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, 1997 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 38801
- ------------------------------------ -------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (601) 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 Continues on Next Page)
1
2
(Continued from Cover Page)
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of January 31, 1998, was approximately $906,901,000 based
on the closing sale price as reported on the New York Stock Exchange on January
31, 1998.
On March 16, 1998, the registrant had outstanding 22,330,782 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 April 21, 1998, are
incorporated by reference into Part III of this Report.
2
3
BANCORPSOUTH, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 1997
CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Stock
and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial
Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
3
4
PART I
Item 1. - Business
General
The Company is a bank holding company with financial services
operations in Mississippi and Tennessee. Its principal subsidiary is
BancorpSouth Bank ("the Bank"). The Company's principal office is located at One
Mississippi Plaza, Tupelo, Mississippi 38801 and its telephone number is (601)
680-2000.
Description of Business
The Bank operates under the trade names Bank of Mississippi in
Mississippi and Volunteer Bank in Tennessee. The Bank has its principal office
in Tupelo, Lee County, Mississippi, and conducts a commercial banking and trust
business through 134 offices in 68 municipalities or communities in 44 counties
throughout Mississippi and western Tennessee. 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
consumer finance, credit life insurance and insurance agency subsidiaries. At
December 31, 1997, the Bank had total deposits of approximately $3.54 billion
and total assets of approximately $4.18 billion.
The Company, through its subsidiaries, provides a range of financial
services and products 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, including personal trust and estate services, certain employee
benefit accounts and plans, including individual retirement accounts, and
limited corporate trust functions.
At December 31, 1997, the Company and its subsidiaries employed 2,030
persons. The Company and its subsidiaries are not a party to any collective
bargaining agreements, and the Company believes employee relations are 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 not only with state and national commercial banks in its service areas
but also with 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 whole 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 with
the Board of Governors of the Federal Reserve System (the "FRB") and is subject
to regulation and supervision by the FRB. The Company is required to file with
the FRB annual reports and such other information as they may require. The FRB
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 its subsidiary, which are subject to approval
by the applicable regulatory authority.
The Bank is incorporated under the banking laws of the State of
Mississippi and is subject to the applicable provisions of Mississippi banking
laws rather than the National Bank Act. The Bank is subject to the supervision
of the Mississippi Department of Banking and Consumer Finance 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 System.
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 Bank's
deposits are in the Bank Insurance Fund (BIF), certain other of the Bank'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 FRB adopts from time to time. See Note 18 of Notes to
Consolidated Financial Statements included herein.
In September 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 ("IBBEA") was signed into law. Beginning September 29,
1996, 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. Beginning June 1, 1997, 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.
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
5
6
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 Company offers a variety of commercial loan services including term
loans, lines of credit, equipment and receivable financing and agricultural
loans. A broad range of short-to-medium term commercial loans, both secured and
unsecured are made available to businesses for working capital (including
inventory and receivables), business expansion (including acquisition and
development of real estate and improvements), and the purchase of equipment and
machinery. At times, the Company also makes construction loans to real estate
developers for the acquisition, development and construction of residential
subdivisions.
Commercial loans are granted based on the borrower's ability to
generate cash flow to support its debt obligations and other cash related
expenses. A borrower's ability to repay commercial loans is substantially
dependent on the success of the business itself and on the quality of its
management. As a general practice, the Company 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 Company requires personal guaranties of its
commercial loans to offset the risks associated with such loans.
The Company 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 Company's lending activities consists of the
origination of fixed and adjustable rate residential mortgage loans secured by
owner-occupied property located in the Company'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
Company's traditional banking facilities or from affordable storefront locations
in commercial buildings. In addition, the Company offers construction loans,
second mortgages home improvement loans and home equity lines of credit. The
Company's banking subsidiary has received an "outstanding" CRA rating from the
Federal Deposit Insurance Company after its most recent examination.
The company 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 bother 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 Company 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 Company will sell its mortgage loans of 15 or more
years in term in the secondary market. The sale to the secondary market allows
the Company to hedge against the interest rate risks related to such lending
operations. This brokerage arrangement allows the Company 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
Company's only involvement is to act as a servicing agent.
The Company in most cases requires title, fire, extended casualty
insurance, and, where required by applicable regulations, flood insurance to be
obtained by the borrower. The Company 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 Company customarily include a "due on sale" clause giving the
Company 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 Company enforces due on sales
clauses. Borrowers are typically permitted to refinance or repay loans at their
option without penalty.
6
7
Non-Residential Consumer Lending
Non-residential consumer loans made by the Company include loans for
automobiles, recreation vehicles, boats, personal (secured and unsecured) and
deposit account secured loans. In addition, the Company provides federally
insured or guaranteed student loans to students at major universities and
community colleges in the Company's market areas. The Company also conducts
various indirect lending activities through established retail companies in its
market areas. Non-residential consumer loans are attractive to the Company
because they typically have a shorter term and carry higher interest rates than
that charged on other types of loans. Non-residential consumer loans, however,
do pose additional risks of collectability when compared to traditional types of
loans granted by commercial banks such as residential mortgage loans.
The Company also issues credit cards solicited on the basis of
applications received through referrals from the Company's bank branch networks.
The Company 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 rations, similar to
the credit policies applicable to other personal consumer loans. Historically,
the Company 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 Company 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
Company" market area.
Asset Quality
Management seeks to maintain a high quality of assets through
conservative underwriting and sound lending practices. Management intends to
follow this policy even though it may result in foregoing the funding of higher
yielding loans. While there is no assurance that the Company will not suffer
losses on its loans, management believes that the Company has in place adequate
underwriting and loan administration policies and personnel to manage the
associated risks prudently.
In an effort to maintain the quality of the loan portfolio, management
seeks to minimize higher risk types of lending. Undesirable loans include loans
to provide initial equity and working capital to new businesses with no other
capital strength, loans secured by unregistered stock, loans for speculative
transactions in stock, land or commodity markets, loans to borrowers or the
taking of collateral outside the Company's market area, loans dependent on
secondary liens as primary collateral, and non-recourse loans. To the extent
risks are identified, additional precautions are taken in order to reduce the
Company's risk of loss. Commercial loans entail certain additional risks since
they usually involve large loan balances to single borrowers or a related group
of borrowers, resulting in a more concentrated loan portfolio. Further, since
their payment is usually dependent upon the successful operation of the
commercial enterprise, they also are subject to adverse conditions in the
economy.
The Board of Directors of the Company 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
Company'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 Board of Directors.
Combined, these components are integral elements of the Company'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.
7
8
Selected Statistical Information
Set forth below is certain selected statistical information relating to
the Company's business.
Distribution of Assets, Liabilities and Shareholders' Equity; Interest
Rates and Interest Differentials
Net Interest Revenue, the difference between Interest Revenue and
Interest Expense, is the most significant component of the Company's earnings.
For internal analytical purposes, management adjusts Net Interest Revenue to a
"taxable equivalent" basis using an effective tax rate of 35% on tax exempt
items (primarily interest on municipal securities).
