Back to GetFilings.com
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required)
For the fiscal year ended December 31, 1999 or
-----------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from __________ to ___________
Commission file number 0-10826
-------
BancorpSouth, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Mississippi 64-0659571
------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Mississippi Plaza
Tupelo, Mississippi 38804
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (662) 680-2000
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ----------------
Common stock, $2.50 par value New York Stock Exchange
Common stock purchase rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $2.50 PAR VALUE
COMMON STOCK PURCHASE RIGHTS
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
(Cover Page Continued on Next Page)
2
(Continued from Cover Page)
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of January 31, 2000, was approximately $821,846,000 based
on the closing sale price as reported on the New York Stock Exchange on such
date.
On January 31, 2000, the registrant had outstanding 57,204,183 shares
of Common Stock, par value $2.50 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement used in connection with
Registrant's Annual Meeting of Shareholders to be held May 2, 2000, are
incorporated by reference into Part III of this Report.
2
3
BANCORPSOUTH, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 1999
CONTENTS
PART I
Item 1. Business............................................................................... 4
Item 2. Properties............................................................................. 17
Item 3. Legal Proceedings ..................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders.................................... 18
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters............... 18
Item 6. Selected Financial Data................................................................ 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation... 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 31
Item 8. Financial Statements and Supplementary Data............................................ 33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 57
PART III
Item 10. Directors and Executive Officers of the Registrant..................................... 58
Item 11. Executive Compensation................................................................. 59
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 59
Item 13. Certain Relationships and Related Transactions......................................... 59
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 60
3
4
PART I
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.
4
5
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.
5
6
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
6
7
(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
7
8
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.
8
9
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.
9
10
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:
December 31,
------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
U. S. Treasury securities $ 60,971 $103,012 $109,013
U. S. Government agency
securities 560,350 333,866 288,711
Taxable obligations of states
and political subdivisions 6,041 2,295 8,131
Tax exempt obligations of states
and political subdivisions 213,392 212,408 169,037
Other securities -- -- 15
-------- -------- --------
TOTAL $840,754 $651,581 $574,907
======== ======== ========
The following table shows the maturities and weighted average yields as
of the end of the latest period for each investment category presented above:
December 31, 1999
------------------------------------------------------
U.S.
U.S. GOVERMENT STATES & WEIGHTED
TREASURY AGENCY POLITICAL AVERAGE
SECURITIES SECURITIES SUBDIVISIONS YIELD
---------- ---------- ------------ -----
(In thousands)
PERIOD TO MATURITY:
Maturing within
one year $38,955 $ 48,564 $ 21,898 6.08%
Maturing after one
year but within
five years 22,016 384,367 113,412 5.94%
Maturing after five
years but within
ten years -- 117,531 60,529 6.68%
Maturing after ten
years -- 9,888 23,594 7.29%
------- -------- --------
TOTAL $60,971 $560,350 $219,433
======= ======== ========
The yield on tax-exempt obligations of states and political
subdivisions has been adjusted to a taxable equivalent basis using a 35% tax
rate.
10
11
Available-for-Sale Securities
The following table shows the book value of available-for-sale
securities at December 31, 1999, 1998 and 1997:
December 31,
------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
U. S. Treasury securities $ 66,024 $106,225 $143,948
U. S. Government agency
securities 195,990 335,506 318,963
Taxable obligations of states
and political subdivisions 6,415 5,739 1,229
Tax exempt obligations of states
and political subdivisions 32,330 38,696 18,034
Other securities 44,525 97,574 55,306
-------- -------- --------
TOTAL $345,284 $583,740 $537,480
======== ======== ========
The following table shows the maturities and weighted average yields as
of the end of the latest period for each investment category presented above:
December 31, 1999
---------------------------------------------------------------
U.S.
U.S. GOVERMENT STATES & WEIGHTED
TREASURY AGENCY POLITICAL OTHER AVERAGE
SECURITIES SECURITIES SUBDIVISIONS SECURITIES YIELD
---------- ---------- ------------ ---------- -----
(In thousands)
PERIOD TO MATURITY:
Maturing within
one year $12,235 $ 20,933 $ 1,017 $ 5,843 6.16%
Maturing after one
year but within
five years 48,510 94,000 4,577 13,521 6.22%
Maturing after five
years but within
ten years 5,279 61,842 15,021 23,461 6.64%
Maturing after ten
years -- 19,215 18,130 1,700 6.95%
------- -------- ------- -------
TOTAL $66,024 $195,990 $38,745 $44,525
======= ======== ======= =======
The yield on tax-exempt obligations of states and political
subdivisions has been adjusted to a taxable equivalent basis using a 35% tax
rate.
