<PAGE 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, 1999
-------------------------------------------
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)
662/680-2000
- --------------------------------------------------------------------------
(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 August 10, 1999, the registrant had outstanding 57,238,854 shares of
common stock, par value $2.50 per share.
<PAGE 2>
BANCORPSOUTH, INC.
CONTENTS
PART I. Financial Information Page
ITEM 1 Financial Statements (unaudited)
Consolidated Condensed Balance Sheets
June 30, 1999 and December 31, 1998.................... 4
Consolidated Condensed Statements of Income and
Comprehensive Income (Loss)
Three and Six Months Ended June 30, 1999 and 1998...... 5
Consolidated Condensed Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998................ 6
Notes to Consolidated Condensed Financial Statements... 7
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 12
ITEM 3 Quantitative and Qualitative Disclosures About
Market Risk............................................ 19
PART II. Other Information
ITEM 2 Changes in Securities and Use of Proceeds.............. 20
ITEM 4 Matters Submitted to a Vote of Security Holders........ 20
ITEM 6 Exhibits and Reports on Form 8-K ...................... 21
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Report may not be based on
historical facts and are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1993, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking
statements may be identified by reference to a future period(s) or by the use
of forward-looking terminology, such as "anticipate," "believe," "estimate,"
"expect," "may," "might," "will," and "would." These forward-looking
statements include, without limitation, those relating to the Company's
liquidity, lending policy, capital resources, acquisitions and Year 2000
compliance. Actual results could differ materially from those indicated in
such forward-looking statements due to a variety of factors. These factors
include, but are not limited to, economic conditions, government fiscal and
monetary policies, prevailing interest rates, effectiveness of the Company's
interest rate hedging strategies, laws and regulations affecting financial
institutions (including regulatory fees and capital requirements), ability of
the Company to effectively service loans, ability of the Company to identify
and integrate acquisitions and investment opportunities, changes in the
Company's operating or expansion strategy, geographic concentrations of
assets, availability of and costs associated with obtaining adequate and
timely sources of liquidity, dependence on existing sources of funding,
changes in consumer preferences, competition from other financial services
companies, Year 2000 compliance, other factors generally understood to affect
<PAGE 3>
the financial results of financial service companies and other risks detailed
from time to time in the Company's press releases and filings with the
Securities and Exchange Commission.
<PAGE 4>
PART I
FINANCIAL INFORMATION
BANCORPSOUTH, INC.
Consolidated Condensed Balance Sheets
(Unaudited)
(In Thousands)
June 30, December 31,
1999 1998
- ----------- -----------
ASSETS
Cash and due from banks $162,137 $179,909
Interest bearing deposits with other banks 13,597 8,377
Held-to-maturity securities, at amortized cost 840,834 647,846
Available-for-sale securities, at fair market value 501,980 587,456
Federal funds sold 32,000 123,210
Loans 3,875,294 3,676,544
Less: Unearned discount 82,285 94,147
Allowance for credit losses 54,004 51,084
----------- -----------
Net loans 3,739,005 3,531,313
Mortgages held for sale 50,312 63,354
Premises and equipment, net 128,588 128,071
Other assets 135,543 113,318
----------- -----------
TOTAL ASSETS $5,603,996 $5,382,854
=========== ===========
LIABILITIES
Deposits:
Demand: Non-interest bearing $666,711 $636,427
Interest bearing 1,098,397 1,077,828
Savings 835,258 814,924
Time 2,100,262 2,058,153
----------- -----------
Total deposits 4,700,628 4,587,332
Short-term borrowings 190,142 64,554
Long-term debt 165,877 182,720
Other liabilities 67,543 80,682
----------- -----------
TOTAL LIABILITIES 5,124,190 4,915,288
SHAREHOLDERS' EQUITY
Common stock 143,261 143,261
Capital surplus 90,858 91,130
Accumulated other comprehensive income 3,098 11,174
Retained earnings 243,347 223,356
Less cost of shares held in treasury (758) (1,355)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 479,806 467,566
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,603,996 $5,382,854
=========== ===========
<FN>
See accompanying notes to consolidated condensed financial statements.
<PAGE 5>
BANCORPSOUTH, INC.
