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| BXS > SEC Filings for BXS > Form 10-Q on 6-May-2009 | All Recent SEC Filings |
6-May-2009
Quarterly Report
mortgage origination and servicing, insurance, brokerage and trust services to
corporate customers, local governments, individuals and other financial
institutions through an extensive network of branches and offices.
Management's discussion and analysis provides a narrative discussion of the
Company's financial condition and results of operations. For a complete
understanding of the following discussion, you should refer to the unaudited
consolidated financial statements for the three-month periods ended March 31,
2009 and 2008 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 Company's 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 Company's subsidiaries provide financial services.
Generally, during 2008 and the first three months of 2009, the pressures of the
national and regional economic cycle created a difficult operating environment
for the financial services industry. The Company is not immune to such pressures
and their impact is reflected in our awareness of credit quality and the
increases in the Company's measures of non-performing loans and net charge-offs,
compared to 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 adversely affect the strength of the
Company's credit quality and, therefore, management intends to move decisively
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 Company's success depends on its ability to compete aggressively
within its markets while maintaining sufficient asset quality and cost controls
to generate net income.
The tables below summarize the Company's net income, net income per share,
return on average assets and return on average shareholders' equity for the
three months ended March 31, 2009 and 2008. Management believes these amounts
and ratios are key indicators of the Company's financial performance.
Three months ended
March 31,
2009 2008 % Change
(Dollars in thousands, except per share amounts)
Net income $ 29,477 $ 35,145 (16.13) %
Net income per share: Basic $ 0.35 $ 0.43 (18.60)
Diluted $ 0.35 $ 0.43 (18.60)
Return on average assets (annualized) 0.90% 1.08% (16.67)
Return on average shareholders' equity (annualized) 9.65% 11.78% (18.08)
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The primary source of revenue for the Company 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. While the Company experienced moderate loan growth, a declining interest rate environment resulted in a decrease in interest revenue of 18.29% in the first quarter of 2009 compared to the same period in 2008. The Company experienced a decrease in interest expense of 43.10% in the first quarter of 2009 compared to the first quarter of 2008 due to the substantial decline in rates paid on deposits and other funding sources. The Company continued with its asset/liability strategies, which include funding loan growth with the proceeds from maturing lower yielding investment securities, short-term borrowings and by growing lower rate demand deposits which somewhat offset the reduction in higher rate time deposits. These factors combined to decrease the Company's net interest revenue to $109.88 million for the first quarter of 2009, a decrease of approximately $194,000, or 0.18%, from $110.07 million for the first quarter of 2008.
Also contributing to the decrease in net income was the increase in the
provision for credit losses in the first quarter of 2009 compared to the first
quarter of 2008. The provision for credit losses was $14.95 million for the
first quarter of 2009 compared to $10.81 million for the first quarter of 2008.
Consistent with the increase in the provision for credit losses, annualized net
charge-offs increased to 0.54% of average loans for the first quarter of 2009
from 0.29% of average loans for the first quarter of 2008. The increase in the
provision for credit losses for the first quarter 2009 was primarily reflective
of the slowing economic environment as well as the Company's focus on early
identification and resolution of any emerging credit issues.
The Company has taken steps that have diversified 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. Overall, noninterest revenue remained
relatively static during the first quarter of 2009 when compared to 2008.
Mortgage lending revenue increased 395.92% to $7.65 million for the first
quarter of 2009 compared to $1.54 million for the first quarter of 2008
primarily as a result of the increase in mortgage originations attributable
primarily to refinancings resulting from historically low mortgage interest
rates. This large increase in mortgage lending revenue was offset, however, by
the decrease in service charges of 11.07% to $14.09 million for the first
quarter of 2009 compared to $15.84 million for the first quarter of 2008 as a
result of lower volumes of items processed. The increase was further offset by a
decrease in insurance commissions of 8.20% to $22.65 million for the first
quarter 2009 compared to $24.67 million for the first quarter of 2008 resulting
from the soft market cycle experienced in the insurance industry.
