Voting Securities" of an entity shall mean any securities of the entity which vote generally in the election of its directors. 7. Merger. Upon a merger or consolidation in which the Company is not the surviving entity this Agreement shall continue unless terminated by Patterson pursuant to Section 6(b), and the surviving corporation shall substitute its common shares having a value equivalent to the value of the Common Stock for the Common Stock required to be delivered after consummation of the merger. 8. Election. Patterson may desire to make an election under Section 83(b) of the Code regarding the timing and amount of compensation income to be recognized by him on account of his receipt of Common Stock. The making of such an election 66 4 shall be wholly within the discretion of Patterson and it shall be the sole responsibility of Patterson to see that such election, if desired, is properly made and timely filed. If Patterson makes such an election, he shall inform the Company in writing immediately thereafter. 9. Withholding. Whenever Patterson shall recognize compensation income as a result of the receipt of Common Stock, he shall remit to the Company the minimum amount of federal and state income and employment tax withholding which the Bank or the Company is required to remit to the Internal Revenue Service or applicable state department of revenue in accordance with the then current provisions of the Code or applicable state law ("Withholding Tax"). The full amount of the Withholding Tax shall be remitted simultaneously with the filing of an election described in Section 7 or upon the occurrence of any other event under this Agreement which results in the recognition of income by Patterson. The Withholding Tax may be paid by (i) cash, (ii) a certified check or (iii) delivery of shares of Common Stock with a fair market value equal to the amount of the Withholding Tax. 10. Nonassignment. No party hereto may assign any rights hereunder. Any such purported delegation or assignment shall be void. 11. Severability. It is the intention of the Company and Patterson that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws of the State of Mississippi, but that the unenforceability (or the modification to conform with such laws or public policies) of any provisions hereof shall not render unenforceable or impair the remainder of this Agreement. Accordingly, if any provision of this Agreement shall be determined to be invalid or unenforceable, either in whole or in part, this Agreement shall be deemed amended to delete or modify, as necessary, the offending provisions and to alter the balance of this Agreement in order to render the same valid and enforceable to the fullest extent permissible as aforesaid. 12. Certain Additional Payments. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by or on behalf of the Company to or for the benefit of Patterson as a result of a Change In Control (as defined in Section 280G of the Internal Revenue Code of 1986 (the "Code") (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 12 (a "Payment")) would be subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties are incurred by Patterson with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then Patterson shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Patterson of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, Patterson retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 12(c), all determinations required to be made under this Section 12, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized accounting firm selected by the Company (the "Accounting Firm"); provided, however, that the Accounting Firm shall not determine that no Excise Tax is payable by Patterson unless it delivers to Patterson a written opinion (the "Accounting Opinion") that failure to pay the Excise Tax and to report the Excise Tax and the payments potentially subject thereto on or with Patterson's applicable federal income tax return will not result in the imposition of an accuracy-related or other penalty on Patterson. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Within 15 business days of the receipt of notice from Patterson that there has been a Payment, or such earlier time as is requested by the Company, the Accounting Firm shall make all determinations required under this Section 12, shall provide to the Company and Patterson a written report setting forth such determinations, together with detailed supporting calculations, and, if the Accounting Firm determines that no Excise Tax is payable, shall deliver the Accounting Opinion to Patterson. Any Gross-Up Payment, as determined pursuant to this Section 12, shall be paid by the Company to Patterson within fifteen days of the receipt of the Accounting Firm's determination. Subject to the remainder of this Section 12, any determination by the Accounting Firm shall be binding upon the Company and Patterson; provided, however, that Patterson shall only be bound to the extent that the determinations of the Accounting Firm hereunder, including the determinations made in the Accounting Opinion, are reasonable and reasonably supported by applicable law. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting 67 5 Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that it is ultimately determined in accordance with the procedures set forth in Section 12(c) that Patterson is required to make a payment of any Excise Tax, the Accounting Firm shall reasonably determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Patterson. In determining the reasonableness of Accounting Firm's determinations hereunder, and the effect thereof, Patterson shall be provided a reasonable opportunity to review such determinations with Accounting Firm and Patterson's tax counsel. Accounting Firm's determinations hereunder, and the Accounting Opinion, shall not be deemed reasonable until Patterson's reasonable objections and comments thereto have been satisfactorily accommodated by Accounting Firm. (c) Patterson shall notify the Company in writing of any claims by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 30 calendar days after Patterson actually receives notice in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid; provided, however, that the failure of Patterson to notify the Company of such claim (or to provide any required information with respect thereto) shall not affect any rights granted to Patterson under this Section 12 except to the extent that the Company is materially prejudiced in the defense of such claim as a direct result of such failure. Patterson shall not pay such claim prior to the expiration of the 30-day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Patterson in writing prior to the expiration of such period that it desires to contest such claim, Patterson shall: I. give the Company any information reasonably requested by the Company relating to such claim; II. take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company and reasonably acceptable to Patterson; III. cooperate with the Company in good faith in order effectively to contest such claim; and IV. if the Company elects not to assume and control the defense of such claim, permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Patterson harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 12, the Company shall have the right, at its sole option, to assume the defense of and control all proceedings in connection with such contest, in which case it may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may either direct Patterson to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Patterson agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Patterson to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Patterson, on an interest-free basis and shall indemnify and hold Patterson harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Patterson with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's right to assume the defense of and control the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Patterson shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by Patterson of an amount advanced by the Company pursuant to Section 12 Patterson becomes entitled to receive any refund with respect to such claim, Patterson shall (subject to the Company's complying with the requirements of Section 12(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Patterson of an amount advanced by the Company pursuant to Section 12(c), a determination is made that Patterson is not entitled to a refund with respect to such claim and the Company does not notify Patterson in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall, to the extent of such denial, be 68 6 forgiven and shall not be required to be repaid and the amount of forgiven advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 13. Miscellaneous. (a) The existence of this Agreement shall not affect in any way the right or power of the company to make or authorize any adjustment, reclassification, reorganization or other change in its capital or business structure, any merger or consolidation of the Company, any issue or debt or equity securities having preferences or priorities as to the Common Stock or the rights thereof, the dissolution or liquidation of the Company, any sale or transfer of all or any part of its business or assets, or any other corporate act or proceeding. (b) This Agreement may only be amended or modified in writing as agreed upon by all the parties hereto. (c) All notices or other communications pursuant to this Agreement shall be in writing and shall be deemed to have been duly given, if by hand delivery, upon receipt thereof, or if mailed by certified or registered mail, postage prepaid, three days following deposit in the United States mail, and in any event, to be addressed to all of the parties as follows: to the Company, at One Mississippi Plaza