11
12
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.
DECEMBER 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(In thousands)
Commercial &
agricultural (1) $ 371,169 $ 395,514 $ 369,427 $ 322,658 $ 299,920
Consumer & installment 978,013 930,698 898,348 818,091 774,012
Real estate mortgage (2) 2,514,573 2,113,380 1,819,396 1,640,755 1,519,718
Lease financing 254,868 210,559 172,821 149,582 122,290
Other 12,795 26,393 26,005 20,483 23,062
---------- ---------- ---------- ---------- ----------
Total gross loans $4,131,418 $3,676,544 $3,285,997 $2,951,569 $2,739,002
========== ========== ========== ========== ==========
(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.
ONE YEAR ONE TO AFTER
OR LESS FIVE YEARS FIVE YEARS
---------- ---------- ----------
(In thousands)
Commercial
& agricultural $ 191,841 $ 152,194 $ 27,134
Consumer & installment 430,284 538,472 9,257
Real estate mortgages 842,592 1,269,488 402,493
Lease financing 80,047 162,011 12,810
Other 10,073 2,467 255
---------- ---------- --------
Total gross loans $1,554,837 $2,124,632 $451,949
========== ========== ========
12
13
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.
December 31, 1999
--------------------------
FIXED VARIABLE
RATE RATE
---------- --------
(In thousands)
Loan Portfolio
Due after one year $2,330,022 $246,559
---------- --------
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.
13
14
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:
14
15
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------------
ALLOW % OF ALLOW % OF ALLOW % OF ALLOW % OF ALLOW % OF
FOR LOANS TO FOR LOANS TO FOR LOANS TO FOR LOANS TO FOR LOANS TO
CREDIT TOTAL CREDIT TOTAL CREDIT TOTAL CREDIT TOTAL CREDIT TOTAL
LOSS LOANS LOSS LOANS LOSS LOANS LOSS LOANS LOSS LOANS
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
Commercial & agricultural $3,932 8.98% $ 3,924 10.76% $ 3,294 11.24% $ 4,003 10.93% $ 3,461 10.95%
Consumer & installment 19,586 23.67% 19,105 25.31% 16,653 27.34% 13,163 27.72% 11,443 28.26%
Real estate mortgage 28,761 60.87% 25,102 57.48% 21,559 55.37% 22,467 55.59% 22,462 55.49%
Lease financing 3,196 6.17% 2,802 5.73% 2,592 5.26% 2,070 5.07% 1,433 4.46%
Other 82 0.31% 150 0.72% 140 0.79% 3 0.69% -- 0.84%
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL $55,557 100.00% $51,083 100.00% $44,238 100.00% $41,706 100.00% $38,799 100.00%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
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.
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
LOANS
Average loans for the period $ 3,799,799 $ 3,424,008 $ 3,004,058 $ 2,787,794 $ 2,478,363
=========== =========== =========== =========== ===========
ALLOWANCE FOR CREDIT LOSSES
Balance, beginning
of period $ 51,083 $ 44,238 $ 41,706 $ 38,799 $ 34,806
Loans charged off:
Commercial & agricultural (520) (1,493) (1,307) (1,919) (1,445)
Consumer & installment (10,438) (9,749) (8,477) (7,031) (5,305)
Real estate mortgage (1,326) (2,130) (1,304) (845) (742)
Lease financing (66) (75) (48) (30) (1)
----------- ----------- ----------- ----------- -----------
Total loans charged off (12,350) (13,447) (11,136) (9,825) (7,493)
----------- ----------- ----------- ----------- -----------
Recoveries:
Commercial & agricultural 304 422 634 771 471
Consumer & installment 1,595 2,315 1,499 1,502 1,319
Real estate mortgage 177 303 366 254 381
Lease financing 59 20 57 5 18
----------- ----------- ----------- ----------- -----------
Total recoveries 2,135 3,060 2,556 2,532 2,189
----------- ----------- ----------- ----------- -----------
Net charge-offs (10,215) (10,387) (8,580) (7,293) (5,304)
Provision charged to
operating expense 14,689 16,080 10,516 10,200 7,183
Acquisitions -- 1,152 596 -- 2,114
----------- ----------- ----------- ----------- -----------
Balance, end of period $ 55,557 $ 51,083 $ 44,238 $ 41,706 $ 38,799
=========== =========== =========== =========== ===========
RATIOS
Net charge-offs to
average loans 0.27% 0.30% 0.29% 0.26% 0.21%
=========== =========== =========== =========== ===========
15
16
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.