Noninterest expense totaled $118.45 million for the first quarter of 2009
compared to $113.47 million for the first quarter of 2008, an increase of
$4.98 million, or 4.39%. This increase in noninterest expense resulted primarily
from incremental costs related to the 17 full-service branch bank offices opened
during 2008 and the four branch bank offices opened in 2009, coupled with the
significant increase in the Company's FDIC insurance expense for the first
quarter of 2009, despite being assessed at the FDIC's lowest rate because of its
status as being well capitalized under federal regulations. The FDIC has also
proposed a one-time emergency special assessment of 20 basis points as part of
the restoration plan for the Deposit Insurance Fund. As a result, the Company
would be assessed approximately $18.40 million in the second quarter of 2009,
which amount would be paid in the third quarter. The one-time assessment has
attracted significant attention and might be reduced to 10 basis points, which
would result in an assessment of approximately $9.20 million for the Company. A
final determination on the rate of the one-time emergency special assessment is
expected in the second quarter. 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 Company's 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 $112.45 million for the three months ended March 31,
2009, compared to $112.71 million for the same period in 2008, representing a
decrease of approximately $256,000, or 0.23%. This slight increase in net
interest revenue for the first quarter of 2009 was primarily related to the
Company's asset/liability management strategy that focused on funding the
Company's loan growth with the proceeds of maturing lower yielding investment
securities, short-term borrowings and growth in demand deposits.
Interest revenue decreased $34.90 million, or 18.08%, to $158.19 million for the
three months ended March 31, 2009 from $193.10 million for the three months
ended March 31, 2008. While average interest earning assets increased
$239.39 million, or 2.00%, to $12.19 billion for the first quarter of 2009 from
$11.95 billion for the first quarter of 2008, the interest revenue attributable
to this increase was more than offset by a decrease of 124 basis points in the
yield on those assets to 5.26% for the first quarter of 2009 from 6.50% for the
first quarter of 2008 resulting in an overall decrease in interest revenue.
Interest expense decreased $34.65 million, or 43.10%, to $45.74 million for the
three months ended March 31, 2009 from $80.39 million for the three months ended
March 31, 2008. While average interest bearing liabilities increased
$99.75 million, or 0.98%, to $10.24 billion for the first quarter of 2009 from
$10.14 billion for the first quarter of 2008, the interest expense attributable
to this increase in average interest bearing liabilities was more than offset by
a decrease of 138 basis points in the average rate paid on those liabilities to
1.81% from 3.19%. The decrease in interest expense for the three months ended
March 31, 2009 compared to the same period in 2008 was a result of the Company's
ability to reduce higher cost time deposits while increasing lower cost demand
deposits and short-term borrowings.
The relative performance of the Company's lending and deposit-raising functions
is frequently measured by two calculations - net interest margin and net
interest rate spread. Net interest margin is determined by dividing fully
taxable equivalent net interest revenue by average earning assets. Net interest
rate spread is the difference between the average fully taxable equivalent yield
earned on interest earning assets (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 three months ended March 31, 2009 and 2008 was 3.74%
and 3.79%, respectively, representing a decrease of five basis points. Net
interest rate spread for the first quarter of 2009 was 3.45%, an increase of 14
basis points from 3.31% for the first quarter of 2008. The average rate earned
on interest earning assets for the three months ended March 31, 2009 and 2008
was 5.26% and 6.50%, respectively, representing a decrease of 124 basis points.
The average rate paid on interest bearing liabilities for the three months ended
March 31, 2009 and 2008 was 1.81% and 3.19%, respectively, representing a
decrease of 138 basis points. The earning asset yield decrease for the three
months ended March 31, 2009 as compared to the three months ended March 31, 2008
was a result of the decline in interest rates that affected the Company's loan
and lease portfolio. The decrease in the average rate paid on interest bearing
liabilities was a result of the Company's ability to reduce higher rate time
deposits while increasing lower cost demand deposits and short-term FHLB and
other borrowings.
