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| BXS > SEC Filings for BXS > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
is not immune to such pressures and understands that the continuing economic
downturn has had a negative impact on the Company and on its customers in all of
the markets that it serves. The impact is reflected in a decline in credit
quality and the increases in the Company's measures of non-performing loans and
net charge-offs, compared to the second quarter and first six months of 2008.
While these measures have increased, the Company believes that it is well
positioned with respect to overall credit quality and the 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 credit quality of the
Company's assets overall and, therefore, management intends to move promptly and
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 and six months ended June 30, 2009 and 2008. Management believes
these amounts and ratios are key indicators of the Company's financial
performance.
Three months ended
June 30,
2009 2008 % Change
(Dollars in thousands, except per share amounts)
Net income $ 33,867 $ 40,125 (15.60 )%
Net income per share: Basic $ 0.41 $ 0.49 (16.33 )
Diluted $ 0.41 $ 0.49 (16.33 )
Return on average assets (annualized) 1.02 % 1.23 % (17.07 )
Return on average shareholders' equity (annualized) 10.86 % 13.16 % (17.48 )
Six months ended
June 30,
2009 2008 % Change
(Dollars in thousands, except per share amounts)
Net income $ 63,344 $ 75,270 (15.84 )%
Net income per share: Basic $ 0.76 $ 0.91 (16.48 )
Diluted $ 0.76 $ 0.91 (16.48 )
Return on average assets (annualized) 0.96 % 1.15 % (16.52 )
Return on average shareholders' equity (annualized) 10.26 % 12.48 % (17.79 )
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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 12.20% in the second quarter of 2009 compared to the same period in 2008 and 15.37% in the first six months of 2009 compared to the same period in 2008. The Company experienced a decrease in interest expense of 34.20% in the second quarter of 2009 compared to the second quarter of 2008 and a decrease of 39.09% in the first six months of 2009 compared to the first six months of 2008 primarily because of 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 increased lower rate demand deposits which somewhat offset the reduction in higher rate time deposits when comparing June 30, 2009 to June 30, 2008. These factors combined to increase the Company's net interest revenue to $110.94 million for the second quarter of 2009, an increase of $1.10 million, or 1.00%, from $109.84 million for the second quarter of 2008 and to $220.82 million for the first six months of 2009, an increase of approximately $903,000, or 0.41%, from $219.91 million for the first six months of 2008.
Contributing to the decrease in net income was the increase in the provision for
credit losses in the second quarter and first six months of 2009 compared to the
same periods of 2008. The provision for credit losses was $17.59 million for the
second quarter of 2009 compared to $11.24 million for the second quarter of 2008
and was $32.54 million for the first six months of 2009 compared to
$22.05 million for the first six months of 2008. Consistent with the increase in
the provision for credit losses, annualized net charge-offs increased to 0.55%
of average loans for the second quarter of 2009 from 0.30% of average loans for
the second quarter of 2008 and to 0.55% of average loans for the first six
months of 2009 from 0.30% of average loans for the first six months of 2008. The
increase in the provision for credit losses for the second quarter and first six
months of 2009 was primarily reflective of the slowing economic environment as
well as the Company's focus on early identification and resolution of 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. Noninterest revenue increased 8.83%
for the second quarter of 2009 compared to the second quarter of 2008 and 4.68%
for the first six months of 2009 compared to the first six months of 2008. One
of the primary contributors to the increase in noninterest revenue was mortgage
lending revenue, which increased 46.83% to $13.96 million for the second quarter
of 2009 compared to $9.51 million for the second quarter of 2008 and 95.57% to
$21.61 million for the first six months of 2009 compared to $11.05 million for
the first six months of 2008. The increase in mortgage lending revenue was
primarily a result of the increase in mortgage originations, the majority of
which were refinancings resulting from historically low mortgage interest rates.
This large increase in mortgage lending revenue was offset, however, by an 8.49%
and 9.73% decrease in service charges for the second quarter and first six
months of 2009, respectively, compared to the same periods in 2008, as a result
of lower volumes of items processed. The increase in mortgage lending revenue
was further offset by a decrease in insurance commissions of 4.13% and 6.31% for
the second quarter and first six months of 2009, respectively, compared to the
same periods in 2008, resulting from the soft market cycle experienced in the
insurance industry. Also contributing to the increase in noninterest revenue
during the first six months of 2009, the Company recorded interest on tax
refunds of $2.83 million, gains on the sale of student loans of $3.68 million, a
gain of $1.81 million on the sale of the Company's remaining shares of
MasterCard, Inc. common stock, and an insurance recovery on a casualty loss of
$1.33 million.
