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EXHIBIT 13 (a)
Managements' Discussion and Analysis of Financial
Condition and Results of Operations
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BancorpSouth, Inc. (the Company) is a bank and thrift holding company with
commercial banking and savings and loan operations in Mississippi and
commercial banking operations in Tennessee. Bank of Mississippi (BOM), the
Company's Mississippi banking subsidiary is headquartered in Tupelo,
Mississippi. Volunteer Bank (VOL), the Company's Tennessee banking subsidiary
is headquartered in Jackson, Tennessee. Laurel Federal Savings and Loan
Association (Laurel Federal), the Company's Mississippi thrift subsidiary, is
headquartered in Laurel, Mississippi. BOM and its consumer finance and credit
life insurance subsidiaries provide commercial banking, leasing, mortgage
origination and servicing and trust services to corporate customers, local
governments, individuals and other financial institutions through an extensive
network of branches and offices located throughout the State of Mississippi.
VOL and its consumer finance and credit life insurance subsidiaries provide
similar banking services in West Tennessee. Laurel Federal provides mortgage,
consumer and commercial lending and traditional thrift deposit services,
including checking accounts.
During 1995, the Company acquired LF Bancorp, Inc.(LF Bancorp),
headquartered in Laurel, Mississippi; First Federal Bank for Savings (First
Federal), headquartered in Starkville, Mississippi; Wes-Tenn Bancorp, Inc.
(Wes-Tenn), headquartered in Covington, Tennessee and the assets and certain
liabilities of Shelby Bank, located in Bartlett, Tennessee, a component of the
suburban Memphis market. Laurel Federal, the principal subsidiary of LF
Bancorp, is operated as a subsidiary of the Company. First Federal and
Wes-Tenn's principal subsidary, Tennessee Community Bank (TCB), were merged
with and into the Company's banking subsidiaries, BOM and VOL, respectively.
The assets and certain liabilities of Shelby Bank were combined with those of
VOL upon acquistion. For a more detailed discussion of these acquisitions,
reference is made to Note 3 of Notes to Consolidated Financial Statements.
The following discussion provides certain information concerning the
consolidated financial condition and results of operations of the Company. For
a complete understanding of the following discussion, reference is made to the
Consolidated Financial Statements and Notes thereto presented elsewhere in this
Annual Report.
Two graphs appear on this page in the Annual Report. The following is a
description of the graphs.
RETURN ON AVERAGE ASSETS
.091% .091% 1.24% 1.07% 1.13%
1991 1992 1993 1994 1995
RETURN ON AVERAGE EQUITY
13.15% 12.30% 15.07% 12.75% 13.23%
1991 1992 1993 1994 1995
THREE YEARS ENDED DECEMBER 31, 1995
RESULTS OF OPERATIONS
Summary
The table below summarizes the Company's net income and returns on average
assets and average shareholders' equity for the years ended December 31, 1995,
1994 and 1993:
1995 1994 1993
-------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income before effect of accounting change $35,504 $30,728 $29,506
Net income $35,504 $30,728 $32,935
Net income per share: $1.69 $1.51 $1.66
Return on average assets 1.13% 1.07% 1.24%
Return on average shareholders' equity 13.23% 12.75% 15.07%
NET INTEREST REVENUE
Net interest revenue, principally interest earned on assets less interest
costs on liabilities, provides the Company with its principal source of income.
Since net interest revenue is affected by changes in the levels of interest
rates and the amount and composition of interest earning assets and interest
bearing liabilities, one of management's primary tasks is to balance these
interest sensitive components of assets and liabilities for the purpose of
maximizing net interest revenue while at the same time minimizing interest rate
risk to the Company.
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The following table presents the average components of interest earning
assets and interest bearing liabilities for each year and their change,
expressed as a percentage, from each of the prior years.
