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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, 1998 or
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[ ] 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
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BancorpSouth, Inc.
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(Exact name of registrant as specified in its charter)
Mississippi 64-0659571
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Mississippi Plaza
Tupelo, Mississippi 38801
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (601) 680-2000
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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)
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(Continued from Cover Page)
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of January 31, 1999, was approximately $869,667,000 based
on the closing sale price as reported on the New York Stock Exchange on January
29, 1999.
On March 18, 1999, the registrant had outstanding 55,942,375 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 27, 1999, are
incorporated by reference into Part III of this Report.
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BANCORPSOUTH, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 1998
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 Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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
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PART I
Item 1. - Business
General
The BancorpSouth, Inc. (the "Company") is a bank holding company with
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 38801 and its
telephone number is (601) 680-2000.
Description of Business
The Bank has its principal office in Tupelo, Lee County, Mississippi,
and conducts a commercial banking and trust business through 157 offices in 82
municipalities or communities in 49 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 consumer
finance, credit life insurance and insurance agency subsidiaries. At December
31, 1998, the Bank had total assets of approximately $5.20 billion and total
deposits of approximately $4.44 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, 1998, the Company and its subsidiaries employed 2,338
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 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 regulations specifically mentioned herein.
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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.
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 approval by the
applicable regulatory authorities.
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.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("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
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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 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" Community
Reinvestment Act ("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 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 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, which allows the Company to hedge against
the interest rate risks related to such lending operations. This
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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.
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's 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.
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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.
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, 1998. 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.
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1998 1997 1996
--------------------------------- ---------------------------- ------------------------------
(Taxable equivalent basis) Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
ASSETS
Interest bearing deposits in
other banks $ 7,919 $ 394 4.98% $ 8,570 $ 426 4.97% $ 12,967 $ 689 5.31%
Held-to-maturity securities:
U.S. treasury and agencies 528,222 32,234 6.10% 444,605 28,981 6.51% 383,723 25,258 6.58%
State and political
subdivisions(1) 191,641 12,842 6.70% 162,976 11,806 7.24% 124,567 10,228 8.21%
Other securities -- -- -- 15 -- -- 84 -- --
Available-for-sale securities(2) 529,480 32,561 6.15% 411,612 26,269 6.38% 331,758 20,017 6.03%
Federal funds sold 70,122 3,691 5.26% 94,970 5,074 5.34% 70,715 4,071 5.76%
Loans (net of unearned
discount)(3)(5) 3,312,635 303,417 9.16% 2,896,305 269,814 9.32% 2,691,996 250,652 9.31%
Mortgages held for sale 52,634 3,470 6.59% 29,409 2,102 7.15% 27,729 1,956 7.05%
---------- -------- ---------- -------- ---------- --------
Total interest earning
assets and revenue 4,692,653 388,609 8.28% 4,048,462 344,422 8.51% 3,643,539 312,871 8.59%
Other assets 361,919 318,091 302,252
Less: allowance for credit losses (46,681) (41,989) (39,583)
---------- ---------- ----------
Total $5,007,891 $4,324,564 $3,906,208
========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Demand-interest bearing $ 966,884 $ 29,883 3.09% $ 883,654 $ 30,332 3.43% $ 797,366 $ 25,957 3.29%
Savings 702,566 29,515 4.20% 564,257 21,426 3.80% 433,581 15,600 3.60%
Time 2,059,637 114,318 5.55% 1,863,105 103,629 5.56% 1,716,887 93,026 5.42%
Federal funds purchased and
securities under
repurchase agreements 62,728 2,853 4.55% 46,382 2,270 4.89% 52,168 2,330 4.47%
Other short-term borrowings(4) 2,794 192 6.87% 4,942 308 6.23% 4,013 360 8.97%
Long-term debt 179,928 10,651 5.92% 55,339 3,305 5.97% 80,619 5,647 7.00%
---------- -------- ---------- -------- ---------- --------
Total interest bearing
liabilities and expense 3,974,537 187,412 4.72% 3,417,679 161,270 4.72% 3,084,634 142,920 4.63%
Demand deposits--non-interest
bearing 534,432 466,346 436,308
Other liabilities 67,055 59,926 53,575
---------- ---------- ----------
Total liabilities 4,576,024 3,943,951 3,574,517
Shareholders' equity 431,867 380,613 331,691
---------- ---------- ----------
Total $5,007,891 $4,324,564 $3,906,208
========== ========== ==========
Net interest revenue $201,197 $183,152 $169,951
======== ======== ========
Net yield on interest earning
assets 4.29% 4.52% 4.66%
==== ==== ====
1. Includes taxable equivalent adjustments of $3,226,000, $2,922,000 and
$2,755,000 in 1998, 1997 and 1996, respectively, using an effective
tax rate of 35%.
2. Includes taxable equivalent adjustment of $828,000, $1,027,000 and $283,000
in 1998, 1997 and 1996 using an effective tax rate of 35%.
3. Includes taxable equivalent adjustment of $1,036,000, $772,000 and $751,000
in 1998, 1997 and 1996, 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.
