UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2008
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File Number:
001-12991
BANCORPSOUTH, INC.
(Exact name of registrant as specified in its charter)
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Mississippi
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64-0659571
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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One Mississippi Plaza, 201 South Spring Street
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Tupelo, Mississippi
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38804
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(Address of principal executive offices)
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(Zip Code)
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Registrants 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
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
þ
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
As of August 5, 2008, the registrant had outstanding 82,393,037 shares of common stock, par value
$2.50 per share.
BANCORPSOUTH, INC.
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Report may not be based on historical facts and are
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements may be identified by reference to a future period(s) or by the use of forward-looking
terminology, such as anticipate, believe, estimate, expect, foresee, may, might,
will, intend, could, would or plan, or future or conditional verb tenses, and variations
or negatives of such terms. These forward-looking statements include, without limitation, those
relating to the Companys net interest margin, payment of dividends, prepayment of Junior
Subordinated Debt Securities, credit losses, credit quality, core deposits, off-balance sheet
commitments and arrangements, amortization expense, valuation of mortgage servicing rights,
allowance for credit losses, continued weakness in the economic environment, deteriorating credit
quality of borrowers, consideration for future acquisitions, estimation of pension and other
postretirement benefit amounts, key indicators of the Companys financial performance (such as
return on average assets and return on average shareholders equity), liquidity needs and
strategies, future acquisitions to further the Companys business strategies, the effect of certain
legal claims, the impact of federal and state regulatory requirements for capital, additional share
repurchases under the Companys stock repurchase program, diversification of the Companys revenue
stream and the application and impact of recent accounting pronouncements. We caution you not to
place undue reliance on the forward-looking statements contained in this report, in that actual
results could differ materially from those indicated in such forward-looking statements as a result
of a variety of factors. These factors include, but are not limited to, the ability of the Company
to increase noninterest revenue and expand noninterest revenue business, the ability of the Company
to fund growth with lower cost liabilities, the ability of the Company to maintain credit quality,
the ability of the Company to provide and market competitive services and products, the ability of
the Company to diversify revenue, the ability of the Company to attract, train and retain qualified
personnel, the ability of the Company to operate and integrate new technology, changes in consumer
preferences, changes in the Companys operating or expansion strategy, changes in economic
conditions and government fiscal and monetary policies, legislation and court decisions related to
the amount of damages recoverable in legal proceedings, fluctuations in prevailing interest rates
and the effectiveness of the Companys interest rate hedging strategies, the ability of the Company
to balance interest rate, credit, liquidity and capital risks, the ability of the Company to
collect amounts due under loan agreements and attract deposits, laws and regulations affecting
financial institutions in general, the ability of the Company to identify and effectively integrate
potential acquisitions, the ability of the Company to manage its growth and effectively serve an
expanding customer and market base, geographic concentrations of the Companys assets and
susceptibility to economic downturns in that area, availability of and costs associated with
maintaining and/or obtaining adequate and timely sources of liquidity, the ability of the Company
to compete with other financial services companies, the ability of the Company to repurchase its
common stock on favorable terms, possible adverse rulings, judgments, settlements and other
outcomes of pending or threatened litigation, other factors generally understood to affect the
financial condition or results of financial services companies and other factors detailed from time
to time in the Companys press releases and filings with the Securities and Exchange Commission. We
undertake no obligation to update these forward-looking statements to reflect events or
circumstances that occur after the date of this report.
2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BANCORPSOUTH, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
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June 30,
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December 31,
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2008
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2007
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(Unaudited)
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(1)
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(Dollars in thousands, except per share amounts)
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ASSETS
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Cash and due from banks
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$
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307,038
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$
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322,926
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Interest bearing deposits with other banks
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15,531
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12,710
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Held-to-maturity securities, at amortized cost
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1,447,806
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1,625,916
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Available-for-sale securities, at fair value
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1,023,065
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1,001,194
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Loans and leases
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9,529,978
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9,227,495
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Less: Unearned income
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48,598
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47,811
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Allowance for credit losses
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123,478
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115,197
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Net loans
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9,357,902
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9,064,487
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Loans held for sale
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171,765
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128,532
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Premises and equipment, net
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334,869
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317,379
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Accrued interest receivable
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83,739
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96,027
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Goodwill
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270,807
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254,889
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Other assets
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386,629
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365,781
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TOTAL ASSETS
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$
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13,399,151
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$
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13,189,841
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LIABILITIES
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Deposits:
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Demand: Noninterest bearing
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$
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1,737,356
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$
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1,670,198
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Interest bearing
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3,364,873
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3,276,275
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Savings
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740,207
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698,449
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Other time
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3,964,117
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4,419,177
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Total deposits
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9,806,553
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10,064,099
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Federal funds purchased and securities
sold under agreement to repurchase
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1,093,805
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809,898
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Short-term Federal Home Loan Bank and
other short-term borrowings
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643,427
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706,586
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Accrued interest payable
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29,134
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37,746
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Junior subordinated debt securities
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160,312
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160,312
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Long-term Federal Home Loan Bank borrowings
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288,900
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88,977
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Other liabilities
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143,244
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125,597
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TOTAL LIABILITIES
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12,165,375
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11,993,215
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SHAREHOLDERS EQUITY
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Common stock, $2.50 par value per share
Authorized - 500,000,000 shares, Issued - 82,377,811 and
82,299,297 shares, respectively
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205,945
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205,748
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Capital surplus
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201,612
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198,620
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Accumulated other comprehensive income (loss)
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(9,232
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)
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(7,214
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)
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Retained earnings
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835,451
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799,472
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TOTAL SHAREHOLDERS EQUITY
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1,233,776
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1,196,626
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
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$
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13,399,151
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$
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13,189,841
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(1)
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Derived from audited financial statements.
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See accompanying notes to consolidated financial statements.
3
BANCORPSOUTH, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
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Three months ended
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Six months ended
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June 30,
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June 30,
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2008
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2007
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2008
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2007
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(In thousands, except for per share amounts)
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INTEREST REVENUE:
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Loans and leases
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$
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147,289
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$
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169,717
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$
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306,473
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$
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322,958
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Deposits with other banks
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193
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268
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|
401
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554
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Federal funds sold and securities purchased
under agreement to resell
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|
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633
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|
67
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3,144
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|
Held-to-maturity securities:
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Taxable
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15,044
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16,962
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30,991
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33,667
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Tax-exempt
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2,025
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2,044
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4,100
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4,059
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Available-for-sale securities:
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|
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Taxable
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8,531
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|
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10,839
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18,095
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20,431
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Tax-exempt
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1,260
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|
|
1,010
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2,464
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|
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2,125
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|
Loans held for sale
|
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|
1,420
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|
|
|
1,082
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|
|
|
3,630
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|
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2,757
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|
|
|
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|
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|
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|
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Total interest revenue
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|
|
175,762
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|
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202,555
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366,221
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389,695
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INTEREST EXPENSE:
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Deposits:
|
|
|
|
|
|
|
|
|
|
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|
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Interest bearing demand
|
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12,938
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21,992
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30,195
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41,879
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Savings
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1,291
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2,481
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2,834
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|
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4,864
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Other time
|
|
|
39,778
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|
|
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55,459
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|
|
|
86,638
|
|
|
|
107,444
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Federal funds purchased and securities sold
under agreement to repurchase
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|
|
3,321
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|
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|
9,283
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8,516
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17,107
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FHLB borrowings
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5,359
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3,332
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11,644
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6,633
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Other
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|
|
3,232
|
|
|
|
3,350
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|
|
|
6,481
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|
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6,442
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
65,919
|
|
|
|
95,897
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|
|
|
146,308
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184,369
|
|
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|
|
|
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|
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|
|
|
|
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Net interest revenue
|
|
|
109,843
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|
|
106,658
|
|
|
|
219,913
|
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|
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205,326
|
|
Provision for credit losses
|
|
|
11,237
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|
|
|
7,843
|
|
|
|
22,048
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|
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9,198
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|
|
|
|
|
|
|
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|
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Net interest revenue, after provision for
credit losses
|
|
|
98,606
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|
|
|
98,815
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|
|
|
197,865
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|
|
|
196,128
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|
|
|
|
|
|
|
|
|
|
|
|
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|
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NONINTEREST REVENUE:
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Mortgage lending
|
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9,507
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|
|
5,484
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11,050
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|
|
|
7,263
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|
Credit card, debit card and merchant fees
|
|
|
8,846
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|
|
|
7,391
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|
|
|
16,822
|
|
|
|
14,265
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|
Service charges
|
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|
17,093
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|
|
|
17,677
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|
|
|
32,932
|
|
|
|
33,073
|
|
Trust income
|
|
|
2,261
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|
|
|
2,457
|
|
|
|
4,495
|
|
|
|
4,671
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|
Security gains, net
|
|
|
199
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|
|
|
10
|
|
|
|
277
|
|
|
|
17
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|
Insurance commissions
|
|
|
21,462
|
|
|
|
17,665
|
|
|
|
46,130
|
|
|
|
37,459
|
|
Other
|
|
|
13,898
|
|
|
|
9,548
|
|
|
|
27,791
|
|
|
|
21,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest revenue
|
|
|
73,266
|
|
|
|
60,232
|
|
|
|
139,497
|
|
|
|
118,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
68,121
|
|
|
|
63,851
|
|
|
|
138,296
|
|
|
|
127,479
|
|
Occupancy, net of rental income
|
|
|
9,716
|
|
|
|
8,709
|
|
|
|
19,199
|
|
|
|
17,172
|
|
Equipment
|
|
|
6,245
|
|
|
|
6,053
|
|
|
|
12,678
|
|
|
|
12,079
|
|
Other
|
|
|
27,982
|
|
|
|
27,315
|
|
|
|
55,361
|
|
|
|
54,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
112,064
|
|
|
|
105,928
|
|
|
|
225,534
|
|
|
|
211,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
59,808
|
|
|
|
53,119
|
|
|
|
111,828
|
|
|
|
103,181
|
|
Income tax expense
|
|
|
19,683
|
|
|
|
17,238
|
|
|
|
36,558
|
|
|
|
33,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
40,125
|
|
|
$
|
35,881
|
|
|
$
|
75,270
|
|
|
$
|
69,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: Basic
|
|
$
|
0.49
|
|
|
$
|
0.44
|
|
|
$
|
0.91
|
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.49
|
|
|
$
|
0.43
|
|
|
$
|
0.91
|
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.22
|
|
|
$
|
0.21
|
|
|
$
|
0.43
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
BANCORPSOUTH, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
75,270
|
|
|
$
|
69,458
|
|
Adjustment to reconcile net income to net
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
22,048
|
|
|
|
9,198
|
|
Depreciation and amortization
|
|
|
14,360
|
|
|
|
13,745
|
|
Deferred taxes
|
|
|
(1,016
|
)
|
|
|
1,173
|
|
Amortization of intangibles
|
|
|
3,003
|
|
|
|
2,406
|
|
Amortization of debt securities premium and discount, net
|
|
|
1,382
|
|
|
|
3,670
|
|
Share-based compensation expense
|
|
|
1,381
|
|
|
|
925
|
|
Security gains, net
|
|
|
(277
|
)
|
|
|
(17
|
)
|
Net deferred loan origination expense
|
|
|
(4,731
|
)
|
|
|
(4,093
|
)
|
Excess tax benefit from exercise of stock options
|
|
|
(165
|
)
|
|
|
(670
|
)
|
Decrease (increase) in interest receivable
|
|
|
12,288
|
|
|
|
(2,393
|
)
|
(Decrease) increase in interest payable
|
|
|
(8,612
|
)
|
|
|
5,599
|
|
Realized gain on student loans sold
|
|
|
(17
|
)
|
|
|
(2,158
|
)
|
Proceeds from student loans sold
|
|
|
1,483
|
|
|
|
80,593
|
|
Origination of student loans held for sale
|
|
|
(43,101
|
)
|
|
|
(46,240
|
)
|
Realized gain on mortgages sold
|
|
|
(5,696
|
)
|
|
|
(5,162
|
)
|
Proceeds from mortgages sold
|
|
|
548,696
|
|
|
|
426,128
|
|
Origination of mortgages held for sale
|
|
|
(546,194
|
)
|
|
|
(440,061
|
)
|
Increase in bank-owned life insurance
|
|
|
(3,432
|
)
|
|
|
(3,406
|
)
|
Decrease (increase) in prepaid pension asset
|
|
|
668
|
|
|
|
(38,423
|
)
|
Other, net
|
|
|
(3,695
|
)
|
|
|
10,742
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
63,643
|
|
|
|
81,014
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from calls and maturities of held-to-maturity securities
|
|
|
186,681
|
|
|
|
79,043
|
|
Proceeds from calls and maturties of available-for-sale securities
|
|
|
249,015
|
|
|
|
302,399
|
|
Purchases of held-to-maturity securities
|
|
|
(8,860
|
)
|
|
|
(141,788
|
)
|
Purchases of available-for-sale securities
|
|
|
(274,541
|
)
|
|
|
(388,836
|
)
|
Net decrease in short-term investments
|
|
|
|
|
|
|
125,871
|
|
Net increase in loans and leases
|
|
|
(314,881
|
)
|
|
|
(323,166
|
)
|
Purchases of premises and equipment
|
|
|
(31,797
|
)
|
|
|
(15,030
|
)
|
Proceeds from sale of premises and equipment
|
|
|
490
|
|
|
|
667
|
|
Acquisition of businesses, net of cash acquired
|
|
|
(10,152
|
)
|
|
|
(59,862
|
)
|
Other, net
|
|
|
(440
|
)
|
|
|
(717
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(204,485
|
)
|
|
|
(421,419
|
)
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Net (decrease) increase in deposits
|
|
|
(257,546
|
)
|
|
|
123,927
|
|
Net increase in short-term debt and other liabilities
|
|
|
219,602
|
|
|
|
129,386
|
|
Advances of long-term debt
|
|
|
200,000
|
|
|
|
|
|
Repayment of long-term debt
|
|
|
(77
|
)
|
|
|
(9,561
|
)
|
Issuance of common stock
|
|
|
1,386
|
|
|
|
3,414
|
|
Purchase of common stock
|
|
|
(326
|
)
|
|
|
(10,846
|
)
|
Excess tax benefit from exercise of stock options
|
|
|
165
|
|
|
|
670
|
|
Payment of cash dividends
|
|
|
(35,429
|
)
|
|
|
(32,994
|
)
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
127,775
|
|
|
|
203,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(13,067
|
)
|
|
|
(136,409
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
335,636
|
|
|
|
451,451
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
322,569
|
|
|
$
|
315,042
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
BANCORPSOUTH, INC. AND SUBSIDIARIES
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 and follow general practices within the industries in which the Company
operates. For further information, refer to the audited consolidated financial statements and
footnotes included in the Companys Annual Report on Form 10-K for the year ended December 31,
2007. 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 and six-month periods ended June
30, 2008 are not necessarily indicative of the results to be expected for the full year. Certain
2007 amounts have been reclassified to conform with the 2008 presentation. Also, beginning March
1, 2007, the financial statements include the accounts of The Signature Bank. See Note 11,
Business Combinations, for further information regarding The Signature Bank.