Another significant statistic in the analysis of Net Interest Revenue
is the effective interest differential, also called the net yield on earning
assets. The net yield on earning assets is net interest divided by total
interest-earning assets. Recognizing the importance of interest differential to
total earnings, management places great emphasis on managing interest rate
spreads. Although interest differential is affected by national, regional and
local economic conditions, including the level of credit demand and interest
rates, there are significant opportunities to influence interest differential
through appropriate loan and investment policies which are designed to maximize
interest differential while maintaining sufficient liquidity and availability of
"incremental funds" for purposes of meeting existing commitments and for
investment in lending and other investment opportunities that may arise.
The following table sets forth the average balances of assets and
liabilities and the average rates earned and paid for the three years ended
December 31, 1997. The table shows the various components of earning assets and
the sources used to fund these assets which are included in the effective
interest differential.
8
9
Distribution of Assets, Liabilities and Shareholders' Equity;
Interest Rates and Interest Differential
1997 1996 1995
------------------------------ ----------------------------- -----------------------------
(Taxable equivalent basis) Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ----- ------- -------- ----- ------- -------- -----
ASSETS (Dollars in thousands)
Interest bearing deposits in
other banks $ 8,018 $ 422 5.26% $ 12,313 $ 646 5.25% $ 15,974 $ 857 5.36%
Held-to-maturity securities:
U.S. treasury and agencies 417,029 27,366 6.56% 361,649 23,823 6.59% 398,194 28,152 7.07%
State and political
subdivisions (1) 155,673 11,226 7.21% 118,458 9,709 8.20% 118,493 10,517 8.88%
Other securities 15 0 0.00% 84 2 2.38% 4,228 168 3.97%
Available-for-sale
securities (2) 315,620 19,884 6.30% 231,040 14,400 6.23% 183,396 8,902 4.85%
Federal funds sold 82,724 4,410 5.33% 60,868 3,289 5.40% 39,451 2,205 5.59%
Loans (net of unearned
discount) (3) (4) (6) 2,598,315 245,652 9.45% 2,410,746 227,920 9.45% 2,146,967 204,397 9.52%
Mortgages held for sale 28,870 2,068 7.16% 27,729 1,917 6.91% 20,805 1,433 6.89%
---------- --------- ---------- ------- ---------- --------
Total interest earning
assets and revenue 3,606,264 311,028 8.62% 3,222,887 281,706 8.74% 2,927,508 256,631 8.77%
Other assets 286,369 266,537 256,363
Less: allowance for credit
losses (38,815) (36,503) (32,574)
---------- ---------- ----------
Total $3,853,818 $3,452,921 $3,151,297
========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Demand - interest bearing $ 783,499 $ 24,550 3.13% $ 700,863 $ 20,426 2.91% $ 654,151 $ 17,733 2.71%
Savings 485,072 20,789 4.29% 371,514 14,930 4.02% 300,278 11,916 3.97%
Time 1,687,071 93,951 5.57% 1,526,564 83,390 5.46% 1,416,901 77,516 5.47%
Federal funds purchased and
securities under
repurchase agreements 32,070 1,594 4.97% 40,880 1,954 4.78% 40,845 2,084 5.10%
Other short-term borrowings (5) 1,892 116 6.13% 3,359 158 4.70% 4,706 299 6.35%
Long term debt 51,220 3,055 5.96% 80,619 5,647 7.00% 68,452 4,909 7.17%
---------- --------- ---------- -------- ---------- --------
Total interest bearing
liabilities and expense 3,040,824 144,055 4.74% 2,723,799 126,505 4.64% 2,485,333 114,457 4.61%
Demand deposits -
non-interest bearing 413,012 383,897 361,120
Other liabilities 55,816 45,476 36,449
---------- ---------- ----------
Total liabilities 3,509,652 3,153,172 2,882,902
Shareholders' equity 344,166 299,749 268,395
---------- ---------- ----------
Total $3,853,818 $3,452,921 $3,151,297
========== ========== ==========
Net interest revenue $ 166,973 $155,201 $142,174
========= ======== ========
Net yield on interest
earning assets 4.64% 4.81% 4.86%
==== ==== ====
1. Includes taxable equivalent adjustments of $2,756,000, $2,755,000 and
$3,026,000 in 1997, 1996 and 1995, respectively, using an effective tax
rate of 35%.
2. Includes taxable equivalent adjustment of $406,000, $281,000 and $581,000
in 1997, 1996 and 1995 using an effective tax rate of 35%.
3. Includes taxable equivalent adjustment of $773,000, $751,000 and $597,000
in 1997, 1996 and 1995, 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.
9
10
Analysis of Changes in Effective Interest Differential
Net interest revenue may also be analyzed by segregating the rate and volume
components of interest revenue and interest expense. The table which follows
presents an analysis of rate and volume change in net interest from 1996 to 1997
and 1995 to 1996. Changes, which are not solely due to volume or rate, are
allocated to volume.
