1
EXHIBIT 13(a)
Managements' Discussion and Analysis of Financial
Condition and Results of Operations
2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BancorpSouth, Inc. (the Company) is a bank holding company with
commercial banking operations in Mississippi and Tennessee. Bank of Mississippi
(BOM), the Company's Mississippi banking subsidiary is headquartered in Tupelo,
Mississippi. Volunteer Bank (VOL), the Company's Tennessee banking subsidiary is
headquartered in Jackson, Tennessee. BOM and its consumer finance and credit
life insurance subsidiaries provide commercial banking, leasing, mortgage
origination and servicing and trust services to corporate customers, local
governments, individuals and other financial institutions through an extensive
network of branches and offices located throughout the State of Mississippi. VOL
and its consumer finance and credit life insurance subsidiaries provide similar
banking services in West Tennessee.
The following discussion provides certain information concerning the
consolidated financial condition and results of operations of the Company. For a
complete understanding of the following discussion, reference is made to the
Consolidated Financial Statements and Notes thereto presented elsewhere in this
Annual Report.
THREE YEARS ENDED DECEMBER 31, 1996
RESULTS OF OPERATIONS
Summary
The table below summarizes the Company's net income and returns on
average assets and average shareholders' equity for the years ended December 31,
1996, 1995 and 1994:
1996 1995 1994
---- ---- ----
(In thousands, except per share amounts)
Net income $ 42,883 $ 35,504 $ 30,728
Net income per share: $ 2.02 $ 1.69 $ 1.51
Return on average assets 1.24% 1.13% 1.07%
Return on average shareholders' equity 14.31% 13.23% 12.75%
NET INTEREST REVENUE
Net interest revenue, principally interest earned on assets less
interest costs on liabilities, provides the Company with its principal source of
income. Since net interest revenue is affected by changes in the levels of
interest rates and the amount and composition of interest earning assets and
interest bearing liabilities, one of management's primary tasks is to balance
these interest sensitive components of assets and liabilities for the purpose of
maximizing net interest revenue while at the same time minimizing interest rate
risk to the Company.
3
The following table presents the average components of interest earning
assets and interest bearing liabilities for each year and their change,
expressed as a percentage, from each of the prior years:
1996 1995 1994
------------------- ------------------- --------------------
AVERAGE % AVERAGE % AVERAGE %
BALANCE CHANGE BALANCE CHANGE BALANCE CHANGE
------- ------ ------- ------ ------- ------
Interest earning assets: (DOLLARS IN THOUSANDS)
Deposits with other banks $ 12,313 -38.3% $ 19,970 +79.7% $ 11,112 -24.9%
Held-to-maturity securities 480,191 -7.1% 516,919 +20.8% 427,759 -16.1%
Available-for-sale securities 231,040 +26.0% 183,396 -31.1% 266,370 +88.3%
Federal funds sold 60,868 +54.3% 39,451 -9.2% 43,437 -11.0%
Loans and leases, net of unearned 2,410,746 +12.3% 2,146,967 +14.1% 1,881,922 +12.4%
Mortgages held for sale 27,729 +33.3% 20,805 -38.1% 33,620 -38.7%
---------- ----- ---------- ----- ---------- -----
Total interest earning assets $3,222,887 +10.1% $2,927,508 +9.9% $2,664,220 +9.0%
========== ===== ========== ===== ========== =====
Interest bearing liabilities:
Deposits $2,598,941 +9.6% $2,371,330 +10.3% $2,149,042 +6.7%
Federal funds purchased and
securities sold under
repurchase agreements 40,880 +0.1% 40,845 +11.3% 36,686 +4.3%
Long-term debt 80,619 +17.8% 68,452 +17.6% 58,191 +67.6%
Other 3,359 -28.6% 4,706 +29.7% 3,627 +11.1%
---------- ----- ---------- ----- ---------- -----
Total interest bearing liabilities $2,723,799 +9.6% $2,485,333 +10.6% $2,247,546 +7.7%
========== ===== ========== ===== ========== =====
Non-interest bearing deposits $ 383,897 +6.3% $ 361,120 -0.9% $ 364,451 +11.3%
========== ===== ========== ===== ========== =====
In 1996 loans and leases continued as the most significant growth
components of interest earning assets. Loans and leases grew at faster rates
than interest bearing deposits in 1996, 1995 and 1994; however, the Company's
other funding sources, non-interest bearing deposits, federal funds purchased
and Federal Home Loan Bank advances, were adequate to fund its asset growth.