Consolidated Condensed Statements of Income and Comprehensive Income (Loss)
(Unaudited)
(In thousands except for per share amounts)
Three months ended Six months ended
----------------------- ------------------------
June 30 June 30
1999 1998 1999 1998
---------- ---------- ----------- -----------
INTEREST REVENUE:
Interest & fees on loans $81,156 $77,876 $160,472 $153,908
Deposits with other banks 114 166 265 296
Interest on federal funds sold 923 1,219 2,643 1,843
Interest on held-to-maturity securities:
U. S. Treasury 1,598 1,660 3,200 3,381
U. S. Government agencies & corporations 7,133 7,750 12,493 14,568
Obligations of states & political subdivisions 2,589 2,408 5,229 4,684
Interest and dividends on available-for-sale securities 6,828 8,395 14,528 16,934
Interest on mortgages held for sale 858 938 1,783 1,604
---------- ---------- ----------- -----------
Total interest revenue 101,199 100,412 200,613 197,218
---------- ---------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits 44,042 45,740 87,690 89,280
Interest on short-term borrowings 922 613 1,535 1,283
Other interest expense 2,742 3,039 5,590 5,842
---------- ---------- ----------- -----------
Total interest expense 47,706 49,392 94,815 96,405
---------- ---------- ----------- -----------
Net interest revenue 53,493 51,020 105,798 100,813
Provision for credit losses 3,607 3,443 6,670 7,174
Net interest revenue, after provision for
---------- ---------- ----------- -----------
credit losses 49,886 47,577 99,128 93,639
---------- ---------- ----------- -----------
OTHER REVENUE:
Mortgage lending 4,500 3,135 9,335 5,570
Trust income 872 840 1,753 1,701
Service charges 6,216 5,861 11,918 11,709
Security gains (losses), net (280) 8 4,008 175
Life insurance income 973 910 1,944 1,728
Other 7,202 5,625 13,622 11,998
---------- ---------- ----------- -----------
Total other revenue 19,483 16,379 42,580 32,881
---------- ---------- ----------- -----------
OTHER EXPENSE:
Salaries and employee benefits 22,214 19,340 43,572 39,460
Net occupancy expense 2,914 2,577 5,776 5,271
Equipment expense 4,069 3,828 8,332 7,615
Telecommunications 1,538 1,175 2,936 2,344
Contributions - - 4,146 -
Other 14,336 12,494 29,208 24,121
---------- ---------- ----------- -----------
Total other expense 45,071 39,414 93,970 78,811
---------- ---------- ----------- -----------
Income before income taxes 24,298 24,542 47,738 47,709
Income tax expense 7,848 8,261 14,423 16,006
---------- ---------- ----------- -----------
Net income 16,450 16,281 33,315 31,703
Other comprehensive income (loss) (1,472) 803 (8,076) 807
---------- ---------- ----------- -----------
Comprehensive income $14,978 $17,084 $25,239 $32,510
========== ========== =========== ===========
Earnings per share: Basic $0.29 $0.28 $0.58 $0.56
========== ========== =========== ===========
Diluted $0.29 $0.28 $0.58 $0.55
========== ========== =========== ===========
Dividends declared per common share $0.12 $0.11 $0.24 $0.22
========== ========== =========== ===========
<FN>
See accompanying notes to consolidated condensed financial statements.
<PAGE 6>
BANCORPSOUTH, INC.
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(In Thousands)
Six Months Ended
June 30,
--------------------------
1999 1998
---------- ----------
---------- ----------
Net cash provided by operating activities $51,500 $35,576
Investing activities:
Proceeds from calls and maturities of
held-to-maturity securities 124,567 186,131
Proceeds from calls and maturities of
available-for-sale securities 240,967 84,189
Proceeds from sales of
available-for-sale securities 11,325 26,600
Purchases of held-to-maturity securities (317,776) (430,932)
Purchases of available-for-sale securities (175,431) (111,238)
Net (increase) decrease in short-term investments 91,210 (61,386)
Net increase in loans (212,027) (241,584)
Purchases of premises and equipment (9,282) (11,601)
Other (17,633) (15,404)
---------- ----------
Net cash used by investing activities (264,080) (575,225)
---------- ----------
Financing activities:
Net increase in deposits 113,296 433,579
Net decrease in short-term
borrowings and other liabilities 11,418 (128,499)
Increase (decrease) in long-term debt 88,156 119,389
Payment of cash dividends (12,893) (11,065)
Payment of cash dividends (85)
Exercise of stock options 51 124
---------- ----------
Net cash provided by financing activities 200,028 413,443
---------- ----------
Decrease in cash and cash equivalents (12,552) (126,206)
Cash and cash equivalents at beginning of
period 188,286 322,187
---------- ----------
Cash and cash equivalents at end of period $175,734 $195,981
========== ==========
<FN>
See accompanying notes to consolidated condensed financial statements.
