1 EXHIBIT 13 (b) Consolidated Financial Statements and Notes thereto and Report of Independent Auditors 33 2 CONSOLIDATED BALANCE SHEETS BANCORPSOUTH, INC. AND SUBSIDIARIES DECEMBER 31 ---------------------------- 1995 1994 ---------- ---------- (In thousands) ASSETS Cash and due from banks (Note 19) $ 149,923 $ 138,230 Interest bearing deposits with other banks 15,892 6,463 Held-to-maturity securities (Note 4) (fair value of $448,075 and $532,985) 439,303 552,832 Available-for-sale securities (Note 5) (amortized cost of $235,909 and $196,760) 239,755 194,029 Federal funds sold 35,450 3,275 Loans (Notes 6, 7 and 17) 2,371,684 2,091,075 Less: Unearned discount 76,518 65,461 Allowance for credit losses 34,636 30,830 ---------- ---------- Net loans 2,260,530 1,994,784 Mortgages held for sale 25,168 10,471 Premises and equipment, net (Note 8) 81,240 71,458 Accrued interest receivable 28,992 22,950 Other assets (Note 11 and 18) 25,775 24,626 ---------- ---------- Total assets $3,302,028 $3,019,118 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand: Non-interest bearing $ 393,417 $ 395,416 Interest bearing 665,313 630,832 Savings 333,436 303,881 Other time (Note 9) 1,471,446 1,268,540 ---------- ---------- Total deposits 2,863,612 2,598,669 Federal funds purchased and securities sold under repurchase agreements (Note 9) 35,848 63,314 Accrued interest payable 13,695 9,623 Other liabilities (Notes 11 and 12) 27,154 27,244 Long-term debt (Note 10) 73,624 67,416 ---------- ---------- Total liabilities 3,013,933 2,766,266 ---------- ---------- Shareholders' equity (Notes 2, 14, 15 and 16) Common stock, $2.50 par value Authorized - 500,000,000 shares; Issued - 21,105,664 (reflects the 1995 2-for-1 stock split effected as a dividend) and 10,328,460 shares at December 31, 1995 and 1994, respectively 52,764 25,819 Capital surplus 84,391 79,008 Unrealized gain (loss) on available-for-sale securities, net of tax 2,480 (1,702) Retained earnings 149,494 152,655 Treasury stock at cost (108,384 and 165,356 shares at December 31, 1995 and 1994, respectively) (1,034) (2,928) ---------- ---------- Total shareholders' equity 288,095 252,852 ---------- ---------- Commitments and contingent liabilities (Notes 6 and 19) Total liabilities and shareholders' equity $3,302,028 $3,019,118 ========== ========== See accompanying notes to consolidated financial statements. 3 CONSOLIDATED STATEMENTS OF INCOME BANCORPSOUTH, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31 ---------------------------------------- 1995 1994 1993 -------- -------- -------- (In thousands, except per share amounts) INTEREST REVENUE: Loans receivable $203,800 $163,727 $149,951 Deposits with other banks 857 660 833 Federal funds sold 2,205 1,756 1,487 Held-to-maturity securities: U.S. Treasury 3,977 2,063 4,550 U.S. Government agencies and corporations 24,175 16,579 17,955 Obligations of states and political subdivisions 7,491 7,213 8,854 Other 168 270 596 Available-for-sale securities 8,321 13,227 6,261 Mortgages held for sale 1,433 2,400 3,382 -------- -------- -------- Total interest revenue 252,427 207,895 193,869 -------- -------- -------- INTEREST EXPENSE: Deposits 107,165 79,270 74,751 Federal funds purchased and securities sold under repurchase agreements (Note 9) 2,084 1,338 982 Other (Note 10) 5,208 4,421 2,982 -------- -------- -------- Total interest expense 114,457 85,029 78,715 -------- -------- -------- Net interest revenue 137,970 122,866 115,154 Provision for credit losses (Note 7) 6,206 5,946 9,032 -------- -------- -------- Net interest revenue, after provision for credit losses 131,764 116,920 106,122 -------- -------- -------- OTHER REVENUE: Mortgage lending 3,723 858 3,075 Service charges 15,965 14,439 13,199 Life insurance premiums 3,345 3,300 3,057 Trust income 2,237 1,873 1,776 Securities gains (losses), net (765) (293) 731 Other 6,735 5,835 4,938 -------- -------- -------- Total other revenue 31,240 26,012 26,776 -------- -------- -------- OTHER EXPENSES: Salaries and employee benefits (Notes 12 and 14) 54,739 48,413 45,971 Occupancy net of rental income 8,022 7,616 7,548 Equipment 8,860 7,463 6,457 Deposit insurance premiums 3,412 5,621 5,140 Other 36,717 30,259 28,060 -------- -------- -------- Total other expenses 111,750 99,372 93,176 -------- -------- -------- Income before income taxes and effect of accounting change 51,254 43,560 39,722 Income tax expense (Note 11) 15,750 12,832 10,216 -------- -------- -------- Income before effect of accounting change 35,504 30,728 29,506 Cumulative effect on prior years of change in accounting for income taxes (Note 1) - - 3,429 -------- -------- -------- Net income $ 35,504 $ 30,728 $ 32,935 ======== ======== ======== EARNINGS PER SHARE (Note 16): Before effect of accounting change $1.69 $1.51 $1.49 ======== ======== ======== After effect of accounting change $1.69 $1.51 $1.66 ======== ======== ======== See accompanying notes to consolidated financial statements. 4 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY BANCORPSOUTH, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 COMMON STOCK UNREALIZED --------------------- CAPITAL GAINS RETAINED TREASURY SHARES AMOUNT SURPLUS (LOSSES), NET EARNINGS STOCK TOTAL ----------- ------- ------- ------------- -------- ---------- -------- (Dollars in thousands) BALANCE, DECEMBER 31, 1992 8,580,313 $21,575 $35,221 - $144,041 $(1,041) $199,796 Shares issued: Conversion of debentures (Note 10) 316,382 791 6,989 - - - 7,780 15% stock dividend (Note 15) 1,025,107 2,580 33,543 - (36,199) - (76) Conversion of warrants 59,540 148 452 - - - 600 Other shares issued 119,909 301 1,313 - - - 1,614 Recognition of stock compensation - - - - 32 - 32 Purchase of treasury stock (70,061) - - - - (1,026) (1,026) Purchase of stock warrants - - (25) - - - (25) Net income - - - - 32,935 - 32,935 Cash dividends declared: BancorpSouth, at $.54 per share (1) - - - - (7,585) - (7,585) Pooled acquisitions - - - - (878) - (878) ---------- ------- ------- ------ -------- ------- -------- BALANCE, DECEMBER 31, 1993 10,031,190 25,395 77,493 - 132,346 (2,067) 233,167 Impact at January 1, 1994 of change in accounting principle, net of tax (Note 1) - - - 2,573 - - 2,573 Shares issued: Employee stock bonus plan (Note 14) 25,000 63 750 - (813) - - Conversion of warrants 119,665 299 908 - - - 1,207 Other shares issued 25,103 62 341 - - - 403 Recognition of stock compensation - - - - 438 - 438 Purchase of treasury stock (37,854) - - - - (861) (861) Purchase of stock warrants - - - - (484) - (484) Change in market valuation of available-for-sale securities, net of tax - - - (4,275) - - (4,275) Net income - - - - 30,728 - 30,728 Cash dividends declared: BancorpSouth, at $.555 per share (1) - - - - (8,754) - (8,754) Pooled acquisitions - - - - (1,290) - (1,290) --------- ------ ------ ------ -------- -------- --------- BALANCE, DECEMBER 31, 1994 10,163,104 25,819 79,008 (1,702) 152,655 (2,928) 252,852 Shares issued: Employee stock bonus plan (Note 14) 15,000 37 476 - (513) - - Purchase business acquisitions (Note 3) 259,285 370 4,530 - - 1,894 6,794 Other shares issued 61,883 154 404 - - - 558 Recognition of stock compensation - - - - 436 - 436 Fractional shares redeemed in poolings (797) (1) (21) - - - (22) Purchase stock warrants - - - (6) - - (6) Change in market valuation of available-for-sale securities, net of tax - - - 4,182 - - 4,182 Net income - - - - 35,504 - 35,504 Stock split effected in the form of a stock dividend (Note 2) 10,498,805 26,385 - - (26,385) - - Cash dividends declared: BancorpSouth, at $.62 per share (1) - - - - (11,278) - (11,278) Pooled acquisitions - - - - (925) - (925) ----------- -------- ------- ------ -------- ------- -------- BALANCE, DECEMBER 31, 1995 20,997,280 $52,764 $84,391 $2,480 $149,494 $(1,034) $288,095 =========== ======== ======= ====== ======== ======= ======== (1) Cash dividends declared per share have been adjusted for the two-for-one stock split in the form of a stock dividend paid November 20, 1995. See accompanying notes to consolidated financial statements. 