The consolidated financial statements include the accounts of the Company, its wholly-owned
subsidiaries, BancorpSouth Bank (the Bank) and Risk Advantage, Inc., and the Banks wholly-owned
subsidiaries, Century Credit Life Insurance Company, Personal Finance Corporation of Tennessee,
BancorpSouth Insurance Services, Inc., BancorpSouth Investment Services, Inc. and BancorpSouth
Municipal Development Corporation.
NOTE 2 LOANS AND LEASES
The composition of the loan and lease portfolio by collateral type as of the dates indicated was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
(In thousands)
|
|
Commercial and agricultural
|
|
$
|
1,302,595
|
|
|
$
|
1,250,113
|
|
|
$
|
1,236,776
|
|
Consumer and installment
|
|
|
419,789
|
|
|
|
391,075
|
|
|
|
450,882
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family
|
|
|
2,573,784
|
|
|
|
2,540,356
|
|
|
|
2,529,986
|
|
Other
|
|
|
4,757,771
|
|
|
|
4,275,168
|
|
|
|
4,490,445
|
|
Lease financing
|
|
|
276,860
|
|
|
|
292,752
|
|
|
|
285,865
|
|
Other
|
|
|
199,179
|
|
|
|
262,898
|
|
|
|
233,541
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,529,978
|
|
|
$
|
9,012,362
|
|
|
$
|
9,227,495
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents information concerning non-performing loans as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
(In thousands)
|
|
Non-accrual loans
|
|
$
|
17,710
|
|
|
$
|
9,135
|
|
|
$
|
9,789
|
|
Loans 90 days or more past due
|
|
|
25,719
|
|
|
|
13,706
|
|
|
|
18,671
|
|
Restructured loans
|
|
|
2,620
|
|
|
|
1,066
|
|
|
|
721
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
$
|
46,049
|
|
|
$
|
23,907
|
|
|
$
|
29,181
|
|
|
|
|
|
|
|
|
|
|
|
6
NOTE 3 ALLOWANCE FOR CREDIT LOSSES
The following table summarizes the changes in the allowance for credit losses for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
Year ended
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
|
$
|
115,197
|
|
|
$
|
98,834
|
|
|
$
|
98,834
|
|
Provision charged to expense
|
|
|
22,048
|
|
|
|
9,198
|
|
|
|
22,696
|
|
Recoveries
|
|
|
2,169
|
|
|
|
1,840
|
|
|
|
4,355
|
|
Loans and leases charged off
|
|
|
(15,936
|
)
|
|
|
(6,682
|
)
|
|
|
(16,841
|
)
|
Acquisitions
|
|
|
|
|
|
|
6,138
|
|
|
|
6,153
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
123,478
|
|
|
$
|
109,328
|
|
|
$
|
115,197
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 4 SECURITIES
The following table summarizes information pertaining to temporarily impaired held-to-maturity and
available-for-sale securities with continuous unrealized loss positions at June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
U.S. government agencies
|
|
|
52,203
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
52,203
|
|
|
|
47
|
|
Obligations of states and
political subdivisions
|
|
|
51,857
|
|
|
|
1,258
|
|
|
|
25,201
|
|
|
|
395
|
|
|
|
77,058
|
|
|
|
1,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
104,060
|
|
|
$
|
1,305
|
|
|
$
|
25,201
|
|
|
$
|
395
|
|
|
$
|
129,261
|
|
|
$
|
1,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
287,402
|
|
|
$
|
970
|
|
|
$
|
113,060
|
|
|
$
|
2,065
|
|
|
$
|
400,462
|
|
|
$
|
3,035
|
|
Obligations of states and
political subdivisions
|
|
|
11,411
|
|
|
|
483
|
|
|
|
422
|
|
|
|
14
|
|
|
|
11,833
|
|
|
|
497
|
|
Other
|
|
|
7,740
|
|
|
|
3,260
|
|
|
|
|
|
|
|
|
|
|
|
7,740
|
|
|
|
3,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
306,553
|
|
|
$
|
4,713
|
|
|
$
|
113,482
|
|
|
$
|
2,079
|
|
|
$
|
420,035
|
|
|
$
|
6,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based upon review of the credit quality of these securities, the ability and intent to hold these
securities for a period of time sufficient for recovery of costs and the volatility of their market
price, the impairments related to these securities were determined to be temporary.
The
Companys unrealized losses on other securities relate to its
investment in pooled trust preferred securities. The decline in value
of these securities is attributable to the current illiquidity in
these markets and not credit quality of the individual securities.
Due to the illiquidity, it is unlikely that the Company would be able
to recover its investment in these securities if it sold them at this
time. Because the Company has analyzed the cash flow characteristics
of the securities and has the intent and ability to hold them until a
recovery of fair value, which may be at maturity, it did not consider
the investment in these securities to be other-than-temporarily
impaired at June 30, 2008.
7
NOTE 5 PER SHARE DATA
The computation of basic earnings per share (EPS) is based on the weighted average number of
shares of common stock outstanding. The computation of diluted earnings per share is based on the
weighted average number of shares of common stock outstanding plus the shares resulting from the
assumed exercise of all outstanding share-based awards using the treasury stock method.
The following tables provide a reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
|
(In thousands, except per share amounts)
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common shareholders
|
|
$
|
40,125
|
|
|
|
82,369
|
|
|
$
|
0.49
|
|
|
$
|
35,881
|
|
|
|
82,170
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive share-
based awards
|
|
|
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common
shareholders plus assumed
exercise of all outstanding
share-based awards
|
|
$
|
40,125
|
|
|
|
82,566
|
|
|
$
|
0.49
|
|
|
$
|
35,881
|
|
|
|
82,535
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
|
(In thousands, except per share amounts)
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common shareholders
|
|
$
|
75,270
|
|
|
|
82,350
|
|
|
$
|
0.91
|
|
|
$
|
69,458
|
|
|
|
80,813
|
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive stock
options
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common shareholders
plus assumed exercise
|
|
$
|
75,270
|
|
|
|
82,550
|
|
|
$
|
0.91
|
|
|
$
|
69,458
|
|
|
|
81,214
|
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 COMPREHENSIVE INCOME
The following tables present the components of other comprehensive income and the related tax
effects allocated to each component for the periods indicated:
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Before
|
|
|
Tax
|
|
|
Net
|
|
|
Before
|
|
|
Tax
|
|
|
Net
|
|
|
|
tax
|
|
|
(expense)
|
|
|
of tax
|
|
|
tax
|
|
|
(expense)
|
|
|
of tax
|
|
|
|
amount
|
|
|
benefit
|
|
|
amount
|
|
|
amount
|
|
|
benefit
|
|
|
amount
|
|
|
|
(In thousands)
|
|
Unrealized gains on available-for-
sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) arising during
holding period
|
|
$
|
(16,684
|
)
|
|
$
|
6,452
|
|
|
$
|
(10,232
|
)
|
|
$
|
(6,078
|
)
|
|
$
|
2,326
|
|
|
$
|
(3,752
|
)
|
Less: Reclassification adjustment for
net (gains) losses realized in net income
|
|
|
(199
|
)
|
|
|
76
|
|
|
|
(123
|
)
|
|
|
(10
|
)
|
|
|
4
|
|
|
|
(6
|
)
|
Recognized employee benefit plan
net periodic benefit cost
|
|
|
146
|
|
|
|
(55
|
)
|
|
|
91
|
|
|
|
985
|
|
|
|
(377
|
)
|
|
|
608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
$
|
(16,737
|
)
|
|
$
|
6,473
|
|
|
$
|
(10,264
|
)
|
|
$
|
(5,103
|
)
|
|
$
|
1,953
|
|
|
$
|
(3,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
40,125
|
|
|
|
|
|
|
|
|
|
|
|
35,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
$
|
29,861
|
|
|
|
|
|
|
|
|
|
|
$
|
32,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Before
|
|
|
Tax
|
|
|
Net
|
|
|
Before
|
|
|
Tax
|
|
|
Net
|
|
|
|
tax
|
|
|
(expense)
|
|
|
of tax
|
|
|
tax
|
|
|
(expense)
|
|
|
of tax
|
|
|
|
amount
|
|
|
benefit
|
|
|
amount
|
|
|
amount
|
|
|
benefit
|
|
|
amount
|
|
|
|
(In thousands)
|
|
Unrealized gains on available-for-
sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) gains arising
during holding period
|
|
$
|
(3,508
|
)
|
|
$
|
1,481
|
|
|
$
|
(2,027
|
)
|
|
$
|
(3,452
|
)
|
|
$
|
1,322
|
|
|
$
|
(2,130
|
)
|
Less: Reclassification adjustment for
net (gains) losses realized in net income
|
|
|
(277
|
)
|
|
|
106
|
|
|
|
(171
|
)
|
|
|
(10
|
)
|
|
|
4
|
|
|
|
(6
|
)
|
Recognized employee benefit plan
net periodic benefit cost
|
|
|
291
|
|
|
|
(111
|
)
|
|
|
180
|
|
|
|
985
|
|
|
|
(377
|
)
|
|
|
608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
$
|
(3,494
|
)
|
|
$
|
1,476
|
|
|
$
|
(2,018
|
)
|
|
$
|
(2,477
|
)
|
|
$
|
949
|
|
|
$
|
(1,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
75,270
|
|
|
|
|
|
|
|
|
|
|
|
69,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
$
|
73,252
|
|
|
|
|
|
|
|
|
|
|
$
|
67,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7 JUNIOR SUBORDINATED DEBT SECURITIES
In 2002, the Company issued $128,866,000 in 8.15% Junior Subordinated Debt Securities to
BancorpSouth Capital Trust I (the Trust), a business trust. The Trust used the proceeds from the
issuance of five million shares of 8.15% trust preferred securities, $25 face value per share, to
acquire the Junior Subordinated Debt Securities. Both the Junior Subordinated Debt Securities and
the trust preferred securities mature on January 28, 2032 and are callable at the option of the
Company.
Pursuant to the merger with Business Holding Corporation on December 31, 2004, the Company assumed
the liability for $6,186,000 in Junior Subordinated Debt Securities issued to Business Holding
Company Trust I, a statutory trust. Business Holding Company Trust I used the proceeds from the
issuance of 6,000 shares of trust preferred securities to acquire the Junior Subordinated Debt
Securities. Both the Junior Subordinated Debt Securities and the trust preferred securities mature
on April 7, 2034, and are callable at the option of the Company, in whole or in part, on any
January 7, April 7, July 7 or October 7 on or after April 7, 2009. The Junior Subordinated Debt
Securities and the trust preferred securities pay a per annum rate of interest, reset quarterly,
equal to the three-month London Interbank Offered Rate (LIBOR) plus 2.80% from January 30, 2004
to April 7, 2009 and thereafter at LIBOR plus 2.85%.
9
Pursuant to the merger with American State Bank Corporation on December 1, 2005, the Company
assumed the liability for $6,702,000 in Junior Subordinated Debt Securities issued to American
State Capital Trust I, a statutory trust. American State Capital Trust I used the proceeds from
the issuance of 6,500 shares of trust preferred securities to acquire the Junior Subordinated Debt
Securities. Both the Junior Subordinated Debt Securities and the trust preferred securities mature
on April 7, 2034, and are callable at the option of the Company, in whole or in part, on any July
7, October 7, January 7 or April 7 on or after April 7, 2009. The Junior Subordinated Debt
Securities and the trust preferred securities pay a per annum rate of interest, reset quarterly,
equal to the three-month LIBOR plus 2.80%.
Pursuant to the merger with City Bancorp on March 1, 2007, the Company assumed the liability for
$8,248,000 in Junior Subordinated Debt Securities issued to Signature Bancshares Preferred Trust I,
a statutory trust. Signature Bancshares Preferred Trust I used the proceeds from the issuance of
8,000 shares of trust preferred securities to acquire the Junior Subordinated Debt Securities.
