1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 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 June 30, 1997, the registrant had outstanding 22,230,107 shares of common stock, par value $2.50 per share. 2 BANCORPSOUTH, INC. CONTENTS PAGE PART I. Financial Information ITEM 1. Financial Statements (unaudited) Consolidated Condensed Balance Sheets June 30, 1997, and December 31, 1996 ............. 3 Consolidated Condensed Statements of Income Three and Six Months Ended June 30, 1997 and 1996 ......................................... 4 Consolidated Condensed Statements of Cash Flows Six Months Ended June 30, 1997 and 1996 .......... 5 Notes to Consolidated Condensed Financial Statements ....................................... 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ....................................... 9 PART II. Other Information ITEM 4. Submission of Matters to a Vote of Security Holders .......................................... 14 ITEM 6. Exhibits and Reports on Form 8-K ................. 15 3 PART I FINANCIAL INFORMATION BANCORPSOUTH, INC. Consolidated Condensed Balance Sheets (Unaudited) (In Thousands) June 30 December 31 1997 1996 ASSETS Cash and due from banks $143,068 $150,920 Interest bearing deposits with other banks 8,474 18,715 Held-to-maturity securities, at amortized cost 574,341 530,066 Federal funds sold 21,000 70,300 Loans 2,672,766 2,554,118 Less: Unearned discount 88,159 84,784 Allowance for credit losses 38,721 37,272 ---------- ---------- Net loans 2,545,886 2,432,062 Available-for-sale securities 321,361 230,739 Mortgages held for sale 24,389 25,728 Premises and equipment, net 96,150 90,939 Other assets 86,437 67,770 ---------- ---------- TOTAL ASSETS $3,821,106 $3,617,239 ========== ========== LIABILITIES Deposits: Demand: Non-interest bearing $430,077 $450,470 Interest bearing 750,490 724,871 Savings 486,811 408,380 Time 1,675,385 1,577,657 ---------- ---------- Total deposits 3,342,763 3,161,378 Federal funds purchased and securities sold under repurchase agreements 31,289 33,636 Long-term debt 48,928 56,078 Other liabilities 52,037 50,823 ---------- ---------- TOTAL LIABILITIES 3,475,017 3,301,915 ---------- ---------- SHAREHOLDERS' EQUITY Common stock 55,990 52,911 Capital surplus 95,804 84,616 Unrealized gain (loss) on available-for-sale securities 3,137 2,280 Retained earnings 194,228 177,741 Less cost of shares held in treasury (3,070) (2,224) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 346,089 315,324 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,821,106 $3,617,239 ========== ========== <FN> See accompanying notes to consolidated condensed financial statements. 4 BANCORPSOUTH, INC. Consolidated Condensed Statements of Income (Unaudited) (In thousands except for per share amounts) Three months ended Six months ended June 30 June 30 1997 1996 1997 1996 INTEREST REVENUE: Interest & fees on loans $60,399 $55,477 $118,598 $109,986 Deposits with other banks 93 105 187 336 Interest on federal funds sold 1,297 644 2,665 1,251 Interest on held-to-maturity securities: U. S. Treasury 1,817 1,006 3,524 1,611 U. S. Government agencies & corporations 5,274 4,856 10,823 9,882 Obligations of states & political subdivisions 2,141 1,682 4,293 3,445 Other - - - 2 Interest and dividends on available-for-sale securities 4,700 3,725 8,312 7,364 Interest on mortgages held for sale 455 613 866 1,045 -------- -------- -------- -------- Total interest revenue 76,176 68,108 149,268 134,922 -------- -------- -------- -------- INTEREST EXPENSE: Interest on deposits 34,088 28,878 66,745 57,585 Interest on federal funds purchased & securities sold under repurchase agreements 440 591 839 1,046 Other interest expense 818 1,456 1,665 2,852 -------- -------- -------- -------- Total interest expense 35,346 30,925 69,249 61,483 -------- -------- -------- -------- Net interest revenue 40,830 37,183 80,019 73,439 Provision for credit losses 2,168 3,060 3,649 4,504 -------- -------- -------- -------- Net interest revenue, after provision for credit losses 38,662 34,123 76,370 68,935 -------- -------- -------- -------- OTHER REVENUE: Mortgage lending 1,949 2,173 3,778 3,463 Trust income 544 660 1,298 1,247 Service charges 4,642 4,409 9,072 8,488 Security gains (losses), net 156 57 211 278 Life insurance income 949 1,057 1,999 1,990 Other 2,459 1,702 5,093 3,448 -------- -------- -------- -------- Total other revenue 10,699 10,058 21,451 18,914 -------- -------- -------- -------- OTHER EXPENSE: Salaries and employee benefits 15,054 12,988 30,657 28,687 Net occupancy expense 2,051 2,090 4,087 4,123 Equipment expense 2,744 2,400 5,552 4,717 Deposit insurance premiums 149 148 197 359 Other 11,144 9,153 21,810 18,559 -------- -------- -------- -------- Total other expense 31,142 26,779 62,303 56,445 -------- -------- -------- -------- Income before income taxes 18,219 17,402 35,518 31,404 Income tax expense 5,968 6,202 11,631 10,755 -------- -------- -------- -------- Net income $12,251 $11,200 $23,887 $20,649 ======== ======== ======== ======== Net income per share $0.55 $0.53 $1.06 $0.97 ======== ======== ======== ======== Dividends declared per common share $0.19 $0.17 $0.38 $0.34 ======== ======== ======== ======== <FN> See accompanying notes to consolidated condensed financial statements. 