<PAGE 7>
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, 1998, 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 adjustments were of a normal recurring nature. The results of operations
for the three and six month periods ended June 30, 1999 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, Personal Finance Corporation, BancorpSouth Insurance Services of
Mississippi, Inc., BancorpSouth Insurance Services of Tennessee, Inc.,
BancorpSouth Insurance Services of Alabama, Inc. and BancorpSouth Investment
Services, Inc.
NOTE 2 - LOANS
The composition of the loan portfolio by collateral type is detailed
below:
June 30, December 31,
----------------------------- ---------------
1999 1998 1998
------------- ------------- ---------------
(in thousands)
Commercial and agricultural $382,344 $394,244 $395,514
Consumer and installment 942,919 914,998 930,697
Real estate mortgage:
1-4 Family 965,515 895,028 916,909
Other 1,335,795 1,107,385 1,196,471
Lease financing 221,363 193,014 210,559
Other 27,358 22,384 26,394
----------- ----------- -----------
Total $3,875,294 $3,527,053 $3,676,544
=========== =========== ===========
<PAGE 8>
The following table presents information concerning non-performing loans:
June 30, December 31,
1999 1998
---------- -------------
(In thousands)
Non-accrual loans $4,361 $6,629
Loans 90 days or more past due 9,231 10,308
Restructured loans 103 1,038
---------- -------------
Total non-performing loans $13,695 $17,975
========== =============
NOTE 3 - ALLOWANCE FOR CREDIT LOSSES
The following schedule summarizes the changes in the allowance for credit
losses for the periods indicated:
Year ended
Six month periods ended June 30, December 31,
------------------------------- ------------
1999 1998 1998
---------- ---------- ----------
(In thousands)
Balance at beginning of period $51,084 $44,238 $44,238
Provision charged to expense 6,670 7,174 16,080
Recoveries 1,017 1,433 2,774
Loans charged off (4,767) (6,138) (13,160)
Acquisitions - 1,152 1,152
-------- ---------- ----------
Balance at end of period $54,004 $47,859 $51,084
======== ========== ==========
<PAGE 9>
NOTE 4 - PER SHARE DATA
The computation of basic earnings per share is based on the weighted
average number of common shares outstanding. The computation of diluted
earnings per share is based on the weighted average number of common shares
outstanding plus the shares resulting from the assumed exercise of all
outstanding stock options using the treasury stock method. The following
table provides a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the periods as shown.
Three Months Ended June 30,
-------------------------------------------------------------------------------
1999 1998
---------------------------------------- -------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- -------- ----------- ------------- --------
Basic EPS (In thousands, except per share amounts)
Income available to
common shareholders $16,450 57,120 $0.29 $16,281 57,147 $0.28
======= =======
Effect of dilutive stock
options - 415 - 613
--------- ---------- --------- --------
Diluted EPS
Income available to
common shareholders
plus assumed exercise $16,450 57,535 $0.29 $16,281 57,760 $0.28
========= ========== ======= ======== ======== =======
Six Months Ended June 30,
------------------------------------------------------------------------------
1999 1998
--------------------------------------- -------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- -------- ----------- ------------- --------
Basic EPS (In thousands, except per share amounts)
Income available to
common shareholders $33,315 57,101 $0.58 $31,703 56,526 $0.56
======= =======
Effect of dilutive stock
options 428 621
--------- ---------- --------- --------
Diluted EPS
Income available to
common shareholders
plus assumed exercise $33,315 57,529 $0.58 $31,703 57,147 $0.55
========= ========== ======= ======== ======== =======
<PAGE 10>
NOTE 5 - COMPREHENSIVE INCOME
The following table presents the components of other comprehensive income
and the related tax effects allocated to each component for the periods
indicated.
