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EX-31.1 - EX-31.1 - BANCORPSOUTH INCc853-20170331xex31_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

________________________________________



FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended March 31, 2017



OR



TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from ________________    to    ________________



Commission File Number:    001-12991

BANCORPSOUTH, INC.

(Exact name of registrant as specified in its charter)





 

Mississippi

64-0659571

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)



 

One Mississippi Plaza, 201 South Spring Street

Tupelo, Mississippi

 

38804

(Address of principal executive offices)

(Zip Code)



Registrant's telephone number, including area code:  (662) 680-2000



NOT APPLICABLE

(Former name, former address, and former fiscal year, if changed since last report)



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 period 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  [X] Yes [  ] No



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”,  “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check One):  Large accelerated filer [X]  Accelerated filer [  ]  Non-accelerated filer (Do not check if a smaller reporting company) [  ]  Smaller reporting company [  ]



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act [  ]



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]          



 As of May 1, 2017, the registrant had outstanding 91,343,458 shares of common stock, par value $2.50 per share.

 


 


 

BANCORPSOUTH, INC.

TABLE OF CONTENTS















 

 

 

PART I.

Financial Information

Page



ITEM 1.

Financial Statements

 



 

Consolidated Balance Sheets

   March 31, 2017 and 2016 (Unaudited) and December 31, 2016



 

Consolidated Statements of Income (Unaudited)

 



 

   Three Months ended March 31, 2017 and 2016



 

Consolidated Statements of Comprehensive Income (Unaudited)

 



 

   Three Months ended March 31, 2017 and 2016



 

Consolidated Statements of Cash Flows (Unaudited)

 



 

    Three months ended March 31, 2017 and 2016



 

Notes to Consolidated Financial Statements (Unaudited)



ITEM 2.

Management's Discussion and Analysis of Financial

 



 

    Condition and Results of Operations

42 



ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

72 



ITEM 4.

Controls and Procedures

72 



 

 

 

PART II.

Other Information

 



ITEM 1.

Legal Proceedings

72 



ITEM 1A.

Risk Factors

73 



ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

74 



ITEM 5.

Other Information

74 



ITEM 6.

Exhibits

    75



 

 

 



2

 


 



PART I.

FINANCIAL INFORMATION



ITEM 1.  FINANCIAL STATEMENTS.



 

 

 

 

 

 



 

 

 

 

 

 

BANCORPSOUTH, INC. AND SUBSIDIARIES

Consolidated Balance Sheets



 

 

 

 

 

 



 

March 31,

 

December 31,

 

March 31,



 

2017

 

2016

 

2016



 

(Unaudited)

 

(1)

 

(Unaudited)



 

(Dollars in thousands, except per share amounts)

ASSETS

 

 

 

 

 

 

Cash and due from banks

 

$          147,684

 

$          184,152

 

$          197,538

Interest bearing deposits with other banks

 

253,738 

 

38,813 

 

148,915 

Available-for-sale securities, at fair value

 

2,540,887 

 

2,531,676 

 

2,016,373 

Loans and leases

 

10,822,568 

 

10,835,512 

 

10,475,528 

Less:   Unearned income

 

20,874 

 

23,521 

 

30,831 

Allowance for credit losses

 

125,196 

 

123,736 

 

126,506 

Net loans and leases

 

10,676,498 

 

10,688,255 

 

10,318,191 

Loans held for sale, at fair value

 

161,600 

 

166,927 

 

150,046 

Premises and equipment, net

 

305,250 

 

305,561 

 

306,765 

Accrued interest receivable

 

42,329 

 

42,005 

 

41,401 

Goodwill

 

300,798 

 

300,798 

 

291,498 

Other identifiable intangibles

 

20,865 

 

21,894 

 

19,664 

Bank-owned life insurance

 

258,518 

 

258,648 

 

253,427 

Other real estate owned

 

8,458 

 

7,810 

 

12,685 

Other assets

 

149,429 

 

177,849 

 

169,895 

TOTAL ASSETS

 

$     14,866,054

 

$     14,724,388

 

$     13,926,398



 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Demand:  Noninterest bearing

 

$       3,401,348

 

$       3,250,537

 

$       3,103,321

 Interest bearing

 

5,182,011 

 

5,034,470 

 

5,033,565 

Savings

 

1,627,621 

 

1,561,819 

 

1,506,942 

Other time

 

1,831,865 

 

1,841,315 

 

1,842,869 

Total deposits

 

12,042,845 

 

11,688,141 

 

11,486,697 

Securities sold under agreement to repurchase

 

375,832 

 

454,002 

 

431,089 

Short-term borrowings

 

 -

 

92,000 

 

 -

Accrued interest payable

 

4,109 

 

3,975 

 

3,305 

Junior subordinated debt securities

 

 -

 

12,888 

 

23,198 

Long-term debt

 

530,000 

 

530,000 

 

67,681 

Other liabilities

 

210,879 

 

219,499 

 

234,635 

TOTAL LIABILITIES

 

13,163,665 

 

13,000,505 

 

12,246,605 



 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Common stock, $2.50 par value per share

 

 

 

 

 

 

Authorized - 500,000,000 shares; Issued - 92,344,409

 

 

 

 

 

 

   93,696,687 and 94,438,626 shares, respectively

 

230,861 

 

234,242 

 

236,097 

Capital surplus

 

226,204 

 

271,292 

 

283,800 

Accumulated other comprehensive loss

 

(50,360)

 

(50,937)

 

(32,144)

Retained earnings

 

1,295,684 

 

1,269,286 

 

1,192,040 

TOTAL SHAREHOLDERS' EQUITY

 

1,702,389 

 

1,723,883 

 

1,679,793 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 

$     14,866,054

 

$     14,724,388

 

$     13,926,398

 (1)  Derived from audited consolidated financial statements.



See accompanying notes to consolidated financial statements.

3

 


 





 

 

 

 



 

 

 

 

BANCORPSOUTH, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)



 

 

 

 



 

Three months ended



 

March 31,



 

2017

 

2016



 

(In thousands, except per share amounts)

INTEREST REVENUE:

 

 

 

 

Loans and leases

 

$        111,498

 

$        107,805

Deposits with other banks

 

485 

 

263 

Available-for-sale securities:

 

 

 

 

Taxable

 

7,350 

 

5,888 

Tax-exempt

 

2,581 

 

3,032 

Loans held for sale

 

1,012 

 

984 

Total interest revenue

 

122,926 

 

117,972 



 

 

 

 

INTEREST EXPENSE:

 

 

 

 

Deposits:

 

 

 

 

Interest bearing demand

 

2,786 

 

2,163 

Savings

 

472 

 

443 

Other time

 

3,582 

 

3,354 

Federal funds purchased and securities sold

 

 

 

 

under agreement to repurchase

 

322 

 

140 

Long-term debt

 

1,142 

 

530 

Junior subordinated debt

 

 

183 

Other

 

 

 -

Total interest expense

 

8,315 

 

6,813 

Net interest revenue

 

114,611 

 

111,159 

Provision for credit losses

 

1,000 

 

1,000 

Net interest revenue, after provision for

 

 

 

 

credit losses

 

113,611 

 

110,159 



 

 

 

 

NONINTEREST REVENUE:

 

 

 

 

Mortgage banking

 

8,990 

 

1,830 

Credit card, debit card and merchant fees

 

8,903 

 

8,961 

Deposit service charges

 

9,689 

 

11,014 

Security gains, net

 

1,071 

 

Insurance commissions

 

32,940 

 

33,249 

Wealth management

 

5,174 

 

5,109 

Other

 

4,102 

 

4,562 

Total noninterest revenue

 

70,869 

 

64,727 



 

 

 

 

NONINTEREST EXPENSE:

 

 

 

 

Salaries and employee benefits

 

81,386 

 

81,679 

Occupancy, net of rental income

 

10,302 

 

10,273 

Equipment

 

3,568 

 

3,765 

Deposit insurance assessments

 

2,484 

 

2,288 

Regulatory settlement

 

 -

 

10,277 

Other

 

29,369 

 

33,230 

Total noninterest expense

 

127,109 

 

141,512 

Income before income taxes

 

57,371 

 

33,374 

Income tax expense

 

19,278 

 

10,825 

Net income

 

$          38,093

 

$          22,549



 

 

 

 

Earnings per share:  Basic

 

$              0.41

 

$              0.24

Diluted

 

$              0.41

 

$              0.24



 

 

 

 

Dividends declared per common share

 

$              0.13

 

$              0.10



See accompanying notes to consolidated financial statements.



4

 


 







 

 

 

 

 



 

 

 

 

 

BANCORPSOUTH, INC. AND SUBSIDIARIES

 

Consolidated Statements of Comprehensive Income

 

(Unaudited)

 



 

 

 

 

 



 

Three months ended

 



 

March 31,

 



 

2017

 

2016

 



 

 

 

 

 



 

(In thousands)

 

Net income

 

$       38,093

 

$       22,549

 

Other comprehensive income, net of tax

 

 

 

 

 

Unrealized (losses) gains on securities

 

(370)

 

8,748 

 

Pension and other postretirement benefits

 

947 

 

933 

 

Other comprehensive income, net of tax

 

577 

 

9,681 

 

Comprehensive income

 

$       38,670

 

$       32,230

 



See accompanying notes to consolidated financial statements.



5

 


 







 

 

 

 

 



 

 

 

 

 

BANCORPSOUTH, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)



 

Three months ended



 

March 31,



 

2017

 

 

2016



 

(In thousands)

Operating Activities:

 

 

 

 

 

Net income

 

$             38,093

 

 

$         22,549

 Adjustment to reconcile net income to net

 

 

 

 

 

cash provided by operating activities:

 

 

 

 

 

Provision for credit losses

 

1,000 

 

 

1,000 

Depreciation and amortization

 

6,485 

 

 

6,307 

Amortization of intangibles

 

1,030 

 

 

880 

Amortization of debt securities premium and discount, net

 

1,871 

 

 

2,651 

Share-based compensation expense

 

1,501 

 

 

2,100 

Security gains, net

 

(1,071)

 

 

(2)

Net deferred loan origination expense

 

(1,582)

 

 

(1,583)

Increase in interest receivable

 

(324)

 

 

(500)

Increase in interest payable

 

134 

 

 

234 

Realized gain on mortgages sold

 

(10,910)

 

 

(10,615)

Proceeds from mortgages sold

 

304,077 

 

 

329,730 

Origination of mortgages held for sale

 

(287,790)

 

 

(315,374)

Loss on other real estate owned, net

 

632 

 

 

843 

Increase in bank-owned life insurance

 

(1,669)

 

 

(1,893)

Other, net

 

22,121 

 

 

2,700 

Net cash provided by operating activities

 

73,598 

 

 

39,027 

Investing activities:

 

 

 

 

 

Proceeds from calls and maturities of available-for-sale securities

 

116,781 

 

 

121,593 

Proceeds from sales of available-for-sale securities

 

1,071 

 

 

 -

Purchases of available-for-sale securities

 

(128,364)

 

 

(43,316)

Net (increase) decrease in loans and leases

 

10,073 

 

 

(72,647)

Purchases of premises and equipment

 

(7,463)

 

 

(5,653)

Proceeds from sale of premises and equipment

 

68 

 

 

640 

Proceeds from death benefits from COLI

 

1,799 

 

 

 -

Proceeds from sale of other real estate owned

 

986 

 

 

2,562 

Other, net

 

(97)

 

 

(29)

Net cash (used in) provided by  investing activities

 

(5,146)

 

 

3,150 

Financing activities:

 

 

 

 

 

Net increase in deposits

 

354,704 

 

 

155,536 

Net decrease in short-term debt and other liabilities

 

(78,170)

 

 

(36,852)

Repayment of long-term debt

 

(92,000)

 

 

(2,094)

Redemption of junior subordinated debt

 

(12,888)

 

 

 -

Issuance of common stock

 

429 

 

 

Repurchase of common stock

 

(50,399)

 

 

(867)

Payment of cash dividends

 

(11,671)

 

 

(9,424)

Net cash provided by financing activities

 

110,005 

 

 

106,307 



 

 

 

 

 

Increase in cash and cash equivalents

 

178,457 

 

 

148,484 

Cash and cash equivalents at beginning of period

 

222,965 

 

 

197,969 

Cash and cash equivalents at end of period

 

$           401,422

 

 

$       346,453







6

 


 

BANCORPSOUTH, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)







 

 

 

 

 



 

Three months ended



 

March 31,



 

2017

 

 

2016

Supplemental Cash Flow Information

 

(In thousands)

Cash paid during the period for:

 

 

 

 

 

Income tax (refunds) payments, net

$

(680)

 

$

6,000 

Interest paid

 

8,090 

 

 

6,193 

Non-cash Activities:

 

 

 

 

 

Transfers of loans to other real estate owned

 

2,266 

 

 

1,359 

MSR  fair value adjustment

 

911 

 

 

(7,954)

Financed sales of other real estate owned

 

180 

 

 

160 

Transfers of loans held for sale to loan portfolio

 

52 

 

 

-  

See accompanying notes to consolidated financial statements.

 

 

 

 

 



 

 

 

 

 















7

 


 



Notes to Consolidated Financial Statements

(Unaudited)



NOTE 1 – BASIS OF FINANCIAL STATEMENT PRESENTATION AND PRINCIPLES OF CONSOLIDATION 



The accompanying unaudited interim consolidated financial statements of BancorpSouth, Inc. (the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and follow general practices within the industries in which the Company operates.  For further information, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.  In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial statements have been included and all such adjustments were of a normal, recurring nature.  The results of operations for the three-month period ended March 31, 2017 are not necessarily indicative of the results to be expected for the full year.  Certain 2016 amounts have been reclassified to conform with the 2017 presentation. 

The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary, BancorpSouth Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, BancorpSouth Insurance Services, Inc., BancorpSouth Municipal Development Corporation, BancorpSouth Bank Securities Corporation,  Gumtree Wholesale Insurance Brokers, Inc and BXS Forrest Investment Fund, LLC



NOTE 2 – LOANS AND LEASES



The Company’s loan and lease portfolio is disaggregated into the following segments:  commercial and industrial; real estate; credit card; and all other.  The real estate segment is further disaggregated into the following classes:  consumer mortgages; home equity; agricultural; commercial and industrial-owner occupied; construction, acquisition and development; and commercial.  A summary of gross loans and leases by segment and class as of the dates indicated follows:









 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2017

 

2016

 

2016



 

 

 

 

 

 



(In thousands)



 

 

 

 

 

 

Commercial and industrial

 

$    1,539,481

 

$    1,720,574

 

$     1,615,608

Real estate

 

 

 

 

 

 

Consumer mortgages

 

2,675,672 

 

2,480,828 

 

2,643,966 

Home equity

 

626,488 

 

605,228 

 

628,846 

Agricultural

 

240,534 

 

239,422 

 

245,377 

Commercial and industrial-owner occupied

 

1,801,613 

 

1,654,577 

 

1,764,265 

Construction, acquisition and development

 

1,136,827 

 

966,362 

 

1,157,248 

Commercial real estate

 

2,271,542 

 

2,233,742 

 

2,237,719 

Credit cards

 

103,813 

 

106,714 

 

109,656 

All other

 

426,598 

 

468,081 

 

432,827 

Gross Loans Total

 

10,822,568 

 

10,475,528 

 

10,835,512 

Less:  Unearned Income

 

20,874 

 

30,831 

 

23,521 

Net Loans

 

$  10,801,694

 

$  10,444,697

 

$  10,811,991

(1)

Gross loans and leases are net of deferred costs of $1.6 million, approximately $264,000 and approximately $282,000 at March 31, 2017 and 2016 and December 31, 2016, respectively.

8

 


 

The following table shows the Company’s loans and leases, net of unearned income, as of March 31, 2017 by segment, class and geographical location:











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Alabama

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

and Florida

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Panhandle

 

Arkansas

 

Louisiana

 

Mississippi

 

Missouri

 

Tennessee

 

Texas

 

Other

 

Total



 

(In thousands)

Commercial and industrial

 

$        146,277 

 

$        181,759 

 

$        172,034 

 

$         554,665 

 

$       85,672 

 

$         118,052 

 

$         219,638 

 

$           58,430 

 

$        1,536,527 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

355,497 

 

322,928 

 

224,643 

 

846,615 

 

89,752 

 

302,422 

 

506,417 

 

27,398 

 

2,675,672 

Home equity

 

95,605 

 

44,558 

 

71,903 

 

230,822 

 

21,956 

 

144,109 

 

15,722 

 

1,813 

 

626,488 

Agricultural

 

8,540 

 

83,664 

 

26,241 

 

66,060 

 

6,568 

 

13,501 

 

35,927 

 

33 

 

240,534 

Commercial and industrial-owner occupied

 

200,300 

 

193,486 

 

210,282 

 

732,207 

 

47,847 

 

155,666 

 

261,825 

 

 -

 

1,801,613 

Construction, acquisition and development

 

125,908 

 

61,890 

 

53,512 

 

344,875 

 

21,592 

 

167,290 

 

361,760 

 

 -

 

1,136,827 

Commercial real estate

 

314,657 

 

355,978 

 

219,715 

 

585,549 

 

200,684 

 

202,476 

 

392,068 

 

415 

 

2,271,542 

Credit cards

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

103,813 

 

103,813 

All other

 

52,756 

 

41,000 

 

25,235 

 

212,471 

 

3,417 

 

23,799 

 

43,841 

 

6,159 

 

408,678 

Total

 

$     1,299,540 

 

$     1,285,263 

 

$     1,003,565 

 

$      3,573,264 

 

$     477,488 

 

$      1,127,315 

 

$      1,837,198 

 

$         198,061 

 

$      10,801,694 





There are no other loan and lease concentrations which exceed 10% of total loans and leases not already reflected in the preceding tables.  A substantial portion of construction, acquisition and development loans are secured by real estate in markets in which the Company is located.  The Company’s loan policy generally prohibits loans for the sole purpose of carrying interest reserves.  Certain of the construction, acquisition and development loans were structured with interest-only terms.  A portion of the consumer mortgage and commercial real estate portfolios were originated through the permanent financing of construction, acquisition and development loans.  Future economic distress could negatively impact borrowers’ and guarantors’ ability to repay their debt which would make more of the Company’s loans collateral dependent.

The following tables provide details regarding the aging of the Company’s loan and lease portfolio, net of unearned income, by segment and class at March 31, 2017 and December 31, 2016:

9

 


 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2017



 

 

 

 

 

 

 

 

 

 

 

 

 

90+ Days



 

30-59 Days

 

60-89 Days

 

90+ Days

 

Total

 

 

 

Total

 

Past Due still



 

Past Due

 

Past Due

 

Past Due

 

Past Due

 

Current

 

Outstanding

 

Accruing



 

(In thousands)

Commercial and industrial

 

$        4,811 

 

$         4,621 

 

$          6,588 

 

$    16,020 

 

$      1,520,507 

 

$     1,536,527 

 

$               84 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

8,303 

 

3,818 

 

13,897 

 

26,018 

 

2,649,654 

 

2,675,672 

 

2,555 

Home equity

 

1,501 

 

396 

 

1,999 

 

3,896 

 

622,592 

 

626,488 

 

 -

Agricultural

 

3,224 

 

2,758 

 

1,067 

 

7,049 

 

233,485 

 

240,534 

 

 -

Commercial and industrial-owner occupied

 

1,630 

 

2,914 

 

4,892 

 

9,436 

 

1,792,177 

 

1,801,613 

 

 -

Construction, acquisition and development

 

3,390 

 

309 

 

1,048 

 

4,747 

 

1,132,080 

 

1,136,827 

 

 -

Commercial real estate

 

2,654 

 

 

11,821 

 

14,476 

 

2,257,066 

 

2,271,542 

 

 -

Credit cards

 

493 

 

337 

 

439 

 

1,269 

 

102,544 

 

103,813 

 

424 

All other

 

525 

 

265 

 

55 

 

845 

 

407,833 

 

408,678 

 

 -

Total

 

$      26,531 

 

$       15,419 

 

$        41,806 

 

$    83,756 

 

$    10,717,938 

 

$   10,801,694 

 

$          3,063 







 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2016



 

 

 

 

 

 

 

 

 

 

 

 

 

90+ Days



 

30-59 Days

 

60-89 Days

 

90+ Days

 

Total

 

 

 

Total

 

Past Due still



 

Past Due

 

Past Due

 

Past Due

 

Past Due

 

Current

 

Outstanding

 

Accruing



 

(In thousands)

Commercial and industrial

 

$        3,231 

 

$         1,610 

 

$          9,152 

 

$    13,993 

 

$      1,598,302 

 

$     1,612,295 

 

$               58 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

12,393 

 

6,785 

 

15,054 

 

34,232 

 

2,609,734 

 

2,643,966 

 

3,439 

Home equity

 

2,771 

 

670 

 

2,959 

 

6,400 

 

622,446 

 

628,846 

 

 -

Agricultural

 

969 

 

354 

 

247 

 

1,570 

 

243,807 

 

245,377 

 

 -

Commercial and industrial-owner occupied

 

2,551 

 

530 

 

4,342 

 

7,423 

 

1,756,842 

 

1,764,265 

 

 -

Construction, acquisition and development

 

2,101 

 

440 

 

1,443 

 

3,984 

 

1,153,264 

 

1,157,248 

 

14 

Commercial real estate

 

312 

 

933 

 

11,211 

 

12,456 

 

2,225,263 

 

2,237,719 

 

 -

Credit cards

 

466 

 

297 

 

501 

 

1,264 

 

108,392 

 

109,656 

 

472 

All other

 

550 

 

148 

 

230 

 

928 

 

411,691 

 

412,619 

 

 -

Total

 

$      25,344 

 

$       11,767 

 

$        45,139 

 

$    82,250 

 

$    10,729,741 

 

$   10,811,991 

 

$          3,983 



The Company utilizes an internal loan classification system to grade loans according to certain credit quality indicators.  These credit quality indicators include, but are not limited to, recent credit performance, delinquency, liquidity, cash flows, debt coverage ratios, collateral type and loan-to-value ratio.  The Company’s internal loan classification system is compatible with classifications used by the Federal Deposit Insurance Corporation, as well as other regulatory agencies.  Loans may be classified as follows:



Pass:  Loans which are performing as agreed with few or no signs of weakness.  These loans show sufficient cash flow, capital and collateral to repay the loan as agreed. 



Special Mention:  Loans where potential weaknesses have developed which could cause a more serious problem if not corrected.



10

 


 

Substandard:  Loans where well-defined weaknesses exist that require corrective action to prevent further deterioration.  Loans are further characterized by the possibility that the Company will sustain some loss if the deficiencies are not corrected.



Doubtful:  Loans having all the characteristics of Substandard and which have deteriorated to a point where collection and liquidation in full is highly questionable.



Loss:  Loans that are considered uncollectible or with limited possible recovery.



Impaired:  Loans for which it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement and for which a specific impairment reserve has been considered.



The following tables provide details of the Company’s loan and lease portfolio, net of unearned income, by segment, class and internally assigned grade at March 31, 2017 and December 31, 2016:









 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2017



 

 

 

Special

 

 

 

 

 

 

 

 

 

 



 

Pass

 

Mention

 

Substandard

 

Doubtful

 

Loss

 

Impaired (1)

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

(In thousands)

Commercial and industrial

 

$    1,489,753

 

$            -

 

$       34,936

 

$         -

 

$        -

 

$     11,838

 

$    1,536,527

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

2,611,576 

 

517 

 

62,045 

 

258 

 

 -

 

1,276 

 

2,675,672 

Home equity

 

615,753 

 

 -

 

9,881 

 

 -

 

 -

 

854 

 

626,488 

Agricultural

 

227,902 

 

 -

 

8,899 

 

141 

 

 -

 

3,592 

 

240,534 

Commercial and industrial-owner occupied

 

1,734,995 

 

3,663 

 

50,908 

 

 -

 

 -

 

12,047 

 

1,801,613 

Construction, acquisition and development

 

1,124,929 

 

 -

 

11,621 

 

 -

 

 -

 

277 

 

1,136,827 

Commercial real estate

 

2,216,915 

 

 -

 

42,614 

 

 -

 

 -

 

12,013 

 

2,271,542 

Credit cards

 

103,813 

 

 -

 

 -

 

 -

 

 -

 

 -

 

103,813 

All other

 

402,287 

 

 -

 

6,291 

 

100 

 

 -

 

 -

 

408,678 

Total

 

$  10,527,923

 

$     4,180

 

$     227,195

 

$    499

 

$        -

 

$     41,897

 

$  10,801,694



(1) Impaired loans are shown exclusive of $4.1 million of accruing troubled debt restructurings (“TDRs”) and $2.7  million of non-accruing TDRs.



11

 


 











 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2016



 

 

 

Special

 

 

 

 

 

 

 

 

 

 



 

Pass

 

Mention

 

Substandard

 

Doubtful

 

Loss

 

Impaired (1)

 

Total



 

(In thousands)

Commercial and industrial

 

$    1,562,263

 

$            -

 

$       41,618

 

$     100

 

$        -

 

$       8,314

 

$    1,612,295

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

2,579,905 

 

522 

 

61,602 

 

282 

 

 -

 

1,655 

 

2,643,966 

Home equity

 

616,758 

 

 -

 

11,231 

 

 -

 

 -

 

857 

 

628,846 

Agricultural

 

233,939 

 

 -

 

10,577 

 

 -

 

 -

 

861 

 

245,377 

Commercial and industrial-owner occupied

 

1,705,266 

 

3,668 

 

47,010 

 

 -

 

 -

 

8,321 

 

1,764,265 

Construction, acquisition and development

 

1,135,618 

 

 -

 

15,697 

 

 -

 

 -

 

5,933 

 

1,157,248 

Commercial real estate

 

2,179,318 

 

634 

 

45,471 

 

 -

 

 -

 

12,296 

 

2,237,719 

Credit cards

 

109,656 

 

 -

 

 -

 

 -

 

 -

 

 -

 

109,656 

All other

 

405,611 

 

 -

 

7,008 

 

 -

 

 -

 

 -

 

412,619 

Total

 

$  10,528,334

 

$     4,824

 

$     240,214

 

$     382

 

$        -

 

$     38,237

 

$  10,811,991



(1) Impaired loans are shown exclusive of $26.0 million of accruing TDRs and $2.2 million of non-accruing TDRs.



12

 


 

The following tables provide details regarding impaired loans and leases, net of unearned income, which exclude accruing TDRs by segment and class as of and for the three months ended March 31, 2017 and as of and for the year ended December 31, 2016:



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

March 31, 2017



 

 

 

Unpaid

 

 

 

Average Recorded Investment

 

Interest Income Recognized



 

Recorded

 

Principal

 

Related

 

Three months

 

Three months



 

Investment

 

Balance of

 

Allowance

 

ended

 

ended



 

in Impaired

 

Impaired

 

for Credit

 

March 31,

 

March 31,



 

Loans (1)

 

Loans

 

Losses

 

2017

 

2017



 

(In thousands)

With no related allowance:

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$                6,801 

 

$              12,021 

 

$                    - 

 

$             6,600 

 

$                  15 

Real estate:

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

1,270 

 

1,670 

 

 -

 

1,302 

 

 -

Home equity

 

266 

 

381 

 

 -

 

470 

 

Agricultural

 

3,592 

 

3,650 

 

 -

 

1,794 

 

Commercial and industrial-owner occupied

 

7,464 

 

8,293 

 

 -

 

7,447 

 

37 

Construction, acquisition and development

 

250 

 

250 

 

 -

 

1,701 

 

 -

Commercial real estate

 

2,382 

 

2,382 

 

 -

 

2,537 

 

All other

 

 -

 

 -

 

 -

 

 -

 

 -

   Total

 

$              22,025 

 

$              28,647 

 

$                    - 

 

$           21,851 

 

$                  61 



 

 

 

 

 

 

 

 

 

 

With an allowance:

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$                5,037 

 

$                5,037 

 

$             3,482 

 

$             4,244 

 

$                    2 

Real estate:

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

 

74 

 

 

411 

 

 -

Home equity

 

588 

 

1,216 

 

30 

 

385 

 

 -

Agricultural

 

 -

 

 -

 

 -

 

 -

 

 -

Commercial and industrial-owner occupied

 

4,583 

 

5,200 

 

352 

 

3,827 

 

Construction, acquisition and development

 

27 

 

27 

 

30 

 

131 

 

 -

Commercial real estate

 

9,631 

 

9,631 

 

2,329 

 

9,639 

 

All other

 

 -

 

 -

 

 -

 

 -

 

 -

   Total

 

$              19,872 

 

$              21,185 

 

$             6,230 

 

$           18,637 

 

$                  10 



 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$              11,838 

 

$              17,058 

 

$             3,482 

 

$           10,844 

 

$                  17 

Real estate:

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

1,276 

 

1,744 

 

 

1,713 

 

 -

Home equity

 

854 

 

1,597 

 

30 

 

855 

 

Agricultural

 

3,592 

 

3,650 

 

 -

 

1,794 

 

Commercial and industrial-owner occupied

 

12,047 

 

13,493 

 

352 

 

11,274 

 

41 

Construction, acquisition and development

 

277 

 

277 

 

30 

 

1,832 

 

 -

Commercial real estate

 

12,013 

 

12,013 

 

2,329 

 

12,176 

 

All other

 

 -

 

 -

 

 -

 

 -

 

 -

   Total

 

$              41,897 

 

$              49,832 

 

$             6,230 

 

$           40,488 

 

$                  71 



 

 

 

 

 

 

 

 

 

 

(1)

Excludes $2.7 million of non-accruing TDRs and $4.1 million of accruing TDRs.