1997 OVER 1996 - INCREASE (DECREASE) 1996 OVER 1995 - INCREASE (DECREASE)
-------------------------------------- ---------------------------------------
(Taxable equivalent basis) Volume Rate Total Volume Rate Total
--------- --------- -------- -------- -------- ---------
(In thousands)
INTEREST REVENUE
Due from banks - interest bearing $ (226) $ 2 $ (224) $ (192) $ (19) $ (211)
Held-to-maturity securities:
U.S. Government agencies 3,634 (91) 3,543 (2,407) (1,922) (4,329)
State and political subdivisions 2,684 (1,167) 1,517 (3) (805) (808)
Other securities -- (2) (2) (99) (67) (166)
Available-for-sale securities 5,329 155 5,484 2,970 2,528 5,498
Federal funds sold 1,165 (44) 1,121 1,157 (73) 1,084
Loans (net of unearned discount) 17,733 (1) 17,732 24,939 (1,416) 23,523
Mortgages held for sale 82 69 151 479 5 484
-------- -------- -------- -------- -------- --------
Total 30,401 (1,079) 29,322 26,841 (1,766) 25,075
-------- -------- -------- -------- -------- --------
INTEREST EXPENSE
Demand deposits - interest bearing 2,589 1,535 4,124 1,361 1,332 2,693
Savings deposits 4,867 992 5,859 2,863 151 3,014
Time deposits 8,938 1,623 10,561 5,990 (116) 5,874
Federal funds purchased and
securities under
repurchase agreements (438) 78 (360) 2 (132) (130)
Other short-term borrowings (90) 48 (42) (63) (78) (141)
Long-term debt (1,753) (839) (2,592) 852 (114) 738
-------- -------- -------- -------- -------- --------
Total 14,113 3,437 17,550 11,005 1,043 12,048
-------- -------- -------- -------- -------- --------
Increase (Decrease) in Effective
Interest Differential $ 16,288 $ (4,516) $ 11,772 $ 15,836 $ (2,809) $ 13,027
======== ======== ======== ======== ======== ========
10
11
Investment Portfolio
Held-to-Maturity Securities
The following table shows the amortized cost of held-to-maturity
securities at December 31, 1997, 1996 and 1995:
December 31
--------------------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
U. S. Treasury securities $109,012 $ 91,340 $ 33,355
U. S. Government agency
securities 259,527 292,930 293,831
Taxable obligations of states
and political subdivisions 1,295 1,375 500
Tax exempt obligations of states
and political subdivisions 163,570 144,406 110,830
Other securities 15 15 787
-------- -------- --------
TOTAL $533,419 $530,066 $439,303
======== ======== ========
The following table shows the maturities and weighted average yields as
of the end of the latest period for each investment category presented above:
-----------------------------------------------------------------------------------------
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 $ 12,087 $ 94,413 $ 16,865 $ -- 6.55%
Maturing after one
year but within
five years 94,939 154,908 104,525 -- 6.86%
Maturing after five
years but within
ten years 1,986 8,702 34,192 -- 6.97%
Maturing after ten
years -- 1,504 9,283 15 7.86%
-------- -------- -------- --------
TOTAL $109,012 $259,527 $164,865 $ 15
======== ======== ======== ========
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
Available-for-Sale Securities
The following table shows the book value of available-for-sale
securities at December 31, 1997, 1996 and 1995:
December 31
----------------------------------------------------------
1997 1996 1995
----------------- ------------------ -----------------
(In thousands)
U. S. Treasury securities $105,373 $ 43,864 $ 51,241
U. S. Government agency
securities 240,040 129,515 127,488
Taxable obligations of states
and political subdivisions 228 503 3,337
Tax exempt obligations of states
and political subdivisions 11,258 12,567 20,000
Other securities 49,313 44,290 37,689
-------- -------- --------
TOTAL $406,212 $230,739 $239,755
======== ======== ========
The following table shows the maturities and weighted average yields as
of the end of the latest period for each investment category presented above:
---------------------------------------------------------------------------------------------------
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 $ 24,953 $ 78,240 $ 1,961 $ 21,001 5.94%
Maturing after one
year but within
five years 75,161 121,400 4,348 11,875 6.40%
Maturing after five
years but within
ten years 5,259 67 3,722 13,552 6.57%
Maturing after ten
years -- 40,333 1,455 2,885 6.46%
-------- -------- -------- --------
TOTAL $105,373 $240,040 $ 11,486 $ 49,313
======== ======== ======== ========
The yield on tax-exempt obligations of states and political
subdivisions has been adjusted to a taxable equivalent basis using a 35% tax
rate.
12
13
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 each of the years indicated.
DECEMBER 31
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(In thousands)
Commercial &
agricultural (1) $ 266,112 $ 238,246 $ 223,225 $ 211,988 $ 203,798
Consumer & installment 823,356 744,456 695,127 633,692 510,538
Real estate mortgage (2) 1,571,137 1,407,841 1,314,935 1,151,666 1,013,446
Lease financing 172,436 149,104 121,617 81,816 60,781
Other 19,844 14,471 16,780 11,913 52,692
---------- ---------- ---------- ---------- ----------
Total gross loans $2,852,885 $2,554,118 $2,371,684 $2,091,075 $1,841,255
========== ========== ========== ========== ==========
(1) Including $13,550,000, $14,580,000, $17,388,000, $15,247,000 and
$15,588,000 in 1997, 1996, 1995, 1994 and 1993, respectively, of loans
classified as agricultural.
(2) Including $35,831,000, $38,406,000, $36,054,000, $29,838,000 and
$27,048,000 in 1997, 1996, 1995, 1994 and 1993, 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, 1997.
ONE YEAR ONE TO AFTER
OR LESS FIVE YEARS FIVE YEARS
---------- -------------- -----------
(In thousands)
Commercial
& agricultural $ 142,260 $ 99,116 $ 24,736
Consumer & installment 199,325 593,119 30,912
Real estate mortgages 556,246 762,772 252,119
Lease financing 58,748 110,729 2,959
Other 14,581 4,990 273.00
---------- ---------- ----------
Total gross loans $ 971,160 $1,570,726 $ 310,999
========== ========== ==========
13
14
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, 1997.
December 31, 1997
FIXED VARIABLE
RATE RATE
---------- ---------
(In thousands)
Loan Portfolio
Due after one year $1,544,384 $337,341
========== ========
Nonaccrual, 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 $4,008,000, $3,940,000, $1,592,000, $3,029,000 and
$4,072,000 at December 31, 1997, 1996, 1995, 1994 and 1993, respectively. The
aggregate principal balance of restructured loans was $659,000, $77,000, $7,000,
$1,448,000 and $4,018,000 at December 31, 1997, 1996, 1995, 1994 and 1993,
respectively. The total amount of interest earned on non-performing loans was
approximately $37,000, $13,000, $70,000, $214,000 and $277,000 in 1997, 1996,
1995, 1994 and 1993, respectively. The gross interest income that would have
been recorded under the original terms of those loans amounted to $128,000,
$167,000, $105,000, $353,000 and $611,000 in 1997, 1996, 1995, 1994 and 1993.
Accruing loans which were contractually past due 90 days or more for years ended
December 31, 1997, 1996, 1995, 1994 and 1993, amounted to $7,465,000,
$4,811,000, $5,148,000, $3,614,000 and $4,277,000, respectively.
Loans considered impaired, under SFAS No. 114, as amended by SFAS No.
118, are loans which, based on current information and events, it is probable
that the creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. The Company's recorded investment in
loans considered impaired at December 31, 1997 and 1996 was $2,928,000 and
$3,306,000, respectively, with a valuation reserve of $927,000 and $995,000,
respectively. The average recorded investment in impaired loans during 1997 and
1996 was $2,523,000 and $2,603,000, 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, 1997,
no loans were known to be potential problem loans.
At December 31, 1997, 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 market area.
Summary of Loan Loss Experience
In the normal course of business, the Company assumes risks in
extending credit. The Company manages these risks through its lending policies,
loan review procedures and the diversification of its loan portfolio. Although
it is not possible to
14
15
predict loan losses with any certainty, management constantly 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 Company 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 the determine the amount of additions to the ALLL. The
Committee is composed of senior management from the Company's Loan
Administration, Lending and Finance Departments. 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 the Company's geographic 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. An independent Loan Review
Department (Loan Review) reviews the gradings assigned by the loan officer. 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 present and future economic conditions of the Company's
market area. Material estimates that are particularly susceptible to significant
change in the near term are a necessary part of this process. Future additions
to the allowance may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for credit losses. Such
agencies may require the Company to recognize additions to the allowance based
on their judgments about information available to them at the time of their
examination.
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.