Both the Junior Subordinated Debt Securities and the trust preferred securities mature on October
8, 2033, and are callable at the option of the Company, in whole or in part, on any January 8,
April 8, July 8 or October 8 on or after October 8, 2008. The Junior Subordinated Debt Securities
and the trust preferred securities pay a per annum rate of interest, reset quarterly, equal to the
three-month LIBOR plus 3.00%.
Pursuant to the merger with City Bancorp on March 1, 2007, the Company also assumed the liability
for $10,310,000 in Junior Subordinated Debt Securities issued to City Bancorp Preferred Trust I, a
statutory trust. City Bancorp Preferred Trust I used the proceeds from the issuance of 10,000
shares of trust preferred securities to acquire the Junior Subordinated Debt Securities. Both the
Junior Subordinated Debt Securities and the trust preferred securities mature on March 15, 2035,
and are callable at the option of the Company, in whole or in part, on any March 15, June 15,
September 15 or December 15 on or after March 15, 2010. The Junior Subordinated Debt Securities
and the trust preferred securities pay a per annum rate of interest, reset quarterly, equal to the
three-month LIBOR plus 2.2%.
NOTE 8 GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill by operating segment for the six months ended June
30, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community
|
|
|
Insurance
|
|
|
|
|
|
|
Banking
|
|
|
Agencies
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Balance as of December 31, 2007
|
|
$
|
214,780
|
|
|
$
|
40,109
|
|
|
$
|
254,889
|
|
Goodwill acquired during the period
|
|
|
673
|
|
|
|
10,329
|
|
|
|
11,002
|
|
Purchase accounting adjustments
|
|
|
4,916
|
|
|
|
|
|
|
|
4,916
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2008
|
|
$
|
220,369
|
|
|
$
|
50,438
|
|
|
$
|
270,807
|
|
|
|
|
|
|
|
|
|
|
|
As reflected in the table above, the community banking goodwill acquired during the period is
related to the acquisition of City Bancorp and the additional purchase price paid as a result of
the settlement of a contingency during the first quarter of 2008. Also, an adjustment was made in
the first quarter of 2008 to the allocation of the purchase price in conjunction with the
acquisition of City Bancorp that related to a loan acquired which was subsequently determined to be
unsubstantiated. See Note 11, Business Combinations, for more information regarding that
transaction.
The following tables present information regarding the components of the Companys identifiable
intangible assets for the dates and periods indicated:
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
(In thousands)
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangibles
|
|
$
|
27,801
|
|
|
$
|
15,545
|
|
|
$
|
27,801
|
|
|
$
|
14,448
|
|
Customer relationship intangibles
|
|
|
32,186
|
|
|
|
14,322
|
|
|
|
24,639
|
|
|
|
12,536
|
|
Non-solicitation intangibles
|
|
|
600
|
|
|
|
320
|
|
|
|
665
|
|
|
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
60,587
|
|
|
$
|
30,187
|
|
|
$
|
53,105
|
|
|
$
|
27,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
$
|
688
|
|
|
$
|
|
|
|
$
|
688
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
Aggregate amortization expense for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangibles
|
|
$
|
531
|
|
|
$
|
811
|
|
|
$
|
1,097
|
|
|
$
|
1,325
|
|
Customer relationship intangibles
|
|
|
883
|
|
|
|
527
|
|
|
|
1,786
|
|
|
|
1,078
|
|
Non-solicitation intangibles
|
|
|
60
|
|
|
|
2
|
|
|
|
120
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,474
|
|
|
$
|
1,340
|
|
|
$
|
3,003
|
|
|
$
|
2,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents information regarding estimated amortization expense on the Companys
amortizable identifiable intangible assets for the year ended December 31, 2008 and the succeeding
four years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
|
|
Non-
|
|
|
|
|
Core Deposit
|
|
Relationship
|
|
Solicitation
|
|
|
|
|
Intangibles
|
|
Intangibles
|
|
Intangibles
|
|
Total
|
|
|
(In thousands)
|
Estimated Amortization Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For year ended December 31, 2008
|
|
$
|
1,977
|
|
|
$
|
3,477
|
|
|
$
|
240
|
|
|
$
|
5,694
|
|
For year ended December 31, 2009
|
|
|
1,709
|
|
|
|
2,948
|
|
|
|
160
|
|
|
|
4,817
|
|
For year ended December 31, 2010
|
|
|
1,308
|
|
|
|
2,508
|
|
|
|
|
|
|
|
3,816
|
|
For year ended December 31, 2011
|
|
|
1,016
|
|
|
|
2,139
|
|
|
|
|
|
|
|
3,155
|
|
For year ended December 31, 2012
|
|
|
946
|
|
|
|
1,828
|
|
|
|
|
|
|
|
2,774
|
|
NOTE 9 PENSION BENEFITS
The following table presents the components of net periodic benefit costs for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
Service cost
|
|
$
|
1,667
|
|
|
$
|
2,179
|
|
|
$
|
3,334
|
|
|
$
|
3,917
|
|
Interest cost
|
|
|
1,654
|
|
|
|
1,624
|
|
|
|
3,308
|
|
|
|
3,066
|
|
Expected return on assets
|
|
|
(2,646
|
)
|
|
|
(2,829
|
)
|
|
|
(5,292
|
)
|
|
|
(4,560
|
)
|
Amortization of unrecognized transition amount
|
|
|
5
|
|
|
|
3
|
|
|
|
10
|
|
|
|
8
|
|
Recognized prior service cost
|
|
|
67
|
|
|
|
68
|
|
|
|
134
|
|
|
|
128
|
|
Recognized net loss
|
|
|
73
|
|
|
|
499
|
|
|
|
146
|
|
|
|
849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit costs
|
|
$
|
820
|
|
|
$
|
1,544
|
|
|
$
|
1,640
|
|
|
$
|
3,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
NOTE 10 RECENT PRONOUNCEMENTS
In September 2006, Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurements, was issued. SFAS No. 157 establishes a framework for measuring fair value in
accordance with generally accepted accounting principles and expands disclosures about fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. In February 2008, the Financial Accounting Standards
Board (FASB) issued FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No.
157, which delays the effective date of SFAS 157 for non-financial assets and non-financial
liabilities that are recognized or disclosed in the financial statements on a nonrecurring basis.
The FSP partially defers the effective date of SFAS No. 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years for items within the scope of this
FSP. The adoption of SFAS No. 157 and FSP FAS 157-2 has had no material impact on the financial
position or results of operations of the Company. The Company has not
applied the provisions of SFAS 157 to its non-financial assets and non-financial liabilities in
accordance with FSP FAS 157-2. The Company will apply the provisions of SFAS 157 to these assets
and liabilities beginning January 1, 2009 as required by FSP FAS 157-2.
In September, 2006, the Emerging Issues Task Force (EITF) reached a final consensus on Issue No.
06-4, Accounting for the Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements. EITF Issue No. 06-4 requires employers to recognize a
liability for future benefits provided through endorsement split-dollar life insurance arrangements
that extend into postretirement periods in accordance with SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions or APB Opinion No. 12, Omnibus Opinion 1967.
EITF Issue No. 06-4 is effective for fiscal years beginning after December 15, 2007. Entities
should recognize the effects of applying EITF Issue No. 06-04 through either (a) a change in
accounting principle through a cumulative-effect adjustment to retained earnings or to other
components of equity or net assets in the statement of financial position as of the beginning of
the year of adoption or (b) a change in accounting principle through retrospective application to
all prior periods. The initial adoption of EITF Issue No. 06-4 resulted in a cumulative-effect
adjustment to retained earnings of approximately $1.1 million at January 1, 2008. During the
second quarter of 2008, management identified certain endorsement split-dollar life insurance
arrangements that were not included in the original adoption of EITF Issue No. 06-4. The
correction of this immaterial error resulted in an additional cumulative-effect adjustment to retained
earnings of approximately $2.5 million for a total cumulative-effect adjustment to retained
earnings at January 1, 2008 of approximately $3.6 million. Retained earnings was originally
reported at March 31, 2008 as $816.0 million. Subsequent to the adjustment of $2.5 million,
retained earnings was $813.5 million. Other liabilities was originally reported at March 31, 2008
as $147.0 million. Subsequent to the adjustment of $2.5 million, other liabilities was $149.5
million.
In February, 2007, SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities, was issued. SFAS No. 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company did not elect the fair value option in regards to
items not previously recorded at fair value. Therefore, the adoption of SFAS No. 159 has had no
material impact on the financial position or results of operations of the Company.
In November 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 109, Written Loan
Commitments Recorded at Fair Value Through Earnings. SAB No. 109 rescinds SAB No. 105s
prohibition on inclusion of expected net future cash flows related to loan servicing activities in
the fair value measurement of a written loan commitment. SAB No. 109 also applies to any loan
commitments for which fair value accounting is elected under SFAS No. 159. SAB No. 109 is
effective prospectively for derivative loan commitments issued or modified in fiscal quarters
beginning after December 15, 2007. The adoption of SAB No. 109 has had no material impact on the
financial position or results of operations of the Company.
In December 2007, SFAS No. 141(R), Business Combinations, was issued. SFAS No. 141(R) expands
the definition of transactions and events that qualify as business combinations; requires that the
acquired assets and liabilities, including contingencies, be recorded at fair value determined on
the acquisition date; changes the recognition timing for restructuring costs; and requires the
expensing of acquisition costs as incurred. SFAS No. 141(R) is effective for fiscal years
beginning on or after December 15, 2008. The Company believes that the
12
adoption of SFAS No. 141(R)
will have no material impact on the financial position or results of operations of the Company.
In December 2007, SFAS No. 160, Noncontrolling Interest in Consolidated Financial Statements an
Amendment of ARB No. 51, was issued. SFAS No. 160 requires that acquired assets and liabilities
be measured at full fair value without consideration to ownership percentage. Under SFAS No. 160,
any non-controlling interests in an acquiree should be presented as a separate component of equity
rather than on a mezzanine level. Additionally, SFAS No. 160 provides that net income or loss
should be reported in the consolidated income statement at its consolidated amount, with disclosure
on the face of the consolidated income statement of the amount of consolidated net income which is
attributable to the parent and noncontrolling interest, respectively. SFAS No. 160 is effective
prospectively for periods beginning on or after December 15, 2008, with the exception of the
presentation and disclosure requirements which should be retrospectively applied to all periods
presented. The Company believes
that the adoption of SFAS No. 160 will have no impact on the financial position or results of
operations of the Company.
In March 2008, SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities an
Amendment of FASB Statement No. 133, was issued. SFAS No. 161 changes the disclosure requirements
for derivative instruments and hedging activities by requiring entities to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under FASB Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items affect an entitys
financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008. SFAS
No. 161 will impact disclosures only and will not have an impact on the financial position or
results of operations of the Company.
NOTE 11 BUSINESS COMBINATIONS
On March 1, 2007, City Bancorp, a bank holding company with approximately $850 million in assets
headquartered in Springfield, Missouri, merged with and into the Company. As a result of the
merger, City Bancorps subsidiary, The Signature Bank, became a subsidiary of the Company.
Effective July 1, 2007, The Signature Bank merged with and into the Bank. Consideration paid to
complete this transaction consisted of 3,327,564 shares of the Companys common stock in addition
to cash paid to City Bancorps shareholders in the aggregate amount of approximately $83.8 million.
The consideration paid to complete the transaction has been adjusted to reflect the additional
amount paid as a result of the settlement of a contingency during the first quarter of 2008. In
addition, all outstanding City Bancorp stock options were converted into stock options to purchase
272,834 shares of the Companys common stock. This transaction was accounted for as a purchase.
This acquisition was not material to the financial position or results of operations of the
Company.
NOTE 12 SEGMENT REPORTING
The Companys principal activity is community banking, which includes providing a full range of
deposit products, commercial loans and consumer loans. During the first quarter of 2008, the
Company determined that an additional operating segment, insurance agencies, should be created
based upon the services offered, the significance of those services to the Companys financial
statements and the regular review of the operating results of the insurance agencies by the chief
operating decision makers of the Company. The insurance agencies serve as agents in the sale of
title insurance, commercial lines of insurance and full lines of property and casualty, life,
health and employee benefits products and services. The general corporate and other operating
segment includes leasing, mortgage lending, trust services, credit card activities, investment
services and other activities not allocated to community banking. The increase in profitability of
the general corporate and other operating segment is primarily related to mortgage lending.