5 CONSOLIDATED STATEMENTS OF CASH FLOWS BANCORPSOUTH, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31 ------------------------------------------------- 1995 1994 1993 ----------- --------- --------- (In thousands) Operating activities: Net income $ 35,504 $ 30,728 $ 32,935 Adjustment to reconcile net income to net cash (used) provided by operating activities: Provision for credit losses 6,206 5,946 9,032 Depreciation and amortization 8,448 6,952 6,081 Deferred taxes 74 3,313 (416) Amortization of intangibles 726 583 315 Amortization of debt securities premium and discount, net (663) 1,483 2,343 Decrease in trading securities, net - - 2,019 Security losses (gains), net 765 293 (731) Net deferred loan origination expense (2,624) (2,087) (2,880) (Increase) decrease in interest receivable (6,042) (4,699) 1,848 Increase (decrease) in interest payable 4,072 2,119 (497) Proceeds from mortgages sold 150,572 266,911 216,069 Origination of mortgages for sale (163,415) (182,192) (266,335) Other, net 4,457 (46) (2,136) -------- -------- -------- Net cash provided by (used) in operating activities 38,080 129,304 (2,353) -------- -------- -------- Investing activities: Proceeds from calls and maturities of held- to-maturity securities 145,071 72,358 247,968 Proceeds from calls and maturities of available- for-sale securities 290,404 498,144 - Proceeds from sales of held-to-maturity securities 931 994 12,139 Proceeds from sales of available-for-sale securities 11,708 19,070 - Purchases of held-to-maturity securities (111,875) (253,423) (297,535) Purchases of available-for-sale securities (261,322) (423,712) - Net increase (decrease) in short-term investments (32,175) 27,676 50,070 Net increase in loans (269,328) (240,538) (188,207) Purchases of premises and equipment (18,695) (10,050) (12,828) Proceeds from sale of premises and equipment 480 103 2,575 Other, net (5,268) (2,914) (5,091) -------- -------- -------- Net cash used in investing activities (250,069) (312,292) (190,909) -------- -------- -------- Financing activities: Net increase in deposits 264,943 132,384 156,117 Net increase (decrease) in short-term debt and other liabilities (28,478) 26,448 (2,328) Advances on long-term debt 21,000 43,093 8,025 Repayment of long-term debt (14,792) (9,432) (1,878) Issuance of common stock 506 404 1,522 Acquisition of treasury stock - (861) (1,026) Purchase of stock warrants (6) (484) (25) Proceeds from warrant conversion, net - 1,207 600 Payment of cash dividends (10,062) (7,669) (10,253) -------- -------- -------- Net cash provided by financing activities 233,111 185,090 150,754 -------- -------- -------- Increase (decrease) in cash and cash equivalents 21,122 2,102 (42,508) Cash and cash equivalents at beginning of year 144,693 42,591 185,099 -------- -------- -------- Cash and cash equivalents at end of year $165,815 $144,693 $142,591 ======== ======== ======== See accompanying notes to consolidated financial statements. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BANCORPSOUTH, INC. AND SUBSIDIARIES DECEMBER 31, 1995, 1994 AND 1993 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of BancorpSouth, Inc. (the Company) have been prepared in conformity with generally accepted accounting principles and prevailing practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period reported. Actual results could differ significantly from those estimates. The Company and its subsidiaries are engaged in the business of banking and activities closely related to banking. The Company and its subsidiaries are subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory agencies. The following is a summary of the more significant accounting and reporting policies. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Bank of Mississippi (BOM), Volunteer Bank (VOL) and Laurel Federal Savings and Loan Association (Laurel Federal). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain 1994 and 1993 amounts have been reclassified to conform with the 1995 presentation. CASH FLOW STATEMENTS Cash equivalents include cash and amounts due from banks including interest bearing deposits with other banks. The Company paid interest of $110,385,000, $82,910,000 and $79,213,000 and income taxes of $15,480,000, $8,505,000 and $8,487,000 for the years ended December 31, 1995, 1994 and 1993, respectively. During 1994, the Company implemented Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities" issued by the Financial Accounting Standards Board (FASB), increasing shareholders' equity by $2,573,000. See Note 4 regarding the reclassification from held-to-maturity securities to available-for-sale securities during 1995 which resulted in increasing shareholders' equity by $390,000. See Notes 10, 14 and 15 related to the conversion of convertible subordinated capital debentures, the stock bonus plan and the stock dividend paid. SECURITIES The Company adopted SFAS 115 effective January 1, 1994. Under SFAS 115, securities are classified as either held-to-maturity, trading or available-for-sale. Held-to-maturity securities are debt securities that the Company has the ability and management has the positive intent to hold to maturity. They are reported at amortized cost. Trading securities are debt and equity securities that are bought and held principally for the purpose of selling them in the near term. They are reported at fair value, with unrealized gains and losses included in earnings. The Company had no trading securities at December 31, 1995 and 1994. Available-for-sale securities are debt and equity securities not classified as either held-to-maturity securities or trading securities. They are reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of tax, in a separate component of shareholders' equity until realized. Prior to the adoption by the Company on January 1, 1994, of SFAS 115, these securities were held for sale and carried at the lower of aggregate amortized cost or market. Gains and losses on securities are determined on the identified certificate basis. Amortization of premium and accretion of discount are computed using the interest method. Changes in the valuation of securities which are considered other than temporary are recorded as losses in the period recognized. 7 LOANS Loans are recorded at the face amount of the notes reduced by collections of principal. Loans include net unamortized deferred origination costs. Unearned discount on discount-basis consumer loans is recognized as income using a method which approximates the level yield method. Interest is recorded monthly as earned on all other loans. Where doubt exists as to the collectibility of the loans, interest income is recorded as payment is received. PROVISION AND ALLOWANCE FOR CREDIT LOSSES The provision for credit losses charged to expense is an amount which, in the judgment of management, is necessary to maintain the allowance for credit losses at a level that is adequate to meet the present and potential risks of losses on the Company's current portfolio of loans. Management's judgment is based on a variety of factors which include the Company's experience related to loan balances, charge-offs and recoveries, scrutiny of individual loans and risk factors, results of regulatory agency reviews of loans, and present and future economic conditions of the Company's market area. Material estimates that are particularly susceptible to significant change in the near term are a necessary part of this process. Future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for credit losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. MORTGAGES HELD FOR SALE Mortgages held for sale are recorded at lower of aggregate cost or market as determined by outstanding commitments from investors or current investor yield requirements. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation and amortization. Provisions for depreciation and amortization, computed using straight-line and accelerated methods, are charged to expense over the shorter of the lease term or the estimated useful lives of the assets. Costs of major additions and improvements are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. OTHER REAL ESTATE OWNED Real estate acquired in settlement of loans is carried at the lower of cost or fair value, less selling cost. Fair value is based on independent appraisals and other relevant factors. At the time of acquisition, any excess of cost over fair value is charged to the allowance for credit losses. Gains and losses realized on sale are included in other revenue. PENSION EXPENSE The Company maintains a non-contributory defined benefit pension plan that covers all employees who qualify as to age and length of service. Net periodic pension expense is actuarially determined. INCOME TAXES Effective January 1, 1993, the Company adopted the provisions of SFAS No. 109, "Accounting for Income Taxes", resulting in a $3,429,000 benefit and reported the cumulative effect of that change in the method of accounting for income taxes in the 1993 consolidated statement of income. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company, with the exception of BOM's credit life insurance subsidiary and VOL's credit life insurance subsidiary, files a consolidated federal income tax return. 8 RECENT PRONOUNCEMENTS SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", issued in March 1995, provides guidance for recognition of impairment losses related to long-lived assets, and certain intangibles and related goodwill. This Statement is effective for fiscal beginning after December 15, 1995. SFAS No. 123 "Accounting for Stock-Based Compensation" was issued in October 1995, and provides for a fair value method of accounting for stock-based compensation arrangements rather than the intrinsic value method now followed. Adoption of the fair value method for purposes of preparing basic financial statements is not required although disclosure or the effect of such adoptions is. The Statement is effective for stock-based compensation arrangements awarded after December 15, 1995. Management believes the adoption of the above-mentioned Statements will not have a material impact on the Company's consolidated financial statement. OTHER Trust income is recorded on the cash basis as received, which does not differ materially from the accrual basis. (2) STOCK SPLIT On November 20, 1995, the Company's two-for-one stock split effected in the form of a 100% stock dividend resulted in the issuance of 10,495,805 new shares of common stock. Information relating to earnings per share, dividends per share and other share data has been retroactively adjusted to reflect this stock split. (3) ACQUISITIONS On March 31, 1995, LF Bancorp, Inc. (LF Bancorp), a $190 million thrift holding company and parent of Laurel Federal, merged with and into the Company and Laurel Federal became a subsidiary of the Company. Pursuant to the merger, each share of common stock of LF Bancorp was converted into 2.026 shares of the Company's common stock, or a total of 1,664,202 common shares. This transaction was accounted for as a pooling of interests and the Company's financial statements for all periods presented include the consolidated accounts of LF Bancorp. On July 31, 1995, First Federal Bank for Savings (First Federal), a $25 million savings and loan association, merged with and into the Company. Pursuant to the merger, First Federal was merged into BOM. Each share of common stock of First Federal was converted into 1.396 shares of the Company's common stock, or a total of 219,654 common shares. This transaction was accounted for as a pooling of interests. The result of operations of First Federal are included in the Company's financial statements for all periods presented but are not presented separately in the table below because they are not material. On September 1, 1995, the Company, issued 156,818 shares of common stock to effect the purchase of substantially all of the assets and the assumption of certain liabilities of the Shelby Bank (Shelby). The purchase price was allocated to the acquired assets and liabilities at their respective estimated fair value at the date of acquisition. On November 30, 1995, Wes-Tenn Bancorp, Inc. (Wes-Tenn), a $340 million bank holding company, merged with and into the Company. Pursuant to the merger, Wes-Tenn's subsidiary bank, Tennessee Community Bank (TCB), was merged into VOL and TCB's wholly-owned subsidiaries, TC Finance, Inc. and West Tennessee Life Insurance Company, became subsidiaries of VOL. Each share of common stock of Wes-Tenn was converted into 1.214702 shares of the Company's common stock, or a total of 3,059,764 common shares. This transaction was accounted for as a pooling of interests and the Company's financial statements for all periods presented include the consolidated accounts of Wes-Tenn. Prior to its merger with the Company, Wes-Tenn on April 3, 1995, acquired West Tennessee Financial Corporation (WTFC), a $38 million bank holding company and parent of Community Bank of West Tennessee (CBWT). WTFC and CBWT were merged into Wes-Tenn and TCB, respectively. This acquisition was accounted for as a purchase and the purchase price was allocated to the acquired assets and liabilities at their respective estimated fair value at the date of acquisition. 9 Details of the results of operations of the previously separate companies for the period before the combinations were consummated that are included in the current consolidated net income follows: NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, 1995 DECEMBER 31, 1994 ------------------ --------------------------- LF COMPANY WES-TENN COMPANY WES-TENN BANCORP ------- -------- ------- -------- ------- (In thousands except per share data) Net interest revenue.................. $92,542 $9,362 $103,876 $11,770 $6,278 Provision for credit losses........... 4,132 464 5,652 285 - Other revenue......................... 21,020 1,760 23,421 1,631 926 Other expense......................... 74,525 7,266 85,799 8,540 5,872 Income tax expense.................... 11,018 961 10,400 1,354 476 ------- ------ -------- ------- ------ Net income............................ $23,887 $2,431 $ 25,446 $ 3,222 $ 856 ------- ------ -------- ------- ------ Earnings per share.................... $ 1.33 $ 1.01 $ 1.605 $ 1.44 $ 2.30 Dividend declared per share........... 