5 BANCORPSOUTH, INC. Consolidated Condensed Statements of Cash Flows (Unaudited) (In Thousands) Six Months Ended June 30 1997 1996 Net cash provided by operating activities $30,659 $27,281 -------- -------- Investing activities: Proceeds from calls and maturities of held-to-maturity securities 50,706 72,558 Proceeds from calls and maturities of available-for-sale securities 79,274 105,356 Proceeds from sales of available-for-sale securities 1,450 3,940 Purchases of held-to-maturity securities (51,057) (125,019) Purchases of available-for-sale securities (161,507) (116,590) Net (increase) decrease in short-term inves 78,400 29,250 Net increase in loans (85,684) (123,540) Purchases of premises and equipment (10,726) (13,585) Other (8,671) (3,936) -------- -------- Net cash used by investing activities (107,815) (171,566) -------- -------- Financing activities: Net increase in deposits 79,599 134,612 Net increase (decrease) in short-term borrowings and other liabilities (3,621) 13,422 Increase (decrease) in long-term debt (7,150) 8,064 Payment of cash dividends (8,536) (6,737) Exercise of stock options 137 96 Acquisition of treasury stock (1,366) (60) -------- -------- Net cash provided by financing activities 59,063 149,397 -------- -------- Increase in cash and cash equivalents (18,093) 5,112 Cash and cash equivalents at beginning of period 169,635 165,815 -------- -------- Cash and cash equivalents at end of period $151,542 $170,927 -------- -------- <FN> See accompanying notes to consolidated condensed financial statements. 6 BANCORPSOUTH, INC. Notes to Consolidated Condensed Financial Statements (Unaudited) NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION AND PRINCIPALS OF CONSOLIDATION The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the accounting policies in effect as of December 31, 1996, as set forth in the annual consolidated financial statements of BancorpSouth, Inc. (the "Company"), as of such date. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated condensed financial statements have been included and all such adjustment were of a normal recurring nature. The results of operations for the three-month and six-month periods ended June 30, 1997 are not necessarily indicative of the results to be expected for the full year. The consolidated condensed financial statements include the accounts of the Company and its wholly-owned subsidiary, BancorpSouth Bank (the "Bank") and the Bank's wholly-owned subsidiaries, Century Credit Life Insurance Company, West Tennessee Life Insurance Company, Personal Finance Corporation and TC Finance, Inc. Prior to June 20, 1997, Volunteer Bank ("VOL") and Bank of Mississippi ("BOM") were wholly-owned subsidiaries of the Company. On that date, VOL was merged with and into BOM and BOM's name was changed to BancorpSouth Bank. NOTE 2 - LOANS The composition of the loan portfolio by collateral type is detailed below: June 30 December 31 --------------------------- ----------- 1997 1996 1996 (in thousands) Commercial and agricultural 257,897 250,575 238,246 Consumer and installment 766,621 714,048 744,456 Real estate mortgage 1,483,492 1,385,486 1,407,841 Lease financing 155,223 132,809 149,104 Other 9,533 12,195 14,471 ---------- ---------- ---------- Total 2,672,766 2,495,113 2,554,118 ========== ========== ========== 7 The following table presents information concerning non-performing loans: June 30 December 31 1997 1996 (In thousands) Non-accrual loans 3,088 3,940 Loans 90 days or more past due 4,540 4,811 Restructured loans 660 77 ---------- ---------- Total non-performing loans 8,288 8,828 ========== ========== NOTE 3 - ALLOWANCE FOR CREDIT LOSSES The following schedule summarizes the changes in the allowance for credit losses for the periods indicated: Six month period Year ended ending June 30 December 31 ---------------------- ----------- 1997 1996 1996 (In thousands) Balance at beginning of period $37,272 $34,636 $34,636 Provision charged to expense 3,649 4,504 8,804 Recoveries 997 1,022 