15
16
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 each of the years presented:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
ALLOWANCE % OF LOANS ALLOWANCE % OF LOANS ALLOWANCE % OF LOANS ALLOWANCE % OF LOANS ALLOWANCE % OF LOANS
FOR TO TOTAL FOR TO TOTAL FOR TO TOTAL FOR TO TOTAL FOR TO TOTAL
CREDIT LOSS LOANS CREDIT LOSS LOANS CREDIT LOSS LOANS CREDIT LOSS LOANS CREDIT LOSS LOANS
----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- -----
(In thousands)
Commercial &
agricultural $ 2,985 9.33% $ 3,570 9.33% $ 3,290 9.41% $ 3,100 10.14% $ 3,020 11.07%
Consumer &
installment 14,760 28.86% 11,100 29.15% 10,413 29.31% 9,350 30.30% 7,620 27.73%
Real estate
mortgage 19,415 55.07% 20,532 55.12% 19,500 55.44% 17,090 55.08% 16,123 55.04%
Lease
financing 2,592 6.04% 2,070 5.84% 1,433 5.13% 1,290 3.91% 705 3.30%
Other 125 0.70% -- 0.56% -- 0.71% -- 0.57% -- 2.86%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
TOTAL $39,877 100.00% $37,272 100.00% $34,636 100.00% $30,830 100.00% $27,468 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
16
17
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, 1997.
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
LOANS
Average loans for the
period $ 2,598,315 $ 2,410,746 $ 2,146,967 $ 1,881,922 $ 1,675,048
=========== =========== =========== =========== ===========
ALLOWANCE FOR CREDIT
LOSSES
Balance, beginning
of period $ 37,272 $ 34,636 $ 30,830 $ 27,468 $ 24,116
Loans charged off:
Commercial & agricultural (678) (1,197) (448) (1,479) (374)
Consumer & installment (7,107) (5,969) (3,550) (3,146) (5,030)
Real estate mortgage (994) (808) (715) (1,217) (2,128)
Lease financing (48) (30) (1) (19) (144)
----------- ----------- ----------- ----------- -----------
Total loans charged off (8,827) (8,004) (4,714) (5,861) (7,676)
----------- ----------- ----------- ----------- -----------
Recoveries:
Commercial & agricultural 214 427 99 1,539 169
Consumer & installment 1,205 1,163 1,084 1,271 1,326
Real estate mortgage 352 241 366 412 325
Lease financing 57 5 18 55 176
----------- ----------- ----------- ----------- -----------
Total recoveries 1,828 1,836 1,567 3,277 1,996
----------- ----------- ----------- ----------- -----------
Net charge-offs (6,999) (6,168) (3,147) (2,584) (5,680)
Provision charged to
operating expense 9,008 8,804 6,206 5,946 9,032
Acquisitions 596 -- 747 -- --
----------- ----------- ----------- ----------- -----------
Balance, end of period $ 39,877 $ 37,272 $ 34,636 $ 30,830 $ 27,468
=========== =========== =========== =========== ===========
RATIOS
Net charge-offs to
average loans 0.27% 0.26% 0.15% 0.14% 0.34%
=========== =========== =========== =========== ===========
17
18
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, 1997.
YEARS ENDED DECEMBER 31
----------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
Non-interest bearing
demand deposits $ 413,012 - $ 383,897 - $ 361,120 -
Interest bearing
demand deposits 783,499 3.13% 700,863 2.91% 654,151 2.71%
Savings 485,072 4.29% 371,514 4.02% 300,278 3.97%
Time 1,687,071 5.57% 1,526,564 5.46% 1,416,901 5.47%
---------- --------- ----------
TOTAL DEPOSITS $3,368,654 $2,982,838 $2,732,450
========== ========== ==========
Time deposits of $100,000 and over including certificates of deposits
of $100,000 and over at December 31, 1997, had maturities as follows:
DECEMBER 31, 1997
-----------------
(In thousands)
Three months or less $116,503
Over three months through six months 134,074
Over six months through twelve months 75,416
Over twelve months 129,967
--------
TOTAL $455,960
18
19
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,
1997, as presented below:
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
Return on average common equity 13.18% 14.31% 13.23%
Return on average assets 1.18 1.24 1.13
Dividend payout ratio 38.92 34.65 34.37
The Company's average common equity as a percent of average assets was
8.93%, 8.68% and 8.52% for 1997, 1996 and 1995, respectively.
Short-Term Borrowings
Time Deposits and Short-Term Debt
Certificates of deposit and other time deposits of $100,000 or more
amounting to approximately $455,960,000 and $399,123,000 were outstanding at
December 31, 1997 and 1996, respectively. Total interest expense relating to
certificate and other time deposits of $100,000 or more totaled approximately
$24,939,000, $19,728,000, and $17,386,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
For time deposits with a remaining maturity of more than one year at
December 31, 1997, the aggregate amount of maturities for each of the following
five years is presented in the following table:
MATURING IN AMOUNT
----------- ------
(In thousands)
1999 $229,092
2000 200,386
2001 41,791
2002 44,960
2003 398
Thereafter --------
Total $518,976
========
19
20
Presented below is information relating to short-term debt for the
years ended December 31, 1997 and 1996:
END OF PERIOD DAILY AVERAGE MAXIMUM
------------------- ------------------- OUTSTANDING
INTEREST INTEREST OF ANY
BALANCE RATE BALANCE RATE MONTH END
------------------- ------------------- -----------
(Dollars in thousands)
1997:
Federal funds $152,450 6.9% $ 3,004 6.3% $152,450
purchased
Securities sold under
repurchase agreements 25,000 5.3% 29,066 4.8% 32,554
-------- ------- --------
Total $177,450 $32,070 $185,005
======== ======= ========
1996:
Federal funds
purchased $ 1,750 5.8% $ 4,266 5.0% $ 5,950
Securities sold under 31,886 4.8% 36,654 4.8% 40,030
-------- ------- --------
Total $ 33,636 $40,880 $ 45,980
======== ======= ========
Federal funds purchased generally mature the day following the date of
purchase while securities sold under repurchase agreements generally mature
within 30 days from the date of sale. At December 31, 1997, the Bank had
established informal federal funds borrowing lines of credit aggregating
$584,000,000.
Item 2. - Properties
The physical properties of the Registrant 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 75% of the rentable space with the remainder
leased to various unaffiliated tenants.
The Bank owns 111 of its 134 branch banking facilities. The
remaining 23 branch banking facilities are occupied under
leases varying in length from one to 9 years. The Bank also
owns several buildings in the Hattiesburg, Mississippi area
(which provide space for certain of the its Southern Region
activities including warehouse requirements, mortgage lending,
trust services, lease servicing and central operations), an
operations center near the Tupelo, Mississippi 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 Company - This wholly-owned subsidiary of the
Bank occupies 46 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 with
average annual rent of approximately $8,200. All these
premises are considered to be in good condition.
20
21
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 1997.