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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 1997 to 1998
and 1996 to 1997. Changes, which are not solely due to volume or rate, are
allocated to volume.
1998 OVER 1997 - INCREASE (DECREASE) 1997 OVER 1996 - INCREASE (DECREASE)
------------------------------------ ------------------------------------
(Taxable equivalent basis) Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
INTEREST REVENUE
Due from banks - interest bearing $ (32) $ 0 $ (32) $ (219) $ (44) $ (263)
Held-to-maturity securities:
U.S. government agencies 5,103 (1,800) 3,303 3,962 (289) 3,673
State and political subdivisions 1,921 (885) 1,036 2,782 (1,204) 1,578
Other securities -- -- -- -- -- --
Available-for-sale securities 7,248 (956) 6,292 5,096 1,156 6,252
Federal funds sold (1,308) (75) (1,383) 1,296 (293) 1,003
Loans (net of unearned discount) 38,133 (4,530) 33,603 19,033 129 19,162
Mortgages held for sale 1,531 (163) 1,368 120 26 146
------- ------- ------- ------- ------- -------
Total 52,597 (8,410) 44,187 32,069 (518) 31,551
------- ------- ------- ------- ------- -------
INTEREST EXPENSE
Demand deposits - interest bearing 2,572 (3,021) (449) 2,962 1,413 4,375
Savings deposits 5,810 2,279 8,089 4,962 864 5,826
Time deposits 10,908 (219) 10,689 8,133 2,470 10,603
Federal funds purchased and
securities under
repurchase agreements 743 (160) 583 (283) 223 (60)
Other short-term borrowings (148) 32 (116) 58 (110) (52)
Long-term debt 7,375 (29) 7,346 (1,510) (832) (2,342)
------- ------- ------- ------- ------- --------
Total 27,262 (1,120) 26,142 14,322 4,028 18,350
------- ------- ------- ------- ------- --------
Increase (Decrease) in Effective
Interest Differential $25,335 $(7,290) $18,045 $17,747 $(4,546) $ 13,201
======= ======= ======= ======= ======= ========
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Investment Portfolio
Held-to-Maturity Securities
The following table shows the amortized cost of held-to-maturity
securities at December 31, 1998, 1997 and 1996:
December 31
------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
U.S. Treasury securities $103,012 $109,012 $ 91,340
U.S. Government agency
securities 333,866 288,711 314,635
Taxable obligations of states
and political subdivisions 2,295 1,295 1,375
Taxable exemption obligations
of states and political
subdivisions 208,673 171,298 150,471
Other securities -- 15 15
-------- -------- --------
TOTAL $647,846 $570,331 $557,836
======== ======== ========
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, 1998
---------------------------------------------------------------
U.S.
U.S. GOVERNMENT STATES & WEIGHTED
TREASURY AGENCY POLITICAL OTHER AVERAGE
SECURITIES SECURITIES SUBDIVISIONS SECURITIES YIELD
---------- ---------- ------------ ---------- -----
(In thousands)
PERIOD TO MATURITY:
Maturing within one year $ 57,144 $ 60,262 $ 13,812 $ -- 6.35%
Maturing after one year but
within five years 43,881 155,328 103,781 -- 6.29%
Maturing after five years but
within ten years 1,987 104,309 80,652 -- 6.57%
Maturing after ten years -- 13,967 12,723 -- 7.28%
-------- -------- -------- ------
TOTAL $103,012 $333,866 $210,968 $ --
======== ======== ======== ======
The yield on tax-exempt obligations of states and political
subdivisions has been adjusted to a taxable equivalent basis using a 35% tax
rate.
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Available-for-Sale Securities
The following table shows the book value of available-for-sale
securities at December 31, 1998, 1997 and 1996:
December 31
-----------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
U.S. Treasury securities $106,226 $109,944 $ 57,663
U.S. Government agency securities 305,960 330,017 192,503
Taxable obligations of states
and political subdivisions 5,739 3,940 1,893
Tax exempt obligations of states
and political subdivisions 38,696 19,155 16,663
Other securities 93,146 48,351 46,603
-------- -------- --------
TOTAL $549,767 $511,407 $315,325
======== ======== ========
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, 1998
---------------------------------------------------------------
U.S.
U.S. GOVERNMENT STATES & WEIGHTED
TREASURY AGENCY POLITICAL OTHER AVERAGE
SECURITIES SECURITIES SUBDIVISIONS SECURITIES YIELD
---------- ---------- ------------ ---------- -----
(In thousands)
PERIOD TO MATURITY:
Maturing within one year $ 42,841 $ 45,809 $ 3,337 $55,450 5.17%
Maturing after one year
but within five years 58,154 166,060 8,399 11,691 6.27%
Maturing after five years
but within ten years 5,231 71,286 17,095 23,028 6.22%
Maturing after ten years -- 22,805 15,604 2,977 6.94%
-------- -------- ------- -------
TOTAL $106,226 $305,960 $44,435 $93,146
======== ======== ======= =======
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
-------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
Commercial & agricultural(1) $ 365,716 $ 341,080 $ 299,522 $ 280,120 $ 252,725
Consumer & installment 905,413 870,823 792,559 747,520 686,902
Real estate mortgage(2) 2,054,143 1,758,636 1,584,967 1,472,172 1,280,921
Lease financing 210,559 172,821 149,582 122,290 82,577
Other 25,575 25,161 19,619 22,387 15,572
---------- ---------- ---------- ---------- ----------
Total gross loans $3,561,406 $3,168,521 $2,846,249 $2,644,489 $2,318,697
========== ========== ========== ========== ==========
(1) Including $15,878,000, $15,867,000, $17,514,000, $21,089,000 and
$18,462,000 in 1998, 1997, 1996, 1995 and 1994, respectively, of loans
classified as agricultural.