Results of operations and selected financial information by operating segment for the three-month
and six-month periods ended June 30, 2008 and 2007 were as follows:
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
|
|
|
|
|
|
|
Community
|
|
|
Insurance
|
|
|
Corporate
|
|
|
|
|
|
|
Banking
|
|
|
Agencies
|
|
|
and Other
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Three months ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
$
|
101,032
|
|
|
$
|
338
|
|
|
$
|
8,473
|
|
|
$
|
109,843
|
|
Provision for credit losses
|
|
|
11,241
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
11,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue after provision for credit losses
|
|
|
89,791
|
|
|
|
338
|
|
|
|
8,477
|
|
|
|
98,606
|
|
Noninterest revenue
|
|
|
30,259
|
|
|
|
21,486
|
|
|
|
21,521
|
|
|
|
73,266
|
|
Noninterest expense
|
|
|
70,865
|
|
|
|
17,577
|
|
|
|
23,622
|
|
|
|
112,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
49,185
|
|
|
|
4,247
|
|
|
|
6,376
|
|
|
|
59,808
|
|
Income taxes
|
|
|
16,187
|
|
|
|
1,661
|
|
|
|
1,835
|
|
|
|
19,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
32,998
|
|
|
$
|
2,586
|
|
|
$
|
4,541
|
|
|
$
|
40,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (at end of period)
|
|
$
|
11,078,459
|
|
|
$
|
152,581
|
|
|
$
|
2,168,111
|
|
|
$
|
13,399,151
|
|
Depreciation and amortization
|
|
|
6,876
|
|
|
|
1,191
|
|
|
|
670
|
|
|
|
8,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
$
|
97,330
|
|
|
$
|
627
|
|
|
$
|
8,701
|
|
|
$
|
106,658
|
|
Provision for credit losses
|
|
|
7,850
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
7,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue after provision for credit losses
|
|
|
89,480
|
|
|
|
627
|
|
|
|
8,708
|
|
|
|
98,815
|
|
Noninterest revenue
|
|
|
31,345
|
|
|
|
17,497
|
|
|
|
11,390
|
|
|
|
60,232
|
|
Noninterest expense
|
|
|
71,877
|
|
|
|
13,661
|
|
|
|
20,390
|
|
|
|
105,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
48,948
|
|
|
|
4,463
|
|
|
|
(292
|
)
|
|
|
53,119
|
|
Income taxes
|
|
|
15,884
|
|
|
|
2,614
|
|
|
|
(1,260
|
)
|
|
|
17,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
33,064
|
|
|
$
|
1,849
|
|
|
$
|
968
|
|
|
$
|
35,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (at end of period)
|
|
$
|
11,053,648
|
|
|
$
|
127,930
|
|
|
$
|
2,027,515
|
|
|
$
|
13,209,093
|
|
Depreciation and amortization
|
|
|
6,920
|
|
|
|
761
|
|
|
|
614
|
|
|
|
8,295
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
|
|
|
|
|
|
|
Community
|
|
|
Insurance
|
|
|
Corporate
|
|
|
|
|
|
|
Banking
|
|
|
Agencies
|
|
|
and Other
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Six months ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
$
|
201,404
|
|
|
$
|
766
|
|
|
$
|
17,743
|
|
|
$
|
219,913
|
|
Provision for credit losses
|
|
|
22,058
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
22,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue after provision for credit losses
|
|
|
179,346
|
|
|
|
766
|
|
|
|
17,753
|
|
|
|
197,865
|
|
Noninterest revenue
|
|
|
58,919
|
|
|
|
46,038
|
|
|
|
34,540
|
|
|
|
139,497
|
|
Noninterest expense
|
|
|
139,741
|
|
|
|
35,868
|
|
|
|
49,925
|
|
|
|
225,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
98,524
|
|
|
|
10,936
|
|
|
|
2,368
|
|
|
|
111,828
|
|
Income taxes
|
|
|
32,209
|
|
|
|
4,293
|
|
|
|
56
|
|
|
|
36,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
66,315
|
|
|
$
|
6,643
|
|
|
$
|
2,312
|
|
|
$
|
75,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (at end of period)
|
|
$
|
11,078,459
|
|
|
$
|
152,581
|
|
|
$
|
2,168,111
|
|
|
$
|
13,399,151
|
|
Depreciation and amortization
|
|
|
11,243
|
|
|
|
2,389
|
|
|
|
3,731
|
|
|
|
17,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
$
|
185,833
|
|
|
$
|
1,139
|
|
|
$
|
18,354
|
|
|
$
|
205,326
|
|
Provision for credit losses
|
|
|
9,193
|
|
|
|
|
|
|
|
5
|
|
|
|
9,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue after provision for credit losses
|
|
|
176,640
|
|
|
|
1,139
|
|
|
|
18,349
|
|
|
|
196,128
|
|
Noninterest revenue
|
|
|
60,002
|
|
|
|
37,185
|
|
|
|
21,404
|
|
|
|
118,591
|
|
Noninterest expense
|
|
|
138,873
|
|
|
|
27,216
|
|
|
|
45,449
|
|
|
|
211,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
97,769
|
|
|
|
11,108
|
|
|
|
(5,696
|
)
|
|
|
103,181
|
|
Income taxes
|
|
|
31,954
|
|
|
|
4,377
|
|
|
|
(2,608
|
)
|
|
|
33,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
65,815
|
|
|
$
|
6,731
|
|
|
$
|
(3,088
|
)
|
|
$
|
69,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (at end of period)
|
|
$
|
11,053,648
|
|
|
$
|
127,930
|
|
|
$
|
2,027,515
|
|
|
$
|
13,209,093
|
|
Depreciation and amortization
|
|
|
13,352
|
|
|
|
1,543
|
|
|
|
1,269
|
|
|
|
16,164
|
|
NOTE 13 MORTGAGE SERVICING RIGHTS
Mortgage servicing rights (MSRs) are recognized based on the fair value of the servicing right on
the date the corresponding mortgage loan is sold. An estimate of the fair value of the Companys
MSRs is determined utilizing assumptions about factors such as mortgage interest rates, discount
rates, mortgage loan prepayment speeds, market trends and industry demand. This estimate and the
assumptions used are reviewed by management. At June 30, 2008, the valuation of MSRs included an
assumed average prepayment speed of 199 PSA and an average discount rate of 9.87%. 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.
The Company does not hedge the change in fair value of MSRs and, therefore, the Company is
susceptible to significant fluctuations in the fair value of its MSRs in changing interest rate
environments.
The Company has 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:
15
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
Fair value as of January 1
|
|
$
|
32,482
|
|
|
$
|
35,286
|
|
Additions:
|
|
|
|
|
|
|
|
|
Origination of servicing assets
|
|
|
4,212
|
|
|
|
2,635
|
|
Changes in fair value:
|
|
|
|
|
|
|
|
|
Due to change in valuation inputs or assumptions
used in the valuation model
|
|
|
1,527
|
|
|
|
(570
|
)
|
Other changes in fair value
|
|
|
(10
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
Fair value as of June 30
|
|
$
|
38,211
|
|
|
$
|
37,338
|
|
|
|
|
|
|
|
|
All of the changes to the fair value of the MSRs are recorded as part of mortgage lending
noninterest revenue on the income statement. As part of mortgage lending noninterest revenue, the
Company recorded contractual servicing fees of approximately $2.10 million and $2.02 million and
late and other ancillary fees of approximately $294,000 and $230,000 for the quarters ended June
30, 2008 and 2007, respectively. The Company recorded contractual servicing fees of $4.18 million
and $4.05 million and late and other ancillary fees of approximately $587,000 and approximately
$492,000 for the six months ended June 30, 2008 and 2007, respectively.
NOTE 14 DERIVATIVE INSTRUMENTS
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 Companys
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 June 30, 2008, the notional amount of forward commitments to sell
individual fixed-rate mortgage loans was $86.5 million with a carrying value and fair value
reflecting a loss of approximately $76,000. At June 30, 2007, the notional amount of forward
commitments to sell individual fixed-rate mortgage loans was $85.1 million with a carrying value
and fair value reflecting a gain of approximately $461,000. At June 30, 2008, the notional amount
of commitments to fund individual fixed-rate mortgage loans was $31.7 million with a carrying value
and fair value reflecting a gain of approximately $339,000. At June 30, 2007, the notional amount
of commitments to fund individual fixed-rate mortgage loans was $35.0 million with a carrying value
and fair value reflecting a loss of approximately $33,000.
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 June 30, 2008, the notional amount of customer related derivative financial
instruments was $379.2 million with an average maturity of 92 months, an average interest receive
rate of 4.40% and an average interest pay rate of 6.63%.
NOTE 15 FAIR VALUE DISCLOSURES
Fair value is defined 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. SFAS No.
157 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 the most 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 Company. Unobservable
inputs are inputs that reflect the Companys assumptions about the assumptions 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 three levels based on the reliability of
inputs as follows:
16
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
entitys own assumptions about the assumptions that market participants would use in pricing the
asset or liability.
The Company adopted the provisions of SFAS 157 and FSP FAS 157-2 on January 1, 2008. The adoption
of these pronouncements did not have a material effect on the Companys financial position or
results of operations.
Determination of Fair Value
The valuation methodologies listed below are used by the Company 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 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 Companys available-for-sale securities that are traded on
an active exchange, such as the New York Stock Exchange, are classified as Level 1. All other
available-for-sale securities are valued using matrix pricing and are classified as Level 2.
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. In determining fair value, the
Company utilizes the expertise of an independent third party. An estimate of the fair value of the
Companys MSRs is determined by the independent third party utilizing assumptions about factors
such as mortgage interest rates, discount rates, mortgage loan prepayment speeds, market trends and
industry demand. All of the Companys MSRs are classified as Level 3.
Derivative instruments.
The Companys derivative instruments consist of commitments to fund
fixed-rate mortgage loans to customers, forward commitments to sell individual fixed-rate mortgage
loans and interest rate swaps. The derivative instruments are traded in over-the-counter markets
where quoted market prices are not readily available. Fair value is measured on a recurring basis
using internally developed models that use primarily market observable inputs, such as yield curves
and option volatilities. The Companys interest rate swaps are classified as Level 2. The
Companys 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 the lower of cost or estimated fair value
and are subjected to nonrecurring fair value adjustments. Estimated fair value is determined on
the basis of existing commitments or the current market value of similar loans. All of the
Companys loans held for sale are classified as Level 2.
Impaired loans.
Loans considered impaired under SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan Income Recognition and Disclosure, 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 Companys impaired loans are classified as Level 3.
17
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following table presents the balances of the assets and liabilities measured at fair value on a
recurring basis as of June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
1,014
|
|
|
$
|
1,022,051
|
|
|
$
|
|
|
|
$
|
1,023,065
|
|
Mortgage servicing rights
|
|
|
|
|
|
|
|
|
|
|
38,211
|
|
|
|
38,211
|
|
Derivative instruments
|
|
|
|
|
|
|
5,502
|
|
|
|
521
|
|
|
|
6,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,014
|
|
|
$
|
1,027,553
|
|
|
$
|
38,732
|
|
|
$
|
1,067,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
|
|
|
$
|
5,502
|
|
|
$
|
257
|
|
|
$
|
5,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the changes in Level 3 assets and liabilities measured at fair value
on a recurring basis for the six-month period ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
|
|
|
|
Servicing
|
|
|
Derivative
|
|
|
|
Rights
|
|
|
instruments
|
|
|
|
(In thousands)
|
|
Balance at December 31, 2007
|
|
$
|
32,482
|
|
|
$
|
(147
|
)
|
Total net gains for the year included in:
|
|
|
|
|
|
|
|
|
Net income
|
|
|
5,729
|
|
|
|
411
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
Purchases, sales, issuances and settlements, net
|
|
|
|
|
|
|
|
|
Transfers in and/or out of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
$
|
38,211
|
|
|
$
|
264
|
|
|
|
|
|
|
|
|
Net unrealized gains included in net income for the
year relating to assets and liabilities held at June 30, 2008
|
|
$
|
1,527
|
|
|
$
|
411
|
|
|
|
|
|
|
|
|
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The following table presents the balances of assets and liabilities measured at fair value on a
nonrecurring basis as of June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Gains (Losses)
|
|
|
(In thousands)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,952
|
|
|
$
|
7,952
|
|
|
$
|
(2,225
|
)
|
Certain non-financial assets measured at fair value on a nonrecurring basis included non-financial
assets and non-financial liabilities measured at fair value in the second step of a goodwill
impairment test, as well as intangible assets measured at fair value for impairment assessment. As
previously stated, SFAS 157 will be applicable to these fair value measurements beginning January
1, 2009.
18
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
BancorpSouth, Inc. (the Company) is a regional financial holding company headquartered in Tupelo,
Mississippi with $13.4 billion in assets. BancorpSouth Bank (the Bank), the Companys
wholly-owned banking subsidiary, has commercial banking operations in Mississippi, Tennessee,
Alabama, Arkansas, Texas, Louisiana, Florida and Missouri. The Bank and its consumer finance,
credit insurance, insurance agency and brokerage subsidiaries 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.
Managements discussion and analysis provides a narrative discussion of the Companys financial
condition and results of operations. For a complete understanding of the following discussion, you
should refer to the unaudited consolidated financial statements for the three-month and six-month
periods ended June 30, 2008 and 2007 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 reported
financial information. The information that follows is provided to enhance
comparability of financial information between periods and to provide a better understanding of the
Companys operations.
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 Companys
subsidiaries provide financial services. Generally, during the first six months of 2008, the
pressures of the national and regional economic cycle created a difficult operating environment for
the financial services industry. The Company is certainly not immune to such pressures and their
impact is reflected in the increases in our measures of credit quality, non-performing loans and
net charge-offs, compared to the second quarter of 2007 and the first quarter of 2008. While these
measures have increased, the Company believes that it is well positioned with respect to overall
credit quality and strength of its allowance for credit losses to meet the challenges of the
current economic cycle. Management believes, however, that continued weakness in the economic
environment could negatively affect the strength of the Companys credit quality and intends to
move decisively in accordance with the Companys business strategies to address any emerging credit
issues.
Most of the revenue of the Company 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 and creditworthiness of
existing borrowers. The financial services industry is highly competitive and heavily regulated.
The Companys success depends on its ability to compete aggressively within its markets while
maintaining sufficient asset quality and cost controls to generate net income.