Executive Officers of the Registrant
For information regarding executive officers of the Company, see "Item
10 Directors and Executive Officers of the Registrant" in this Report.
21
22
PART II
Item 5. - Market for the Registrant's Common Stock 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 from May 15, 1997 and as reported on the Nasdaq Stock Market
prior to May 15, 1997. The prices have been restated to reflect a two-for-one
stock split of the Company's common stock effected in the form of a 100% stock
dividend paid November 20, 1996.
1997: High Low
----- ---
4th quarter $48.3750 $35.1875
3rd quarter 36.0000 29.0000
2nd quarter 29.5000 26.5000
1st quarter 30.0000 26.5000
1996:
4th quarter $28.5000 $23.7500
3rd quarter 24.0000 21.5000
2nd quarter 25.7500 21.3750
1st quarter 25.5000 22.5000
Holders of Record
As of February 28, 1998, there were 7,697 shareholders of record of the
Company's common stock.
Dividends
The Company declared cash dividends totaling $0.79 per share during
1997, $0.70 during 1996 and $0.62 during 1995. Future dividends, if any, will
vary depending on the Company's profitability and anticipated capital
requirements. See "Item 1 Business - Regulation and Supervision".
22
23
Item 6. - Selected Financial Data
SELECTED FINANCIAL INFORMATION (UNAUDITED)
(Dollars in thousands, except per share amounts)
YEARS ENDED DECEMBER 31
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Earnings Summary:
Interest revenue $ 307,094 $ 277,919 $ 252,427 $ 207,895 $ 193,869
Interest expense 144,055 126,505 114,457 85,029 78,715
---------- ---------- ---------- ---------- ----------
Net interest revenue 163,039 151,414 137,970 122,866 115,154
Provision for credit losses 9,008 8,804 6,206 5,946 9,032
---------- ---------- ---------- ---------- ----------
Net interest revenue, after provision
for credit losses 154,031 142,610 131,764 116,920 106,122
Other revenue 43,667 40,745 31,240 26,012 26,776
Other expense 131,988 118,472 111,750 99,372 93,176
---------- ---------- ---------- ---------- ----------
Income before income taxes and
effect of accounting change 65,710 64,883 51,254 43,560 39,722
Income taxes 20,360 22,000 15,750 12,832 10,216
---------- ---------- ---------- ---------- ----------
Income before effect of accounting change 45,350 42,883 35,504 30,728 29,506
Cummulative effect of change in
accounting for income taxes -- -- -- -- 3,429
---------- ---------- ---------- ---------- ----------
Net income $ 45,350 $ 42,883 $ 35,504 $ 30,728 $ 32,935
========== ========== ========== ========== ==========
Per Share Data:
Net income: Basic $ 2.04 $ 2.04 $ 1.70 $ 1.51 $ 1.66
Diluted 2.03 2.03 1.69 1.51 1.65
Cash dividends 0.79 0.70 0.62 0.555 0.54
Book value 16.18 15.01 13.72 12.44 11.82
Balance Sheet - Averages:
Total assets $3,853,818 $3,452,921 $3,151,297 $2,884,539 $2,659,785
Held-to-maturity securities 572,717 480,191 516,919 427,759 509,996
Available-for-sale securities 315,620 231,040 183,396 266,370 141,496
Loans, net of unearned discount 2,598,315 2,410,746 2,146,967 1,881,922 1,675,048
Total deposits 3,368,654 2,982,838 2,732,450 2,513,493 2,342,137
Long-term debt 47,539 55,778 73,625 67,416 24,508
Total shareholders' equity 344,166 299,749 268,395 240,929 218,504
Selected Ratios:
Return on average assets 1.18% 1.24% 1.13% 1.07% 1.24%
Return on average shareholders' equity 13.18% 14.31% 13.23% 12.75% 15.07%
23
24
Item 7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
BancorpSouth, Inc. is a bank holding company with commercial banking
operations in Mississippi and Tennessee. BancorpSouth Bank, the Company's
banking subsidiary is headquartered in Tupelo, Mississippi. The Bank operates
under the trade names Bank of Mississippi in Mississippi and Volunteer Bank in
Tennessee. The Bank and its consumer finance, credit life insurance and
insurance agency subsidiaries provide commercial banking, leasing, mortgage
origination and servicing, life insurance and trust services to corporate
customers, local governments, individuals and other financial institutions
through an extensive network of branches and offices located throughout
Mississippi and west Tennessee.
The following discussion provides certain information concerning the
consolidated financial condition and results of operations of the Company. For a
complete understanding of the following discussion, reference is made to the
Consolidated Financial Statements and Notes thereto presented elsewhere in this
Annual Report.
THREE YEARS ENDED DECEMBER 31, 1997
RESULTS OF OPERATIONS
Summary
The table below summarizes the Company's net income and returns on
average assets and average shareholders' equity for the years ended December 31,
1997, 1996 and 1995:
1997 1996 1995
---- ---- ----
(In thousands, except per share amounts)
Net income $45,350 $42,883 $35,504
Net income per share: Basic $ 2.04 $ 2.04 $ 1.70
Diluted $ 2.03 $ 2.03 $ 1.69
Return on average assets 1.18% 1.24% 1.13%
Return on average shareholders' equity 13.18% 14.31% 13.23%
NET INTEREST REVENUE
Net interest revenue, principally interest earned on assets less
interest costs on liabilities, provides the Company with its principal source of
income. Since net interest revenue is affected by changes in the levels of
interest rates and the amount and composition of interest earning assets and
interest bearing liabilities, one of management's primary tasks is to balance
these interest sensitive components of assets and liabilities for the purpose of
maximizing net interest revenue while at the same time minimizing interest rate
risk to the Company.
24
25
The following table presents the average components of interest earning
assets and interest bearing liabilities for each year and their change,
expressed as a percentage, from each of the prior years:
1997 1996 1995
---------------------- ---------------------- ----------------------
AVERAGE % AVERAGE % AVERAGE %
BALANCE CHANGE BALANCE CHANGE BALANCE CHANGE
------- ------ ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
Interest earning assets:
Deposits with other banks $ 8,018 -34.9% $ 12,313 -38.3% $ 19,970 +79.7%
Held-to-maturity securities 572,717 +19.3 480,191 -7.1 516,919 +20.8
Available-for-sale securities 315,620 +36.6 231,040 +26.0 183,396 -31.1
Federal funds sold 82,724 +35.9 60,868 +54.3 39,451 -9.2
Loans and leases, net of unearned 2,598,315 +7.8 2,410,746 +12.3 2,146,967 +14.1
Mortgages held for sale 28,870 +4.1 27,729 +33.3 20,805 -38.1
---------- ---------- ----------
Total interest earning assets $3,606,264 +11.9% $3,222,887 +10.1% $2,927,508 +9.9%
========== ========== ==========
Interest bearing liabilities:
Deposits $2,955,642 +13.7% $2,598,941 +9.6% $2,371,330 +10.3%
Federal funds purchased and
securities sold under
repurchase agreements 32,070 -21.6 40,880 +0.1 40,845 +11.3
Long-term debt 51,220 -36.5 80,619 +17.8 68,452 +17.6
Other 1,892 -43.7 3,359 -28.6 4,706 +29.7
---------- ---------- ----------
Total interest bearing liabilities $3,040,824 +11.6% $2,723,799 +9.6% $2,485,333 +10.6%
========== ========== ==========
Non-interest bearing deposits $ 413,012 +7.6% $ 383,897 +6.3% $ 361,120 -0.9%
========== ========== ==========
In 1997 the growth of loans and leases slowed as compared to prior
years. Loans and leases grew at faster rates than interest bearing deposits in
1996 and 1995; however, the Company's other funding sources, non-interest
bearing deposits, federal funds purchased and Federal Home Loan Bank advances,
were adequate to fund its asset growth during such periods.