Three months ended June 30,
-------------------------------------------------------------
1999 1998
-------------------------------- ----------------------------
Before Tax Net Before Tax Net
tax (expense) of tax tax (expense) of tax
amount benefit amount amount benefit amount
(In thousands)
Unrealized gains on securities:
Unrealized gains (losses) arising
during holding period ($2,714) $1,038 ($1,676) $1,300 ($497) $803
Less: Reclassification adjustment
for gains realized in net income 331 (127) $204 - - -
-------- ------- -------- ------- ------ ------
Other Comprehensive Income (Loss) ($2,383) $911 ($1,472) $1,300 ($497) $803
======== ======= ======== ======= ====== ======
Six months ended June 30,
-------------------------------------------------------------
1999 1998
------------------------------- ----------------------------
Before Tax Net Before Tax Net
tax (expense) of tax tax (expense) of tax
amount benefit amount amount benefit amount
(In thousands)
Unrealized gains on securities:
Unrealized gains (losses) arising
during holding period ($9,144) $3,497 ($5,647) $1,466 ($561) $905
Less: Reclassification adjustment
for gains realized in net income (3,934) 1,505 ($2,429) (159) 61 ($98)
-------- ------- -------- ------- ------ ------
Other Comprehensive Income (Loss) ($13,078) $5,002 ($8,076) $1,307 ($500) $807
======== ======= ======== ======= ====== ======
NOTE 6 - BUSINESS COMBINATIONS
On February 26, 1999, the Company completed its merger with The HomeBanc
Corporation. The Company issued approximately 2.1 million shares of common
stock in the merger that was accounted for as a pooling of interests. The
Company's financial statements for all periods presented include the
consolidated accounts of The HomeBanc Corporation.
On June 30, 1999, the Company completed its merger with the Stewart Sneed
Hewes Group. The Company issued approximately 1.3 million shares of common
stock in the merger that was accounted for as a pooling of interests. The
Company's financial statements for all periods presented include the
consolidated accounts of the Stewart Sneed Hewes Group.
NOTE 7 - RECENT PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended by SFAS No.
137, established accounting and reporting standards for derivative instruments
and hedging activities and requires recognition of all derivatives as either
assets or liabilities measured at fair value. This statement will be adopted
<PAGE 11>
for the year 2001 and is not expected to have a material effect on the
Company's financial condition or results of operations.
NOTE 8 - STOCK SPLIT
A two-for-one stock split effected in the form of a 100% stock dividend
was paid on May 15, 1998. Certain 1998 information relating to earnings per
share, dividends per share and other share data has been retroactively
adjusted to reflect this stock split.
NOTE 9 - SEGMENT REPORTING
The Company's principal activity is community banking, which includes
providing a full range of deposit products, commercial loans and consumer
loans. General corporate and other includes leasing, mortgage lending, trust
services, credit card activities, insurance services and other activities not
allocated to community banking.
Results of operations and selected financial information by operating
segment for the three month periods ended June 30, 1999 and 1998 are presented
below:
Community Banking General Corporate Total
----------------- ----------------- -----------------
Three Months Ended June 30, 1999 (In thousands)
Results of Operations
Net interest revenue $ 40,500 $12,993 $53,493
Provision for credit losses 3,016 591 3,607
------------ ------------ ------------
Net interest income after provision for credit losses 37,484 12,402 49,886
Other revenue 9,336 10,147 19,483
Other expense 34,205 10,866 45,071
------------ ------------ ------------
Income before income taxes 12,615 11,683 24,298
Income taxes 4,075 3,773 7,848
------------ ------------ ------------
Net income 8,540 7,910 16,450
Selected Financial Information
Identifiable Assets 5,006,516 597,480 5,603,996
Depreciation & amortization 3,496 386 3,882
Three Months Ended June 30, 1998
Results of Operations
Net interest revenue $ 38,599 $12,421 $51,020
Provision for credit losses 3,046 397 3,443
------------ ------------ ------------
Net interest income after provision for credit losses 35,553 12,024 47,577
Other revenue 8,007 8,372 16,379
Other expense 29,866 9,548 39,414
------------ ------------ ------------
Income before income taxes 13,694 10,848 24,542
Income taxes 4,610 3,651 8,261
------------ ------------ ------------
Net income 9,084 7,197 16,281
Selected Financial Information
Identifiable Assets 4,774,710 547,699 5,322,409
Depreciation & amortization 3,204 365 3,569
<PAGE 12>
Results of operations and selected financial information by operating
segment for the six month periods ended June 30, 1999 and 1998 are presented
below:
Community Banking General Corporate Total
----------------- ----------------- -----------------
Six Months Ended June 30, 1999 (In thousands)
Results of Operations
Net interest revenue $ 79,470 $26,328 $105,798
Provision for credit losses 5,457 1,213 6,670
------------ ------------ ------------
Net interest income after provision for credit losses 74,013 25,115 99,128
Other revenue 22,377 20,203 42,580
Other expense 72,801 21,169 93,970
------------ ------------ ------------
Income before income taxes 23,589 24,149 47,738
Income taxes 7,127 7,296 14,423
------------ ------------ ------------
Net income 16,462 16,853 33,315
Selected Financial Information
Identifiable Assets 5,006,515 597,481 5,603,996
Depreciation & amortization 7,101 752 7,853
Six Months Ended June 30, 1998
Results of Operations
Net interest revenue $ 75,840 $24,973 $100,813
Provision for credit losses 5,783 1,391 7,174
------------ ------------ ------------
Net interest income after provision for credit losses 70,057 23,582 93,639
Other revenue 16,823 16,058 32,881
Other expense 60,305 18,506 78,811
------------ ------------ ------------
Income before income taxes 26,575 21,134 47,709
Income taxes 8,916 7,090 16,006
------------ ------------ ------------
Net income 17,659 14,044 31,703
Selected Financial Information
Identifiable Assets 4,774,710 547,699 5,322,409
Depreciation & amortization 6,465 671 7,136
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, 1999 and 1998,
found elsewhere in this report.
