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 September 30, 1999
OR
/ / QUARTERLY 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
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BancorpSouth, Inc.
(Exact name of registrant as specified in its charter)
Mississippi
64-0659571
(State or other jurisdiction of
incorporation or organization)
(IRS Employer 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)
NOT APPLICABLE
(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 November 10, 1999, the registrant had outstanding 57,190,175 shares of
common stock, par value $2.50 per share.
BANCORPSOUTH, INC.
CONTENTS
PART I. Financial Information Page
ITEM 1. Financial Statements (unaudited)
Consolidated Condensed Balance Sheets
September 30, 1999 and December 31, 1998 3
Consolidated Condensed Statements of Income and
Comprehensive Income
Three and Nine months ended
September 30, 1999 and 1998 4
Consolidated Condensed Statements of Cash Flows
Nine months ended September 30, 1999 and 1998 5
Notes to Consolidated Condensed Financial
Statements 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 18
PART II. Other Information
ITEM 6. Exhibits and Reports on Form 8-K 19
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, allowance for
loan losses, 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, changes in 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
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 3>
PART I
FINANCIAL INFORMATION
BANCORPSOUTH, INC.
Consolidated Condensed Balance Sheets
(Unaudited)
September 30, December 31,
1999 1998
------------ ------------
(In Thousands)
ASSETS
Cash and due from banks $160,490 $179,909
Interest bearing deposits with other banks 13,116 8,377
Held-to-maturity securities, at amortized cost 816,336 647,846
Available-for-sale securities, at fair market value 460,370 587,456
Federal funds sold 71,500 123,210
Loans 4,013,141 3,676,544
Less: Unearned discount 79,376 94,147
Allowance for credit losses 55,253 51,084
------------ ------------
Net loans 3,878,512 3,531,313
Mortgages held for sale 41,929 63,354
Premises and equipment, net 128,522 128,071
Other assets 138,629 113,318
------------ ------------
TOTAL ASSETS $5,709,404 $5,382,854
============ ============
LIABILITIES
Deposits:
Demand: Non-interest bearing $599,268 $636,427
Interest bearing 1,095,332 1,077,828
Savings 830,960 814,924
Time 2,206,840 2,058,153
------------ ------------
Total deposits 4,732,400 4,587,332
Short-term borrowings 251,347 64,554
Long-term debt 153,217 182,720
Other liabilities 84,035 80,682
------------ ------------
TOTAL LIABILITIES 5,220,999 4,915,288
SHAREHOLDERS' EQUITY
Common stock 143,261 143,261
Capital surplus 90,858 91,130
Accumulated other comprehensive income 1,843 11,174
Retained earnings 254,059 223,356
Less cost of shares held in treasury (1,616) (1,355)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 488,405 467,566
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,709,404 $5,382,854
============ ============
<FN>
See accompanying notes to consolidated condensed financial statements.
<PAGE 4>
BANCORPSOUTH, INC.