The changes in the components of interest earning assets, interest
bearing liabilities, and non-interest bearing deposits resulted in the following
tax equivalent net interest revenue expressed as a percentage of average earning
assets for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995
---- ---- ----
Net interest margin 4.64% 4.81% 4.86%
The Company experienced a decrease in net interest margin in 1997 and
1996 as interest rates stabilized and volume growth in loans and leases slowed
in 1997. As short-term interest rates began to rise in 1995, the net interest
margin stabilized and then increased. The Company utilizes short-term,
intermediate-term and long-term borrowings from the Federal Home Loan Bank for
the purpose of funding asset growth. The Company has sought to lengthen the
maturity of deposits by actively seeking four and five-year certificates of
deposit with interest rates slightly above the relative market for such funds,
thereby reducing the net interest margin in all three years presented.
25
26
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, 1997:
1997 INTEREST RATE SENSITIVITY
DECEMBER 31, 1997
MATURING OR REPRICING
-------------------------------------------------------------------
91 DAYS OVER 1
0 TO 90 TO YEAR TO OVER
DAYS 1 YEAR 5 YEARS 5 YEARS
-------------- -------------- --------------- -------------
(IN THOUSANDS)
Interest earning assets:
Interest bearing deposits due from banks $ 6,465 $ -- $ -- $ --
Held-to-maturity securities 50,172 73,195 328,211 81,841
Available-for-sale securities 68,494 57,661 212,061 67,996
Loans & leases, net of unearned 850,002 376,642 1,401,788 130,595
Mortgages held for sale 39,134 -- -- --
----------- ----------- ----------- -----------
Total interest earning assets 1,014,267 507,498 1,942,060 280,432
----------- ----------- ----------- -----------
Interest bearing liabilities:
Interest bearing demand deposits & savings 611,267 232,624 544,801 --
Time deposits 418,043 760,055 502,754 2,749
Federal funds purchased & securities
sold under repurchase agreements 177,450 -- -- --
Long-term debt 807 2,413 34,916 9,403
Other 405 9 144 289
----------- ----------- ----------- -----------
Total interest bearing liabilities 1,207,972 995,101 1,082,615 12,441
----------- ----------- ----------- -----------
Interest sensitivity gap $ (193,705) $ (487,603) $ 859,445 $ 267,991
=========== =========== =========== ===========
Cumulative interest sensitivity gap $ (193,705) $ (681,308) $ 178,137 $ 446,128
=========== =========== =========== ===========
In the event interest rates decline after 1997, it is likely that the
Company will experience a slightly positive effect on net interest income in the
following one year period, as the cost of funds will decrease at a more rapid
rate than interest income on interest bearing assets. Conversely, in periods of
increasing interest rates, based on the current interest sensitivity gap, the
Company will experience decreased net interest income.
PROVISIONS FOR CREDIT LOSSES
The Company has an asset quality review staff which, with a committee
of senior officers, reviews the adequacy of the allowance for credit losses in
each accounting period. An amount is provided as a charge against current
income, based on this group's recommendation and senior management's approval,
to maintain the allowance for credit losses at a level sufficient to absorb
possible losses inherent in the existing loan and lease portfolios. This
provision is determined after examining potential losses in specific credits and
considering the general risks associated with lending functions such as current
and anticipated economic conditions, historical experience as related to losses,
changes in the mix of the loan portfolio and credits which bear substantial risk
of loss but which cannot be readily quantified. The process of determining the
adequacy of the provision requires that management make material estimates and
assumptions, which are particularly susceptible to significant change in the
near-term.
26
27
The provision for credit losses, the allowance for credit losses as a
percentage of loans and leases outstanding at the end of each year and net
charge offs are shown in the following table:
1997 1996 1995
--------- ---------- ----------
(DOLLARS IN THOUSANDS)
Provision for credit losses $ 9,008 $ 8,804 $ 6,206
Allowance for credit losses as
a percent of loans and leases
outstanding at year end 1.45% 1.51% 1.51%
Net charge offs $ 6,999 $ 6,168 $ 3,147
Net charge offs as a percent
of average loans 0.27% 0.26% 0.15%
The provision for credit losses for 1997 increased 2.3% as compared to
the provision for 1996, principally as a result of the slower rate of growth in
the loan portfolio and an increase in losses in consumer based loans. The 1996
provision for credit losses increased from 1995's level by 41.9% as a result of
the growth in loans and an increase in loan losses, primarily in consumer based
loans. The 1995 provision for credit losses increased 4.4% from 1994's level as
a result of the growth in the loan portfolio.
OTHER REVENUE
The components of other revenue for the years ended December 31, 1997,
1996 and 1995 and the percentage change from the prior year are shown in the
following table:
1997 1996 1995
-------------------- -------------------- ---------------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Mortgage lending $ 7,596 -10.2% $ 8,460 +127.2% $ 3,723 +333.9%
Service charges 19,050 +6.9 17,828 +11.7 15,965 +10.6
Life insurance premiums 3,772 -13.0 4,337 +29.7 3,345 +1.4
Trust income 2,744 +5.3 2,606 +16.5 2,237 +19.4
Securities gains (losses), net 1,251 +377.5 262 +134.2 (765) -161.1
Other revenue 9,254 +27.6 7,252 +7.7 6,735 +15.4
-------- -------- --------
Total other revenue $ 43,667 +7.2% $ 40,745 +30.4% $ 31,240 +20.1%
======== ======== ========
Mortgage lending revenue decreased in 1997 principally as a result of a
decline in revenue related to mortgage servicing. Revenue from mortgage
servicing was $2,198,000 in 1997 compared to $3,097,000 in 1996. The decrease is
attributable to increased amortization of capitalized mortgage servicing rights
along with changes in the valuation allowance for impairment. 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.
Revenue from mortgage origination and secondary marketing was $5,398,000 in 1997
compared to $5,363,000 in 1996. The revenue produced by mortgage lending
activities increased in 1996 primarily as a result of declining interest rates
and growth in servicing income. In 1995, mortgage lending revenue rebounded from
the prior year's level as a result of stable interest rates and growth in
servicing income.