1,836 Loans charged off (3,793) (3,525) (8,004) Acquisitions 596 - - ---------- ---------- ---------- Balance at end of period $38,721 $36,637 $37,272 ========== ========== ========== NOTE 4 - BUSINESS COMBINATIONS On February 28, 1997, the Company completed its merger with Iuka Guaranty Bank ("IGB"). The Company issued approximately 1.2 million shares of common stock in the merger which was accounted for as a pooling of interests. As a result of this transaction, the Company restated its financial statements to include IGB as of January 1, 1997. Prior years' financial statements were not restated, as the changes would have been immaterial. NOTE 5 - PER SHARE DATA Net income per share is based on the weighted average number of shares of the Company's common stock outstanding and the assumed exercise of all outstanding stock options using the treasury stock method (22,465,698 and 21,216,528 shares for the three months ended June 30, 1997 and 1996, respectively; 22,475,421 and 21,216,942 shares for the six months ended June 30, 1997 and 1996, respectively). 8 NOTE 6 - RECENT PRONOUNCEMENTS In June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," which provides new accounting and reporting standards for sales, securitizations, servicing of financial assets and extinguishment of liabilities. The Company adopted this statement on January 1, 1997. The adoption of SFAS No. 125 did not have a material impact on the Company's consolidated financial statements. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides certain information concerning the consolidated financial condition and results of operations of the Company. This discussion should be read in conjunction with the unaudited consolidated condensed financial statements for the periods ended June 30, 1997 and 1996, found elsewhere in this report. RESULTS OF OPERATIONS Net Income The Company's net income for the second quarter of 1997 was $12.25 million compared to $11.2 million in the second quarter of 1996. For the first six months of 1997, net income was $23.89 million, an increase of 15.7% from $20.65 million for the same period of 1996. Net income per share was $0.55 for the second quarter of 1997 compared to $0.53 in 1996. For the first six months of 1997, earnings per share were $1.06, an increase of 9.3% from $0.97 for the first six months of 1996. The annualized returns on average assets for the second quarter of 1997 and 1996 were 1.29% and 1.31%, respectively. For the six months ended June 30, the annualized returns on average assets were 1.27% and 1.22% for 1997 and 1996, 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 $41.78 million for the three months ended June 30, 1997, compared to $38.14 million for the same period in 1996. For the six months ended June 30, 1997 and 1996, net interest revenue was $81.92 million and $75.38 million, respectively. Earning assets averaged $3.56 billion in the second quarter and $3.52 billion for the first six months of 1997, compared with $3.19 billion and $3.13 billion in the respective periods in 1996. Average interest-bearing liabilities were $3.00 billion in the second quarter and $2.97 billion for the first six months of 1997, compared with $2.70 billion and $2.67 billion in the respective periods in 1996. Net interest revenue, expressed as a percentage of average earning assets, was 4.71% for the second quarter of 1997 as compared to 4.80% for the same period of 1996 and 4.70% for the first six months of 1997 as compared to 4.84% for the same period of 1996. Provision 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 on the Company's current portfolio of loans. 10 The provision for credit losses totaled $2.17 million for the second quarter of 1997 compared to $3.06 million for the same period of 1996. For the six-month periods ended June 30, 1997 and 1996, the provision for credit losses totaled $3.65 million and $4.50 million, respectively. Other Revenue Other revenue for the quarter ended June 30, 1997, totaled $10.70 million compared to $10.06 million for the same period of 1996, a 6.4% increase. For the six months ended June 30, 1997 and 1996, other revenue was $21.45 million and $18.91 million, respectively, a 13.4% increase. The most significant change in other revenue was in mortgage lending where revenue of $3.78 million was recorded during the first six months of 1997 compared to $3.46 million in the same period of 1996. Service charges on deposit accounts for the first six months increased 6.9%. Net security gains were $211,000 for the first six months of 1997 compared to $278,000 for the same period in 1996. Other Expense Other expense totaled $31.14 million