Item 1. - Business
General
BancorpSouth, Inc. (the "Company") is a bank holding company with commercial banking and financial services operations in Mississippi, Tennessee and Alabama. Its principal subsidiary is BancorpSouth Bank (the "Bank"). The Company's principal office is located at One Mississippi Plaza, Tupelo, Mississippi 38804 and its telephone number is (662) 680-2000.
Description of Business
The Bank has its principal office in Tupelo, Lee County, Mississippi, and conducts a general commercial banking and trust business through 167 offices in 87 municipalities or communities in 50 counties throughout Mississippi, western Tennessee and parts of Alabama. The Bank has grown through the acquisition of other banks, the purchase of assets from federal regulators and through the opening of new branches and offices. In addition, the Bank operates investment services, consumer finance, credit life insurance and insurance agency subsidiaries. At December 31, 1999, the Bank had total deposits of approximately $4.82 billion and total assets of approximately $5.78 billion.
The Company, through its subsidiaries, provides a range of financial services to individuals and small-to-medium size businesses. Various types of checking accounts, both interest bearing and non-interest bearing, are available. Savings accounts and certificates of deposit with a range of maturities and interest rates are available to meet the needs of customers. Other services include safe deposit and night depository facilities. Limited 24-hour banking with automated teller machines is provided in most of its principal markets. The Bank is an issuing bank for MasterCard and overdraft protection is available to approved MasterCard holders maintaining checking accounts with the Bank.
The Company offers a variety of services through the Bank's trust department of its subsidiary bank, including personal trust and estate services, certain employee benefit accounts and plans, including individual retirement accounts, and limited corporate trust functions.
At December 31, 1999, the Company and its subsidiaries employed 2,606 persons. The Company and its subsidiaries are not a party to any collective bargaining agreements, and employee relations are considered to be good.
Competition
Vigorous competition exists in all major areas where the Company is engaged in business. The Bank competes for available loans and depository accounts with state and national commercial banks as well as savings and loan associations, insurance companies, credit unions, money market mutual funds, automobile finance companies and financial services companies. None of these competitors is dominant in the entire area served by the Bank.
The principal areas of competition in the banking industry center on a financial institution's ability and willingness to provide credit on a timely and competitively priced basis, to offer a sufficient range of deposit and investment opportunities at a competitive price and maturity, and to offer personal and other services of sufficient quality and at competitive prices. The Company and its subsidiaries believe they can compete effectively in all these areas.
Regulation and Supervision
The following is a brief summary of the regulatory environment in which the Company and its subsidiaries operate and is not designed to be a complete discussion of all statutes and regulations affecting such operations, including those statutes and regulation specifically mentioned herein.
The Company is a bank holding company and is registered as such under the Bank Holding Company Act of 1956 with the Board of Governors of the Federal Reserve System (the "Federal Reserve") and is subject to regulation and supervision by the Federal Reserve. The Company is required to file with the Federal Reserve annual reports and such other information as it may require. The Federal Reserve may also conduct examinations of the Company.
The Company is a legal entity which is separate and distinct from its subsidiaries. There are various legal limitations on the extent to which the Bank may extend credit, pay dividends or otherwise supply funds to the Company or its affiliates. In particular, the Bank is subject to certain restrictions imposed by federal law on any extensions of credit to the Company or, with certain exceptions, other affiliates. Dividends to shareholders are paid from dividends paid to the Company by the Bank, which are subject to regulation by the Mississippi Department of Banking and Consumer Finance (the "Mississippi Department").
The Bank is incorporated under the banking laws of the State of Mississippi and is subject to the applicable provisions of Mississippi banking laws. The Bank is subject to the supervision of the Mississippi Department and to regular examinations by that department. The deposits in the Bank are insured by the Federal Deposit Insurance Corporation (the "FDIC") and, therefore, the Bank is subject to the provisions of the Federal Deposit Insurance Act and to examination by the FDIC. The Bank is not a member of the Federal Reserve.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") permits, among other things, the acquisition by bank holding companies of savings associations, irrespective of their financial condition, and increased the deposit insurance premiums for banks and savings associations. FIRREA also provides that commonly controlled federally insured financial institutions must reimburse the FDIC for losses incurred by the FDIC in connection with the default of another commonly controlled financial institution or in connection with the provision of FDIC assistance to such a commonly controlled financial institution in danger of default. Reimbursement liability under FIRREA is superior to any obligations to shareholders of such federally insured institutions (including a bank holding company such as the Company if it were to acquire another federally insured financial institution), arising as a result of their status as a shareholder of a reimbursing financial institution.
The Company and the Bank are subject to the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). This statute provides for increased funding for the FDIC's deposit insurance fund and expanded the regulatory powers of federal banking agencies to permit prompt corrective actions to resolve problems of insured depository institutions through the regulation of banks and their affiliates, including bank holding companies. The provisions are designed to minimize the potential loss to depositors and to FDIC insurance funds if financial institutions default on their obligations to depositors or become in danger of default. Among other things, FDICIA provides a framework for a system of supervisory actions based primarily on the capital levels of financial institutions. FDICIA also provides for a risk-based deposit insurance premium structure. The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to its deposit insurance fund. While most of the Company's deposits are in the Bank Insurance Fund (BIF), certain other of the Company's deposits which were acquired from thrifts over the years remain in the Savings Association Insurance Fund (SAIF).
The Company is required to comply with the risk-based capital guidelines established by the FRB, and to other tests relating to capital adequacy which the Federal Reserve adopts from time to time. See Note 19 of Notes to Consolidated Financial Statements included in this report.
In September 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA") was signed into law. IBBEA permits adequately capitalized and managed bank holding companies to acquire control of banks in states other than their home states, subject to federal regulatory approval, without regard to whether such a transaction is prohibited by the laws of any state. IBBEA permits states to continue to require that an acquired bank have been in existence for a certain minimum time period which may not exceed five years. A bank holding company may not, following an interstate acquisition, control more than 10% of the nation's total amount of bank deposits or 30% of bank deposits in the relevant state (unless the state enacts legislation to raise the 30% limit). States retain the ability to adopt legislation to effectively lower the 30% limit. Federal banking regulators may approve merger transactions involving banks located in different states, without regard to laws of any state prohibiting such transactions; except that, mergers may not be approved with respect to banks located in states that, prior to June 1, 1997, enacted legislation prohibiting mergers by banks located in such state with out-of-state institutions. Federal banking regulators may permit an out-of-state bank to open new branches in another state if such state has enacted legislation permitting interstate branching. Affiliated institutions are authorized to accept deposits for existing accounts, renew time deposits and close and service loans for affiliated institutions without being deemed an impermissible branch of the affiliate.
The federal Gramm-Leach-Bliley Act of 1999 (the "GLBA") was signed into law on November 12, 1999. Under the GLBA, banks are no longer prohibited by the Glass-Steagall Act from associating with a company engaged principally in securities activities. The GLBA also permits bank holding companies to elect to become a "financial holding company," which would expand the powers of the bank holding company. Financial holding company powers relate to financial activities that are determined by the Federal Reserve to be financial in nature, incidental to an activity that is financial in nature, or complementary to a financial activity (provided that the complementary activity does not pose a safety and soundness risk). The GLBA itself defines certain activities as financial in nature, including lending activities, underwriting and selling insurance, providing financial or investment advice, underwriting, dealing and making markets in securities and merchant banking. In order to qualify as a financial holding company, a bank holding company's depository subsidiaries must be both well capitalized and well managed, and must have at least a satisfactory rating under the Community Reinvestment Act. The bank holding company must also declare its intention to become a financial holding company to the Federal Reserve and certify that its depository subsidiaries meet the capitalization and management requirements. The repeal of the Glass-Steagall Act provisions and the availability of financial holding company powers became effective on March 11, 2000. The GLBA establishes the Federal Reserve as the umbrella regulator of financial holding companies, with subsidiaries of the financial holding company being more specifically regulated by other regulatory authorities, such as the Securities and Exchange Commission, the Commodity Futures Trading Commission and state securities and insurance regulators, based upon the subsidiaries' particular activities. The GLBA also provides for minimum federal standards of privacy to protect the confidentiality of the personal financial information of customers and to regulate use of such information by financial institutions. A bank holding company that does not elect to become a financial holding company remains subject to the Bank Holding Company Act. Management believes that the Company currently meets the requirements to make an election to become a financial holding company under the GLBA; however, management is considering the operational flexibility and other benefits, and the increased regulation, expense and other disadvantages, associated with becoming a financial holding company, and has not yet determined whether the Company will make an election to become a financial holding company.
The Community Reinvestment Act of 1997 ("CRA") and its implementing regulations are intended to encourage regulated financial institutions to meet the credit need of their local community or communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of such financial institutions. The regulations provide that the appropriate regulatory authority will assess CRA reports in connection with applications for establishment of domestic branches, acquisitions of banks or mergers involving bank holding companies. An unsatisfactory CRA rating may serve as a basis to deny an application to acquire or establish a new bank, to establish a new branch or to expand banking services. At December 31, 1999, the Company had a "satisfactory" CRA rating.
The Equal Credit Opportunity Act requires non-discrimination in banking services. The federal enforcement agencies have recently cited institutions for red-lining (refusing to extend credit to residents of a specific geographic area known to be comprised predominantly of minorities) or reverse red-lining (extending credit to minority applicants on terms less favorable than those offered to non-minority applicants). Violations can result in the assessment of substantial civil penalties.
The Bank's insurance subsidiaries are regulated by the insurance regulatory authorities and applicable laws and regulations of the states in which they operate.