13

 


 















 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

December 31, 2016



 

 

 

Unpaid

 

 

 

 



 

Recorded

 

Principal

 

Related

 

 

 

 



 

Investment

 

Balance of

 

Allowance

 

Average

 

Interest



 

in Impaired

 

Impaired

 

for Credit

 

Recorded

 

Income



 

Loans (1)

 

Loans

 

Losses

 

Investment

 

Recognized



 

(In thousands)

With no related allowance:

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$              6,222

 

$            11,856

 

$                  -

 

$            6,394

 

$                 72

Real estate:

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

1,655 

 

2,305 

 

 -

 

1,851 

 

22 

Home equity

 

857 

 

1,600 

 

 -

 

1,176 

 

Agricultural

 

861 

 

919 

 

 -

 

440 

 

Commercial and industrial-owner occupied

 

8,321 

 

9,520 

 

 -

 

10,314 

 

355 

Construction, acquisition and development

 

4,803 

 

4,803 

 

 -

 

5,379 

 

Commercial real estate

 

2,646 

 

2,646 

 

 -

 

4,391 

 

94 

All other

 

 -

 

 -

 

 -

 

 -

 

 -

   Total

 

$            25,365

 

$            33,649

 

$                  -

 

$          29,945

 

$               564

With an allowance:

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$              2,092

 

$              2,092

 

$          1,837

 

$            1,190

 

$                 20

Real estate:

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

 -

 

 -

 

 -

 

431 

 

 -

Home equity

 

 -

 

 -

 

 -

 

367 

 

Agricultural

 

 -

 

 -

 

 -

 

352 

 

 -

Commercial and industrial-owner occupied

 

 -

 

 -

 

 -

 

741 

 

 -

Construction, acquisition and development

 

1,130 

 

1,130 

 

35 

 

739 

 

10 

Commercial real estate

 

9,650 

 

9,650 

 

2,481 

 

9,868 

 

203 

All other

 

 -

 

 -

 

 -

 

 -

 

 -

   Total

 

$            12,872

 

$            12,872

 

$          4,353

 

$          13,688

 

$               234

Total:

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$              8,314

 

$            13,948

 

$          1,837

 

$            7,584

 

$                 92

Real estate:

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

1,655 

 

2,305 

 

 -

 

2,282 

 

22 

Home equity

 

857 

 

1,600 

 

 -

 

1,543 

 

10 

Agricultural

 

861 

 

919 

 

 -

 

792 

 

Commercial and industrial-owner occupied

 

8,321 

 

9,520 

 

 -

 

11,055 

 

355 

Construction, acquisition and development

 

5,933 

 

5,933 

 

35 

 

6,118 

 

14 

Commercial real estate

 

12,296 

 

12,296 

 

2,481 

 

14,259 

 

297 

All other

 

 -

 

 -

 

 -

 

 -

 

 -

   Total

 

$            38,237

 

$            46,521

 

$          4,353

 

$          43,633

 

$               798

(1)

Excludes $2.2 million of non-accruing TDRs and $26.0 million of accruing TDRs.



The following tables provide details regarding impaired loans and leases, net of unearned income, which include accruing TDRs, by segment and class as of and for the three months ended March 31, 2017 and as of and for the year ended December 31, 2016:







 

 

 

 

 

 

 

 

 

 

 

14

 


 



 

March 31, 2017



 

Recorded

 

Unpaid Principal

 

 

 

Average Recorded Investment

Interest Income Recognized



 

Investment

 

Balance of

 

Related

 

Three months

 

Three months

 



 

in Impaired

 

Impaired Loans

 

Allowance

 

ended

 

ended

 



 

Loans and

 

and

 

for Credit

 

March 31,

 

March 31,

 



 

Accruing TDRs

 

Accruing TDRs

 

Losses

 

2017

 

2017

 



 

(In thousands)

With no related allowance:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$              6,801 

 

$             12,021 

 

$                  - 

 

$          12,584 

 

$              111 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

1,270 

 

1,670 

 

 -

 

1,302 

 

 -

 

Home equity

 

266 

 

381 

 

 -

 

470 

 

 

Agricultural

 

3,592 

 

3,650 

 

 -

 

1,794 

 

 

Commercial and industrial-owner occupied

 

7,464 

 

8,293 

 

 -

 

7,447 

 

37 

 

Construction, acquisition and development

 

250 

 

250 

 

 -

 

1,706 

 

 -

 

Commercial real estate

 

2,382 

 

2,382 

 

 -

 

4,307 

 

24 

 

All other

 

 -

 

 -

 

 -

 

 -

 

 -

 

   Total

 

$            22,025 

 

$             28,647 

 

$                  - 

 

$          29,610 

 

$              178 

 

With an allowance:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$              5,368 

 

$               5,387 

 

$           3,544 

 

$            5,138 

 

$                13 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

1,654 

 

1,858 

 

299 

 

2,670 

 

16 

 

Home equity

 

721 

 

1,359 

 

41 

 

486 

 

 -

 

Agricultural

 

348 

 

360 

 

26 

 

170 

 

 

Commercial and industrial-owner occupied

 

7,525 

 

8,951 

 

478 

 

8,106 

 

44 

 

Construction, acquisition and development

 

261 

 

261 

 

41 

 

366 

 

 

Commercial real estate

 

9,755 

 

9,755 

 

2,339 

 

12,130 

 

32 

 

Credit card

 

821 

 

821 

 

49 

 

851 

 

85 

 

All other

 

217 

 

240 

 

33 

 

1,921 

 

19 

 

   Total

 

$            26,670 

 

$             28,992 

 

$           6,850 

 

$          31,838 

 

$              212 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$            12,169 

 

$             17,408 

 

$           3,544 

 

$          17,722 

 

$              124 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

2,924 

 

3,528 

 

299 

 

3,972 

 

16 

 

Home equity

 

987 

 

1,740 

 

41 

 

956 

 

 

Agricultural

 

3,940 

 

4,010 

 

26 

 

1,964 

 

 

Commercial and industrial-owner occupied

 

14,989 

 

17,244 

 

478 

 

15,553 

 

81 

 

Construction, acquisition and development

 

511 

 

511 

 

41 

 

2,072 

 

 

Commercial real estate

 

12,137 

 

12,137 

 

2,339 

 

16,437 

 

56 

 

Credit card

 

821 

 

821 

 

49 

 

851 

 

85 

 

All other

 

217 

 

240 

 

33 

 

1,921 

 

19 

 

   Total

 

$            48,695 

 

$             57,639 

 

$           6,850 

 

$          61,448 

 

$              390 

 









15

 


 





 

 

 

 

 

 

 

 

 

 

 



December 31, 2016

 



 

Recorded

 

Unpaid Principal

 

 

 

 

 

 

 



 

Investment

 

Balance of

 

Related

 

 

 

 

 



 

in Impaired

 

Impaired Loans

 

Allowance

 

Average

 

Interest

 



 

Loans and

 

and

 

for Credit

 

Recorded

 

Income

 



 

Accruing TDRs

 

Accruing TDRs

 

Losses

 

Investment

 

Recognized

 



 

(In thousands)

 

With no related allowance:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$            6,222

 

$           11,856

 

$                -

 

$          6,394

 

$               72

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

1,655 

 

2,305 

 

 -

 

1,851 

 

22 

 

Home equity

 

857 

 

1,600 

 

 -

 

1,176 

 

 

Agricultural

 

861 

 

919 

 

 -

 

440 

 

 

Commercial and industrial-owner occupied

 

8,321 

 

9,520 

 

 -

 

10,314 

 

355 

 

Construction, acquisition and development

 

4,803 

 

4,803 

 

 -

 

5,379 

 

 

Commercial real estate

 

2,646 

 

2,646 

 

 -

 

4,391 

 

94 

 

All other

 

 -

 

 -

 

 -

 

 -

 

 -

 

   Total

 

$          25,365

 

$           33,649

 

$                -

 

$        29,945

 

$             564

 



 

 

 

 

 

 

 

 

 

 

 

With an allowance:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$          12,401

 

$           12,424

 

$        1,938

 

$          4,045

 

$             160

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

2,453 

 

2,734 

 

300 

 

2,241 

 

55 

 

Home equity

 

 

13 

 

 

377 

 

 

Agricultural

 

76 

 

76 

 

 

424 

 

 

Commercial and industrial-owner occupied

 

4,937 

 

5,406 

 

103 

 

4,643 

 

124 

 

Construction, acquisition and development

 

1,373 

 

1,373 

 

47 

 

1,551 

 

35 

 

Commercial real estate

 

16,187 

 

16,400 

 

2,532 

 

12,888 

 

336 

 

Credit cards

 

823 

 

823 

 

58 

 

881 

 

347 

 

All other

 

2,890 

 

2,927 

 

23 

 

1,894 

 

78 

 

   Total

 

$          41,143

 

$           42,176

 

$        5,003

 

$        28,944

 

$          1,140

 



 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$          18,623

 

$           24,280

 

$        1,938

 

$        10,439

 

$             232

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

4,108 

 

5,039 

 

300 

 

4,092 

 

77 

 

Home equity

 

860 

 

1,613 

 

 

1,553 

 

10 

 

Agricultural

 

937 

 

995 

 

 

864 

 

12 

 

Commercial and industrial-owner occupied

 

13,258 

 

14,926 

 

103 

 

14,957 

 

479 

 

Construction, acquisition and development

 

6,176 

 

6,176 

 

47 

 

6,930 

 

39 

 

Commercial real estate

 

18,833 

 

19,046 

 

2,532 

 

17,279 

 

430 

 

Credit cards

 

823 

 

823 

 

58 

 

881 

 

347 

 

All other

 

2,890 

 

2,927 

 

23 

 

1,894 

 

78 

 

   Total

 

$          66,508

 

$           75,825

 

$        5,003

 

$        58,889

 

$          1,704

 



Loans considered impaired under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 310, Receivables (“FASB ASC 310”), are loans greater than $500,000 for which, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement and all loans restructured in a TDR.  The Company’s

16

 


 

recorded investment in loans considered impaired exclusive of accruing TDRs at March 31, 2017 and December 31, 2016 was $41.9 million and $38.2 million, respectively.  At March 31, 2017 and December 31, 2016, $19.9 million and $12.9 million, respectively, of those impaired loans had a valuation allowance of $6.2 million and $4.4 million, respectively.  The remaining balance of impaired loans of $22.0 million and $25.3 million at March 31, 2017 and December 31, 2016, respectively, have sufficient collateral supporting the collection of all outstanding principle or were charged down to fair value, less estimated selling costs. Therefore, such loans did not have an associated valuation allowance.  Impaired loans that were characterized as non-accruing TDRs totaled $11.6 million and $12.6 million at March 31, 2017 and December 31, 2016, respectively. 

Non-performing loans and leases (“NPLs”) consist of non-accrual loans and leases, loans and leases 90 days or more past due and still accruing, and loans and leases that have been restructured because of the borrower’s weakened financial condition.  The following table presents information concerning NPLs as of the dates indicated:





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2017

 

2016

 

2016



(In thousands)



 

 

 

 

 

 

Non-accrual loans and leases

 

$        74,439

 

$        81,926

 

$         71,812

Loans and leases 90 days or more past due, still accruing

 

3,063 

 

4,567 

 

3,983 

Restructured loans and leases still accruing

 

4,060 

 

7,753 

 

26,047 

Total non-performing loans and leases

 

$        81,562

 

$        94,246

 

$       101,842



The Bank’s policy for all loan classifications provides that loans and leases are generally placed in non-accrual status if, in management’s opinion, payment in full of principal or interest is not expected or payment of principal or interest is more than 90 days past due, unless such loan or lease is both well-secured and in the process of collection.  At March 31, 2017, the Company’s geographic NPL distribution was concentrated primarily in its Arkansas, Mississippi and Missouri markets.  The following table presents the Company’s nonaccrual loans and leases by segment and class as of the dates indicated:







 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2017

 

2016

 

2016



 

(In thousands)

Commercial and industrial

 

$       13,959

 

$     10,248

 

$         13,679

Real estate

 

 

 

 

 

 

Consumer mortgages

 

21,543 

 

22,968 

 

21,084 

Home equity

 

3,157 

 

3,564 

 

3,817 

Agricultural

 

5,180 

 

932 

 

1,546 

Commercial and industrial-owner occupied

 

15,135 

 

16,633 

 

10,791 

Construction, acquisition and development

 

1,466 

 

7,720 

 

7,022 

Commercial real estate

 

13,638 

 

19,417 

 

13,402 

Credit cards

 

87 

 

188 

 

161 

All other

 

274 

 

256 

 

310 

    Total

 

$       74,439

 

$     81,926

 

$         71,812



In the normal course of business, management will sometimes grant concessions, which would not otherwise be considered, to borrowers that are experiencing financial difficulty.  Loans identified as meeting the criteria set out in FASB ASC 310 are identified as TDRs.  The concessions granted most frequently for TDRs involve reductions or delays in required payments of principal and interest for a specified period or the rescheduling of payments in accordance with a bankruptcy plan.  In most cases, the conditions of the credit also warrant nonaccrual status, even after the restructure occurs.  Other conditions that warrant a loan being considered a TDR include reductions in interest rates to below market rates due to bankruptcy plans or by the bank in an attempt to assist the borrower in working through liquidity problems.  As part of the credit approval process, the restructured loans are evaluated for adequate collateral protection in determining the appropriate accrual status at the time of restructure.  TDRs recorded as nonaccrual loans may generally be returned to accrual status in years after the

17

 


 

restructure if there has been at least a six-month period of sustained repayment performance by the borrower in accordance with the terms of the restructured loan.  During the first quarter of 2017, the most common concessions that were granted involved rescheduling payments of principal and interest over a longer amortization period, granting a period of reduced principal payment or interest only payment for a limited time period, or the rescheduling of payments in accordance with a bankruptcy plan.

The following tables summarize the financial effect of TDRs recorded during the periods indicated:









 

 

 

 

 

 



 

 

 

 

 

 



 

Three months ended March 31, 2017



 

 

 

Pre-Modification

 

Post-Modification



 

Number

 

Outstanding

 

Outstanding



 

of

 

Recorded

 

Recorded



 

Contracts

 

Investment

 

Investment



 

(Dollars in thousands)

Commercial and industrial

 

 

$                       22 

 

$                         18 

Real estate

 

 

 

 

 

 

  Consumer mortgages

 

 

230 

 

230 

Home equity

 

 

134 

 

134 

  Commercial and industrial-owner occupied

 

 

260 

 

257 

All other

 

 

58 

 

53 

    Total

 

14 

 

$                     704 

 

$                       692 











 

 

 

 

 

 



 

 

 

 

 

 



 

Year ended December 31, 2016



 

 

 

Pre-Modification

 

Post-Modification



 

Number

 

Outstanding

 

Outstanding



 

of

 

Recorded

 

Recorded



 

Contracts

 

Investment

 

Investment



 

(Dollars in thousands)

Commercial and industrial

 

25 

 

$                 14,469 

 

$                   14,305 

Real estate

 

 

 

 

 

 

Consumer mortgages

 

16 

 

1,429 

 

1,354 

Home equity

 

 

 

Agricultural

 

 

79 

 

79 

Commercial and industrial-owner occupied

 

10 

 

4,344 

 

4,331 

Commercial real estate

 

 

8,931 

 

6,702 

All other

 

 

3,622 

 

3,608 

Total

 

67 

 

$                 32,877 

 

$                   30,382 



 

 

 

 

 

 



18

 


 

The tables below summarize TDRs within the previous 12 months for which there was a payment default during the period indicated (i.e., 30 days or more past due at any given time during the period indicated).









 

 

 

 



 

 

 

 



 

Three months ended March 31, 2017



 

Number of

 

Recorded



 

Contracts

 

Investment



 

(Dollars in thousands)

Commercial and industrial

 

 

$                           16

Real estate

 

 

 

 

  Consumer mortgages

 

 

391 

  Commercial and industrial-owner occupied

 

 

406 

    Total

 

 

$                         813













 

 

 

 



 

 

 

 



 

Year ended December 31, 2016



 

Number of

 

Recorded



 

Contracts

 

Investment



 

(Dollars in thousands)

Commercial and industrial

 

 

$                      3,804

Real estate

 

 

 

 

  Consumer mortgages

 

 

597 

  Commercial and industrial-owner occupied

 

 

532 

  Construction, acquisition and development

 

 

14 

  Commercial real estate

 

 

9,336 

All other

 

 

20 

    Total

 

21 

 

$                    14,303





NOTE 3 – ALLOWANCE FOR CREDIT LOSSES



The following tables summarize the changes in the allowance for credit losses by segment and class for the periods indicated:











 

 

 

 

 

 

 

 

 

 



 

Three months ended



 

March 31, 2017



 

Balance,

 

 

 

 

 

 

 

Balance,



 

Beginning of

 

 

 

 

 

 

 

End of



 

Period

 

Charge-offs

 

Recoveries

 

Provision

 

Period



 

(In thousands)

Commercial and industrial

 

$        19,170

 

$             (384)

 

$           490

 

$       1,291

 

$      20,567

Real estate

 

 

 

 

 

 

 

 

 

 

 Consumer mortgages

 

30,386 

 

(596)

 

625 

 

1,340 

 

31,755 

 Home equity

 

7,174 

 

(459)

 

356 

 

(39)

 

7,032 

 Agricultural

 

2,172 

 

(44)

 

41 

 

109 

 

2,278 

 Commercial and industrial-owner occupied

 

12,899 

 

(404)

 

193 

 

1,178 

 

13,866 

 Construction, acquisition and development

 

13,957 

 

(30)

 

1,324 

 

(1,766)

 

13,485 

 Commercial real estate

 

24,845 

 

(19)

 

69 

 

767 

 

25,662 

Credit cards

 

7,787 

 

(838)

 

249 

 

(1,032)

 

6,166 

All other

 

5,346 

 

(559)

 

446 

 

(848)

 

4,385 

   Total

 

$      123,736

 

$          (3,333)

 

$        3,793

 

$       1,000

 

$    125,196





19

 


 



 

 

 

 

 

 

 

 

 

 



 

Year ended



 

December 31, 2016



 

Balance,

 

 

 

 

 

 

 

Balance,



 

Beginning of

 

 

 

 

 

 

 

End of



 

Period

 

Charge-offs

 

Recoveries

 

Provision

 

Period



 

(In thousands)

Commercial and industrial

 

$        17,583

 

$          (4,551)

 

$        1,833

 

$       4,305

 

$      19,170

Real estate

 

 

 

 

 

 

 

 

 

 

 Consumer mortgages

 

33,198 

 

(2,687)

 

1,694 

 

(1,819)

 

30,386 

 Home equity

 

6,949 

 

(1,884)

 

506 

 

1,603 

 

7,174 

 Agricultural

 

2,524 

 

(110)

 

175 

 

(417)

 

2,172 

 Commercial and industrial-owner occupied

 

14,607 

 

(1,095)

 

544 

 

(1,157)

 

12,899 

 Construction, acquisition and development

 

15,925 

 

(521)

 

1,373 

 

(2,820)

 

13,957 

 Commercial real estate

 

25,508 

 

(1,129)

 

2,411 

 

(1,945)

 

24,845 

Credit cards

 

4,047 

 

(2,845)

 

850 

 

5,735 

 

7,787 

All other

 

6,117 

 

(2,197)

 

911 

 

515 

 

5,346 

   Total

 

$      126,458

 

$        (17,019)

 

$      10,297

 

$       4,000

 

$    123,736







 

 

 

 

 

 

 

 

 

 



 

Three months ended



 

March 31, 2016



 

Balance,

 

 

 

 

 

 

 

Balance,



 

Beginning of

 

 

 

 

 

 

 

End of



 

Period

 

Charge-offs

 

Recoveries

 

Provision

 

Period



 

(In thousands)

Commercial and industrial

 

$        17,583

 

$             (140)

 

$           212

 

$       1,625

 

$      19,280

Real estate

 

 

 

 

 

 

 

 

 

 

 Consumer mortgages

 

33,198 

 

(710)

 

455 

 

403 

 

33,346 

 Home equity

 

6,949 

 

(550)

 

80 

 

554 

 

7,033 

 Agricultural

 

2,524 

 

(11)

 

36 

 

(148)

 

2,401 

 Commercial and industrial-owner occupied

 

14,607 

 

(154)

 

125 

 

171 

 

14,749 

 Construction, acquisition and development

 

15,925 

 

(226)

 

272 

 

(1,307)

 

14,664 

 Commercial real estate

 

25,508 

 

(245)

 

683 

 

(533)

 

25,413 

Credit cards

 

4,047 

 

(720)

 

181 

 

(268)

 

3,240 

All other

 

6,117 

 

(487)

 

247 

 

503 

 

6,380 

   Total

 

$      126,458

 

$          (3,243)

 

$        2,291

 

$       1,000

 

$    126,506



The following tables provide the allowance for credit losses by segment, class and impairment status as of the dates indicated::

20

 


 









 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

March 31, 2017



 

Recorded

 

Allowance for

 

Allowance for

 

 



 

Balance of

 

Impaired Loans

 

All Other Loans

 

Total



 

Impaired Loans (1)

 

and Leases

 

and Leases

 

Allowance



 

(In thousands)

Commercial and industrial

 

$                 11,838

 

$              3,482

 

$             17,085

 

$        20,567

Real estate

 

 

 

 

 

 

 

 

Consumer mortgages

 

1,276 

 

 

31,748 

 

31,755 

Home equity

 

854 

 

30 

 

7,002 

 

7,032 

Agricultural

 

3,592 

 

 -

 

2,278 

 

2,278 

Commercial and industrial-owner occupied

 

12,047 

 

352 

 

13,514 

 

13,866 

Construction, acquisition and development

 

277 

 

30 

 

13,455 

 

13,485 

Commercial real estate

 

12,013 

 

2,329 

 

23,333 

 

25,662 

Credit cards

 

 -

 

 -

 

6,166 

 

6,166 

All other

 

 -

 

 -

 

4,385 

 

4,385 

Total

 

$                 41,897

 

$              6,230

 

$           118,966

 

$      125,196

(1)

Impaired loans are shown exclusive of accruing TDRs and $2.7 million of non-accruing TDRs





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

December 31, 2016



 

Recorded

 

Allowance for

 

Allowance for

 

 



 

Balance of

 

Impaired Loans

 

All Other Loans

 

Total



 

Impaired Loans (1)

 

and Leases

 

and Leases

 

Allowance



 

(In thousands)

Commercial and industrial

 

$                  8,314

 

$              1,837

 

$             17,333

 

$        19,170

Real estate

 

 

 

 

 

 

 

 

Consumer mortgages

 

1,655 

 

 -

 

30,386 

 

30,386 

Home equity

 

857 

 

 -

 

7,174 

 

7,174 

Agricultural

 

861 

 

 -

 

2,172 

 

2,172 

Commercial and industrial-owner occupied

 

8,321 

 

 -

 

12,899 

 

12,899 

Construction, acquisition and development

 

5,933 

 

35 

 

13,922 

 

13,957 

Commercial real estate

 

12,296 

 

2,481 

 

22,364 

 

24,845 

Credit cards

 

 -

 

 -

 

7,787 

 

7,787 

All other

 

 -

 

 -

 

5,346 

 

5,346 

Total

 

$                38,237

 

$              4,353

 

$           119,383

 

$      123,736



 (1) Impaired loans are shown exclusive of accruing TDRs and $2.2 million of non-accruing TDRs



Management evaluates impaired loans individually in determining the adequacy of the allowance for impaired loans.  As a result of the Company individually evaluating loans of $500,000 or greater for impairment, further review of remaining loans collectively, as well as the corresponding potential allowance, would be immaterial in the opinion of management.

21

 


 

NOTE 4 – OTHER REAL ESTATE OWNED



The following table presents the activity in other real estate owned (“OREO”) for the periods indicated:



 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

 

 

 



 

Three months ended

 

Year ended



 

March 31,

 

December 31,



 

2017

 

2016

 

2016



 

(In thousands)

Balance at beginning of period

 

$          7,810

 

$     14,759

 

$           14,759

Additions to foreclosed properties

 

 

 

 

 

 

New foreclosed properties

 

2,266 

 

1,359 

 

9,752 

Reductions in foreclosed properties

 

 

 

 

 

 

Sales including realized gains and losses, net

 

(989)

 

(2,837)

 

(14,183)

Writedowns for unrealized losses

 

(629)

 

(596)

 

(2,518)

Balance at end of period

 

$          8,458

 

$     12,685

 

$             7,810



The following tables present the OREO by segment and class as of the dates indicated:





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2017

 

2016

 

2016



(In thousands)

Commercial and industrial

 

$                  -

 

$             74

 

$                 -

Real estate

 

 

 

 

 

 

Consumer mortgages

 

2,005 

 

1,697 

 

857 

Home equity

 

39 

 

594 

 

39 

Agricultural

 

22 

 

25 

 

22 

Commercial and industrial-owner occupied

 

2,060 

 

1,051 

 

1,958 

Construction, acquisition and development

 

3,068 

 

8,546 

 

3,746 

Commercial real estate

 

1,159 

 

466 

 

1,128 

All other

 

105 

 

232 

 

60 

Total

 

$          8,458

 

$      12,685

 

$          7,810



The Company incurred total foreclosed property expenses of approximately $1.1 million and $1.2 million for the three months ended March 31, 2017 and 2016, respectively.  Realized net losses on dispositions and holding losses on valuations of these properties, a component of total foreclosed property expenses, were approximately $632,000 and $843,000 for the three months ended March 31, 2017 and 2016, respectively.  





NOTE 5 – SECURITIES



A comparison of amortized cost and estimated fair values of available-for-sale securities as of March 31, 2017 and 2016, respectively, and December 31, 2016 follows:

22

 


 





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

March 31, 2017



 

 

 

Gross

 

Gross

 

Estimated



 

Amortized

 

Unrealized

 

Unrealized

 

Fair



 

Cost

 

Gains

 

Losses

 

Value



(In thousands)

U.S. Government agencies

 

$   1,823,294

 

$           861

 

$        5,975

 

$   1,818,180

U.S. Government agency issued residential mortgage-backed securities

 

167,986 

 

1,389 

 

1,833 

 

167,542 

U.S. Government agency issued commercial mortgage-backed securities

 

169,996 

 

1,510 

 

1,424 

 

170,082 

Obligations of states and political subdivisions

 

337,595 

 

16,193 

 

1,464 

 

352,324 

FHLB and other securities

 

32,531 

 

228 

 

 -

 

32,759 

Total

 

$   2,531,402

 

$      20,181

 

$      10,696

 

$   2,540,887







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

December 31, 2016



 

 

 

Gross

 

Gross

 

Estimated



 

Amortized

 

Unrealized

 

Unrealized

 

Fair



 

Cost

 

Gains

 

Losses

 

Value



(In thousands)

U.S. Government agencies

 

$   1,794,231

 

$        1,261

 

$        6,065

 

$   1,789,427

U.S. Government agency issued residential  mortgage-backed securities

 

176,476 

 

1,665 

 

1,898 

 

176,243 

U.S. Government agency issued commercial mortgage-backed securities

 

171,840 

 

1,648 

 

1,209 

 

172,279 

Obligations of states and political subdivisions

 

346,609 

 

15,547 

 

2,151 

 

360,005 

FHLB and other securities

 

32,436 

 

1,286 

 

 -

 

33,722 

Total

 

$   2,521,592

 

$      21,407

 

$      11,323

 

$   2,531,676







 

 

 

 

 

 

 

 



 

March 31, 2016



 

 

 

Gross

 

Gross

 

Estimated



 

Amortized

 

Unrealized

 

Unrealized

 

Fair



 

Cost

 

Gains

 

Losses

 

Value



 

(In thousands)

U.S. Government agencies

 

$   1,190,199

 

$        5,974

 

$               6

 

$   1,196,167

U.S. Government agency issued residential mortgage-backed securities

 

187,410 

 

2,582 

 

251 

 

189,741 

U.S. Government agency issued commercial mortgage-backed securities

 

204,246 

 

3,719 

 

57 

 

207,908 

Obligations of states and political subdivisions

 

384,326 

 

24,219 

 

 

408,537 

FHLB and other securities

 

13,142 

 

878 

 

 -

 

14,020 

Total

 

$   1,979,323

 

$      37,372

 

$           322

 

$   2,016,373



Gross gains of $1.1 million and no gross losses were recognized on available-for-sale securities during the first three months of 2017.  Gross gains of approximately $2,000 and no gross losses were recognized on available-for-sale securities during the first three months of 2016.