YEARS ENDED DECEMBER 31
---------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
---------- -------- ---------- ------- ---------- --------
(Dollars in thousands)
Non-interest bearing
demand deposits $ 603,545 -- $ 554,450 -- $ 485,542 --
Interest bearing
demand deposits 1,098,270 2.41% 997,007 2.63% 912,813 3.17%
Savings deposits 818,375 4.78% 715,368 4.85% 576,464 4.20%
Time deposits 2,159,454 5.26% 2,136,382 5.56% 1,931,880 5.57%
---------- ---------- ----------
TOTAL DEPOSITS $4,679,644 $4,403,207 $3,906,699
========== ========== ==========
Time deposits of $100,000 and over including certificates of deposits
of $100,000 and over at December 31, 1999, had maturities as follows:
DECEMBER 31,
1999
--------
(In thousands)
Three months or less $328,278
Over three months through six months 178,105
Over six months through twelve months 186,278
Over twelve months 147,757
--------
TOTAL $840,418
========
16
17
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:
YEARS ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
----- ----- -----
Return on average common equity 14.47% 13.16% 13.89%
Return on average assets 1.24 1.12 1.20
Dividend payout ratio 40.83 44.55 39.90
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. - 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.
17
18
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. - 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. - 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.
High Low
----- ---
1999:
4th quarter $17.5000 $16.3125
3rd quarter 19.3750 15.3750
2nd quarter 19.1250 15.8125
1st quarter 19.4375 15.7500
High Low
----- ---
1998:
4th quarter $21.5625 $17.7500
3rd quarter 22.4375 16.8125
2nd quarter 23.0625 20.3125
1st quarter 24.0000 20.6250
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".
18
19
Item 6. - Selected Financial Data
SELECTED FINANCIAL INFORMATION (UNAUDITED)
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
Earnings Summary:
Interest revenue $ 414,187 $ 398,003 $ 353,774 $ 322,410 $ 294,901
Interest expense 196,686 194,309 167,606 148,999 135,938
---------- ---------- ---------- ---------- ----------
Net interest revenue 217,501 203,694 186,168 173,411 158,963
Provision for credit losses 14,689 16,080 10,516 10,200 7,183
---------- ---------- ---------- ---------- ----------
Net interest revenue, after provision
for credit losses 202,812 187,614 175,652 163,211 151,780
Other revenue 79,331 66,242 59,679 56,529 48,485
Other expense 183,000 166,514 156,574 142,039 136,649
---------- ---------- ---------- ---------- ----------
Income before income taxes 99,143 87,342 78,757 77,701 63,616
Income tax expense 30,190 29,369 24,891 26,350 19,041
---------- ---------- ---------- ---------- ----------
Net income $ 68,953 $ 57,973 $ 53,866 $ 51,351 $ 44,575
========== ========== ========== ========== ==========
Per Share Data:
Net income: Basic $ 1.21 $ 1.02 $ 1.00 $ 1.00 $ 0.87
Diluted 1.20 1.01 0.99 0.99 0.87
Cash dividends 0.49 0.45 0.395 0.35 0.31
Book value 8.70 8.18 7.45 6.91 6.23
Balance Sheet - Averages:
Total assets $5,563,010 $5,177,846 $4,481,933 $4,055,489 $3,711,949
Held-to-maturity securities 784,372 723,981 612,308 512,958 559,217
Available-for-sale securities 475,929 555,978 437,748 360,821 307,732
Loans, net of unearned discount 3,799,799 3,424,008 3,004,058 2,787,794 2,478,363
Total deposits 4,679,644 4,403,207 3,906,699 3,509,474 3,226,575
Total shareholders' equity 476,453 440,659 387,675 335,356 304,628
Selected Ratios:
Return on average assets 1.24% 1.12% 1.20% 1.27% 1.20%
Return on average shareholders' equity 14.47% 13.16% 13.89% 15.31% 14.63%
19
20
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
QUARTER ENDED
----------------------------------------------
MAR 31 JUN 30 SEPT 30 DEC 31
------- -------- -------- --------
(In thousands, except per share amounts)
1999
Interest revenue $99,414 $101,199 $104,323 $109,251
Net interest revenue 52,305 53,493 54,666 57,037
Provision for credit losses 3,063 3,607 4,112 3,907
Income before income taxes 23,440 24,298 26,523 24,882