RESULTS OF OPERATIONS
- ---------------------
Net Income
- ----------
The Company's net income for the second quarter of 1999 was $16.45
million, an increase of 1.0% from $16.28 million in the second quarter of
1998. For the first six months of 1999, net income was $33.32 million, an
increase of 5.1% from $31.70 million for the same period in 1998. Basic and
diluted earnings per common share for the second quarter of 1999 were $0.29,
compared to basic and diluted earnings per common share of $0.28 for the same
period of 1998. For the six months ended June 30, 1999, basic and diluted
earnings per share were $0.58 compared to basic earnings per share of $0.56
and diluted earnings per share of $0.55 for the first six months of 1998. The
<PAGE 13>
annualized returns on average assets for the second quarter of 1999 and 1998
were 1.20% and 1.25%, respectively. For the six months ended June 30, 1999
and 1998, the annualized returns on average assets were 1.23% and 1.24%,
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 $54.41 million for the three months ended June
30, 1999, compared to $52.19 million for the same period in 1998, representing
an increase of 4.3%. For the first six months of 1999 and 1998, net interest
revenue was $108.58 million and $103.06 million, respectively, representing an
increase of 5.4%. Earning assets averaged $5.13 billion in the second quarter
of 1999, compared with $4.89 billion in the second quarter of 1998,
representing an increase of 4.9%. Earnings assets for the first six months
of 1999 averaged $5.09 billion compared to $4.80 in 1998, representing an
increase of 6.0%. Average interest-bearing liabilities were $4.33 billion in
the second quarter of 1999 compared with $4.16 billion in the second quarter
of 1998, representing an increase of 4.1%. Average interest-bearing
liabilities were $4.30 billion for the first six months of 1999 compared to
$4.09 billion for the same period in 1998, representing an increase of 5.1%.
Net interest revenue, expressed as a percentage of average earning
assets, was 4.26% for the second quarter of 1999 as compared to 4.28% for the
same period of 1998 and 4.30% for the first six months of 1999 compared to
4.33% for the same period in 1999.
Provision for Credit Losses
- ---------------------------
The provision for credit losses is the cost of providing an allowance or
reserve for estimated probable losses on loans. The amount for each
accounting period is dependent upon many factors, including loan growth, net
charge-offs, changes in the composition of the loan portfolio, delinquencies,
management's assessment of loan portfolio quality, the value of collateral
and general economic factors. The process of determining the adequacy of the
provision requires that management make material estimates and assumptions
that are particularly susceptible to significant change. Future additions to
the allowance may be necessary based upon 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 changes to the
allowance based on their judgments about information available to them at the
time of their examination.
The provision for credit losses totaled $3.61 million for the second
quarter of 1999 compared to $3.44 million for the same period of 1998,
representing an increase of 4.9%. For the six-month periods ended June 30,
1999 and 1998, the provision for credit losses totaled $6.67 million and
$7.17 million, respectively, representing a decrease of 7.0%. The decrease
in provision for the first six months of 1999 as compared to the same period
of 1998 reflects a corresponding decrease in net charge-offs during the first
six months of 1999 as compared to the same period in 1998.