At March 31, 2017, the Company’ available-for-sale securities included FHLB stock with a carrying value of $32.4 million compared to a required investment of $27.2 million.  At March 31, 2016, the Company’ available-

23

 


 

for-sale securities included FHLB stock with a carrying value of $13.0 million compared to a required investment of $6.5 million. 

The amortized cost and estimated fair value of available-for-sale securities at March 31, 2017 by contractual maturity are shown below.  Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Equity securities are considered as maturing after ten years.



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

March 31, 2017



 

 

 

Estimated

 

Weighted



 

Amortized

 

Fair

 

Average



 

Cost

 

Value

 

Yield



 

(Dollars in thousands)

Maturing in one year or less

 

$      569,032

 

$      569,120

 

1.05 

%

Maturing after one year through five years

 

1,347,399 

 

1,341,746 

 

1.37 

 

Maturing after five years through ten years

 

45,459 

 

47,804 

 

5.90 

 

Maturing after ten years

 

231,530 

 

244,593 

 

5.47 

 

Mortgage-backed securities

 

337,982 

 

337,624 

 

2.18 

 

Total

 

$   2,531,402

 

$   2,540,887

 

 

 



The following tables summarize information pertaining to temporarily impaired available-for-sale securities with continuous unrealized loss positions at March 31, 2017 and December 31, 2016:



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



March 31, 2017



Continuous Unrealized Loss Position

 

 

 

 



Less Than 12 Months

 

12 Months or Longer

 

Total



Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized



Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses



 

 

 

 

 

 

 

 

 

 

 



(In thousands)

U.S. Government agencies

$  1,319,456

 

$        5,975

 

$                -

 

$                -

 

$  1,319,456

 

$        5,975

U.S. Government agency issued residential mortgage-backed securities

88,596 

 

1,751 

 

5,578 

 

82 

 

94,174 

 

1,833 

U.S. Government agency issued commercial mortgage-backed securities

128,763 

 

1,295 

 

13,662 

 

129 

 

142,425 

 

1,424 

Obligations of states and political subdivisions

25,727 

 

1,464 

 

 -

 

 -

 

25,727 

 

1,464 

Total

$  1,562,542

 

$      10,485

 

$      19,240

 

$           211

 

$  1,581,782

 

$      10,696



24

 


 







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



December 31, 2016



Continuous Unrealized Loss Position

 

 

 

 



Less Than 12 Months

 

12 Months or Longer

 

Total



Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized



Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses



 

 

 

 

 

 

 

 

 

 

 



(In thousands)

U.S. Government agencies

$  1,082,573

 

$        6,065

 

$                -

 

$                -

 

$  1,082,573

 

$        6,065

U.S. Government agency issued residential mortgage-backed securities

71,599 

 

1,783 

 

15,375 

 

115 

 

86,974 

 

1,898 

U.S. Government agency issued commercial mortgage-backed securities

129,940 

 

1,084 

 

14,385 

 

125 

 

144,325 

 

1,209 

Obligations of states and political subdivisions

46,798 

 

2,151 

 

 -

 

 -

 

46,798 

 

2,151 

Total

$  1,330,910

 

$      11,083

 

$      29,760

 

$           240

 

$  1,360,670

 

$      11,323



Based upon a review of the credit quality of these securities, and considering that the issuers were in compliance with the terms of the securities, management has no intent to sell these securities until the full recovery of unrealized losses, which may be until maturity, and it was more likely than not that the Company would not be required to sell the securities prior to recovery of costs. Therefore, the impairments related to these securities were determined to be temporary.  No other-than-temporary impairment was recorded during the first three months of 2017 or 2016.



NOTE 6 – PER SHARE DATA



Basic earnings per share (“EPS”) are calculated using the two-class method.  The two-class method provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of basic EPS.  Diluted EPS is computed using the weighted-average number of shares determined for the basic EPS computation plus the shares resulting from the assumed exercise of all outstanding share-based awards using the treasury stock method.  There were no weighted-average antidilutive stock options to purchase of Company common stock for the three months ended March 31, 2017 to be excluded from diluted shares.  Antidilutive other equity awards of approximately 26,700 shares of Company common stock for the three months ended March 31, 2017 were excluded from diluted shares. Weighted-average antidilutive stock options to purchase approximately 169,100 of Company common stock with a weighted average exercise price of $23.35 per share for the three months ended March 31, 2016 were excluded from diluted shares. Antidilutive other equity awards of approximately 32,200 shares of Company common stock for the three months ended March 31, 2016 were excluded from diluted shares. 

The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the periods shown:

25

 


 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended March 31,



 

2017

 

2016



 

Income

 

Shares

 

Per Share

 

Income

 

Shares

 

Per Share



 

(Numerator)

 

(Denominator)

 

Amount

 

(Numerator)

 

(Denominator)

 

Amount

Basic EPS

(In thousands, except per share amounts)

Income available to common

 

 

 

 

 

 

 

 

 

 

 

 

shareholders

 

$       38,093 

 

93,643 

 

$            0.41 

 

$       22,549 

 

94,369 

 

$       0.24 

Effect of dilutive share-

 

 

 

 

 

 

 

 

 

 

 

 

based awards

 

               -

 

186 

 

 

 

               -

 

225 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common

 

 

 

 

 

 

 

 

 

 

 

 

shareholders plus assumed

 

 

 

 

 

 

 

 

 

 

 

 

exercise of all outstanding

 

 

 

 

 

 

 

 

 

 

 

 

share-based awards

 

$       38,093 

 

93,829 

 

$            0.41 

 

$       22,549 

 

94,594 

 

$       0.24 







NOTE 7 – COMPREHENSIVE INCOME 



The following tables present the components of other comprehensive (loss) income and the related tax effects allocated to each component for the periods indicated:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended March 31,



 

2017

 

2016



 

Before

 

 

 

Net

 

Before

 

 

 

Net



 

tax

 

Tax

 

of tax

 

tax

 

Tax

 

of tax



 

amount

 

effect

 

amount

 

amount

 

effect

 

amount

Net unrealized gains on available-for-

 

(In thousands)

sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains arising during

 

 

 

 

 

 

 

 

 

 

 

 

holding period

 

$         474 

 

$        (183)

 

$              291 

 

$    14,169 

 

$     (5,420)

 

$      8,749 

Reclassification adjustment for

 

 

 

 

 

 

 

 

 

 

 

 

net gains realized in net income (1)

 

(1,071)

 

410 

 

(661)

 

(2)

 

 

(1)

Recognized employee benefit plan

 

 

 

 

 

 

 

 

 

 

 

 

net periodic benefit cost (2)

 

1,533 

 

(586)

 

947 

 

1,511 

 

(578)

 

933 

Other comprehensive income

 

$         936 

 

$        (359)

 

$              577 

 

$    15,678 

 

$     (5,997)

 

$      9,681 

Net income

 

 

 

 

 

38,093 

 

 

 

 

 

22,549 

Comprehensive  income

 

 

 

 

 

$         38,670 

 

 

 

 

 

$    32,230 





(1)  Reclassification adjustments for net gains (losses) on available-for-sale securities are reported as net security gains on the consolidated statements of income.

(2)  Recognized employee benefit plan net periodic benefit cost include recognized prior service cost and recognized net loss.  For more information, see Note 9 - Pension Benefits.

26

 


 



NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS



The carrying amounts of goodwill by operating segment for the three months ended March 31, 2017 were as follows:





 

 

 

 

 

 



 

 

 

 

 

 



 

Community

 

Insurance

 

 



 

Banking

 

Agencies

 

Total



 

(In thousands)

Balance as of December 31, 2016

 

$      217,618

 

$     83,180

 

$     300,798

Goodwill recorded during the period

 

 -

 

 -

 

 -

Balance as of March 31, 2017

 

$      217,618

 

$     83,180

 

$     300,798



The Company’s policy is to assess goodwill for impairment at the reporting segment level on an annual basis or sooner if an event occurs or circumstances change which indicate that the fair value of a reporting segment is below its carrying amount.  Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value.  Accounting standards require management to estimate the fair value of each reporting segment in assessing impairment at least annually.  The Company’s annual assessment date is during the Company’s fourth quarter.  No events occurred during the first three months of 2017 that indicated the necessity of an earlier goodwill impairment assessment.   

In the current economic environment, forecasting cash flows, credit losses and growth in addition to valuing the Company’s assets with any degree of assurance is very difficult and subject to significant changes over very short periods of time.  Management will continue to update its analysis as circumstances change.  As market conditions continue to be volatile and unpredictable, impairment of goodwill related to the Company’s reporting segments may be necessary in future periods.

The following tables present information regarding the components of the Company’s identifiable intangible assets for the dates and periods indicated: 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

As of

 

As of



 

March 31, 2017

 

December 31, 2016



 

Gross Carrying

 

Accumulated

 

Gross Carrying

 

Accumulated



 

Amount

 

Amortization

 

Amount

 

Amortization

Amortized intangible assets:

 

(In thousands)

Core deposit intangibles

 

$          27,801

 

$          23,829

 

$          27,801

 

$          23,721

Customer relationship intangibles

 

45,758 

 

$          30,406

 

46,568 

 

30,406 

Non-solicitation intangibles

 

1,650 

 

$               798

 

1,850 

 

886 

Total

 

$          75,209

 

$          55,033

 

$          76,219

 

$          55,013



 

 

 

 

 

 

 

 

Unamortized intangible assets:

 

 

 

 

 

 

 

 

Trade names

 

$               688

 

$                    -

 

$               688

 

$                    -



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Three months ended

 

 

 

 



 

March 31,

 

 

 

 



 

2017

 

2016

 

 

 

 



 

 

 

 

 

 

 

 

Aggregate amortization expense for:

 

(In thousands)

 

 

 

 

Core deposit intangibles

 

$              108

 

$              117

 

 

 

 

Customer relationship intangibles

 

810 

 

638 

 

 

 

 

Non-solicitation intangibles

 

112 

 

125 

 

 

 

 

Total

 

$           1,030

 

$              880

 

 

 

 



The following table presents information regarding estimated amortization expense on the Company’s amortizable identifiable intangible assets for the year ending December 31, 2017 and the succeeding four years:





27

 


 



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

 

Customer

 

Non-

 

 



 

Core Deposit

 

Relationship

 

Solicitation

 

 



 

Intangibles

 

Intangibles

 

Intangibles

 

Total



 

 

 

 

 

 

 

 

Estimated Amortization Expense:

 

(In thousands)

For the year ending December 31, 2017

 

$              419

 

$           3,147

 

$              448

 

$           4,014

For the year ending December 31, 2018

 

390 

 

2,696 

 

419 

 

3,505 

For the year ending December 31, 2019

 

363 

 

2,330 

 

97 

 

2,790 

For the year ending December 31, 2020

 

340 

 

2,014 

 

 -

 

2,354 

For the year ending December 31, 2021

 

251 

 

1,591 

 

 -

 

1,842 





NOTE 9 – PENSION BENEFITS



The following table presents the components of net periodic benefit costs for the periods indicated:







 

 

 

 

 



 

Three months ended

 



 

March 31,

 



 

2017

 

2016

 



 

(In thousands)

Service cost

 

$    1,532

 

$    2,213

 

Interest cost

 

2,294 

 

2,341 

 

Expected return on assets

 

(2,953)

 

(2,613)

 

Recognized prior service cost

 

(186)

 

(179)

 

Recognized net loss

 

1,719 

 

1,690 

 

Net periodic benefit costs

 

$    2,406

 

$    3,452

 







NOTE 10 – RECENT PRONOUNCEMENTS



In September 2014, the FASB issued an ASU regarding accounting for revenue from contracts with customers. This ASU implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i)identify the contract(s)with a customer, (ii)identify the performance obligations in the contract, (iii)determine the transaction price, (iv)allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as)the entity satisfies a performance obligation. ASU 2014-09 was originally going to be effective on January 1, 2017; however, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606)–Deferral of the Effective Date" which deferred the effective date of ASU 2014-09 by one year to January 1, 2018. The Company is continuing to evaluate the impact of ASU 2014-09 on the financial statements as well as the most appropriate transition method of application.  Based on this evaluation to date, the Company does not believe the adoption of the ASU will have a material impact on the financial position and results of operations of the Company.

In February 2016, the FASB issued an ASU regarding accounting for leases. ASU 2016-02 requires all leases, except short-term leases, to be recognized on the lessee’s balance sheet at commencement date as a lease liability for the obligation of lease payments and a right-of-use asset for the right to use/control a specified asset for the lease term. This ASU is effective for interim and annual periods beginning after December 15, 2018.  This ASU is not expected to have a material impact on the financial position and results of operations of the Company.

In March 2016, the FASB issued an ASU regarding stock compensation and improvements to employee share-based payment accounting.  This ASU changes five aspects of the accounting for share-based payment award transactions including 1) accounting for income taxes; 2) classification of excess tax benefits on the statement of cash flows; 3) forfeitures; 4) minimum statutory tax withholding requirements; 5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes.  Effective

28

 


 

January 1, 2017, the Company adopted provisions of this ASU which makes several revisions to equity compensation accounting.  Under the new guidance all excess tax benefits and deficiencies that occur when an award vests, is exercised, or expires are recognized in income tax expense as discrete period items.  Previously, these transactions were typically recorded directly within equity.  Consistent with this change, excess tax benefits and deficiencies are no longer included within estimated proceeds when performing the calculation for diluted earnings per share.  The presentation of excess tax benefits in the statement of cash flows shifted to an operating activity from the prior classification as a financing activity.

ASU 2016-09 also provides an accounting policy election to recognize forfeitures of awards as they occur when estimating stock-based compensation expense rather than the previous requirement to estimate forfeitures from inception.  Transition to the new guidance was accomplished through a combination of retrospective, cumulative-effect adjustment to equity and prospective methodologies.  The Company estimates, based on currently enacted tax rates, that adoption of ASU 2016-09 in 2017 will result in an incremental effect on tax provision ranging from approximately $218,000 to approximately $865,000 of tax benefit.  The actual effects of adoption in 2017 will primarily depend upon the share price of the Company’ stock, which affects the vesting of certain performance awards, probability of exercise of certain stock options and the magnitude of windfalls for all awards upon either vesting or exercise.  The effects on earnings per share calculations and election to account for forfeitures as incurred have not been significant.

In June 2016, the FASB issued an ASU regarding credit losses on financial instruments.  This ASU will provide financial statement users with more information regarding the expected credit losses on financial instruments and other commitments to extend credit at each reporting date rather than the incurred loss impairment method. This ASU is effective for interim and annual periods after December 15, 2019. The Company is currently evaluating the potential impact of this ASU on the financial statements.

In August 2016, the FASB issued an ASU regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  The update addresses eight specific cash flow items whose objective is to reduce existing diversity in practice.  This ASU is effective for interim and annual periods after December 15, 2017.  The adoption of this ASU is not expected to have a material impact on the financial position and results of operations of the Company.

In January 2017, the FASB issued an ASU regarding how goodwill is tested annually.  This ASU will simplify the measurement of goodwill which will reduce cost and complexity of the evaluating process.  This ASU is effective beginning after December 15, 2019.  The adoption of this ASU will not have a material impact on the financial position and results of the Company.







NOTE 11 - SEGMENT REPORTING



The Company is a financial holding company with subsidiaries engaged in the business of banking and activities closely related to banking.  The Company determines reportable segments based upon the services offered, the significance of those services to the Company's financial condition and operating results and management's regular review of the operating results of those services.  The Company's primary segment is the Banking Services Group, which includes providing a full range of deposit products, commercial loans and consumer loans.  The Company has also designated four additional reportable segments --Mortgage, Insurance Agencies, Wealth Management, and General Corporate and Other.  The Company’s Mortgage segment includes the mortgage banking activities of originating mortgage loans, selling mortgage loans in the secondary market and servicing the mortgage loans that are sold on a servicing retained basis.  The Company's insurance agencies serve as agents in the sale of commercial lines of insurance and full lines of property and casualty, life, health and employee benefits products and services.  The Wealth Management segment offers individuals, businesses, governmental institutions and non-profit entities a wide range of solutions to help protect, grow and transfer wealth.  Offerings include credit related products, trust and investment management, asset management, retirement and savings solutions, estate planning and annuity products.  The General Corporate and Other segment includes other activities not allocated to Banking Services Group, Mortgage, Insurance Agencies or Wealth Management segments. 

Results of operations and selected financial information by segment for the three-month period ended March 31, 2017 and 2016 were as follows:







 

 

 

 

 

 

 

 

 

 

 

 

29

 


 



 

Banking Services Group

 

Mortgage

 

Insurance Agencies

 

Wealth Management

 

General Corporate and Other

 

Total



 

(In thousands)

Three months ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

Net interest revenue

 

$        111,053

 

$       3,530

 

$           11

 

$                5

 

$                12

 

$        114,611

Provision for credit losses

 

 -

 

 -

 

 -

 

 -

 

1,000 

 

1,000 

Net interest revenue after provision for credit losses

 

111,053 

 

3,530 

 

11 

 

 

(988)

 

113,611 

Noninterest revenue

 

21,877 

 

8,990 

 

33,113 

 

5,617 

 

1,272 

 

70,869 

Noninterest expense

 

75,850 

 

6,862 

 

25,974 

 

3,948 

 

14,475 

 

127,109 

Income before income taxes

 

57,080 

 

5,658 

 

7,150 

 

1,674 

 

(14,191)

 

57,371 

Income tax expense (benefit)

 

19,633 

 

2,098 

 

2,844 

 

620 

 

(5,917)

 

19,278 

Net income

 

37,447 

 

3,560 

 

4,306 

 

1,054 

 

(8,274)

 

38,093 

Selected Financial Information

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at end of period

 

$  11,566,533

 

$   543,022

 

$  216,784

 

$       21,373

 

$    2,518,342

 

$   14,866,054

Depreciation and amortization

 

5,502 

 

152 

 

1,187 

 

26 

 

648 

 

7,515 







 

 

 

 

 

 

 

 

 

 

 

 



 

Banking Services Group

 

Mortgage

 

Insurance Agencies

 

Wealth Management

 

General Corporate and Other

 

Total



 

(In thousands)

Three months ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

Net interest revenue

 

$        108,901

 

$       2,610

 

$           19

 

$                1

 

$             (372)

 

$        111,159

Provision for credit losses

 

 -

 

 -

 

 -

 

 -

 

1,000 

 

1,000 

Net interest revenue after provision for credit losses

 

108,901 

 

2,610 

 

19 

 

 

(1,372)

 

110,159 

Noninterest revenue

 

22,706 

 

1,830 

 

33,364 

 

5,535 

 

1,292 

 

64,727 

Noninterest expense

 

76,906 

 

5,863 

 

25,482 

 

4,099 

 

29,162 

 

141,512 

Income before income taxes

 

54,701 

 

(1,423)

 

7,901 

 

1,437 

 

(29,242)

 

33,374 

Income tax expense (benefit)

 

17,629 

 

(502)

 

3,140 

 

506 

 

(9,948)

 

10,825 

Net income

 

37,072 

 

(921)

 

4,761 

 

931 

 

(19,294)

 

22,549 

Selected Financial Information

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at end of period

 

$  10,749,801

 

$   399,532

 

$  210,535

 

$       15,370

 

$    2,551,160

 

$   13,926,398

Depreciation and amortization

 

5,314 

 

145 

 

1,060 

 

28 

 

640 

 

7,187 



The change in income for the Banking Services Group for the three months ended March 31, 2017 compared to the same periods in 2016 is mainly due to an increase in interest revenue for loans and leases due to the balance increase of net loans and leases.  The change in income for the Mortgage segment for the three months ended March 31, 2017 compared to the same periods in 2016 is a result of the negative MSR adjustment of $8.0 million recorded during the first quarter of 2016 compared to a positive MSR adjustment of $0.9 million recorded during the first quarter of 2017.  The decrease in the loss in the General, Corporate and Other segment when comparing comparable periods is a result of the pre-tax charge of $10.3 million related to a liability associated with

30

 


 

an ongoing regulatory matter recorded during the first quarter of 2016 with no such charge recorded during the first quarter of 2017.



NOTE 12 – MORTGAGE SERVICING RIGHTS



Mortgage servicing rights (“MSRs”), which are recognized as a separate asset on the date the corresponding mortgage loan is sold on a servicing retained basis, are recorded at fair value as determined at each accounting period end.  An estimate of the fair value of the Company’s MSRs is determined utilizing assumptions about factors such as mortgage interest rates, discount rates, mortgage loan prepayment speeds, market trends and industry demand.  Data and assumptions used in the fair value calculation related to MSRs as of the dates indicated were as follows:





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2017

 

2016

 

2016



 

(Dollars in thousands)

Unpaid principal balance

 

$6,429,617 

 

$6,096,220 

 

$6,384,649 

Weighted-average prepayment speed (CPR)

 

9.2 

 

12.5 

 

9.4 

Discount rate (annual percentage)

 

9.8 

 

9.8 

 

9.8 

Weighted-average coupon interest rate (percentage)

 

3.9 

 

4.0 

 

3.9 

Weighted-average remaining maturity (months)

 

323.0 

 

320.0 

 

323.0 

Weighted-average servicing fee (basis points)

 

26.6 

 

26.6 

 

26.7 



Because the valuation is determined by using discounted cash flow models, the primary risk inherent in valuing the MSRs is the impact of fluctuating interest rates on the estimated life of the servicing revenue stream.  The use of different estimates or assumptions could also produce different fair values.  As of March 31, 2017, the Company had a hedge in place designed to cover approximately 6% of the MSR.  The Company is susceptible to fluctuations in their value of its MSRs in changing interest rate environments.

The Company has only one class of mortgage servicing asset comprised of closed end loans for one-to-four family residences, secured by first liens.  The following table presents the activity in this class for the periods indicated:





 

 

 

 



 

 

 

 



 

2017

 

2016



 

(In thousands)

Fair value as of January 1

 

$        65,263

 

$         57,268

Additions:

 

 

 

 

Origination of servicing assets

 

2,866 

 

2,612 

Changes in fair value:

 

 

 

 

Due to payoffs/paydowns

 

(1,876)

 

(1,380)

Due to change in valuation inputs or assumptions

 

 

 

 

used in the valuation model

 

909 

 

(7,954)

Other changes in fair value

 

(1)

 

(2)

Fair value as of March 31

 

$        67,161

 

$         50,544



All of the changes to the fair value of the MSRs are recorded as part of mortgage banking noninterest revenue on the income statement.  As part of mortgage banking noninterest revenue, the Company recorded contractual servicing fees of $4.4 million and $4.0 million and late and other ancillary fees of approximately $389,000 and $745,000 for the three months ended March 31, 2017 and 2016, respectively. 

31

 


 



NOTE 13 – DERIVATIVE INSTRUMENTS AND OFFSETTING ASSETS AND LIABILITIES



The derivatives held by the Company include commitments to fund fixed-rate mortgage loans to customers and forward commitments to sell individual fixed-rate mortgage loans.  The Company’s objective in obtaining the forward commitments is to mitigate the interest rate risk associated with the commitments to fund the fixed-rate mortgage loans.  Both the commitments to fund fixed-rate mortgage loans and the forward commitments to sell individual fixed-rate mortgage loans are reported at fair value, with adjustments being recorded in current period earnings, and are not accounted for as hedges.  At March 31, 2017, the notional amount of forward commitments to sell individual fixed-rate mortgage loans was $212.7 million with a carrying value and fair value reflecting a loss of approximately $804,000.  At March 31, 2016, the notional amount of forward commitments to sell individual fixed-rate mortgage loans was $255.2 million with a carrying value and fair value reflecting a loss of $1.8 million.  At March 31, 2017, the notional amount of commitments to fund individual fixed-rate mortgage loans was $173.1 million with a carrying value and fair value reflecting a gain of $5.6 million.  At March 31, 2016, the notional amount of commitments to fund individual fixed-rate mortgage loans was $216.5 million with a carrying value and fair value reflecting a gain of $6.4 million.    

The Company also enters into derivative financial instruments in the form of interest rate swaps to meet the financing, interest rate and equity risk management needs of its customers.  Upon entering into these interest rate swaps to meet customer needs, the Company enters into offsetting positions to minimize interest rate and equity risk to the Company.  These derivative financial instruments are reported at fair value with any resulting gain or loss recorded in current period earnings.  These instruments and their offsetting positions are recorded in other assets and other liabilities on the consolidated balance sheets.  As of March 31, 2017, the notional amount of customer related derivative financial instruments was $207.5 million with an average maturity of 27 months, an average interest receive rate of 3.1% and an average interest pay rate of 5.7%.  As of March 31, 2016, the notional amount of customer related derivative financial instruments was $243.2 million with an average maturity of 39 months, an average interest receive rate of 2.7% and an average interest pay rate of 5.6%.

Additionally, the Bank utilizes securities sold under agreements to repurchase to facilitate the needs of our customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. The Bank monitors collateral levels on a continuous basis and may be required to provide additional collateral based on the fair value of the underlying securities.

Certain financial instruments, such as derivatives, may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar agreements. The Bank’s derivative transactions with upstream financial institution counterparties are generally executed under International Swaps and Derivative Association  master agreements which include “right of set-off” provisions. In such cases, there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis.  Nonetheless, the Bank does not generally offset such financial instruments for financial reporting purposes.

32

 


 

The following tables present components of financial instruments eligible for offsetting for the periods indicated:



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2017



 

 

 

 

 

 

 

Gross Amounts Not Offset

 

 



 

 

 

 

 

 

 

in the Consolidated

 

 



 

 

 

 

 

 

 

Balance Sheet

 

 



 

 

 

 

 

 

 

 

 

Financial

 

 

  

  

Gross Amount

 

Gross Amount

 

Net Amount

 

Financial

 

Collateral

 

Net



 

Recognized

 

Offset

 

Recognized

 

Instruments

 

Pledged

 

Amount



  

(In thousands)

Financial assets:

  

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

  

 

 

 

 

 

 

 

 

 

 

 

Forward commitments

  

$                5,642 

  

$                      - 

  

$               5,642 

  

$                  - 

 

$                  - 

 

$              5,642 

Loan/lease interest rate swaps

  

7,384 

 

 -

 

7,384 

  

 -

 

 -

 

7,384 

Total financial assets

  

$              13,026 

  

$                      - 

  

$             13,026 

  

$                  - 

 

$                  - 

 

$            13,026 



  

.