0.45 0.37 0.555 0.37 0.60 (4) HELD-TO-MATURITY SECURITIES A comparison of amortized cost and estimated fair values of held-to-maturity securities as of December 31, 1995 and 1994 follows: 1995 ---------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ---------- (In thousands) U.S. Treasury $33,355 $ 1,698 $ 10 $ 35,043 U.S. Government agencies and corporations 293,831 5,603 771 298,663 Tax exempt obligations of states and political subdivisions 111,330 3,297 1,052 113,575 Other 787 7 - 794 -------- ------- ------ -------- Total $439,303 $10,605 $1,833 $448,075 ======== ======= ====== ======== 1994 --------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------------------------------------------------- (In thousands) U.S. Treasury $ 59,793 $ 35 $ 2,124 $ 57,704 U.S. Government agencies and corporations 376,708 192 18,166 358,734 Tax exempt obligations of states and political subdivisions 112,915 3,194 2,979 113,130 Other 3,416 1 - 3,417 -------- ------ ------- -------- Total $552,832 $3,422 $23,269 $532,985 ======== ====== ======= ======== Gross gains of $123,000 and gross losses of $389,000 were recognized in 1995, gross gains of $67,000 and gross losses of $181,000 were recognized in 1994 and gross gains of $588,000 and gross losses of $585,000 were recognized in 1993 on held-to-maturity securities. These gains and losses were primarily the result of held-to-maturity securities being called prior to maturity. Held-to-maturity securities with a carrying value of approximately $279,000,000 at December 31, 1995, were pledged to secure public and trust funds on deposit and for other purposes. On November 15, 1995, the FASB issued a special report pertaining to the implementation of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Concurrent ith the issuance of the report but not later than December 31, 1995, the FASB allowed for a reassessment of the appropriateness of the classification of securities held at that time and to account for any resulting reclassification at fair value. Reclassifications from the held-to-maturity category that were a result of this 10 one-time assessment would not call into question the intent of the Company to hold other debt securities until maturity in the future. Based upon this guidance, the Company transferred securities with an amortized cost of $59,069,000 and an estimated fair value of $59,698,000 to the available-for-sale category with a resulting unrealized gain of $629,000. The amortized cost and estimated fair value of held-to-maturity securities at December 31, 1995 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 1995 --------------------- ESTIMATED AMORTIZED FAIR COST VALUE --------------------- (In thousands) Due in one year or less $ 32,941 $ 32,863 Due after one year through five years 222,789 226,700 Due after five years through ten years 168,116 173,154 Due after ten years 15,457 15,358 -------- -------- Total $439,303 $448,075 ======== ======== (5) AVAILABLE-FOR-SALE SECURITIES A comparison of amortized cost and estimated fair values of available-for-sale securities as of December 31, 1995 and 1994 follows: 1995 -------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- --------- (In thousands) U.S. Treasury $ 50,626 $ 683 $ 68 $ 51,241 U.S. Government agencies and corporations 127,087 1,143 742 127,488 Tax exempt obligations of states and political subdivisions 23,212 444 315 23,341 Preferred stock 19,500 - - 19,500 Other 15,484 2,756 55 18,185 -------- ------ ------ -------- Total $235,909 $5,026 $1,180 $239,755 ======== ====== ====== ======== 1994 -------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- --------- (In thousands) U.S. Treasury $ 31,642 $ 30 $1,248 $ 30,424 U.S. Government agencies and corporations 70,205 101 2,699 67,607 Tax exempt obligations of states and political subdivisions 31,377 339 1,482 30,234 Preferred stock 53,000 - - 53,000 Other 10,536 2,283 55 12,764 -------- ------ ------ -------- Total $196,760 $2,753 $5,484 $194,029 ======== ====== ====== ======== Gross gains of $900,000 and gross losses of $1,399,000 were recognized in 1995, gross gains of $170,000 and gross losses of $349,000 were recognized in 1994 and gross gains of $807,000 and gross losses of $180,000 were recognized in 1993 on available-for-sale securities. Gross gains of $101,000 were recognized in 1993 from sales of trading securities. 11 Available-for-sale securities with a carrying value of approximately $82,000,000 at December 31, 1995, were pledged to secure public and trust funds on deposit and for other purposes. The amortized cost and estimated fair value of available-for-sale securities at December 31, 1995 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalities. 1995 --------------------- ESTIMATED AMORTIZED FAIR COST VALUE --------- --------- (In thousands) Due in one year or less $ 49,946 $ 50,022 Due after one year through five years 128,564 129,684 Due after five years through ten years 31,986 34,767 Due after ten years 25,413 25,282 -------- -------- Total $235,909 $239,755 ======== ======== (6) LOANS A summary of loans classified by collateral type at December 31, 1995 and 1994 follows: 1995 1994 --------- ---------- (In thousands) Commercial and agricultural $ 223,225 $ 211,988 Consumer and installment 695,127 633,692 Real estate mortgage 1,314,935 1,151,666 Lease financing 121,617 81,816 Other 16,780 11,913 ---------- ---------- Total $2,371,684 $2,091,075 ========== ========== Non-performing loans consist of both non-accrual loans and loans which have been restructured (primarily in the form of reduced interest rates) because of the borrower's weakened financial condition. The aggregate principal balance of non-accrual loans was $1,592,000 and $3,029,000 at December 31, 1995 and 1994, respectively. Restructured loans totaled $7,000 and $1,448,000 at December 31, 1995 and 1994, respectively. The recorded investment in loans considered impaired at December 31, 1995, under SFAS No. 114 was $30,875,000 with a valuation reserve of $3,279,000. Interest income of approximately $2,740,000 was recognized on these impaired loans. There were no impaired loans without a valuation reserve at December 31, 1995. The total amount of interest earned on non-performing loans was approximately $70,000, $214,000 and $277,000 in 1995, 1994 and 1993, respectively. The gross interest income which would have been recorded under the original terms of those loans amounted to $105,000, $353,000 and $611,000 in 1995, 1994 and 1993, respectively. 12 (7) ALLOWANCE FOR CREDIT LOSSES The following schedule summarized the changes in the allowance for credit losses for the years ended December 31, 1995, 1994 and 1993: 1995 1994 1993 ------- ------- ------- (In thousands) Balance at beginning of year $30,830 $27,468 $24,116 Provision charged to expense 6,206 5,946 9,032 Recoveries 1,567 3,277 1,996 Loans charged off (4,714) (5,861) (7,676) Acquisitions 747 - - ------- ------- ------- Balance at end of year $34,636 $30,830 $27,468 ======= ======= ======= (8) PREMISES AND EQUIPMENT A summary by asset classification at December 31, 1995 and 1994 follows: ESTIMATED USEFUL LIFE YEARS 1995 1994 ----------- -------- -------- (In thousands) Cost: Land $ 12,756 $ 11,125 Buildings and improvements 20-50 61,943 57,475 Leasehold improvements 10-20 1,608 2,103 Equipment, furniture and fixtures 3-12 48,486 46,333 Construction in progress 5,044 2,309 -------- -------- 129,837 119,345 Accumulated Depreciation and Amortization 48,597 47,887 -------- -------- Premises and Equipment, net $ 81,240 $ 71,458 ======== ======== (9) TIME DEPOSITS AND SHORT-TERM DEBT Certificates of deposit and other time deposits of $100,000 or more amounting to approximately $334,915,000 and $264,486,000 were outstanding at December 31, 1995 and 1994, respectively. Total interest expense relating to certificate and other time deposits of $100,000 or more totaled approximately $17,386,000, $10,582,000 and $13,314,000 for the years ended December 31, 1995, 1994 and 1993, respectively. 