1995 1994 1993
------------------ ------------------ ------------------
AVERAGE % AVERAGE % AVERAGE %
BALANCE CHANGE BALANCE CHANGE BALANCE CHANGE
---------- ------ ---------- ------ ---------- ------
Interest earning assets: (DOLLARS IN THOUSANDS)
Deposits with other banks $ 19,970 +79.7% $11,112 -24.9% $ 14,799 -27.2%
Held-to-maturity securities 516,919 +20.8% 427,759 -16.1% 509,996 -17.7%
Available-for-sale securities 183,396 -31.1% 266,370 +88.3% 141,496 -
Federal funds sold 39,451 -9.2% 43,437 -11.0% 48,780 -3.7%
Loans and leases, net of unearned 2,146,967 +14.1% 1,881,922 +12.4% 1,675,048 +8.0%
Mortgages held for sale 20,805 -38.1% 33,620 -38.7% 54,833 -1.5%
---------- ---------- ----------
Total interest earning assets $2,927,508 +9.9% $2,664,220 +9.0% $2,444,952 +6.4%
========== ========== ==========
Interest bearing liabilities:
Deposits $2,371,330 +10.3% $2,149,042 +6.7% $2,014,597 +4.6%
Federal funds purchased and
securities sold under
repurchase agreements 40,845 +11.3% 36,686 +4.3% 35,166 +15.6%
Long-term debt 68,452 +17.6% 58,191 +67.6% 34,713 -16.1%
Other 4,706 +29.7% 3,627 +11.1% 3,266 -42.3%
---------- ---------- ----------
Total interest bearing liabilities $2,485,333 +10.6% $2,247,546 +7.7% $2,087,742 +4.2%
========== ========== ==========
Non-interest bearing deposits $361,120 -0.9% $364,451 +11.3% $327,540 +14.8%
========== ========== ==========
In 1995 loans and leases continued as the most significant growth
components of interest earning assets. Loans and leases grew at faster rates
than interest bearing deposits in 1995, 1994 and 1993; however, the Company's
other funding sources, non-interest bearing deposits, federal funds and Federal
Home Loan Bank advances, were adequate to fund its asset growth.
The changes in the components of interest earning assets, interest bearing
liabilities, and non-interest bearing deposits resulted in the following tax
equivalent net interest revenue expressed as a percent of average earning
assets for the years ended December 31, 1995, 1994 and 1993:
1995 1994 1993
----- ----- -----
Net interest margin 4.86% 4.76% 4.89%
The Company experienced a decrease in net interest margin in 1994 as
interest rates stabilized. As short-term interest rates began to rise in 1995,
the net interest margin stabilized and then increased. The Company began in
1994 to utilize short-term, intermediate-term and long-term borrowings from the
Federal Home Loan Bank for the purpose of funding asset growth. The Company
has sought to lengthen the maturity of deposits by actively seeking four and
five-year certificates of deposit with interest rates slightly above the
relative market for such funds, thereby reducing the net interest margin in all
three years presented. While net interest margin has been reduced in the
short-term, a stable deposit base has been the result of placing emphasis on
intermediate-term deposits.
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INTEREST RATE SENSITIVITY
The interest sensitivity gap is the difference between the maturity or
repricing scheduling of interest sensitive assets and interest sensitive
liabilities for a given period of time. A prime objective of asset/liability
management is to maximize net interest margin while maintaining a reasonable
mix of interest sensitive assets and liabilities. The following table sets
forth the Company's interest rate sensitivity at December 31, 1995.
INTEREST RATE SENSITIVITY
DECEMBER 31, 1995
MATURING OR REPRICING
-------------------------------------------------
91 DAYS OVER 1
0 TO 90 TO YEAR TO OVER
DAYS 1 YEAR 5 YEARS 5 YEARS
-------------------------------------------------
(IN THOUSANDS)
Interest earning assets:
Interest bearing deposits due from banks $ 15,892 $ - $ - $ -
Federal funds sold 35,450 - - -
Held-to-maturity securities 19,668 48,338 227,273 144,024
Available-for-sale securities 36,084 42,365 107,023 54,283
Loans & leases, net of unearned 744,221 389,734 1,080,083 81,128
Mortgages held for sale 25,168 - - -
-------- --------- ---------- --------
Total interest earning assets 876,483 480,437 1,414,379 279,435
-------- --------- ---------- --------
Interest bearing liabilities:
Interest bearing demand deposits & savings 337,432 212,980 448,337 -
Time deposits 402,670 734,733 330,557 3,486
Federal funds purchased & securities
sold under repurchase agreements 34,944 904 - -
Long-term debt 829 2,463 33,006 37,326
Other 1,435 130 730 451
-------- --------- ---------- --------
Total interest bearing liabilities 777,310 951,210 812,630 41,263
-------- --------- ---------- --------
Interest sensitivity gap $ 99,173 $(470,773) $ 601,749 $238,172
======== ========= ========== ========
Cumulative interest sensitivity gap $ 99,173 $(371,600) $ 230,149 $468,321
======== ========= ========== ========
Two graphs appear on this page in the Annual Report. The following is a
description of the graphs.