The changes in the components of interest earning assets, interest
bearing liabilities, and non-interest bearing deposits resulted in the following
tax equivalent net interest revenue expressed as a percent of average earning
assets for the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994
---- ---- ----
Net interest margin 4.81% 4.86% 4.76%
The Company experienced a decrease in net interest margin in 1996 as
interest rates stabilized. As short-term interest rates began to rise in 1995,
the net interest margin stabilized and then increased. The Company began in 1994
to utilize short-term, intermediate-term and long-term borrowings from the
Federal Home Loan Bank for the purpose of funding asset growth. The Company has
sought to lengthen the maturity of deposits by actively seeking four and
five-year certificates of deposit with interest rates slightly above the
relative market for such funds, thereby reducing the net interest margin in all
three years presented.
2
4
INTEREST RATE SENSITIVITY
The interest sensitivity gap is the difference between the maturity or
repricing scheduling of interest sensitive assets and interest sensitive
liabilities for a given period of time. A prime objective of asset/liability
management is to maximize net interest margin while maintaining a reasonable mix
of interest sensitive assets and liabilities. The following table sets forth the
Company's interest rate sensitivity at December 31, 1996:
INTEREST RATE SENSITIVITY
DECEMBER 31, 1996
MATURING OR REPRICING
--------------------------------------------------------------
91 DAYS OVER 1
0 TO 90 TO YEAR TO OVER
DAYS 1 YEAR 5 YEARS 5 YEARS
---------- --------- -------- --------
(IN THOUSANDS)
Interest earning assets:
Interest bearing deposits due from banks $ 18,715 $ - $ - $ -
Federal funds sold 70,300 - - -
Held-to-maturity securities 31,054 122,594 303,517 72,901
Available-for-sale securities 46,651 57,081 99,427 27,580
Loans & leases, net of unearned 823,938 338,850 1,201,638 104,908
Mortgages held for sale 25,728 - - -
---------- --------- -------- --------
Total interest earning assets 1,016,386 518,525 1,604,582 205,389
---------- --------- --------- --------
Interest bearing liabilities:
Interest bearing demand deposits & savings 440,575 215,968 476,708 -
Time deposits 393,463 588,461 592,260 3,473
Federal funds purchased & securities
sold under repurchase agreements 32,753 883 - -
Long-term debt 812 7,726 31,648 15,592
Other 947 44 300 371
---------- --------- --------- --------
Total interest bearing liabilities 868,550 813,082 1,100,916 19,436
---------- --------- --------- --------
Interest sensitivity gap $ 147,836 ($294,557) $ 503,666 $185,953
========== ========= ========= ========
Cumulative interest sensitivity gap $ 147,836 ($146,721) $ 356,945 $542,898
========== ========= ========= ========
In the event interest rates decline after 1996, it is likely that the
Company will experience a slightly positive effect on net interest income in the
following one year period, as the cost of funds will decrease at a more rapid
rate than interest income on interest bearing assets. Conversely, in periods of
increasing interest rates, based on the current interest sensitivity gap, the
Company will experience decreased net interest income.
PROVISIONS FOR CREDIT LOSSES
The Company has an asset quality review staff which, with a committee of
senior officers, reviews the adequacy of the allowance for credit losses in each
accounting period. An amount is provided as a charge against current income,
based on this group's recommendation and senior management's approval, to
maintain the allowance for credit losses at a level sufficient to absorb
possible losses inherent in the existing loan and lease portfolios. This
provision is determined after examining potential losses in specific credits and
considering the general risks associated with lending functions such as current
and anticipated economic conditions, historical experience as related to losses,
changes in the mix of the loan portfolio and credits which bear substantial risk
of loss but which cannot be readily quantified. The process of determining the
adequacy of the provision requires that management make material estimates and
assumptions which are particularly susceptible to significant change in the
near-term.