Lending Activities
The Company's lending activities include both commercial and consumer loans. Loan originations are derived from a number of sources including real estate broker referrals, mortgage loan companies, direct solicitation by the Company's loan officers, present savers and borrowers, builders, attorneys, walk-in customers and, in some instances, other lenders. The Company has established disciplined and systematic procedures for approving and monitoring loans that vary depending on the size and nature of the loan.
Commercial Lending
The Bank offers a variety of commercial loan services including term loans, lines of credit, equipment and receivable financing and agricultural loans. A broad range of short-to-medium term commercial loans, both secured and unsecured are made available to businesses for working capital (including inventory and receivables), business expansion
(including acquisition and development of real estate and improvements), and the purchase of equipment and machinery. At times, the Company also makes construction loans to real estate developers for the acquisition, development and construction of residential subdivisions.
Commercial loans are granted based on the borrower's ability to generate cash flow to support its debt obligations and other cash related expenses. A borrower's ability to repay commercial loans is substantially dependent on the success of the business itself and on the quality of its management. As a general practice, the Bank takes as collateral a security interest in any available real estate, equipment, inventory, receivables or other personal property, although such loans may also be made infrequently on an unsecured basis. Generally, the Bank requires personal guaranties of its commercial loans to offset the risks associated with such loans.
The Bank has very little exposure as an agricultural lender. Crop production loans are either fully supported by the collateral and financial strength of the borrower, or else a 90% loan guaranty is obtained through the Farmers Home Administration on such loans.
Residential Consumer Lending
A portion of the Bank's lending activities consists of the origination of fixed and adjustable rate residential mortgage loans secured by owner-occupied property located in the Bank's primary market areas. Home mortgage lending is unique in that a broad geographic territory may be serviced by originators working from strategically placed offices either within the Bank's traditional banking facilities or from affordable storefront locations in commercial buildings. In addition, the Bank offers construction loans, second mortgages home improvement loans and home equity lines of credit. The Bank has received an "outstanding" CRA rating from the FDIC Company after its most recent examination.
The Bank finances the construction of individual, owner-occupied houses on the basis of written underwriting and construction loan management guidelines. First mortgage construction loans are made to solvent and competent contractors on both a pre-sold and a "speculation" basis. Such loans are also made to qualified individual borrowers and are generally supported by a take-out commitment from a permanent lender. The Bank makes residential construction loans to individuals who intend to erect owner occupied housing on a purchased parcel of real estate. The construction phase of these loans have certain risks, including the viability of the contractor, the contractor's ability to complete the project and changes in interest rates.
In most cases, the Bank will sell its mortgage loans of 15 or more years in term in the secondary market. The sale to the secondary market allows the Bank to hedge against the interest rate risks related to such lending operations. This brokerage arrangement allows the Bank to accommodate its clients' demands while eliminating the interest rate risk for the 15 to 30 year period generally associated with such loans. After the sale of a loan, the Bank's only involvement is to act as a servicing agent.
The Bank in most cases requires title, fire, extended casualty insurance, and, where required by applicable regulations, flood insurance to be obtained by the borrower. The Bank maintains its own errors and omissions insurance policy to protect against loss in the event of failure of a mortgagor to pay premiums on fire and other hazard insurance policies. Mortgage loans originated by the Bank customarily include a "due on sale" clause giving the Bank the right to declare a loan immediately due and payable in the event, among other matters, that the borrower sells or otherwise disposes of the real property subject to a mortgage. In general, the Bank enforces due on sales clauses. Borrowers are typically permitted to refinance or repay loans at their option without penalty.
Non-Residential Consumer Lending
Non-residential consumer loans made by the Bank include loans for automobiles, recreation vehicles, boats, personal (secured and unsecured) and deposit account secured loans. In addition, the Bank provides federally insured or guaranteed student loans to students at major universities and community colleges in the Bank's market areas. The Bank also conducts various indirect lending activities through established retail companies in its market areas. Non-residential consumer loans are attractive to the Bank because they typically have a shorter term and carry higher interest rates than
that charged on other types of loans. Non-residential consumer loans, however, do pose additional risks of collectability when compared to traditional types of loans granted by commercial banks such as residential mortgage loans.
The Bank also issues credit cards solicited on the basis of applications received through referrals from the Bank's branch networks. The Bank generally has a small portfolio of credit card receivables outstanding. Credit card lines are underwritten using conservative credit criteria, including past credit history and debt-to-income ratios, similar to the credit policies applicable to other personal consumer loans. Historically, the Bank believes that its credit card losses have been well-below industry norms.
Consumer loans are granted based on employment and financial information solicited from prospective borrowers as well as credit records collected from various reporting agencies. Stability of the borrower, willingness to pay and credit history are the primary factors to be considered. The availability of collateral is also a factor considered in making such a loan. The Bank seeks collateral that can be assigned and has good marketability with a clearly adequate margin of value. The geographic area of the borrower is another consideration with preference given to borrowers in the Bank's market area.
Other Financial Services
The Bank's consumer finance subsidiaries extend consumer loans to individuals and entities that may not satisfy the Bank's lending standards, and operate in 51 offices located in 51 communities in Mississippi, Tennessee and Alabama.
The Bank's insurance service subsidiaries serve as agents in the sale of title, life, automobile, homeowners, farmowners and other commercial insurance policies, and operate in 94 offices in Mississippi, Tennessee and Alabama. On June 30, 1999, Stewart Sneed Hewes, Inc. and its affiliated companies merged with one of the Bank's insurance services subsidiaries. Founded in 1905, Stewart Sneed Hewes specialized in commercial lines of insurance and offered a full line of property and casualty, life, health and employee benefits products and services. Stewart Sneed Hewes was one of the largest insurance brokerage organizations in Mississippi. Headquartered in Gulfport, Mississippi, Stewart Sneed Hewes operated in 6 communities in Mississippi.
The Bank's investment services subsidiary provides brokerage, investment advisory and asset management services, and operates in 8 communities in Mississippi, Tennessee and Alabama.
See Note 20 to the Company's Consolidated Financial Statements included elsewhere in the Report for financial information about each segment of the Company, as defined by generally accepted accounting principles.
Asset Quality
Management seeks to maintain a high quality of assets through conservative underwriting and sound lending practices. Management intends to follow this policy even though it may result in foregoing the funding of higher yielding loans. While there is no assurance that the Company will not suffer losses on its loans, management believes that the Company has in place adequate underwriting and loan administration policies and personnel to manage the associated risks prudently.
In an effort to maintain the quality of the loan portfolio, management seeks to minimize higher risk types of lending. Undesirable loans include loans to provide initial equity and working capital to new businesses with no other capital strength, loans secured by unregistered stock, loans for speculative transactions in stock, land or commodity markets, loans to borrowers or the taking of collateral outside the Company's market area, loans dependent on secondary liens as primary collateral, and non-recourse loans. To the extent risks are identified, additional precautions are taken in order to reduce the Company's risk of loss. Commercial loans entail certain additional risks since they usually involve large loan balances to single borrowers or a related group of borrowers, resulting in a more concentrated loan portfolio. Further, since their payment is usually dependent upon the successful operation of the commercial enterprise, they also are subject to adverse conditions in the economy.
The Board of Directors of the Bank concentrates its efforts and resources, and that of its management and lending officials, on loan review and underwriting policies. Loan status and monitoring is handled through the Bank's Loan Administration Department. Weak financial performance is identified and monitored using past due reporting, the internal loan rating system, loan review reports, the various loan committee functions, and periodic Asset Quality Rating Committee meetings. Senior loan officers have established a review process with the objective of quickly identifying, evaluating and initiating necessary corrective action for substandard loans. The results of loan reviews are reported to the audit committee of the Company's and the Bank's Board of Directors. Combined, these components are integral elements of the Bank's loan program, which has resulted in its loan portfolio performance to date. Nonetheless, management maintains a cautious outlook in anticipating the potential effects of uncertain economic conditions (both locally and nationally) and the possibility of more stringent regulatory standards.
Selected Statistical Information
Set forth in this section below is certain selected statistical information relating to the Company's business.
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differentials
See "Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations" under the caption "Net Interest Revenue" included herein for information regarding the distribution of assets, liabilities and shareholders' equity, and interest rates and interest differentials.
Analysis of Changes in Effective Interest Differential
See "Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations" under the caption "Net Interest Revenue" included herein for information regarding the analysis of changes in effective interest differential.
Investment Portfolio
Held-to-Maturity Securities
The following table shows the amortized cost of held-to-maturity securities at December 31, 1999, 1998 and 1997:
The following table shows the maturities and weighted average yields as of the end of the latest period for each investment category presented above:
The yield on tax-exempt obligations of states and political subdivisions has been adjusted to a taxable equivalent basis using a 35% tax rate.
Available-for-Sale Securities
The following table shows the book value of available-for-sale securities at December 31, 1999, 1998 and 1997:
The following table shows the maturities and weighted average yields as of the end of the latest period for each investment category presented above:
The yield on tax-exempt obligations of states and political subdivisions has been adjusted to a taxable equivalent basis using a 35% tax rate.
Loan Portfolio
The Company's loans are widely diversified by borrower and industry. The following table shows the composition of loans by collateral type of the Company at December 31 for the years indicated.
(1) Including $11,731,000, $16,864,000, $16,691,000, $18,731,000 and $19,637,000 in 1999, 1998, 1997, 1996 and 1995, respectively, of loans classified as agricultural.
(2) Including $63,038,000, $49,214,000, $44,249,000, $42,672,000 and $36,448,000 in 1999, 1998, 1997, 1996 and 1995, respectively, of loans secured by or relating to agricultural land.