for the second quarter of 1997, a 16.3% increase from the same period of 1996. For the six months ended June 30, 1997, other expenses totaled $62.30 million, a 10.4% increase over 1996's other expense. Salaries and employee benefits for the first six months of 1997 show a 6.9% increase over the same period of 1996 while the second quarter of 1997 showed an increase in salaries and employee benefits of 15.9% compared to 1996. Deposit insurance was $197,000 for the six months ended 1997 compared to the same period last year of $359,000. Also included in other expense for the first six months of 1997 are amounts totaling $11,000 related to merger and acquisition activity compared to $577,000 in the same period for 1996. The other components of other expense reflect normal increases and general inflation in the cost of services and supplies purchased by the Company. Income Tax Income tax expense was $5.97 million and $6.20 million for the second quarters of 1997 and 1996, respectively. For the six-month period ended June 30, 1997, income tax expense was $11.63 million compared to $10.76 million for the same period in 1996. FINANCIAL CONDITION Earning Assets The percentage of earning assets to total assets measures the effectiveness of Management's efforts to invest available funds into the most efficient and profitable uses. Earning assets at June 30, 1997 were $3.53 billion or 92.5% of total assets, compared with $3.34 billion, or 92.5% at December 31, 1996. The securities portfolio is used to make various term investments, to provide a source of liquidity and to serve as collateral to secure certain types of deposits. Held-to-maturity securities at June 30, 1997, were $574.3 million compared with $530.1 million at the end of 1996, an 8.4% increase. Available for sale securities were $321.4 million at June 30, 1997, compared to $230.7 million at December 31, 1996. Proceeds from maturing investment securities have been used to fund the Company's loan growth. 11 The loan portfolio of the Company's bank subsidiary makes up the largest single component of the Company's earning assets. The Company's lending activities include both commercial and consumer loans. Loan originations are derived from a number of sources including direct solicitation by the Company's loan officers, real estate broker referrals, mortgage loan companies, 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. Loans, net of unearned discount, totaled $2.58 billion at June 30, 1997, which represents a 4.7% increase from the December 31, 1996 total of $2.47 billion. At June 30, 1997, the Company did not have any concentrations of loans in excess of 10% of total loans outstanding. Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. However, the Company does conduct business in a geographically concentrated area. The ability of the Company's borrowers to repay loans is to some extent dependent upon the economic conditions prevailing in its market area. In the normal course of business, management becomes aware of possible credit problems in which borrowers exhibit potential for the inability to comply with the contractual terms of their loans, but which do not currently meet the criteria for disclosure as problem loans. Historically, some of these loans are ultimately restructured or placed in non-accrual status. The Company's policy provides that loans, other than installment loans, are generally placed on non-accrual status if, in management's opinion, payment in full of principal or interest is not expected, or when payment of principal or interest is more than 90 days past due, unless the loans is both well secured and in the process of collection. Non-performing loans were 0.32% of all loans outstanding at June 30, 1997, compared to 0.36% at the end of 1996. Allowance for credit losses The Company attempts to maintain the allowance for credit losses at a level which, in the opinion of management, is adequate to meet the present and potential risks of losses on its current portfolio of loans. Management's judgement is based on a variety of factors that include examining potential losses in specific credits and considering the general risks associated with lending functions such as current and anticipated economic conditions, business trends in the Company's region and nationally, historical experience as related to losses, changes in the mix of the loan portfolio and credits which bear substantial risk of loss but which cannot be readily quantified. Material estimates that are particularly susceptible to significant change in the near term are a necessary part of this process. Future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as integral part of their examination process, periodically review the Company's allowance for credit losses. 