Tupelo, Mississippi 38801 to Patterson, at One Overdale Drive Tupelo, Mississippi 38801 or to such other address as shall hereafter be provided by proper notice to the other parties. (d) The captions and headings herein are for convenience of reference only and shall not be deemed to be a part of the substance of this Agreement. (e) This Agreement shall be construed and interpreted according to the laws of the State of Mississippi. (f) The foregoing contains the entire and only agreement between the parties respecting the subject matter hereof, and any representation, promise or condition in connection therewith not incorporated herein shall not be binding upon either party. (g) The foregoing agreement shall be binding upon the parties hereto and there respective heirs, successors and assigns. 69 7 IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written. BANCORPSOUTH, INC. By: ---------------------------------------- Its: --------------------------------------- ------------------------------------------- AUBREY B. PATTERSON STOCK BONUS ESCROW AGREEMENT THIS AGREEMENT is entered into as of this 30th day of January, 1998, among Aubrey B. Patterson, a resident of Tupelo, Mississippi ("Patterson"), BancorpSouth, Inc. (the "Company") and BancorpSouth Bank as escrow agent ("Escrow Agent"). WHEREAS, the Company has granted to Patterson 35,000 shares of the Company's Common Stock, $2.50 par value, ("Common Stock") which are subject to certain restrictions and risks of forfeiture that are described in the Stock Bonus Agreement, dated January 30, 1998, between Patterson and the Company (the "Stock Agreement"); WHEREAS, pursuant to the Stock Agreement, the Company and Patterson have agreed that the shares of Common Stock granted thereunder shall be held in escrow until such restrictions and risks of forfeiture have lapsed, at which time the shares are to be released to Patterson; and WHEREAS, the Company is the sole shareholder of the Escrow Agent, and Escrow Agent is willing to hold the shares of Common Stock described in the Stock Agreement pending their release to Patterson or forfeiture to the Company; NOW, THEREFORE, in consideration of the premises set forth herein and other mutual agreements and good and valuable consideration hereinafter set forth, the parties hereby agree as follows: 1. Transfer of Stock to Escrow Agent. Upon the issuance of the Common Stock under the Stock Agreement, the Company shall issue ten stock certificates to the Escrow Agent, each for 3,500 shares of the Common Stock, registered in the name of Aubrey B. Patterson. Certificates issued upon the execution of the Stock Agreement are referred to herein as "Certificates." Each Certificate will bear a legend substantially as follows: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS OF AN ESCROW AGREEMENT, DATED APRIL 1, 1998, AMONG AUBREY B. PATTERSON, BANCORPSOUTH, INC. AND BANCORPSOUTH BANK, AS ESCROW AGENT, AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN COMPLIANCE WITH SUCH AGREEMENT. A COPY OF THE ESCROW AGREEMENT IS AVAILABLE AT THE PRINCIPAL OFFICES OF BANCORPSOUTH, INC. 70 8 Upon issuance Patterson will, or will cause the Company to, deposit the Certificates with the Escrow Agent, together with one stock power for each Certificate, duly executed in blank, to be held by the Escrow Agent in accordance with the terms of this Agreement. 2. Release of Shares From Escrow. The Escrow Agent will hold the Certificates until they are released. A Certificate, and the attendant stock power, shall be released to Patterson upon April 1, 1998 and upon each succeeding April 1 while he is employed by the Company, until all Certificates have been released to Patterson or forfeited to the Company pursuant to the terms of the Stock Agreement. (a) Notwithstanding the foregoing, upon receipt, prior to April l of any year, of a certificate signed by the majority of the Company's Board of Directors or the Company's Secretary certifying that according to the Company's annual report for the Company's year ending on the preceding December 31, the Company's Return on Average Assets was less than .9% or its Return on Average Equity was less than 12.825%, the Escrow Agent will retain the Certificate that was to be delivered to Patterson on April 1 of the year that follows such December 31, and shall hold such Certificate until it is forfeited or becomes vested under the terms of the Stock Agreement. (b) On April 1, 2007, the Escrow Agent shall deliver to Patterson all Certificates in its possession, together with the accompanying stock powers, that have not been forfeited pursuant to the terms of the Stock Agreement. (c) Upon delivery of the Certificates to Patterson, they will bear appropriate state and federal securities legends as directed by the Company and appropriate stop transfer instructions will be noted in the stock records of the Company. 