Maturity Distribution of Loans
The maturity distribution of the Company's loan portfolio is one factor in management's evaluation of the risk characteristics of the loan portfolio. The following table shows the maturity distribution of gross loans of the Company as of December 31, 1999.
Sensitivity of Loans to Changes in Interest Rates
The interest sensitivity of the Company's loans is important in the management of effective interest differential. The Company attempts to manage the relationship between the rate sensitivity of its assets and liabilities to produce an effective interest differential that is not significantly impacted by the level of interest rates. The following table shows the interest sensitivity of the Company's gross loans as of December 31, 1999.
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Non-accrual, Past Due and Restructured Loans
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 $5,150,000, $6,629,000, $5,179,000, $6,593,000 and $3,696,000 at December 31, 1999, 1998, 1997, 1996 and 1995, respectively. The aggregate principal balance of restructured loans was $91,000, $713,000, $1,097,000, $1,812,000 and $281,000 at December 31, 1999, 1998, 1997, 1996 and 1995, respectively. The total amount of interest earned on non-performing loans was approximately $126,000, $153,000, $58,000, $42,000 and $70,000 in 1999, 1998, 1997, 1996 and 1995, respectively. The gross interest income that would have been recorded under the original terms of those loans amounted to $361,000, $385,000, $263,000, $373,000 and $112,000 in 1999, 1998, 1997, 1996 and 1995, respectively. Accruing loans which were contractually past due 90 days or more for years ended December 31, 1999, 1998, 1997, 1996 and 1995, amounted to $14,378,000, $10,308,000, $8,659,000, $6,687,000 and $6,203,000, respectively.
Loans considered impaired, under Statement of Financial Accounting Standards ("SFAS") No. 114, as amended by SFAS No. 118, are loans which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company's recorded investment in loans considered impaired at December 31, 1999 and 1998 was $5,790,000 and $8,643,000, respectively, with a valuation reserve of $2,176,000 and $3,223,000, respectively. The average recorded investment in impaired loans during 1999 and 1998 was $6,207,000 and $9,187,000, respectively.
The Company's policy provides that loans, other than installment loans, are generally placed in non-accrual status if, in management's opinion, payment in full of principal or interest is not expected, or when payment of principal or interest is more than 90 days past due, unless the loan is both well-secured and in the process of collection.
In the normal course of business, management becomes aware of possible credit problems in which borrowers exhibit potential for the inability to comply with the contractual terms of their loans, but which do not currently meet the criteria for disclosure as problem loans. Historically, some of these loans are ultimately restructured or placed in non-accrual status. At December 31, 1999, no loans were known to be potential problem loans.
At December 31, 1999, the Company did not have any concentration of loans in excess of 10% of total loans outstanding. Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities, which would cause them to be similarly impacted by economic or other conditions. However, the Company does conduct business in a geographically concentrated area. The ability of the Company's borrowers to repay loans is to some extent dependent upon the economic conditions prevailing in the Company's market area.
Summary of Loan Loss Experience
In the normal course of business, the Company assumes risks in extending credit. The Company manages these risks through its lending policies, loan review procedures and the diversification of its loan portfolio. Although it is not possible to predict loan losses with certainty, management continuously reviews the characteristics of the loan portfolio to determine its overall risk profile and quality.
Constant attention to the quality of the loan portfolio is achieved by a formal loan review process. The Board of Directors of the Bank has appointed a Loan Loss Reserve Valuation Committee (the Committee) which is responsible for ensuring that the allowance for loan and leases losses (ALLL) provides coverage of both known and inherent losses. The Committee considers estimates of loss for individually-analyzed credits as well as factors such as historical experience, changes in economic and business conditions and concentrations of risk in determining the level of ALLL. The Committee meets a least quarterly to determine the amount of additions to the ALLL. The Committee is composed of senior management from Loan Administration, Lending and Finance. In each period, the Committee bases the ALLL on its loan classification system as well as an analysis of general economic and business trends in our region and nationally.
A key input for determining the amount of the ALLL is the Company's loan classification system. The Company has a disciplined approach for assigning credit ratings and classifications to individual credits. Each credit is assigned a grade by the loan officer at origination that serves as a basis for the credit analysis of the entire portfolio. Periodically, loan officers review the status of each credit and update its grading. The gradings assigned by the loan officer are reviewed by an independent Loan Review Department (Loan Review). Loan Review is responsible for reviewing the credit rating and classification of individual credits. They also assess trends in the overall portfolio, adherence to internal credit policies and Loan Administration procedures and other factors that may affect the overall adequacy of the ALLL. Throughout this on-going process, management and the Committee are advised of the condition of individual loans and of the quality profile of the entire loan portfolio for consideration in establishing the ALLL.
Any loan or portion thereof which is classified as "loss" by regulatory examiners or which is determined by management to be uncollectible because of such factors as the borrower's failure to pay interest or principal, the borrower's financial condition, economic conditions in the borrower's industry, or the inadequacy of underlying collateral, is charged off.
The provision for credit losses charged to operating 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 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.
Management does not believe the allowance for credit losses can be fragmented by category of loans with any precision that would be useful to investors but is doing so in this report only in an attempt to comply with disclosure requirements of regulatory agencies. The breakdown of the allowance by loan category is based in part on evaluations of specific loans' past history and on economic conditions within specific industries or geographical areas. Accordingly, since all of these conditions are subject to change, the allocation is not necessarily indicative of the breakdown of any future losses.
The following table presents (a) the breakdown of the allowance for credit losses by loan category and (b) the percentage of each category in the loan portfolio to total loans at December 31 for the years presented:
The following table sets forth certain information with respect to the Company's loans (net of unearned discount) and the allowance for credit losses for the five years ended December 31, 1999.
Deposits
Deposits represent the principal source of funds for the Company. The distribution and market share of deposits by type of deposit and by type of depositor are important considerations in the Company's assessment of the stability of its funds sources and its access to additional funds. Furthermore, management shifts the mix and maturity of the deposits depending on economic conditions and loan and investment policies in an attempt, within set policies, to minimize cost and maximize effective interest differential.
The following table shows the classification of deposits on an average basis for the three years ended December 31, 1999.
Time deposits of $100,000 and over including certificates of deposits of $100,000 and over at December 31, 1999, had maturities as follows:
Return on Equity and Assets
Return on average common equity, average assets, and the dividend payout ratio are based on net income for the three years ended December 31, 1999, as presented below:
The Company's average common equity as a percent of average assets was 8.57%, 8.51% and 8.65% for 1999, 1998 and 1997, respectively.
Short-Term Borrowings
See Note 9 of Notes to Consolidated Financial Statements included herein for information about short-term borrrowings.
Item 2.
Item 2. - Properties
The physical properties of the Company are held in its subsidiaries as follows:
a. BancorpSouth Bank - The main office is located at One Mississippi Plaza in the central business district of Tupelo, Mississippi in a seven-floor modern glass, concrete and steel office building owned by the Bank. The Bank occupies approximately 80% of the rentable space, with the remainder leased to various unaffiliated tenants.
The Bank owns 136 of its 154 branch banking facilities. The remaining 18 branch banking facilities are occupied under leases varying in length from one to eight years. The Bank also owns several buildings in the Hattiesburg, Mississippi, area (which provide space for certain of its Southern Region activities, including warehouse requirements, mortgage lending, trust services, lease servicing and central operations), an operations center near the Tupelo Municipal Airport, an office building in downtown Jackson, Mississippi (which has approximately 86,000 square feet of space, of which the Bank uses approximately two-thirds for banking activities while leasing or holding for lease the remaining 28,000 square feet) and an office building in downtown Gulfport, Mississippi (which has approximately 85,000 square feet of space, of which the Bank uses approximately 7,500 square feet for banking activities while leasing or holding for lease the remaining portion of the building).
The Bank considers all its buildings and leased premises to be in good condition. The Bank also owns several parcels of property acquired under foreclosure. Ownership of and rentals on other real property by the Bank are not material.
b. Personal Finance Corporation - This wholly-owned subsidiary of the Bank occupies 38 leased offices, with the unexpired terms varying in length from one to five years. The average size of these leased offices is approximately 1,000 square feet. All these premises are considered to be in good condition.
c. BancorpSouth Insurance Services of Mississippi, Inc. - This wholly-owned subsidiary of the Bank owns four of the six offices it occupies. It leases two offices that have unexpired terms varying in length from five months to one year.
Item 3.
Item 3. - Legal Proceedings
The Company and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. In the opinion of management, after consultation with outside legal counsel, the outcome of these actions should not have a material adverse effect on the financial condition of the Company and its subsidiaries, taken as a whole.
Item 4.
Item 4. - Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth quarter of 1999.
Executive Officers of the Company
For information regarding executive officers of the Company, see "Item 10. - Directors and Executive Officers of the Registrant" in this Report.
PART II
Item 5.
Item 5. - Market for the Registrant's Common Equity and Related Stockholder Matters
Market for Common Stock
The common stock of the Company trades on the New York Stock Exchange under the symbol BXS. The following table sets forth, for the periods indicated, the range of sale prices of the Company's common stock as reported on the New York Stock Exchange. The prices have been restated to reflect the effect of the two-for-one stock split effected in the form of a 100% stock dividend paid May 15, 1998.
Holders of Record
As of February 29, 2000, there were 9,149 shareholders of record of the Company's common stock.
