UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-10826 BancorpSouth, Inc. (Exact name of registrant as specified in its charter) Mississippi 64-0659571 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) One Mississippi Plaza, Tupelo, Mississippi 38801 (Address of principal executive offices) (Zip Code) 601/680-2000 (Registrant's telephone number, including area code) (Former name, former address, and former fiscal year, if changed since last year) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ On March 31, 1995, the registrant had outstanding 8,763,666 shares of common stock, par value $2.50 per share. PART I FINANCIAL INFORMATION BANCORPSOUTH, INC. Consolidated Condensed Balance Sheets (Unaudited) (In Thousands) March 31 December 31 1995 1994 ASSETS Cash and due from banks $130,745 $130,085 Interest bearing deposits with other banks 8,266 1,367 Held-to-maturity securities, at amortized cost 499,473 496,838 Federal funds sold 49,100 0 Loans 1,925,304 1,895,298 Less: Unearned discount 62,256 61,402 Allowance for credit losses 28,780 27,529 Net loans 1,834,268 1,806,367 Available-for-sale securities 137,738 150,573 Mortgages held for sale 11,180 10,471 Premises and equipment, net 69,524 67,119 Other assets 51,238 43,323 TOTAL ASSETS $2,791,532 $2,706,143 LIABILITIES Deposits: Demand: Non-interest bearing $319,785 $371,367 Interest bearing 632,088 577,057 Savings 277,076 393,990 Time 1,216,901 995,822 Total deposits 2,445,850 2,338,236 Federal funds purchased and securities sold under repurchase agreements 31,864 63,314 Long-term debt 47,037 48,028 Other liabilities 36,016 31,633 TOTAL LIABILITIES 2,560,767 2,481,211 SHAREHOLDERS' EQUITY Common stock 22,045 19,932 Capital surplus 73,782 75,202 Unrealized gain (loss) on securities available for sale 125 (878) Retained earnings 135,847 131,710 Less cost of shares held in treasury (1,034) (1,034) TOTAL SHAREHOLDERS' EQUITY 230,765 224,932 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,791,532 $2,706,143 <FN> See accompanying notes to consolidated condensed financial statements. BANCORPSOUTH, INC. Consolidated Condensed Statements of Income (Unaudited) (In thousands except for per share amounts) Three months ended March 31 1995 1994 INTEREST REVENUE: Interest & fees on loans $42,255 $33,315 Deposits with other banks 82 81 Interest on federal funds sold 381 321 Interest on held-to-maturity securities: U. S. Treasury 963 32 U. S. Government agencies & corporations 5,204 2,363 Obligations of states & political subdivisions 1,537 1,638 Other 67 137 Interest and dividends on available-for-sale 1,859 3,387 securities Interest on mortgages held for sale 162 1,216 Total interest revenue 52,510 42,490 INTEREST EXPENSE: Interest on deposits 21,111 16,061 Interest on federal funds purchased & securities sold under repurchase agreements 458 243 Other interest expense 944 742 Total interest expense 22,513 17,046 Net interest revenue 29,997 25,444 Provision for credit losses 1,176 1,064 Net interest revenue, after provision for credit losses 28,821 24,380 OTHER REVENUE: Mortgage lending 899 (176) Trust income 464 441 Service charges 3,385 2,977 Security losses, net (15) (589) Life insurance income 746 683 Other 1,583 1,548 Total other revenue 7,062 4,884 OTHER EXPENSES: Salaries and employee benefits 12,823 11,082 Occupancy, net 1,737 1,670 Equipment 1,806 1,605 Deposit insurance premiums 1,303 1,214 Other 7,788 6,289 Total other expenses 25,457 21,860 Income before income taxes 10,426 7,404 Income tax expense 3,385 2,015 Net income $7,041 $5,389 Net income per share $0.80 $0.62 Dividends declared per share $0.30 $0.27 <FN> See accompanying notes to consolidated condensed financial statements. BANCORPSOUTH, INC. Consolidated Condensed Statements of Cash Flows (Unaudited) (In Thousands) Three Months Ended March 31 1995 1994 Net cash provided by operating activities $10,965 $54,056 Investing activities: Proceeds from calls and maturities of held-to-maturity securities 5,401 12,768 Proceeds from calls and maturities of available-for-sale securities 74,872 121,599 Proceeds from sales of held-to-maturity securities - 994 Purchases of held-to-maturity securities (6,912) (31,871) Purchases of available-for-sale securities (61,552) (116,484) Net increase in short-term investments (49,100) (41,865) Net increase in loans (28,624) (46,088) Purchases of premises and equipment (4,221) (2,090) Other (6,692) (8,248) Net cash used by investing activities (76,828) (111,285) Financing activities: Net increase in deposits 107,614 55,445 Net increase (decrease) in short-term borrowings and other liabilities (31,019) 1,526 Increase (decrease) in long-term debt (991) 22,223 Payment of cash dividends (2,372) (2,125) Issuance of common stock 33 191 Other 157 72 Net cash provided by financing activities 73,422 77,332 Increase in cash and cash equivalents 7,559 20,103 Cash and cash equivalents at beginning of period 131,452 122,848 Cash and cash equivalents at end of period $139,011 $142,951 <FN> See accompanying notes to consolidated condensed financial statements BANCORPSOUTH, INC. Notes to Consolidated Condensed Financial Statements (Unaudited) 1. The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the accounting policies in effect as of December 31, 1994, as set forth in the annual consolidated financial statements of BancorpSouth, Inc. (the "Company"), as of such date. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the three-month period ended March 31, 1995 are not necessarily indicative of the results to be expected for the full year. 2. On March 31, 1995, the Company merged with LF Bancorp, Inc. ("LF Bancorp"), the parent company of Laurel Federal Savings and Loan Association, headquartered in Laurel, Mississippi. The consolidated total assets of LF Bancorp were $189.5 million at the merger date. Each share of outstanding LF Bancorp common stock was exchanged for 1.013 shares of the Company's common stock. A total of 832,101 shares of the Company's common stock were issued to effect the transaction. This business combination was accounted for by the pooling-of-interests method. Accordingly, prior year and quarterly financial statements have been restated to reflect the consolidation. The results of operations of the Company and LF Bancorp for the period before the combination was consummated are presented below. Three Months Ended Three Months Ended March 31, 1995 (In thousands) BancorpSouth LF Bancorp Net interest revenue $ 28,437 $ 1,560 Net income $ 6,884 157 3. Comparative net income per share amounts have been restated to reflect the acquisition of LF Bancorp accounted for as a pooling-of-interests. The computation of net income per share is based upon the weighted average number of common shares outstanding (8,760,239 and 8,713,325 for the three months ended March 31, 1995 and 1994, respectively). ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides certain information concerning the consolidated financial condition and results of operations of BancorpSouth, Inc. (the "Company"), a bank and thrift holding company and the parent of Bank of Mississippi ("BOM"), Volunteer Bank ("VOL") and Laurel Federal Savings and Loan Association ("Laurel"). Laurel was a subsidiary of LF Bancorp, Inc. which merged into the Company on March 31, 1995, in a business combination accounted for by the pooling-of-interests method. Accordingly, all the information regarding the financial condition and results of operations on which this discussion is based reflects the combined results of the Company and LF Bancorp for the periods analyzed. This discussion should be read in conjunction with the unaudited consolidated condensed financial statements for the periods ended March 31, 1995 and 1994. Reference is also made to Note 2 to those unaudited consolidated condensed financial statements for additional discussion regarding the merger with LF Bancorp. RESULTS OF OPERATIONS Net Income The Company's net income for the first quarter of 1995 was $7.04 million, an increase of 30.7% from $5.39 million in the first quarter of 1994. Net income per common share for the first quarter of 1995 was $0.80, an increase of 29.3% from $0.62 for the same period in 1994. The annualized returns on average assets for the first quarter of 1995 and 1994 were 1.03% and 0.86%, respectively. Net Interest Revenue Net interest revenue, the difference between interest earned on assets and the cost of interest-bearing liabilities, is the largest component of the Company's net income. For purposes of this discussion, all interest revenue has been adjusted to a fully taxable equivalent basis. The primary items of concern in managing net interest revenue are the mix and maturity balance between interest-sensitive assets and liabilities. Net interest revenue was $31.5 million for the three months ended March 31, 1995, compared to $26.6 million for the same period in 1994. Earning assets averaged $2.52 billion in the first quarter of 1995, compared with $2.30 billion in the respective period in 1994. Average interest-bearing liabilities were $2.10 billion in the first quarter of 1995, compared with $1.94 billion for the same period of 1994. Net interest revenue, expressed as a percentage of average earning assets, was 5.08% for the first quarter of 1995, as compared to 4.69% for the same period of 1994. While interest-earning assets increased at a faster pace than the interest-bearing liabilities, the average yield earned on those assets rose at a faster pace than the average rate paid on interest-sensitive liabilities. Provision and Allowance for Credit Losses 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 in the Company's current portfolio of loans. Management's judgment is based on a variety of factors which include the Company's experience related to loan balances, charge-offs