(2) Including $48,871,000, $40,310,000, $43,512,000, $41,835,000 and
$35,772,000 in 1998, 1997, 1996, 1995 and 1994, 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, 1998.
ONE YEAR ONE TO AFTER
OR LESS FIVE YEARS FIVE YEARS
------- ---------- ----------
(In thousands)
Commercial and agricultural $ 189,265 $ 139,690 $ 36,761
Consumer & installment 211,248 676,079 18,086
Real estate mortgages 720,842 1,006,269 327,032
Lease financing 66,299 140,321 3,939
Other 16,904 7,075 1,596
---------- ---------- --------
Total gross loans $1,204,558 $1,969,434 $387,414
========== ========== ========
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, 1998.
December 31, 1998
-----------------
FIXED VARIABLE
RATE RATE
---- ----
(In thousands)
Loan Portfolio
Due after one year $2,044,561 $312,287
========== ========
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 $6,152,000, $5,047,000, $6,227,000, $3,556,000 and
$4,709,000 at December 31, 1998, 1997, 1996, 1995 and 1994, respectively. The
aggregate principal balance of restructured loans was $713,000, $1,097,000,
$493,000, $281,000 and $1,751,000 at December 31, 1998, 1997, 1996, 1995 and
1994, respectively. The total amount of interest earned on non-performing loans
was approximately $153,000, $58,000, $42,000, $70,000 and $214,000 in 1998,
1997, 1996, 1995 and 1994, respectively. The gross interest income that would
have been recorded under the original terms of those loans amounted to $366,000,
$257,000, $353,000, $105,000 and $353,000 in 1998, 1997, 1996, 1995 and 1994,
respectively. Accruing loans which were contractually past due 90 days or more
for years ended December 31, 1998, 1997, 1996, 1995 and 1994, amounted to
$9,654,000, $8,148,000, $5,501,000, $5,366,000 and $3,800,000, 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, 1998 and 1997 was $8,166,000 and
$7,181,000, respectively, with a valuation reserve of $3,151,000 and $2,862,000,
respectively. The average recorded investment in impaired loans during 1998 and
1997 was $9,187,000 and $7,536,000, 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, 1998,
no loans were known to be potential problem loans.
At December 31, 1998, 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.
14
15
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 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 at
least quarterly to 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 probable
losses inherent in 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 economic assumptions 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:
1998 1997 1996 1995
---- ---- ---- ----
ALLOWANCE % OF LOANS ALLOWANCE % OF LOANS ALLOWANCE % OF LOANS ALLOWANCE % OF LOANS
FOR TO TOTAL FOR TO TOTAL FOR TO TOTAL FOR TO TOTAL
CREDIT LOSS LOANS CREDIT LOSS LOANS CREDIT LOSS LOANS CREDIT LOSS LOANS
----------- ----- ----------- ----- ----------- ----- ----------- -----
Commercial & agricultural $ 3,865 10.27% $ 3,172 10.76% $ 3,796 10.52% $ 3,395 10.59%
Consumer & installment 18,926 25.42% 16,304 27.49% 12,963 12.85% 10,942 28.27%
Real estate mortgage 23,875 57.68% 20,782 55.51% 21,538 55.69% 21,762 55.67%
Lease financing 2,802 5.91% 2,592 5.45% 2,070 5.25% 1,433 4.62%
Other 150 0.72% 138 0.79% -- 0.69% -- 0.85%
------- ------ ------- ------ ------- ------ ------- ------
TOTAL $49,618 100.00% $42,988 100.00% $40,367 100.00% $37,532 100.00%
======= ====== ======= ====== ======= ====== ======= ======
1998
----
ALLOWANCE % OF LOANS
FOR TO TOTAL
CREDIT LOSS LOANS
----------- -----
Commercial & agricultural $ 3,238 10.90%
Consumer & installment 11,403 29.62%
Real estate mortgage 17,836 55.25%
Lease financing 1,290 3.56%
Other -- 0.67%
------- ------
TOTAL $33,767 100.00%
======= ======
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, 1998.