3. Effect of Termination of Employment. Notwithstanding the provisions of Section 2 hereof, the Escrow Agent shall deliver all certificates held to Patterson or the Company in the event of Patterson's termination of employment prior to the expiration of this Agreement, in accordance with the following: (a) Upon receipt of a certificate signed by the majority of the Company's Board of Directors (excluding Patterson) and the Company's Secretary certifying that Patterson's employment with the Company and/or the Bank has been terminated in accordance with the provisions of Section 6(a)(i) of the Stock Agreement, or if Patterson voluntarily terminates his employment with the Company and/or the Bank and the provisions of Section 6(b) do not apply, the Escrow Agent will complete the stock powers relating to all Certificates held by it and deliver such Certificates, together with the accompanying stock powers, to the Company. (b) If Patterson's employment with the Company and/or the Bank has been terminated in accordance with the provisions of Section 6(a)(ii) or 6(b) of the Stock Agreement, the Escrow Agent will deliver to Patterson all Certificates held by it with the accompanying stock powers. 4. Shareholder Rights. During the period that the Escrow Agent holds any of the Certificates, Patterson shall be entitled to notice of all meetings, annual or special, of stockholders of the Company at which stockholders have the right to vote and Patterson shall be entitled to vote all shares represented by such Certificates held by the Escrow Agent at any such meeting upon any matter upon which stockholders of the Company have the right to vote. Patterson shall not be entitled to any of the other attributes of ownership of the shares subject to escrow, nor shall he have the right to pledge, hypothecate or otherwise encumber such shares; provided, however, that Patterson shall be entitled to receive cash dividends paid with respect to any shares held in escrow. In the event the Company increases or decreases the number of shares of Common Stock outstanding by means of a stock split, stock dividend or recapitalization, certificates representing any additional shares which Patterson would be entitled to receive as the record holder of any shares of Common Stock subject to escrow shall automatically be delivered by the Company to the Escrow Agent and such shares shall be subject to the terms of this Agreement as if they were part of the Certificates in respect of which they were received. 5. Rights and Obligations of Escrow Agent. (a) The Escrow Agent shall not be liable to any person for any act by it except for gross negligence or willful misconduct by the Escrow Agent. Each of Patterson and the Company, severally, agrees to indemnify and hold 71 9 harmless the Escrow Agent for all liabilities of the Escrow Agent arising from the doing of any act or the failure to do any act except if such conduct constituted gross negligence or willful misconduct by the Escrow Agent. (b) The Escrow Agent shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by it to be genuine and to have been signed or presented by the proper party or parties. Except as set forth in Section 5(a), the Escrow Agent shall not be personally liable for any act it may do or omit to do hereunder as Escrow Agent while acting in good faith and in the exercise of its own good judgment, and any act done or omitted by it pursuant to the advice of its own attorneys shall be conclusive evidence of such good faith. (c) In case the Escrow Agent obeys or complies with any order, judgment or decree of any court, it shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. (d) The Escrow Agent shall be entitled to employ such legal counsel and other experts as it may deem-necessary properly to advise it in connection with its obligations hereunder. The Escrow Agent may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. (e) The Company agrees to reimburse Escrow Agent for all expenses incurred by it in the performance of its services under this Agreement. The Escrow Agent agrees to maintain adequate records and in such form and detail to support any claim for reimbursement hereunder and to furnish such records or copies to the Company as it may request. 6. Right to Information. If the Escrow Agent reasonably requires other or further instruments in connection with this Agreement or its obligations in respect hereto, Patterson, and the Company each agree that he or it shall furnish such instruments. 7. Retainment of Shares. Disputes. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by the Escrow Agent hereunder, the Escrow Agent is authorized and directed to retain in its possession without liability to anyone all or any part of said securities until such dispute shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but the Escrow Agent shall be under no duty whatsoever to institute or defend any such proceedings, whether by interpleader or otherwise. 