and recoveries, scrutiny of individual loans and risk factors, results of regulatory agency reviews of loans, and present and anticipated 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. These 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. The provision for credit losses totaled $1.18 million for the first quarter of 1995, compared to $1.06 million for the same period of 1994. This increase is due to the growth in the Company's loan portfolio. The allowance for credit losses as a percent of loans outstanding was 1.54% at the end of the first quarter 1995, compared to 1.50% at December 31, 1994. Other Revenue Other revenue for the quarter ended March 31, 1995 totaled $7.06 million, compared to $4.89 million for the same period of 1994, a 44.6 % increase. The most significant change in other revenue was in mortgage lending where net revenue of $899,000 was reported in 1995, compared to a net loss of $176,000 in 1994. The loss in 1994 was attributable to realized and unrealized losses on mortgage loans held for sale during the rapidly rising rate environment of the first quarter of 1994. Trust income and life insurance income showed modest increases. Service charges on deposit accounts increased 13.7%. Other Expenses Other expenses totaled $25.46 million for the first quarter of 1995, a 16.5 % increase over 1994's expense for the same period. The components of other expenses reflect normal increases for personel related expenses and general inflation in the cost of services and supplies purchased by the Company. Income Tax Income tax expense was $3.38 million for the first quarter of 1995 (an effective tax rate of 32.5%) and $2.02 million for the first quarter 1994 (an effective tax rate of 27.2%). This increase resulted from a decrease in the relative level of the Company's investment in assets with respect to which earnings are afforded favorable tax treatment. The Company's taxable net income continues to increase. FINANCIAL CONDITION Loans The loan portfolios of the Company's bank and thrift subsidiaries make up the largest single component of the Company's earning assets. The portfolio, net of unearned discount, totaled $1.86 billion at March 31, 1995, which represents a 1.6% increase from $1.83 billion at December 31, 1994. Non- performing loans were 0.48 % of all loans outstanding at March 31, 1995. This percentage is unchanged from December 31, 1994. Securities and Other Earning Assets The securities portfolios are used to make various term investments, to provide a source of liquidity and to serve as collateral to secure certain types of deposits. Held-to-maturity securities at March 31, 1995 were $499.5 million, compared with $496.8 million at the end of 1994, a 0.5% increase. Available-for- sale securities were $137.7 million at March 31, 1995, compared to $150.6 million at December 31, 1994, an 8.6% decrease. Deposits Total deposits at the end of the first quarter were $2.45 billion as compared to $2.34 billion at December 31, 1994, representing a 4.6% increase. Deposits continue to be the Company's primary source of funds with which to support its earning assets. LIQUIDITY Liquidity is the ability of the Company to fund the need of its borrowers, depositors and creditors. The Company's traditional sources of liquidity include maturing loans and investment securities, purchased federal funds and its base of core deposits. Management believes these sources are adequate to meet liquidity needs for normal operations. The Company continues to pursue a lending policy stressing adjustable rate loans, in furtherance of its strategy for matching interest sensitive assets with an increasingly interest sensitive liability structure. CAPITAL RESOURCES The Company is required to comply with the risk-based capital requirements of the Board of Governors of the Federal Reserve System (FRB). These requirements apply a variety of weighting factors which vary according to the level of risk associated with the particular assets. At March 31, 1995, the Company's Tier 1 capital and total capital, as a percentage of total risk- adjusted assets, was 11.51% and 13.71%, respectively. Both ratios exceed the required minimum levels for these ratios of 4.0% and 8.0%, respectively. In addition, the Company's leverage capital ratio (Tier 1 capital divided by total assets, less goodwill) was 8.20 % at March 31, 1995, compared to the required minimum leverage capital raio of 4%. The Company's current capital position continues to provide it with a level of resources available for the acquisition of depository institutions and businesses closely related to banking in the event opportunities arise. PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended March 31, 1995. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BancorpSouth, Inc. (Registrant) DATE: May 12, 1995 L. Nash Allen, Jr. L. Nash Allen, Jr. Treasurer and Chief Financial Officer