Dividends
The Company declared cash dividends totaling $0.49 per share during 1999, $0.45 during 1998 and $0.395 during 1997. Future dividends, if any, will vary depending on the Company's profitability and anticipated capital requirements and applicable federal and state regulations. See "Item 1. - Business - Regulation and Supervision".
Item 6.
Item 6. - Selected Financial Data
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
ITEM 7.
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is a bank holding company with commercial banking operations in Mississippi, Tennessee and Alabama. The Bank, the Company's banking subsidiary, is headquartered in Tupelo, Mississippi. The Bank and its consumer finance, credit life insurance, insurance agency and brokerage subsidiaries provide commercial banking, leasing, mortgage origination and servicing, life insurance, brokerage and trust services to corporate customers, local governments, individuals and other financial institutions through an extensive network of branches and offices located throughout Mississippi, west Tennessee and certain Alabama markets.
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, 1999 RESULTS OF OPERATIONS
Summary
The table below summarizes the Company's net income, return on average assets and return on average shareholders' equity for the years ended December 31, 1999, 1998 and 1997.
NET INTEREST REVENUE
Net interest revenue is the difference between interest revenue earned from earning assets such as loans, leases and securities, and interest expense paid on liabilities such as deposits and borrowings, and continues to provide the Company with its principal source of revenue. Net interest revenue is affected by the general level of interest rates, changes in interest rates and by changes in the amount and composition of interest earning assets and interest bearing liabilities. The Company's long-term objective is to manage those assets and liabilities to maximize net interest revenue, while balancing interest rate, credit, liquidity and capital risks. The relative performance of the lending and deposit-raising functions is frequently measured by two calculations - net interest margin and net interest rate spread. Net interest margin is determined by dividing fully-taxable equivalent net interest revenue by average earning assets. Net interest rate spread is the difference between the average fully-taxable equivalent yield earned on interest earning assets and the average rate paid on interest bearing liabilities. Net interest margin is generally greater than the net interest rate spread due to the additional income earned on those assets funded by non-interest bearing liabilities, or free funding, such as demand deposits and shareholders' equity.
The Company has shown significant growth in average interest earning assets and average interest bearing liabilities during the three years ended December 31, 1999. Average interest earning assets increased by 7.4% during 1999, 15.6% during 1998 and 11.0% during 1997. Average interest bearing liabilities for increased 7.3% during 1999, 16.0% during 1998 and 10.6% during 1997. Net interest margin for 1999 was 4.28%, a decline of three basis points from 4.31% for 1998, which represented a decline of 25 basis points from 4.56% for 1997.
The following table presents average interest earning assets, average interest bearing liabilities, net interest income, net interest margin and net interest rate spread for the three years ended December 31, 1999. Each of the measures is reported on a fully-taxable equivalent basis.
(1) Includes taxable equivalent adjustments of $3,345,000, $3,226,000 and $2,922,000 in 1999, 1998 and 1997, respectively, using an effective tax rate of 35%.
(2) Includes taxable equivalent adjustment of $854,000, $828,000 and $1,027,000 in 1999, 1998 and 1997, respectively, using an effective tax rate of 35%.
(3) Includes taxable equivalent adjustment of $1,212,000, $1,036,000 and $772,000 in 1999, 1998 and 1997, respectively, using an effective tax rate of 35%.
(4) Interest expense includes interest paid on liabilities not included in averages.
(5) Non-accrual loans are immaterial for each of the years presented.
Net interest revenue may also be analyzed by segregating the rate and volume components of interest revenue and interest expense. The table that follows presents an analysis of rate and volume change in net interest revenue from 1997 to 1998 and from 1998 to 1999. Changes, which are not solely due to volume or rate, are allocated to volume.
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, 1999.
In the event interest rates decline after 1999, 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 earning 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 AND ALLOWANCE FOR CREDIT LOSSES
The provision for credit losses is the annual cost of providing an allowance or reserve for estimated probable losses on loans. The amount for each year is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of loan portfolio quality, the value of collateral and general economic factors. The process of determining the adequacy of the provision requires that management make material estimates and assumptions that are particularly susceptible to significant change.
When determining the adequacy of the allowance for credit losses, management considers changes in the size and character of the loan portfolio, changes in non-performing and past due loans, historical loan loss experience, the existing risk of individual loans, concentrations of loans to specific borrowers or industries and existing economic conditions. The allowance for credit losses for commercial loans is based principally upon the Company's loan classification system. The Company has a disciplined approach for assigning credit ratings and classifications to individual credits. Each credit is assigned a grade by the loan officer that serves as a basis for the credit analysis of the entire portfolio. The grade assigned considers the borrower's creditworthiness, collateral values, cash flows and other factors. An independent loan review department is responsible for reviewing the credit rating and classification of individual credits and assessing trends in the portfolio, adherence to internal credit policies and procedures and other
factors that may affect the overall adequacy of the allowance. The loan review department is supplemented by regulatory agencies that provide an additional level of review. The loss factors assigned to each classification are based upon the attributes (loan to collateral values, borrower creditworthiness, etc.) of the loans typically assigned to each grade. Management periodically reviews the loss factors assigned in light of the general economic environment and overall condition of the loan portfolio and modifies the loss factors assigned to each classification as deemed appropriate. The allowance for credit losses for the consumer loan portfolio is based upon delinquencies and historic loss rates. The overall allowance includes a component representing the results of other analyses intended to insure that the allowance is adequate to cover other probable losses inherent in the portfolio. This component considers analyses of changes in credit risk resulting from the differing underwriting criteria in acquired loan portfolios, industry concentrations, changes in the mix of loans originated, overall credit criteria and other economic indicators.
The provision for credit losses, the allowance for credit losses as a percentage of loans and leases outstanding at the end of 1999, 1998 and 1997 and net charge-offs for those years are shown in the following table:
The provision for credit losses for 1999 decreased 8.7% from the provision for 1998, primarily due to a decrease in net charge-offs and the improvement in the internal credits ratings and classifications of the Company's overall loan portfolio at December 31, 1999. The provision for credit losses for 1998 increased 52.9% from the provision for 1997, principally as a result of faster growth in the loan portfolio, an increase in losses and differences in underwriting standards at acquired institutions. The 1997 provision for credit losses increased 3.1% from the provision for 1996 as a result of slower growth in the loan portfolio and increases in loan losses. In all years presented, increases in consumer based loans were the principal contributors to the higher levels of net charge-offs.
Other Revenue
The components of other revenue for the years ended December 31, 1999, 1998 and 1997 and the percentage change from the prior year are shown in the following table:
Mortgage lending revenue consists principally of revenue generated by originating loans and by servicing loans for others. The origination process, which includes secondary marketing of loans originated, produced revenue of $8,777,000, $11,869,000 and $5,644,000 for 1999, 1998 and 1997, respectively. Historically, origination volumes vary as mortgage interest rates change. Rising mortgage interest rates generally slow down originations, while falling mortgage interest rates generally result in increased originations. The servicing process includes the actual servicing of loans and the recognition of changes in the valuation of capitalized mortgage servicing rights. 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. The servicing process generated revenue of $6,198,000 in 1999, a loss of $1,061,000 in 1998 and revenue of $2,268,000 in 1997. The fluctuation in servicing revenue is primarily due to changes in the valuation of
capitalized mortgage servicing rights. Rising mortgage interest rates during 1999 resulted in the recovery of $3.3 million during 1999 of previously recorded impairment. This compares to the recognition of $4.1 million and $400,000 in impairment expense during 1998 and 1997, respectively. The following table presents the principal amount of mortgage loans serviced at December 31, 1999, 1998 and 1997 and the percentage change from the previous year end.
Service charges on deposit accounts increased in 1999, 1998 and 1997 because of higher volumes of items processed as a result of greater economic activity, growth in the number of deposit accounts and rate increases. Life insurance premium revenue increased 8.8% in 1999 over 1998, reversing the trend of declining revenue from insurance underwriting, which declined 3.1% during 1998 and 16.6% during 1997. Trust income increased 7.4% in 1999, 13.7% in 1998 and 7.1% in 1997, as a result of increases in the number of trust accounts and the value of assets under care (either managed or in custody). The Company established a charitable foundation in 1999 and contributed appreciated equity securities to initially fund the foundation. This transaction resulted in one-time securities gains of approximately $4.14 million, which are reflected in the results for 1999. Revenue from insurance commissions and fees shows steady growth over the three-year periods ended December 31, 1999, as the Company continued to expand those products and services. Other revenue increased 24.3%, 1.2% and 18.4% in 1999, 1998 and 1997, respectively. The increases in other revenue in 1999 and 1998 were primarily attributable to increased analysis charges and increased debit card net interchange. The increase in other revenue in 1997 was attributable to increases in gains on the sale of equipment and facilities and increases in debit card net interchange.
OTHER EXPENSE
The components of other expense for the years ended December 31, 1999, 1998 and 1997 and the percentage change from the prior year are shown in the following table.
While regular salaries and employee benefits increased in each of the three years presented due to the hiring of employees to staff the banking locations added during those years, stock appreciation rights (SARs) expense, which is included in employee benefits, fluctuated significantly during the three year period. The Company previously granted SARs to certain of its employees, which requires the Company to recognize an expense in the event of an increase in the market price of the Company's common stock or a reduction of expense in the event of a decline in the market price of the Company's common stock. In 1999, the Company's common stock price declined by approximately 9.7% and in 1998 the Company's common stock price declined by approximately 24%. As a result of these declines in value, a reduction in expense of $956,000 was recorded in 1999 and a reduction of expense of $2.7 million was recorded in 1998. In 1997, the Company's common stock price increased approximately 75%, which resulted in expense of $6.1 million. At December 31, 1999, the Company had approximately 552,000 SARs outstanding. Based on that amount, a dollar increase in the Company's stock price would result in $552,000 in SAR expense while a dollar decrease in the Company's stock price would result in an $552,000 reduction in SAR expense. Occupancy and equipment expenses have increased in each of the three years presented principally as a result of additional branch offices and upgrades to the Company's internal operating systems.