<PAGE 14>
Other Revenue
- -------------
Other revenue for the quarter ended June 30, 1999, totaled $19.48
million compared to $16.38 million for the same period of 1998, an increase
of 19.0%. For the six months ended June 30, 1999 and 1998, other revenue was
$42.58 million and $32.88 million respectively. Revenue from mortgage
lending activities increased significantly during the second quarter and six
months ended June 30, 1999 when compared to the same periods of 1998. Market
conditions during the first six months of 1999 allowed for the recovery of
previously recorded impairment of $2.4 million related to the Company's
mortgage servicing rights.
The Company established a charitable foundation in the first quarter of
1999. Appreciated equity securities were contributed by the Company to
initially fund the foundation. This transaction resulted in one-time
securities gains of approximately $4.14 million reflected in the results for
the six months ended June 30, 1999.
Other Expense
- -------------
Other expense totaled $45.07 million for the second quarter of 1999, a
14.4% increase from $39.41 million the same period of 1998. For the six
months ended June 30, 1999, other expenses totaled $93.97 million, a 19.23%
increase from $78.81 million for the same period in 1999. A significant
component of this increase for the six months ended June 30, 1999, was the
contribution by the Company of appreciated equity securities with an aggregate
market value of approximately $4.15 million in connection with the Company's
establishment of a charitable foundation during the first quarter of 1999, as
discussed in "Other Revenue" above.
A significant change in other expense relates to the Company's stock
option plans, expense for which is reported in the Company's financial
statements under the line item "salaries and employee benefits". Certain of
the stock option plans contain a provision for stock appreciation rights
(SARs) which require the recognition of expense for Company stock price
appreciation or a reduction of expense in the event of a decline in the stock
price. As a result of an increase in the Company's stock price, expense of
approximately $1.2 million was recorded in the second quarter of 1999. This
compares to a reduction in expense of $417,000 during the second quarter of
1998. For the six months ended June 30, 1999, expense related to the
Company's stock option plans of $49,000 was recorded compared to a reduction
in expense of approximately $1.2 million during the first six months of 1998.
The Company also recorded merger-related expense of $1.2 million during
the first six months of 1999 related to the mergers with The HomeBanc
Corporation and the Stewart Sneed Hewes Group. The charge to operating
expense consisted of termination and change of control payments ($0.5
million), professional fees ($0.7 million) and miscellaneous cost ($0.05
million). At June 30, 1999, accrued merger-related expenses totaled
approximately $940,000 related to all recently completed mergers.
The other components of other expense reflect normal increases and
general inflation in the cost of services and supplies purchased by the
Company.
<PAGE 15>
Income Tax
- ----------
Income tax expense was $7.85 million and $8.26 million for the second
quarters of 1999 and 1998, respectively. For the six month period ended June
30, 1999, income tax expense was $14.42 million compared to $16.01 million
for the same period in 1998. The decrease for the first six months of 1999
was due to the $1.6 million tax benefit related to the establishment of a
charitable foundation discussed in "Other Revenue" and "Other Expense" above.
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, 1999 were $5.23
billion, or 93.4% of total assets, compared with $5.01 billion, or 93.1%, at
December 31, 1998.
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, 1999 were $840.8
million compared with $647.8 million at the end of 1998, a 29.8% increase.
Available-for-sale securities were $502.0 million at June 30, 1999, compared
to $587.5 million at December 31, 1998.
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 $3.79 billion at June 30, 1999, which represents a 5.9%
increase from the December 31, 1998 total of $3.58 billion.
At June 30, 1999, 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 because management
currently does not have serious doubt as to the borrowers' ability to comply
with the loan terms. 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 loan is both
<PAGE 16>
well secured and in the process of collection. Non-performing loans were
0.36% of all loans outstanding at June 30, 1999 and 0.50% at December 31,
1998.
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 estimated
probable losses on its current portfolio of loans. Management's judgement is
based on a variety of factors that include examining probable losses in
specific credits and considering the current risks associated with lending
functions such as current 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 an integral part of their examination process,
periodically review the Company's allowance for credit losses. These
agencies may require the Company to record changes 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 dates indicated.