3
5
The provision for credit losses, the allowance for credit losses as a
percent of loans and leases outstanding at the end of each year and net charge
offs are shown in the following table:
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
Provision for credit losses $ 8,804 $ 6,206 $ 5,946
Allowance for credit losses as
a percent of loans and leases
outstanding at year end 1.51% 1.51% 1.52%
Net charge offs $ 6,168 $ 3,147 $ 2,584
Net charge offs as a percent
of average loans .26% .15% .14%
The 1996 provision for credit losses increased from 1995's level by
41.9% as a result of the growth in loans and an increase in loan losses,
primarily in consumer based loans. The 1995 provision for credit losses
increased 4.4% from 1994's level as a result of the growth in the loan
portfolio. The provision for credit losses for 1994 was 34.2% less than the
provision for the previous year principally as a result of an improvement in
general economic conditions as evidenced by the lowest level of net loans
charged off in recent history.
OTHER REVENUE
The components of other revenue for the years ended December 31, 1996,
1995 and 1994 and the percentage change from the prior year are shown in the
following table:
1996 1995 1994
------------------- ------------------- ------------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
------ -------- ------- --------- ------- --------
(DOLLARS IN THOUSANDS)
Mortgage lending $ 8,460 +127.2% $ 3,723 +333.9% $ 858 -72.1%
Service charges 17,828 +11.7% 15,965 +10.6% 14,439 +9.4%
Life insurance premiums 4,337 +29.7% 3,345 +1.4% 3,300 +7.9%
Trust income 2,606 +16.5% 2,237 +19.4% 1,873 +5.5%
Securities gains (losses), net 262 +134.2% (765) -161.1% (293) -140.1%
Other revenue 7,252 +7.7% 6,735 +15.4% 5,835 +18.2%
-------- -------- --------
Total other revenue $ 40,745 +30.4% $ 31,240 +20.1% $ 26,012 -2.9%
======== ======== ========
Mortgage lending revenue in 1996 represents $4,235,000 gain on sale of
mortgage loans and $4,225,000 from servicing mortgage loans. The revenue
produced by mortgage lending activities increased in 1996 primarily as a result
of declining interest rates and growth in servicing income. In 1995, mortgage
lending revenue rebounded from 1994's level as a result of stable interest rates
and growth in servicing income. In 1994, mortgage lending was impacted by losses
incurred on the sale of mortgages in an unfavorable secondary market. The
Company's mortgage loan servicing portfolio has continued to increase as
indicated in the following table:
1996 1995 1994
------------------- ------------------ -----------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
------ -------- ------ -------- ------ --------
(DOLLARS IN MILLIONS)
Mortgage loans serviced at year-end $1,033.9 +18.0% $ 876.0 +8.0% $ 811.3 +11.4%
Service charges on deposit accounts increased in 1996 and 1995 because
of higher volumes of items processed as a result of increased economic activity.
Trust income increased 16.5% in 1996, 19.4% in 1995 and 5.5% in 1994. The trust
business experienced steady growth as evidenced by increases in the number of
trust
4
6
accounts and the value of assets under care (either managed or in custody).
Other revenue increased 7.7% and 15.4% in 1996 and 1995, respectively,
principally as a result of increases in fees for non-deposit related services.
OTHER EXPENSE
The components of other expense for the years ended December 31, 1996,
1995 and 1994 and the percentage change from the prior year are shown in the
following table:
1996 1995 1994
------------------- ------------------ -----------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Salary and employee benefits $ 57,806 +5.6% $ 54,739 +13.1% $ 48,413 +5.3%
Occupancy net of rental income 8,331 +3.9% 8,022 +5.3% 7,616 +0.9%
Equipment 9,752 +10.1% 8,860 +18.7% 7,463 +15.6%
Deposit insurance premiums 2,601 -23.8% 3,412 -39.3% 5,621 +9.4%
Other 39,982 +8.9% 36,717 +21.3% 30,259 +7.8%
-------- -------- --------
Total other expense $118,472 +6.0% $111,750 +12.5% $ 99,372 +6.6%
======== ======== ========
Increases in salary and employee benefits are primarily attributable to
incentives and salary increases, additional employees to staff the banking
locations added in each of the three years and the increased cost of employee
health care benefits. Occupancy and equipment expenses have increased
principally as a result of additional branch offices and upgrades to the
Company's internal operating systems.
Deposit insurance premiums decreased substantially in 1996 and 1995 as
a result of lower rates in the insurance assessment rate of the Federal Deposit
Insurance Corporation (FDIC) which were based upon the risk assessment
classification assigned to it by the FDIC. Deposit insurance rates for 1996 for
the Company's deposits in the Bank Insurance Fund (BIF) were assessed at zero.