13 Presented below is information relating to short-term debt for the years ended December 31, 1995 and 1994. END OF PERIOD DAILY AVERAGE MAXIMUM ---------------------- ------------------------ OUTSTANDING INTEREST INTEREST AT ANY BALANCE RATE BALANCE RATE MONTH END ------------------------ ------------------------ -------------- (Dollars in thousands) 1995: Federal funds purchased $ 3,850 5.2% $ 5,747 6.7% $11,474 Securities sold under repurchase agreements 31,998 4.8% 33,996 5.0% 39,345 ------- ------- ------- Total $35,848 $39,743 $50,819 ======= ======= ======= 1994: Federal funds purchased $34,350 6.3% $ 8,403 4.0% $35,700 Securities sold under repurchase agreements 28,964 4.6% 28,398 3.5% 32,410 ------- ------- ------- Total $63,314 $36,801 $68,110 ======= ======= ======= Federal funds purchased generally mature the day following the date of purchase while securities sold under repurchase agreements generally mature within 30 days from the date of sale. At December 31, 1995, the Company's subsidiary banks had established informal federal funds borrowing lines of credit aggregating $173,500,000. (10) LONG-TERM DEBT SUBORDINATED CAPITAL DEBENTURES On May 21, 1986, the Company issued $10,000,000 of 7.25% convertible subordinated capital debentures due May 1, 1998. The 7.25% debentures were convertible at or before maturity at a conversion price of $11.01 principal amount of debentures for one share of the Company's common stock, $2.50 par value per share, subject to adjustment. On March 12, 1993, the Company called for redemption on April 27, 1993, of the remaining $7,996,000 in outstanding debentures. Prior to the redemption date, substantially all of the outstanding debentures were converted into an aggregate of 727,678 shares of the Company's common stock (316,382 shares prior to adjusting for the 15% stock dividend and 2-for-1 stock split, see Notes 2 and 15), and on April 27, 1993, the remaining $22,000 principal amount of the debentures were redeemed. Interest of $116,000 on the 7.25% debentures is included in interest expense for 1993. On November 22, 1989, the Company issued $25,000,000 of 9% subordinated capital debentures due November 1, 1999. At December 31, 1995 and 1994, $24,508,000 of the debentures were outstanding. At December 31, 1995, the 9% debentures were redeemable at the option of the Company in whole or in part at the redemption price of 101.5% of par and will be redeemable at par on or after November 1, 1996. Up to $25,000 of 9% debentures per holder and a maximum of $250,000 of 9% debentures in the aggregate may be tendered for prepayment in the event of a holder's death in each 12-month period ending October 31. If aggregate redemptions are less than $250,000 in any such 12-month period, the unused portion will be carried forward to succeeding periods. No debentures were prepaid during 1993, 1994 or 1995. Interest of $2,206,000 on the 9% debentures is included in interest expense for 1995, 1994 and 1993, respectively. 14 FEDERAL HOME LOAN BANK ADVANCES BOM has entered into a blanket floating lien security agreement with the Federal Home Loan Bank (FHLB) of Dallas. Under the terms of this agreement, BOM is required to maintain sufficient collateral to secure borrowings in an aggregate amount of the lessor of 65 percent of the book value (unpaid principal balance) of the borrower's first mortgage collateral or 35 percent of the borrower's assets. VOL has entered into a blanket floating lien security agreement with the FHLB of Cincinnati. Under the terms of this agreement, VOL is required to maintain unencumbered, quality first mortgage loans in an amount equal to 150 percent of outstanding advances as collateral for those advances. At December 31, 1995, the following FHLB fixed term advances were repayable in monthly installments as follows: FINAL DUE DATE INTEREST RATE AMOUNT --------------- ------------- ------ (In thousands) 1997 5.95% $ 5,000 1998 5.63% 5,000 2000 5.82% - 6.55% 10,000 Thereafter 5.21% - 8.95% $29,116 ------- Total $49,116 ======= (11) INCOME TAXES Total income taxes for the year ended December 31, 1995, 1994 and 1993 were allocated as follows: 1995 1994 1993 --------- ------------ ---------- (In thousands) Income from continuing operations $15,750 $12,832 $10,216 Cumulative effect of accounting change - - (3,429) Shareholders' equity for unrealized gain (loss) on available-for-sale securities 2,395 (1,139) - ------- ------- ------- Total $18,145 $11,693 $ 6,787 ======= ======= ======= The components of income tax expense (credit) attributable to continuing operations are as follows for the years ended December 31, 1995, 1994 and 1993: 1995 1994 1993 ---------- ----------- -------- (In thousands) Current: Federal $14,118 $ 8,224 $ 9,702 State 1,558 1,295 930 Deferred: Federal 13 3,002 (330) State 61 311 (86) ------- ------- ------- Total $15,750 $12,832 $10,216 ======= ======= ======= 15 Income tax expense differs from the amount computed by applying the U.S. federal income tax rate of 35% to income before income taxes due to the following: 1995 1994 1993 -------- ----------- -------- (In thousands) Tax expense at statutory rate $17,939 $15,246 $13,903 Increase (reduction) in taxes resulting from: State income taxes net of federal tax benefit 1,052 1,044 549 Tax exempt interest revenue (2,718) (2,796) (3,022) Dividend received deduction (378) (497) (418) Tax over book loss on security transactions (520) (100) (268) Non-deductible merger expenses 490 41 - Other, net (115) (106) (528) ------- ------- ------- Total $15,750 $12,832 $10,216 ======= ======= ======= The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995 and 1994 are as follows: 1995 1994 ---- ---- (In thousands) Deferred tax assets: Loans receivable, principally due to allowance for credit losses $13,196 $10,843 Deferred liabilities principally due to compensation arrangements and vacation accruals 2,939 2,453 Unrealized losses on available-for-sale securities - 1,029 Other, net 105 199 Net operating loss carryforwards 395 460 Alternative minimum tax credit carryforwards - 756 ------- ------- Total gross deferred tax assets $16,635 $15,740 Less: valuation allowance - - ------- ------- Deferred tax assets $16,635 $15,740 ======= ======= Deferred tax liabilities: Bank premises and equipment, principally due to differences in depreciation and lease transactions $10,439 $ 8,168 Loans and lease receivables, principally due to deferral of loan origination costs and interest income recognition 1,342 1,959 Deferred assets, principally due to the capitalization of excess servicing rights for financial reporting purposes 2,432 1,617 Investments, principally due to interest income recognition 767 1,035 Unrealized gains on available-for-sale securities 1,366 - Other, net 18 221 ------- ------- Total gross deferred liabilities 16,364 13,000 ------- ------- Net deferred tax assets (liabilities) $ 271 $ 2,740 ======= ======= 16 Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences existing at December 31, 1995. At December 31, 1995 the Company has net operating loss carryforwards for federal income tax purposes of approximately $1,127,000 that are available to offset future federal taxable income, subject to various limitations, through 2001. At December 31, 1995 the Company has capital loss carryforwards for federal income tax purposes of approximately $202,000 that are available to offset future capital gains, if any. The capital loss carryforwards will expire in 1997 and 1998. Based on the Company's historical and current pretax earnings, management believes that it is more likely than not that the Company will realize the benefits of the capital loss carryforwards existing at December 31, 1995. Tax bad debt reserves at Laurel Federal in the amount of $5,857,000 have not been tax-effected and represent a potential deferred tax liability. (12) PENSION AND PROFIT SHARING PLANS The Company maintains a noncontributory and trusteed defined benefit pension plan covering substantially all full-time employees who have at least one year of service and have attained the age of twenty-one. Benefits are based on years of service and the employee's compensation. The Company's funding policy is to contribute to the pension plan the amount required to fund benefits expected to be earned for the current year and to amortize amounts related to prior years using the projected