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