NET INTEREST INCOME
TAX EQUIVALENT BASIS
IN MILLIONS
$101.13 $115.4 $119.5 $126.9 $142.1
1991 1992 1993 1994 1995
ALLOWANCE FOR CREDIT LOSSES
AS A PERCENT OF LOANS,
NET OF UNEARNED DISCOUNT
1.39% 1.51% 1.54% 1.52% 1.51%
1991 1992 1993 1994 1995
In the event interest rates decline after 1995, it is likely that the
Company will experience a slightly negative effect on net interest income, as
the cost of funds will decrease at a less rapid rate than interest income on
interest bearing assets. Conversely, in periods of increasing interest rates,
based on the current interest sensitivity gap, the Company will experience
increased net interest income.
PROVISIONS FOR CREDIT LOSSES
The Company has an asset quality review staff which, with a committee of
senior officers, reviews the adequacy of the allowance for credit losses in
each accounting period. An amount is provided as a charge against current
income, based on this group's recommendation and senior management's approval,
to maintain the allowance for credit losses at a level sufficient to absorb
possible losses inherent in the existing loan and lease portfolios. This
provision is determined after examining potential losses in specific credits
and considering the general risks associated with lending functions such as
current and anticipated economic conditions, historical experience as related
to losses, changes in the mix of the loan portfolio and credits which bear
substantial risk of
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loss but which cannot be readily quantified. The process of determining the
adequacy of the provision requires that management make material estimates and
assumptions which are particularly susceptible to significant change in the
near-term.
The provision for credit losses, the allowance for credit losses as a
percent of loans and leases outstanding at the end of each year and net charge
offs are shown in the following table:
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
Provision for credit losses $6,206 $5,946 $9,032
Allowance for credit losses as
a percent of loans and leases
outstanding at year end 1.51% 1.52% 1.54%
Net charge offs $3,147 $2,584 $5,680
Net charge offs as a percent
of average loans .15% .14% .34%
The 1995 provision for credit losses increased from 1994's level by 4.4%
as a result of the growth in loans. The 1994 provision for credit losses
decreased 34.2% from 1993's level as a result of an improvement in general
economic conditions as evidenced by the lowest level of net loans charged off
in recent history. The provision for credit losses for 1993 was 29.6% less
than the provision for the previous year principally as a result of conforming
in 1992 the loan, litigation and real estate valuation policies of VOL to make
them consistent with those applied at BOM. Net charge offs were abnormally
high in 1993 as a result of actions taken at VOL to conform the quality of its
loan portfolio on a basis consistent with BOM.
The provisions for credit losses in 1995 and 1994 have been at reduced
levels from 1993's provision as a result of an improvement in the Company's
loan portfolio as evidenced by the decline in non-performing assets as set
forth in the discussion of Loans in the Financial Condition section of this
presentation.
OTHER REVENUE
The components of other revenue for the years ended December 31, 1995,
1994 and 1993 and the percent of change from the prior year are shown in the
following table:
1995 1994 1993
----------------------- ---------------------- ----------------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
------- --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
Mortgage lending $ 3,723 +333.9% $ 858 -72.1% $ 3,075 +143.1%
Service charges 15,965 +10.6% 14,439 +9.4% 13,199 +4.3%
Life insurance premiums 3,345 +1.4% 3,300 +7.9% 3,057 -1.4%
Trust income 2,237 +19.4% 1,873 +5.5% 1,776 +0.1%
Securities gains (losses), net (765) +161.1% (293) -140.1% 731 +246.4%
Other revenue 6,735 +15.4% 5,835 +18.2% 4,938 +3.6%
------- ------- -------
Total other revenue $31,240 +20.1% $26,012 -2.9% $26,776 +12.7%
======= ======= =======
The revenue produced by mortgage lending activities rebounded in 1995
primarily as a result of stable interest rates and growth in servicing income.