The tables below summarize the Companys net income, net income per share, return on average
assets and return on average shareholders equity for the three months and six months ended June
30, 2008 and 2007. Management believes these amounts and ratios are key indicators of the
Companys financial performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
June 30,
|
|
|
|
|
2008
|
|
2007
|
|
% Change
|
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
40,125
|
|
|
$
|
35,881
|
|
|
|
11.83
|
%
|
Net income per share: Basic
|
|
$
|
0.49
|
|
|
$
|
0.44
|
|
|
|
11.36
|
|
Diluted
|
|
$
|
0.49
|
|
|
$
|
0.43
|
|
|
|
13.95
|
|
Return on average assets (annualized)
|
|
|
1.23
|
%
|
|
|
1.11
|
%
|
|
|
10.81
|
|
Return on average shareholders equity
(annualized)
|
|
|
13.16
|
%
|
|
|
12.82
|
%
|
|
|
2.65
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
|
June 30,
|
|
|
|
|
2008
|
|
2007
|
|
% Change
|
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
75,270
|
|
|
$
|
69,458
|
|
|
|
8.37
|
%
|
Net income per share: Basic
|
|
$
|
0.91
|
|
|
$
|
0.86
|
|
|
|
5.81
|
|
Diluted
|
|
$
|
0.91
|
|
|
$
|
0.86
|
|
|
|
5.81
|
|
Return on average assets (annualized)
|
|
|
1.15
|
%
|
|
|
1.11
|
%
|
|
|
3.60
|
|
Return on average shareholders equity
(annualized)
|
|
|
12.48
|
%
|
|
|
12.86
|
%
|
|
|
(2.95
|
)
|
The Companys primary source of revenue is the amount of net interest revenue earned by the Bank.
Net interest revenue is the difference between interest earned on loans and investments and
interest paid on deposits and other obligations. The Company noticed moderate loan growth in a
declining interest rate environment resulting in a decrease in interest revenue of 13.23% in the
second quarter of 2008 compared to the same period in 2007 and 6.02% in the first six months of
2008 compared to the same period in 2007. The Company noticed a larger decrease in interest
expense than in interest revenue as interest expense decreased 31.26% in the second quarter of 2008
compared to the second quarter of 2007 and 20.64% in the first six months of 2008 compared to the
same period in 2007. The larger decrease in interest expense than in interest revenue is a result
of the Companys asset/liability strategies which include funding loan growth with the proceeds
from maturing lower yielding investment securities, short-term borrowings from the Federal Home
Loan Bank (the FHLB) and short-term borrowings from the Federal Reserve and by growing lower rate
demand deposits which offset the reduction in higher rate time deposits. These factors combined to
increase the Companys net interest revenue to $109.84 million for the second quarter of 2008, a
$3.19 million, or 2.99%, increase from $106.66 million for the second quarter of 2007 and to
$219.91 million for the first six months of 2008, a $14.59 million, or 7.10%, increase from $205.33
million for the first six months of 2007.
While the increase in net interest revenue during the second quarter and first six months of 2008
compared to the second quarter and first six months of 2007 positively impacted net income, the
provision for credit losses increased in the second quarter and first six months of 2008 compared
to the same periods in 2007, negatively impacting net income. The provision for credit losses was
$11.24 million for the second quarter of 2008 compared to $7.84 million for the second quarter of
2007 and was $22.05 million for the first six months of 2008 compared to $9.20 million for the same
period in 2007. Consistent with the increase in the provision for credit losses, annualized net
charge-offs increased to 0.30% of average loans for the second quarter of 2008 from 0.14% of
average loans for the second quarter of 2007. The increase in the provision for credit losses for
the second quarter and first six months of 2008 was primarily reflective of a slowing economic
environment. The unusually low provision for credit losses experienced by the Company for the
first six months of 2007 was primarily the result of net charge-offs reaching an unsustainably low
level during the first quarter of 2007.
The Company has taken steps to diversify its revenue stream by increasing the amount of revenue
received from mortgage lending 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. This continued diversification strategy resulted in an overall increase in
noninterest revenue of 21.64% for the second quarter of 2008, compared to the same period in 2007
and 17.63% for the first six months of 2008, compared to the same period in 2007. One of the
primary contributors to the increase in noninterest revenue was insurance commissions, which
increased 21.49% for the second quarter of 2008 compared to the same period in 2007 and 23.15% for
the first six months of 2008 compared to the first six months of 2007. The Companys mortgage
lending revenue increased 73.36% during the second quarter of 2008 as compared to the second
quarter of 2007 and 52.14% during the first six months of 2008 compared to the first six months of
2007. The increase in mortgage lending revenue for the second quarter and first six months of 2008
was primarily a result of a $4.91 million increase in the value of the Companys mortgage servicing
asset during the second quarter of 2008 compared to a $1.23 million increase in the value of the
Companys mortgage servicing asset during the second quarter of 2007.
20
Noninterest expense totaled $112.06 million for the second quarter of 2008 compared to $105.93
million for the second quarter of 2007, an increase of $6.14 million, or 5.79%. Noninterest
expense totaled $225.53 million and $211.54 million for the six months ended June 30, 2008 and
2007, respectively, for an increase of $14.00 million, or 6.62%. The increase in noninterest
expense for the second quarter and first six months of 2008 resulted primarily from increased costs
related to additional banking locations and facilities added since June 30, 2007, costs
attributable to the operations of the insurance agencies acquired since June 30, 2007, as well as
costs related to the integration and operation of The Signature Bank, acquired by the Company on
March 1, 2007. The major components of net income are discussed in more detail in the various
sections that follow.
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 paid on liabilities, such as deposits and borrowings,
and continues to provide the Company with its principal source of revenue. Net interest revenue is
affected by the general level of interest rates, changes in interest rates and changes in the
amount and composition of interest earning assets and interest bearing liabilities. The Companys
long-term objective is to manage interest earning assets and interest bearing liabilities to
maximize net interest revenue, while balancing interest rate, credit, liquidity and capital risks.
For purposes of the following discussion, revenue from tax-exempt loans and investment securities
has been adjusted to a fully taxable equivalent basis, using an effective tax rate of 35%.
Net interest revenue was $112.63 million for the three months ended June 30, 2008, compared to
$109.14 million for the same period in 2007, representing an increase of $3.49 million, or 3.20%.
For the first six months of 2008 and 2007, net interest revenue was $225.12 million and $210.32
million, respectively, representing and increase of $14.80 million, or 7.04%. The increase in net
interest revenue for the second quarter and first six months of 2008 is related to the slight
growth in loans experienced by the Company when comparing the three-month and six-month periods
ended June 30, 2008 to the same periods in 2007 as well as the Companys continued focus on funding
this growth with maturing securities and lower-cost liabilities.
Interest revenue decreased $26.49 million, or 12.92%, to $178.55 million for the three months ended
June 30, 2008 from $205.04 million for the three months ended June 30, 2007. While average
interest earning assets increased $107.11 million, or 0.90%, to $11.96 billion for the second
quarter of 2008 from $11.85 billion for the second quarter of 2007, this increase was more than
offset by a decrease of 93 basis points in the yield on those assets to 6.01% for the second
quarter of 2008 from 6.94% for the second quarter of 2007 resulting in an overall decrease in
interest revenue. For the first six months of 2008 and 2007, interest revenue was $371.43 million
and $394.69 million, respectively, representing a decrease of $23.26 million. Again, this decrease
in interest revenue was a result of the 3.58% increase in average interest earning assets to $11.95
billion for the first six months of 2008 from $11.54 billion for the first six months of 2007 being
more than offset by a decrease of 65 basis points in the yield on those assets to 6.25% for the
first six months of 2008 compared to 6.90% for the first six months of 2007.
Interest expense decreased $29.98 million, or 31.26%, to $65.92 million for the three months ended
June 30, 2008 from $95.90 million for the three months ended June 30, 2007. While average interest
bearing liabilities increased $84.18 million, or 0.85%, to $10.04 billion for the second quarter of
2008 from $9.96 billion for the second quarter of 2007, this increase in average interest bearing
liabilities was more than offset by a decrease of 122 basis points in the average rate paid on
those liabilities to 2.64% from 3.86%. Interest expense decreased $38.06 million, or 20.64%, to
$146.31 million for the first six months of 2008 from $184.37 million for the first six months of
2007. The decrease in interest expense for the first six months of 2008 when compared to the first
six months of 2007 was a result of the decrease of 92 basis points in the average rate paid on
interest bearing liabilities to 2.92% from 3.84% with this decrease slightly offset by the $397.09
million, or 4.10%, increase in average interest bearing liabilities to $10.09 billion for the first
six months of 2008 from $9.69 billion for the first six months of 2007.
The relative performance of the Companys lending and deposit-raising functions is frequently
measured by two calculations net interest margin and net interest rate spread. Net interest
margin is determined by dividing fully taxable equivalent net interest revenue by average earning
assets. Net interest rate spread is the difference between
21
the average fully taxable equivalent yield earned on interest earning assets (earning asset yield)
and the average rate paid on interest bearing liabilities. Net interest margin is generally
greater than the net interest rate spread because of the additional income earned on assets funded
by noninterest bearing liabilities, or interest free funding, such as noninterest bearing demand
deposits and shareholders equity.
Net interest margin for the second quarter of 2008 and 2007 was 3.79% and 3.69%, respectively,
representing an increase of 10 basis points. Net interest margin for the six months ended June 30,
2008 and 2007 was 3.79% and 3.68%, respectively, representing an increase of 11 basis points. Net
interest rate spread for the second quarter of 2008 was 3.37%, an increase of 29 basis points from
3.08% for the second quarter of 2007. Net interest rate spread for the first six months of 2008
and 2007 was 3.33% and 3.06%, respectively, representing an increase of 27 basis points. The
increase in net interest margin and net interest rate spread for the second quarter of 2008 when
compared to the second quarter of 2007 was primarily a result of the smaller decrease in the
average rate earned on interest earning assets, from 6.94% for the second quarter of 2007 to 6.01%
for the second quarter of 2008, than the decrease in the average rate paid on interest bearing
liabilities from 3.86% for the second quarter of 2007 to 2.64% for the second quarter of 2008. The
increase in net interest margin and net interest rate spread for the first six months of 2008 when
compared to the first six months of 2007 was primarily a result of the smaller decrease in the
average rate earned on interest earning assets, from 6.90% for the first six months of 2007 to
6.25% for the first six months of 2008, than the decrease in the average rate paid on interest
bearing liabilities from 3.84% for the first six months of 2007 to 2.92% for the first six months
of 2008. The earning asset yield decrease for the three months and six months ended June 30, 2008
when compared to the three months and six months ended June 30, 2007 was a result of a decrease in
the Companys investment portfolio. In addition, the Company chose to fund its loan growth with
lower rate short-term FHLB borrowings and demand deposits rather than higher rate time deposits.
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 Companys asset/liability management is to maximize net interest margin
while maintaining a reasonable mix of interest sensitive assets and liabilities. The Companys
current asset/liability strategy of partially funding loan growth with short-term borrowings from
the FHLB has contributed to the increased liability sensitivity in the 0 to 90 days category. The
following table presents the Companys interest rate sensitivity at June 30, 2008:
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
15,531
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Held-to-maturity securities
|
|
|
105,534
|
|
|
|
336,578
|
|
|
|
778,040
|
|
|
|
227,654
|
|
Available-for-sale and trading securities
|
|
|
272,948
|
|
|
|
80,004
|
|
|
|
334,209
|
|
|
|
335,904
|
|
Loans and leases, net of unearned income
|
|
|
5,002,211
|
|
|
|
1,632,145
|
|
|
|
2,648,931
|
|
|
|
198,093
|
|
Loans held for sale
|
|
|
141,305
|
|
|
|
319
|
|
|
|
1,969
|
|
|
|
28,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
5,537,529
|
|
|
|
2,049,046
|
|
|
|
3,763,149
|
|
|
|
789,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits and
savings
|
|
|
4,105,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other time deposits
|
|
|
1,537,023
|
|
|
|
1,778,597
|
|
|
|
646,498
|
|
|
|
1,999
|
|
Federal funds purchased and securities
sold under agreement to repurchase,
short-term FHLB borrowings and other
short-term borrowings
|
|
|
1,721,782
|
|
|
|
2,580
|
|
|
|
12,870
|
|
|
|
|
|
Long-term FHLB borrowings and junior
subordinated debt securities
|
|
|
|
|
|
|
2,569
|
|
|
|
257,831
|
|
|
|
188,812
|
|
Other
|
|
|
86
|
|
|
|
|
|
|
|
30
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
7,363,971
|
|
|
|
1,783,746
|
|
|
|
917,229
|
|
|
|
190,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate sensitivity gap
|
|
$
|
(1,826,442
|
)
|
|
$
|
265,300
|
|
|
$
|
2,845,920
|
|
|
$
|
598,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest sensitivity gap
|
|
$
|
(1,826,442
|
)
|
|
$
|
(1,561,142
|
)
|
|
$
|
1,284,778
|
|
|
$
|
1,883,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Credit Losses and Allowance for Credit Losses
The provision for credit losses is the periodic cost of providing an allowance or reserve for
losses inherent within the loan and lease portfolio. The Bank employs a systematic methodology
for determining the allowance for credit losses that considers both qualitative and quantitative
factors and requires that management make material estimates and assumptions that are particularly
susceptible to significant change. Some of the quantitative factors considered by the Bank include
loan and lease growth, changes in nonperforming and past due loans and leases, historical loan and
lease loss experience, delinquencies, managements assessment of loan and lease portfolio quality,
the value of collateral and concentrations of loans and leases to specific borrowers or industries.
Some of the qualitative factors that the Bank considers include existing general economic
conditions and the inherent risks of individual loans and leases.