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

  

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

  

 

 

 

 

 

 

 

 

 

 

 

Forward commitments

  

$                1,124 

  

$                      - 

  

$               1,124 

  

$                  - 

 

$                  - 

 

$              1,124 

Loan/lease interest rate swaps

  

7,384 

 

 -

 

7,384 

  

 -

 

(7,384)

 

 -

Repurchase arrangements

 

375,832 

 

 -

 

375,832 

 

(375,832)

 

 -

 

 -

Total financial liabilities

 

$            384,340 

 

$                      - 

 

$           384,340 

 

$     (375,832)

 

$         (7,384)

 

$              1,124 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2016



 

 

 

 

 

 

 

Gross Amounts Not Offset

 

 



 

 

 

 

 

 

 

in the Consolidated

 

 



 

 

 

 

 

 

 

Balance Sheet

 

 



 

 

 

 

 

 

 

 

 

Financial

 

 

  

  

Gross Amount

 

Gross Amount

 

Net Amount

 

Financial

 

Collateral

 

Net



 

Recognized

 

Offset

 

Recognized

 

Instruments

 

Pledged

 

Amount



  

(In thousands)

Financial assets:

  

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

  

 

 

 

 

 

 

 

 

 

 

 

Forward commitments

  

$                6,701 

  

$                      - 

  

$               6,701 

  

$                  - 

 

$                  - 

 

$              6,701 

Loan/lease interest rate swaps

  

9,175 

 

 -

 

9,175 

  

 -

 

 -

 

9,175 

Total financial assets

  

$              15,876 

  

$                      - 

  

$             15,876 

  

$                  - 

 

$                  - 

 

$            15,876 



  

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

  

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

  

 

 

 

 

 

 

 

 

 

 

 

Forward commitments

  

$                   448 

  

$                      - 

  

$                  448 

  

$                  - 

 

$                  - 

 

$                 448 

Loan/lease interest rate swaps

  

9,175 

 

 -

 

9,175 

  

 -

 

(9,175)

 

 -

Repurchase arrangements

 

454,002 

 

 -

 

454,002 

 

(454,002)

 

 -

 

 -

Total financial liabilities

 

$            463,625 

 

$                      - 

 

$           463,625 

 

$     (454,002)

 

$         (9,175)

 

$                 448 



33

 


 





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2016



 

 

 

 

 

 

 

Gross Amounts Not Offset

 

 



 

 

 

 

 

 

 

in the Consolidated

 

 



 

 

 

 

 

 

 

Balance Sheet

 

 



 

 

 

 

 

 

 

 

 

Financial

 

 

  

  

Gross Amount

 

Gross Amount

 

Net Amount

 

Financial

 

Collateral

 

Net



 

Recognized

 

Offset

 

Recognized

 

Instruments

 

Pledged

 

Amount



 

 

 

 

 

 

 

 

 

 

 

 



  

(In thousands)

Financial assets:

  

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

  

 

 

 

 

 

 

 

 

 

 

 

Forward commitments

  

$                6,436 

  

$                      - 

  

$               6,436 

  

$                  - 

 

$                  - 

 

$              6,436 

Loan/lease interest rate swaps

  

17,285 

 

 -

 

17,285 

  

 -

 

 -

 

17,285 

Total financial assets

  

$              23,721 

 

$                      - 

 

$             23,721 

 

$                  - 

 

$                  - 

 

$            23,721 



  

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

  

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

  

 

 

 

 

 

 

 

 

 

 

 

Forward commitments

  

$                1,804 

  

$                      - 

  

$               1,804 

  

$                  - 

 

$                  - 

 

$              1,804 

Loan/lease interest rate swaps

  

17,285 

 

 -

 

17,285 

  

 -

 

(17,285)

 

 -

Repurchase arrangements

 

431,089 

 

 -

 

431,089 

 

(431,089)

 

 -

 

 -

Total financial liabilities

 

$            450,178 

 

$                      - 

 

$           450,178 

 

$     (431,089)

 

$       (17,285)

 

$              1,804 







NOTE 14 – FAIR VALUE DISCLOSURES



“Fair value” is defined by FASB ASC 820, Fair Value Measurement (“FASB ASC 820”), as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  FASB ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available.  Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity.  Unobservable inputs are inputs that reflect the reporting entity’s assumptions about the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances.  The hierarchy is broken down into the following three levels, based on the reliability of inputs:



Level 1:  Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.



Level 2:  Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data.



Level 3:  Significant unobservable inputs for the asset or liability that reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.



Determination of Fair Value



The Company uses the valuation methodologies listed below to measure different financial instruments at fair value.  An indication of the level in the fair value hierarchy in which each instrument is generally classified is

34

 


 

included.  Where appropriate, the description includes details of the valuation models, the key inputs to those models as well as any significant assumptions.



Available-for-sale securities.  Available-for-sale securities are recorded at fair value on a recurring basis.  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.  The Company’s available-for-sale securities that are traded on an active exchange, such as the New York Stock Exchange, are classified as Level 1.  Available-for-sale securities valued using matrix pricing are classified as Level 2.  Available-for-sale securities valued using matrix pricing that has been adjusted to compensate for the present value of expected cash flows, market liquidity, credit quality and volatility are classified as Level 3. 



Mortgage servicing rights.  The Company records MSRs at fair value on a recurring basis with subsequent remeasurement of MSRs based on change in fair value.  An estimate of the fair value of the Company’s MSRs is determined by utilizing assumptions about factors such as mortgage interest rates, discount rates, mortgage loan prepayment speeds, market trends and industry demand.  All of the Company’s MSRs are classified as Level 3.  For additional information about the Company’s valuation of MSRs, see Note 12,  Mortgage Servicing Rights.



Derivative instruments.  The Company’s derivative instruments consist of commitments to fund fixed-rate mortgage loans to customers and forward commitments to sell individual fixed-rate mortgage loans.  Fair value of these derivative instruments is measured on a recurring basis using recent observable market prices.  The Company also enters into interest rate swaps to meet the financing, interest rate and equity risk management needs of its customers.  The fair value of these instruments is either an observable market price or a discounted cash flow valuation using the terms of swap agreements but substituting original interest rates with prevailing interest rates ranging from 2.33% to 4.52%.  The Company also considers the associated counterparty credit risk when determining the fair value of these instruments.  The Company’s interest rate swaps, commitments to fund fixed-rate mortgage loans to customers and forward commitments to sell individual fixed-rate mortgage loans are classified as Level 3.



Loans held for sale.   Loans held for sale are carried at fair value.  The fair value of loans held for sale is based on commitments outstanding from investors as well as what secondary markets are currently offering for portfolios with similar characteristics.  Therefore, loans held for sale are subjected to recurring fair value adjustments and are classified as Level 2.  The Company obtains quotes, bids or pricing indications on all or part of these loans directly from the buyers.  Premiums and discounts received or to be received on the quotes, bids or pricing indications are indicative of the fact that the cost is lower or higher than fair value.



Impaired loans.  Loans considered impaired under FASB ASC 310 are loans for 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.  Impaired loans are subject to nonrecurring fair value adjustments to reflect (1) partial write-downs that are based on the observable market price or current appraised value of the collateral, or (2) the full charge-off of the loan carrying value.  All of the Company’s impaired loans are classified as Level 3.



Other real estate owned.  OREO is carried at the lower of cost or estimated fair value, less estimated selling costs and is subject to nonrecurring fair value adjustments.  Estimated fair value is determined on the basis of independent appraisals and other relevant factors less an average of 7% for estimated selling costs.  All of the Company’s OREO is classified as Level 3.



Off-Balance sheet financial instruments.  The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the present creditworthiness of the counterparties.  The Company has reviewed the unfunded portion of commitments to extend credit as well as standby and other letters of credit, and has determined that the fair value of such financial instruments is not material.  The Company classifies the estimated fair value of credit-related financial instruments as Level 3. 

35

 


 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis



The following tables present the balances of the assets and liabilities measured at fair value on a recurring basis as of March 31, 2017 and 2016:







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

March 31, 2017



 

Level 1

 

Level 2

 

Level 3

 

Total

Assets:

 

(In thousands)

Available-for-sale securities:

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$                    -

 

$    1,818,180

 

$               -

 

$    1,818,180

U.S. Government agency issued residential

 

 

 

 

 

 

 

 

mortgage-backed securities

 

 -

 

167,542 

 

 -

 

167,542 

U.S. Government agency issued commercial

 

 

 

 

 

 

 

 

mortgage-backed securities

 

 -

 

170,082 

 

 -

 

170,082 

Obligations of states and

 

 

 

 

 

 

 

 

political subdivisions

 

 -

 

352,324 

 

 -

 

352,324 

Other

 

160 

 

32,599 

 

 -

 

32,759 

Mortgage servicing rights

 

 -

 

 -

 

67,161 

 

67,161 

Derivative instruments

 

 -

 

 -

 

12,911 

 

12,911 

Loans held for sale

 

 -

 

161,600 

 

 -

 

161,600 

Total

 

$               160

 

$    2,702,327

 

$     80,072

 

$    2,782,559

Liabilities:

 

 

 

 

 

 

 

 

Derivative instruments

 

$                    -

 

$                   -

 

$       8,508

 

$           8,508









 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

March 31, 2016



 

Level 1

 

Level 2

 

Level 3

 

Total

Assets:

 

(In thousands)

Available-for-sale securities:

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$                    -

 

$    1,196,167

 

$               -

 

$    1,196,167

U.S. Government agency issued residential

 

 

 

 

 

 

 

 

mortgage-backed securities

 

 -

 

189,741 

 

 -

 

189,741 

U.S. Government agency issued commercial

 

 

 

 

 

 

 

 

mortgage-backed securities

 

 -

 

207,908 

 

 -

 

207,908 

Obligations of states and

 

 

 

 

 

 

 

 

political subdivisions

 

 -

 

408,537 

 

 

 

408,537 

Other

 

810 

 

13,210 

 

 -

 

14,020 

Mortgage servicing rights

 

 -

 

 -

 

50,544 

 

50,544 

Derivative instruments

 

 -

 

 -

 

23,479 

 

23,479 

Loans held for sale

 

 -

 

150,046 

 

 -

 

150,046 

Total

 

$               810

 

$    2,165,609

 

$     74,023

 

$    2,240,442

Liabilities:

 

 

 

 

 

 

 

 

Derivative instruments

 

$                    -

 

$                   -

 

$     19,089

 

$         19,089



36

 


 

The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three-month period ended March 31, 2017 and 2016:







 

 

 

 

 



 

 

 

 

 



 

Mortgage

 

 

 



 

Servicing

 

Derivative

 



 

Rights

 

Instruments

 



 

(In thousands)

Balance at December 31, 2016

 

$        65,263

 

$          6,138

 

Year to date net gains (losses) included in:

 

 

 

 

 

Net loss

 

(968)

 

(1,735)

 

Other comprehensive income

 

 -

 

 -

 

Additions

 

2,866 

 

 -

 

Transfers in and/or out of Level 3

 

 -

 

 -

 

Balance at March 31, 2017

 

$        67,161

 

$          4,403

 

Net unrealized gains (losses) included in net income for the

 

 

 

 

 

quarter relating to assets and liabilities held at March 31, 2017

 

$             909

 

$          (1,735)

 







 

 

 

 

 



 

 

 

 

 



 

Mortgage

 

 

 



 

Servicing

 

Derivative

 



 

Rights

 

Instruments

 



 

(In thousands)

Balance at December 31, 2015

 

$        57,268

 

$          3,257

 

Year to date net gains (losses) included in:

 

 

 

 

 

Net (loss) gain

 

(9,336)

 

1,133 

 

Other comprehensive income

 

 -

 

 -

 

Additions

 

2,612 

 

 -

 

Transfers in and/or out of Level 3

 

 -

 

 -

 

Balance at March 31, 2016

 

$        50,544

 

$          4,390

 

Net unrealized (losses) gains included in net income for the

 

 

 

 

 

quarter relating to assets and liabilities held at March 31, 2016

 

$          (7,954)

 

$          1,133

 



Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis



The following tables present the balances of assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2017 and 2016:







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

March 31, 2017

 

Three months ended



 

 

 

 

 

 

 

 

 

March 31, 2017



 

Level 1

 

Level 2

 

Level 3

 

Total

 

Net Losses

Assets:

 

(In thousands)

Impaired loans

 

$                    -

 

$              -

 

$    41,897

 

41,897 

 

$                      (299)

Other real estate owned

 

 -

 

 -

 

8,458 

 

8,458 

 

(527)







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

March 31, 2016

 

Three months ended



 

 

 

 

 

 

 

 

 

March 31, 2016



 

 

 

 

 

 

 

 

 

Net Losses

Assets:

 

(In thousands)

Impaired loans

 

 -

 

 -

 

49,646 

 

49,646 

 

(373)

Other real estate owned

 

 -

 

 -

 

12,685 

 

12,685 

 

(80)



37

 


 

Fair Value of Financial Instruments



FASB ASC 825, Financial Instruments (“FASB ASC 825”), requires that the Company disclose estimated fair values for its financial instruments.  Fair value estimates, methods and assumptions that are used by the Company in estimating fair values of financial instruments and that are not disclosed above in Note 14 are set forth below.



Cash and Due From Banks.  The carrying amounts for cash and due from banks approximate fair values due to their immediate and shorter-term maturities.



Loans and Leases.  Fair values are estimated for portfolios of loans and leases with similar financial characteristics.  The fair value of loans and leases is calculated by discounting scheduled cash flows through the estimated maturity using rates the Company would currently offer customers based on the credit and interest rate risk inherent in the loan or lease.  Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market and borrower information.  Estimated maturity represents the expected average cash flow period, which in some instances is different than the stated maturity.  This entrance price approach results in a calculated fair value that would be different than an exit or estimated actual sales price approach and such differences could be significant.  All of the Company’s loans and leases are classified as Level 3.



Deposit Liabilities.  Under FASB ASC 825, the fair value of deposits with no stated maturity, such as noninterest bearing demand deposits, interest bearing demand deposits and savings, is equal to the amount payable on demand as of the reporting date.  The fair value of certificates of deposit is based on the discounted value of contractual cash flows.  The discount rate is estimated using the prevailing rates offered for deposits of similar maturities.  The Company’s noninterest bearing demand deposits, interest bearing demand deposits and savings are classified as Level 1.  Certificates of deposit are classified as Level 2.



Debt.  The carrying amounts for federal funds purchased and repurchase agreements approximate fair value because of their short-term maturity.  The fair value of the Company’s fixed-term Federal Home Loan Bank (“FHLB”) advances is based on the discounted value of contractual cash flows.  The discount rate is estimated using the prevailing rates available for advances of similar maturities.  The fair value of the Company’s long-term borrowings with U.S. Bank is based on the LIBOR rates plus an interest rate spread. The fair value of the Company’s junior subordinated debt is based on market prices or dealer quotes.  The Company’s federal funds purchased, repurchase agreements and junior subordinated debt are classified as Level 1.  FHLB advances and U.S. Bank advances are classified as Level 2.



Lending Commitments.  The Company’s lending commitments are negotiated at prevailing market rates and are relatively short-term in nature.  As a matter of policy, the Company generally makes commitments for fixed-rate loans for relatively short periods of time.  Therefore, the estimated value of the Company’s lending commitments approximates the carrying amount and is immaterial to the financial statements.  The Company’s lending commitments are classified as Level 2.  The Company’s off-balance sheet commitments including letters of credit, which totaled $90.1 million at March 31, 2017, are funded at current market rates at the date they are drawn upon.  It is management’s opinion that the fair value of these commitments would approximate their carrying value, if drawn upon.

38

 


 



The following table presents carrying and fair value information of financial instruments at March 31, 2017 and December 31, 2016:





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

March 31, 2017

 

December 31, 2016



 

Carrying

 

Fair

 

Carrying

 

Fair



 

Value

 

Value

 

Value

 

Value

Assets:

 

(In thousands)

Cash and due from banks

 

$      147,684

 

$      147,684

 

$      184,152

 

$      184,152

Interest bearing deposits with other banks

 

253,738 

 

253,738 

 

38,813 

 

38,813 

Available-for-sale securities

 

2,540,887 

 

2,540,887 

 

2,531,676 

 

2,531,676 

Net loans and leases

 

10,676,498 

 

10,658,071 

 

10,688,255 

 

10,692,820 

Loans held for sale

 

161,600 

 

161,600 

 

166,927 

 

166,927 



 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Noninterest bearing deposits

 

3,401,348 

 

3,401,348 

 

3,250,537 

 

3,250,537 

Savings and interest bearing deposits

 

6,809,632 

 

6,809,632 

 

6,596,289 

 

6,596,289 

Other time deposits

 

1,831,865 

 

1,850,188 

 

1,841,315 

 

1,857,506 

Federal funds purchased and securities

 

 

 

 

 

 

 

 

sold under agreement to repurchase

 

 

 

 

 

 

 

 

and other short-term borrowings

 

375,832 

 

374,849 

 

546,002 

 

545,002 

Long-term debt and other borrowings

 

530,000 

 

531,719 

 

542,888 

 

547,273 



 

 

 

 

 

 

 

 

Derivative instruments:

 

 

 

 

 

 

 

 

Forward commitments to sell fixed rate

 

 

 

 

 

 

 

 

mortgage loans

 

(804)

 

(804)

 

2,903 

 

2,903 

Commitments to fund fixed rate

 

 

 

 

 

 

 

 

mortgage loans

 

5,623 

 

5,623 

 

3,362 

 

3,362 

Interest rate swap position to receive

 

7,269 

 

7,269 

 

9,061 

 

9,061 

Interest rate swap position to pay

 

(7,384)

 

(7,384)

 

(9,175)

 

(9,175)







NOTE 15 – OTHER NONINTEREST REVENUE AND EXPENSE



The following table details other noninterest revenue for the three months ended March 31, 2017 and 2016:





 

 

 

 

 



 

 

 

 

 



 

Three months ended

 



 

March 31,

 



 

2017

 

2016

 



 

(In thousands)

Bank-owned life insurance

 

$      1,669

 

$      1,893

 

Other miscellaneous income

 

2,433 

 

2,669 

 

  Total other noninterest income

 

$      4,102

 

$      4,562

 



39

 


 



The following table details other noninterest expense for the three months ended March 31, 2017 and 2016:





 

 

 

 

 



 

 

 

 

 



 

Three months ended

 



 

March 31,

 



 

2017

 

2016

 



 

(In thousands)

Advertising

 

$         663

 

$         633

 

Foreclosed property expense

 

1,050 

 

1,181 

 

Telecommunications

 

1,147 

 

1,295 

 

Public relations

 

720 

 

661 

 

Data processing

 

6,623 

 

6,391 

 

Computer software

 

2,981 

 

2,660 

 

Amortization of intangibles

 

1,030 

 

880 

 

Legal fees

 

1,229 

 

4,535 

 

Merger expense

 

 -

 

 

Postage and shipping

 

1,175 

 

1,117 

 

Other miscellaneous expense

 

12,751 

 

13,876 

 

Total other noninterest expense

 

$    29,369

 

$    33,230

 







NOTE 16 – COMMITMENTS AND CONTINGENT LIABILITIES



The nature of the Company’s business ordinarily results in a certain amount of claims, litigation, investigations and legal and administrative cases and proceedings. Although the Company and its subsidiaries have developed policies and procedures to minimize the impact of legal noncompliance and other disputes, and endeavored to provide reasonable insurance coverage, litigation and regulatory actions present an ongoing risk.

The Company and its subsidiaries are engaged in lines of business that are heavily regulated and involve a large volume of financial transactions and potential transactions with numerous customers or applicants, and the Company is a public company with a large number of shareholders. From time to time, borrowers, customers, shareholders, former employees and other third parties have brought actions against the Company or its subsidiaries, in some cases claiming substantial damages. Financial services companies are subject to the risk of class action litigation and, from time to time, the Company and its subsidiaries are subject to such actions brought against it. Additionally, the Bank is, and management expects it to be, engaged in a number of foreclosure proceedings and other collection actions as part of its lending and leasing collections activities, which, from time to time, have resulted in counterclaims against the Bank. Various legal proceedings have arisen and may arise in the future out of claims against entities to which the Company is a successor as a result of business combinations. The Company and its subsidiaries may also be subject to enforcement actions by federal or state regulators, including the Securities and Exchange Commission, the Federal Reserve, the FDIC, the Consumer Financial Protection Bureau (the “CFPB”), the Department of Justice (the “DOJ”), state attorneys general and the Mississippi Department of Banking and Consumer Finance.

When and as the Company determines it has meritorious defenses to the claims asserted, it vigorously defends against such claims. The Company will consider settlement of claims when, in management’s judgment and in consultation with counsel, it is in the best interests of the Company to do so.

The Company cannot predict with certainty the cost of defense, the cost of prosecution or the ultimate outcome of litigation and other proceedings filed by or against it, its directors, management or employees, including remedies or damage awards. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with outstanding legal proceedings as well as certain threatened claims (which are not considered incidental to the ordinary conduct of the Company’s business) utilizing the latest and most reliable information available. For matters where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established. For matters where it is probable the Company will incur a loss and the amount can be reasonably

40

 


 

estimated, the Company establishes an accrual for the loss. Once established, the accrual is adjusted periodically to reflect any relevant developments. The actual cost of any outstanding legal proceedings and the potential loss, however, may turn out to be substantially higher than the amount accrued. Further, the Company’s insurance policies have deductibles and they will likely not cover all such litigation, other proceedings or claims, or the costs of defense.

While the final outcome of any legal proceedings is inherently uncertain, based on the information available, advice of counsel and available insurance coverage, if applicable, management believes that the litigation-related expense of $2.9 million accrued as of March 31, 2017, which excludes amounts reserved for regulatory settlement expenses discussed below, is adequate and that any incremental liability arising from the Company’s legal proceedings and threatened claims, including the matters described herein and those otherwise arising in the ordinary course of business, will not have a material adverse effect on the Company's business or consolidated financial condition. It is possible, however, that future developments could result in an unfavorable outcome for or resolution of any one or more of the lawsuits in which the Company or its subsidiaries are defendants, which may be material to the Company’s results of operations for a particular fiscal period or periods.

On July 31, 2014, the Company, its Chief Executive Officer and former Chief Financial Officer were named in a purported class-action lawsuit filed in the U.S. District Court for the Middle District of Tennessee on behalf of certain purchasers of the Company’s common stock.  The complaint was subsequently amended to add the former President and Chief Operating Officer.  The complaint alleges that the defendants made misleading statements concerning the Company’s expectation that it would be able to close two merger transactions within a specified time period and the Company’s compliance with certain Bank Secrecy Act and anti-money laundering requirements.  On July 10, 2015, the District Court granted in part and denied in part the defendants’ motion to dismiss and dismissed the claims concerning the Company’s expectations about the closing of the mergers.  Class certification was granted by the District Court on April 21, 2016, and a petition for immediate appeal of the class certification was filed and was granted.  Class certification was vacated by the U.S. Sixth Circuit Court of Appeals, and the case was remanded to the District Court for further proceedings.  The plaintiff seeks an unspecified amount of damages and awards of costs and attorneys’ fees and such other equitable relief as the District Court may deem just and proper.  At this stage of the lawsuit, management cannot determine the probability of an unfavorable outcome to the Company as it is uncertain whether the lead plaintiff will be successful in certifying a class on its second attempt and the exact amount of damages (should the District Court grant class certification again) is uncertain.  Although it is not possible to predict the ultimate resolution or financial liability with respect to the litigation, management is currently of the opinion that the outcome of this lawsuit will not have a material adverse effect on the Company’s business, consolidated financial position or results of operations.

On June 29, 2016, the Bank, the CFPB and the DOJ agreed to a settlement set forth in a consent order (the “Consent Order”) related to the joint investigation by the CFPB and the DOJ of the Bank’s fair lending program during the period between January 1, 2011 and December 31, 2013.  The Consent Order was signed by the United States District Court for the Northern District of Mississippi (the “District Court”) on July 25, 2016.  In the first quarter of 2016, the Bank reserved $13.8 million to cover costs related to this matter, $10.3 million of which was reflected as regulatory settlement expense and $3.5 million of which was included in other noninterest expense.  The settlement of this matter did not have a material financial impact on the second and third quarter 2016 financial results.  For additional information regarding the terms of this settlement and the Consent Order, see the signed Consent Order and the Company’s Current Report on Form 8-K that was filed with the SEC on June 29, 2016 which are incorporated herein by reference





NOTE 17 – LONG-TERM DEBT



On August 8, 2013, the Company entered into a Credit Agreement with U.S. Bank National Association (“U.S. Bank”) as a lender and administrative agent, and First Tennessee Bank, National Association, as a lender.  The Credit Agreement included an unsecured revolving loan of up to $25.0 million that terminated and the outstanding balance of which was payable in full on August 8, 2015, which the Bank did not renew, and an unsecured multi-draw term loan of up to $60.0 million, which commitment terminated on February 28, 2014.  The proceeds from the term loan were used to repurchase trust preferred securities.  All principal and interest due under the Credit Agreement were repaid in full in October 2016

The Company had no long-term borrowings from U.S. Bank pursuant to the Credit Agreement at March 31, 2017 or December 31, 2016.  The Company also had long-term borrowings from FHLB of $530.0 million at both March 31, 2017  and December 31, 2016.

41

 


 

 

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.



FORWARD-LOOKING STATEMENTS



Certain statements contained in this Quarterly Report on Form 10-Q may not be based upon historical facts and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may be identified by their reference to a future period or periods or by the use of forward-looking terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “foresee,” “hope,” “intend,” “may,” “might,” “plan,” “will,” or “would” or future or conditional verb tenses and variations or negatives of such terms. These forward-looking statements include, without limitation, those relating to the terms, timing and closings of the proposed mergers with Ouachita Bancshares Corp. and Central Community Corporation, the acceptance by customers of Ouachita Bancshares Corp. and Central Community Corporation of the Company’s products and services if the proposed mergers close, the Company’s ability to operate its regulatory compliance programs consistent with federal, state and local laws, including its Bank Secrecy Act (“BSA”) and anti-money laundering (“AML”) compliance program and its fair lending compliance program, the Company’s compliance with the consent order it entered into with the Consumer Financial Protection Bureau and the United States Department of Justice related to the Company’s fair lending practices (the “Consent Order”), amortization expense for intangible assets, goodwill impairments, loan impairment, utilization of appraisals and inspections for real estate loans, maturity, renewal or extension of construction, acquisition and development loans, net interest revenue, fair value determinations, the amount of the Company’s non-performing loans and leases, credit quality, credit losses, liquidity, off-balance sheet commitments and arrangements, valuation of mortgage servicing rights, allowance and provision for credit losses, early identification and resolution of credit issues, utilization of non-GAAP financial measures, the ability of the Company to collect all amounts due according to the contractual terms of loan agreements, the Company’s reserve for losses from representation and warranty obligations, the Company’s foreclosure process related to mortgage loans, the resolution of non-performing loans that are collaterally dependent, real estate values, fully-indexed interest rates, interest rate risk, interest rate sensitivity, calculation of economic value of equity, impaired loan charge-offs, diversification of the Company’s revenue stream, the growth of the Company’s insurance business and commission revenue, the growth of the Company’s customer base and loan, deposit and fee revenue sources, liquidity needs and strategies, sources of funding, net interest margin, declaration and payment of dividends, the utilization of the Company’s share repurchase program, the implementation and execution of cost saving initiatives, improvement in the Company’s efficiencies, operating expense trends, future acquisitions and consideration to be used therefor, and the impact of certain claims and ongoing, pending or threatened litigation, administrative and investigatory matters.

The Company cautions readers not to place undue reliance on the forward-looking statements contained in this Report, in that actual results could differ materially from those indicated in such forward-looking statements as a result of a variety of factors. These factors may include, but are not limited to, the Company’s ability to operate its regulatory compliance programs consistent with federal, state and local laws, including its BSA/AML compliance program and its fair lending compliance program, the Company’s ability to successfully implement and comply with the Consent Order, the ability of the Company, Ouachita Bancshares Corp. and Central Community Corporation to obtain regulatory approval of and close the proposed mergers, the willingness of Ouachita Bancshares Corp. and Central Community Corporation to proceed with the proposed mergers, the potential impact upon the Company of the delay in the closings of these proposed mergers, the impact of any ongoing, pending or threatened litigation, administrative and investigatory matters involving the Company, conditions in the financial markets and economic conditions generally, the adequacy of the Company’s provision and allowance for credit losses to cover actual credit losses, the credit risk associated with real estate construction, acquisition and development loans, limitations on the Company’s ability to declare and pay dividends, the availability of capital on favorable terms if and when needed, liquidity risk, governmental regulation, including the Dodd-Frank Act, and supervision of the Company’s operations, the short-term and long-term impact of changes to banking capital standards on the Company’s regulatory capital and liquidity, the impact of regulations on service charges on the Company’s core deposit accounts, the susceptibility of the Company’s business to local economic and environmental conditions, the soundness of other financial institutions, changes in interest rates, the impact of monetary policies and economic factors on the Company’s ability to attract deposits or make loans, volatility in capital and credit markets, reputational risk, the impact of the loss of any key Company personnel, the impact of hurricanes or other adverse

42

 


 

weather events, any requirement that the Company write down goodwill or other intangible assets, diversification in the types of financial services the Company offers, the growth of the Company’s insurance business and commission revenue, the growth of the Company’s loan, deposit and fee revenue sources, the Company’s ability to adapt its products and services to evolving industry standards and consumer preferences, competition with other financial services companies, risks in connection with completed or potential acquisitions, the Company’s growth strategy, interruptions or breaches in the Company’s information system security, the failure of certain third-party vendors to perform, unfavorable ratings by rating agencies, dilution caused by the Company’s issuance of any additional shares of its common stock to raise capital or acquire other banks, bank holding companies, financial holding companies and insurance agencies, the utilization of the Company’s share repurchase program, the implementation and execution of cost saving initiatives, other factors generally understood to affect the assets, business, cash flows, financial condition, liquidity, prospects and/or results of operations of financial services companies and other factors detailed from time to time in the Company’s press and news releases, reports and other filings with the SEC, including, without limitation, those factors included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 under the heading “Item 1A. Risk Factors” and in the Company’s Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Forward-looking statements speak only as of the date that they were made, and, except as required by law, the Company does not undertake any obligation to update or revise forward-looking statements to reflect events or circumstances that occur after the date of this Report.