Noninterest expense totaled $123.27 million for the second quarter of 2009
compared to $112.06 million for the second quarter of 2008, an increase of
$11.20 million, or 10.00%, and $241.72 million for the first six months of 2009
compared to $225.53 million for the first six months of 2008, an increase of
$16.19 million, or 7.18%. This increase in noninterest expense included the
incremental costs related to the 14 full-service branch bank offices opened
since the end of the second quarter of last year, coupled with an increase of
$2.86 million and $5.69 million in the Company's regular FDIC insurance
assessment for the second quarter and first six months of 2009, respectively,
compared to the same periods in 2008, despite being assessed at the FDIC's
lowest rate because of its status as well capitalized under federal regulations.
Noninterest expense was also negatively impacted by the $6.10 million special
FDIC assessment as part of the restoration plan for the Deposit Insurance Fund.
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 $113.49 million for the three months ended June 30,
2009, compared to $112.63 million for the same period in 2008, representing an
increase of approximately $861,000, or 0.76%. Net interest revenue was
$225.94 million for the first six months of 2009, compared to $225.12 million
for the same period in 2008, representing an increase of approximately $824,000,
or 0.37%. This slight increase in net interest revenue for the second quarter
and first six months of 2009 was primarily due to average loans and leases
increasing to $9.74 billion for the second quarter of 2009 from $9.37 billion
for the second quarter of 2008, and to $9.72 billion for the first six months of
2009 from $9.29 billion for the first six months of 2008.
Interest revenue decreased $21.69 million, or 12.15%, to $156.86 million for the
three months ended June 30, 2009 from $178.55 million for the three months ended
June 30, 2008. While average interest earning assets increased $177.99 million,
or 1.49%, to $12.14 billion for the second quarter of 2009 from $11.96 billion
for the second quarter of 2008, the interest revenue attributable to this
increase was more than offset by a decrease of 82 basis points in the yield on
those assets to 5.18% for the second quarter of 2009 from 6.01% for the second
quarter of 2008, resulting in the overall decrease in interest revenue. Interest
revenue decreased $56.37 million, or 15.18%, to $315.06 million for the first
six months of 2009 from $371.43 million for the first six months of 2008. While
average interest earning assets increased $208.49 million, or 1.74%, to
$12.16 billion for the first six months of 2009 from $11.95 billion for the
first six months of 2008, the interest revenue attributable to this increase was
more than offset by a decrease of 103 basis points in the yield on those assets
to 5.22% for the first six months of 2009 from 6.25% for the first six months of
2008, again resulting in the overall decrease in interest revenue.
Interest expense decreased $22.55 million, or 34.20%, to $43.37 million for the
three months ended June 30, 2009 from $65.92 million for the three months ended
June 30, 2008. While average interest bearing liabilities increased
$48.41 million, or 0.48%, to $10.09 billion for the second quarter of 2009 from
$10.04 billion for the second quarter of 2008, the interest expense attributable
to this increase in average interest bearing liabilities was more than offset by
a decrease of 92 basis points in the average rate paid on those liabilities to
1.72% from 2.64%, respectively, for the same periods. Interest expense decreased
$57.19 million, or 39.09%, to $89.12 million for the first six months of 2009
from $146.31 million for the first six months of 2008. While average interest
bearing liabilities increased $73.66 million, or 0.73%, to $10.17 billion for
the first six months of 2009 from $10.09 billion for the first six months of
2008, the interest expense attributable to this increase in average interest
bearing liabilities was more than offset by a decrease of 115 basis points in
the average rate paid on those liabilities to 1.77% from 2.92%, respectively,
for the same periods. The decrease in interest expense for the three months and
six months ended June 30, 2009 compared to the same periods in 2008 was a result
of the Company's ability to reduce higher cost time deposits while increasing
lower cost demand deposits and replacing higher cost short-term borrowings with
lower cost 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 June 30, 2009 and 2008 was 3.75%
and 3.79%, respectively, representing a decrease of four basis points. Net
interest rate spread for the second quarter of 2009 was 3.46%, an increase of
nine basis points from 3.37% for the second quarter of 2008. The average rate
earned on interest earning assets for the three months ended June 30, 2009 and
2008 was 5.18% and 6.01%, respectively, representing a decrease of 83 basis
points. The average rate paid on interest bearing liabilities for the three
months ended June 30, 2009 and 2008 was 1.72% and 2.64%, respectively,
representing a decrease of 92 basis points. Net interest margin for the six
months ended June 30, 2009 and 2008 was 3.75% and 3.79%, respectively,
representing a decrease of four basis points. Net interest rate spread for the
first six months of 2009 was 3.46%, an increase of 13 basis points from 3.33%
for the first six months of 2008. The average rate earned on interest earning
assets for the six months ended June 30, 2009 and 2008 was 5.22% and 6.25%,
respectively, representing a decrease of 103 basis points. The average rate paid
on interest bearing liabilities for the six months ended June 30, 2009 and 2008
was 1.77% and 2.92%, respectively, representing a decrease of 115 basis points.