8. Miscellaneous. (a) This Agreement may only be amended or modified in writing executed by the parties hereto. (b) All notices or other communications pursuant to this Agreement shall be in writing and shall be deemed to have been duly given, if by hand delivery, upon receipt thereof, or if mailed by certified or registered mail, postage prepaid, three days following deposit in the United States mail, and in any event, to be addressed to: the Company, at One Mississippi Plaza Tupelo, Mississippi 38801 Patterson, at One Overdale Drive Tupelo, Mississippi 38801 Escrow Agent, at One Mississippi Plaza Tupelo, Mississippi 38801 72 10 or to such other address as shall hereafter be provided by proper notice to the other parties. (c) This Agreement shall be construed and interpreted according to the internal laws of the State of Mississippi. (d) The foregoing, in conjunction with the Stock Agreement, contains the entire and only agreement between the parties respecting the subject matter hereof, and any representation, promise or condition in connection therewith not incorporated herein or therein shall not be binding upon either party. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. BANCORPSOUTH, INC. By: - ------------------------------ -------------------------------------- Aubrey B. Patterson Its: ------------------------------------- BANCORPSOUTH BANK By: -------------------------------------- Its: ------------------------------------- 73 EX-11 3 COMPUTATION OF EARNINGS 1 EXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Year Ended December 31, ----------------------------------------------- (Dollars in thousands except per share amounts.) 1997 1996 1995 ------- ------- ------- Basic Earning per Share Average shares outstanding 22,213 20,995 20,874 ======= ======= ======= Income available to common shareholders' $45,350 $42,883 $35,504 ======= ======= ======= Basic Earnings per Share $ 2.04 $ 2.04 $ 1.70 ======= ======= ======= Diluted Earnings per Share Average common shares outstanding 22,213 20,995 20,874 Effect of dilutive stock options 181 134 141 ------- ------- ------- Average diluted shares outstanding 22,394 21,129 21,015 ======= ======= ======= Income available to common shareholders' $45,350 $42,883 $35,504 ======= ======= ======= Diluted Earnings per Share $ 2.03 $ 2.03 $ 1.69 ======= ======= =======
63 EX-21 4 SUBSIDIARIES 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
Jurisdiction Holder of Name Of Incorporation Outstanding Stock ---- ---------------- ----------------- BancorpSouth Bank Mississippi BancorpSouth, Inc. Personal Finance Corporation Mississippi BancorpSouth Bank Century Credit Life Insurance Company Mississippi BancorpSouth Bank West Tennessee Life Insurance Company Tennessee BancorpSouth Bank BancorpSouth Insurance Services Mississippi BancorpSouth Bank of Mississippi, Inc. BancorpSouth Insurance Services Tennessee BancorpSouth Bank of Tennessee, Inc.
All of the above subsidiaries are wholly owned except West Tennessee Life Insurance Company of which BancorpSouth Bank owns 96% of the outstanding voting shares and 76% of the voting power and are included in the consolidated financial statements of the registrant. 74 EX-23.1 5 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23 ACCOUNTANTS' CONSENT The Board of Directors BancorpSouth, Inc.: We consent to incorporation by reference in the Registration Statement (No. 33-28081) on Form S-4 and the Registration Statement (No. 33-60699) on Form S-8 of BancorpSouth, Inc. of our report dated January 20, 1998, relating to the consolidated balance sheets of BancorpSouth, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997, which report is included in the 1997 annual report on Form 10-K of BancorpSouth, Inc. KPMG Peat Marwick LLP Memphis, Tennessee March 28, 1998 75 EX-27.1 6 FINANCIAL DATA SCHEDULE - 1997
9 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 286,307 6,465 0 0 406,212 406,212 406,212 2,759,027 39,877 4,180,143 3,540,255 177,450 54,477 47,539 55,990 0 0 304,432 4,180,143 244,880 35,836 26,378 307,094 139,290 144,055 163,039 9,008 1,251 131,988 65,710 65,710 0 0 45,350 2.04 2.03 4.64 4,008 7,465 659 0 37,272 8,827 1,828 39,877 39,877 0 0
EX-27.2 7 FINANCIAL DATA SCHEDULE - 1996
9 YEAR DEC-31-1995 JAN-1-1995 DEC-31-1995 149,923 15,892 35,450 0 439,303 439,303 448,075 2,295,166 34,636 3,302,028 2,863,612 35,848 40,849 73,624 0 0 52,764 235,331 3,302,028 203,800 35,811 12,816 252,427 107,165 114,457 137,970 6,206 (765) 111,750 51,254 35,504 0 0 35,504 1.70 1.69 4.86 1,592 5,148 7 0 30,830 4,714 1,567 34,636 34,636 0 0
EX-27.3 8 FINANCIAL DATA SCHEDULE - 1995
9 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 153,148 18,715 70,300 0 530,066 530,066 537,119 2,469,334 37,272 3,617,239 3,161,379 33,636 51,122 55,778 0 0 52,911 262,413 3,617,239 227,169 30,779 19,971 277,919 118,746 126,505 151,414 8,804 262 118,472 64,883 42,883 0 0 42,883 2.04 2.03 4.81 3,940 4,811 77 0 34,636 8,004 1,836 37,272 37,272 0 0
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