Certain other of the Company's deposits, which were acquired from thrifts,
remained in the Savings Association Insurance Fund (SAIF) and continued to
experience assessments for 1996 at the rate of 23 cents per $100 of insured
deposits, the same rate experienced in all three years. In 1996, a one-time
assessment on SAIF insured deposits was imposed which resulted in a pre-tax
payment of $1.9 million and reduced 1996 after-tax net income per share $0.05.
Other expenses increased 8.9% in 1996 as a result of expanded
telecommunications, systems enhancements, and credit card interchange fees, all
of which related to providing higher levels of convenient consumer oriented
banking services. Additionally, approximately $500,000 of unamortized expense
relating to the issuance of the Company's 9% Subordinated Capital Debentures was
charged against 1996 earnings as a result of the early extinguishment of the
debt issue in December 1996.
Other expenses increased 21.3% in 1995 principally as a result of merger
expenses related to the Company's acquisitions. The expansion of the Company's
branch banking network also contributed to increases in all years presented.
5
7
FINANCIAL CONDITION
LOANS
The Company's loan portfolio represents the largest single component of
its earning asset base. The following table indicates the average loans, year
end balances of the loan portfolio and the percentage increases for the years
presented:
1996 1995 1994
-------------------- -------------------- ------------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
-------- -------- -------- -------- ------ --------
(DOLLARS IN MILLIONS)
Loans, net of unearned - average $ 2,411 +12.3% $ 2,147 +14.1% $ 1,882 +12.4%
Loans, net of unearned - year end $ 2,469 +7.6% $ 2,295 +13.3% $ 2,026 +13.4%
The Company's loan portfolio continues to grow. The Company strives to
maintain a high-quality loan portfolio, forsaking growth for quality. The
Company's non-performing assets, which were less than 0.5% of net loans for all
years presented and which are carried either in the loan account or other assets
on the consolidated balance sheets, were as follows at the end of each year
presented:
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
Foreclosed properties $ 1,835 $2,662 $1,757
Non-accrual loans 3,940 1,592 3,029
Loans 90 days or more past due 4,811 5,148 3,614
Restructured loans 77 7 1,448
------- ------ ------
Total non-performing assets $10,663 $9,409 $9,848
======= ====== ======
The Company has not, as a matter of policy, participated in any highly
leveraged transactions nor made any loans or investments relating to corporate
transactions such as leveraged buyouts or leveraged recapitalizations. At
December 31, 1996 and 1995, the Company did not have any concentration of loans
in excess of 10% of loans outstanding. Loan concentrations are considered to
exist when there are amounts loaned to multiple borrowers engaged in similar
activities which would cause them to be similarly impacted by economic or other
conditions.
Included in non-performing assets above were loans the Company
considered impaired totaling $4,164,000, $1,774,000 and $3,029,000 in 1996, 1995
and 1994, respectively.
SECURITIES AND OTHER EARNING ASSETS
The securities portfolio is used to make various term investments,
provide a source of liquidity and to serve as collateral to secure certain types
of deposits. A portion of the Company's securities portfolio continues to be
tax-exempt. Investments in tax-exempt securities totaled $157.0 million at
December 31, 1996, compared to $134.7 million at the end of 1995. The Company
invests only in investment grade securities, with the exception of obligations
of Mississippi and Tennessee counties and municipalities, and avoids other high
yield non-rated securities and investments.
At December 31, 1996, the Company's available-for-sale securities
totaled $230.7 million. These securities, which are subject to possible sale,
are recorded at fair value. At December 31, 1996, the Company held no securities
whose decline in fair value was considered other than temporary.
Net unrealized gains on investment securites as of December 31, 1996
totaled $10.7 million. Net unrealized gains on held-to-maturity securities
comprised $7.0 million of that total while net unrealized gains on
available-for-sale securities were $3.7 million.
Net unrealized gains on investment securities as of December 31, 1995,
amounted to $12.6 million. Of that total, $8.8 million was attributable to
held-to-maturity securities and $3.8 million available-for-sale securities.
6
8
These unrealized gains were a direct result of relatively stable intermediate
term interest rates during 1996 and 1995. Because the average maturity of
securities owned is relatively short, market value fluctuations due to interest
rate changes are softened and the impact of foregone earnings is reduced.