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
LOANS
Average loans for the
period $3,312,635 $2,896,305 $2,691,996 $ 2,394,571 $2,090,998
========== ========== ========== =========== ==========
ALLOWANCE FOR CREDIT
LOSSES
Balance beginning of
period $ 42,988 $ 40,367 $ 37,532 $ 33,767 $ 30,281
Loans charged off:
Commercial & agricultural (1,462) (1,307) (1,769) (1,445) (1,894)
Consumer & installment (8,657) (7,503) (6,443) (4,448) (3,481)
Real estate mortgage (1,738) (1,129) (817) (725) (1,224)
Lease financing (75) (48) (30) (1) (72)
---------- ----------- ---------- ----------- ----------
Total loans charged off (11,932) (9,987) (9,059) (6,619) (6,671)
---------- ----------- ---------- ----------- ----------
Recoveries:
Commercial & agricultural 422 607 771 470 1,649
Consumer & installment 1,790 1,382 1,339 1,253 1,446
Real estate mortgage 164 359 254 377 422
Lease financing 20 57 5 18 91
---------- ----------- ---------- ----------- ----------
Total recoveries 2,396 2,405 2,369 2,118 3,608
---------- ----------- ---------- ----------- ----------
Net charge-offs (9,536) (7,582) (6,690) (4,501) (3,063)
Provision charged to
operating expense 15,014 9,607 9,525 6,418 6,432
Acquisitions 1,152 596 -- 1,848 117
---------- ----------- ---------- ----------- ----------
Balance, end of period $ 49,618 $ 42,988 $ 40,367 $ 37,532 $ 33,767
========== =========== ========== =========== ==========
RATIOS
Net charge-offs to
average loans 0.29% 0.26% 0.25% 0.19% 0.15%
========== =========== ========== =========== ==========
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, 1998.
YEARS ENDED DECEMBER 31
--------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in thousands)
Non-interest bearing
demand deposits $ 534,432 -- $ 466,346 -- $ 436,308 --
Interest bearing
demand deposits 966,884 3.09% 883,654 3.43% 797,366 3.26%
Savings 702,566 4.20% 564,257 3.80% 433,581 3.60%
Time 2,059,637 5.55% 1,863,105 5.56% 1,716,887 5.42%
---------- ---------- ----------
TOTAL DEPOSITS $4,263,519 $3,777,362 $3,384,142
========== ========== ==========
Time deposits of $100,000 and over including certificates of deposits
of $100,000 and over at December 31, 1998, had maturities as follows:
DECEMBER 31, 1998
-----------------
(In thousands)
Three months or less $214,515
Over three months through six months 145,987
Over six months through twelve months 124,559
Over twelve months 155,178
--------
TOTAL $640,239
========
18
19
Return on Equity and Assets
Return on average equity, average assets and the dividend payout ratio
are based on net income for the three years ended December 31, 1998, as
presented below:
YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1996
---- ---- ----
[S] [C] [C] [C]
Return on average equity 12.61% 13.19% 14.27%
Return on average assets 1.09 1.16 1.21
Dividend payout ratio 44.55 40.31 35.71
The Company's average equity as a percent of average assets was 8.62%,
8.80% and 8.49% for 1998, 1997 and 1996, 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 $640,239,000 and $531,243,000 were outstanding at
December 31, 1998 and 1997, respectively. Total interest expense relating to
certificate and other time deposits of $100,000 or more totaled approximately
$36,579,000, $28,282,000, and $21,663,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
For time deposits with a remaining maturity of more than one year at
December 31, 1998, the aggregate amount of maturities for each of the following
five years is presented in the following table:
MATURING IN AMOUNT
----------- ------
(In thousands)
2000 $424,473
2001 95,433
2002 76,056
2003 31,431
2004 210
Thereafter 2,808
--------
Total $630,411
========
19
20
Presented below is information relating to short-term debt for the
years ended December 31, 1998 and 1997:
END OF PERIOD DAILY AVERAGE MAXIMUM
--------------------- ------------------ OUTSTANDING
INTEREST INTEREST AT ANY
BALANCE RATE BALANCE RATE MONTH END
---------------------- ----------------- -----------
(Dollars in thousands)
1998:
Federal funds purchased $ 3,051 4.6% $ 6,172 5.2% $ 12,600
Securities sold under repurchase agreements 61,503 3.7% 56,556 4.5% 70,678
-------- ------- --------
Total $ 64,554 $62,728 $ 83,278
======== ======= ========
1997:
Federal funds purchased $152,449 6.9% $ 3,616 6.2% $152,449
Securities sold under repurchase agreements 36,922 5.1% 42,766 4.8% 48,274
-------- ------- --------
Total $189,371 $46,382 $200,723
======== ======= ========
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, 1998, the Bank had
established informal federal funds borrowing lines of credit aggregating
$153,000,000.
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 85% of the
rentable space with the remainder leased to various unaffiliated
tenants.
The Bank owns 128 of its 147 branch banking facilities. The
remaining 19 branch banking facilities are occupied under leases
varying in length from one to nine 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, 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 37 leased offices, with the unexpired terms varying
in length from one to five years. The average size of
20
21
these leased offices is approximately 1,000 square feet with
average annual rent of approximately $9,000. All these premises
are considered to be in good condition.
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 1998.
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.
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 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 May 15, 1998.