The allowance for credit losses is based principally upon the Banks loan and lease classification
system, delinquencies and historic loss rates. The Bank has a disciplined approach for assigning
credit ratings and classifications to individual credits. Each credit is assigned a grade by the
appropriate loan officer, which serves as a basis for the credit analysis of the entire portfolio.
The assigned grade reflects the borrowers creditworthiness, collateral values, cash flows and
other factors. 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. The work of the loan review department is supplemented by governmental
regulatory agencies in connection with their periodic examinations of the Bank, which provide an
additional independent level of review. The loss factors assigned to each classification are based
upon the attributes of the loans and leases typically assigned to each grade (such as
loan-to-collateral values and borrower creditworthiness). Further, the Bank requires that a
relatively narrow group of loans that have adverse internal ratings or that are significantly past
due be subject to testing for impairment as required by SFAS No. 114. Management periodically
reviews the loss factors assigned in light of the general economic environment and overall
condition of the loan and lease portfolio and modifies the
loss factors assigned to each classification as it deems appropriate. The overall allowance
generally includes a
23
component representing the results of other analyses intended to ensure that
the allowance is adequate to cover other probable losses inherent in the portfolio. This component
considers analyses of changes in credit risk resulting from the differing underwriting criteria in
acquired loan and lease portfolios, industry concentrations, changes in the mix of loans and leases
originated, overall credit criteria and other economic indicators.
The Companys provision for credit losses, allowance for credit losses and net charge-offs are
shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
June 30,
|
|
|
|
|
2008
|
|
2007
|
|
% Change
|
|
|
(Dollars in thousands)
|
Provision for credit losses
|
|
$
|
11,237
|
|
|
$
|
7,843
|
|
|
|
43.27
|
%
|
Net charge-offs
|
|
$
|
7,060
|
|
|
$
|
3,195
|
|
|
|
120.97
|
|
Net charge-offs as a percentage
of average loans and leases (annualized)
|
|
|
0.30
|
%
|
|
|
0.14
|
%
|
|
|
114.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
|
June 30,
|
|
|
|
|
2008
|
|
2007
|
|
% Change
|
|
|
(Dollars in thousands)
|
Provision for credit losses
|
|
$
|
22,048
|
|
|
$
|
9,198
|
|
|
|
139.70
|
%
|
Net charge-offs
|
|
$
|
13,767
|
|
|
$
|
4,842
|
|
|
|
184.32
|
|
Net charge-offs as a percentage
of average loans and leases (annualized)
|
|
|
0.30
|
%
|
|
|
0.11
|
%
|
|
|
172.73
|
|
Allowance for credit losses as a percentage
of loans and leases outstanding at period end
|
|
|
1.30
|
%
|
|
|
1.22
|
%
|
|
|
6.56
|
|
The increase in the provision for credit losses for the first three months and six months of 2008
compared to the same periods of 2007 was a result of the increased credit risk from the loan growth
experienced by the Company, an increase in net charge-offs, the slowing economic environment and
some downward migration of loans within the Banks loan and lease credit ratings and
classifications. The unusually low provision for credit losses experienced during the first six
months of 2007 was primarily the result of net charge-offs reaching an unsustainable low level
during the first quarter of 2007. Because our mortgage lending decisions are based on conservative
lending policies, we continue to have only nominal exposure to the credit issues affecting the
subprime residential mortgage market.
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 (a) the breakdown of the allowance for credit losses by loan and lease
category and (b) the percentage of each category in the loan and lease portfolio to total loans and
leases at the dates indicated:
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
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 agricultural
|
|
$
|
17,609
|
|
|
|
13.67
|
%
|
|
$
|
14,139
|
|
|
|
13.87
|
%
|
|
$
|
15,109
|
|
|
|
13.40
|
%
|
Consumer and installment
|
|
|
5,035
|
|
|
|
4.40
|
%
|
|
|
7,458
|
|
|
|
4.34
|
%
|
|
|
9,013
|
|
|
|
4.89
|
%
|
Real estate mortgage
|
|
|
95,824
|
|
|
|
76.93
|
%
|
|
|
82,888
|
|
|
|
75.62
|
%
|
|
|
88,061
|
|
|
|
76.08
|
%
|
Lease financing
|
|
|
2,548
|
|
|
|
2.91
|
%
|
|
|
2,697
|
|
|
|
3.25
|
%
|
|
|
2,656
|
|
|
|
3.10
|
%
|
Other
|
|
|
2,462
|
|
|
|
2.09
|
%
|
|
|
2,146
|
|
|
|
2.92
|
%
|
|
|
358
|
|
|
|
2.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
123,478
|
|
|
|
100.00
|
%
|
|
$
|
109,328
|
|
|
|
100.00
|
%
|
|
$
|
115,197
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides an analysis of the allowance for credit losses for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
Year ended
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period
|
|
$
|
115,197
|
|
|
$
|
98,834
|
|
|
$
|
98,834
|
|
|
Loans and leases charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
|
(5,748
|
)
|
|
|
(1,564
|
)
|
|
|
(2,533
|
)
|
Consumer and installment
|
|
|
(3,428
|
)
|
|
|
(3,013
|
)
|
|
|
(6,393
|
)
|
Real estate mortgage
|
|
|
(6,654
|
)
|
|
|
(2,105
|
)
|
|
|
(7,792
|
)
|
Lease financing
|
|
|
(106
|
)
|
|
|
|
|
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
|
Total loans charged off
|
|
|
(15,936
|
)
|
|
|
(6,682
|
)
|
|
|
(16,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
|
714
|
|
|
|
405
|
|
|
|
913
|
|
Consumer and installment
|
|
|
1,042
|
|
|
|
1,041
|
|
|
|
1,962
|
|
Real estate mortgage
|
|
|
406
|
|
|
|
367
|
|
|
|
1,396
|
|
Lease financing
|
|
|
7
|
|
|
|
27
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
2,169
|
|
|
|
1,840
|
|
|
|
4,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(13,767
|
)
|
|
|
(4,842
|
)
|
|
|
(12,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision charged to operating expense
|
|
|
22,048
|
|
|
|
9,198
|
|
|
|
22,696
|
|
Acquisitions
|
|
|
|
|
|
|
6,138
|
|
|
|
6,153
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
123,478
|
|
|
$
|
109,328
|
|
|
$
|
115,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans for period
|
|
$
|
9,291,485
|
|
|
$
|
8,514,807
|
|
|
$
|
8,784,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans (annualized)
|
|
|
0.30
|
%
|
|
|
0.11
|
%
|
|
|
0.14
|
%
|
|
|
|
|
|
|
|
|
|
|
Noninterest Revenue
The components of noninterest revenue for the three months and six months ended June 30, 2008 and
2007 and the corresponding percentage changes are shown in the following table:
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
Mortgage lending
|
|
$
|
9,507
|
|
|
$
|
5,484
|
|
|
|
73.36
|
%
|
Credit card, debit card
and merchant fees
|
|
|
8,846
|
|
|
|
7,391
|
|
|
|
19.69
|
|
Service charges
|
|
|
17,093
|
|
|
|
17,677
|
|
|
|
(3.30
|
)
|
Trust income
|
|
|
2,261
|
|
|
|
2,457
|
|
|
|
(7.98
|
)
|
Securities gains, net
|
|
|
199
|
|
|
|
10
|
|
|
|
1,890.00
|
|
Insurance commissions
|
|
|
21,462
|
|
|
|
17,665
|
|
|
|
21.49
|
|
Other
|
|
|
13,898
|
|
|
|
9,548
|
|
|
|
45.56
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest revenue
|
|
$
|
73,266
|
|
|
$
|
60,232
|
|
|
|
21.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
Mortgage lending
|
|
$
|
11,050
|
|
|
$
|
7,263
|
|
|
|
52.14
|
%
|
Credit card, debit card
and merchant fees
|
|
|
16,822
|
|
|
|
14,265
|
|
|
|
17.92
|
|
Service charges
|
|
|
32,932
|
|
|
|
33,073
|
|
|
|
(0.43
|
)
|
Trust income
|
|
|
4,495
|
|
|
|
4,671
|
|
|
|
(3.77
|
)
|
Securities gains, net
|
|
|
277
|
|
|
|
17
|
|
|
|
1,529.41
|
|
Insurance commissions
|
|
|
46,130
|
|
|
|
37,459
|
|
|
|
23.15
|
|
Other
|
|
|
27,791
|
|
|
|
21,843
|
|
|
|
27.23
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest revenue
|
|
$
|
139,497
|
|
|
$
|
118,591
|
|
|
|
17.63
|
%
|
|
|
|
|
|
|
|
|
|
|
The Companys revenue from mortgage lending 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. The Companys normal practice is to generate mortgage loans to sell them
in the secondary market and to either retain or release the associated MSRs with the loan sold.
Origination revenue, a component of mortgage lending revenue, is comprised of gains or losses from
the sale of the mortgage loans originated. Origination volume of $265.54 million and $257.13
million produced origination revenue of $2.20 million and $2.00 million for the quarters ended June
30, 2008 and 2007, respectively. Origination volume of $546.19 million and $440.06 million
produced origination revenue of $4.76 million and $3.29 million for the six months ended June 30,
2008 and 2007, respectively. Increased origination volume resulted in the higher revenue for the
three months and six months ended June 30, 2008 as compared to the same periods in 2007.
Revenue from the servicing process, the other component of mortgage lending revenue, includes fees
from the actual servicing of loans and the recognition of changes in the valuation of the Companys
MSRs. Revenue from the servicing of loans was $2.39 million and $2.25 million for the quarters
ended June 30, 2008 and 2007, respectively. For the six months ended June 30, 2008 and 2007,
revenue from the servicing of loans was $4.77 million and $4.54 million, respectively. Changes in
the fair value of the Companys MSRs are generally a result of changes in mortgage rates from the
previous reporting date. The fair value is also impacted by principal payments, prepayments and
payoffs on loans in the servicing portfolio. An increase in mortgage rates typically results in an
increase in the fair value of the MSRs while a decrease in mortgage rates typically results in a
decrease in the fair value of MSRs. The Company does not hedge the change in fair value of its
MSRs and is susceptible to significant fluctuations in their value in changing interest rate
environments. Reflecting this sensitivity to interest rates, the fair value of MSRs increased
$4.91 million for the quarter ended June 30, 2008 and increased $1.23 million for the
26
quarter ended June 30, 2007. The fair value of MSRs increased $1.52 million for the six months
ended June 30, 2008 and decreased approximately $570,000 for the six months ended June 30, 2007.
Credit card, debit card and merchant fees increased as a result of an increase in the numerical and
monetary volume of items processed. Service charges on deposit accounts decreased slightly because
of a decrease in income related to non-sufficient funds. Trust income decreased for the comparable
three-month and six-month periods as a result of decreases in the value of assets under care
(either managed or in custody). The increase in insurance commissions was a result of the
increase in policies written since June 30, 2007, higher policy premiums and the acquisition of
three insurance agencies since June 30, 2007. The Insurance Network of Jonesboro, Arkansas was
acquired during the third quarter of 2007. Joe Max Green/ Insurance Concepts headquartered in
Nacogdoches, Texas and an insurance broker in Springfield, Missouri were acquired during the first
quarter of 2008.
Contributing to the growth in other noninterest revenue for the second quarter and first six months
of 2008 compared to the second quarter and first six months of 2007 were increases in corporate
analysis charges, brokerage revenue and annuity fees. Also reflected in other noninterest revenue
during 2008 is a first quarter gain of $2.78 million related to the sale of shares of Visa, Inc.
common stock in connection with its initial public offering and a second quarter gain of $2.56
million related to the sale of shares of MasterCard Incorporated common stock. The Company owned
103,193 shares of Visa, Inc. class B stock and 10,688 shares of MasterCard Incorporated class B
stock at June 30, 2008. During the first six months of 2007, the Company recorded a gain from the
sale of student loans of $2.16 million. There were no such student loan sales during the first six
months of 2008, contributing to the increase in loans held for sale.
Noninterest Expense
The components of noninterest expense for the three months and six months ended June 30, 2008 and
2007 and the corresponding percentage changes are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
68,121
|
|
|
$
|
63,851
|
|
|
|
6.69
|
%
|
Occupancy, net of rental income
|
|
|
9,716
|
|
|
|
8,709
|
|
|
|
11.56
|
|
Equipment
|
|
|
6,245
|
|
|
|
6,053
|
|
|
|
3.17
|
|
Other
|
|
|
27,982
|
|
|
|
27,315
|
|
|
|
2.44
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
112,064
|
|
|
$
|
105,928
|
|
|
|
5.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
138,296
|
|
|
$
|
127,479
|
|
|
|
8.49
|
%
|
Occupancy, net of rental income
|
|
|
19,199
|
|
|
|
17,172
|
|
|
|
11.80
|
|
Equipment
|
|
|
12,678
|
|
|
|
12,079
|
|
|
|
4.96
|
|
Other
|
|
|
55,361
|
|
|
|
54,808
|
|
|
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
225,534
|
|
|
$
|
211,538
|
|
|
|
6.62
|
%
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits expense for the three months and six months ended June 30, 2008
increased compared to the same period in 2007, primarily as a result of the hiring of employees to
staff banking locations and facilities added since June 30, 2007, salary and employee benefit costs
related to the operation of the insurance agencies acquired since June 30, 2007, as well as the
addition of the salaries and employee benefits related to the acquisition of The Signature Bank on
March 1, 2007. Occupancy expense also increased on a comparable three-month and six-month period
basis primarily because of additional banking and insurance agency locations and facilities opened
since June 30, 2007, including the addition of The Signature Bank facilities during the first
quarter
27
of 2007. Equipment expense increased for the comparable three-month and six-month periods because
of increased depreciation related to equipment purchased since June 30, 2007. The increase in
other noninterest expense was primarily a result of normal increases and general inflation in the
cost of services and supplies purchased by the Company during the first six months of 2008 compared
to the first six months of 2007. The increase in other noninterest expense was offset in the first
quarter of 2008 by the $1.10 million reversal of a portion of the $2.30 million litigation expense
reported in the fourth quarter of 2007 related to the Companys guarantee of Visa, Inc.s projected
obligations for certain litigation matters, as well as the $1.10 million reversal of a portion of a
previously recorded litigation contingency as a result of a favorable court ruling in the second
quarter of 2008.