The earning asset yield decrease for the three months and six months ended
June 30, 2009 as compared to the three months and six months ended June 30, 2008
was
1.77% and 2.92%, respectively, representing a decrease of 115 basis points. The
earning asset yield decrease for the three months and six months ended June 30,
2009 as compared to the three months and six months ended June 30, 2008 was a
result of the decline in interest rates that affected the Company's loan and
lease portfolio. That decline somewhat offset the increase in the yield on the
investment portfolio as the Company chose to replace some lower-cost maturing
investments. 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 June 30,
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 $ 28,836 $ - $ - $ -
Held-to-maturity securities 64,881 366,126 579,629 193,982
Available-for-sale and trading securities 55,118 20,843 445,506 447,740
Loans and leases, net of unearned income 5,056,181 1,616,381 2,875,848 212,990
Loans held for sale 60,270 431 2,592 31,443
Total interest earning assets 5,265,286 2,003,781 3,903,575 886,155
Interest bearing liabilities:
Interest bearing demand deposits and
savings 4,678,310 - - -
Other time deposits 881,841 1,828,652 937,801 57,525
Federal funds purchased and securities sold
under agreement to repurchase, short-term
FHLB borrowings and other short-term
borrowings 1,148,158 2,960 79,491 -
Long-term FHLB borrowings and junior
subordinated debt securities - 202,000 55,792 188,812
Other 2 13 - 98
Total interest bearing liabilities 6,708,311 2,033,625 1,073,084 246,435
Interest rate sensitivity gap $ (1,443,025 ) $ (29,844 ) $ 2,830,491 $ 639,720
Cumulative interest sensitivity gap $ (1,443,025 ) $ (1,472,869 ) $ 1,357,622 $ 1,997,342
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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 current economic downturn has
had a negative impact on the Company's measures of credit quality, as evidenced
by the information in the tables below. Continued weakness in the economy could
adversely affect the Company's credit quality.
The Company's provision for credit losses, allowance for credit losses and net
charge-offs are shown in the following table:
Three months ended
June 30,
2009 2008 % Change
(Dollars in thousands)
Provision for credit losses $ 17,594 $ 11,237 56.57 %
Net charge-offs $ 13,479 $ 7,060 90.92
Net charge-offs as a percentage of average loans
and leases (annualized) 0.55 % 0.30 % 83.33
Six months ended
June 30,
2009 2008 % Change
(Dollars in thousands)
Provision for credit losses $ 32,539 $ 22,048 47.58 %
Net charge-offs $ 26,585 $ 13,767 93.11
Net charge-offs as a percentage of average loans
and leases (annualized) 0.55 % 0.30 % 83.33
Allowance for credit losses as a percentage of
loans and leases outstanding at period end 1.42 % 1.30 % 9.23
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The increase in the provision for credit losses for the second quarter and first six months of 2009 compared to the same periods of 2008 was a result of the increased credit risk from the loan growth experienced by the Company during the second quarter and first six months of 2009, 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 prevailing economic environment. The increase in the net charge-offs as a percentage of average loans and leases for the second quarter and first six months of 2009 compared to the same periods of 2008 was primarily a result of the Company addressing credit issues and losses within the consumer mortgage and construction, acquisition and development portfolios. Because the Company's mortgage lending decisions are based on conservative lending policies, the Company continues to have only nominal exposure to the credit issues affecting the sub-prime residential mortgage market.
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