In 1994, mortgage lending revenue was impacted by losses incurred on the sale
of mortgages in an unfavorable secondary market. The revenue produced by
mortgage lending activities in 1993 increased because of declining interest
rates which stimulated refinancing activity by borrowers and a favorable
secondary mortgage market. The Company's mortgage loan servicing portfolio has
continued to increase as indicated in the following table:
1995 1994 1993
------------------- ------------------ -----------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
------ -------- ------ -------- ------ --------
(DOLLARS IN MILLIONS)
Mortgage loans serviced $876.0 +8.0% $811.3 +11.4% $728.4 +24.4%
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Service charges on deposit accounts increased in 1995 because of higher
volumes of items processed as a result of increased economic activity. Life
insurance premiums decreased slightly in 1995. Growth in life insurance
premiums has not kept pace with loan growth because much of the Company's loan
growth has occurred in indirect automobile financing which does not present the
opportunity to sell credit life insurance. Trust income in 1995 increased
19.4% over 1994. The trust business experienced steady growth as evidenced by
increases in the number of trust accounts and the value of assets under care
(either managed or in custody). Security losses in 1995 and 1994 were
primarily the result of securities being called before their maturity dates.
Security gains in 1993 were primarily the result of certain taxable municipal
securities being sold after losses considered by management to be other than
temporary were recognized in prior periods. Other revenue increased 15.4% and
18.2% in 1995 and 1994, respectively, principally as a result of increases in
fees for non-deposit related services.
OTHER EXPENSES
The components of other expense for the years ended December 31, 1995,
1994 and 1993 and the percent change from the prior year are shown in the
following table:
1995 1994 1993
----------------------- ---------------------- ------------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
------ --------- ------ --------- ------ --------
(DOLLARS IN THOUSANDS)
Salary and employee benefits $ 54,739 +13.1% $48,413 +5.3% $45,971 +7.2%
Occupancy net of rental income 8,022 +5.3% 7,616 +0.9% 7,548 +7.6%
Equipment 8,860 +18.7% 7,463 +15.6% 6,457 +5.5%
Deposit insurance premiums 3,412 -39.3% 5,621 +9.4% 5,140 +3.4%
Other 36,717 +21.3% 30,259 +7.8% 28,060 -1.0%
-------- ------- -------
Total other expenses $111,750 +12.5% $99,372 +6.6% $93,176 +4.3%
======== ======= =======
Increases in salary and employee benefits are primarily attributable to
incentives and salary increases, additional employees to staff the banking
locations added in each of the three years and the increased cost of employee
health care benefits. Occupancy and equipment expenses have increased
principally as a result of additional branch offices and upgrades to the
Company's internal operating systems.
Deposit insurance premiums decreased substantially in 1995 as a result of
lower rates in the insurance assessment rate of the Federal Deposit Insurance
Corporation (FDIC). The Federal Deposit Insurance Corporation Improvement Act
of 1991 (FDICIA) requires that deposit premiums be assessed based on the risk
inherent in and the financial soundness of a bank. Effective January 1, 1994,
the actual assessment rate for premiums applicable to a particular institution
depends upon the risk assessment classification assigned to it by the FDIC. As
a result of the financial condition of the Company's subsidiary banks, under
the FDIC's current risk-based premium policy, deposit insurance rates for 1996
for the Company's deposits in the Bank Insurance Fund (BIF) have been assessed
at zero. However, Laurel Federal, the Company's thrift subsidiary, and certain
other of the Company's deposits which were acquired from thrifts over the years
remain in the Savings Association Insurance Fund (SAIF) and will continue to
experience assessments for 1996 at the rate of 23 cents per $100 of insured
deposits, the same rate experienced in all three years in the above table.
Also, Congress is currently considering a special, one-time assessment on SAIF
insured deposits and if enacted, this assessment could result in a one-time,
pre-tax charge of up to $2.7 million.