Telecommunications expense increased significantly during 1999 and 1998 as a result of expanded voice and data networks and expansion of the Bank's call center, all of which related to providing higher levels of convenient,
consumer oriented banking services. Contribution expense of $4.14 million during 1999 represents the aggregate market value of appreciated equity securities used to fund the charitable foundation established by the Company in 1999.
In 1999, as a direct result of the Company's mergers with HomeBanc Corporation and the Stewart Sneed Hewes Insurance Group, the Company recorded merger-related costs of approximately $1.1 million ($976,000 after tax) as other operating expense. In 1998, as a direct result of the Company's mergers with Alabama Bancorp., Inc., Merchants Capital Corporation and The First Corporation, the Company recorded merger-related costs of approximately $5 million ($4.1 million after tax) as other operating expense.
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.
Despite significant increases in the Company's loan portfolio, quality is stressed in its lending policy as opposed to growth. The Company's non-performing assets, 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.
The increase in loans 90 days or more past due at December 31, 1999, when compared to December 31, 1998, is primarily the result of delinquent mortgage loans being repurchased from investors. These repurchased loans are government guaranteed and do not indicate an overall deterioration of the loan portfolio. 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, 1999, 1998 and 1997, 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. However, the Company does conduct business in a geographically concentrated area. The ability of the Company's borrowers to repay loans also is dependent upon the economic conditions prevailing in the market area.
Included in non-performing assets above were loans the Company considered impaired totaling $5,790,000, $8,643,000 and $7,181,000 in 1999, 1998 and 1997, 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 and borrowings. A portion of the Company's securities portfolio continues to be tax-exempt. Investments in tax-exempt securities totaled $245.7 million at December 31, 1999, compared to $251.1 million at the end of 1998. The Company invests only in investment grade securities, with the exception of obligations of Mississippi, Tennessee and Alabama counties and municipalities, and avoids other high yield non-rated securities and investments.
At December 31, 1999, the Company's available-for-sale securities totaled $345.3 million. These securities, which are subject to possible sale, are recorded at fair value. At December 31, 1999, the Company held no securities whose decline in fair value was considered other than temporary.
Net unrealized losses on investment securities as of December 31, 1999 totaled $18.6 million. Net unrealized losses on held-to-maturity securities comprised $18.5 million of that total, while net unrealized losses on available-for-sale securities were $154,000. Net unrealized gains on investment securities as of December 31, 1998 totaled $29.4 million. Of that total, $11.6 million was attributable to held-to-maturity securities and $17.9 million to available-for-sale securities.
DEPOSITS
Deposits are the Company's primary source of funds to support its earning assets. The Company has been able to effectively compete for deposits as its primary market areas provide the sources of substantially all deposits for all periods presented. The following table presents the Company's average deposit mix and percentage change for the years indicated.
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. Management believes that the Company's traditional sources of maturing loans, investment securities, mortgages held for sale, purchased federal funds and base of core deposits are adequate to meet the Company's liquidity needs for normal operations. The Company maintains a relationship with the Federal Home Loan Bank, which provides an additional source of liquidity to fund term loans with borrowings of matched or longer maturities. The matching of these assets and liabilities has had the effect of reducing the Company's net interest margin.
CAPITAL RESOURCES
The Company is required to comply with the risk-based capital guidelines established by the Federal Reserve. 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. Total capital is the sum of Tier I and Tier II capital. The Company's Tier I capital and total capital, as a percentage of total risk-adjusted assets, was 11.49% and 12.80%, respectively, at December 31, 1999, compared to 11.56% and 12.82%, respectively at December 31, 1998. Both ratios exceeded the required minimum levels for these ratios of 4% and 8%, respectively, for each period. In addition, the Company's leverage capital ratio (Tier I capital divided by total assets, less goodwill) was 8.38% at December 31, 1999 and December 31, 1998, compared to the required minimum leverage capital ratio of 3%.
The FDIC's capital-based supervisory system for insured financial institutions categorizes the capital position for banks into five categories, ranging from well capitalized to critically undercapitalized. For a bank to classify as "well capitalized", the Tier I risk-based capital, total risk-based capital and leverage capital ratios must be at least 6%, 10% and 5%, respectively. The Bank the criteria for the "well capitalized" category at December 31, 1999.
The Company may 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 any, would be shares of the Company's common stock; however, transactions involving cash consideration or other forms of consideration may also be considered.
YEAR 2000
Prior to January 1, 2000, the Company conducted significant testing, planning and system upgrades to address potential malfunctions by computer systems and embedded computer chips related to calendar dates after December 31, 1999. The Company has not experienced any material Year 2000 disruptions or malfunctions, and has not been informed of any material Year 2000 disruptions or malfunctions experienced by any of its significant vendors or customers, or by any of the municipal agencies that provide services to the Company. The Company will continue to monitor its internal operations and its significant vendors and customers with respect to Year 2000 problems, and intends to take appropriate measures to prevent or alleviate any malfunction or failures identified. Based upon the Company's successful operation during the Year 2000, the Company does not anticipate that it will experience any material problems related to the Year 2000; however, no assurance can be given that this will be the case.
BUSINESS RISKS
Certain statements contained in the Annual Report may not be based on historical facts and are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may be identified by reference to a future period(s) or by the use of forward-looking terminology, such as "anticipate," "estimate," "expect," "foresee," "may," "might,""will," "would," or "intend" future or conditional verb tenses, and variations or negatives of such terms. These forward-looking statements include, without limitation, those relating to the Company's future growth, revenue, assets, profitability and customer service, Year 2000 issues, net interest revenue, interest rate sensitivity, loan loss experience, liquidity, capital resources, market risk, earnings, effect of pending litigation, acquisition strategy and competition.
We caution you not to place undue reliance on the forward-looking statements contained in this Report in that actual results could differ materially from those indicated in such forward-looking statements, due to a variety of factors. These factors include, but are not limited to, changes in the Company's operating or expansion strategy, availability of and costs associated with obtaining adequate and timely sources of liquidity, possible adverse rulings, judgements, settlements and other outcomes of pending litigation, Year 2000 compliance, changes in consumer preferences and the risk factors that are described in greater detail in this section below. Other relevant risk factors may be detailed from time to time in the Company's press releases and filings with the Securities and Exchange Commission. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date of this Report.
Our Operations are Subject to Extensive Governmental Regulation.
BancorpSouth, Inc. is a registered bank holding company under the Bank Holding Company Act of 1956, and the Bank is a Mississippi state banking corporation. Accordingly, both are subject to extensive governmental regulation, legislation and control. These laws limit the manner in which we operate, including the amount of loans we can originate, interest we can charge on loans and fees we can charge for certain services. We cannot predict whether, or the extent to which, the government and governmental organizations may change any of these laws or controls. BancorpSouth also cannot predict how any of these changes would adversely affect the our business and prospects.
We Compete with Other Bank Holding Companies, Banks and Financial Services Companies.
The banking business is extremely competitive in our service areas in Mississippi, Tennessee and Alabama. We compete, and will compete, with well established banks, credit unions and other financial institutions, several of which have significantly greater resources and lending limits. Some of these competitors provide certain services that the Company does not provide.
Rising Interest Rates May Result in Higher Interest Rates Being Paid on Interest Bearing Deposits Than Are Charged on Outstanding Loans.
If interest rates rise, the we may pay interest on our customers' interest-bearing deposits and our other liabilities at higher rates than the interest rates paid to us by our customers on outstanding loans that were made when interest rates were at a lower level. This situation would result in a negative interest rate spread with respect to those loans and cause an adverse effect on our earnings. This adverse effect would increase if interest rates continued to rise while we had outstanding loans payable at fixed interest rates that could not be adjusted to a higher interest rate.
Our Growth Strategy Includes Risks That Could Have an Adverse Effect on Financial Performance.
A material element of the our growth strategy is the acquisition of additional banks and bank holding companies in order to achieve greater economies of scale. We cannot assure you that the current level of growth opportunities will continue to exist, that we will be able to acquire banks and bank holding companies that satisfy the our criteria or that any such acquisition will be on terms favorable to the us. Further, our growth strategy will require that we continue to hire qualified personnel, while concurrently expanding our managerial and operational infrastructure. We cannot assure you that we will be able to hire and retain qualified personnel or that we will be able to successfully expand our infrastructure to accommodate future acquisitions or growth. As a result of these factors, we may not realize the expected economic benefits associated with our acquisitions. This could have a material adverse effect on the our financial performance.
Our Stock Price May Fluctuate.
The stock market has, from time to time, experienced extreme price and volume fluctuations, which often have been unrelated to the operating performance of particular companies. Any announcement with respect to the banking industry, market conditions or any variance in our revenues or earnings from levels generally expected by securities analysts for a given period could have an immediate and significant effect of the trading price of our common stock.
Issuing Additional Shares of Its Common Stock to Acquire Other Banks and Bank Holding Companies May Result in Dilution for Existing Shareholders.
In connection with our growth strategy, we have issued, and may issue in the future, shares of our common stock to acquire additional banks and bank holding companies. Resales of substantial amounts of common stock in the public market and the potential of such sales could adversely affect the prevailing market price of the our common stock and impair our ability to raise additional capital through the sale of equity securities. We usually must pay an acquisition premium above the fair market value of acquired assets for the acquisition of banks and bank holding companies. Paying this acquisition premium, in addition to the dilutive effect of issuing additional shares, may also adversely affect the prevailing market price of our common stock.