Consolidated Condensed Statements of Income and Comprehensive Income
(Unaudited)
Three months ended Nine months ended
September 30 September 30
------------------------- ---------------------------
1999 1998 1999 1998
---------- ----------- ------------ ------------
(In thousands except for per share amounts)
INTEREST REVENUE:
Interest & fees on loans $84,474 $80,198 $244,946 $234,106
Deposits with other banks 138 130 403 426
Interest on federal funds sold 417 901 3,060 2,744
Interest on held-to-maturity securities:
U. S. Treasury 1,152 1,650 4,352 5,031
U. S. Government agencies & corporations 7,937 6,389 20,430 20,957
Obligations of states & political subdivisions 2,390 2,420 7,619 7,104
Interest and dividends on available-for-sale securities 6,931 8,153 21,459 25,087
Interest on mortgages held for sale 884 996 2,667 2,600
---------- ----------- ------------ ------------
Total interest revenue 104,323 100,837 304,936 298,055
---------- ----------- ------------ ------------
INTEREST EXPENSE:
Interest on deposits 44,543 45,721 132,233 135,001
Interest on short-term borrowings 1,246 772 2,781 2,055
Other interest expense 3,868 3,029 9,458 8,871
---------- ----------- ------------ ------------
Total interest expense 49,657 49,522 144,472 145,927
---------- ----------- ------------ ------------
Net interest revenue 54,666 51,315 160,464 152,128
Provision for credit losses 4,112 5,089 10,782 12,263
---------- ----------- ------------ ------------
Net interest revenue, after provision for
credit losses 50,554 46,226 149,682 139,865
---------- ----------- ------------ ------------
OTHER REVENUE:
Mortgage lending 3,034 2,714 12,369 8,284
Trust income 1,050 918 2,803 2,619
Service charges 6,512 6,107 18,430 17,816
Security gains (losses), net 77 70 4,085 245
Life insurance income 1,016 951 2,960 2,679
Other 6,902 5,413 20,524 17,411
---------- ----------- ------------ ------------
Total other revenue 18,591 16,173 61,171 49,054
---------- ----------- ------------ ------------
OTHER EXPENSE:
Salaries and employee benefits 21,340 18,388 64,912 57,848
Net occupancy expense 3,071 2,874 8,847 8,145
Equipment expense 4,374 3,874 12,706 11,489
Telecommunications 1,311 1,187 4,247 3,531
Contributions - - 4,146 -
Other 12,526 13,756 41,734 37,877
---------- ----------- ------------ ------------
Total other expense 42,622 40,079 136,592 118,890
---------- ----------- ------------ ------------
Income before income taxes 26,523 22,320 74,261 70,029
Income tax expense 8,943 7,759 23,366 23,765
---------- ----------- ------------ ------------
Net income 17,580 14,561 50,895 46,264
Other comprehensive income (loss) 1,256 2,339 (9,331) 3,146
---------- ----------- ------------ ------------
Comprehensive income $18,836 $16,900 $41,564 $49,410
========== =========== ============ ============
Earnings per share: Basic $0.31 $0.26 $0.89 $0.82
========== =========== ============ ============
Diluted $0.31 $0.25 $0.88 $0.81
========== =========== ============ ============
Dividends declared per common share $0.12 $0.11 $0.36 $0.33
========== =========== ============ ============
<FN>
See accompanying notes to consolidated condensed financial statements.
<PAGE 5>
BANCORPSOUTH, INC.
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(In Thousands)
Nine Months Ended
September 30,
1999 1998
----------- ------------
Net cash provided by operating activities $90,596 $71,171
----------- ------------
Investing activities:
Proceeds from calls and maturities of
held-to-maturity securities 159,559 477,148
Proceeds from calls and maturities of
available-for-sale securities 293,353 115,083
Proceeds from sales of
held-to-maturity securities 9,040 -
Proceeds from sales of
available-for-sale securities 21,810 26,600
Purchases of held-to-maturity securities (337,489) (536,681)
Purchases of available-for-sale securities (197,972) (95,421)
Net decrease (increase) in short-term investments 51,710 (28,462)
Net increase in loans (354,268) (356,047)
Purchases of premises and equipment (13,380) (14,129)
Proceeds from sale of premises and equipment 1,193 986
Other (21,259) (44,068)
----------- ------------
Net cash used by investing activities (387,703) (454,991)
----------- ------------
Financing activities:
Net increase in deposits 145,068 249,984
Net increase (decrease) in short-term
borrowings and other liabilities 187,247 (116,536)
(Decrease) increase in long-term debt (29,503) 117,994
Acquisition of treasury stock (857) (603)
Payment of cash dividends (19,579) (15,972)
Exercise of stock options 51 130
----------- ------------
Net cash provided by financing activities 282,427 234,997
----------- ------------
Decrease in cash and cash equivalents (14,680) (148,823)
Cash and cash equivalents at beginning of
period 188,286 322,187
----------- ------------
Cash and cash equivalents at end of period $173,606 $173,364
=========== ============
<FN>
See accompanying notes to consolidated condensed financial statements.