Net income 16,865 16,450 17,580 18,058
Earnings per share: Basic 0.29 0.29 0.31 0.32
Diluted 0.29 0.29 0.31 0.31
Dividends per share 0.12 0.12 0.12 0.13
1998
Interest revenue $96,806 $100,412 $100,837 $ 99,948
Net interest revenue 49,793 51,020 51,315 51,566
Provision for credit losses 3,731 3,443 5,089 3,817
Income before income taxes 23,167 24,542 22,320 17,313
Net income 15,422 16,281 14,561 11,709
Earnings per share: Basic 0.27 0.28 0.26 0.21
Diluted 0.27 0.28 0.25 0.21
Dividends per share 0.11 0.11 0.11 0.12
1997
Interest revenue $84,224 $ 87,726 $ 89,888 $ 91,936
Net interest revenue 44,747 46,645 46,702 48,074
Provision for credit losses 1,740 2,481 2,804 3,491
Income before income taxes 20,604 21,832 20,262 16,059
Net income 13,762 14,640 13,849 11,615
Earnings per share: Basic 0.25 0.27 0.26 0.21
Diluted 0.25 0.27 0.25 0.21
Dividends per share 0.095 0.095 0.095 0.11
20
21
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.
1999 1998 1997
---- ---- ----
(Dollars in thousands, except per share amounts)
Net income $ 68,953 $ 57,973 $ 53,866
Net income per share: Basic $ 1.21 $ 1.02 $ 1.00
Diluted $ 1.20 $ 1.01 $ 0.99
Return on average assets 1.24% 1.12% 1.20%
Return on average shareholders' equity 14.47% 13.16% 13.89%
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.
21
22
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.
1999 1998 1997
------------------------------- ------------------------------- ---------------------------------
(Taxable equivalent basis) Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
(Dollars in thousands)
ASSETS
Interest bearing deposits in
other banks $ 10,081 $ 556 5.52% $ 10,250 $ 598 5.83% $ 10,778 $ 578 5.36%
Held-to-maturity securities:
U.S. treasury and agencies 555,822 33,856 6.09% 528,222 32,234 6.10% 444,605 28,931 6.51%
State and political
subdivisions (1) 228,550 13,770 6.02% 195,758 12,842 6.56% 167,688 12,042 7.18%
Other securities -- -- -- 1 -- -- 15 -- --
Available-for-sale securities(2) 475,929 28,683 6.03% 555,978 34,344 6.18% 437,748 27,901 6.37%
Federal funds sold 80,340 3,974 4.95% 77,606 4,090 5.27% 95,521 5,102 5.34%
Loans (net of unearned
discount) (3) (5) 3,799,799 335,121 8.82% 3,424,008 315,515 9.21% 3,004,058 281,839 9.38%
Mortgages held for sale 51,664 3,638 7.04% 52,634 3,470 6.59% 29,409 2,103 7.15%
---------- -------- ---------- -------- ---------- --------
Total interest earning
assets and revenue 5,202,185 419,598 8.07% 4,844,457 403,093 8.32% 4,189,822 358,496 8.56%
Other assets 414,308 381,425 335,480
Less: allowance for credit
losses (53,483) (48,036) (43,369)
---------- ---------- ----------
Total $5,563,010 $5,177,846 $4,481,933
========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Demand - interest bearing $1,098,270 $ 26,453 2.41% $ 997,007 $ 26,210 2.63% $ 912,813 $ 28,965 3.17%
Savings 818,375 39,090 4.78% 715,368 34,697 4.85% 576,464 24,228 4.20%
Time 2,159,454 113,686 5.26% 2,136,382 118,761 5.56% 1,931,880 107,520 5.57%
Federal funds purchased and
securities sold under
repurchase agreements 103,258 4,403 4.26% 62,796 2,861 4.56% 47,026 2,342 4.98%
Other short-term borrowings(4) 57,803 3,421 5.92% 13,622 906 6.65% 12,943 1,130 8.73%
Long-term debt 170,377 9,633 5.65% 183,815 10,874 5.92% 61,202 3,421 5.59%
---------- -------- ---------- -------- ---------- --------
Total interest bearing
liabilities and expense 4,407,537 196,686 4.46% 4,108,990 194,309 4.73% 3,542,328 167,606 4.73%
Demand deposits -
non-interest bearing 603,545 554,450 485,542
Other liabilities 75,475 73,747 66,388
---------- ---------- ----------
Total liabilities 5,086,557 4,737,187 4,094,258
Shareholders' equity 476,453 440,659 387,675
---------- ---------- ----------
Total $5,563,010 $5,177,846 $4,481,933
========== ========== ==========
Net interest revenue $222,912 $208,784 $190,890
======== ======== ========
Net interest margin 4.28% 4.31% 4.56%
Net interest rate spread 3.60% 3.59% 3.82%
Interest bearing liabilities to
interest earning assets 84.72% 84.82% 84.55%
(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.