1998: High Low
---- ----
4th quarter $21.5625 $17.7500
3rd quarter 22.4375 16.8125
2nd quarter 23.0625 20.3125
1st quarter 24.0000 20.6250
1997:
4th quarter $24.1875 $17.5938
3rd quarter 18.0000 14.5000
2nd quarter 14.7500 13.2500
1st quarter 15.0000 13.2500
Holders of Record
As of February 28, 1999, there were 8,519 shareholders of record of the
Company's common stock.
Dividends
The Company declared quarterly cash dividends totaling $0.45 per share
during 1998, $0.395 during 1997 and $0.35 during 1996. Future dividends, if any,
will vary depending on the Company's profitability and anticipated capital
requirements. See "Item 1 - Business - Regulation and Supervision".
21
22
ITEM 6. -- SELECTED FINANCIAL DATA
SELECTED FINANCIAL INFORMATION (UNAUDITED)
(Dollars in thousands, except per share amounts)
YEARS ENDED DECEMBER 31
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Earnings Summary:
Interest revenue $ 383,519 $ 339,701 $ 308,965 $ 282,422 $ 231,191
Interest expense 187,412 161,270 142,920 130,474 96,123
---------- ---------- ---------- ---------- ----------
Net interest revenue 196,107 178,431 166,045 151,948 135,068
Provision for credit losses 15,014 9,607 9,525 6,418 6,432
---------- ---------- ---------- ---------- ----------
Net interest revenue, after provision
for credit losses 181,093 168,824 156,520 145,530 128,636
Other revenue 53,018 47,903 45,422 35,264 29,264
Other expense 152,084 143,618 130,211 123,663 109,914
---------- ---------- ---------- ---------- ----------
Income before income taxes 82,027 73,109 71,731 57,131 47,986
Income tax expense 27,550 22,907 24,396 17,494 14,176
---------- ---------- ---------- ---------- ----------
Net income $ 54,477 $ 50,202 $ 47,335 $ 39,637 $ 33,810
========== ========== ========== ========== ==========
Per Share Data:
Net income: Basic $ 1.02 $ 0.99 $ 0.98 $ 0.83 $ 0.72
Diluted 1.01 0.98 0.98 0.82 0.72
Cash dividends 0.45 0.395 0.35 0.31 0.2775
Book value 8.48 7.79 7.21 6.62 5.96
Balance Sheet - Averages:
Total assets $5,007,891 $4,324,564 $3,906,208 $3,574,545 $3,258,782
Held-to-maturity securities 719,863 607,596 508,374 554,896 481,569
Available-for-sale securities 529,480 411,612 331,758 278,654 335,361
Loans, net of unearned discount 3,312,635 2,896,305 2,691,996 2,394,571 2,090,998
Total deposits 4,263,519 3,777,362 3,384,142 3,112,036 2,848,710
Total shareholders' equity 431,867 380,613 331,691 296,570 266,743
Selected Ratios:
Return on average assets 1.09% 1.16% 1.21% 1.11% 1.04%
Return on average shareholders' equity 12.61% 13.19% 14.27% 13.37% 12.68%
22
23
ITEM 7. -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BancorpSouth, Inc. (the Company) is a bank holding company with
commercial banking operations in Mississippi, Tennessee and Alabama.
BancorpSouth Bank (the Bank), the Company's banking subsidiary is headquartered
in Tupelo, Mississippi. The Bank operated prior to December 1998, under the
trade names Bank of Mississippi in Mississippi, Volunteer Bank in Tennessee and
BancorpSouth in Alabama. In December, 1998 the Bank's name was changed to
BancorpSouth Bank in all areas of operations. 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, 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, 1998
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,
1998, 1997 and 1996:
1998 1997 1996
---- ---- ----
(In thousands, except per share amounts)
Net income $54,477 $50,202 $47,335
Net income per share: Basic $ 1.02 $ 0.99 $ 0.98
Diluted $ 1.01 $ 0.98 $ 0.98
Return on average assets 1.09% 1.16% 1.21%
Return on average shareholders' equity 12.61% 13.19% 14.27%
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.