unit credit cost method. The difference between the pension cost included in current income and the funded amount is included in other assets or other liabilities, as appropriate. Actuarial assumptions are evaluated periodically. Pension expense for the years ended December 31, 1995, 1994 and 1993 included the following components: 1995 1994 1993 ------ ------ ------ (In thousands) Service cost $ 785 $1,035 $ 992 Interest cost 1,001 1,081 1,032 Actual return on plan assets (3,637) 31 (1,079) Net amortization and deferral 2,510 (1,200) 67 Cost of special termination benefits 464 - - ------ ------ ------ Pension expense $1,123 $ 947 $1,012 ====== ====== ====== The funded status of the Company's plan at December 31, 1995 and 1994 was as follows: 1995 1994 ------- ------- (In thousands) Plan assets at fair value (primarily in listed bonds and commingled funds) $19,234 $14,857 Actuarial present value of projected benefit obligations 17,433 13,515 ------- ------- Projected benefit obligation less than plan assets 1,801 1,342 Unrecognized net gain (1,507) (2,670) Unrecognized prior service cost (1,341) (527) Unrecognized net obligation at January 1 (10) (12) ------- ------- Accrued pension expense recorded in the financial statements $(1,057) $(1,867) ======= ======= Actuarial present value of vested benefit obligations $ 7,412 $ 7,482 ======= ======= Accumulated benefit obligations $11,285 $ 8,769 ======= ======= 17 The discount rate used in determining the actuarial present value of the projected benefit obligation was 7.5% for 1995 and 1994. The rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 5% for 1995 and 5.5% for 1994. The expected long-term rate of return on assets during 1995 and 1994 was 7.5%. The Company has a non-qualified supplemental retirement plan for certain key employees. Benefits commence when the employee retires and are payable over a period of ten years. The amount accrued under the plan was $111,000 in 1995, $93,000 in 1994 and $90,000 in 1993. The Company has a deferred compensation plan (commonly referred to as a 401(k) Plan), whereby employees may contribute a portion of their compensation, as defined, subject to the limitation as established in Section 415 of the Internal Revenue Code. Employee contributions (up to five percent of defined compensation) are matched dollar-for-dollar by the Company. Under the terms of the plan, contributions matched by the Company are used to purchase Company common stock at prevailing market prices. Plan expense for the years ended December 31, 1995, 1994 and 1993 was $1,495,000, $1,402,000 and $1,353,000, respectively. In December 1993, the Company adopted the BancorpSouth, Inc. Restoration Plan (Restoration Plan) to provide for the payment of retirement benefits to certain participants in the BancorpSouth, Inc. Retirement Plan (Basic Plan). The Restoration Plan covers any employee whose benefit under the Basic Plan is limited by the provisions of the Internal Revenue Code of 1986 and any employee who elects to participate in the BancorpSouth, Inc. Deferred Compensation Plan, thereby reducing his benefit under the Basic Plan. Restoration Plan expense was $48,000 in 1995 and $36,000 in 1994. (13) FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS 107, "Disclosures about Fair Value of Financial Instruments", requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments. SECURITIES The carrying amounts for short-term securities approximate fair value because of their short-term maturity (90 days or less) and present no unexpected credit risk. The fair value of most longer-term securities is estimated based on market prices or dealer quotes. See Note 4, Held-to-Maturity Securities, and Note 5, Available-for-Sale Securities for fair values. LOANS Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, consumer and installment and real estate mortgage. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information. The following table presents information for loans at December 31, 1995 and 1994: 1995 1994 -------------------------- -------------------------- BOOK FAIR BOOK FAIR VALUE VALUE VALUE VALUE ---------- ---------- ---------- ---------- (In thousands) Commercial $ 223,225 $ 224,129 $ 211,988 $ 207,837 Consumer and installment 695,127 708,100 633,692 647,177 Real estate mortgage 1,314,935 1,295,090 1,151,666 1,126,932 All other 16,780 16,780 11,913 11,913 ---------- ---------- ---------- ---------- Total $2,250,067 $2,244,099 $2,009,259 $1,993,859 ========== ========== ========== ========== 18 Average maturity represents the expected average cash flow period, which in some instances is different than the stated maturity. Management has made estimates of fair value discount rates that is believed to be reasonable. However, because there is no market for many of these financial instruments, management has no basis to determine whether the fair value presented above would be indicative of the value negotiated in an actual sale. New loan rates were used as the discount rate on new loans of the same type, credit quality on maturity. For lower graded loans, the discount rate was based on yields of bonds of similar credit risk and maturity. DEPOSIT LIABILITIES Under SFAS 107, the fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings, and NOW accounts, and money market and checking accounts, is equal to the amount payable on demand as of December 31, 1995 and 1994. The fair value of fixed-rate certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar maturities. The following table presents information for certificates of deposit at December 31, 1995 and 1994: 1995 1994 ------------------------ ------------------------ BOOK FAIR BOOK FAIR VALUE VALUE VALUE VALUE ---------- ---------- ---------- ---------- (In thousands) Certificates of deposit: Maturing in six months or less $ 755,204 $ 757,639 $ 597,947 $ 597,358 Maturing between six months and one year 345,987 347,679 215,342 215,855 Maturing between one and three years 288,709 292,169 339,008 339,820 Maturing beyond three years 81,546 84,766 116,243 115,249 ---------- ---------- ---------- ---------- Total $1,471,446 $1,482,253 $1,268,540 $1,268,282 ========== ========== ========== ========== LONG-TERM DEBT The fair value of the Company's subordinated capital debentures is estimated based on quoted market prices. The following table presents information at December 31, 1995 and 1994: 1995 1994 ------------------- ------------------ BOOK FAIR BOOK FAIR VALUE VALUE VALUE VALUE ------- ------- ------- ------- (In thousands) Subordinated Capital Debentures $24,508 $24,265 $24,508 $24,018 ======= ======= ======= ======= 19 The fair value of the Company's FHLB advances is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently available for advances of similar maturities. The following table presents information on the FHLB advances at December 31, 1995 and 1994. 