OVERVIEW



BancorpSouth, Inc. (the “Company”) is a regional financial holding company headquartered in Tupelo, Mississippi with $14.9 billion in assets at March 31, 2017.  BancorpSouth Bank (the “Bank”), the Company’s wholly-owned banking subsidiary, has commercial banking operations in Alabama, Arkansas, Florida, Louisiana, Mississippi, Missouri, Tennessee and Texas.  The Bank’s insurance agency subsidiary also operates an office in Illinois.  The Bank and its insurance agency subsidiary provide commercial banking, leasing, mortgage origination and servicing, insurance, brokerage and trust services to corporate customers, local governments, individuals and other financial institutions through an extensive network of branches and offices. 

Management’s discussion and analysis provides a narrative discussion of the Company’s financial condition and results of operations.  For a complete understanding of the following discussion, please refer to the unaudited consolidated financial statements for the three-month period ended March 31, 2017 and 2016 and the consolidated financial statements as of December 31, 2016 and the notes to such financial statements found under “Part I, Item 1. Financial Statements” of this report.  This discussion and analysis is based on such reported financial information. 

As a financial holding company, the financial condition and operating results of the Company are heavily influenced by economic trends nationally and in the specific markets in which the Company’s subsidiaries provide financial services.  Generally, the pressures of the national and regional economic cycle created a difficult operating environment for the financial services industry.  The Company was not immune to such pressures and the economic downturn had a negative impact on the Company and its customers in all of the markets that it serves.  However, the Company’s financial condition has remained stable during the first three months of 2017 as reflected by decreases in non-performing assets, gross charge-offs and criticized loans, when compared to prior periods.  

 Management believes that the Company remains well positioned with respect to overall credit quality as evidenced by the stable credit quality metrics especially when comparing March 31, 2017 to December 31, 2016 and March 31, 2016.  Management believes, however, that future weakness in the economic environment could adversely affect the strength of the credit quality of the Company’s assets overall.  Therefore, management will continue to focus on early identification and resolution of any credit issues.

The largest source of the Company’s revenue is derived from the operation of its principal operating subsidiary, the Bank.  The financial condition and operating results of the Bank are affected by the level and volatility of interest rates on loans, investment securities, deposits and other borrowed funds, and the impact of economic downturns on loan demand, collateral value and creditworthiness of existing borrowers.  The financial services industry is highly competitive and heavily regulated.  The Company’s success depends on its ability to compete aggressively within its markets while maintaining sufficient asset quality and cost controls to generate net income.

The information that follows is provided to enhance comparability of financial information between periods and to provide a better understanding of the Company’s operations:



43

 


 

SELECTED FINANCIAL DATA



 

 

 

 

 

 

 



 

Three months ended

 



 

March 31,

 



 

2017

 

2016

 



 

(Dollars in thousands, except per share data)

Earnings Summary:

 

 

 

 

 

 

 

Total interest revenue

 

$          122,926 

 

 

$             117,972 

 

 

Total interest expense

 

8,315 

 

 

6,813 

 

 

Net interest revenue

 

114,611 

 

 

111,159 

 

 

Provision for credit losses

 

1,000 

 

 

1,000 

 

 

Noninterest revenue

 

70,869 

 

 

64,727 

 

 

Noninterest expense

 

127,109 

 

 

141,512 

 

 

Income before income taxes

 

57,371 

 

 

33,374 

 

 

Income tax expense

 

19,278 

 

 

10,825 

 

 

Net income

 

$            38,093 

 

 

$               22,549 

 

 



 

 

 

 

 

 

 

Balance Sheet - Period-end balances:

 

 

 

 

 

 

 

Total assets

 

$     14,866,054 

 

 

$        13,926,398 

 

 

Total securities

 

2,540,887 

 

 

2,016,373 

 

 

Loans and leases, net of unearned income

 

10,801,694 

 

 

10,444,697 

 

 

Total deposits

 

12,042,845 

 

 

11,486,697 

 

 

Long-term debt

 

530,000 

 

 

67,681 

 

 

Total shareholders' equity

 

1,702,389 

 

 

1,679,793 

 

 



 

 

 

 

 

 

 

Balance Sheet-Average Balances:

 

 

 

 

 

 

 

Total assets

 

$     14,832,260 

 

 

$        13,851,661 

 

 

Total securities

 

2,507,701 

 

 

2,037,739 

 

 

Loans and leases, net of unearned income

 

10,820,486 

 

 

10,372,925 

 

 

Total deposits

 

11,941,851 

 

 

11,431,480 

 

 

Long-term debt

 

530,000 

 

 

67,750 

 

 

Total shareholders' equity

 

1,731,931 

 

 

1,668,465 

 

 



 

 

 

 

 

 

 

Common Share Data:

 

 

 

 

 

 

 

Basic earnings per share

 

$                0.41 

 

 

$                   0.24 

 

 

Diluted earnings per share

 

0.41 

 

 

0.24 

 

 

Cash dividends per share

 

0.13 

 

 

0.10 

 

 

Book value per share

 

18.44 

 

 

17.79 

 

 

Tangible book value per share (1)

 

14.95 

 

 

14.49 

 

 

Dividend payout ratio

 

30.73 

%

 

41.85 

%

 



 

 

 

 

 

 

 

Financial Ratios (Annualized):

 

 

 

 

 

 

 

Return on average assets

 

1.04 

%

 

0.65 

%

 

Return on average shareholders' equity

 

8.92 

 

 

5.44 

 

 

Total shareholders' equity to total assets

 

11.45 

 

 

12.06 

 

 

Tangible shareholders' equity to tangible assets (1)

 

9.49 

 

 

10.05 

 

 

Net interest margin-fully taxable equivalent

 

3.46 

 

 

3.56 

 

 



 

 

 

 

 

 

 

Credit Quality Ratios (Annualized):

 

 

 

 

 

 

 

Net charge-offs to average loans and leases

 

(0.02)

%

 

0.04 

%

 

Provision for credit losses to average loans and leases

 

0.04 

 

 

0.04 

 

 

Allowance for credit losses to net loans and leases

 

1.16 

 

 

1.21 

 

 

Allowance for credit losses to NPLs

 

153.50 

 

 

134.23 

 

 

Allowance for credit losses to NPAs

 

139.08 

 

 

118.31 

 

 

NPLs to net loans and leases

 

0.76 

 

 

0.90 

 

 

NPAs to net loans and leases

 

0.83 

 

 

1.02 

 

 



 

 

 

 

 

 

 

Capital Adequacy:

 

 

 

 

 

 

 

Common equity Tier 1 capital

 

12.16 

%

 

12.14 

%

 

Tier 1 capital

 

12.16 

 

 

12.34 

 

 

Total capital

 

13.21 

 

 

13.43 

 

 

Tier 1 leverage capital

 

9.95 

 

 

10.61 

 

 



 

 

 

 

 

 

 

 (1) Non-GAAP financial measures.  See “—Non-GAAP Measures and Reconciliations.”

44

 


 

Non-GAAP Financial Measures and Reconciliations



In addition to financial ratios based on measures defined by U.S. GAAP, the Company utilizes tangible shareholders’ equity, tangible asset and tangible book value per share measures when evaluating the performance of the Company.  Tangible shareholders’ equity is defined by the Company as total shareholders’ equity less goodwill and identifiable intangible assets.  Tangible assets are defined by the Company as total assets less goodwill and identifiable intangible assets.  Management believes the ratio of tangible shareholders’ equity to tangible assets to be important to investors who are interested in evaluating the adequacy of the Company’s capital levels.  Tangible book value per share is defined by the Company as tangible shareholders’ equity divided by total common shares outstanding.  Management believes that tangible book value per share is important to investors who are interested in changes from period to period in book value per share exclusive of changes in intangible assets.  The following table reconciles tangible shareholders’ equity, tangible assets and tangible book value per share as presented above to U.S. GAAP financial measures as reflected in the Company’s unaudited consolidated financial statements:





 

 

 

 

 

 



 

 



 

March 31,



 

2017

 

2016



 

 

 

 

 

 



(Dollars in thousands, except per share data)

Tangible Assets:

 

 

 

 

 

 

Total assets

 

$    14,866,054

 

 

$       13,926,398

 

Less:  Goodwill

 

300,798 

 

 

291,498 

 

Other identifiable intangible assets

 

20,865 

 

 

19,664 

 

Total tangible assets

 

$    14,544,391

 

 

$       13,615,236

 



 

 

 

 

 

 

Tangible Shareholders' Equity:

 

 

 

 

 

 

Total shareholders' equity

 

$      1,702,389

 

 

$            1,679,793 

 

Less:  Goodwill

 

300,798 

 

 

291,498 

 

Other identifiable intangible assets

 

20,865 

 

 

19,664 

 

Total tangible shareholders' equity

 

$      1,380,726

 

 

$            1,368,631 

 



 

 

 

 

 

 

Total common shares outstanding

 

92,344,409 

 

 

94,438,626 

 



 

 

 

 

 

 

Tangible shareholders' equity to tangible assets

 

9.49 

%

 

10.05 

%



 

 

 

 

 

 

Tangible book value per share

 

$             14.95

 

 

$                   14.49 

 



FINANCIAL HIGHLIGHTS



The Company reported net income of $38.1 million for the first quarter of 2017, compared to net income of $22.5 million for the same quarter of 2016.     A primary factor contributing to the increase in net income for the three months ended March 31, 2017 compared to the same period in 2016 was the decrease in noninterest expense which was $127.1 million for the first quarter of 2017 compared to $141.5 million for the first quarter of 2016.  A pre-tax charge of $10.3 million was recorded during the first quarter of 2016 related to a liability associated with an ongoing regulatory matter.  This regulatory matter was settled during the second quarter of 2016 with no additional regulatory settlement charges deemed necessary in 2017.  Also contributing to the increase in net income during the first quarter of 2017 compared to the first quarter of 2016 was the increase in noninterest revenue and net interest revenue.  The increase in noninterest revenue for the comparable three-month periods is primarily a result of the increase in mortgage banking.  The increase in net interest revenue is a result of the increase in loan and lease revenue more than offsetting the increase in interest expense associated with interest bearing demand deposits and long term debt.

The primary source of revenue for the Company is the net interest revenue earned by the Bank.  Net interest revenue is the difference between interest earned on loans, investments and other earning assets and interest paid on deposits and other obligations.  Net interest revenue was $114.6 million for the first quarter of 2017, an increase of $3.5 million, or 3.1%, from $111.2 million for the first quarter of 2016. Net interest revenue is affected by the general level of interest rates, changes in interest rates and changes in the amount and composition of interest

45

 


 

earning assets and interest bearing liabilities.  One of the Company’s objective is to manage those assets and liabilities to maximize net interest revenue, while balancing interest rate, credit, liquidity and capital risks.  The increase in net interest revenue for the first quarter of 2017 compared to the first quarter of 2016 was primarily a result of the increase in interest revenue related to loans and leases due to the increasing loan portfolio more than offsetting the increase in interest expense related to the increase in interest bearing demand deposits and long-term debt.

Interest revenue increased $5.0 million, or 4.2%, in the first quarter of 2017 compared to the first quarter of 2016.  The Company has managed to increase loans as new loan production more than offset loan runoff in most loan categories when comparing the first quarter of 2017 to the first quarter of 2016.  The increase in interest expense of $1.5 million, or 22.0%, for the first quarter of 2017 compared to the first quarter of 2016 was primarily due to an increase in interest related to long term debt as FHLB borrowings have increased $462.3 million compared to March 31, 2016 coupled with the increase in average balances and rates on interest bearing deposits

The Company attempts to diversify its revenue stream by increasing the amount of revenue received from mortgage banking operations, insurance agency activities, brokerage and securities activities and other activities that generate fee income.  Management believes this diversification is important to reduce the impact of fluctuations in net interest revenue on the overall operating results of the Company.  Noninterest revenue increased $6.1 million, or 9.5%, for the first quarter of 2017 compared to the first quarter of 2016.  One of the primary contributors to the increase in noninterest revenue for the comparable three month period was mortgage banking.  Mortgage banking increased to $9.0 million for the first quarter of 2017 compared to $1.8 million for the first quarter of 2016.  The increase in mortgage banking for the comparable three month period was a result of the change in MSRs.  The fair value of MSRs, including the MSR hedge, increased approximately $934,000 during the first quarter of 2017 compared to a decrease of $8.0 million during the first quarter of 2016.  Mortgage origination volume decreased 8.7% to $287.8 million for the first quarter of 2017 compared to $315.4 million for the first quarter of 2016.  As a result of decreased mortgage originations, mortgage origination revenue decreased to $5.1 million during the first quarter of 2017 compared to $6.4 million during the first quarter of 2016.

Insurance commissions and wealth management revenue remained relatively stable for the first three months of 2017 compared to the first three months of 2016. The increase in mortgage banking for the first quarter of 2017 compared to the first quarter of 2016 was partially offset by the decrease in deposit service charges of $1.3 million to $9.7 million for the same period. There were no significant non-recurring noninterest revenue items during the first three months of 2017 or 2016.

Total noninterest expense decreased 10.2% to $127.1 million for the first quarter of 2017 compared to $141.5 million for the first quarter of 2016.  The decrease in noninterest expense during the first three months of 2017 compared to the first three months of 2016 was primarily a result of a pre-tax charge of $10.3 million recorded during the first quarter of 2016 related to a liability associated with an ongoing regulatory matter. This regulatory matter was settled during the second quarter of 2016 with no additional regulatory settlement charges deemed necessary.  The Company continues to focus attention on controlling noninterest expense.  The major components of net income are discussed in more detail below.





RESULTS OF OPERATIONS



Net Interest Revenue



Net interest revenue is the difference between interest revenue earned on assets, such as loans, leases and securities, and interest expense incurred on liabilities, such as deposits and borrowings, and continues to provide the Company with its principal source of revenue.  Net interest revenue is affected by the general level of interest rates, changes in interest rates and changes in the amount and composition of interest earning assets and interest bearing liabilities.  One of the Company’s long-term objectives is to manage interest earning assets and interest bearing liabilities to maximize net interest revenue, while balancing interest rate, credit and liquidity risk.  Net interest margin is determined by dividing fully taxable equivalent net interest revenue by average earning assets.  For purposes of the following discussion, revenue from tax-exempt loans and investment securities has been adjusted to a fully taxable equivalent (“FTE”) basis, using an effective tax rate of 35%. 

The following table presents average interest earning assets, average interest bearing liabilities, net interest revenue-FTE, net interest margin-FTE and net interest rate spread for the three months ended March 31, 2017 and 2016:

46

 


 





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Three months ended March 31,



2017

 

2016



Average

 

 

Yield/

 

Average

 

 

Yield/



Balance

 

Interest

Rate

 

Balance

 

Interest

Rate

ASSETS

(Dollars in millions, yields on taxable equivalent basis)

Loans and leases (net of unearned

 

 

 

 

 

 

 

 

 

 income) (1)(2)

$      10,820.5 

 

$      112.4 

4.21% 

 

$           10,372.9 

 

$      108.7 

4.22% 

Loans held for sale

128.9 

 

1.0  3.18% 

 

103.2 

 

1.0  3.83% 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 Taxable

2,203.1 

 

7.3  1.35% 

 

1,687.5 

 

5.9  1.40% 

 Non-taxable (3)

304.6 

 

4.0  5.29% 

 

350.3 

 

4.7  5.36% 

Federal funds sold, securities

 

 

 

 

 

 

 

 

 

 purchased under agreement to resell

 

 

 

 

 

 

 

 

 

 and short-term investments

258.5 

 

0.5  0.76% 

 

316.1 

 

0.2  0.33% 

 Total interest earning

 

 

 

 

 

 

 

 

 

   assets and revenue

13,715.6 

 

125.2  3.70% 

 

12,830.0 

 

120.5  3.78% 

Other assets

1,241.3 

 

 

 

 

1,148.3 

 

 

 

Less:  Allowance for credit losses

(124.6)

 

 

 

 

(126.6)

 

 

 

   Total

$      14,832.3 

 

 

 

 

$           13,851.7 

 

 

 



 

 

 

 

 

 

 

 

 

LIABILITIES AND

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 Demand - interest bearing

$        5,244.1 

 

$          2.8 

0.22% 

 

$             5,102.6 

 

$          2.2 

0.17% 

 Savings

1,587.7 

 

0.5  0.12% 

 

1,468.3 

 

0.4  0.12% 

 Other time

1,837.2 

 

3.6  0.79% 

 

1,845.7 

 

3.4  0.73% 

Federal funds purchased, securities

 

 

 

 

 

 

 

 

 

 sold under agreement to repurchase,

 

 

 

 

 

 

 

 

 

 short-term FHLB borrowings

 

 

 

 

 

 

 

 

 

 and other short term borrowings

433.8 

 

0.3  0.31% 

 

441.7 

 

0.1  0.14% 

Junior subordinated debt securities

1.2 

 

0.0  3.29% 

 

23.2 

 

0.2  3.18% 

Long-term  debt

530.0 

 

1.1  0.87% 

 

67.8 

 

0.5  3.08% 

 Total interest bearing

 

 

 

 

 

 

 

 

 

   liabilities and expense

9,634.0 

 

8.3  0.35% 

 

8,949.3 

 

6.8  0.31% 

Demand deposits -

 

 

 

 

 

 

 

 

 

 noninterest bearing

3,272.9 

 

 

 

 

3,014.9 

 

 

 

Other liabilities

193.5 

 

 

 

 

219.0 

 

 

 

 Total liabilities

13,100.4 

 

 

 

 

12,183.2 

 

 

 

Shareholders' equity

1,731.9 

 

 

 

 

1,668.5 

 

 

 

 Total

$      14,832.3 

 

 

 

 

$           13,851.7 

 

 

 

Net interest revenue-FTE

 

 

$      116.9 

 

 

 

 

$      113.7 

 

Net interest margin-FTE

 

 

 

3.46% 

 

 

 

 

3.56% 

Net interest rate spread

 

 

 

3.35% 

 

 

 

 

3.47% 

Interest bearing liabilities to

 

 

 

 

 

 

 

 

 

  interest earning assets

 

 

 

70.24% 

 

 

 

 

69.75% 

 (1)  Includes taxable equivalent adjustment to interest of $0.9 million for both the three months ended March 31, 2017 and 2016 using an effective tax rate of 35%.

(2)  Includes non-accrual loans.

(3)  Includes taxable equivalent adjustment to interest of $1.4  million and $1.7 million for the three months ended March 31, 2017 and 2016, respectively, using an effective tax rate of 35%.



Net interest revenue-FTE for the three-month period ended March 31, 2017 increased $3.2  million, or 2.8%, compared to the same period in 2016.  The increase in net interest revenue-FTE for the comparable three-month periods was primarily a result of the increase in interest revenue-FTE related to the increase in average earning assets with that increase somewhat offset by the first quarter 2017 increase in rates paid on other time deposits and in the average balance of long-term debt.   The increase in earning assets was a result of loan run-off

47

 


 

being more than replaced with new lower yielding loans.  The decrease in earning asset yields was primarily a result of new securities and maturity securities being replaced by securities with lower yields.  Rates on interest bearing liabilities increased slightly as a result of increases in rates paid on interest-bearing and other time deposits.

Interest revenue-FTE for the three-month period ended March 31, 2017 increased $4.7 million, or 3.9%, compared to the same period in 2016The increase in interest revenue-FTE for these periods was a result of the declining loan yields, as interest rates continued to be at historically low levels, being more than offset by loan growth noticed during the first quarter of 2017 combined with the increase in average available-for-sale securities.  The yield on average interest-earning assets decreased 8 basis points for the first quarter of 2017 compared to the same period in 2016.  Average interest-earning assets increased $885.6 million, or 6.9%, for the three-month period ended March 31, 2017, compared to the same period in 2016.

Interest expense for the three-month period ended March 31, 2017 increased $1.5 million, or 22.1%, compared to the same period in 2016.  The increase in interest expense for the comparable three-month period was primarily a result of the increase in average long-term debt combined with the increase in rates paid on interest bearing and other time deposits.  Average rates paid on interest bearing liabilities increased 4  basis points for the first quarter of 2017 compared to the first quarter of 2016.  Average interest bearing liabilities increased $684.7 million, or 7.7%, for the first quarter of 2017 compared to the first quarter of 2016.    The increase in average interest bearing liabilities for these periods was primarily a result of increases in average interest bearing demand and savings deposits combined with the increase in average long-term FHLB borrowings.

Net interest margin-FTE was 3.46% and 3.56% for the three months ended March 31, 2017 and March 31, 2016, respectively.



Interest Rate Sensitivity

The interest rate sensitivity gap is the difference between the maturity or repricing opportunities of interest sensitive assets and interest sensitive liabilities for a given period of time.  A prime objective of the Company’s asset/liability management is to maximize net interest margin while maintaining a reasonable mix of interest sensitive assets and liabilities.

The following table presents the Company’s interest rate sensitivity at March 31, 2017:

48

 


 



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Interest Rate Sensitivity - Maturing or Repricing Opportunities



 

 

 

91 Days

 

Over One

 

 



 

0  to 90

 

to

 

Year to

 

Over



 

Days

 

One Year

 

Five Years

 

Five Years



 

(In thousands)

Interest earning assets:

 

 

 

 

 

 

 

 

Interest bearing deposits with banks

 

$        253,738

 

$                    -

 

$                  -

 

$                  -

Available-for-sale and trading securities

 

177,770 

 

553,409 

 

1,474,875 

 

334,833 

Loans and leases, net of unearned income

 

3,362,798 

 

1,582,941 

 

4,838,453 

 

1,017,502 

Loans held for sale

 

161,600 

 

 -

 

 

 

 -

Total interest earning assets

 

3,955,906 

 

2,136,350 

 

6,313,328 

 

1,352,335 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

Interest bearing demand and savings deposits

 

6,809,632 

 

 -

 

 -

 

 -

Other time deposits

 

271,695 

 

696,375 

 

863,795 

 

 -

Federal funds purchased , securities

 

 

 

 

 

 

 

 

sold under agreement to repurchase,

 

 

 

 

 

 

 

 

short-term FHLB borrowings and other

 

 

 

 

 

 

 

 

short-term borrowings

 

375,832 

 

 -

 

 -

 

 -

Long-term debt

 

500,000 

 

 -

 

30,000 

 

 -

Total interest bearing liabilities

 

7,957,159 

 

696,375 

 

893,795 

 

 -

Interest rate sensitivity gap

 

$     (4,001,253)

 

$     1,439,975

 

$   5,419,533

 

$   1,352,335

Cumulative interest sensitivity gap

 

$     (4,001,253)

 

$     (2,561,278)

 

$   2,858,255

 

$   4,210,590



In the event interest rates increase after March 31, 2017, based on this interest rate sensitivity gap, the Company could experience decreased net interest revenue in the following one-year period, as the cost of funds could increase at a more rapid rate than interest revenue on interest earning assets.  However, the Company’s historical repricing sensitivity on interest bearing demand deposits and savings suggests that these deposits, while having the ability to reprice in conjunction with rising market rates, often exhibit less repricing sensitivity to a change in market rates, thereby somewhat reducing the exposure to rising interest rates.  In the event interest rates decline after March 31, 2017, based on this interest rate sensitivity gap, it is possible that the Company could experience slightly increased net interest revenue in the following one-year period.  However, any potential benefit to net interest revenue in a falling rate environment is mitigated by implied rate floors on interest bearing demand deposits and savings resulting from the historically low interest rate environment.  It should be noted that the balances shown in the table above are at March 31, 2017 and may not be reflective of positions at other times during the year or in subsequent periods.  Allocations to specific interest rate sensitivity periods are based on the earlier of maturity or repricing dates.   The elevated liability sensitivity in the 0 to 90 day category as compared to other categories was primarily a result of the Company’s utilization of shorter term, lower cost deposits to fund earning assets.

As of March 31, 2017, the Bank had $2.3  billion in variable rate loans with interest rates determined by a floor, or minimum rate.  This portion of the loan portfolio had an average interest rate earned of 4.13%, an average maturity of 177 months and a fully-indexed interest rate of 4.63% at March 31, 2017.  The fully-indexed interest rate is the interest rate that these loans would be earning without the effect of interest rate floors.  The fully-indexed interest rate also considers the impact of loans that will earn an interest rate above their floor at their next repricing date. While the Bank benefits from interest rate floors in the current interest rate environment, loans currently earning their floored interest rate may not experience an immediate impact on the interest rate earned should key indices rise.  Key indices include, but are not limited to, the Bank’s prime rate, the Wall Street Journal prime rate and the London Interbank Offering Rate.  At March 31, 2017, the Company had $427.6 million, $4.4 billion and $782.2 million in variable rate loans with interest rates tied to the Bank’s prime rate, the Wall Street Journal prime rate and the London Interbank Offering Rate, respectively.  The Bank’s net interest margin may be negatively impacted by the timing and magnitude of a rise in key indices. 

49

 


 

Interest Rate Risk Management



Interest rate risk refers to the potential changes in net interest income and Economic Value of Equity (“EVE”) resulting from adverse movements in interest rates.  EVE is defined as the net present value of the balance sheet’s cash flow.  EVE is calculated by discounting projected principal and interest cash flows under the current interest rate environment.  The present value of asset cash flows less the present value of liability cash flows derives the net present value of the Company’s balance sheet.  The Company’s Asset / Liability Committee utilizes financial simulation models to measure interest rate exposure.  These models are designed to simulate the cash flow and accrual characteristics of the Company’s balance sheet.  In addition, the models incorporate assumptions about the direction and volatility of interest rates, the slope of the yield curve, and the changing composition of the Company’s balance sheet arising from both strategic plans and customer behavior.  Finally, management makes assumptions regarding loan and deposit growth, pricing, and prepayment speeds.

The sensitivity analysis included in the tables below delineates the percentage change in net interest income and EVE derived from instantaneous parallel rate shifts of plus and minus 400, 300, 200 and 100 basis points.  The impact of minus 400, 300, 200 and 100 basis point rate shocks as of March 31, 2017 and 2016 was not considered meaningful because of the historically low interest rate environment.  However, the risk exposure should be mitigated by any downward rate shifts.  Variances were calculated from the base case scenario, which reflected prevailing market rates, and the net interest income forecasts used in the calculations spanned 12 months for each scenario. 

For the tables below, average life assumptions and beta values for non-maturity deposits were estimated based on the historical behavior rather than assuming an average life of one day and a beta value of 1, or 100%.  Historical behavior suggests that non-maturity deposits have longer average lives for which to discount expected cash flows and lower beta values for which to re-price expected cash flows.  The former results in a higher premium derived from the present value calculation, while the latter results in a slower rate of change and lower change in interest rate paid given a change in market rates.  Both have a positive impact on the EVE calculation for rising rate shocks.  Calculations using these assumptions are designed to delineate more precise risk exposure under the various shock scenarios.  While the falling rate shocks are not considered meaningful in the historically low interest rate environment, the risk profile would be negatively impacted by downward rate shifts under these assumptions.





 

 

 



 

 

 



Net Interest Income



% Variance from Base Case Scenario

Rate Shock

March 31, 2017

 

March 31, 2016

+400 basis points

6.0%

 

9.5%

+300 basis points

8.0%

 

10.8%

+200 basis points

8.5%

 

10.4%

+100 basis points

4.2%

 

5.2%

-100 basis points

NM

 

NM

-200 basis points

NM

 

NM

-300 basis points

NM

 

NM

-400 basis points

NM

 

NM

NM=not meaningful

 

 

 



 

 

 



 

 

 



Economic Value of Equity



% Variance from Base Case Scenario

Rate Shock

March 31, 2017

 

March 31, 2016

+400 basis points

23.5%

 

27.9%

+300 basis points

18.3%

 

21.5%

+200 basis points

12.0%

 

14.4%

+100 basis points

6.0%

 

6.9%

-100 basis points

NM

 

NM

-200 basis points

NM

 

NM

-300 basis points

NM

 

NM

-400 basis points

NM

 

NM

NM=not meaningful

 

 

 

50

 


 



In addition to instantaneous rate shocks, the Company monitors interest rate exposure through simulations of gradual interest rate changes over a 12-month time horizon.  The results of these analyses are included in the following table:



 

 

 



 

 

 



Net Interest Income



% Variance from Base Case Scenario

Rate Ramp

March 31, 2017

 

March 31, 2016

+200 basis points

3.4%

 

4.5%

-200 basis points

NM

 

NM

NM=not meaningful

 

 

 





Provision for Credit Losses and Allowance for Credit Losses



In the normal course of business, the Bank assumes risks in extending credit.  The Bank manages these risks through underwriting in accordance with its lending policies, loan review procedures and the diversification of its loan and lease portfolio.  Although it is not possible to predict credit losses with certainty, management regularly reviews the characteristics of the loan and lease portfolio to determine its overall risk profile and quality.