DEPOSITS
The following table presents the Company's average deposit mix and
percentage change for the years indicated:
1996 1995 1994
------------------- ------------------ -----------------
AVERAGE
BALANCE % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
------- -------- ------ -------- ------ --------
(DOLLARS IN MILLIONS)
Interest bearing deposits $2,598.9 +9.6% $2,371.3 +10.3% $2,149.0 +6.7%
Non-interest bearing deposits $ 383.9 +6.3% $ 361.1 -0.9% $ 364.5 +11.3%
The Company's deposit mix continued to experience change in 1996. By
year end 1996, other time deposits showed an increase of 7.2% from the end of
1995, while interest bearing demand deposits increased by 9.0% and other
short-term savings accounts increased 22.5%. Non-interest bearing demand
deposits increased 14.5% from year end 1995 to year end 1996. Management is of
the opinion that the low interest rates paid on deposit accounts in 1996 and
1995 caused depositors to reduce the period over which they were willing to
commit their funds and shifted their deposits from longer term, fixed rate
instruments to daily savings and demand accounts, or even to seek alternative
non-bank investments. While that trend continued into 1996, the Company has
countered with a strategy of paying slightly above market rates for intermediate
term deposits. Deposits are the Company's primary source of funds to support its
earning assets. The Company's primary market areas provide the sources of
substantially all deposits for all periods presented.
LIQUIDITY
The Company's goal is to provide adequate funds to meet changes in loan
demand or any potential increase in the normal level of deposit withdrawals.
This goal is accomplished primarily by maintaining sufficient short-term liquid
assets coupled with consistent growth in core deposits in order to fund earning
assets and to maintain the availability of unused capacity to acquire funds in
national and local capital markets. The Company's traditional sources of
maturing loans, investment securities, mortgages held for sale, purchased
federal funds and base of core deposits seem adequate to meet liquidity needs
for normal operations. In 1994, the Company's two subsidiary banks initiated
relationships with the Federal Home Loan Bank which provided an additional
source of liquidity to fund term loans with borrowings of matched maturities.
The matching of these assets and liabilities has had the effect of reducing the
Company's net interest margin.
On October 23, 1996 the Company announced that it would call for
redemption all of its outstanding 9% Subordinated Capital Debentures due in
1999. On December 30, 1996 the Company extinguished the debt by irrevocably
depositing with the trustee $24,508,000 in cash plus accrued and unpaid interest
from November 1, 1996 to redeem the debentures on January 15, 1997.
CAPITAL RESOURCES
The Company is required to comply with the risk-based capital guidelines
established by the Board of Governors of the Federal Reserve System (FRB). These
guidelines apply a variety of weighting factors which vary according to the
level of risk associated with the assets. Capital is measured in two "Tiers":
Tier I consists of paid-up share capital, including common stock and disclosed
reserves (retained earnings and related surplus in the case of common stock),
and Tier II consists of general allowance for losses on loans and leases,
"hybrid" debt capital instruments, and all or a portion of other subordinated
capital debt, depending upon remaining term to maturity. The Company's Tier I
capital and total capital, as a percentage of total risk-adjusted assets, was
12.14% and 13.39%, respectively at December 31, 1996, compared to 12.11% and
13.97% at December 31, 1995. Both ratios exceed the required minimum levels for
these ratios of 4% and 8%, respectively. In addition, the Company's leverage
capital ratio (Tier I capital divided by total assets, less goodwill) was 8.56%
at December 31, 1996 and 8.56% at December 31, 1995, compared to the required
minimum leverage capital ratio of 3%.
7
9
The FDIC's capital-based supervisory system for insured financial
institutions categorizes the capital position for banks into five categories,
ranging from well capitalized to critically undercapitalized. For a bank to
classify as "well capitalized", the Tier I risk-based capital, total risk-based
capital and leverage capital ratios must be at least 6%, 10% and 5%,
respectively. Each of the Company's bank subsidiaries meet the criteria for the
"well capitalized" category at December 31, 1996.
The Company has determined to pursue acquisition transactions of
depository institutions and businesses closely related to banking which further
the Company's business strategies. The Company anticipates that the
consideration for substantially all of these transactions, if completed, will be
shares of the Company's Common Stock; however, transactions involving cash
consideration or other forms of consideration will not be excluded.
On August 28, 1996 the Company announced that it would purchase up to
$2.5 million of its outstanding common stock within the next year. As of
December 31, 1996 the Company had purchased 43,566 shares at a cost of $1.2
million. The shares were held as treasury stock except those shares re-issued to
satisfy the exercise of options to purchase common stock.
8