22
23
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.
1999 OVER 1998 - 1998 OVER 1997 -
INCREASE (DECREASE) INCREASE (DECREASE)
-------------------------------- -------------------------------
(Taxable equivalent basis) Volume Rate Total Volume Rate Total
-------- -------- -------- -------- ------- --------
(In thousands)
INTEREST REVENUE
Due from banks - interest bearing $ (9) $ (33) $ (42) $ (31) $ 51 $ 20
Held-to-maturity securities:
U.S. Government agencies 1,681 (59) 1,622 5,103 (1,800) 3,303
State and political subdivisions 1,976 (1,048) 928 1,841 (1,041) 800
Available-for-sale securities (4,824) (837) (5,661) 7,303 (860) 6,443
Federal funds sold 135 (251) (116) (944) (68) (1,012)
Loans (net of unearned discount) 33,143 (13,537) 19,606 38,697 (5,021) 33,676
Mortgages held for sale (68) 236 168 1,531 (164) 1,367
-------- -------- -------- -------- ------- --------
Total 32,034 (15,529) 16,505 53,500 (8,903) 44,597
-------- -------- -------- -------- ------- --------
INTEREST EXPENSE
Demand deposits - interest bearing 2,439 (2,196) 243 2,213 (4,968) (2,755)
Savings deposits 4,920 (527) 4,393 6,737 3,732 10,469
Time deposits 1,215 (6,290) (5,075) 11,368 (127) 11,241
Federal funds purchased and
securities sold under
repurchase agreements 1,725 (183) 1,542 718 (199) 519
Other short-term borrowings 2,615 (100) 2,515 45 (269) (224)
Long-term debt (760) (481) (1,241) 7,253 200 7,453
-------- -------- -------- -------- ------- --------
Total 12,154 (9,777) 2,377 28,334 (1,631) 26,703
-------- -------- -------- -------- ------- --------
Increase (decrease) in effective
interest differential $ 19,880 $ (5,752) $ 14,128 $ 25,166 $(7,272) $ 17,894
======== ======== ======== ======== ======= ========
23
24
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.