1997 1996 1995
------------------ ------------------- ----------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
------ -------- ------ -------- ------ --------
(DOLLARS IN MILLIONS)
Mortgage loans serviced at year-end $1,324.0 +13.5% $1,166.8 +33.2% $876.0 +8.0%
Service charges on deposit accounts increased in 1997, 1996 and 1995
because of higher volumes of items processed as a result of increased economic
activity and growth in the number of demand deposit accounts. Trust income
increased 5.3% in 1997, 16.5% in 1996 and 19.4% in 1995. The trust business
experienced steady growth as evidenced by increases in the number
27
28
of trust accounts and the value of assets under care (either managed or in
custody). Other revenue increased 27.6%, 7.7% and 15.4% in 1997, 1996 and 1995,
respectively. The increase in other revenue in 1997 was attributable to
increases in gains on the sale of equipment and facilities and fees relating to
greater usage of the Bank's debit card. The increases in 1996 and 1995 were
principally as a result of increases in fees for non-deposit related services.
OTHER EXPENSE
The components of other expense for the years ended December 31, 1997,
1996 and 1995 and the percentage change from the prior year are shown in the
following table:
1997 1996 1995
---------------------- --------------------- ---------------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Salary and employee benefits $ 65,761 +13.8% $ 57,806 +5.6% $ 54,739 +13.1%
Occupancy net of rental income 8,479 +1.8 8,331 +3.9 8,022 +5.3
Equipment 12,099 +24.1 9,752 +10.1 8,860 +18.7
Deposit insurance 488 -81.2 2,601 -23.8 3,412 -39.3
Other 45,161 +13.0 39,982 +8.9 36,717 +21.3
======== ======== ========
Total other expense $131,988 +11.4% $118,472 +6.0% $111,750 +12.5%
======== ======== ========
Increases in salary and employee benefits are primarily attributable to
incentives and salary increases, additional employees to staff the banking
locations added in each of the three years and the increased cost of employee
health care benefits. The Company's stock option plans contain a provision for
stock appreciation rights (SARs) which requires the recognition of expense for
stock price appreciation. In 1997 the Company's common stock price increased
approximately 75% which resulted in SARs expense of $6.1 million, as compared to
$1.9 million and $0.9 million in 1996 and 1995, respectively. In the event that
the market price of the Company's common stock continues to increase, additional
expense related to SARs could be incurred, which could have a material adverse
effect on the Company's results of operations. Occupancy and equipment expenses
have increased principally as a result of additional branch offices and upgrades
to the Company's internal operating systems.
Deposit insurance premiums decreased substantially in 1997, 1996 and
1995 as a result of lower insurance rates assessed by the Federal Deposit
Insurance Corporation (FDIC). Deposit insurance premiums are based upon the risk
assessment classification assigned to a bank by the FDIC. In 1996, a one-time
assessment on SAIF insured deposits was imposed which resulted in a pre-tax
payment of $1.9 million and reduced 1996 after-tax net income per share $0.05.
Other expense increased 13.0% in 1997 as a result of the out-sourcing
of certain computer programming expense, other equipment and software expense
and system enhancements.
Other expense increased 8.9% in 1996 as a result of expanded
telecommunications, systems enhancements, and credit card interchange fees, all
of which related to providing higher levels of convenient consumer oriented
banking services. Additionally, approximately $500,000 of unamortized expense
relating to the issuance of the Company's 9% Subordinated Capital Debentures was
charged against 1996 earnings as a result of the early extinguishment of the
debt issue in December 1996.
Other expense increased 21.3% in 1995 principally as a result of merger
expenses related to the Company's acquisitions. The expansion of the Company's
branch banking network also contributed to increases in all years presented.
28
29
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:
1997 1996 1995
------------------- --------------------- ----------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
------ -------- ------ -------- ------ --------
(DOLLARS IN MILLIONS)
Loans, net of unearned - average $2,598 +7.8% $2,411 +12.3% $2,147 +14.1%
Loans, net of unearned - year end 2,759 +11.7 2,469 +7.6 2,295 +13.3
The Company's loan portfolio continues to grow. The Company strives to
maintain a high-quality loan portfolio, forsaking growth for quality. The
Company's non-performing assets which 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:
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Foreclosed properties $ 1,971 $ 1,835 $ 2,662
Non-accrual loans 4,008 3,940 1,592
Loans 90 days or more past due 7,465 4,811 5,148
Restructured loans 659 77 7
------- ------- -------
Total non-performing assets $14,103 $10,663 $ 9,409
======= ======= =======
Total non-performing assets as a percent of net loans 0.51% 0.43% 0.41%
======= ======= =======
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, 1997, 1996 and 1995, the Company did not have any concentration of
loans in excess of 10% of loans outstanding. Loan concentrations are considered
to exist when there are amounts loaned to multiple borrowers engaged in similar
activities, which would cause them to be similarly impacted by economic or other
conditions. 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 market
area.
Included in non-performing assets above were loans the Company
considered impaired totaling $2,928,000, $3,306,000, and $1,774,000 in 1997,
1996 and 1995, respectively.
SECURITIES AND OTHER EARNING ASSETS
The securities portfolio is used to make various term investments,
provide a source of liquidity and to serve as collateral to secure certain types
of deposits. A portion of the Company's securities portfolio continues to be
tax-exempt. Investments in tax-exempt securities totaled $174.9 million at
December 31, 1997, compared to $157.0 million at the end of 1996. The Company
invests only in investment grade securities, with the exception of obligations
of Mississippi and Tennessee counties and municipalities, and avoids other high
yield non-rated securities and investments.
At December 31, 1997, the Company's available-for-sale securities
totaled $406.2 million. These securities, which are subject to possible sale,
are recorded at fair value. At December 31, 1997, the Company held no securities
whose decline in fair value was considered other than temporary.
Net unrealized gains on investment securities as of December 31, 1997
totaled $15.2 million. Net unrealized gains on held-to-maturity securities
comprised $7.9 million of that total, while net unrealized gains on
available-for-sale securities were $7.3 million.
29
30
Net unrealized gains on investment securities as of December 31, 1996,
amounted to $10.7 million. Of that total, $7.0 million was attributable to
held-to-maturity securities and $3.7 to million available-for-sale securities.
These unrealized gains were a direct result of relatively stable intermediate
term interest rates during 1997 and 1996. Because the average maturity of
securities owned is relatively short, market value fluctuations due to interest
rate changes are softened and the impact of foregone earnings is reduced.