Income Tax
Income tax expense was $19.68 million for the second quarter of 2008, a 14.18% increase from $17.24
million for the second quarter of 2007. For the six-month period ending June 30, 2008, income tax
expense was $36.56 million compared to $33.72 million for the same period in 2007, representing an
increase of 8.41%. The increase in income tax expense for the second quarter and first six months
of 2008, compared to the second quarter and first six months of 2007, was a result of the increase
in net income before tax, as net income before tax increased 12.59% and 8.38% when comparing the
second quarter and first six months of 2008 to the second quarter and first six months of 2007,
respectively. The effective tax rates for the second quarter of 2008 and 2007 were 32.91% and
32.45%, respectively, and the effective tax rates for the six-month periods ended June 30, 2008 and
2007 were 32.69% and 32.68%, respectively. The effective tax rates remained relatively stable for
the quarter ended and six months ended June 30, 2008 and 2007.
FINANCIAL CONDITION
Earning Assets
The percentage of earning assets to total assets measures the effectiveness of managements efforts
to invest available funds into the most efficient and profitable uses. Earning assets at June 30,
2008 were $12.14 billion, or 90.60% of total assets, compared with $10.88 billion, or 90.37% of
total assets, at December 31, 2007.
The Company uses the Banks securities portfolios to make various term investments, to provide a
source of liquidity and to serve as collateral to secure certain types of deposits.
Held-to-maturity securities at June 30, 2008 were $1.45 billion, compared with $1.63 billion at
December 31, 2007, a 10.95% decrease. Available-for-sale securities were $1.02 billion at June 30,
2008, compared to $1.00 billion at December 31, 2007, a 2.18% increase.
The Banks loan and lease portfolios make up the single largest component of the Companys earning
assets. The Banks 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
Banks 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. Loans and leases, net of unearned income, totaled $9.48 billion at June 30,
2008, which represented a 3.29% increase from $9.18 billion at December 31, 2007.
At June 30, 2008, the Bank did not have any concentrations of loans or leases in excess of 10% of
total loans and leases outstanding. Loan concentrations are considered to exist when there are
amounts loaned to a multiple number of borrowers engaged in similar activities, which would cause
them to be similarly impacted by economic or other conditions. The Bank conducts business in a
geographically concentrated area but does not consider this factor alone in identifying loan
concentrations. The ability of the Banks borrowers to repay loans is somewhat dependent upon the
economic conditions prevailing in the Banks market areas.
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 do not currently meet the criteria for disclosure as non-performing loans and
leases. Historically, some of these loans and
28
leases are ultimately restructured or placed in non-accrual status. At June 30, 2008, no single
loan or lease of material significance was known to be a potential non-performing loan or lease.
Collateral for some of the Banks 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 from a review standpoint, evaluations
of some real property and other collateral are dependent upon third-party independent appraisers
employed either by the Banks customers or as independent contractors of the Bank.
The Banks policy provides that loans and leases, other than installment loans and leases, are
generally placed in non-accrual status if, in managements 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 loans and
leases were 0.49% of loans and leases, net of unearned income, at June 30, 2008 and 0.32% of loans
and leases, net of unearned income, at December 31, 2007.
The following table provides additional details related to the make up of the Companys loan and
lease portfolio and the distribution of non-performing loans (NPL) at June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPL as a %
|
|
Loan and Lease Portfolio
|
|
Outstanding
|
|
|
NPL
|
|
|
of Outstanding
|
|
|
|
(Dollars in thousands)
|
|
Commercial and industrial
|
|
$
|
1,302,595
|
|
|
$
|
6,656
|
|
|
|
0.51
|
%
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer mortgages
|
|
|
2,103,281
|
|
|
|
14,859
|
|
|
|
0.71
|
|
Home equity
|
|
|
470,503
|
|
|
|
561
|
|
|
|
0.12
|
|
Agricultural
|
|
|
255,262
|
|
|
|
1,452
|
|
|
|
0.57
|
|
Commercial and industrial-owner occupied
|
|
|
1,444,014
|
|
|
|
2,757
|
|
|
|
0.19
|
|
Construction, acquisition and development
|
|
|
1,578,628
|
|
|
|
13,962
|
|
|
|
0.88
|
|
Commercial
|
|
|
1,479,867
|
|
|
|
791
|
|
|
|
0.05
|
|
Credit cards
|
|
|
90,193
|
|
|
|
3,588
|
|
|
|
3.98
|
|
All other
|
|
|
757,037
|
|
|
|
1,423
|
|
|
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
9,481,380
|
|
|
$
|
46,049
|
|
|
|
0.49
|
%
|
|
|
|
|
|
|
|
|
|
|
The following table provides selected characteristics of the Companys real estate construction,
acquisition and development loans at June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90+ Days
|
|
|
|
|
|
|
|
|
|
|
NPL as a
|
|
Real Estate Construction,
|
|
|
|
|
|
Past Due still
|
|
|
Non-accruing
|
|
|
|
|
|
|
% of
|
|
Acquisition and Development
|
|
Outstanding
|
|
|
Accruing
|
|
|
Loans
|
|
|
NPL
|
|
|
Outstanding
|
|
|
|
(Dollars in thousands)
|
|
Multi-family construction
|
|
$
|
24,403
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
Condomimiums
|
|
|
17,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family construction
|
|
|
450,800
|
|
|
|
1,716
|
|
|
|
932
|
|
|
|
2,648
|
|
|
|
0.59
|
|
Recreation and all other loans
|
|
|
41,180
|
|
|
|
32
|
|
|
|
11
|
|
|
|
43
|
|
|
|
0.10
|
|
Commercial construction
|
|
|
321,696
|
|
|
|
6,830
|
|
|
|
|
|
|
|
6,830
|
|
|
|
2.12
|
|
Commercial acquisition and
development
|
|
|
208,674
|
|
|
|
1,529
|
|
|
|
|
|
|
|
1,529
|
|
|
|
0.73
|
|
Residential acquisition and
development
|
|
|
514,192
|
|
|
|
300
|
|
|
|
2,612
|
|
|
|
2,912
|
|
|
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,578,628
|
|
|
$
|
10,407
|
|
|
$
|
3,555
|
|
|
$
|
13,962
|
|
|
|
0.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits and Other Interest Bearing Liabilities
Deposits originating within the communities served by the Bank continue to be the Companys 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. Deposits totaled $9.81 billion at June 30,
29
2008 as compared to $10.06 billion at December 31, 2007, representing a 2.56% decrease.
Noninterest bearing demand deposits increased by $67.16 million, or 4.02%, to $1.74 billion at June
30, 2008 from $1.67 billion at December 31, 2007, and interest bearing demand, savings and time
deposits decreased $324.70 million, or 3.87%, to $8.07 billion at June 30, 2008 from $8.39 billion
at December 31, 2007.
Liquidity and Capital Resources
One of the Companys goals is to provide adequate funds to meet increases in loan demand or any
potential increase in the normal level of deposit withdrawals. The Company accomplishes this goal
primarily by generating cash from the Banks operating activities and maintaining sufficient
short-term liquid assets. These sources, coupled with a stable deposit base and a strong
reputation in the capital markets, allow the Company to fund earning assets and maintain the
availability of funds. Management believes that the Banks 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 Companys 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 lending arrangements. Further, the Company maintains a borrowing
relationship with the Federal Home Loan Bank (the FHLB) which provides access to short-term and
long-term borrowings. During 2007, the Company chose to fund its loan growth with short-term FHLB
and Federal Reserve advances rather than with higher rate time deposits. As a result, short-term
advances from the FHLB and Federal Reserve increased 60.86% to $643.43 million at June 30, 2008
from $400.00 million at June 30, 2007. The Company had long-term advances totaling $288.90 million
at June 30, 2008, an increase of 99.04% from $145.15 million at June 30, 2007.
If the Companys traditional sources of liquidity were constrained, the Company would be forced to
pursue avenues of funding not typically used by the Company and the Companys net interest margin
could be impacted negatively. 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 Companys net interest margin and
overall level of liquidity. The Companys approach to providing adequate liquidity has been
successful in the past and management does not anticipate any short- or long-term changes to its
liquidity strategies.
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 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 Board
of Governors of the Federal Reserve System. 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 I consists of common shareholders equity and qualifying noncumulative perpetual
preferred stock, less goodwill and certain other intangible assets; and Tier II consists of general
allowance for losses on loans and leases, hybrid debt capital instruments and all or a portion of
other subordinated capital debt, depending upon remaining term to maturity. Total capital is the
sum of Tier I and Tier II capital. The Companys Tier I capital and total capital, as a percentage
of total risk-adjusted assets, was 10.54% and 11.74%, respectively, at June 30, 2008. Both ratios
exceeded the required minimum levels for these ratios of 4% and 8%, respectively, at June 30, 2008.
In addition, the Companys Tier I leverage capital
30
ratio (Tier I capital divided by total assets, less goodwill) was 8.53% at June 30, 2008, compared
to the required minimum leverage capital ratio of 4%.
The Federal Deposit Insurance Corporations capital-based supervisory system for insured financial
institutions categorizes the capital position for banks into five categories, ranging from well
capitalized to critically undercapitalized. For a bank to classify as well capitalized, the Tier
I capital, total capital and leverage capital ratios must be at least 6%, 10% and 5%, respectively.
The Bank met the criteria for the well capitalized category at June 30, 2008 as its Tier I
capital, total capital and leverage capital ratios were 10.27%, 11.46% and 8.33%, respectively.
There are various legal and regulatory limits on the extent to which the Bank may pay dividends or
otherwise supply funds to the Company. In addition, federal and state regulatory agencies have the
authority to prevent a bank, bank holding company or financial holding company from paying a
dividend or engaging in any other activity that, in the opinion of the agency, would constitute an
unsafe or unsound practice. The Company does not expect these limitations to cause a material
adverse effect with regard to its ability to meet its cash obligations.
Uses of Capital
The Company may pursue acquisitions of depository institutions and businesses closely related to
banking that further the Companys business strategies. The Company anticipates that consideration
for any such transactions would be shares of the Companys common stock, cash or a combination
thereof. For example, the merger with City Bancorp was completed on March 1, 2007 and the
consideration in that transaction was a combination of shares of the Companys common stock and
cash.
On March 21, 2007, the Company announced a new stock repurchase program whereby the Company may
acquire up to three million shares of its common stock in the open market at prevailing market
prices or in privately negotiated transactions during the period from May 1, 2007 through April 30,
2009. The extent and timing of any repurchases will depend on market conditions and other
corporate considerations. Repurchased shares will be held as authorized but unissued shares.
These authorized but unissued shares will be available for use in connection with the Companys
stock option plans, other compensation programs, other transactions or for other corporate purposes
as determined by the Companys Board of Directors. As of June 30, 2008, 460,700 shares had been
repurchased under this program. No shares were repurchased during the second quarter of 2008. The
Company will continue to evaluate additional share repurchases under this repurchase program and
will evaluate whether to adopt a new stock repurchase program before the current program expires.
From January 1, 2001 through June 30, 2008, the Company repurchased approximately 12.0 million
shares of its common stock under various repurchase plans authorized by the Companys Board of
Directors. The Company conducts its stock repurchase program by using funds received in the
ordinary course of business. The Company has not experienced, and does not expect to experience, a
material adverse effect on its capital resources or liquidity in connection with its stock
repurchase program.
In 2002, the Company issued $128.87 million in 8.15% Junior Subordinated Debt Securities to
BancorpSouth Capital Trust I (the Trust), a business trust. The Trust used the proceeds from the
issuance of five million shares of 8.15% trust preferred securities, $25 face value per share, to
acquire the Junior Subordinated Debt Securities. Both the Junior Subordinated Debt Securities and
the trust preferred securities mature on January 28, 2032, and are callable at the option of the
Company. The $125.00 million in trust preferred securities issued by the Trust qualifies as Tier I
capital under Federal Reserve Board guidelines. The Company may prepay the Junior Subordinated
Debt Securities, and in turn the trust preferred securities, at a prepayment price of 100% of the
principal amount of these securities within 90 days of a determination by the Federal Reserve Board
that trust preferred securities will no longer qualify as Tier I capital.
The Company assumed $6.19 million in Junior Subordinated Debt Securities and the related $6.00
million in trust preferred securities pursuant to the merger on December 31, 2004 with Business
Holding Corporation. The Company also assumed $6.70 million in Junior Subordinated Debt Securities
and the related $6.50 million in trust preferred securities pursuant to the merger on December 1,
2005 with American State Bank Corporation and $18.56
31
million in Junior Subordinated Debt Securities and the related $18.00 million in trust preferred
securities pursuant to the merger on March 1, 2007 with City Bancorp. The Companys aggregate of
$30.50 million in assumed trust preferred securities qualifies as Tier I capital under Federal
Reserve Board guidelines. For more information, see Note 7 to the Companys Consolidated Financial
Statements included elsewhere in this report.