INTEREST RATE SENSITIVITY
MATURING OR REPRICING
---------------------------------------------------
91 DAYS OVER 1
0 TO 90 TO YEAR TO OVER
DAYS 1 YEAR 5 YEARS 5 YEARS
----------- ----------- ---------- --------
(IN THOUSANDS)
Interest earning assets:
Interest bearing deposits with banks $ 5,411 $ -- $ -- $ --
Federal funds sold 65,000 -- -- --
Held-to-maturity securities 83,815 187,474 482,671 86,794
Available-for-sale securities 17,277 46,727 178,497 102,783
Loans & leases, net of unearned 1,012,232 515,689 2,215,564 310,047
Mortgages held for sale 37,521 -- -- --
----------- ----------- ---------- --------
Total interest earning assets 1,221,256 749,890 2,876,732 499,624
----------- ----------- ---------- --------
Interest bearing liabilities:
Interest bearing demand deposits & savings 909,199 282,167 683,803 --
Time deposits 727,039 1,076,899 518,253 3,488
Federal funds purchased & securities
sold under repurchase agreements 153,989 -- -- --
Long-term debt 657 1,971 8,425 127,507
Other 80,539 9,195 352 2,868
----------- ----------- ---------- --------
Total interest bearing liabilities 1,871,423 1,370,232 1,210,833 133,863
----------- ----------- ---------- --------
Interest sensitivity gap $ (650,167) $ (620,342) $1,665,899 $365,761
=========== =========== ========== ========
Cumulative interest sensitivity gap $ (650,167) $(1,270,509) $ 395,390 $761,151
=========== =========== ========== ========
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
24
25
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:
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Provision for credit losses $ 14,689 $ 16,080 $ 10,516
Allowance for credit losses as
a percentage of loans and leases
outstanding at year end 1.37% 1.43% 1.39%
Net charge offs $ 10,215 $ 10,387 $ 8,580
Net charge offs as a percent
of average loans 0.27% 0.30% 0.29%
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:
1999 1998 1997
------------------ ------------------ ------------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
------- ------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
Mortgage lending $14,975 +38.6% $10,808 +36.6% $ 7,912 -9.0%
Service charges 25,288 +5.3 24,006 +6.0 22,640 +5.8
Life insurance premiums 3,975 +8.8 3,655 -3.1 3,772 -16.6
Trust income 3,954 +7.4 3,682 +13.7 3,239 +7.1
Securities gains, net 4,176 +396.0 842 -34.4 1,283 +223.2
Insurance commissions 13,573 +8.8 12,475 +22.5 10,187 +7.3
Other revenue 13,390 +24.3 10,774 +1.2 10,646 +18.4
------- ------- -------
Total other revenue $79,331 +19.8% $66,242 +11.0% $59,679 +5.6%
======= ======= =======
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
25
26
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.
1999 1998 1997
------------------ -------------------- -------------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
------ -------- ------ -------- ------ --------
(DOLLARS IN MILLIONS)
Mortgage loans serviced $1,951.1 +14.7% $1,701.7 +28.5% $1,324.0 +13.5%
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.
1999 1998 1997
------------------ -------------------- -------------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
------ -------- ------ -------- ------ --------
(Dollars in thousands)
Salaries and employee benefits $ 88,278 +10.1% $ 80,207 -2.3% $ 82,126 +13.9%
Occupancy, net 12,118 +9.7 11,042 +8.4 10,183 -0.2
Equipment 16,940 +7.3 15,784 +12.5 14,025 +28.0
Telecommunications 5,918 +21.4 4,876 +16.2 4,195 +4.2
Contributions 4,146 N/A -- -- -- --
Other 55,600 +1.8 54,605 +18.6 46,045 +2.9
-------- -------- --------
Total other expense $183,000 +9.9% $166,514 +6.3% $156,574 +10.2%
======== ======== ========
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,
26
27
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.
1999 1998 1997
----------------- ----------------- ------------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
------ -------- ------ -------- ------ --------
(DOLLARS IN MILLIONS)
Loans, net of unearned - average $3,799.8 +11.0% $3,424.0 +14.0% $3,004.1 +7.8%
Loans, net of unearned - year end 4,053.5 +13.2 3,582.4 +12.4 3,187.3 +11.4
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.
1999 1998 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
Foreclosed properties $ 7,764 $ 7,131 $ 3,153
Non-accrual loans 5,150 6,629 5,179
Loans 90 days or more past due 14,378 10,308 8,659
Restructured loans 91 713 1,097
------- ------- -------
Total non-performing assets $27,383 $24,781 $18,088
======= ======= =======
Total non-performing assets as a percent of net loans 0.68% 0.69% 0.57%
======= ======= =======
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.
27
28
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.
1999 1998 1997
------------------- ------------------- --------------------
AVERAGE % AVERAGE % AVERAGE %
BALANCE CHANGE BALANCE CHANGE BALANCE CHANGE
-------- ------ -------- ------ -------- ------
(Dollars in millions)
Interest bearing deposits $4,076.1 +5.9% $3,848.8 +12.5% $3,421.2 +12.0%
Non-interest bearing deposits 603.5 +8.8 554.5 +14.2 485.5 +6.4
-------- -------- --------
Total average deposits $4,679.6 +6.3 $4,403.3 +12.7 $3,906.7 +11.3
======== ======== ========
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.
28
29
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.
29
30
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 ou