<PAGE 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, 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 nine month periods ended September 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:
September 30, December 31,
--------------------------- ------------
1999 1998 1998
----------- ----------- ------------
(In thousands)
Commercial and agricultural $379,032 $411,504 $395,514
Consumer and installment 979,248 948,006 930,697
Real estate mortgage:
1-4 Family 1,005,741 906,938 916,909
Other 1,383,016 1,147,551 1,196,471
Lease financing 238,910 197,108 210,559
Other 27,194 27,706 26,394
----------- ----------- ------------
Total $4,013,141 $3,638,813 $3,676,544
=========== =========== ============
<PAGE 7>
The following table presents information concerning non-performing loans:
September 30, December 31,
1999 1998
------------- ------------
(In thousands)
Non-accrual loans $4,565 $6,629
Loans 90 days or more past due 11,108 10,308
Restructured loans 93 1,038
------------- ------------
Total non-performing loans $15,766 $17,975
============= ============
NOTE 3 - ALLOWANCE FOR CREDIT LOSSES
The following schedule summarizes the changes in the allowance for credit
losses for the periods indicated:
Nine month periods Year ended
Ended September 30, December 31,
----------------------------- -------------
1999 1998 1998
---------- ---------- -----------
(In thousands)
Balance at beginning of period $51,084 $44,238 $44,238
Provision charged to expense 10,782 12,263 16,080
Recoveries 1,509 2,305 2,774
Loans charged off (8,122) (9,423) (13,160)
Acquisitions - 1,152 1,152
---------- ---------- -----------
Balance at end of period $55,253 $50,535 $51,084
========== ========== ===========
<PAGE 8>
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 September 30,
----------------------------------------------------------------------------------------------------
1999 1998
--------------------------------------------------- -----------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- ------------- ------------ ----------- ------------- -----------
(In thousands, except per share amounts)
Basic EPS
Income available to
common shareholders $17,580 57,133 $0.31 $14,561 56,553 $0.26
=========== ==========
Effect of dilutive stock
options - 399 - 569
------------- ------------- ----------- -------------
Diluted EPS
Income available to
common shareholders
plus assumed exercise $17,580 57,532 $0.31 $14,561 57,122 $0.25
============= ============= ============ =========== ============= ===========
Nine Months Ended September 30,
----------------------------------------------------------------------------------------------------
1999 1998
--------------------------------------------------- -----------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- ------------- ------------ ----------- ------------- -----------
(In thousands, except per share amounts)
Basic EPS
Income available to
common shareholders $50,895 57,112 $0.89 $46,264 56,535 $0.82
=========== ==========
Effect of dilutive stock
options - 418 - 604
------------- ------------- ----------- -------------
Diluted EPS
Income available to
common shareholders
plus assumed exercise $50,895 57,530 $0.88 $46,264 57,139 $0.81
============= ============= ============ =========== ============= ===========
<PAGE 9>
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 September 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 $2,024 ($774) $1,250 $3,813 ($1,459) $2,354
Less: Reclassification adjustment
for gains realized in net income 10 (4) 6 (25) 10 (15)
----------- ----------- ---------- ----------- ----------- -----------
Other Comprehensive Income (Loss) $2,034 ($778) $1,256 $3,788 ($1,449) $2,339
=========== =========== ========== =========== =========== ===========
Nine months ended September 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 ($11,187) $4,279 ($6,908) $5,167 ($1,976) $3,191
Less: Reclassification adjustment
for gains realized in net income (3,924) 1,501 (2,423) (73) 28 (45)
----------- ----------- ---------- ----------- ----------- -----------
Other Comprehensive Income (Loss) ($15,111) $5,780 ($9,331) $5,094 ($1,948) $3,146
=========== =========== ========== =========== =========== ===========
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
for the year 2001 and is not expected to have a material effect on the
Company's financial condition or results of operations.