23
24
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:
1998 1997 1996
------------------------ ------------------------- --------------------------
AVERAGE % AVERAGE % AVERAGE %
BALANCE CHANGE BALANCE CHANGE BALANCE CHANGE
---------- ------ ---------- ------ ---------- -------
INTEREST EARNING ASSETS: (DOLLARS IN THOUSANDS)
Deposits with other banks $7,919 -7.6% $8,570 -33.9% $12,967 -36.6%
Held-to-maturity securities 719,863 +18.5 607,596 +19.5 508,374 -8.4
Available-for-sale securities 529,480 +28.6 411,612 +24.1 331,758 +19.1
Federal funds sold 70,122 -26.2 94,970 +34.3 70,715 +36.7
Loans and leases, net of unearned 3,312,635 +14.4 2,896,305 +7.6 2,691,996 +12.4
Mortgages held for sale 52,634 +79.0 29,409 +6.1 27,729 +33.3
---------- ---------- ----------
Total interest earning assets $4,692,653 +15.9% $4,048,462 +11.1% $3,643,539 +9.7%
========== ========== ==========
Interest bearing liabilities:
Deposits $3,729,087 +12.6% $3,311,016 +12.3% $2,947,834 +9.1%
Federal funds purchased and
securities sold under
repurchase agreements 62,728 +35.2 46,382 -11.1 52,168 +7.3
Long-term debt 179,928 +225.1 55,339 -31.4 80,619 +17.8
Other 2,794 -43.5 4,942 +23.1 4,013 -14.7
---------- ---------- ----------
Total interest bearing liabilities $3,974,537 +16.3% $3,417,679 +10.8% $3,084,634 +9.3%
========== ========== ==========
Non-interest bearing deposits $534,432 +14.6% $466,346 +6.9% $436,308 +6.3%
========== ========== ==========
In 1998 the growth of loans and leases increased as compared to 1997. In
1996 loans and leases grew at a faster rate than interest bearing deposits;
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 bank's leasing operation provides
lease financing for equipment for commercial accounts as well as municipal
governments in its primary market area.
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, 1998, 1997 and 1996:
1998 1997 1996
---- ---- ----
Net interest margin 4.29% 4.52% 4.66%
The Company experienced a decrease in net interest margin in 1998 and
1997 as a result of increased deposit costs and a decline in asset yields in
1998 and a reduced growth rate in loans and leases in 1997. Increased loans and
lease growth rates in 1996 resulted in a more favorable net interest margin
experience. The Company utilizes short-term, intermediate-term and long-term
borrowings from the Federal Home Loan Bank for the purpose of funding asset
growth. In years prior to 1998, the Company 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 1997 and 1996. In 1998, competitive
pressures, which show no signs of abating, lengthened loan maturities and,
coupled with declining loan yields, further reduced net interest margin.
In 1998, from February to August, the Company was the depository for $175
million of State of Mississippi funds as a result of a successful competitive
bid for the funds. These funds were invested in short term instruments which
provided a nominal interest spread which further contributed to the narrowing of
net interest margins for the year. The Company does not expect a reoccurrence of
this one-time transaction.
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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, 1998:
INTEREST RATE SENSITIVITY
DECEMBER 31, 1998
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 $ 6,632 $ -- $ -- $ --
Federal funds sold 115,040 -- -- --
Held-to-maturity securities 79,601 157,160 313,276 97,809
Available-for-sale securities 126,665 110,793 205,191 107,118
Loans & leases, net of unearned 946,584 473,024 1,807,786 241,307
Mortgages held for sale 63,354 -- -- --
----------- ----------- ---------- --------
Total interest earning assets 1,337,876 740,977 2,326,253 446,234
----------- ----------- ---------- --------
Interest bearing liabilities:
Interest bearing demand deposits & savings 889,456 294,269 661,412 --
Time deposits 519,844 845,383 614,012 3,018
Federal funds purchased & securities
sold under repurchase agreements 64,554 -- -- --
Long-term debt 804 2,420 42,159 132,935
Other 694 9 145 255
----------- ----------- ---------- --------
Total interest bearing liabilities 1,475,352 1,142,081 1,317,728 136,208
----------- ----------- ---------- --------
Interest sensitivity gap $ (137,476) $ (401,104) $1,008,525 $310,026
=========== =========== ========== ========
Cumulative interest sensitivity gap $ (137,476) $ (538,580) $ 469,945 $779,971
=========== =========== ========== ========
In the event interest rates decline after 1998, 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 AND ALLOWANCE FOR CREDIT LOSSES
The provision for credit losses is the annual cost of providing an
allowance or reserve for estimated probable future 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 and prospective 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
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factors. An independent loan review department is responsible for reviewing the
credit rating and classification of individual credits and assessing trends in
the portfolio, adherence to internal credit policies and procedures and other
factors that may affect the overall adequacy of the allowance. The loan review
department is supplemented by regulatory agencies that provide and additional
level of review. 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 analysis intended to
insure that the allowance is adequate to cover other probable losses inherent in
the portfolio. This component considers our 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 each year and net
charge-offs are shown in the following table:
1998 1997 1996
---------- --------- ---------
(DOLLARS IN THOUSANDS)
Provision for credit losses $ 15,014 $ 9,607 $ 9,525
Allowance for credit losses as
a percent of loans and leases
outstanding at year end 1.43% 1.40% 1.46%
Net charge offs $ 9,536 $ 7,582 $ 6,690
Net charge offs as a percent
of average loans 0.29% 0.26% 0.25%
The provision for credit losses for 1998 increased 56.3% as compared to
the provision for 1997, principally as a result of the faster rate of growth in
the loan portfolio, an increase in losses and differences in underwriting
standards at acquired institutions. The 1997 provision for credit losses
increased from 1996's level by 0.9% as a result of the slower growth in loans