Monetary Policies and Economic Factors May Limit the Our Ability to Attract Deposits or Make Loans.
The monetary policies of federal regulatory authorities, particularly the Board of Governors of the Federal Reserve System, and economic conditions in the our service area and the United States generally, affect the our ability to attract deposits and extend loans. We cannot predict either the nature and timing of any changes in these monetary policies and economic conditions, or their impact on our financial performance. The banking business is subject to various material business risks, which may become more acute in periods of economic slowdown or recession. During
such periods, foreclosures generally increase, and such conditions also could lead to a potential decline in deposits and demand for loans.
Diversification in Types of Financial Services May Adversely Affect Our Financial Performance.
As part of our business strategy, we have in the past diversified, and may further diversify, our lines of business into areas that are not traditionally associated with the banking business. We now offer insurance and investment services through wholly-owned subsidiaries of BancorpSouth Bank. As a result, we must now manage the development of new business lines in which we have not previously participated. Each new business line requires the investment of additional capital and the significant involvement of our senior management to develop and integrate the insurance and investment services subsidiaries with our traditional banking operations. We can offer no assurances that we will be able to develop and integrate these new services without adversely effecting our financial performance.
Our Ability to Declare and Pay Dividends is Limited by Law.
We derive our income solely from dividends received from owning BancorpSouth Bank's common stock. Federal and state law limits the Bank's ability to declare and pay dividends. In addition, the Board of Governors of the Federal Reserve System may impose restrictions on our ability to declare and pay dividends on our common stock.
Anti-Takeover Provisions May Prevent A Change of Our Control.
Our governing documents and certain agreements to which we are a party contain several provisions which make a change-in-control difficult to accomplish, and may discourage a potential acquirer. These include a shareholder rights plan or "poison pill," a classified or "staggered" Board, change-in-control agreements with members of management and supermajority voting requirements. These anti-takeover provisions may have an adverse effect on the market for our common stock.
Limited Geographic Area Increases Our Risk From Economic Downturn.
We conduct business in the limited geographic area of Mississippi, Tennessee and Alabama. An economic downturn in the economies of these states or the southern portion of the United States could adversely affect our financial performance, particularly our ability to attract deposits and extend loans.
In evaluating an investment in shares of our common stock, the factors set forth in this section should be carefully considered, along with other matters discussed in reports and other filings that we have made with the Securities and Exchange Commission. It should not be assumed that we have listed or described the only risks that could affect our future performance or the market price of our common stock.
Item 7A.
Item 7A. - Quantitative and Qualitative Disclosures About Market Risk
Market risk reflects the risk of economic loss resulting from changes in interest rates and market prices. This risk of loss can be reflected in either reduced potential net interest revenue in future periods or diminished market values of financial assets.
The Company's market risk arises primarily from interest rate risk that is inherent in its lending, investment and deposit taking activities. Financial institutions derive their income primarily from the excess of interest collected over interest paid. The rates of interest the Company earns on its assets and owes on its liabilities are established contractually for a period of time. Since market interest rates change over time, the Company is exposed to lower profit margins (or losses) if it cannot adapt to interest rate changes. Several techniques might be used by a financial institution to minimize interest rate risk. One approach used by the Company is to periodically analyze its assets and liabilities and make future financing and investing decisions based on payment streams, interest rates, contractual maturities, repricing opportunities and estimated sensitivity to actual or potential changes in market interest rates. Such activities fall under the broad definition of asset/liability management. The Company's primary asset/liability management technique is the measurement of its asset/liability gap, that is, the difference between the amounts of interest-sensitive assets and liabilities that will be refinanced (repriced) during a given period. If the asset amount to be repriced exceeds the corresponding liability amount for a certain day, month, year or longer period, the Company is in an asset-sensitive gap position. In this situation, net interest revenue would increase if market interest rates rose or decrease if market interest rates fell. If, alternatively, more liabilities than assets will reprice, the Company is in a liability-sensitive position. Accordingly, net interest revenue would decline when rates rose and increase when rates fell. These examples assume that interest-rate changes for assets and liabilities are of the same magnitude, whereas actual interest-rate changes generally differ in magnitude for assets and liabilities.
Management seeks to manage interest-rate risk through the utilization of various tools that include matching repricing periods for new assets and liabilities and managing the composition and size of the investment portfolio so as to reduce the risk in the deposit and loan portfolios, while at the same time maximizing the yield generated from the portfolio.
The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates as of December 31, 1999. The expected maturity categories take into account repricing opportunities as well as contractual maturities. For core deposits without contractual maturities (interest-bearing checking, savings and money market accounts), the table presents cash flows based on management's judgement concerning their most likely runoff or repricing behaviors. The fair value of loans, deposits and other borrowings are based on the discounted value of expected cash flows using a discount rate which is commensurate with the maturity. The fair value of securities is based on market prices or dealer quotes.
(1) Mortgage servicing rights represent a non-financial asset that is rate-sensitive in that its value is dependent upon the underlying mortgage loans being serviced that are rate-sensitive
In addition, please see the discussion in this Report under the section of "Item 1. - Business" captioned "Investment Portfolio" and the sections of "Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations" that are captioned "Interest Rate Sensitivity" and "Securities and Other Earning Assets".
Item 8.
Item 8. - Financial Statements and Supplementary Data
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, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1999. 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An 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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles.
/S/ KPMG LLP
Memphis, Tennessee January 18, 2000
CONSOLIDATED BALANCE SHEETS BANCORPSOUTH, INC. AND SUBSIDIARIES
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME BANCORPSOUTH, INC. AND SUBSIDIARIES
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME BANCORPSOUTH, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS BANCORPSOUTH, INC. AND SUBSIDIARIES
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BANCORPSOUTH, INC. AND SUBSIDIARIES DECEMBER 31, 1999, 1998 AND 1997
(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 subsidiary, BancorpSouth Bank (the Bank). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain 1998 and 1997 amounts have been reclassified to conform with the 1999 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 $195,801,000, $194,277,000 and $163,060,000 and income taxes of $20,461,000, $27,453,000 and $28,680,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
SECURITIES
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, 1999 and 1998. 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, as a separate component of shareholders' equity until realized. 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.
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 interest 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 based on estimated probable 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.
SECURITIES GAINS/CONTRIBUTION TO CHARITABLE FOUNDATION
During 1999, the Company established a charitable foundation. Appreciated equity securities with an aggregate market value of approximately $4.15 million were contributed by the Company to initially fund the foundation. This transaction resulted in securities gains of $4.14 million and contributions expense of $4.15 million during 1999.
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.
STOCK BASED COMPENSATION
The Company elected to continue to account for stock-based compensation to employees using the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed by Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based Compensation." See Note 14 for disclosure of pro forma net income and pro forma net income per share as required under SFAS No. 123.
Prior to 1998, certain of the Company's stock option plans contained provisions for Stock Appreciation Rights (SARs). Accounting rules for SARs require the recognition of expense for appreciation in the market value of the Company's common stock or a reduction of expense in the event of a decline in the market value of the Company's common stock. See Note 14 for further disclosures regarding SARs.
RECENT PRONOUNCEMENT
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," established accounting and reporting standards for derivative instruments and hedging activities and requires recognition of all derivatives as either assets or liabilities measured at fair value. This statement will be adopted for the year 2001 and is not expected to have a material effect on the Company's financial condition or results of operations.
INCOME TAXES
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. 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 the Bank's credit life insurance subsidiary, files a consolidated federal income tax return.
OTHER
Trust income is recorded on the cash basis as received, which does not differ materially from the accrual basis.
(2) STOCK SPLIT
On May 15, 1998, the Company's two-for-one stock split effected in the form of a 100% stock dividend resulted in the issuance of 28,331,240 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 28, 1997, Iuka Guaranty Bank, a $117 million bank headquartered in Iuka, Mississippi, was merged with and into the Bank. Pursuant to the merger, the Company issued 2,463,420 shares of common stock. This transaction was accounted for as a pooling of interests and Iuka Guaranty Bank's results of operations are included in the Company's financial statements for all periods presented.
On October 30, 1998, Alabama Bancorp., Inc., a $280 million bank holding company headquartered in Birmingham, Alabama, was merged with and into the Company. Pursuant to the merger, Alabama Bancorp's subsidiary banks, Highland Bank and First Community Bank of the South, were merged into the Bank. The Company issued 3,604,394 shares of common stock to the shareholders of Alabama Bancorp. In addition, a total of 491,573 shares of the Company's common stock were issued to the minority shareholders of Highland Bank and First Community Bank of the South. This transaction was accounted for as a pooling of interests, except for the acquisition of the minority interest, which was accounted for as a purchase. The purchase of the minority interest resulted in the recognition of an intangible asset of $6.9 million that is being amortized over a period of 15 years. The Company's financial statements for all periods presented include the consolidated accounts of Alabama Bancorp.
On December 4, 1998, Merchants Capital Corporation, a $220 million bank holding company headquartered in Vicksburg, Mississippi, was merged with and into the Company. Pursuant to the merger, Merchants Capital Corporation's subsidiary bank, Merchants Bank, was merged into the Bank. The Company issued 2,798,022 shares of common stock to the shareholders of Merchants Capital Corporation. 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 Merchants Capital Corporation.