June 30, December 31,
--------------------------------------------------------------- ----------------------------
1999 1998 1998
------------------------------ ------------------------------- ----------------------------
ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF
FOR LOANS TO FOR LOANS TO FOR LOANS TO
CREDIT LOSSES TOTAL LOANS CREDIT LOSSES TOTAL LOANS CREDIT LOSSES TOTAL LOANS
------------- -------------- ------------- ----------- ------------- -----------
(dollars in thousands)
Commercial and agricultural $4,406 9.87% $4,304 11.18% $3,989 10.76%
Consumer and installment 22,361 24.33% 18,423 25.94% 19,182 25.31%
Real estate mortgage 24,126 59.38% 22,376 56.78% 24,956 57.48%
Lease financing 2,934 5.71% 2,590 5.47% 2,802 5.73%
Other 177 0.71% 166 0.63% 155 0.72%
------------- -------------- ------------- ----------- ------------- -----------
Total $54,004 100.00% $47,859 100.00% $51,084 100.00%
============= ============== ============= =========== ============= ===========
<PAGE 17>
The following table provides an analysis of the allowance for credit
losses for the periods indicated.
Twelve months ended
Six months ended June 30, December 31,
------------------------------
1999 1998 1998
----------- ----------- -------------
(dollars in thousands)
Balance, beginning of period $51,084 $44,238 $44,238
Loans charged off:
Commercial and agricultural (114) (406) (1,493)
Consumer & installment (4,338) (4,441) (9,462)
Real estate mortgage (300) (1,247) (2,130)
Lease financing (15) (44) (75)
----------- ----------- -------------
Total loans charged off (4,767) (6,138) (13,160)
----------- ----------- -------------
Recoveries:
Commercial and agricultural 141 274 422
Consumer & installment 773 959 2,029
Real estate mortgage 83 181 303
Lease financing 20 19 20
----------- ----------- -------------
Total recoveries 1,017 1,433 2,774
----------- ----------- -------------
Net charge-offs (3,750) (4,705) (10,386)
Provision charged to operating expense 6,670 7,174 16,080
Acquisitions - 1,152 1,152
----------- ----------- -------------
Balance, end of period $54,004 $47,859 $51,084
=========== =========== =============
Average loans for period $3,675,447 $3,336,436 $3,424,008
=========== =========== =============
RATIOS:
Net charge offs to average loans-annualized 0.20% 0.28% 0.30%
=========== =========== =============
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 of 1999 were $4.70 billion as
compared to $4.59 billion at December 31, 1998, representing a 2.5% increase.
Non-interest bearing deposits increased by $30.3 million, or 4.8%, while
interest-bearing deposits grew $83.0 million, or 2.1% from December 31, 1998
to June 30, 1999.
LIQUIDITY
- ---------
Liquidity is the ability of the Company to fund the needs of its bor
rowers, depositors and creditors. The Company's traditional sources of
<PAGE 18>
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. These
requirements apply a variety of weighting factors, which vary according to
the level of risk associated with the particular assets. At June 30, 1999,
the Company's Tier 1 capital and total capital, as a percentage of total risk-
adjusted assets, were 11.63% and 12.92%, respectively. Both ratios exceed
the required minimum levels for these ratios of 4.0% and 8.0%, respectively.
In addition, the Company's Tier 1 leverage capital ratio (Tier 1 capital
divided by total assets, less goodwill) was 8.41% at June 30, 1999, compared
to the required minimum Tier 1 leverage capital ratio of 3%.
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.
YEAR 2000
- ---------
The Company is addressing issues associated with the potential inability
of computer systems, and technology or equipment utilizing embedded computer
chips, to properly recognize and process date-sensitive information relating
to dates after December 31, 1999. Many computer programs were designed to
utilize two digits, rather than four, in the date field, and may experience
system failures, interruptions or miscalculations when processing information
relating to the Year 2000 and beyond.
The Company is utilizing both internal and external resources to
identify, correct or reprogram, and test its systems for 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 to remediate
potential Year 2000 compliance issues. The Company's internal efforts
address information technology systems and functions with embedded computer
chips. Functions with embedded computer chips include such things as vaults,
security systems, elevators and heating and cooling systems. External
efforts deal with material business partners, including customers, vendors,
suppliers and utility providers. The Company is conducting its Year 2000
efforts in accordance with Federal Financial Institutions Examination Council
(FFIEC) guidelines. Reports are given to senior management and to the Board
of Directors. The Company met FFIEC guidelines for financial institutions
by substantially completing testing of its in-house mission critical systems
by December 31, 1998 and met the March 31, 1999 guideline for testing third
party service bureau systems. The Company will continue testing throughout
1999. The Company believes that with the modifications of existing systems
and the conversion to new systems as discussed above, the remaining Year 2000
compliance issues will be resolved on a timely basis and any related costs
<PAGE 19>
will not have a material impact on the Company's operations, cash flows or
financial condition in future periods.