Other expenses increased 21.3% in 1995 principally as a result of merger
expenses related to the Company's acquisitions. The expansion of the Company's
branch banking network also contributed to increases in all years presented.
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FINANCIAL CONDITION
LOANS
The Company's loan portfolio represents the largest single component of
its earning asset base. The following table indicates the average loans, year
end balances of the loan portfolio and the percent of increases for the years
presented:
Two graphs appear on this page in the Annual Report. the following is a
description of the graphs.
NONACCRUAL AND RESTRUCTURED LOANS
AS A PERCENT OF LOANS,
NET OF UNEARNED DISCOUNT
.081% .081% .45% .22% .07%
1991 1992 1993 1994 1995
TOTAL SHAREHOLDER'S EQUITY
IN MILLIONS
$173.6 $199.9 $233.2 $252.9 $288.1
1991 1992 1993 1994 1995
1995 1994 1993
------------------ -------------------- -----------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
------ -------- ------ -------- ------ --------
(DOLLARS IN MILLIONS)
Loans, net of unearned - average $2,147 +14.1% $1,882 +12.4% $1,675 +8.0%
Loans, net of unearned - year end $2,295 +13.3% $2,026 +13.4% $1,786 +11.8%
The Company's loan portfolio continued to grow in 1995 in both its
Mississippi and Tennessee markets. The increase in 1994 occurred principally
in the Company's Mississippi market. The Company strives to maintain a
high-quality loan portfolio, forsaking growth for quality. The Company's
non-performing assets which were significantly reduced in 1994 and continued to
decline in 1995 and which are carried either in the loan account or other
assets on the consolidated balance sheets, were as follows at the end of each
year presented.
DECEMBER 31
----------------------------------
1995 1994 1993
------ ------ -------
(IN THOUSANDS)
Foreclosed properties $2,662 $1,757 $ 1,652
Non-accrual loans 1,592 3,029 4,072
Loans 90 days or more past due 5,148 3,614 4,277
Restructured loans 7 1,448 4,018
------ ------ -------
Total non-performing assets $9,409 $9,848 $14,019
====== ====== =======
The Company has not as a matter of policy participated in any highly
leveraged transactions nor made any loans or investments relating to corporate
transactions such as leveraged buyouts or leveraged recapitalizations.
SECURITIES AND OTHER EARNING ASSETS
The securities portfolio is used to make various term investments, provide
a source of liquidity and to serve as collateral to secure certain types of
deposits. A portion of the Company's securities portfolio continues to be
tax-exempt. Investments in tax-exempt securities totaled $134.5 million at
December 31, 1995, compared to $144.3 million at the end of 1994. The Company
invests only in investment grade securities, with the exception of obligations
of Mississippi and Tennessee counties and municipalities, and avoids other high
yield non-rated securities and investments.
At December 31, 1995, the Company's available-for-sale securities totaled
$239.8 million. These securities, which are subject to possible sale, are
recorded at fair value. At December 31, 1995, the Company held no securities
whose decline in fair value was considered other than temporary.
Net unrealized gains on investment securities as of December 31, 1995
totaled $12.6 million. Net unrealized gains on held-to-maturity securities
comprised $8.8 million of that total while net unrealized gains on
available-for-sale securities were $3.8 million.
Net unrealized losses on investment securities as of December 31, 1994,
amounted to $22.6 million. Of that total, $19.8 million was attributable to
held-to-maturity securities and $2.8 million available-for-sale securities.
These unrealized losses were a direct result of the strong upward movement in
interest rates during the 1994. While these interest rate movements presented
buying opportunities, they also resulted in lower market values on existing
investments. Because the average maturity of securities owned is relatively
short, market value fluctuations due to interest rate changes are softened and
the impact of foregone earnings is reduced.