The provision for credit losses is the periodic cost (or credit) of providing an allowance or reserve for estimated probable incurred losses on loans and leases.  The Board of Directors has appointed a Credit Committee, composed of senior management and loan administration staff which meets on a quarterly basis or more frequently if required to review the recommendations of several internal working groups developed for specific purposes including the allowance for loans and lease losses, impairments and charge-offs.  The allowance for loan and lease losses group (“ALLL group”) bases its estimates of credit losses on three primary components:  (1) estimates of probable incurred losses that exist in various segments of performing loans and leases based upon historical net loss experience; (2) specifically identified losses in individually analyzed credits; and (3) qualitative factors that address estimates of incurred losses not fully identified by historical net loss experience.  Factors such as financial condition of the borrower and guarantor, recent credit performance, delinquency, liquidity, cash flows, collateral type and value are used to assess credit risk.  Estimates of incurred losses are influenced by the historical net losses experienced by the Bank for loans and leases of comparable creditworthiness and structure.  Specific loss assessments are performed for loans and leases classified as impaired loans based upon the collateral protection or expected future cash flows to determine the amount of impairment under FASB ASC 310, Receivables (“FASB ASC 310”).  In addition, qualitative factors such as changes in economic conditions, concentrations of risk, and changes in portfolio risk resulting from regulatory changes are considered in determining the adequacy of the level of the allowance for credit losses.

Attention is paid to the quality of the loan and lease portfolio through a formal loan review process. An independent loan review department of the Bank 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 for credit losses.  The ALLL group is responsible for ensuring that the allowance for credit losses provides adequate coverage of estimated probable incurred loan losses.  The ALLL group  meets at least quarterly to determine the amount of adjustments to the allowance for credit losses.   The ALLL group is composed of senior management from the Bank’s loan administration and finance departments.  The impairment group is responsible for evaluating individual loans that have been specifically identified as impaired loans through various channels, including examination of the Bank’s watch list, past due listings, loan officer assessments and loans to borrowers or industries known to be experiencing problems.  For all loans identified, the responsible loan officer in conjunction with his or her credit administrator is required to prepare an impairment analysis to be reviewed by the impairment group.  The impairment group deems that a loan is impaired if the loan is greater than $500,000 and it is probable that the Company will be unable to collect the contractual principal and interest on the loan and all loans restructured in a TDR.  The impairment group also evaluates the circumstances surrounding the loan in order to determine whether the most appropriate method for measuring the impairment of the loan was used (i.e., present value of expected future cash flows, observable market price or fair value of the underlying collateral if the loan is collateral dependent).  The impairment group meets on a monthly basis.

If concessions are granted to a borrower as a result of its financial difficulties, the loan is classified as a troubled debt restructuring (“TDR”) and an impaired loan, with the amount of impairment, if any, determined as

51

 


 

discussed above.  TDRs are reserved in accordance with FASB ASC 310.  Should the borrower’s financial condition, collateral protection or performance deteriorate, warranting reassessment of the loan rating or impairment, additional reserves and/or chargeoffs may be required.

Loans of $500,000 or more that are identified as impaired loans are reviewed by the impairment group, which approves the amount of specific reserve, if any, and/or chargeoff amounts.  The impairment evaluation of real estate loans generally focuses on the fair value of underlying collateral less estimated costs to sell obtained from appraisals, as the repayment of these loans may be dependent on the liquidation of the collateral.  In certain circumstances, other information such as comparable sales data is deemed to be a more reliable indicator of fair value of the underlying collateral than the most recent appraisal.  In these instances, such information is used in determining the impairment recorded for the loan.  As the repayment of commercial and industrial loans is generally dependent upon the cash flow of the borrower or guarantor support, the impairment evaluation generally focuses on the discounted future cash flows of the borrower or guarantor support, as well as the projected liquidation of any pledged collateral.  The impairment group reviews the results of each evaluation and approves the final impairment amounts, which are then included in the analysis of the adequacy of the allowance for credit losses in accordance with FASB ASC 310.  Loans identified for impairment are placed in non-accrual status.

A new appraisal is generally ordered for loans greater than $500,000 that have characteristics of potential impairment, such as delinquency or other loan-specific factors identified by management, when a current appraisal (dated within the prior 12 months) is not available or when a current appraisal uses assumptions that are not consistent with the expected disposition of the loan collateral.  In order to measure impairment properly at the time that a loan is deemed to be impaired, a staff appraiser may estimate the collateral fair value based upon earlier appraisals received from outside appraisers, sales contracts, approved foreclosure bids, comparable sales, officer estimates or current market conditions until a new appraisal is received.  This estimate can be used to determine the extent of the impairment on the loan.  After a loan is deemed to be impaired, it is management’s policy to obtain an updated appraisal on at least an annual basis.  Management performs a review of the pertinent facts and circumstances of each impaired loan, such as changes in outstanding balances, information received from loan officers and receipt of re-appraisals, on a monthly basis.  As of each review date, management considers whether additional impairment and/or chargeoffs should be recorded based on recent activity related to the loan-specific collateral as well as other relevant comparable assets.  Any adjustment to reflect further impairments, either as a result of management’s periodic review or as a result of an updated appraisal, are made through recording additional loan loss provisions and/or charge-offs.

At March 31, 2017, impaired loans totaled $41.9 million, which was net of cumulative charge-offs of $7.9 million.  Additionally, the Company had specific reserves for impaired loans of $6.2 million included in the allowance for credit losses.  Impaired loans at March 31, 2017 were primarily from the Company’s commercial real estate and commercial and industrial-owner occupied portfolios.  Impaired loan charge-offs are determined necessary when management determines that the amount is not likely to be collected.  

When a guarantor is relied upon as a source of repayment, it is the Company’s policy to analyze the strength of the guaranty.  This analysis varies based on circumstances, but may include a review of the guarantor’s personal and business financial statements and credit history, a review of the guarantor’s tax returns and the preparation of a cash flow analysis of the guarantor.  Management will continue to update its analysis on individual guarantors as circumstances change.  Subsequent analyses may result in the identification of the inability of some guarantors to perform under the agreed upon terms.

Any loan or portion thereof which is classified as “loss” or which is determined by management to be uncollectible, because of factors such 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.

52

 


 



The following table provides an analysis of the allowance for credit losses for the periods indicated:





 

 

 

 



 

 

 

 



 

Three months ended



 

March 31,



 

2017

 

2016



(Dollars in thousands)

Balance, beginning of period

 

$         123,736

 

$      126,458



 

 

 

 

Loans and leases charged off:

 

 

 

 

Commercial and industrial

 

(384)

 

(140)

Real estate

 

 

 

 

Consumer mortgages

 

(596)

 

(710)

Home equity

 

(459)

 

(550)

Agricultural

 

(44)

 

(11)

Commercial and industrial-owner occupied

 

(404)

 

(154)

Construction, acquisition and development

 

(30)

 

(226)

Commercial real estate

 

(19)

 

(245)

Credit cards

 

(838)

 

(720)

All other

 

(559)

 

(487)

 Total loans charged off

 

(3,333)

 

(3,243)



 

 

 

 

Recoveries:

 

 

 

 

Commercial and industrial

 

490 

 

212 

Real estate

 

 

 

 

Consumer mortgages

 

625 

 

455 

Home equity

 

356 

 

80 

Agricultural

 

41 

 

36 

Commercial and industrial-owner occupied

 

193 

 

125 

Construction, acquisition and development

 

1,324 

 

272 

Commercial real estate

 

69 

 

683 

Credit cards

 

249 

 

181 

All other

 

446 

 

247 

 Total recoveries

 

3,793 

 

2,291 

Net recoveries (charge-offs)

 

460 

 

(952)

Provision charged to operating expense

 

1,000 

 

1,000 

Balance, end of period

 

$         125,196

 

$      126,506



 

 

 

 

Average loans for period

 

$    10,820,486

 

$ 10,372,925

Ratios:

 

 

 

 

Net (recoveries) charge-offs to average loans (annualized)

 

(0.02%)

 

0.04% 

Provision for credit losses to average

 

 

 

 

loans and leases, net of unearned income (annualized)

 

0.04% 

 

0.04% 

Allowance for credit losses to loans

 

 

 

 

and leases, net of unearned income

 

1.16% 

 

1.21% 



Net recoveries were approximately  $460,000 in the first quarter of 2017 compared to net chargeoffs of $1.0 million in the first quarter of 2016.   Annualized net recoveries as a percentage of average loans and leases for the

53

 


 

first quarter of 2017 were (0.02%), compared to annualized net chargeoffs as a percentage of average loans and leases of 0.04% for the first quarter of 2016.  The 2017 net recovery was a result of elevated levels of recoveries primarily in the construction, acquisition and development real estate portfolio.  Total recoveries were $3.8 million for the three-month period ended March 31, 2017, compared to $2.3 million for the three-month period ended March 31, 2016 with 34.9% of the first three months 2017 recoveries being noticed in the real estate construction, acquisition and development portfolio.    

A $1.0 million provision for credit losses was recorded for both the first three months of 2017 and the first three months of 2016The low provision for credit losses for the first three months of 2017 was a result of improving credit trends, including the elevated levels of recoveries.  As of March 31, 2017 and 2016,  56% and 61%, respectively, of nonaccrual loans had been charged down to net realizable value or had specific reserves to reflect recent appraised values.  As a result, impaired loans had an aggregate net book value of 84%  and 82% of their contractual principal balance at March 31, 2017 and 2016, respectively

The allowance for credit losses decreased $1.3 million to $125.2 million at March 31, 2017 compared to $126.5 million at March 31, 2016The decrease was a result of improving credit metrics since March 31, 2016, including reductions in classified loans and NPLs.

The breakdown of the allowance by loan and lease category is based, in part, on evaluations of specific loan and lease histories and on economic conditions within specific industries or geographical areas.  Accordingly, because all of these conditions are subject to change, the allocation is not necessarily indicative of the breakdown of any future allowance or losses.  The following table presents (i) the breakdown of the allowance for credit losses by loan and lease segment and class and (ii) the percentage of each segment and class in the loan and lease portfolio to total loans and leases at the dates indicated:



 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

March 31,

 

December 31,

 



 

2017

 

2016

 

2016

 



 

Allowance

 

% of

 

Allowance

 

% of

 

Allowance

 

% of

 



 

for

 

Total

 

for

 

Total

 

for

 

Total

 



 

Credit

 

Loans

 

Credit

 

Loans

 

Credit

 

Loans

 



 

Losses

 

and Leases

 

Losses

 

and Leases

 

Losses

 

and Leases

 



 

(Dollars in thousands)

 

Commercial and industrial

 

$20,567 

 

14.2 

%

$19,280 

 

16.4 

%

$     19,170

 

14.9 

%

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

31,755 

 

24.7 

 

33,346 

 

23.7 

 

30,386 

 

24.4 

 

Home equity

 

7,032 

 

5.8 

 

7,033 

 

5.8 

 

7,174 

 

5.8 

 

Agricultural

 

2,278 

 

2.2 

 

2,401 

 

2.3 

 

2,172 

 

2.2 

 

Commercial and industrial-owner occupied

 

13,866 

 

16.6 

 

14,749 

 

15.8 

 

12,899 

 

16.3 

 

Construction, acquisition and development

 

13,485 

 

10.5 

 

14,664 

 

9.2 

 

13,957 

 

10.7 

 

Commercial real estate

 

25,662 

 

21.0 

 

25,413 

 

21.3 

 

24,845 

 

20.7 

 

Credit cards

 

6,166 

 

1.0 

 

3,240 

 

1.0 

 

7,787 

 

1.0 

 

All other

 

4,385 

 

4.0 

 

6,380 

 

4.5 

 

5,346 

 

4.0 

 

    Total

 

$125,196 

 

100.0 

%

$126,506 

 

100.0 

%

$   123,736

 

100.0 

%



54

 


 

Noninterest Revenue



The components of noninterest revenue for the three months ended March 31, 2017 and 2016 and the corresponding percentage changes are shown in the following tables:



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

Three months ended

 

 

 



 

March 31,

 

 

 



 

2017

 

2016

 

% Change



 

 

 

 

 

 

 



 

(Dollars in thousands)

 

 

 

Mortgage banking excl. MSR and MSR Hedge Market value

 

$        8,056

 

$        9,784

 

(17.7)

%

MSR and MSR Hedge Market value adjustment

 

934 

 

(7,954)

 

NM

 

Credit card, debit card and merchant fees

 

8,903 

 

8,961 

 

(0.6)

 

Deposit service charges

 

9,689 

 

11,014 

 

(12.0)

 

Securities gains, net

 

1,071 

 

 

NM

 

Insurance commissions

 

32,940 

 

33,249 

 

(0.9)

 

Trust income*

 

3,561 

 

3,430 

 

3.8 

 

Annuity fees *

 

349 

 

477 

 

(26.8)

 

Brokerage commissions and fees*

 

1,264 

 

1,202 

 

5.2 

 

Bank-owned life insurance

 

1,669 

 

1,893 

 

(11.8)

 

Other miscellaneous income

 

2,433 

 

2,669 

 

(8.8)

 

Total noninterest revenue

 

$      70,869

 

$      64,727

 

9.5 

%

* Included in Wealth Management revenue on the Consolidated Statements of Income

NM= Not meaningful







The Company’s revenue from mortgage banking typically fluctuates as mortgage interest rates change and is primarily attributable to two activities - origination and sale of new mortgage loans and servicing mortgage loans.  Since mortgage revenue can be significantly affected by changes in the valuation of MSRs in changing interest rate environments, the Company began piloting a hedge of the change in fair value of its MSRs during the fourth quarter of 2015.  The Company’s normal practice is to originate mortgage loans for sale in the secondary market and to either retain or release the associated MSRs with the loan sold.  The Company records MSRs at fair value for all loans sold on a servicing retained basis with subsequent adjustments to fair value of MSRs in accordance with FASB ASC 860.  

In the course of conducting the Company’s mortgage banking activities of originating mortgage loans and selling those loans in the secondary market, various representations and warranties are made to the purchasers of the mortgage loans.  These representations and warranties also apply to underwriting the real estate appraisal opinion of value for the collateral securing these loans.  Under the representations and warranties, failure by the Company to comply with the underwriting and/or appraisal standards could result in the Company being required to repurchase the mortgage loan or to reimburse the investor for losses incurred (i.e., make whole requests) if such failure cannot be cured by the Company within the specified period following discovery.  During the first three months of 2017,   five mortgage loans were settled as a result of make whole requests with no mortgage loans repurchased as a result of underwriting and appraisal standard exceptions.  A loss of approximately $180,000 was recognized related to repurchased or make whole loans.  During the first three months of 2016, three mortgage loans totaling approximately $63,000 were repurchased or otherwise settled as a result of underwriting and appraisal standard exceptions or make whole requests.  A loss of approximately $41,000 was recognized related to repurchased or make whole loans.

At March 31, 2017, the Company had accrued $1.5 million for its estimate of losses from representation and warranty obligations.  The reserve was based on the Company’s repurchase and loss trends, and quantitative and qualitative factors that may result in anticipated losses different than historical loss trends, including loan vintage, underwriting characteristics and macroeconomic trends. 

Management believes that the Company’s foreclosure process related to mortgage loans continues to operate effectively.  Before beginning the foreclosure process, a mortgage loan foreclosure working group of the Bank reviews the identified delinquent loan.  All documents and activities related to the foreclosure process are executed in-house by mortgage department personnel. 

55

 


 

Origination revenue, a component of mortgage banking, is comprised of gains or losses from the sale of the mortgage loans originated, origination fees, underwriting fees and other fees associated with the origination of loans.  Mortgage loan origination volumes of $287.8 million and $315.4 million produced origination revenue of $5.1 million and $6.4 million for the quarters ended March 31, 2017 and 2016, respectively.  The decrease in mortgage origination revenue for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 is a result of the decrease in mortgage loan originations.    

Revenue from the servicing process, another component of mortgage banking, includes fees from the actual servicing of loans.  Revenue from the servicing of loans was $4.8  million and $4.7 million for the quarters ended March 31, 2017 and 2016, respectively. 

Changes in the fair value of the Company’s MSRs are generally a result of changes in mortgage interest rates from the previous reporting date.  An increase in mortgage interest rates typically results in an increase in the fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease in the fair value of MSRs.  The fair value of MSRs is also impacted by principal payments, prepayments, chargeoffs and payoffs on loans in the servicing portfolio.  Decreases in value from principal payments, prepayments, chargeoffs and payoffs were $1.9 million and $1.4 million for the quarters ended March 31, 2017 and 2016, respectively.  The Company began piloting a hedge of the change in fair value of its MSRs during the fourth quarter of 2015.  At March 31, 2017, the Company had a hedge in place designed to cover approximately 6% of the MSR value. The Company is susceptible to fluctuations in their value in changing interest rate environments.   Reflecting this sensitivity to interest rates, the fair value of MSRs, including the MSR hedges increased approximately  $934,000 and decreased $8.0 million for the quarters ended March 31, 2017 and 2016, respectively.    





 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

Three months ended

 

 

 



 

March 31,

 

 

 



 

2017

 

2016

 

% Change



 

(Dollars in thousands)

 

 

 

Mortgage banking:

 

 

 

 

 

 

 

Origination

 

$           5,117

 

$           6,420

 

(20.3)

%

Servicing

 

4,815 

 

4,744 

 

1.5 

 

Payoffs/Paydowns

 

(1,876)

 

(1,380)

 

35.9 

 



 

8,056 

 

9,784 

 

 

 

Market value adjustment on MSR

 

909 

 

(7,954)

 

NM

 

Market value adjustment on MSR Hedge

 

25 

 

 -

 

 

 

Mortgage banking

 

$           8,990

 

$           1,830

 

391.3 

%



 

 

 

 

 

 

 



 

(Dollars in millions)

 

 

 

Origination volume

 

$              288

 

$              315

 

(8.6)

%

Outstanding principal balance of

 

 

 

 

 

 

 

mortgage loans serviced at year-end

 

$           6,430

 

$           6,096

 

5.5 

%



 

 

 

 

 

 

 



 

 

 

 

 

 

 

NM=Not meaningful

 

 

 

 

 

 

 



Credit card, debit card and merchant fees remained stable for the comparable three-month periods.  Deposit service charge revenue decreased 12.0% when comparing the three-month period ended March 31, 2017 and 2016 due to modifications made on the calculation and assessment of overdraft fees since March 31, 2016. 

Net security gains of $1.1 million for the three-month period ended March 31, 2017 and net security gains of approximately $2,000 for the three-month period ended March 31, 2016 were a result of sales and calls of available-for-sale securities. 

Insurance commissions remained relatively stable decreasing only 0.9% for the first quarter of 2017 compared to the first quarter of 2016Trust income increased 3.8% during the first quarter of 2017 compared to the first quarter of 2016 as a result increases in the value of assets under management or in custody, as revenue is earned on assets under management.  Annuity fees decreased 26.8% for the first quarter of 2017 compared to the first quarter of 2016 as a result of less annuity sales during the first quarter of 2017.  Brokerage commissions and fees remained relatively stable increasing approximately $62,000, or 5.2% for the comparable three-month period. Bank-owned life insurance decreased 11.8% for the comparable three-month period as a result of recording life insurance

56

 


 

proceeds in 2016 and no proceeds in the first quarter of 2017.  Other miscellaneous income, which includes safe deposit box rental income, gain or loss on disposal of assets, and other non-recurring revenue items decreased 8.8% for the comparable three-month periods ended March 31, 2017 and 2016 primarily as a result of the decrease in credit trading fee income and gain on sale of fixed assets.



 Noninterest Expense



The components of noninterest expense for the three months ended March 31, 2017 and 2016 and the corresponding percentage changes are shown in the following tables:



 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

Three months ended

 

 

 



 

March 31,

 

 

 



 

2017

 

2016

 

% Change



 

(Dollars in thousands)

 

 

 

Salaries and employee benefits

 

$     81,386

 

$     81,679

 

(0.4)

%

Occupancy, net

 

10,302 

 

10,273 

 

0.3 

 

Equipment

 

3,568 

 

3,765 

 

(5.2)

 

Deposit insurance assessments

 

2,484 

 

2,288 

 

8.6 

 

Regulatory settlement

 

 -

 

10,277 

 

NM

 

Advertising

 

663 

 

633 

 

4.7 

 

Foreclosed property expense

 

1,050 

 

1,181 

 

(11.1)

 

Telecommunications

 

1,147 

 

1,295 

 

(11.4)

 

Public relations

 

720 

 

661 

 

8.9 

 

Data processing

 

6,623 

 

6,391 

 

3.6 

 

Computer software

 

2,981 

 

2,660 

 

12.1 

 

Amortization of intangibles

 

1,030 

 

880 

 

17.0 

 

Legal fees

 

1,229 

 

4,535 

 

(72.9)

 

Merger expense

 

 -

 

 

NM

 

Postage and shipping

 

1,175 

 

1,117 

 

5.2 

 

Other miscellaneous expense

 

12,751 

 

13,876 

 

(8.1)

 

Total noninterest expense

 

$   127,109

 

$   141,512

 

(10.2)

%

NM= Not meaningful







Salaries and employee benefit expense and occupancy expense remained relatively stable for the three months ended March 31, 2017 compared to the same period in 2016.  Equipment expense decreased 5.2%  for the comparable three-month period as a result of decreases in depreciation expense.  Deposit insurance assessments increased 8.6% for the comparable three-month period as a result of additional assessments related to the surcharge to be levied on all larger banks to bring the Deposit Insurance Fund reserve ratio to the statutory minimum combined with movement evidenced in several variables utilized by the FDIC in calculating the deposit insurance assessmentA pre-tax charge of $10.3 million was recorded during the first quarter of 2016 related to a liability associated with ongoing regulatory matters. No similar charges were recorded in the first quarter of 2017.

Foreclosed property expense decreased 11.1% for the comparable three months ended March 31, 2017 and 2016.  The decrease for the comparable three month period was due to decrease in the loss on sale of OREO recorded in the first quarter of 2017 compared to first quarter of 2016.    During the first three months of 2017, the Company added $2.3 million to OREO through foreclosures.  Sales of OREO in the first three months of 2017 were $1.0 million, resulting in a net loss of approximately $3,000.  The components of foreclosed property expense for the three months ended March 31, 2017 and 2016 and the percentage change between periods are shown in the following tables:

57

 


 





 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

Three months ended

 

 

 



 

March 31,

 

 

 



 

2017

 

2016

 

% Change



 

(Dollars in thousands)

 

 

 

Loss on sale of other real estate owned

 

$            3

 

$        246

 

(98.8)

%

Writedown of other real estate owned

 

629 

 

596 

 

5.5 

 

Other foreclosed property expense

 

418 

 

339 

 

23.3 

 

Total foreclosed property expense

 

$     1,050

 

$     1,181

 

(11.1)

%



 

 

 

 

 

 

 



While the Company experienced some fluctuations in various components of other noninterest expense, including telecommunications, public relations and computer software, the primary fluctuations included the decrease in legal fees and in other miscellaneous expense for the first three months of 2017 compared to the first three months of 2016.  The decrease in legal fees and other miscellaneous expense is a result of additional legal, consulting and compliance costs recorded during the first three months of 2016 related to ongoing regulatory matters more than offsetting legal, consulting and compliance costs recorded during the first three months of 2017.



Income Tax



The Company recorded income tax expense of $19.3 million for the first quarter of 2017 compared to income tax expense of $10.8 million for the first quarter of 2016.   The primary differences between the Company’s recorded expense for the first quarter of 2017 and the expense that would have resulted from applying the U.S. statutory tax rate of 35% to the Company’s pre-tax income were primarily the effects of tax-exempt income and other tax preference items.   Upon adoption of ASU 2016-09 regarding stock based compensation in the first quarter of 2017, the Company estimates, based on currently enacted tax rates, the change will result in an incremental effect on tax provision ranging from approximately $218,000 to approximately $865,000 of tax benefit.  The actual effects of adoption in 2017 will primarily depend upon the share price of the Company’ stock, which affects the vesting of certain performance awards, probability of exercise of certain stock options and the magnitude of windfalls for all awards upon either vesting or exercise.



FINANCIAL CONDITION



The percentage of earning assets to total assets measures the effectiveness of management’s efforts to invest available funds into the most efficient and profitable uses.  Earning assets at March 31, 2017 were $13.8 billion, or 92.6% of total assets, compared with $13.5 billion, or 92.0% of total assets, at December 31, 2016



Loans and Leases



The Bank’s loan and lease portfolio represents the largest single component of the Company’s earning asset base, comprising 78.9% of average earning assets during the first quarter of 2017.  The Bank’s lending activities include both commercial and consumer loans and leases.  Loan and lease originations are derived from a number of sources, including direct solicitation by the Bank’s loan officers, existing depositors and borrowers, builders, attorneys, walk-in customers and, in some instances, other lenders, real estate broker referrals and mortgage loan companies.  The Bank has established systematic procedures for approving and monitoring loans and leases that vary depending on the size and nature of the loan or lease, and applies these procedures in a disciplined manner.  The Company’s loans and leases are widely diversified by borrower and industry.  Loans and leases, net of unearned income, totaled $10.8 billion at both March 31, 2017 and December 31, 2016.     

58

 


 

The following table shows the composition of the Company’s gross loans and leases by segment and class at the dates indicated:



 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2017

 

2016

 

2016



 

 

 

 

 

 



(In thousands)



 

 

 

 

 

 

Commercial and industrial

 

$    1,539,481

 

$    1,720,574

 

$     1,615,608

Real estate

 

 

 

 

 

 

Consumer mortgages

 

2,675,672 

 

2,480,828 

 

2,643,966 

Home equity

 

626,488 

 

605,228 

 

628,846 

Agricultural

 

240,534 

 

239,422 

 

245,377 

Commercial and industrial-owner occupied

 

1,801,613 

 

1,654,577 

 

1,764,265 

Construction, acquisition and development

 

1,136,827 

 

966,362 

 

1,157,248 

Commercial real estate

 

2,271,542 

 

2,233,742 

 

2,237,719 

Credit cards

 

103,813 

 

106,714 

 

109,656 

All other

 

426,598 

 

468,081 

 

432,827 

Gross Loans Total

 

10,822,568 

 

10,475,528 

 

10,835,512 

Less:  Unearned Income

 

20,874 

 

30,831 

 

23,521 

Net Loans

 

$  10,801,694

 

$  10,444,697

 

$  10,811,991

(1)

Gross loans and leases are net of deferred costs of $1.6 million, approximately $264,000 and approximately $282,000 at March 31, 2017 and 2016 and December 31, 2016, respectively.



The following table shows the Company’s loans and leases, net of unearned income by segment, class and geographical location as of March 31, 2017:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Alabama

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

and Florida

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Panhandle

 

Arkansas

 

Louisiana

 

Mississippi

 

Missouri

 

Tennessee

 

Texas

 

Other

 

Total



 

(In thousands)

Commercial and industrial

 

$        146,277 

 

$        181,759 

 

$        172,034 

 

$         554,665 

 

$       85,672 

 

$         118,052 

 

$         219,638 

 

$           58,430 

 

$        1,536,527 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

355,497 

 

322,928 

 

224,643 

 

846,615 

 

89,752 

 

302,422 

 

506,417 

 

27,398 

 

2,675,672 

Home equity

 

95,605 

 

44,558 

 

71,903 

 

230,822 

 

21,956 

 

144,109 

 

15,722 

 

1,813 

 

626,488 

Agricultural

 

8,540 

 

83,664 

 

26,241 

 

66,060 

 

6,568 

 

13,501 

 

35,927 

 

33 

 

240,534 

Commercial and industrial-owner occupied

 

200,300 

 

193,486 

 

210,282 

 

732,207 

 

47,847 

 

155,666 

 

261,825 

 

 -

 

1,801,613 

Construction, acquisition and development

 

125,908 

 

61,890 

 

53,512 

 

344,875 

 

21,592 

 

167,290 

 

361,760 

 

 -

 

1,136,827 

Commercial real estate

 

314,657 

 

355,978 

 

219,715 

 

585,549 

 

200,684 

 

202,476 

 

392,068 

 

415 

 

2,271,542 

Credit cards

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

103,813 

 

103,813 

All other

 

52,756 

 

41,000 

 

25,235 

 

212,471 

 

3,417 

 

23,799 

 

43,841 

 

6,159 

 

408,678 

Total

 

$     1,299,540 

 

$     1,285,263 

 

$     1,003,565 

 

$      3,573,264 

 

$     477,488 

 

$      1,127,315 

 

$      1,837,198 

 

$         198,061 

 

$      10,801,694 



59

 


 

The maturity distribution of the Bank’s loan portfolio is one factor in management’s evaluation by collateral type of the risk characteristics of the loan and lease portfolio.  The following table shows the maturity distribution of the Company’s loans and leases, net of unearned income, as of March 31, 2017:





 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

 

 

One Year

 

One to

 

After

 

 



 

Past Due

 

or Less

 

Five Years

 

Five Years

 

Total



 

(In thousands)

Commercial and industrial

 

$        48,734

 

$        492,729

 

$         745,786

 

$        249,278

 

$     1,536,527

Real estate

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

4,110 

 

250,459 

 

352,865 

 

2,068,238 

 

2,675,672 

Home equity

 

1,636 

 

76,204 

 

303,681 

 

244,967 

 

626,488 

Agricultural

 

3,376 

 

36,922 

 

53,098 

 

147,138 

 

240,534 

Commercial and industrial-owner occupied

 

23,428 

 

196,704 

 

397,174 

 

1,184,307 

 

1,801,613 

Construction, acquisition and development

 

3,555 

 

591,408 

 

275,669 

 

266,195 

 

1,136,827 

Commercial real estate

 

12,731 

 

225,053 

 

640,203 

 

1,393,555 

 

2,271,542 

Credit cards

 

 -

 

103,813 

 

 -

 

 -

 

103,813 

All other

 

244 

 

180,806 

 

166,195 

 

61,433 

 

408,678 

Total

 

$        97,814

 

$     2,154,098

 

$      2,934,671

 

$     5,615,111

 

$  10,801,694



Commercial and Industrial - Commercial and industrial loans are loans and leases to finance business operations, equipment and owner-occupied facilities primarily for small and medium-sized enterprises. These include both lines of credit for terms of one year or less and term loans which are amortized over the useful life of the assets financed. Personal guarantees are generally required for these loans. Also included in this category are loans to finance agricultural production.  Commercial and industrial loans outstanding decreased 4.7% from December 31, 2016 to March 31, 2017.  