Certain Litigation Contingencies
The Company and its subsidiaries are engaged in lines of business that are heavily regulated and
involve a large volume of financial transactions with numerous customers through offices in eight
states. Although the Company and its subsidiaries have developed policies and procedures to
minimize the impact of legal noncompliance and other disputes, litigation presents an ongoing risk.
The Company and its subsidiaries are defendants in various lawsuits arising out of the normal
course of business, including claims against entities to which the Company is a successor as a
result of business combinations. In the opinion of management, the ultimate resolution of such
matters should not have a material adverse effect on the Companys consolidated financial position
or results of operations. Litigation is, however, inherently uncertain, and the Company cannot
make assurances that it will prevail in any of these actions, nor can it estimate with reasonable
certainty the amount of damages that it might incur.
The Company reported litigation expense of approximately $2.30 million in 2007 attributed to legal
and other accruals established relative to the Companys guarantee of Visa, Inc.s projected
obligations for certain litigation matters. These reserves were recorded as other liabilities and
pertain to Visa, Inc.s settlement with American Express, as well as other pending Visa, Inc.
litigation and were based on information available from Visa, Inc. and other member banks. During
the first quarter of 2008, approximately $1.10 million of the reserve that was related to the above
referenced litigation was reversed and recorded as a reduction of litigation expense as a result of
Visa, Inc.s initial public offering and its deposit of a portion of the net proceeds thereof into
an escrow account from which settlement of, or judgments relating to, the covered litigation may be
paid. Also, during the second quarter of 2008, approximately $1.10 million of the reserve related
to previously recorded litigation contingencies was reversed as a result of a favorable court
ruling.
CRITICAL ACCOUNTING POLICIES
During the three months ended June 30, 2008, there was no significant change in the Companys
critical accounting policies and no significant change in the application of critical accounting
policies as presented in the Companys Annual Report on Form 10-K for the year ended December 31,
2007.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
During the three months ended June 30, 2008, there were no significant changes to the quantitative
and qualitative disclosures about market risks presented in the Companys Annual Report on Form
10-K for the year ended December 31, 2007.
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
Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.
Based upon that evaluation and as of the end of the period covered by this report, the Companys
Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure
controls and procedures are effective to allow timely decisions regarding disclosure in its reports
that the Company files or submits to the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended. There have been no changes in the Companys 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 Companys internal control
over financial reporting.
32
PART II
OTHER INFORMATION
ITEM 1A. RISK FACTORS.
There have been no material changes from the risk factors previously disclosed in our annual report
on Form 10-K for the year ended December 31, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The Company did not repurchase any shares of its common stock during the three months ended June
30, 2008.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders for the Company was held on April 23, 2008. At this meeting,
the following matters were voted upon by the Companys shareholders:
(a) Election of Directors
W. G. Holliman, Jr., James V. Kelley, Turner O. Lashlee and Alan W. Perry were elected to serve as
Class II directors of the Company until the annual meeting of shareholders in 2011 or until their
respective successors are elected and qualified. The votes were cast as follows:
|
|
|
|
|
|
|
|
|
|
|
Votes Cast
|
|
Votes Cast
|
Name
|
|
in Favor
|
|
Against or Withheld
|
W. G. Holliman, Jr.
|
|
|
62,830,954
|
|
|
|
615,246
|
|
James V. Kelley
|
|
|
62,407,627
|
|
|
|
1,038,573
|
|
Turner O. Lashlee
|
|
|
62,313,803
|
|
|
|
1,132,397
|
|
Alan W. Perry
|
|
|
61,391,124
|
|
|
|
2,555,076
|
|
The following directors continued in office following the meeting and they will serve until the
annual meeting of shareholders in the years indicated or until their respective successors are
elected and qualified:
|
|
|
|
|
Name
|
|
Term Expires
|
Hassell H. Franklin
|
|
|
2009
|
|
Robert C. Nolan
|
|
|
2009
|
|
W. Cal Partee, Jr.
|
|
|
2009
|
|
Larry G. Kirk
|
|
|
2010
|
|
Guy W. Mitchell, III
|
|
|
2010
|
|
R. Madison Murphy
|
|
|
2010
|
|
Aubrey B. Patterson
|
|
|
2010
|
|
In addition, immediately following the annual meeting, the Board of Directors selected James E.
Campbell III to fill the vacancy created by the resignation of Travis E. Staub. Mr. Campbells
term expires at the annual meeting of shareholders in 2009 or until his successor is elected and
qualified.
(b) Selection of Independent Auditors
The shareholders of the Company ratified the appointment of KPMG LLP as the Companys independent
auditors for the fiscal year ending December 31, 2008 by the following vote:
|
|
|
|
|
Votes Cast
|
|
Votes Cast
|
|
Abstentions/
|
In Favor
|
|
Against or Withheld
|
|
Non-Votes
|
62,628,709
|
|
484,060
|
|
333,431
|
33
(c) Amendment to the BancorpSouth, Inc. 1995 Non-Qualified Stock Option Plan for Non-Employee
Directors
The shareholders of the Company approved the Amendment to the BancorpSouth, Inc. 1995 Non-Qualified
Stock Option Plan for Non-Employee Directors, which (i) provides for awards of non-qualified stock
options, restricted stock and restricted stock units, (ii) eliminates the automatic grant of stock
options and provides discretion to the Nominating Committee to determine the awards made under the
plan, (iii) limits the number of shares of the Companys common stock that may be issued as awards
each year and (iv) increases the number of shares of the Companys common stock that are available
for award under the plan by 400,000 shares to a total of 964,000 shares.
|
|
|
|
|
Votes Cast
|
|
Votes Cast
|
|
Abstentions/
|
In Favor
|
|
Against or Withheld
|
|
Non-Votes
|
46,153,600
|
|
5,778,309
|
|
11,514,291
|
ITEM 6. EXHIBITS.
(3)
|
(a)
|
|
Articles of Incorporation, as amended and restated. (1)
|
|
|
(b)
|
|
Bylaws, as amended and restated. (2)
|
|
|
(c)
|
|
Amendment No. 1 to Amended and Restated Bylaws. (3)
|
|
|
(d)
|
|
Amendment No. 2 to Amended and Restated Bylaws. (4)
|
|
|
(e)
|
|
Amendment No. 3 to Amended and Restated Bylaws. (4)
|
|
(4)
|
(a)
|
|
Specimen Common Stock Certificate. (5)
|
|
|
(b)
|
|
Rights Agreement, dated as of April 24, 1991, including as Exhibit A the forms
of Rights Certificate and of Election to Purchase and as Exhibit B the summary of
Rights to Purchase Common Shares. (6)
|
|
|
(c)
|
|
First Amendment to Rights Agreement, dated as of March 28, 2001. (7)
|
|
|
(d)
|
|
Amended and Restated Certificate of Trust of BancorpSouth Capital Trust I. (8)
|
|
|
(e)
|
|
Second Amended and Restated Trust Agreement of BancorpSouth Capital Trust I,
dated as of January 28, 2002, between BancorpSouth, Inc., The Bank of New York, The
Bank of New York (Delaware) and the Administrative Trustees named therein. (9)
|
|
|
(f)
|
|
Junior Subordinated Indenture, dated as of January 28, 2002, between
BancorpSouth, Inc. and The Bank of New York. (9)
|
|
|
(g)
|
|
Guarantee Agreement, dated as of January 28, 2002, between BancorpSouth, Inc.
and The Bank of New York. (9)
|
|
|
(h)
|
|
Junior Subordinated Debt Security Specimen. (9)
|
|
|
(i)
|
|
Trust Preferred Security Certificate for BancorpSouth Capital Trust I. (7)
|
|
|
(j)
|
|
Certain instruments defining the rights of certain holders of long-term debt
securities of the Registrant are omitted pursuant to Item 601(b)(4)(iii)(A) of
Regulation S-K. The Registrant hereby agrees to furnish copies of these instruments to
the SEC upon request.
|
|
(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.*
|
|
|
|
(1)
|
|
Filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended June
30, 2007 (file number 1-12991) and incorporated by reference thereto.
|
34
|
|
|
(2)
|
|
Filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December
31, 1998 (file number 1-12991) and incorporated by reference thereto.
|
|
(3)
|
|
Filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December
31, 2000 (file number 1-12991) and incorporated by reference thereto.
|
|
(4)
|
|
Filed as exhibits 3.1 and 3.2 to the Companys Current Report on Form 8-K filed on January
26, 2007 (File number 1-12991) and incorporated by reference thereto.
|
|
(5)
|
|
Filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December
31, 1994 (file number 0-10826) and incorporated by reference thereto.
|
|
(6)
|
|
Filed as exhibit 1 to the Companys registration statement on Form 8-A filed on April 24,
1991 (file number 0-10826) and incorporated by reference thereto.
|
|
(7)
|
|
Filed as exhibit 2 to the Companys amended registration statement on Form 8-A/A filed on
March 28, 2001 (file number 1-12991) and incorporated by reference thereto.
|
|
(8)
|
|
Filed as exhibits 4.12 and 4.13 to the Companys registration statement on Form S-3 filed on
November 2, 2001 (Registration No. 33-72712) and incorporated by reference thereto.
|
|
(9)
|
|
Filed as an exhibit to the Companys Current Report on Form 8-K filed on January 28, 2002
(file number 1-12991) and incorporated by reference thereto.
|
|
*
|
|
Filed herewith.
|
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: August 8, 2008
|
/s/ L. Nash Allen, Jr.
|
|
|
L. Nash Allen, Jr.
|
|
|
Treasurer and
Chief Financial Officer
|
|
|
35
INDEX TO EXHIBITS
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
(3)
|
|
(a)
|
|
Articles of Incorporation, as amended and restated. (1)
|
|
|
|
|
|
|
|
(b)
|
|
Bylaws, as amended and restated. (2)
|
|
|
|
|
|
|
|
(c)
|
|
Amendment No. 1 to Amended and Restated Bylaws. (3)
|
|
|
|
|
|
|
|
(d)
|
|
Amendment No. 2 to Amended and Restated Bylaws. (4)
|
|
|
|
|
|
|
|
(e)
|
|
Amendment No. 3 to Amended and Restated Bylaws. (4)
|
|
|
|
|
|
(4)
|
|
(a)
|
|
Specimen Common Stock Certificate. (5)
|
|
|
|
|
|
|
|
(b)
|
|
Rights Agreement, dated as of April 24, 1991, including as Exhibit A the forms
of Rights Certificate and of Election to Purchase and as Exhibit B the summary of
Rights to Purchase Common Shares. (6)
|
|
|
|
|
|
|
|
(c)
|
|
First Amendment to Rights Agreement, dated as of March 28, 2001. (7)
|
|
|
|
|
|
|
|
(d)
|
|
Amended and Restated Certificate of Trust of BancorpSouth Capital Trust I. (8)
|
|
|
|
|
|
|
|
(e)
|
|
Second Amended and Restated Trust Agreement of BancorpSouth Capital Trust I,
dated as of January 28, 2002, between BancorpSouth, Inc., The Bank of New York, The
Bank of New York (Delaware) and the Administrative Trustees named therein. (9)
|
|
|
|
|
|
|
|
(f)
|
|
Junior Subordinated Indenture, dated as of January 28, 2002, between
BancorpSouth, Inc. and The Bank of New York. (9)
|
|
|
|
|
|
|
|
(g)
|
|
Guarantee Agreement, dated as of January 28, 2002, between BancorpSouth, Inc.
and The Bank of New York. (9)
|
|
|
|
|
|
|
|
(h)
|
|
Junior Subordinated Debt Security Specimen. (9)
|
|
|
|
|
|
|
|
(i)
|
|
Trust Preferred Security Certificate for BancorpSouth Capital Trust I. (7)
|
|
|
|
|
|
|
|
(j)
|
|
Certain instruments defining the rights of certain holders of long-term debt
securities of the Registrant are omitted pursuant to Item 601(b)(4)(iii)(A) of
Regulation S-K. The Registrant hereby agrees to furnish copies of these instruments to
the SEC upon request.
|
|
|
|
|
|
(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.*
|
|
|
|
(1)
|
|
Filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended June
30, 2007 (file number 1-12991) and incorporated by reference thereto.
|
|
(2)
|
|
Filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December
31, 1998 (file number 1-12991) and incorporated by reference thereto.
|
|
(3)
|
|
Filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December
31, 2000 (file number 1-12991) and incorporated by reference thereto.
|
|
(4)
|
|
Filed as exhibits 3.1 and 3.2 to the Companys Current Report on Form 8-K filed on January
26, 2007 (File number 1-12991) and incorporated by reference thereto.
|
|
(5)
|
|
Filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December
31, 1994 (file number 0-10826) and incorporated by reference thereto.
|
|
(6)
|
|
Filed as exhibit 1 to the Companys registration statement on Form 8-A filed on April 24,
1991 (file number 0-10826) and incorporated by reference thereto.
|
|
(7)
|
|
Filed as exhibit 2 to the Companys amended registration statement on Form 8-A/A filed on
March 28, 2001 (file number 1-12991) and incorporated by reference thereto.
|
36
|
|
|
(8)
|
|
Filed as exhibits 4.12 and 4.13 to the Companys registration statement on Form S-3 filed on
November 2, 2001 (Registration No. 33-72712) and incorporated by reference thereto.
|
|
(9)
|
|
Filed as an exhibit to the Companys Current Report on Form 8-K filed on January 28, 2002
(file number 1-12991) and incorporated by reference thereto.
|
|
*
|
|
Filed herewith.
|
37
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