1995 1994 ------------------- ------------------ BOOK FAIR BOOK FAIR VALUE VALUE VALUE VALUE ------- ------- ------- ------- (In thousands) (In thousands) Final due date - -------------- 1997 $ 5,000 $ 5,024 $ - $ - 1998 5,000 5,001 - - 2000 10,000 10,257 - - Thereafter 29,116 29,548 42,908 38,334 ------- ------- ------- ------- Total $49,116 $49,830 $42,908 $38,334 ======= ======= ======= ======= (14) STOCK INCENTIVE AND STOCK OPTION PLANS During 1987, the Company issued 34,500 shares of common stock (15,000 shares prior to adjusting for the 15% stock dividend and the 2-for-1 stock split effected in the form of a dividend, see Notes 2 and 15) to a key employee. The shares vest over a 10-year period subject to the Company meeting certain performance goals. The unearned shares are held in escrow and totaled 6,900 at December 31, 1995. The compensation associated with this award is being recognized over the 10-year period. During 1994, the Company issued 50,000 shares of common stock (25,000 shares prior to adjusting for the 2-for-1 stock split effected in the form of a dividend, see Note 2) to a key employee; 25,000 shares were awarded upon issuance and 25,000 shares were awarded on November 21, 1995. The stock bonus agreement provides for a cash bonus to the employee in an amount equal to the state and federal income and employment tax liabilities incurred by the employee as a result of this stock bonus award. The Company recorded compensation expense of $905,000 and $753,000 in 1995 and 1994, respectively, with regard to this stock bonus. In 1995, the Company issued 30,000 shares of common stock (15,000 shares prior to adjusting for the 2-for-1 stock split effected in the form of a dividend, see Note 2) to a key employee. The shares vest over a 10-year period subject to the Company meeting certain performance goals. The unearned shares are held in escrow and totaled 30,000 at December 31, 1995. The compensation associated with this award is being recognized over the 10-year period. Key employees and directors of the Company and its subsidiaries have been granted stock options and stock appreciation rights (SARs) under the Company's 1990, 1994 and 1995 stock incentive plans. All options and SARs granted pursuant to these plans have been at market value on the date of the grant and are exercisable over periods of one to ten years. The Company recorded $947,000, $106,000 and $213,000 in compensation expense in 1995, 1994 and 1993, respectively, related to the SARs because of the increase in market value of its common stock. In 1995, pursuant to certain acquisitions, incentive and non-qualified stock options were granted to employees and directors of the companies being acquired in exchange for stock options that were outstanding at the time those mergers were consummated. The number of shares and option prices of shares authorized under the various stock option plans have been adjusted for the two-for-one stock split effected in the form of a dividend discussed in Note 2. 20 Changes in options outstanding during 1995, 1994 and 1993 were as follows: PRICE RANGE SHARES PER SHARE ------- ---------------- Outstanding, December 31, 1992 265,843 $ 9.44 to $14.94 Granted during 1993 250,700 $15.82 to $17.45 Exercised during 1993 (19,545) $ 8.26 to $12.99 Expired or cancelled during 1993 (3,680) $ 8.21 to $ 9.95 ------- ---------------- Outstanding, December 31, 1993 493,318 $ 8.21 to $17.45 Granted during 1994 24,150 $14.88 Exercised during 1994 (37,071) $ 8.26 to $12.99 Expired or cancelled during 1994 (2,645) $ 8.26 to $15.82 ------- ---------------- Outstanding, December 31, 1994 477,752 $ 8.21 to $17.45 Granted during 1995 178,000 $17.13 to $22.13 Additions due to acquistions 64,691 $ 4.94 to $ 7.16 Exercised during 1995 (42,073) $ 4.94 to $15.82 Expired or cancelled during 1995 (1,150) $14.88 ------- ---------------- Outstanding, December 31, 1995 677,220 $ 4.94 to $22.13 ------- ---------------- Exercisable, December 31, 1995 424,852 $ 4.94 to $17.45 ------- ---------------- (15) STOCK DIVIDEND On December 1, 1993, the Company issued 2,050,214 new shares of common stock (1,025,107 shares prior to adjusting for the 2-for-1 stock split, see Note 2) to effect the payment of a 15% stock dividend. Shareholders who were entitled to fractional shares were paid cash equal to the market value of the fraction on the record date which amounted to $76,000. Information relating to earnings per share has been retroactively adjusted to reflect this 15% stock dividend. (16) PER SHARE AND DIVIDEND DATA Net income per share is based on the weighted average number of shares of the Company's common stock and common stock equivalents outstanding. Net income per share for all periods presented has been retroactively adjusted to the reflect the acquisitions as discussed in Note 3. Common stock and common stock equivalents have also been adjusted for all periods presented for the 15% stock dividend and the two-for-one stock split effected in the form of a 100% stock dividend (see Notes 2 and 15). The computation of earnings per share is based on this adjusted weighted average number of common shares outstanding and the assumed exercise of all outstanding stock options using the treasury stock method (21,015,406 in 1995, 20,373,414 in 1994 and 19,858,018 in 1993). Wes-Tenn had outstanding warrants to purchase shares of its common stock all of which were exercised prior to its merger with the Company as discussed in Note 3. Dividends to shareholders can be paid only from dividends paid to the Company by its subsidiary banks which are subject to approval by the applicable state regulatory authorities. 21 (17) RELATED PARTY TRANSACTIONS The Company has made, and expects in the future to continue to make in the ordinary course of business, loans to directors and executive officers of the Company and their affiliates. In management's opinion, these transactions with directors and executive officers were made on substantially the same terms as those prevailing at the time for comparable transactions with other persons and did not involve more than normal risk of collectibility or present any other unfavorable features. An analysis of such outstanding loans is as follows: AMOUNT ------ (In thousands) Loans outstanding December 31, 1994 $ 16,916 New loans 14,488 Repayments (13,543) Changes in directors and executive officers (586) -------- Loans outstanding December 31, 1995 $ 17,275 ======== (18) CAPITALIZED MORTGAGE SERVICING RIGHTS In May 1995, SFAS No. 122, "Accounting for Mortgage Servicing Rights," was issued which is an amendment to SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." The Company elected in the fourth quarter to adopt this statement as of January 1, 1995. The effect of implementing SFAS No. 122 was not material to the consolidated financial statements. The primary difference between SFAS No. 122 and SFAS No. 65, as they relate to the Company, is the accounting treatment for in-house originated mortgage servicing rights (OMSRs). Substantially all of the Company's originations are in-house, whereby the underlying loans are funded and closed by the Company. SFAS No. 122, among other provisions, requires the recognitions of OMSRs, as well as purchased mortgage servicing rights (PMSRs), as assets by allocating the total cost incurred between the loan and the servicing rights based on their relative fair values. Under SFAS No. 65, the cost of OMSRs was included with the cost of the related loans and written off against income when the loans were sold. PMSRs were previously recorded as assets under SFAS No. 65. Also under the new Statement, all capitalized mortgage servicing rights are evaluated for impairment based on the excess of the carrying amount of the mortgage servicing rights over their fair value. In measuring impairment, the carrying amount must be stratified based on one or more predominant risk characteristics of the underlying loans. Impairment is recognized through a valuation allowance for each individual stratum. Under SFAS No. 65, the impairment evaluation could be made using either discounted or undiscounted cash flows with no required level of disaggregation specified. Any impairment was recorded directly against the asset. SFAS No. 122 does not change the provisions of SFAS No. 65 related to the recognition and amortization of excess servicing rights. The following is a summary of capitalized mortgage servicing rights, net of accumulated amortization, and a valuation allowance for impairment: (in thousands) December 31, 1994 $3,608 Mortgage servicing rights capitalized 2,100 Amortization expense (657) ------ December 31, 