Real Estate – Consumer Mortgages - Consumer mortgages are first- or second-lien loans to consumers secured by a primary residence or second home. These loans are generally amortized over terms up to 25 years.  The loans are generally secured by properties located within the local market area of the community bank which originates and services the loan. These loans are underwritten in accordance with the Bank’s general loan policies and procedures which require, among other things, proper documentation of each borrower’s financial condition, satisfactory credit history and property value. Consumer mortgages outstanding increased 1.2% at March 31, 2017 compared to December 31, 2016.  In addition to loans originated through the Bank’s branches, the Bank originates and services consumer mortgages sold in the secondary market which are underwritten and closed pursuant to investor and agency guidelines.  The Bank’s exposure to sub-prime mortgages is minimal.

Real Estate – Home Equity - Home equity loans include revolving credit lines which are secured by a first or second lien on a borrower’s residence. Each loan is underwritten individually by lenders who specialize in home equity lending and must conform to Bank lending policies and procedures for consumer loans as to borrower’s financial condition, ability to repay, satisfactory credit history and the condition and value of collateral. Properties securing home equity loans are generally located in the local market area of the Bank branch or office originating and servicing the loan.  The Bank has not purchased home equity loans from brokers or other lending institutions.  Home equity loans outstanding decreased by 0.4% at March 31, 2017 compared to December 31, 2016.

Real Estate – Agricultural - Agricultural loans include loans to purchase agricultural land and production lines secured by farm land.  Agricultural loans outstanding decreased by 2.0% from December 31, 2016 to March 31, 2017.

Real Estate – Commercial and Industrial-Owner Occupied - Commercial and industrial-owner occupied loans include loans secured by business facilities to finance business operations, equipment and owner-occupied facilities primarily for small and medium-sized enterprises. These include both lines of credit for terms of one year or less and term loans which are amortized over the useful life of the assets financed. Personal guarantees are generally required for these loans.  Commercial and industrial-owner occupied loans increased 2.1% from December 31, 2016 to March 31, 2017.

Real Estate – Construction, Acquisition and Development - Construction, acquisition and development loans include both loans and credit lines for the purpose of purchasing, carrying and developing land into

60

 


 

commercial developments or residential subdivisions.  Also included are loans and lines for construction of residential, multi-family and commercial buildings. The Bank generally engages in construction and development lending only in local markets served by its branches. Construction, acquisition and development loans decreased 1.8% from December 31, 2016 to March 31, 2017. 

The underwriting process for construction, acquisition and development loans with interest reserves is essentially the same as that for a loan without interest reserves and may include analysis of borrower and guarantor financial strength, market demand for the proposed project, experience and success with similar projects, property values, time horizon for project completion and the availability of permanent financing once the project is completed.  The Company’s loan policy generally prohibits the use of interest reserves on loans.  Construction, acquisition and development loans, with or without interest reserves, are inspected periodically to ensure that the project is on schedule and eligible for requested draws.  Inspections may be performed by construction inspectors hired by the Company or by appropriate loan officers and are done periodically to monitor the progress of a particular project.  These inspections may also include discussions with project managers and engineers. 

At March 31, 2017, the Company had $88.3 million in construction, acquisition and development loans that provided for the use of interest reserves with approximately $755,000 recognized as interest income during the first quarter of 2017.  There were no construction, acquisition and development loans with interest reserves that were on non-accrual status at March 31, 2017.  Interest income is not recognized on construction, acquisition and development loans with interest reserves that are in non-accrual status.  Loans with interest reserves normally have a budget that includes the various cost components involved in the project. Interest is such a cost, along with hard and other soft costs.  The Company’s policy is to allow interest reserves only during the construction phase.

Each construction, acquisition and development loan is underwritten to address: (i) the desirability of the project, its market viability and projected absorption period; (ii) the creditworthiness of the borrower and the guarantor as to liquidity, cash flow and assets available to ensure performance of the loan; (iii) equity contribution to the project; (iv) the developer’s experience and success with similar projects; and (v) the value of the collateral.

Real Estate – Commercial - Commercial loans include loans to finance income-producing commercial and multi-family properties.  Lending in this category is generally limited to properties located in the Bank’s trade area with only limited exposure to properties located elsewhere but owned by in-market borrowers. Loans in this category include loans for neighborhood retail centers, medical and professional offices, single retail stores, warehouses and apartments leased generally to local businesses and residents. The underwriting of these loans takes into consideration the occupancy and rental rates as well as the financial health of the borrower.  The Bank’s exposure to national retail tenants is minimal.  The Bank has not purchased commercial real estate loans from brokers or third-party originators.  Commercial real estate loans increased 1.5% from December 31, 2016 to March 31, 2017. 

Credit Cards - Credit cards include consumer and business MasterCard and Visa accounts.  The Bank offers credit cards primarily to its deposit and loan customers.  Credit card balances decreased 5.3% from December 31, 2016 to March 31, 2017.

All Other - All other loans and leases include consumer installment loans and loans and leases to state, county and municipal governments and non-profit agencies. Consumer installment loans and leases include term loans of up to five years secured by automobiles, boats and recreational vehicles.  The Bank offers lease financing for vehicles and heavy equipment to state, county and municipal governments and medical equipment to healthcare providers across the southern states.  All other loan and lease balances, net of unearned income decreased 1.0% from December 31, 2016 to March 31, 2017.

NPLs consist of non-accrual loans and leases, loans and leases 90 days or more past due, still accruing, and accruing loans and leases that have been restructured (primarily in the form of reduced interest rates and modified payment terms) because of the borrower’s or guarantor’s weakened financial condition or bankruptcy proceedings.  The Bank’s policy provides that loans and leases are generally placed in non-accrual status if, in management’s opinion, payment in full of principal or interest is not expected or payment of principal or interest is more than 90 days past due, unless the loan or lease is both well-secured and in the process of collection.  Non-performing assets (“NPAs”) consist of NPLs and OREO, which consists of foreclosed properties.  NPAs, which are carried either in the loan account or OREO on the Company’s consolidated balance sheets, depending on foreclosure status, were as follows as of the dates presented:

61

 


 



 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2017

 

2016

 

2016



 

(Dollars in thousands)

Non-accrual loans and leases

 

$        74,439

 

$        81,926

 

$        71,812

Loans 90 days or more past due, still accruing

 

3,063 

 

4,567 

 

3,983 

Restructured loans and leases, still accruing

 

4,060 

 

7,753 

 

26,047 

Total NPLs

 

81,562 

 

94,246 

 

101,842 



 

 

 

 

 

 

Other real estate owned

 

8,458 

 

12,685 

 

7,810 

Total NPAs

 

$        90,020

 

$      106,931

 

$      109,652



 

 

 

 

 

 

NPLs to net loans and leases

 

0.76% 

 

0.90% 

 

0.94% 

NPAs to net loans and leases

 

0.83% 

 

1.02% 

 

1.01% 



NPLs decreased 19.9% to $81.6 million at March 31, 2017 compared to $101.8 million at December 31, 2016 and decreased 13.5%  compared to $94.2 million at March 31, 2016.  Included in NPLs at March 31, 2017 were $41.9 million of loans that were impaired.  These impaired loans had a specific reserve of $6.2 million included in the allowance for credit losses of $125.2 million at March 31, 2017, and were net of $7.9 million in partial charge-downs previously taken on these impaired loans.  NPLs at December 31, 2016 included $38.2 million of loans that were impaired.  These impaired loans had a specific reserve of $4.4 million included in the allowance for credit losses of $123.7 million at December 31, 2016.  NPLs at March 31, 2016 included $49.6 million of loans that were impaired.  These impaired loans had a specific reserve of $2.3 million included in the allowance for credit losses of $126.5 million at March 31, 2016

Non-accrual loans at March 31, 2017 reflected an increase of $2.6 million, or 3.7%, compared to December 31, 2016 but reflected a  decrease of $7.5 million, or 9.1%, compared to March 31, 2016.    While non-accrual loans decreased slightly in several loan categories when comparing March 31, 2017 to March 31, 2016, the primary decreases in non-accrual loans are recognized in the real estate construction, acquisition and development and the commercial real estate portfolios.  Non-accrual loans related to the real estate construction, acquisition and development portfolio decreased $6.3 million, or 81.0%, to $1.5 million at March 31, 2017 compared to $7.7 million at March 31, 2016.  Non-accrual loans related to the commercial real estate portfolio decreased $5.8 million, or 29.8%, to $13.6 million at March 31, 2017 compared to $19.4 million at March 31, 2016.    The decrease in the real estate construction, acquisition and development and commercial real estate portfolios was partially offset by the increase of $4.2  million, or 456.0%, in the real estate agricultural portfolio to $5.2 million at March 31, 2017 compared to approximately $932,000 at March 31, 2016. 

The Bank’s NPLs are primarily located in Arkansas, Mississippi and Missouri as these markets represent $60.0 million, or 73.5% of total NPLs of $81.6 million at March 31, 2017.    These markets continue to be affected by high inventories of unsold homes, unsold lots and undeveloped land intended for use as housing developments.  The following table presents the NPLs by geographical location at March 31, 2017:

62

 


 





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

90+ Days

 

 

 

Restructured

 

 

 

NPLs as a



 

 

 

Past Due still

 

Non-accruing

 

Loans, still

 

 

 

% of



 

Outstanding

 

Accruing

 

Loans

 

accruing

 

NPLs

 

Outstanding



 

(Dollars in thousands)

Alabama and Florida Panhandle

 

$    1,299,540

 

$             81

 

$               3,426

 

$                 16

 

$       3,523

 

0.3 

%

Arkansas

 

1,285,263 

 

175 

 

8,385 

 

1,520 

 

10,080 

 

0.8 

 

Louisiana

 

1,003,565 

 

 -

 

6,246 

 

 

6,255 

 

0.6 

 

Mississippi

 

3,573,264 

 

1,163 

 

38,702 

 

1,061 

 

40,926 

 

1.1 

 

Missouri

 

477,488 

 

519 

 

8,436 

 

 -

 

8,955 

 

1.9 

 

Tennessee

 

1,127,315 

 

290 

 

2,144 

 

599 

 

3,033 

 

0.3 

 

Texas

 

1,837,198 

 

184 

 

6,728 

 

71 

 

6,983 

 

0.4 

 

Other

 

198,061 

 

651 

 

372 

 

784 

 

1,807 

 

0.9 

 

Total

 

$  10,801,694

 

$        3,063

 

$             74,439

 

$            4,060

 

$     81,562

 

0.8 

%



 

 

 

 

 

 

 

 

 

 

 



OREO increased by approximately $648,000 to $8.5  million at March 31, 2017 compared to $7.8 million at December 31, 2016 and decreased by $4.2 million compared to $12.7 million at March 31, 2016.  OREO decreased as a result of sales of foreclosed properties exceeding new foreclosures. Writedowns were the result of continuing processes to value these properties at fair value.  The Bank recorded losses from the loans that were secured by these foreclosed properties in the allowance for credit losses at the time of foreclosure. 

The Company has processes in place to review credits upon renewal or modification to determine if concessions are being granted that meet the requirements set forth in FASB ASC 310.  Loans identified as meeting the criteria set out in FASB ASC 310 are identified as TDRs.  The concessions granted most frequently for TDRs involve reductions or delays in required payments of principal and/or interest for a specified time, the rescheduling of payments in accordance with a bankruptcy plan or the charge-off of a portion of the loan.  In most cases, the conditions of the credit also warrant non-accrual status, even after the restructure occurs.  TDR loans may be returned to accrual status in years after the restructure if there has been at least a six-month sustained period of repayment performance under the restructured loan terms by the borrower and the interest rate at the time of restructure was at or above market for a comparable loan.  For reporting purposes, if a restructured loan is 90 days or more past due or has been placed in non-accrual status, the restructured loan is included in the loans 90 days or more past due category or the non-accrual loan category of NPAs.  Total restructured loans were $18.4 million and $40.9 million at March 31, 2017 and December 31, 2016, respectively.  Restructured loans of $14.3 million and  $14.8 million were included in the non-accrual loan category at March 31, 2017 and December 31, 2016, respectively.

At March 31, 2017,  the Company did not have any concentration of loans or leases in excess of 10% of total loans and leases outstanding which were not otherwise disclosed as a category of loans or leases.  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.  The Bank conducts business in a geographically concentrated area and has a significant amount of loans secured by real estate to borrowers in varying activities and businesses, but does not consider these factors alone in identifying loan concentrations.  The ability of the Bank’s borrowers to repay loans is somewhat dependent upon the economic conditions prevailing in the Bank’s market areas.

The Company utilizes an internal loan classification system to grade loans according to certain credit quality indicators.  These credit quality indicators include, but are not limited to, recent credit performance, delinquency, liquidity, cash flows, debt coverage ratios, collateral type and loan-to-value ratio.  The following table provides details of the Company’s loan and lease portfolio, net of unearned income, by segment, class and internally assigned grade at March 31, 2017:

63

 


 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2017



 

 

 

Special

 

 

 

 

 

 

 

 

 

 



 

Pass

 

Mention

 

Substandard

 

Doubtful

 

Loss

 

Impaired (1)

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

(In thousands)

Commercial and industrial

 

$    1,489,753

 

$            -

 

$       34,936

 

$         -

 

$        -

 

$     11,838

 

$    1,536,527

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

2,611,576 

 

517 

 

62,045 

 

258 

 

 -

 

1,276 

 

2,675,672 

Home equity

 

615,753 

 

 -

 

9,881 

 

 -

 

 -

 

854 

 

626,488 

Agricultural

 

227,902 

 

 -

 

8,899 

 

141 

 

 -

 

3,592 

 

240,534 

Commercial and industrial-owner occupied

 

1,734,995 

 

3,663 

 

50,908 

 

 -

 

 -

 

12,047 

 

1,801,613 

Construction, acquisition and development

 

1,124,929 

 

 -

 

11,621 

 

 -

 

 -

 

277 

 

1,136,827 

Commercial real estate

 

2,216,915 

 

 -

 

42,614 

 

 -

 

 -

 

12,013 

 

2,271,542 

Credit cards

 

103,813 

 

 -

 

 -

 

 -

 

 -

 

 -

 

103,813 

All other

 

402,287 

 

 -

 

6,291 

 

100 

 

 -

 

 -

 

408,678 

Total

 

$  10,527,923

 

$     4,180

 

$     227,195

 

$    499

 

$        -

 

$     41,897

 

$  10,801,694

 (1) Impaired loans are shown exclusive of accruing TDRs



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 and leases, but which currently do not yet meet the criteria for disclosure as NPLs.  However, based upon past experiences, some of these loans and leases with potential weaknesses will ultimately be restructured or placed in non-accrual status.  At March 31, 2017, the Bank had $2.7 million of potential problem loans or leases or loans and leases with potential weaknesses that were not included in the non-accrual loans and leases or in the loans 90 days or more past due categories.  These loans or leases are included in the above rated categories.  Loans with identified weaknesses based upon analysis of the credit quality indicators are included in the loans 90 days or more past due category or in the non-accrual loan and lease category which would include impaired loans.

The following table provides details regarding the aging of the Company’s loan and lease portfolio, net of unearned income, by internally assigned grade at March 31, 2017:



 

 

 

 

 

 

 

 

 

 



 

 

 

30-59 Days

 

60-89 Days

 

90+ Days

 

 



 

Current

 

Past Due

 

Past Due

 

Past Due

 

Total



 

(In thousands)

Pass

 

$  10,522,627

 

$         5,003

 

$                 116

 

$                177

 

$   10,527,923

Special Mention

 

4,180 

 

 -

 

 -

 

 -

 

4,180 

Substandard

 

184,129 

 

17,583 

 

6,458 

 

19,025 

 

227,195 

Doubtful

 

432 

 

 -

 

 -

 

67 

 

499 

Loss

 

 -

 

 -

 

 -

 

 -

 

 -

Impaired

 

6,570 

 

3,945 

 

8,845 

 

22,537 

 

41,897 

Total

 

$  10,717,938

 

$       26,531

 

$            15,419

 

$           41,806

 

$   10,801,694



All loan grade categories decreased at March 31, 2017 compared to December 31, 2016 with the exception of the Doubtful and Impaired loan grade categories, which increased approximately $117,000, or 30.6%, and $3.7 million, or 9.6%, respectively, at March 31, 2017 compared to December 31, 2016.  Of the $227.2 million of Substandard loans and leases, 81.0% remained current as to scheduled repayment of principal and interest, with only 8.4% having outstanding balances that were 90 days or more past due at March 31, 2017.  Of the $41.9 million of Impaired loans and leases, 15.7% remained current as to scheduled repayment of principal and/or interest, with 53.8% having outstanding balances that were 90 days or more past due at March 31, 2017.

Collateral for some of the Bank’s loans and leases is subject to fair value evaluations that fluctuate with market conditions and other external factors.  In addition, while the Bank has certain underwriting obligations related to such evaluations, the evaluations of some real property and other collateral are dependent upon third-party

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independent appraisers employed either by the Bank’s customers or as independent contractors of the Bank.  During the current economic cycle, some subsequent fair value appraisals have reported lower values than were originally reported.  These declining collateral values could impact future losses and recoveries.

The following table provides additional details related to the make-up of the Company’s loan and lease portfolio, net of unearned income, and the distribution of NPLs at March 31, 2017:





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

90+ Days

 

 

 

Restructured

 

 

 

NPLs as a



 

 

 

Past Due still

 

Non-accruing

 

Loans, still

 

 

 

% of

Loans and leases, net of unearned income

 

Outstanding

 

Accruing

 

Loans

 

accruing

 

NPLs

 

Outstanding



 

(Dollars in thousands)

Commercial and industrial

 

$      1,536,527 

 

$               84 

 

$         13,959 

 

$            267 

 

$     14,310 

 

0.9 

%

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer mortgages

 

2,675,672 

 

2,555 

 

21,543 

 

853 

 

24,951 

 

0.9 

 

Home equity

 

626,488 

 

 -

 

3,157 

 

 -

 

3,157 

 

0.5 

 

Agricultural

 

240,534 

 

 -

 

5,180 

 

 

5,181 

 

2.2 

 

Commercial and industrial-owner occupied

 

1,801,613 

 

 -

 

15,135 

 

1,813 

 

16,948 

 

0.9 

 

Construction, acquisition and development

 

1,136,827 

 

 -

 

1,466 

 

234 

 

1,700 

 

0.1 

 

Commercial real estate

 

2,271,542 

 

 -

 

13,638 

 

124 

 

13,762 

 

0.6 

 

Credit cards

 

103,813 

 

424 

 

87 

 

741 

 

1,252 

 

1.2 

 

All other

 

408,678 

 

 -

 

274 

 

27 

 

301 

 

0.1 

 

Total

 

$    10,801,694 

 

$          3,063 

 

$         74,439 

 

$         4,060 

 

$     81,562 

 

0.8 

%



Securities



The Company uses the Bank’s securities portfolios to make various term investments, to provide a source of liquidity and to serve as collateral to secure certain types of deposits. Available-for-sale securities were $2.5 billion at both March 31, 2017 and December 31, 2016.  Available-for-sale securities, which are subject to possible sale, are recorded at fair value.  At March 31, 2017, the Company held no securities whose decline in fair value was considered other than temporary.

The following table shows the available-for-sale securities portfolio by credit rating as obtained from Moody’s rating service as of March 31, 2017:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Amortized Cost

 

Estimated Fair Value

 



 

Amount

 

%

 

Amount

 

%

 

Available-for-sale Securities:

 

(Dollars in thousands)

 

Aaa

 

$     2,217,834

 

87.6 

%

$     2,213,450

 

87.1 

%

Aa1 to Aa3

 

117,250 

 

4.6 

 

124,282 

 

4.9 

 

A1 to A3

 

38,580 

 

1.5 

 

40,537 

 

1.6 

 

Not rated (1)

 

157,738 

 

6.3 

 

162,618 

 

6.4 

 

  Total

 

$     2,531,402

 

100.0% 

 

$     2,540,887

 

100.0% 

 

(1)  Not rated securities primarily consist of Mississippi and Arkansas municipal bonds.

 



Of the securities not rated by Moody’s, bonds with a book value of $57.3 million and a market value of $60.4 million were rated A- or better by Standard and Poor’s.

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Goodwill



The Company’s policy is to assess goodwill for impairment at the reporting segment level on an annual basis or sooner if an event occurs or circumstances change which indicate that the fair value of a reporting segment is below its carrying amount.  Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value.  Accounting standards require management to estimate the fair value of each reporting segment in assessing impairment at least annually.  The Company’s annual assessment date is during the Company’s fourth quarterNo events occurred during the first quarter of 2017 that indicated the necessity of an earlier goodwill impairment assessment.  

In the current environment, forecasting cash flows, credit losses and growth, in addition to valuing the Company’s assets with any degree of assurance is very difficult and subject to significant changes over very short periods of time.  Management will continue to update its analysis as circumstances change.  If market conditions continue to be volatile and unpredictable, impairment of goodwill related to the Company’s reporting segments may be necessary in future periods.  Goodwill was $300.8 million at both March 31, 2017 and December 31, 2016.    



Other Real Estate Owned



OREO was $8.5 million and  $7.8 million at March 31, 2017 and December 31, 2016, respectively.  OREO at March 31, 2017 had aggregate loan balances at the time of foreclosure of $16.1 million.  OREO at December 31, 2016 had aggregate loan balances at the time of foreclosure of $12.5 million.  The following table presents the OREO by segment and class at the dates indicated:





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2017

 

2016

 

2016



(In thousands)

Commercial and industrial

 

$                  -

 

$             74

 

$                 -

Real estate

 

 

 

 

 

 

Consumer mortgages

 

2,005 

 

1,697 

 

857 

Home equity

 

39 

 

594 

 

39 

Agricultural

 

22 

 

25 

 

22 

Commercial and industrial-owner occupied

 

2,060 

 

1,051 

 

1,958 

Construction, acquisition and development

 

3,068 

 

8,546 

 

3,746 

Commercial real estate

 

1,159 

 

466 

 

1,128 

All other

 

105 

 

232 

 

60 

Total

 

$          8,458

 

$      12,685

 

$          7,810



Because of the relatively high number of the Bank’s NPLs that have been determined to be collaterally dependent, management expects the resolution of a significant number of these loans to necessitate foreclosure proceedings resulting in further additions to OREO.  While management expects future foreclosure activity in virtually all loan categories, the magnitude of NPLs in the consumer mortgage and commercial and industrial-owner occupied real estate portfolios and the commercial and industrial portfolio at March 31, 2017 indicated that a majority of additions to OREO in the near-term might be from these categories.

At the time of foreclosure, the fair value of construction, acquisition and development properties is typically determined by an appraisal performed by a third party appraiser holding professional certifications.  Such appraisals are then reviewed and evaluated by the Company’s internal appraisal group.  A market value appraisal using a 180-360 day marketing period is typically ordered and the OREO is recorded at the time of foreclosure at its market value less estimated selling costs.  For residential subdivisions that are not completed, the appraisals reflect the uncompleted status of the subdivision.

To attempt to ensure that OREO is carried at the lower of cost or fair value less estimated selling costs on an ongoing basis, new appraisals are obtained on at least an annual basis and the OREO carrying values are adjusted accordingly.  The type of appraisals typically used for these periodic reappraisals are “Restricted Use Appraisals,” meaning the appraisal is for client use only.   Other indications of fair value are also used to attempt to ensure that OREO is carried at the lower of cost or fair value.  These include listing the property with a broker and acceptance of an offer to purchase from a third party.  If an OREO property is listed with a broker at an amount less than the

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current carrying value, the carrying value is immediately adjusted to reflect the list price less estimated selling costs and if an offer to purchase is accepted at a price less that the current carrying value, the carrying value is immediately adjusted to reflect that sales price, less estimated selling costs.  The majority of the properties in OREO are actively marketed using a combination of real estate brokers, bank staff who are familiar with the particular properties and/or third parties. 



Deposits and Other Interest Bearing Liabilities



Deposits originating within the communities served by the Bank continue to be the Bank’s primary source of funding its earning assets.  The Company has been able to compete effectively for deposits in its primary market areas, while continuing to manage the exposure to rising interest rates.  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 fund 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 net interest margin. 

The following table presents the Company’s noninterest bearing, interest bearing, savings and other time deposits as of the dates indicated and the percentage change between dates:





 

 

 

 

 

 

 



 

 

 

 

 



 

March 31,

 

December 31,

 

 

 



 

2017

 

2016

 

% Change



 

(Dollars in millions)

 

 

 

Noninterest bearing demand

 

$            3,401

 

$           3,251

 

4.6 

%

Interest bearing demand

 

5,182 

 

5,034 

 

2.9 

 

Savings

 

1,628 

 

1,562 

 

4.2 

 

Other time

 

1,832 

 

1,841 

 

(0.5)

 

Total deposits

 

$          12,043

 

$         11,688

 

3.0 

%





The 3.0% increase in deposits at March 31, 2017 compared to December 31, 2016 was primarily a result of the increase in noninterest bearing demand, interest bearing and savings deposits more than offsetting the decline in other time deposits.    The average maturity of time deposits at March 31, 2017 was 19.6 months, compared to 19.4 months at December 31, 2016.



Liquidity and Capital Resources



One of the Company's goals is to maintain adequate funds to meet increases in loan demand or any potential increase in the normal level of deposit withdrawals.  This goal is accomplished primarily by generating cash from the Bank’s operating activities and maintaining sufficient short-term liquid assets.  These sources, coupled with a stable deposit base and a historically strong reputation in the capital markets, allow the Company to fund earning assets and maintain the availability of funds.  Management believes that the Bank’s traditional sources of maturing loans and investment securities, sales of loans held for sale, cash from operating activities and a strong base of core deposits are adequate to meet the Company’s liquidity needs for normal operations over both the short-term and the long-term. 

To provide additional liquidity, the Company utilizes short-term financing through the purchase of federal funds and securities sold under agreements to repurchase.  All securities sold under agreements to repurchase are accounted for as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest.  Further, the Company maintains a borrowing relationship with the FHLB which provides access to short-term and long-term borrowings.  The Company had no short-term borrowings from the FHLB at March 31, 2017 and $92.0 million at December 31, 2016.  The Company also has access to the Federal Reserve discount window and other bank lines.  The Company had federal funds purchased and securities sold under agreements to repurchase of $375.8 million and $454.0 million at March 31, 2017 and December 31, 2016, respectively. 

On August 8, 2013, the Company entered into a Credit Agreement with U.S. Bank as a lender and administrative agent, and First Tennessee Bank, National Association, as a lender.  The Credit Agreement included 

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an unsecured revolving loan of up to $25.0 million that terminated and the outstanding balance of which was payable in full on August 8, 2015, which the Bank did not renew, and an unsecured multi-draw term loan of up to $60.0 million, which commitment terminated on February 28, 2014.  The proceeds from the term loan were used to repurchase trust preferred securities.  All principal and interest due under the Credit Agreement were repaid in full in October 2016.    