<PAGE 10>
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 September 30, 1999 and 1998 are presented
below:
General
Community Corporate
Banking and Other Total
------------- ----------- ------------
(In thousands)
Three Months Ended September 30, 1999
Results of Operations
Net interest revenue $41,247 $13,419 $54,666
Provision for credit losses 2,866 1,246 4,112
- ---------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 38,381 12,173 50,554
Other revenue 12,679 5,912 18,591
Other expense 34,272 8,350 42,622
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 16,788 9,735 26,523
Income taxes 5,660 3,283 8,943
- ---------------------------------------------------------------------------------------------------------------
Net income 11,128 6,452 17,580
Selected Financial Information
Identifiable assets 5,105,710 603,694 5,709,404
Depreciation & amortization 3,690 380 4,070
Three Months Ended September 30, 1998
Results of Operations
Net interest revenue $38,764 $12,551 $51,315
Provision for credit losses 4,787 302 5,089
- ---------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 33,977 12,249 46,226
Other revenue 11,237 4,936 16,173
Other expense 32,849 7,230 40,079
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 12,365 9,955 22,320
Income taxes 4,298 3,461 7,759
- ---------------------------------------------------------------------------------------------------------------
Net income 8,067 6,494 14,561
Selected Financial Information
Identifiable assets 4,619,639 544,703 5,164,342
Depreciation & amortization 3,233 315 3,548
<PAGE 11>
Results of operations and selected financial information by operating segment
for the nine month periods ended September 30, 1999 and 1998 are presented
below:
General
Community Corporate
Banking and Other Total
------------- ----------- ------------
(In thousands)
Nine Months Ended September 30, 1999
Results of Operations
Net interest revenue $120,654 $39,810 $160,464
Provision for credit losses 8,324 2,458 10,782
- ---------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 112,330 37,352 149,682
Other revenue 32,178 28,993 61,171
Other expense 105,227 31,365 136,592
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 39,281 34,980 74,261
Income taxes 12,359 11,007 23,366
- ---------------------------------------------------------------------------------------------------------------
Net income 26,922 23,973 50,895
Selected Financial Information
Identifiable Assets 5,091,735 617,669 5,709,404
Depreciation & amortization 10,760 1,162 11,922
Nine Months Ended September 30, 1998
Results of Operations
Net interest revenue $114,732 $37,396 $152,128
Provision for credit losses 10,570 1,693 12,263
- ---------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 104,162 35,703 139,865
Other revenue 25,211 23,843 49,054
Other expense 91,222 27,668 118,890
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 38,151 31,878 70,029
Income taxes 12,947 10,818 23,765
- ---------------------------------------------------------------------------------------------------------------
Net income 25,204 21,060 46,264
Selected Financial Information
Identifiable Assets 4,610,926 553,416 5,164,342
Depreciation & amortization 9,678 1,006 10,684
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 September 30, 1999 and
1998, found elsewhere in this report.
RESULTS OF OPERATIONS
- ---------------------
Net Income
- ----------
The Company's net income for the third quarter of 1999 was $17.58 million, an
increase of 20.7% from $14.56 million in the third quarter of 1998. For the
first nine months of 1999, net income was $50.90 million, an increase of 10.0%
from $46.26 million for the same period in 1998. Basic and diluted earnings
per common share for the third quarter of 1999 were $0.31, compared to basic
and diluted earnings per common share of $0.26 and $0.25, respectively, for
<PAGE 12>
the same period of 1998. For the nine months ended September 30, 1999, basic
earnings per share were $0.89 compared to basic earnings per share of $0.82
for the first nine months of 1998, while diluted earnings per share were $0.88
for the first nine months of 1999 compared to $0.81 for the first nine months
of 1998. The annualized returns on average assets for the third quarter of
1999 and 1998 were 1.25% and 1.12%, respectively. For the nine months ended
September 30, 1999 and 1998, the annualized returns on average assets were
1.23% and 1.20%, 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 $55.89 million for the three months ended September
30, 1999, compared to $52.26 million for the same period in 1998, representing
an increase of 7.0%. For the first nine months of 1999 and 1998, net
interest revenue was $164.48 million and $155.32 million, respectively,
representing an increase of 5.9%. Earning assets averaged $5.25 billion in
the third quarter of 1999, compared with $4.87 billion in the third quarter of
1998, representing an increase of 7.8%. Earnings assets for the first nine
months of 1999 averaged $5.15 billion compared to $4.82 billion for the same
period in 1998, representing an increase of 6.7%. Average interest-bearing
liabilities were $4.47 billion in the third quarter of 1999 compared with
$4.14 billion in the third quarter of 1998, representing an increase of 7.9%.