On December 31, 1998, The First Corporation, a $150 million bank holding company headquartered in Opelika, Alabama, was merged with and into the Company. Pursuant to the merger, The First Corporation's subsidiary bank, The First National Bank of Opelika, was merged into the Bank. The Company issued 2,265,444 shares of common stock to the shareholders of The First Corporation. This transaction was accounted for as a pooling of interests and the Company's financial statements for 1998 include the consolidated accounts of The First Corporation. The financial statements for periods prior to 1998 were not restated because the impact of The First Corporation acquisition represented a change of less than 3% to the Company's financial results.
On February 26, 1999, HomeBanc Corporation, a $160 million bank holding company headquartered in Guntersville, Alabama, was merged with and into the Company. Pursuant to the merger, HomeBanc Corporation's subsidiary bank, The Home Bank, was merged into the Bank. Each share of stock of HomeBanc Corporation was converted into 1.5747417 shares of the Company's common stock, or a total of 2,099,971 shares of common stock. 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 HomeBanc Corporation.
On June 30, 1999, Stewart Sneed Hewes, Inc. and subsidiaries, TSH Rentals, Inc. and Stewart Sneed Hewes II, Inc., a group of interrelated commercial insurance agencies, were merged with and into BancorpSouth Insurance Services of Mississippi, Inc., a subsidiary of the Bank. A total of 1,252,806 shares of the Company's common stock were issued to effect this transaction. This transaction was accounted for as a pooling of interests and the Company's financial statements for all periods presented include the accounts of Stewart Sneed Hewes, Inc. and subsidiaries, TSH Rentals, Inc. and Stewart Sneed Hewes II, Inc.
(4) HELD-TO-MATURITY SECURITIES A comparison of amortized cost and estimated fair values of held-to-maturity securities as of December 31, 1999 and 1998 follows:
Gross gains of $183,000 and gross losses of $17,000 were recognized in 1999, gross gains of $371,000 and gross losses of $64,000 were recognized in 1998 and gross gains of $640,000 and gross losses of $30,000 were recognized in 1997 on held-to-maturity securities. Except for 1999, these gains and losses were the result of held-to-maturity securities being called prior to maturity. Included in the 1999 amounts is a gross gain of $21,000 related to the sale of held-to-maturity securities with amortized cost of $6,016,000. The decision to sell these securities was based on the deteriorating credit quality of the issuer.
Held-to-maturity securities with a carrying value of approximately $629,000,000 at December 31, 1999 were pledged to secure public and trust funds on deposit and for other purposes.
The amortized cost and estimated fair value of held-to-maturity securities at December 31, 1999 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. Securities that reprice periodically are considered as maturing on the first repricing date subsequent to December 31, 1999.
(5) AVAILABLE-FOR-SALE SECURITIES
A comparison of amortized cost and estimated fair values of available-for-sale securities as of December 31, 1999 and 1998 follows:
Gross gains of $4,423,000 and gross losses of $413,000 were recognized in 1999, gross gains of $624,000 and gross losses of $89,000 were recognized in 1998 and gross gains of $718,000 and gross losses of $45,000 were recognized in 1997 on available-for-sale securities.
Available-for-sale securities with a carrying value of approximately $217,000,000 at December 31, 1999 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, 1999 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. Equity securities are considered as maturing after 10 years unless they have a repricing feature. Securities that reprice periodically are considered as maturing on the first repricing date subsequent to December 31, 1999.
(6) LOANS
A summary of loans classified by collateral type at December 31, 1999 and 1998 follows:
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 $5,150,000 and $6,629,000 at December 31, 1999 and 1998, respectively. Restructured loans totaled $91,000 and $713,000 at December 31, 1999 and 1998, respectively.
The total amount of interest earned on non-performing loans was approximately $126,000, $153,000 and $58,000 in 1999, 1998 and 1997, respectively. The gross interest income which would have been recorded under the original terms of those loans amounted to $361,000, $385,000 and $263,000 in 1999, 1998 and 1997, respectively.
Loans considered impaired, under SFAS No.114, as amended by SFAS No. 118, are loans which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company's recorded investment in loans considered impaired at December 31, 1999 and 1998 was $5,790,000 and $8,643,000, respectively, with a valuation reserve of $2,176,000 and $3,223,000, respectively. The average recorded investment in impaired loans during 1999 and 1998 was $6,207,000 and $9,187,000, respectively.
(7) ALLOWANCE FOR CREDIT LOSSES
The following summarizes the changes in the allowance for credit losses for the years ended December 31, 1999, 1998 and 1997:
(8) PREMISES AND EQUIPMENT
A summary by asset classification at December 31, 1999 and 1998 follows:
(9) TIME DEPOSITS AND SHORT-TERM DEBT
Certificates of deposit and other time deposits of $100,000 or more amounting to approximately $840,418,000 and $667,363,000 were outstanding at December 31, 1999 and 1998, respectively. Total interest expense relating to certificate and other time deposits of $100,000 or more totaled approximately $35,403,000, $37,802,000, and $29,211,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
For time deposits with a remaining maturity of more than one year at December 31, 1999, the aggregate amount of maturities for each of the following five years is presented in the following table:
Presented below is information relating to short-term debt for the years ended December 31, 1999 and 1998:
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, 1999, the Bank had established informal federal funds borrowing lines of credit aggregating $747,000,000.
(10) LONG-TERM DEBT
FEDERAL HOME LOAN BANK ADVANCES
The Bank has entered into a blanket floating lien security agreement with the Federal Home Loan Bank (FHLB) of Dallas. Under the terms of this agreement, the Bank is required to maintain sufficient collateral to secure borrowings in an aggregate amount of the lesser of 75% of the book value (unpaid principal balance) of the borrower's first mortgage collateral or 35% of the borrower's assets.
The Bank has advances from the FHLB of Atlanta which are secured by securities pledged at 97% of market value.
At December 31, 1999, the following FHLB fixed term advances were repayable as follows:
(11) INCOME TAXES
Total income taxes for the years ended December 31, 1999, 1998 and 1997 were allocated as follows:
The components of income tax expense (credit) attributable to continuing operations are as follows for the years ended December 31, 1999, 1998 and 1997:
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:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998 are as follows:
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, 1999.
At December 31, 1999 the Company had net operating loss carryforwards related to business combinations for federal income tax purposes of approximately $1,826,000 that were available to offset future federal taxable income, subject to various limitations, through 2009.
(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 21. 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.
The BancorpSouth, Inc. Restoration Plan ("Restoration Plan") provides 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 their benefit under the Basic Plan.
A summary of the defined benefit retirement plans at and for the years ended December 31 follows:
Plan assets consist primarily of listed bonds and commingled funds. The assumptions used for measuring net periodic pension cost for the years ended December 31, 1999, 1998 and 1997 are presented in the following table.
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 10 years. The amount accrued under the plan was $144,000 in 1999, $128,000 in 1998 and $148,000 in 1997.
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 limitations as established by the Internal Revenue Code. Employee contributions (up to 5% 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, 1999, 1998 and 1997 was $2,625,000, $2,519,000 and $2,445,000, respectively.
(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 rates currently available 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, 1999 and 1998:
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 are 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 and maturity.
DEPOSIT LIABILITIES
Under SFAS 107, the fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings, NOW accounts and money market checking accounts, is equal to the amount payable on demand as of December 31, 1999 and 1998. The fair value of 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, 1999 and 1998:
LONG-TERM DEBT
The fair value of the Company's fixed-term 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, 1999 and 1998:
(14) STOCK INCENTIVE AND STOCK OPTION PLANS
During 1987, the Company issued 69,000 shares of common stock to a key employee. The shares vested over a 10-year period subject to the Company meeting certain performance goals and the compensation associated with this award was recognized over the vesting period that ended during 1997.
In 1995, the Company issued 60,000 shares of common stock 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 36,000 at December 31, 1999. The compensation associated with this award is being recognized over the 10-year period.
In 1998, the Company issued 70,000 shares of common stock 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 56,000 at December 31, 1999. The compensation associated with this award is being recognized over the 10-year period.
In 1998, the Company issued 8,000 shares to the directors of the Company. The shares vest over a 3-year period and the unearned shares are held in escrow and totaled 5,340 at December 31, 1999. The compensation associated with this award is being recognized over the 3-year period.
Key employees and directors of the Company and its subsidiaries have been granted stock options and SARs under the Company's 1990, 1994 and 1995 stock incentive plans. The stock incentive plans were amended in 1998 to eliminate SARs and to allow a limited number of restricted stock awards. All options and SARs granted pursuant to these plans have an exercise price equal to the market value on the date of the grant and are exercisable over periods of one to
ten years. At December 31, 1999, the Company had outstanding 552,453 SARs exercisable in conjunction with certain of the options outstanding. The Company recorded reductions in compensation expense of $956,000 and $2,709,000 in 1999 and 1998, respectively, and recorded additional compensation expense of $6,113,000 in 1997 related to the SARs because of the changes in market value of its common stock. In 1995 and 1998, 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.
In 1998, the Company adopted a stock plan through which at least 50% of the compensation payable to each director is paid in the form of stock effective January 1, 1999. Directors may elect under the plan to receive up to 100% of their compensation in the form of stock.
A summary of the status of the Company's stock options outstanding as of December 31, 1999, 1998 and 1997, and changes during the years ended on those dates is presented below:
The following table summarizes information about stock options at December 31, 1999:
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require, adoption of a fair-value based accounting method for employee stock-based compensation arrangements. As permitted by the statement, the Company has elected to disclose pro forma net income and earnings per share amounts as if the fair-value based method had been applied in measuring compensation cost. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1999, 1998 and 1997: expected options lives of 7 years for all three years; expected dividend yield of 3.18%, 2.84% and 3.0%; expected volatility of 23%, 22% and 22% and risk-free interest rates of 6%, 6% and 7%. Pro forma net income and pro forma net income per share calculated under the provisions of SFAS No. 123 for the years ended December 31, 1999, 1998 and 1997 are presented in the following table.