1995 5,051 Valuation allowance (401) ------ Fair value at December 31, 1995 $4,650 ====== The value of pre-SFAS No. 122 PMSRs is established using a discounted cash flow analysis. These PMSRs are being amortized using an accelerated method over the estimated life of the net servicing income. The value of post-SFAS No. 122 PMSRs and OMSRs is established by allocating the total costs incurred between the loan and the servicing rights based on their relative fair values. To determine the fair value of the servicing rights created, the Company uses a valuation model that calculates the present value of future cash flows. The significant assumptions utilized by the valuation model are prepayment assumptions based upon dealer consensus and discount rates based upon market indices at the date of determination. Post-SFAS No. 122 implementation 22 PMSRs and OMSRs are being amortized in proportion to and over the period of the estimated net servicing income. A quarterly value impairment analysis is performed using a discounted methodology that is disaggregated by predominant risk characteristics. The Company has determined those risk characteristics to include: note rate and term and loan type based on 1) loan guarantee (i.e. conventional or government) and 2) interest characteristic (i.e. fixed-rate or adjustable-rate). (19) COMMITMENTS AND CONTINGENT LIABILITIES LEASES Rent expense was approximately $1,658,000 for 1995, $1,717,000 for 1994 and $1,623,000 for 1993. Future minimum lease payments for all non-cancelable operating leases with initial or remaining terms of one year or more consisted of the following at December 31, 1995: AMOUNT ------ (In thousands) 1996 $1,300 1997 1,113 1998 918 1999 772 2000 483 Thereafter 1,001 ------ Total future minimum lease payments $5,587 ====== MORTGAGE LOANS SERVICED FOR OTHERS The Company services mortgage loans for others which are not included in the accompanying financial statements. Included in the $876 million of loans serviced for investors is approximately $299.5 million of primary recourse servicing where the Company is responsible for any losses incurred in the event of nonperformance by the mortgagor. The Company's exposure to credit loss in the event of such nonperformance is the unpaid principal balance at the time of default. This exposure is limited by the underlying collateral which consists of single family residences and either federal or private mortgage insurance. FORWARD CONTRACTS Forward contracts are agreements to purchase or sell securities at a future specific date at a specific price or yield. Risks arise from the possibility that counterparties may be unable to meet the term of their contracts and from movements in securities values and interest rates. At December 31, 1995, the Company had obligations under forward contracts consisting of commitments to sell mortgage loans originated or purchased by the Company into the secondary market at a future date. These obligations are entered into by the Company in order to establish the interest rate at which it can offer mortgage loans to its customers. Changes in the values of mortgage loans held for sale by the Company for delivery into the secondary market are recorded at the lower of cost or market. As of December 31, 1995, the contractual or notional amount of these forward contracts was approximately $34,988,000. The Company's exposure under these commitments to sell mortgage loans in the future is not material. LENDING COMMITMENTS In the normal course of business, there are outstanding various commitments and other arrangements for credit which are not reflected in the consolidated balance sheets. As of December 31, 1995, these included approximately $26,993,000 for letters of credit, and approximately $453,069,000 for interim mortgage financing, construction credit, credit card and revolving and line of credit arrangements. No significant credit losses are expected from these commitments and arrangements. REGULATORY MATTERS 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, the Company's thrift subsidiary's deposits 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 be assessed for 1996 23 at the rate of $0.23 per $100 of insured deposits, the same rate as 1995. 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. LITIGATION Various legal claims have arisen in the normal course of business, including claims against entities to which the Company is successor as a result of business combinations. In the opinion of management and legal counsel, the ultimate resolution of these claims will have no material effect on the Company's consolidated financial position. RESTRICTED CASH BALANCE Aggregate reserves (in the form of deposits with the Federal Reserve Bank) of $35,036,000 were maintained to satisfy Federal regulatory requirements at December 31, 1995. 24 (20) CONDENSED FINANCIAL STATEMENT INFORMATION OF BANCORPSOUTH, INC. (PARENT COMPANY ONLY) The following condensed unaudited financial information reflects the accounts and transactions of BancorpSouth, Inc. (parent company only) for the dates indicated: CONDENSED BALANCE SHEETS DECEMBER 31 --------------------- 1995 1994 -------- -------- (In thousands) Assets Cash on deposit with subsidiary banks $ 5,718 $ 2,455 Securities 1,233 1,255 Investment in subsidiaries 305,331 270,155 Other assets 1,375 8,008 -------- -------- Total assets $313,657 $281,873 ======== ======== Liabilities and shareholders' equity Long-term debt $ 24,508 $ 24,508 Other liabilities 1,054 4,513 -------- -------- Total liabilities 25,562 29,021 Shareholders' equity 288,095 252,852 -------- -------- Total liabilities and shareholders' equity $313,657 $281,873 ======== ======== YEARS ENDED DECEMBER 31 --------------------------- CONDENSED STATEMENTS OF INCOME 1995 1994 1993 ------- ------- ------- (In thousands) Dividends from subsidiaries $14,665 $12,279 $12,329 Management fees from subsidiaries 603 1,282 1,180 Other operating income 60 60 57 ------- ------- ------- Total income 15,328 13,621 13,566 Operating expenses 3,243 3,128 4,629 ------- ------- ------- Income before equity in undistributed earnings of subsidiaries 12,085 10,493 8,937 Equity in undistributed earnings of subsidiaries 23,419 20,235 23,998 ------- ------- ------- Net income $35,504 $30,728 $32,935 ======= ======= ======= YEARS ENDED DECEMBER 31 --------------------------- CONDENSED STATEMENTS OF CASH FLOWS 1995 1994 1993 ------- ------- ------- (In thousands) Operating Activities: Net income $35,504 $30,728 $32,935 Adjustments to reconcile net income to net cash provided by operating activities (22,592) (25,589) (20,985) ------- ------- ------- Net cash provided by operating activities 12,912 5,139 11,950 Net cash provided by (used in) investing activities - 900 (1,037) Net cash used in financing activities (9,649) (6,844) (11,962) ------- ------- ------- Increase (decrease) in cash and cash equivalents 3,263 (805) (1,049) Cash and cash equivalents at beginning of year 2,455 3,260 4,309 ------- ------- ------- Cash and cash equivalents at end of year $ 5,718 $ 2,455 $ 3,260 ======= ======= ======= 25 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders BancorpSouth, Inc.: We have audited the consolidated balance sheets of BancorpSouth, Inc., and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BancorpSouth, Inc., and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1, the Company changed its method of accounting for securities to adopt the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities", in 1994. As discussed in Notes 1 and 11, the Company changed its method of accounting for income taxes to adopt the provisions of SFAS No. 109, "Accounting for Income Taxes" in 1993. KPMG Peat Marwick LLP Memphis, Tennessee January 26, 1996