The Company had long-term borrowings from the FHLB of $530.0 million at both March 31, 2017 and December 31, 2016.   The Company has pledged eligible mortgage loans to secure the FHLB borrowings and had $3.8  billion in additional borrowing capacity under the existing FHLB borrowing agreement at March 31, 2017.    

The Company had non-binding federal funds borrowing arrangements with other banks aggregating $793.0 million at March 31, 2017.  The unencumbered fair value of the Company’s federal government and government agencies securities portfolio may provide substantial additional liquidity. 

The ability of the Company to obtain funding from these or other sources could be negatively affected should the Company experience a substantial deterioration in its financial condition or its debt rating, or should the availability of short-term funding become restricted as a result of disruption in the financial markets.  Management does not anticipate any short- or long-term changes to its liquidity strategies and believes that the Company has ample sources to meet the liquidity challenges caused by current economic conditions.  The Company utilizes, among other tools, maturity gap tables, interest rate shock scenarios and an active asset and liability management committee to analyze, manage and plan asset growth and to assist in managing the Company’s net interest margin and overall level of liquidity. 



Off-Balance Sheet Arrangements



In the ordinary course of business, the Company enters into various off-balance sheet commitments and other arrangements to extend credit that are not reflected in the consolidated balance sheets of the Company.  The business purpose of these off-balance sheet commitments is the routine extension of credit.  While most of the commitments to extend credit are made at variable rates, included in these commitments are forward commitments to fund individual fixed-rate mortgage loans.  Fixed-rate lending commitments expose the Company to risks associated with increases in interest rates.  As a method to manage these risks, the Company enters into forward commitments to sell individual fixed-rate mortgage loans.  The Company also faces the risk of deteriorating credit quality of borrowers to whom a commitment to extend credit has been made; however, no significant credit losses are currently expected from these commitments and arrangements.



Regulatory Requirements for Capital



The Company is required to comply with the risk‑based capital guidelines established by the Federal Reserve.  These guidelines apply a variety of weighting factors that vary according to the level of risk associated with the assets.  Capital is measured in two “Tiers”: Tier 1 consists of common shareholders’ equity, qualifying non-cumulative perpetual preferred stock and minority interest in consolidated subsidiaries, less goodwill and certain other intangible assets; and Tier 2 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. Common equity Tier 1 capital generally consists of common stock (plus related additional paid in capital) and retained earnings plus limited amounts of minority interest in the form of common stock, less goodwill and other specified intangible assets and other regulatory deductions. Total capital is the sum of Tier 1 and Tier 2 capital.  The required minimum ratio levels to be considered “well capitalized” for the Company’s Common equity Tier 1 capital, Tier 1 capital, total capital, as a percentage of total risk-adjusted assets, and Tier 1 leverage capital (Tier 1 capital divided by total assets, less goodwill) are 6.5%, 8%, 10% and 5%, respectively.  The Company exceeded the required minimum levels for these ratios at  March 31, 2017 and December 31, 2016 as follows:

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March 31, 2017

 

December 31, 2016



 

Amount

 

Ratio

 

Amount

 

Ratio



(Dollars in thousands)

BancorpSouth, Inc.

 

 

 

 

 

 

 

 

Common equity Tier 1 capital (to risk-weighted assets)

 

$    1,444,719

 

12.16% 

 

$    1,467,979

 

12.23% 

Tier 1 capital (to risk-weighted assets)

 

1,444,905 

 

12.16 

 

1,480,867 

 

12.34 

Total capital (to risk-weighted assets)

 

1,570,279 

 

13.21 

 

1,605,257 

 

13.38 

Tier 1 leverage capital (to average assets)

 

1,444,719 

 

9.95 

 

1,480,867 

 

10.32 



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 under capitalized.”  For a bank to be classified as “well capitalized,” the common equity Tier 1 capital, Tier 1 capital, total capital and leverage capital ratios must be at least 6.5%, 8%, 10% and 5%, respectively.  The Bank met the criteria for the “well capitalized” category at March 31, 2017 and December 31, 2016 as follows:





 

 

 

 

 

 

 

 



 

March 31, 2017

 

December 31, 2016



 

Amount

 

Ratio

 

Amount

 

Ratio



(Dollars in thousands)

BancorpSouth Bank

 

 

 

 

 

 

 

 

Common equity Tier 1 capital (to risk-weighted assets)

 

$    1,264,146

 

10.64% 

 

$    1,311,542

 

10.94% 

Tier 1 capital (to risk-weighted assets)

 

1,264,146 

 

10.64 

 

1,311,542 

 

10.94 

Total capital (to risk-weighted assets)

 

1,389,520 

 

11.70 

 

1,435,932 

 

11.97 

Tier 1 leverage capital (to average assets)

 

1,264,146 

 

8.71 

 

1,311,542 

 

9.17 



Federal and state banking laws and regulations and state corporate laws restrict the amount of dividends that the Company may declare and pay. For example, under guidance issued by the Federal Reserve, as a bank holding company, the Company is required to consult with the Federal Reserve before declaring dividends and is to consider eliminating, deferring or reducing dividends if (i) the Company’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends, (ii) the Company’s prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial condition, or (iii) the Company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.



Uses of Capital



Subject to pre-approval of the Federal Reserve and other banking regulators, the Company may pursue acquisitions of depository institutions and businesses closely related to banking that further the Company’s business strategies, including FDIC-assisted transactions.  Management anticipates that consideration for any transactions other than FDIC-assisted transactions would include shares of the Company’s common stock, cash or a combination thereof. 

On December 11, 2014, the Company announced a stock repurchase program whereby the Company could acquire up to an aggregate of 6% or 5,764,000 shares of its common stock in the open market at prevailing market prices or in privately negotiated transactions during the period between December 11, 2014 through November 30, 2016.  The extent and timing of any repurchases depended on market conditions and other corporate, legal and regulatory considerations.  Repurchased shares are held as authorized but unissued shares.  These authorized but unissued shares are available for use in connection with the Company’s stock option plans, other compensation programs, other transactions or for other corporate purposes as determined by the Company’s Board of Directors.  On January 27, 2016, the Company announced this stock repurchase plan was terminated. At the time of termination, 2,882,000 shares had been repurchased under this program.

On January 27, 2016, the Company announced a new stock repurchase program whereby the Company may acquire up to an aggregate of 7,000,000 shares of its common stock in the open market at prevailing market prices or in privately negotiated transactions during the period between January 27, 2016 through December 29,

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2017. The extent and timing of any repurchases depends on market conditions and other corporate, legal and regulatory considerations. Repurchased shares are held as authorized but unissued shares. These authorized but unissued shares are available for use in connection with the Company’s stock option plans, other compensation programs, other transactions or for other corporate purposes as determined by the Company’s Board of Directors. At March 31, 2017,  2,601,751 shares had been repurchased under this program.

The Company assumed $6.2 million in Junior Subordinated Debt Securities and the related $6.0 million in trust preferred securities pursuant to the merger on December 31, 2004 with Business Holding Corporation.  The Company also assumed $6.7 million in Junior Subordinated Debt Securities and the related $6.5 million in trust preferred securities pursuant to the merger on December 1, 2005 with American State Bank Corporation and $18.5 million in Junior Subordinated Debt Securities and the related $18.0 million in trust preferred securities pursuant to the merger on March 1, 2007 with City Bancorp.  The Company redeemed $8.2 million of the Junior Subordinated Debt Securities and $8.0 million of the related trust preferred securities assumed in the City Bancorp merger at par on January 8, 2014. The Company redeemed the remaining $10.3 million in Junior Subordinated Debt Securities and the related $10.0 million in trust preferred securities assumed in the City Bancorp merger at par on December 14, 2016.  On January 9, 2017, the remaining $12.9 million in Junior Subordinated Debt securities and the related $12.5 million in trust preferred securities assumed in the Business Holding Corporation and American State Bank Corporation mergers were redeemed.  At March 31, 2017, there were no additional Junior Subordinated Debt securities outstanding.    



Certain Litigation Contingencies



The nature of the Company’s business ordinarily results in a certain amount of claims, litigation, investigations and legal and administrative cases and proceedings. Although the Company and its subsidiaries have developed policies and procedures to minimize the impact of legal noncompliance and other disputes, and endeavored to provide reasonable insurance coverage, litigation and regulatory actions present an ongoing risk.

The Company and its subsidiaries are engaged in lines of business that are heavily regulated and involve a large volume of financial transactions and potential transactions with numerous customers or applicants, and the Company is a public company with a large number of shareholders. From time to time, borrowers, customers, shareholders, former employees and other third parties have brought actions against the Company or its subsidiaries, in some cases claiming substantial damages. Financial services companies are subject to the risk of class action litigation and, from time to time, the Company and its subsidiaries are subject to such actions brought against it. Additionally, the Bank is, and management expects it to be, engaged in a number of foreclosure proceedings and other collection actions as part of its lending and leasing collections activities, which, from time to time, have resulted in counterclaims against the Bank. Various legal proceedings have arisen and may arise in the future out of claims against entities to which the Company is a successor as a result of business combinations. The Company and its subsidiaries may also be subject to enforcement actions by federal or state regulators, including the Securities and Exchange Commission, the Federal Reserve, the FDIC, the Consumer Financial Protection Bureau (the “CFPB”), the Department of Justice (the “DOJ”), state attorneys general and the Mississippi Department of Banking and Consumer Finance.

When and as the Company determines it has meritorious defenses to the claims asserted, it vigorously defends against such claims. The Company will consider settlement of claims when, in management’s judgment and in consultation with counsel, it is in the best interests of the Company to do so.

The Company cannot predict with certainty the cost of defense, the cost of prosecution or the ultimate outcome of litigation and other proceedings filed by or against it, its directors, management or employees, including remedies or damage awards. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with outstanding legal proceedings as well as certain threatened claims (which are not considered incidental to the ordinary conduct of the Company’s business) utilizing the latest and most reliable information available. For matters where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established. For matters where it is probable the Company will incur a loss and the amount can be reasonably estimated, the Company establishes an accrual for the loss. Once established, the accrual is adjusted periodically to reflect any relevant developments. The actual cost of any outstanding legal proceedings and the potential loss, however, may turn out to be substantially higher than the amount accrued. Further, the Company’s insurance policies have deductibles and they will likely not cover all such litigation, other proceedings or claims, or the costs of defense.

While the final outcome of any legal proceedings is inherently uncertain, based on the information available, advice of counsel and available insurance coverage, if applicable, management believes that the litigation-

70

 


 

related expense of $2.9 million accrued as of March 31, 2017, which excludes amounts reserved for regulatory settlement expenses discussed below, is adequate and that any incremental liability arising from the Company’s legal proceedings and threatened claims, including the matters described herein and those otherwise arising in the ordinary course of business, will not have a material adverse effect on the Company's business or consolidated financial condition. It is possible, however, that future developments could result in an unfavorable outcome for or resolution of any one or more of the lawsuits in which the Company or its subsidiaries are defendants, which may be material to the Company’s results of operations for a particular fiscal period or periods.

On July 31, 2014, the Company, its Chief Executive Officer and former Chief Financial Officer were named in a purported class-action lawsuit filed in the U.S. District Court for the Middle District of Tennessee on behalf of certain purchasers of the Company’s common stock.  The complaint was subsequently amended to add the former President and Chief Operating Officer.  The complaint alleges that the defendants made misleading statements concerning the Company’s expectation that it would be able to close two merger transactions within a specified time period and the Company’s compliance with certain Bank Secrecy Act and anti-money laundering requirements.  On July 10, 2015, the District Court granted in part and denied in part the defendants’ motion to dismiss and dismissed the claims concerning the Company’s expectations about the closing of the mergers.  Class certification was granted by the District Court on April 21, 2016, and a petition for immediate appeal of the class certification was filed and was granted.  Class certification was vacated by the U.S. Sixth Circuit Court of Appeals, and the case was remanded to the District Court for further proceedings.  The plaintiff seeks an unspecified amount of damages and awards of costs and attorneys’ fees and such other equitable relief as the District Court may deem just and proper.  At this stage of the lawsuit, management cannot determine the probability of an unfavorable outcome to the Company as it is uncertain whether the lead plaintiff will be successful in certifying a class on its second attempt and the exact amount of damages (should the District Court grant class certification again) is uncertain.  Although it is not possible to predict the ultimate resolution or financial liability with respect to the litigation, management is currently of the opinion that the outcome of this lawsuit will not have a material adverse effect on the Company’s business, consolidated financial position or results of operations.

On June 29, 2016, the Bank, the CFPB and the DOJ agreed to a settlement set forth in a consent order (the “Consent Order”) related to the joint investigation by the CFPB and the DOJ of the Bank’s fair lending program during the period between January 1, 2011 and December 31, 2013.  The Consent Order was signed by the United States District Court for the Northern District of Mississippi (the “District Court”) on July 25, 2016.  In the first quarter of 2016, the Bank reserved $13.8 million to cover costs related to this matter, $10.3 million of which was reflected as regulatory settlement expense and $3.5 million of which was included in other noninterest expense.  The settlement of this matter did not have a material financial impact on the second and third quarter 2016 financial results.  For additional information regarding the terms of this settlement and the Consent Order, see the signed Consent Order and the Company’s Current Report on Form 8-K that was filed with the SEC on June 29, 2016 which are incorporated herein by reference

71

 


 

CRITICAL ACCOUNTING POLICIES



During the three months ended March 31, 2017, there was no material change in the Company’s critical accounting policies and no significant change in the application of critical accounting policies as presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.





ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.



During the three months ended March 31, 2017, there were no significant changes to the quantitative and qualitative disclosures about market risks presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.



ITEM 4.  CONTROLS AND PROCEDURES.



The Company, with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report.  Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the Company’s filings under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There have been no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.



PART II

OTHER INFORMATION



ITEM 1.  LEGAL PROCEEDINGS.



The nature of the Company’s business ordinarily results in a certain amount of claims, litigation, investigations and legal and administrative cases and proceedings. Although the Company and its subsidiaries have developed policies and procedures to minimize the impact of legal noncompliance and other disputes, and endeavored to provide reasonable insurance coverage, litigation and regulatory actions present an ongoing risk.

The Company and its subsidiaries are engaged in lines of business that are heavily regulated and involve a large volume of financial transactions and potential transactions with numerous customers or applicants, and the Company is a public company with a large number of shareholders. From time to time, borrowers, customers, shareholders, former employees and other third parties have brought actions against the Company or its subsidiaries, in some cases claiming substantial damages. Financial services companies are subject to the risk of class action litigation and, from time to time, the Company and its subsidiaries are subject to such actions brought against it. Additionally, the Bank is, and management expects it to be, engaged in a number of foreclosure proceedings and other collection actions as part of its lending and leasing collections activities, which, from time to time, have resulted in counterclaims against the Bank. Various legal proceedings have arisen and may arise in the future out of claims against entities to which the Company is a successor as a result of business combinations. The Company and its subsidiaries may also be subject to enforcement actions by federal or state regulators, including the Securities and Exchange Commission, the Federal Reserve, the FDIC, the Consumer Financial Protection Bureau (the “CFPB”), the Department of Justice (the “DOJ”), state attorneys general and the Mississippi Department of Banking and Consumer Finance.

When and as the Company determines it has meritorious defenses to the claims asserted, it vigorously defends against such claims. The Company will consider settlement of claims when, in management’s judgment and in consultation with counsel, it is in the best interests of the Company to do so.

72

 


 

The Company cannot predict with certainty the cost of defense, the cost of prosecution or the ultimate outcome of litigation and other proceedings filed by or against it, its directors, management or employees, including remedies or damage awards. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with outstanding legal proceedings as well as certain threatened claims (which are not considered incidental to the ordinary conduct of the Company’s business) utilizing the latest and most reliable information available. For matters where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established. For matters where it is probable the Company will incur a loss and the amount can be reasonably estimated, the Company establishes an accrual for the loss. Once established, the accrual is adjusted periodically to reflect any relevant developments. The actual cost of any outstanding legal proceedings and the potential loss, however, may turn out to be substantially higher than the amount accrued. Further, the Company’s insurance policies have deductibles and they will likely not cover all such litigation, other proceedings or claims, or the costs of defense.

While the final outcome of any legal proceedings is inherently uncertain, based on the information available, advice of counsel and available insurance coverage, if applicable, management believes that the litigation-related expense of $2.9 million accrued as of March 31, 2017, which excludes amounts reserved for regulatory settlement expenses discussed below, is adequate and that any incremental liability arising from the Company’s legal proceedings and threatened claims, including the matters described herein and those otherwise arising in the ordinary course of business, will not have a material adverse effect on the Company's business or consolidated financial condition. It is possible, however, that future developments could result in an unfavorable outcome for or resolution of any one or more of the lawsuits in which the Company or its subsidiaries are defendants, which may be material to the Company’s results of operations for a particular fiscal period or periods.

On July 31, 2014, the Company, its Chief Executive Officer and former Chief Financial Officer were named in a purported class-action lawsuit filed in the U.S. District Court for the Middle District of Tennessee on behalf of certain purchasers of the Company’s common stock.  The complaint was subsequently amended to add the former President and Chief Operating Officer.  The complaint alleges that the defendants made misleading statements concerning the Company’s expectation that it would be able to close two merger transactions within a specified time period and the Company’s compliance with certain Bank Secrecy Act and anti-money laundering requirements.  On July 10, 2015, the District Court granted in part and denied in part the defendants’ motion to dismiss and dismissed the claims concerning the Company’s expectations about the closing of the mergers.  Class certification was granted by the District Court on April 21, 2016, and a petition for immediate appeal of the class certification was filed and was granted.  Class certification was vacated by the U.S. Sixth Circuit Court of Appeals, and the case was remanded to the District Court for further proceedings.  The plaintiff seeks an unspecified amount of damages and awards of costs and attorneys’ fees and such other equitable relief as the District Court may deem just and proper.  At this stage of the lawsuit, management cannot determine the probability of an unfavorable outcome to the Company as it is uncertain whether the lead plaintiff will be successful in certifying a class on its second attempt and the exact amount of damages (should the District Court grant class certification again) is uncertain.  Although it is not possible to predict the ultimate resolution or financial liability with respect to the litigation, management is currently of the opinion that the outcome of this lawsuit will not have a material adverse effect on the Company’s business, consolidated financial position or results of operations.

On June 29, 2016, the Bank, the CFPB and the DOJ agreed to a settlement set forth in a consent order (the “Consent Order”) related to the joint investigation by the CFPB and the DOJ of the Bank’s fair lending program during the period between January 1, 2011 and December 31, 2013.  The Consent Order was signed by the United States District Court for the Northern District of Mississippi (the “District Court”) on July 25, 2016.  In the first quarter of 2016, the Bank reserved $13.8 million to cover costs related to this matter, $10.3 million of which was reflected as regulatory settlement expense and $3.5 million of which was included in other noninterest expense.  The settlement of this matter did not have a material financial impact on the second and third quarter 2016 financial results.  For additional information regarding the terms of this settlement and the Consent Order, see the signed Consent Order and the Company’s Current Report on Form 8-K that was filed with the SEC on June 29, 2016 which is incorporated herein by reference





ITEM 1A.  RISK FACTORS



There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.



73

 


 



ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS









 

 

 

 

 

 

 

 



 

 

 

 

 

Total Number of

 

Maximum Number of



 

 

 

 

 

Shares Purchased

 

Shares that May



 

Total Number

 

 

 

as Part of Publicly

 

Yet Be Purchased



 

of Shares

 

Average Price

 

Announced Plans

 

Under the Plans

Period

 

Purchased (1)(2)

 

Paid per Share

 

or Programs (2)

 

or Programs (2)

January 1- January 31

 

 -

 

$                        -

 

 -

 

6,011,940 

February 1-February 28

 

33,398 

 

29.70 

 

 -

 

6,011,940 

March 1-March 31

 

1,613,691 

 

30.62 

 

1,613,691 

 

4,398,249 



 

 

 

 

 

 

 

 

Total

 

1,647,089 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

(1) This column represents 33,398 shares redeemed in February 2017 from employees for tax withholding purposes for stock compensation.

(2) On December 11, 2014, the Company announced a stock repurchase program pursuant to which the Company could purchase up to 5.8 million shares of its common stock during the period between December 11, 2014 and November 30, 2016.   On January 27, 2016, the Company announced the termination of this stock repurchase program, under which the Company had repurchased 2,882,000 shares of common stock, and the initiation of a new stock repurchase program pursuant to which the Company may purchase up to 7 million shares of its common stock during the period between January 27, 2016 and December 29, 2017.  On July 25, 2016, the Company adopted a Rule 10b5-1 plan in connection with this stock repurchase program.  In March 2017, 1,613,691 shares were repurchased under the current stock repurchase program.



ITEM 5. OTHER INFORMATION



Mergers with Ouachita Bancshares Corp. and Central Community Corporation



For information regarding our respective mergers with Ouachita Bancshares Corp. and Central Community Corporation and their corresponding Agreements and Plans of Reorganization, see the Form 8-K that was filed with the SEC on October 14, 2016 which is incorporated herein by reference.

74

 


 

ITEM 6.  EXHIBITS







 

 

(2)

(a)

Agreement and Plan of Reorganization, dated as of January 22, 2014, by and between BancorpSouth, Inc. and Central Community Corporation. (1)



(b)

Amendment  No. 1 to Agreement and Plan of Reorganization, dated July 21, 2014, by and between BancorpSouth, Inc. and Central Community Corporation. (2)



(c)

Amendment No. 2 to Agreement and Plan of Merger, dated June 30, 2015, by and between BancorpSouth, Inc. and Central Community Corporation. (3)



(d)

Amendment No. 3 to Agreement and Plan of Reorganization, dated October 13, 2016, by and between BancorpSouth, Inc. and Central Community Corporation. (4)

(3)

(a)

Amended and Restated Articles of Incorporation. (5)



(b)

Amended and Restated Bylaws. (5)

(4)

(a)

Specimen Common Stock Certificate. (6)

(31.1)

 

Certification of the Chief Executive Officer of BancorpSouth, Inc. pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

(31.2)

 

Certification of the Chief Financial Officer of BancorpSouth, Inc. pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

(32.1)

 

Certification of the Chief Executive Officer of BancorpSouth, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

(32.2)

 

Certification of the Chief Financial Officer of BancorpSouth, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

(99.1)

(a)

Agreement and Plan of Reorganization, dated January 8, 2014, by and between BancorpSouth, Inc. and Ouachita BancShares Corp. (7)



(b)

Amendment No. 1 to Agreement and Plan of Reorganization, dated July 21, 2014, by and between BancorpSouth, Inc. and Ouachita Bancshares Corp. (8)



(c)

Amendment No. 2 to Agreement and Plan of Reorganization, dated June 30, 2015 by and between BancorpSouth, Inc. and Ouachita Bancshares Corp. (9)



(d)

Amendment No. 3 to Agreement and Plan of Reorganization, dated October 13, 2016 by and between BancorpSouth, Inc. and Ouachita Bancshares Corp. (10)

(101)

 

Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2017, is formatted in XBRL (Extensible Business Reporting Language) interactive data files: (i) the Consolidated Balance Sheets as of March 31, 2017 and 2016, and December 31, 2016, (ii) the Consolidated Statements of Income for the three-month periods ended March 31, 2017 and 2016, (iii) the Consolidated Statements of Comprehensive Income for the three-month  periods ended March 31, 2017 and 2016, (iv) the Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2017 and 2016, and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text.*

____________________________

(1)

 

Filed as Annex A to the Company's registration statement on Form S-4 filed on February 28, 2014 (file number 333-194233) and incorporated by reference thereto.

(2)

 

Filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on July 24, 2014 (file number 1-12991) and incorporated by reference thereto.

(3)

 

Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed on July 1, 2016 (file number 1-12991) and incorporated by reference thereto.

(4)

 

Filed as an exhibit to the Company’s Current Report on Form 8-K filed on April 27, 2017 (file number 1-12991) and incorporated by reference thereto.

75

 


 

(5)

 

Filed as an exhibit to the Company's Current Report on Form 8-K filed on April 27, 2016 (file-number 1-12991 and incorporated by reference thereto.

(6)

 

Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1993 (file number 1-10826) and incorporated by reference thereto.

(7)

 

Filed as Appendix A to the Company's registration statement on Form S-4 filed on February 12, 2014 (file number 333-193912) and incorporated by reference hereto.

(8)

 

Filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed on July 24, 2014 (file number 1-12991) and incorporated by reference hereto.

(9)

 

Filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed on July 1, 2015 (file number 1-12991) and incorporated by reference hereto.

(10)

 

Filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed on October 14, 2016 (file number 1-12991) and incorporated by reference hereto.

*

 

Filed herewith.

**

 

Furnished herewith.





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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



 

 



 

BancorpSouth, Inc.



 

(Registrant)



 

 

DATE:  May 8,  2017

 

/s/ Chris A. Bagley



 

Chris A. Bagley



 

President, Chief Operating Officer and



 

Interim Chief Financial Officer



 

 







77

 


 

INDEX TO EXHIBITS





 

 

Exhibit No.

 

Description







 

 

(2)

(a)

Agreement and Plan of Reorganization, dated as of January 22, 2014, by and between BancorpSouth, Inc. and Central Community Corporation. (1)



(b)

Amendment  No. 1 to Agreement and Plan of Reorganization, dated July 21, 2014, by and between BancorpSouth, Inc. and Central Community Corporation. (2)



(c)

Amendment No. 2 to Agreement and Plan of Merger, dated June 30, 2015, by and between BancorpSouth, Inc. and Central Community Corporation. (3)



(d)

Amendment No. 3 to Agreement and Plan of Reorganization, dated October 13, 2016, by and between BancorpSouth, Inc. and Central Community Corporation. (4)

(3)

(a)

Amended and Restated Articles of Incorporation. (5)



(b)

Amended and Restated Bylaws. (5)

(4)

(a)

Specimen Common Stock Certificate. (6)

(31.1)

 

Certification of the Chief Executive Officer of BancorpSouth, Inc. pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

(31.2)

 

Certification of the Chief Financial Officer of BancorpSouth, Inc. pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

(32.1)

 

Certification of the Chief Executive Officer of BancorpSouth, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

(32.2)

 

Certification of the Chief Financial Officer of BancorpSouth, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

(99.1)

(a)

Agreement and Plan of Reorganization, dated January 8, 2014, by and between BancorpSouth, Inc. and Ouachita BancShares Corp. (7)



(b)

Amendment No. 1 to Agreement and Plan of Reorganization, dated July 21, 2014, by and between BancorpSouth, Inc. and Ouachita Bancshares Corp. (8)



(c)

Amendment No. 2 to Agreement and Plan of Reorganization, dated June 30, 2015 by and between BancorpSouth, Inc. and Ouachita Bancshares Corp. (9)



(d)

Amendment No. 3 to Agreement and Plan of Reorganization, dated October 13, 2016 by and between BancorpSouth, Inc. and Ouachita Bancshares Corp. (10)

(101)

 

Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2017, is formatted in XBRL (Extensible Business Reporting Language) interactive data files: (i) the Consolidated Balance Sheets as of March 31, 2017 and 2016, and December 31, 2016, (ii) the Consolidated Statements of Income for the three-month periods ended March 31, 2017 and 2016, (iii) the Consolidated Statements of Comprehensive Income for the three-month  periods ended March 31, 2017 and 2016, (iv) the Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2017 and 2016, and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text.*

____________________________

(1)

 

Filed as Annex A to the Company's registration statement on Form S-4 filed on February 28, 2014 (file number 333-194233) and incorporated by reference thereto.

(2)

 

Filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on July 24, 2014 (file number 1-12991) and incorporated by reference thereto.

(3)

 

Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed on July 1, 2016 (file number 1-12991) and incorporated by reference thereto.

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(4)

 

Filed as an exhibit to the Company’s Current Report on Form 8-K filed on April 27, 2017 (file number 1-12991) and incorporated by reference thereto.

(5)

 

Filed as an exhibit to the Company's Current Report on Form 8-K filed on April 27, 2016 (file-number 1-12991 and incorporated by reference thereto.

(6)

 

Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1993 (file number 1-10826) and incorporated by reference thereto.

(7)

 

Filed as Appendix A to the Company's registration statement on Form S-4 filed on February 12, 2014 (file number 333-193912) and incorporated by reference hereto.

(8)

 

Filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed on July 24, 2014 (file number 1-12991) and incorporated by reference hereto.

(9)

 

Filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed on July 1, 2015 (file number 1-12991) and incorporated by reference hereto.

(10)

 

Filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed on October 14, 2016 (file number 1-12991) and incorporated by reference hereto.

*

 

Filed herewith.

**

 

Furnished herewith.



79