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DEPOSITS
The following table presents the Company's average deposit mix and percent
of change for the years indicated:
1995 1994 1993
---------------- ----------------- -----------------
AVERAGE % AVERAGE % AVERAGE %
BALANCE CHANGE BALANCE CHANGE BALANCE CHANGE
------- ------ ------- ------ ------- ------
Interest bearing deposits $2,371.3 +10.3% $2,149.0 +6.7% $2,014.6 +4.6%
Non-interest bearing deposits $ 361.1 +0.9% $ 364.5 +11.3% $ 327.5 +14.8%
The Company's deposit mix continued to experience change in 1995. By year
end 1995, other time deposits showed an increase of 11.9% from the end of 1994,
while interest bearing demand deposits decreased slightly by 0.6% and other
short-term savings accounts increased 4.6%. Non-interest bearing demand
deposits decreased 0.5% from year end 1994 to year end 1995. Management
believes that significant declines in interest rates in 1993 and early 1994
caused depositors to reduce the period over which they were willing to commit
their funds and shifted their deposits from longer term, fixed rate instruments
to daily savings and demand accounts, or even to seek alternative non-bank
investments. As interest rates began to rise in mid-1994, funds began to move
into longer term certificates of deposits as depositors sought higher yields on
their deposits. That trend continued into 1995. Deposits are the Company's
primary source of funds to support its earning assets. The Company's primary
market areas provide the sources of all deposits for all periods presented.
LIQUIDITY
The Company's goal is to provide adequate funds to meet changes in loan
demand or any potential increase in the normal level of deposit withdrawals.
This goal is accomplished primarily by maintaining sufficient short-term liquid
assets coupled with consistent growth in core deposits in order to fund earning
assets and to maintain the availability of unused capacity to acquire funds in
national and local capital markets. The Company's traditional sources of
maturing loans, investment securities, mortgages held for sale, purchased
federal funds and base of core deposits seem adequate to meet liquidity needs
for normal operations. In 1994, the Company's two subsidiary banks initiated
relationships with the Federal Home Loan Bank which provided an additional
source of liquidity to fund term loans with borrowings of matched maturities.
The matching of these assets and liabilities has had the effect of reducing the
Company's net interest margin.
CAPITAL RESOURCES
The Company is required to comply with the risk-based capital guidelines
established by the Board of Governors of the Federal Reserve System (FRB).
These guidelines apply a variety of weighting factors which vary according to
the level of risk associated with the assets. Capital is measured in two
"Tiers": Tier I consists of paid-up share capital, including common stock and
disclosed reserves (retained earnings and related surplus in the case of common
stock), and Tier II consists of general allowance for losses on loans and
leases, "hybrid" debt capital instruments, and all or a portion of other
subordinated capital debt, depending upon remaining term to maturity (such as
the Company's 9% subordinated debentures due 1999). The Company's Tier I
capital and total capital, as a percentage of total risk-adjusted assets, was
12.11% and 13.97%, respectively at December 31, 1995, compared to 11.31% and
13.49% at December 31, 1994. Both ratios exceed the required minimum levels
for these ratios of 4% and 8% respectively. In addition, the Company's
leverage capital ratio (Tier I capital divided by total assets, less goodwill)
was 8.56% at December 31, 1995 and 8.33% at December 31, 1994, compared to the
required minimum leverage capital ratio of 3%.
The FDIC's capital-based supervisory system for insured financial
institutions categorizes the capital position for banks into five categories,
ranging from well capitalized to critically undercapitalized. For a bank to
classify as "well capitalized", the Tier I risk-based capital, total risk-based
capital and leverage capital ratios must be at least 6%, 10% and 5%,
respectively. Each of the Company's bank subsidiaries meet the criteria for
the "well capitalized" category at December 31, 1995.
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The Office of Thrift Supervision (OTS) establishes capital requirements
for savings associations. These requirements include a tangible capital
requirement, a leverage limit and a risk-based capital requirement. The
tangible capital requirement requires a savings association to maintain
tangible capital in an amount no less than 1.5% of adjusted total assets, the
leverage limit requires an association to maintain core capital of no less than
3% of adjusted assets and the risk-based capital requirement requires an
association to have total capital equal to 8% of risk-weighted assets, which
must include core capital equal to at least 4% of risk-weighted assets. The
Company's thrift subsidiary met each of these capital requirements at December
31, 1995.
The Company has determined to pursue acquisition transactions of
depository institutions and businesses closely related to banking which further
the Company's business strategies. The Company anticipates that the
consideration for substantially all of these transactions, if completed, will
be shares of the Company's Common Stock.
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