12 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. Management does not believe the allowance for credit losses can be fragmented by category of loans with any precision that would be useful to investors but is doing so in this report only in an attempt to comply with disclosure requirements of regulatory agencies. The allocation of allowance by loan category is based in part on evaluations of specific loans' past history and on economic conditions within specific industries or geographical areas. Accordingly, since all of these conditions are subject to change, the allocation is not necessarily indicative of the breakdown of any future losses. The following table presents (a) the allocation of the allowance for credit losses by loan category and (b) the percentage of each category in the loan portfolio to total loans for the periods indicated. The following table provides an analysis of the allowance for credit losses for the periods indicated. Six months ended June 30 December 31 ------------------------ 1997 1996 1996 (in thousands) Balance, beginning of period 37,272 34,636 34,636 Loans charged off: Commercial and agricultural -221 -331 -1,197 Consumer & installment -167 -581 -5,969 Real estate mortgage -3,367 -2,609 -808 Lease financing -38 -4 -30 --------- --------- --------- Total loans charged off -3,793 -3,525 -8,004 --------- --------- --------- Recoveries: Commercial and agricultural 260 134 427 Consumer & installment 171 343 1,163 Real estate mortgage 527 543 241 Lease financing 39 2 5 --------- --------- --------- Total recoveries 997 1,022 1,836 --------- --------- --------- Net charge-offs -2,796 -2,503 -6,168 Provsion charged to operating expense 3,649 4,504 8,804 Acquistions 596 0 0 --------- --------- --------- Balance, end of period 38,721 36,637 37,272 ========= ========= ========= Average loans for period 2,552,720 2,374,429 2,410,746 ========= ========= ========= RATIOS: Net charge offs to average loans 0.11% 0.11% 0.26% ========= ========= ========= Deposits and Other Interest-bearing Liabilities Deposits originating within the communities served by the Bank continue to be the Company's primary source of funding its earning assets. Total deposits at the end of the second quarter were $3.34 billion as compared to $3.16 billion at December 31, 1996, representing a 5.7% increase. Non-interest bearing deposits declined by $20.4 million while interest bearing deposits grew $201.8 million. 13 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 June 30, 1997, the Company's Tier 1 capital and total capital, as a percentage of total risk- adjusted assets, was 12.69% and 13.94%, 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 8.87% at June 30, 1997, compared to the required minimum leverage capital ratio 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. 14 PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of shareholders of the Company was held on Tuesday, April 25, 1997. At this meeting, the following matters were voted upon by the Company's shareholders: (a) Election of Class II Directors S. H. Davis, Hassell H. Franklin, Fletcher H.Goode, Travis E. Staub and Lowery A. Woodall were elected to serve as Class II directors of the Company until the annual meeting of shareholders in 1999 or until their respective successors are elected and qualified. The vote was as follows: Votes Cast Votes Cast Abstentions/ in Favor Against or Withheld Non Votes NAME S. H. Davis 16,716,595 101,467 0 Hassell H. Franklin 16,717,557 100,505 0 Fletcher H. Goode, M.D. 16,639,200 178,862 0 Travis E. Staub 16,723,877 94,185 0 Lowery A. Woodall 16,720,985 97,077 0 The following directors continue in office following the meeting: NAME Term Expires Aubrey Burns Patterson 1998 Frank A. Riley 1998 Dr. Andrew R. Townes 1998 J. Louis Griffin, Jr. 1998 A. Douglas Jumper 1999 T. O. Lashlee 1999 W. G. Holliman, Jr. 1999 Alan W. Perry 1999 (b) Selection of Independent Auditors The shareholders of the Company ratified the appointment of KPMG Peat Marwick LLP as the Company's independent auditors for the fiscal year ended December 31, 1997 by the following vote: Votes Cast Votes Cast Abstentions/ in Favor Against or Withheld Non Votes 16,998,618 49,953 62,622 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (b)No reports on Form 8-K were filed during the quarter ended June 30, 1997. 16 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: August 6, 1997 /S/ L. Nash Allen, Jr. -------------------------- L. Nash Allen, Jr. Treasurer and Chief Financial Officer