Average interest-bearing liabilities were $4.36 billion for the first nine
months of 1999 compared to $4.11 billion for the same period in 1998,
representing an increase of 6.1%.
Net interest revenue, expressed as a percentage of average earning assets, was
4.22% for the third quarter of 1999 as compared to 4.25% for the same period
of 1998, and 4.27% for the first nine months of 1999 as compared to 4.30% for
the same period in 1998.
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 for credit losses 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.
<PAGE 13>
The provision for credit losses totaled $4.11 million for the third quarter of
1999 compared to $5.09 million for the same period of 1998, representing a
decrease of 19.2%. For the nine month periods ended September 30, 1999 and
1998, the provision for credit losses totaled $10.78 million and $12.26
million, respectively, representing a decrease of 12.1%. The decrease in
provision for the third quarter and the first nine months of 1999 as compared
to the same periods of 1998 reflects the decrease in net charge-offs and the
decrease in non-performing loans during the third quarter and first nine
months of 1999 as compared to the same periods in 1998.
Other Revenue
- -------------
Other revenue for the quarter ended September 30, 1999, totaled $18.59 million
compared to $16.17 million for the same period of 1998, an increase of 15.0%.
For the nine months ended September 30, 1999 and 1998, other revenue was
$61.17 million and $49.05 million, respectively, representing an increase of
$12.12 million or 24.7%. Revenue from mortgage lending activities increased
11.8% and 49.3% during the three and nine months ended September 30, 1999 when
compared to the same periods of 1998. Market conditions during the first nine
months of 1999 allowed for the recovery of previously recorded impairment of
$3.0 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, which are reflected in the results for the
nine months ended September 30, 1999.
Other Expense
- -------------
Other expense totaled $42.62 million for the third quarter of 1999, a 6.3%
increase from $40.08 million for the same period of 1998. For the nine months
ended September 30, 1999, other expense totaled $136.59 million, a 14.88%
increase from $118.89 million for the same period in 1999. A significant
component of this increase for the nine months ended September 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 as
a component of the line item "salaries and employee benefits." Certain of the
Company's 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
Company's stock price. As a result of a decrease in the Company's stock
price, a reduction in salaries and employee benefits expense of approximately
$662,000 was recorded in the third quarter of 1999. This compares to a
reduction in expense of $1.6 million during the third quarter of 1998. For
the nine months ended September 30, 1999, a reduction in salaries and employee
benefits expense related to the Company's stock option plans of $613,000 was
recorded, compared to a reduction in expense of approximately $2.8 million
<PAGE 14>
during the first nine months of 1998.
The Company also recorded merger-related expense of $1.2 million during the
first nine 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 September 30,
1999, accrued merger-related expenses totaled approximately $557,000, which
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.
Income Tax
- ----------
Income tax expense was $8.94 million and $7.76 million for the third quarters
of 1999 and 1998, respectively. For the nine month period ended September 30,
1999, income tax expense was $23.37 million compared to $23.77 million for the
same period in 1998. The decrease for the first nine 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 September 30, 1999 were $5.34 billion, or
93.5% 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 September 30, 1999 were $816.3
million, compared with $647.8 million at the end of 1998, a 26.0% increase.
Available-for-sale securities were $460.4 million at September 30, 1999,
compared to $587.5 million at December 31, 1998, a 21.6% decrease.