DEPOSITS
The following table presents the Company's average deposit mix and
percentage change for the years indicated:
1997 1996 1995
--------------------- --------------------- ---------------------
AVERAGE % AVERAGE % AVERAGE %
BALANCE CHANGE BALANCE CHANGE BALANCE CHANGE
------- ------ ------- ------ ------- ------
(DOLLARS IN MILLIONS)
Interest bearing deposits $2,955.6 +13.7% $2,598.9 +9.6% $2,371.3 +10.3%
Non-interest bearing deposits 413.0 +7.6 383.9 +6.3 361.1 -0.9
The Company's deposit mix continued to experience change in 1997. By
year end 1997, other time deposits showed an increase of 6.7% from the end of
1996, while interest bearing demand deposits increased by 15.9% and other
short-term savings accounts increased 34.4%. Non-interest bearing demand
deposits increased 3.9% from year end 1996 to year end 1997. Management is of
the opinion that the low interest rates paid on deposit accounts in 1996 and
1995 caused depositors to reduce the period over which they were willing to
commit their funds and shifted their deposits from longer term, fixed rate
instruments to daily savings and demand accounts, or even to seek alternative
non-bank investments. While that trend continued into 1997, the Company has
countered with a strategy of paying slightly above market rates for intermediate
term deposits. Deposits are the Company's primary source of funds to support its
earning assets. The Company's primary market areas provide the sources of
substantially all deposits for all periods presented.
LIQUIDITY
The Company's goal is to provide adequate funds to meet changes in loan
demand or any potential increase in the normal level of deposit withdrawals.
This goal is accomplished primarily by maintaining sufficient short-term liquid
assets coupled with consistent growth in core deposits in order to fund earning
assets and to maintain the availability of unused capacity to acquire funds in
national and local capital markets. The Company's traditional sources of
maturing loans, investment securities, mortgages held for sale, purchased
federal funds and base of core deposits seem adequate to meet liquidity needs
for normal operations. 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 maturities. The matching of these assets and
liabilities has had the effect of reducing the Company's net interest margin.
On October 23, 1996 the Company announced that it would call for
redemption all of its outstanding 9% Subordinated Capital Debentures due in
1999. On December 30, 1996 the Company extinguished the debt by irrevocably
depositing with the trustee $24,508,000 in cash plus accrued and unpaid interest
from November 1, 1996 to redeem the debentures, which were redeemed on January
15, 1997.
CAPITAL RESOURCES
The Company is required to comply with the risk-based capital
guidelines established by the Board of Governors of the Federal Reserve System
(FRB). These guidelines apply a variety of weighting factors, which vary
according to the level of risk associated with the assets. Capital is measured
in two "Tiers": Tier I consists of paid-up share capital, including common stock
and disclosed reserves (retained earnings and related surplus in the case of
common stock), and Tier II consists of general allowance for losses on loans and
leases, "hybrid" debt capital instruments, and all or a portion of other
subordinated capital debt, depending upon remaining term to maturity. The
Company's Tier I capital and total capital, as a percentage of total
risk-adjusted assets, was 12.49% and 13.74%, respectively at December 31, 1997,
compared to 12.14% and 13.39%, respectively at December 31, 1996. Both ratios
exceed the required minimum levels for these ratios of 4% and 8%, respectively.
In addition, the Company's leverage capital ratio (Tier I capital divided by
total assets, less goodwill) was 8.82% at December 31, 1997 and 8.56% at
December 31, 1996, 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
30
31
Tier I risk-based capital, total risk-based capital and leverage capital ratios
must be at least 6%, 10% and 5%, respectively. The Company's bank subsidiary met
the criteria for the "well capitalized" category at December 31, 1997.
The Company has determined to pursue acquisition transactions of
depository institutions and businesses closely related to banking which further
the Company's business strategies. The Company anticipates that the
consideration for substantially all of these transactions, if completed, will be
shares of the Company's common stock; however, transactions involving cash
consideration or other forms of consideration will not be excluded.
On August 28, 1996 the Company announced that it would purchase up to
$2.5 million of its outstanding common stock within the next year. As of
December 31, 1996 the Company had purchased 43,566 shares at a cost of $1.2
million. An additional 47,038 shares were purchased in the first quarter of 1997
at a cost of $1.3 million completing the announced purchase.
YEAR 2000
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (Year 2000) approaches. The "Year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Company is utilizing both internal and external resources to
identify, correct or reprogram, and test the systems for the Year 2000
compliance. During 1997, the Company developed a plan to deal with the Year 2000
problem and established a Year 2000 committee that consists of representatives
from the major functional areas of the Company. The committee has conducted a
comprehensive review of the Company's computer systems to identify the systems
that could be affected by the Year 2000 issue and has developed an
implementation plan to resolve potential problems. We have reviewed our core
mainframe systems and application subsystems and have obtained the Year 2000
compliant releases and are developing the installation and testing plan for each
of these applications. We have corresponded with our third party service
providers and other providers of software and hardware for certification of
their compliance with Year 2000 issues. It is anticipated that all reprogramming
efforts will be completed by December 31, 1998, allowing adequate time for
testing. Management has assessed the Year 2000 compliance expense and believe
that the related potential effect on the Company's business, financial condition
and results of operations should be immaterial. The Company is expensing all
costs associated with the Year 2000 as the costs are incurred.
FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report which are not historical in
nature are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include without limitation, those relating to the Company's future revenue,
earnings and profitability, growth, acquisition strategy, liquidity, loan loss
experience, competition, net interest income, capital resources and "Year 2000"
compliance. Such forward-looking statements involve certain risks and
uncertainties that could cause actual results to differ materially from
anticipated results. These risks and uncertainties include regulatory
constraints, changes in interest rates, competition from other financial
services companies, changes in the Company's operating or expansion strategy,
the general economy of the United States and the specific markets in which the
Company operates, ability to successfully integrate acquisitions, ability to
continue to attract and retain quality personnel and other factors as may be
identified from time to time in the Company's filings with the Securities and
Exchange Commission or in the Company's press releases.
Item 7A. - Quantitative and Qualitative Disclosures About Market Risk
Market risk reflects the risk of economic loss resulting from changes
in interest rates and market prices. This risk of loss can be reflected in
either reduced potential net interest revenue in future periods or diminished
market values of financial assets.
The Company's market risk arises primarily from interest rate risk that
is inherent in its lending, investment and deposit taking activities. Financial
institutions derive their income primarily from the excess of interest collected
over interest paid. The rates of interest the Company earns on its assets and
owes on its liabilities are established contractually for a period of time.
Since market interest rates change over time, the Company is exposed to lower
profit margins (or losses) if it cannot adapt to interest-rate changes. Several
techniques might be used by a financial institution to minimize interest-rate
risk. One approach used by the Company is to periodically analyze its assets and
liabilities and make future financing and investing decisions based on payment
streams, interest rates, contractual maturites, repricing opportunities and
estimated sensitivity to actual or potential changes in market interest rates.
Such activities fall under the broad definition of asset/liability management.
The Company's primary asset/liability management technique is the measurement of
its asset/liability gap; that is, the difference between the amounts of
interest-sensitive assets and liabilities that will be refinanced (repriced)
during a given period. If the asset amount to be repriced exceeds the
corresponding liability amount for a certain day, month, year or longer period,
the Company is in an asset-sensitive
31
32
gap position. In this situation, net interest revenue would increase if market
interest rates rose or decrease if market interest rates fell. If,
alternatively, more liabilities than assets will reprice, the Company is in a
liability-sensitive position. Accordingly, net interest revenue would decline
when ra