and an increase in loan losses. The 1996 provision for credit losses increased
48.4% from 1995's level as a result of the 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, 1998,
1997 and 1996 and the percentage change from the prior year are shown in the
following table:
1998 1997 1996
---------------------- ----------------------- ---------------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Mortgage lending $10,808 +36.6% $7,912 -9.0% $8,694 +133.5%
Service charges 23,291 +5.7 22,030 +5.9 20,808 +15.2
Life insurance premiums 3,655 -3.1 3,772 -13.0 4,337 +29.7
Trust income 3,682 +13.7 3,239 +7.1 3,023 +14.8
Securities gains, net 867 -32.4 1,283 +462.7 228 +133.6
Other revenue 10,715 +10.8 9,667 +16.0 8,332 +1.8
------- ------- -------
Total other revenue $53,018 +10.7% $47,903 +5.5% $45,422 +28.8%
======= ======= =======
Mortgage lending revenue, which consists principally of revenue generated
by originating loans and by servicing loans for others, increased in 1998. The
increase in mortgage loan originations was spurred by lower interest rates in
1998. Mortgage lending revenue decreased in 1997 principally as a result of a
decline in revenue related to mortgage servicing. The revenue produced by
mortgage lending activities increased in 1996 primarily as a result of declining
interest rates and growth in servicing income. Mortgage servicing resulted in a
loss of $1,276,000 in 1998, with income of $2,198,000 in 1997, compared to
income of $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 $11,885,000 in 1998 as compared to
$5,398,000 in 1997 and $5,363,000 in 1996. The following table presents the
principal amount of mortgage loans serviced at December 31, 1998, 1997 and 1996
and the percentage change from the previous year:
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1998 1997 1996
------------------- --------------------- -------------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
------- -------- ------- -------- ------- --------
(DOLLARS IN MILLIONS)
Mortgage loans serviced $1,701.7 +28.5% $1,324.0 +13.5% $1,166.8 +33.2%
Service charges on deposit accounts increased in 1998, 1997 and 1996
because of higher volumes of items processed as a result of greater economic
activity and growth in the number of demand deposit accounts. Trust income
increased 13.7% in 1998, 7.1% in 1997 and 14.8% in 1996, as a result of
increases in the number of trust accounts and the value of assets under care
(either managed or in custody). Other revenue increased 10.8%, 16.0% and 1.8% in
1998, 1997 and 1996, respectively. The increase in 1998 was primarily
attributable to commissions and fees derived from the sale of annuities and
other life insurance products. This service was added to the Company's financial
offerings in late 1997 but only began to contribute revenue in 1998. These
commissions and fees were approximately $1 million in 1998. 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 increase in 1996 was 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, 1998,
1997 and 1996 and the percentage change from the prior year are shown in the
following table:
1998 1997 1996
------------------------- -------------------------- --------------------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
--------- --------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
Salaries and employee benefits $70,937 -3.6% $73,620 +13.2% $65,056 +5.8%
Occupancy, net 10,417 +8.6 9,594 +2.3 9,380 +4.8
Equipment 15,023 +12.2 13,390 +22.2 10,953 +9.5
Telecommunications 4,602 +16.7 3,943 +3.9 3,796 +21.7
Other 51,105 +18.7 43,071 +5.0 41,026 +2.3
-------- -------- --------
Total other expense $152,084 +5.9% $143,618 +10.3% $130,211 +5.3%
======== ======== ========
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's stock option plans contain a provision for SARs
which requires the recognition of expense for stock price appreciation or a
reduction of expense in the event of a decline in the stock price. In 1998, the
Company's common stock declined by approximately 24% from year end 1997. As a
result of this decline in value, a reduction in expense of $2.7 million was
recorded. In 1997, the Company's common stock price increased approximately 75%,
which resulted in SARs expense of $6.1 million, as compared to expense of $1.9
million in 1996. At December 31, 1998, the Company had approximately 587,000
SARs outstanding. Each dollar increase in the Company's stock price will result
in $587,000 in SAR expense while each dollar decrease in the Company's stock
price will result in an $587,000 reduction in SAR expense. Occupancy and
equipment expenses have increased principally as a result of additional branch
offices and upgrades to the Company's internal operating systems.
Equipment, telecommunications and all other expenses recorded
double-digit percentage increases in 1998. These expenses increased in all
periods as a result of expanded telecommunications, increased computer
programming expense, 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.
In 1998, as a direct result of the mergers with Alabama Bancorp., Inc. on
October 30, 1998, Merchants Capital Corporation on December 4, 1998 and The
First Corporation on December 31, 1998, the Company recorded mergerrelated costs
of approximately $5 million $(4.1 million after tax) as other operating expense.
Of the merger-related costs, $4.6 million $(3.7 million after tax) was recorded
as other operating expense in the fourth quarter of 1998. The charge to
operating expense consisted of termination and change of control payments $(2.4
million), costs to eliminate duplicate headquarters facilities $(0.5 million),
professional fees $(2.0 million) and miscellaneous $(0.1 million). Substantially
all of the termination and change of control payments were made during the
fourth quarter of 1998 at consummation of the
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mergers. The Company had formulated, documented and approved plans of
termination with respect to termination payments that had not been paid at
December 31, 1998, and expects to make those payments by the second quarter of
1999. Included in the cost is a loss in the fourth quarter of 1998 for
abandonment of a duplicate headquarters facility in Vicksburg, Mississippi. The
loss amount was determined based upon third party appraisals of the property.