Interest Rate Sensitivity
The interest rate sensitivity gap is the difference between the maturity or
repricing opportunities of interest sensitive assets and interest sensitive
liabilities for a given period of time. A prime objective of the Company's
asset/liability management is to maximize net interest margin while maintaining
a reasonable mix of interest sensitive assets and liabilities. The Company's
current asset/liability strategy of partially funding loan growth with
short-term borrowings from the FHLB and federal funds purchased has contributed
to the increased liability sensitivity in the 0 to 90 days category. The
following table presents the Company's interest rate sensitivity at March 31,
2009:
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 $ 34,230 $ - $ - $ -
Held-to-maturity securities 104,121 312,090 688,696 225,903
Available-for-sale and trading securities 47,492 23,037 433,871 489,129
Loans and leases, net of unearned income 5,114,794 1,559,544 2,861,301 177,184
Loans held for sale 143,768 318 1,919 22,764
Total interest earning assets 5,444,405 1,894,989 3,985,787 914,980
Interest bearing liabilities:
Interest bearing demand deposits and savings 4,725,296 - - -
Other time deposits 783,719 1,936,890 823,810 1,452
Federal funds purchased and securities
sold under agreement to repurchase,
short-term FHLB borrowings and other
short-term borrowings 1,417,146 - 49,503 -
Long-term FHLB borrowings and junior
subordinated debt securities - 201,000 56,802 188,812
Other 2 13 - 98
Total interest bearing liabilities 6,926,163 2,137,903 930,115 190,362
Interest rate sensitivity gap $ (1,481,758 ) $ (242,914 ) $ 3,055,672 $ 724,618
Cumulative interest sensitivity gap $ (1,481,758 ) $ (1,724,672 ) $ 1,331,000 $ 2,055,618
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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 estimated probable losses on loans and leases. The Bank employs a systematic methodology for determining its 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, management's 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 Bank's 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 borrower's 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 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. The overall allowance generally includes a 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 Company's provision for credit losses, allowance for credit losses and net
charge-offs are shown in the following table:
Three months ended
March 31,
2009 2008 % Change
(Dollars in thousands)
Provision for credit losses $ 14,945 $ 10,811 38.24 %
Allowance for credit losses as a percentage
of loans and leases outstanding at period-end 1.39% 1.29% 7.75
Net charge-offs $ 13,106 $ 6,707 95.41
Net charge-offs as a percentage
of average loans and leases (annualized) 0.54% 0.29% 86.21
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The increase in the provision for credit losses for the first three months of
2009 compared to the same period of 2008 was a result of the increased credit
risk from the loan growth experienced by the Company, an increase in net
charge-offs and some downward migration of loans within the Bank's loan and
lease credit ratings and classifications attributable to the current economic
environment. Net charge-offs as a percentage of average loans and leases
increased for the first three months of 2009 compared to the same period of 2008
as a result of the Company addressing emerging credit issues. Because the
Company's mortgage lending decisions are based on conservative lending policies,
the Company continues to have only nominal direct exposure to the credit issues
affecting the sub-prime 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:
March 31, December 31,
2009 2008 2008
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 $ 15,727 13.21 % $ 15,852 13.46 % $ 16,210 13.22 %
Consumer and installment 5,174 4.21 % 7,520 4.62 % 5,313 4.13 %
Real estate mortgage 107,202 77.75 % 92,681 76.59 % 105,666 77.67 %
Lease financing 3,057 2.85 % 2,823 3.00 % 2,940 2.87 %
Other 3,472 1.98 % 425 2.33 % 2,664 2.11 %
Total $ 134,632 100.00 % $ 119,301 100.00 % $ 132,793 100.00 %
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The following table provides an analysis of the allowance for credit losses for the periods indicated:
Three months ended Year ended
March 31, December 31,
2009 2008 2008
(Dollars in thousands)
Balance, beginning of period $ 132,793 $ 115,197 $ 115,197
Loans and leases charged off:
Commercial and agricultural (740 ) (4,069 ) (6,798 )
Consumer, installment and other (1,968 ) (1,454 ) (6,978 )
Real estate mortgage (11,036 ) (2,085 ) (27,965 )
Lease financing (407 ) (106 ) (326 )
Total loans charged off (14,151 ) (7,714 ) (42,067 )
Recoveries:
Commercial and agricultural 124 184 1,082
Consumer, installment and other 491 660 1,856
Real estate mortgage 375 159 923
Lease financing 55 4 52
Total recoveries 1,045 1,007 3,913
Net charge-offs (13,106 ) (6,707 ) (38,154 )
Provision charged to operating expense 14,945 10,811 56,176
Acquisitions - - (426 )
Balance, end of period $ 134,632 $ 119,301 $ 132,793
Average loans for period $ 9,695,475 $ 9,213,294 $ 9,429,963
Ratios:
Net charge-offs to average loans (annualized) 0.54 % 0.29 % 0.40 %
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Noninterest Revenue
The components of noninterest revenue for the three months ended March 31, 2009
and 2008 and the corresponding percentage changes are shown in the following
table:
Three months ended
March 31,
2009 2008 % Change
(Dollars in thousands)
Mortgage lending $ 7,652 $ 1,543 395.92 %
Credit card, debit card
and merchant fees 8,348 7,976 4.66
Service charges 14,085 15,839 (11.07 )
Trust income 2,209 2,234 (1.12 )
Securities gains, net 5 78 (93.59 )
. . .
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