(15) EARNINGS PER SHARE AND DIVIDEND DATA
The computation of basic earnings per share is based on the weighted average number of common shares outstanding. The computation of diluted earnings per share is based on the weighted average number of common shares outstanding plus the shares resulting from the assumed exercise of all outstanding stock options using the treasury stock method. The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the years ended December 31, 1999, 1998 and 1997:
Dividends to shareholders are paid from dividends paid to the Company by the Bank which are subject to approval by the applicable state regulatory authority. At December 31, 1999, the Bank could have paid dividends to the Company of $144,000,000 under current regulatory guidelines.
(16) OTHER COMPREHENSIVE INCOME
The following table presents the components of other comprehensive income and the related tax effects allocated to each component for the years ended December 31, 1999, 1998 and 1997:
(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 (in thousands):
(18) CAPITALIZED MORTGAGE SERVICING RIGHTS
Originated mortgage servicing rights ("OMSRs"), as well as purchased mortgage servicing rights ("PMSRs"), are capitalized as assets by allocating the total cost 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. PMSRs and OMSRs are being amortized in proportion to and over the period of the estimated net servicing income. 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. 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). 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.
The following is a summary of capitalized mortgage servicing rights, net of accumulated amortization, and a valuation allowance for impairment:
(19) REGULATORY MATTERS
The Company is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by the Board of Governors of the Federal Reserve (FRB) to ensure capital adequacy require the Company to maintain minimum capital amounts and ratios (risk-based capital ratios). All banking companies are required to have core capital (Tier I) of a least 4% of risk-weighted assets, total capital of at least 8% of risk-weighted assets and a minimum Tier I leverage ratio of 3% of adjusted average assets. The regulations also define well capitalized levels of Tier I, total capital and Tier I leverage as 6%, 10% and 5%, respectively. The Company had Tier I, total capital and leverage above the well capitalized levels at December 31, 1999 and 1998, respectively, as set forth in the following table:
(20) SEGMENTS
The Company's principal activity is community banking which includes providing a full range of deposit products, commercial loans and consumer loans. General corporate and other includes leasing, mortgage lending, trust services, credit card activities, insurance services and other activities not allocated to community banking.
Results of operations and selected financial information by operating segment for the three years ended December 31, 1999, 1998 and 1997 are presented below:
(21) COMMITMENTS AND CONTINGENT LIABILITIES
LEASES
Rent expense was approximately $3,421,000 for 1999, $3,153,000 for 1998 and $3,064,000 for 1997. 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, 1999 (in thousands):
MORTGAGE LOANS SERVICED FOR OTHERS
The Company services mortgage loans for others which are not included in the accompanying financial statements. Included in the $1.95 billion of loans serviced for investors at December 31, 1999, is approximately $7.0 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, 1999, 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. 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, 1999, the contractual or notional amount of these forward contracts was approximately $38,000,000.
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, 1999, these included approximately $29,682,000 for letters of credit, and approximately $807,656,000 for interim mortgage financing, construction credit, credit card and revolving line of credit arrangements. No significant credit losses are expected from these commitments and arrangements.
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, 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 $8,000,000 were maintained to satisfy Federal regulatory requirements at December 31, 1999.
(22) 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:
Item 9.
Item 9. - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no disagreements with the Company's independent accountants and auditors on any matter of accounting principles or practices or financial statement disclosure.
PART III
Item 10.
Item 10. - Directors and Executive Officers of the Registrant
Information concerning the directors and nominees of the Company appears under the caption "Election of Directors" in the Company's definitive Proxy Statement for its 2000 annual meeting of shareholders, and is incorporated herein by reference.
Executive Officers of Registrant
Information follows concerning the executive officers of the Company who are subject to the reporting requirements of Section 16 of the Securities Exchange Act of 1934.
None of the executive officers of the Company are related by blood, marriage or adoption. There are no arrangements or understandings between any of the executive officers and any other person pursuant to which the individual named above was or is to be selected as an officer. The executive officers of the Company are elected by the Board of Directors at its first meeting following the annual meeting of shareholders, and they hold office until the next annual meeting or until their successors are duly elected and qualified.
Mr. Patterson has served as Chairman of the Board and Chief Executive Officer of the Bank and the Company for at least the past five years.
Mr. Allen has served as Executive Vice President of the Bank for at least the past five years. He has served as Treasurer and Chief Financial Officer of the Company during this same period.
Mr. Baxter has served as Executive Vice President of the Company and Vice Chairman and Director of Marketing of the Bank for at least the past five years.
Mr. Harder served as Senior Vice President and Executive Vice President-Loan Review of the Bank for at least the past five years. He is also Executive Vice President of the Company.
Mr. Weeks served as Chairman of the Board and Chief Executive Officer of Volunteer Bank until June 1997 when Volunteer Bank was merged into BancorpSouth Bank and he was named Vice Chairman of BancorpSouth Bank. He has served as Executive Vice President of the Company for at least the past five years. Prior to his employment by the Company, Mr. Weeks served as a partner in the accounting firm of KPMG LLP.
Mr. Sappington has served as Executive Vice President of the Company and Vice Chairman of the Bank for at least the past five years.
Mr. Cowsert has served as Executive Vice President and Vice Chairman of the Bank for at least the past five years. He also is Executive Vice President of the Company.
Mrs. Robertson has served as First Vice President, Senior Vice President and Executive Vice President of the Bank for at least the past five years. She is also Executive Vice President of the Company.
Item 11.
Item 11. - Executive Compensation
Information concerning the remuneration of executive officers of the Company appears under the caption "Executive Compensation" in the Company's definitive Proxy Statement for its 2000 annual meeting of shareholders, and is incorporated herein by reference. Information concerning the remuneration of directors of the Company appears under the caption "Compensation of Directors" in the Company's definitive Proxy Statement for its 2000 annual meeting of shareholders, and is incorporated herein by reference.
Item 12.
Item 12. - Security Ownership of Certain Beneficial Owners and Management
Information concerning the security ownership of certain beneficial owners and directors and executive officers of the Company appears under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Company's definitive Proxy Statement for its 2000 annual meeting of shareholders, and is incorporated herein by reference.
Item 13.
Item 13. - Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions with management and others appears under the caption "Certain Relationships and Related Transactions" in the Company's definitive Proxy Statement for its 2000 annual meeting of shareholders, and is incorporated herein by reference.
PART IV
Item 14.
Item 14. - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Consolidated Financial Statements: See Item 8.
(a) 2. Consolidated Financial Statement Schedules: All schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.
(a) 3. Exhibits:
(3) (a) Articles of Incorporation, as amended. (1) (b) Bylaws. (2) (4) Specimen Common Stock Certificate. (3) (10) (a) 1998 Directors Plan. (2)(8) (b) Form of deferred compensation agreement between Bancorp of Mississippi, Inc. and certain key executives. (4)(8) (c) 1994 Stock Incentive Plan. (3)(8) (d) 1995 Non-Qualified Stock Option Plan for Non-Employee Directors. (3)(7)(8) (e) Stock Bonus Agreement between BancorpSouth, Inc. and Michael W. Weeks, dated January 17, 1995 and Escrow Agreement between Bank of Mississippi and Michael W. Weeks dated January 17, 1995 (6)(8) (f) Stock Bonus Agreement between BancorpSouth, Inc. and Aubrey B. Patterson, Jr., dated January 20, 1998 and Escrow Agreement between BancorpSouth Bank and Aubrey B. Patterson, Jr., dated March 20, 1998 (7)(8) (g) Information regarding Bancorp of Mississippi, Inc., amended and restated Salary Deferral-Profit Sharing Employee Stock Ownership Plan. (5)(8) (11) Statement re computation of per share earnings (21) Subsidiaries of the Registrant. (23) Consent of Independent Accountants. (27) Financial Data Schedule. (28) Information regarding Bancorp of Mississippi, Inc., amended and restated Salary Deferral-Profit Sharing Employee Stock Ownership Plan. (5)(8) (1) Filed as exhibits 3.1 and 3.2 to the Company's registration statement on Form S-4 filed on January 6, 1995 (Registration No. 33-88274) and incorporated by reference thereto. (2) Filed as an exhibit to the Company's Form 10-K for the year ended December 31, 1998 (file number 0-10826), and incorporated by reference thereto. (3) Filed as an exhibit to the Company's Form 10-Q for the three months ended March 31, 1998 (file number 0-10826) and incorporated by reference thereto. (4) Filed as an exhibit to the Company's Form 10-K for the year ended December 31, 1988 (file number 0-10826), and incorporated by reference thereto. (5) Filed as an exhibit to the Company's Form 10-K for the year ended December 31, 1990 (file number 0-10826), and incorporated by reference thereto. (6) Filed as an exhibit to the Company's Form 10-K for the year ended December 31, 1995 (file number 0-10826), and incorporated by reference thereto. (7) Filed as an exhibit to the Company's Form 10-K for the year ended December 31, 1997 (file number 0-1-826), and incorporated by reference thereto. (8) Compensatory plans or arrangements.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 31, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BancorpSouth, Inc.
DATE: March 22, 2000 /s/ Aubrey B. Patterson -------------------------------------------- Aubrey B. Patterson Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.