Professional fees consist of investment banking, legal and accounting fees
substantially all of which were paid during 1998.
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:
1998 1997 1996
----------------------- ------------------------ ------------------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT % CHANGE
------- -------- ------- -------- ------- --------
(DOLLARS IN MILLIONS)
Loans, net of unearned - average $3,312.6 +14.4% $2,896.3 +7.6% $2,692.0 +12.4%
Loans, net of unearned - year end 3,468.7 +12.9 3,073.0 +11.4 2,759.2 +7.5
Despite significant levels of increase 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:
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
Foreclosed properties $6,766 $2,711 $ 2,119
Non-accrual loans 6,152 5,047 6,227
Loans 90 days or more past due 9,654 8,148 5,501
Restructured loans 713 1,097 539
------- ------- -------
Total non-performing assets $23,285 $17,003 $14,386
======= ======= =======
Total non-performing assets as a percent of net loans 0.67% 0.55% 0.52%
======= ======= =======
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, 1998, 1997 and 1996, 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, which was expanded into Alabama in 1998. 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 $8,166,000, $7,181,000, and $7,808,000 in 1998, 1997 and 1996,
respectively.
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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 $247.4 million at
December 31, 1998, compared to $190.5 million at the end of 1997. 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, 1998, the Company's available-for-sale securities totaled
$549.8 million. These securities, which are subject to possible sale, are
recorded at fair value. At December 31, 1998, 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, 1998
totaled $25.4 million. Net unrealized gains on held-to-maturity securities
comprised $11.4 million of that total, while net unrealized gains on
available-for-sale securities were $14.0 million. Net unrealized gains on
investment securities as of December 31, 1997, amounted to $15.8 million. Of
that total, $7.5 million was attributable to held-to-maturity securities and
$8.3 million to available-for-sale securities. These unrealized gains were a
direct result of relatively stable to lower intermediate term interest rates
during 1998 and 1997. 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:
1998 1997 1996
------------------------ ---------------------------- ---------------------
AVERAGE % AVERAGE % AVERAGE %
BALANCE CHANGE BALANCE CHANGE BALANCE CHANGE
------- ------ ------- ------ ------- ------
(DOLLARS IN MILLIONS)
Interest bearing deposits $3,729.1 +12.6% $3,311.0 +12.3% $2,947.8 +9.1%
Non-interest bearing deposits 534.4 +14.6 466.3 +6.9 436.3 +6.3
The Company's deposit mix continued to experience change in 1998. By year
end 1998, other time deposits showed an increase of 6.2% from the end of 1997,
while interest bearing demand deposits increased by 10.0% and other short-term
savings accounts increased 26.8%. Non-interest bearing demand deposits increased
5.3% from year end 1997 to year end 1998. Management is of the opinion that the
low interest rates paid on deposit accounts in 1997 and 1996 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. That
trend continued into 1998 and 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. 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.
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.
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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. 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 11.74% and
12.99%, respectively at December 31, 1998, compared to 12.13% and 13.38%,
respectively at December 31, 1997. 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 8.49% at December 31, 1998 and 8.52% at December 31, 1997, 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 Company's bank subsidiary met the criteria for the "well
capitalized" category at December 31, 1998.
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.
The Company has announced that it may repurchase annually up to $3
million of its outstanding common stock for the purpose of providing liquidity
to a Company employee benefit plan. During 1998, approximately $600,000 of
common stock was repurchased from the employee benefit plan.
YEAR 2000
The Company is addressing 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 its 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. The project includes reviews of
internal and external factors. The Company's internal efforts address
information technology systems and functions with embedded computer chips.
Functions with embedded computer chips include such things as vaults, security
systems, elevators and heating and cooling systems have been reviewed and
remediation should be completed by June 30, 1999. External efforts deal with
critical business partners including customers, vendors, suppliers and utility
providers. The Company is actively communicating with third party providers of
software and hardware for certification of their compliance with Year 2000
issues. We are conducting our efforts in accordance with Federal Financial
Institutions Examination Council (FFIEC) guidelines. Reports are given to senior
management and to the Board of Directors. The Company met the FFIEC guidelines
for financial institutions by substantially completing testing of its in-house
mission critical systems by December 31, 1998 and will meet the March 31, 1999
guideline for testing third party service bureau systems. We will continue
testing throughout 1999.
The Company completed a major systems upgrade in 1998 of our core
mainframe systems and application subsystems that brought Year 2000 compliance
to these in-house mission critical applications. This systems upgrade will add
approximately $850,000 in additional annual software maintenance. It is
projected that the Company has or will incur a total of approximately $700,000
in additional external costs related to Year 2000 issues. Such cost is primarily
related to third party programming resources that are used for all mainframe
based application modifications. The Company does not separately track the
internal cost incurred related to Year 2000 compliance efforts. Such costs are
principally the related payroll costs for our information systems group. The
Company
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believes that with the modifications