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 $3.93 billion at September 30, 1999, which represents a 9.8%
increase from the December 31, 1998 total of $3.58 billion.
At September 30, 1999, the Company did not have any concentrations of loans in
<PAGE 15>
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 potential 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 well secured
and in the process of collection. Non-performing loans were 0.40% of all
loans outstanding at September 30, 1999 and 0.50% of all loans outstanding 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
allowance or 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.
September 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 $4,465 9.44% $4,206 11.31% $3,989 10.76%
Consumer and installment 22,532 24.40% 19,784 26.05% 19,182 25.31%
Real estate mortgage 25,048 59.53% 23,462 56.46% 24,956 57.48%
Lease financing 3,024 5.95% 2,923 5.42% 2,802 5.73%
Other 184 0.68% 160 0.76% 155 0.72%
------------- ----------- ------------- ----------- ------------- -----------
Total $55,253 100.00% $50,535 100.00% $51,084 100.00%
------------- ----------- ------------- ----------- ------------- -----------
<PAGE 16>
The following table provides an analysis of the allowance for credit losses
for the periods indicated.
Nine Months ended Twelve months ended
September 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 (179) (567) (1,493)
Consumer & installment (7,187) (6,981) (9,462)
Real estate mortgage (741) (1,800) (2,130)
Lease financing (15) (75) (75)
-------------- -------------- ---------------
Total loans charged off (8,122) (9,423) (13,160)
-------------- -------------- ---------------
Recoveries:
Commercial and agricultural 156 381 422
Consumer & installment 1,184 1,666 2,029
Real estate mortgage 139 238 303
Lease financing 30 20 20
-------------- -------------- ---------------
Total recoveries 1,509 2,305 2,774
-------------- -------------- ---------------
Net charge-offs (6,613) (7,118) (10,386)
Provision charged to operating expense 10,782 12,263 16,080
Acquisitions - 1,152 1,152
-------------- -------------- ---------------
Balance, end of period $55,253 $50,535 $51,084
============== ============== ===============
Average loans for period $ 3,738,389 $ 3,383,971 $ 3,424,008
============== ============== ===============
RATIOS:
Net charge offs to average loans-annualized 0.24% 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 third quarter of 1999 were $4.73 billion as compared to $4.59
billion at December 31, 1998, representing a 3.2% increase. Non-interest
bearing demand deposits decreased by $37.2 million, or 5.8%, while interest-
bearing demand, savings and time deposits grew $182.2 million, or 4.6%, from
December 31, 1998 to September 30, 1999.
LIQUIDITY
- ---------
Liquidity is the ability of the Company to fund the needs 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. During 1999, the Company is also using short-term
borrowings from the Federal Home Loan Bank to meet potential short-term
liquidity requirements as evidenced by the 289% increase in short-term
<PAGE 17>
borrowing at September 30, 1999 as compared to December 31, 1998. Management
believes these sources are adequate to meet the Company's 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 September 30, 1999, the
Company's Tier 1 capital and total capital, as a percentage of total risk-
adjusted assets, were 11.49% and 12.80%, 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 8.35% at September 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 has utilized 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.
<PAGE 18>
The Company believes that with the modifications of existing systems and the
conversion to new systems, the remaining Year 2000 compliance issues will be
resolved on a timely basis and any related costs will not have a material
impact on the Company's operations, cash flows or financial condition in
future periods.
As of September 30, 1999, the Company had incurred a total of approximately
$1,050,000 in additional external costs related to Year 2000 issues, and
anticipates incurring approximately $300,000 in additional 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
does not separately track the internal costs 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 ATMs, 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 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 September 30, 1999, there were no material
changes to the quantitative and qualitative disclosures about market risks
presented in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
<PAGE 19>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) Exhibits
(27.1) Financial Data Schedule for the periods ended September 30, 1999.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30, 1999.
<PAGE 20>
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: November 12, 1999 /S/ L. Nash Allen, Jr.
----------------------
L. Nash Allen, Jr.
Treasurer and
Chief Financial Officer