As of June 30, 1999, the Company had incurred a total of approximately
$850,000 in additional external costs related to Year 2000 issues, and
anticipates incurring an additional approximately $600,000 in external costs.
The Company is expensing all costs associated with the Year 2000 as the costs
are incurred. Such costs are primarily related to third party programming
resources that are used for all mainframe-based application modifications.
In 1998, the Company completed a major system upgrade of its core computer
mainframe systems and application subsystems, which was designed in part to
address Year 2000 compliance with respect to these in-house mission critical
applications. The Company anticipates that this system upgrade will result
in approximately $850,000 in additional annual software maintenance. The
Company do not separately track the internal cost incurred related to Year
2000 compliance efforts. Such costs are principally the related payroll
costs for the Company's information systems group.
Year 2000 related risks include the Company's inability to access and
process data and information, excessive cash withdrawals at year-end 1999,
out-of-service ATMSs, failure of time locks and security systems, the
inability to meet customers' demand for cash and the inability to process
electronic transactions for the Company and its customers. These risks also
include those associated with the Company's business partners, such as
customers, vendors, suppliers and utility providers, and their ability to
effectively address their own Year 2000 issues, including failure of voice
and data communication systems, failure of utility providers such as water,
gas and electricity, delayed cash couriers and inaccessibility of external
data sources. The Company will continue to evaluate the most likely
reasonably likely worst case scenario related to the Year 2000.
The Company has developed contingency plans to address Year 2000 issues
that may arise. The Company intends to continue refining and testing these
plans. The Company's contingency plans include items such as having an
alternative source of power for our corporate operations center in the event
that commercial power sources experience outages, providing paper based
reports to our network of branches to allow customer service in the event of
telephone or data line outages, and the use of remote item processing sites
in dispersed geographical areas to allow for continued processing of customer
transactions. There can be no assurance that the Company's Year 2000
remediation efforts will be timely or successful, or that its Year 2000
contingency plans will prevent or mitigate malfunctions, disruptions or
system failure related to Year 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the three months ended June 30, 1999, there were no material
changes to the quantitative and qualitative disclosures about market risks
presented in the Company's Annual Report or Form 10-K for the year ended
December 31, 1998.
<PAGE 20>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- ----------------------------------------------------
In April 1999, the Company conveyed an aggregate of 5,451 shares of the
Company's common stock to non-employee directors of the Company and
BancorpSouth Bank under the Company's Director Stock Plan, in payment of
director fees. These shares were conveyed in reliance on an exemption from
registration contained in Section 4(2) of the Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
The annual meeting of shareholders of the Company was held on Tuesday,
April 27, 1999. At this meeting, the following matters were voted upon by
the Company's shareholders:
(a) Election of Class II Directors
- ------------------------------
W. G. Holliman, Jr., A. Douglas Jumper, Turner O. Lashlee and Alan W.
Perry were elected to serve as Class II directors of the Company until the
annual meeting of shareholders in 2002 or until their respective successors
are elected and qualified. The vote was as follows:
Votes Cast Votes Cast Abstentions/
Name in Favor Against or Withheld Non Votes
------------ ------------------- ------------
W. G. Holliman, Jr. 44,566,148 291,528 0
A. Douglas Jumper 44,562,915 294,761 0
Turner O. Lashlee 44,552,193 305,483 0
Alan W. Perry 44,375,342 482,334 0
The following directors continued in office following the meeting:
Name Term Expires
- ---- ------------
S. H. Davis 2000
Hassell H. Franklin 2000
Fletcher H. Goode, M.D. 2000
Travis E. Staub 2000
Lowery A. Woodall 2000
Aubrey B. Patterson 2001
Andrew R. Townes, D.D.S. 2001
<PAGE 21>
(b) Selection of Independent Auditors
---------------------------------
The shareholders of the Company ratified the appointment of KPMG LLP as
the Company's independent auditors for the fiscal year ending December 31,
1999 by the following vote:
Votes Cast Votes Cast Abstentions/
in Favor Against or Withheld Non Votes
---------- ------------------- ------------
44,487,837 168,546 201,293
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27.1) Financial Data Schedule for the periods ended June 30, 1999.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1999.
<PAGE 22>
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 13, 1999 /S/ L. Nash Allen, Jr.
----------------------------------
L. Nash Allen, Jr.
Treasurer and
Chief Financial Officer