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BXS > SEC Filings for BXS > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for BANCORPSOUTH INC

Form 10-Q for BANCORPSOUTH INC


7-Nov-2012

Quarterly Report


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

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," "assume," "believe," "estimate," "expect," "may," "might," "will," "intend," "indicated," "could," or "would," or future or conditional verb tenses, and variations or negatives of such terms. These forward-looking statements include, without limitation, those relating to amortization expense for intangible assets, goodwill impairments, loan impairment, utilization of appraisals and inspections for real estate loans, maturity, renewal or extension of construction, acquisition and development loans, net interest revenue, fair value determinations, the amount of the Company's non-performing loans and leases, credit quality, credit losses, liquidity, off-balance sheet commitments and arrangements, valuation of mortgage servicing rights, allowance and provision for credit losses, continued weakness in the economic environment, early identification and resolution of credit issues, utilization of non-GAAP financial measures, the ability of the Company to collect all amounts due according to the contractual terms of loan agreements, the Company's reserve for losses from representation and warranty obligations, the Company's foreclosure process related to mortgage loans, the impact of the Durbin Debit Interchange Amendment on the Company's debit card revenue, the resolution of non-performing loans that are collaterally dependent, real estate values, fully-indexed interest rates, interest rate risk, interest rate sensitivity, calculation of economic value of equity, impaired loan charge-offs, troubled debt restructurings, diversification of the Company's revenue stream, liquidity needs and strategies, sources of funding, net interest margin, declaration and payment of dividends, future acquisitions and consideration to be used therefore, the use of proceeds from the Company's underwritten public offering and the impact of certain claims, legal and administrative proceedings and pending litigation. 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 may include, but are not limited to, conditions in the financial markets and economic conditions generally, the ongoing debt crisis and the downgrade of the sovereign credit ratings for various nations, the adequacy of the Company's provision and allowance for credit losses to cover actual credit losses, the credit risk associated with real estate construction, acquisition and development loans, losses resulting from the significant amount of the Company's other real estate owned, limitations on the Company's ability to declare and pay dividends, the short-term and long-term impact of changes to banking capital standards on the Company's regulatory capital and liquidity, the impact of legal or administrative proceedings, the availability of capital on favorable terms if and when needed, liquidity risk, governmental regulation, including the Dodd Frank Act, and supervision of the Company's operations, the impact of regulations on service charges on the Company's core deposit accounts, the susceptibility of the Company's business to local economic conditions, the soundness of other financial institutions, changes in interest rates, the impact of monetary policies and economic factors on the Company's ability to attract deposits or make loans, volatility in capital and credit markets, reputational risk, the impact of hurricanes or other adverse weather events, any requirement that the Company write down goodwill or other intangible assets, diversification in the types of financial services the Company offers, competition with other financial services companies, risks in


connection with completed or potential acquisitions, the Company's growth strategy, interruptions or breaches in the Company's information system security, the failure of certain third party vendors to perform, dilution caused by the Company's issuance of any additional shares of its common stock to raise capital or acquire other banks, bank holding companies, financial holding companies and insurance agencies, the effectiveness of the Company's internal controls, other factors generally understood to affect the financial results of financial services companies and other factors detailed from time to time in the Company's 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.

OVERVIEW

BancorpSouth, Inc. (the "Company") is a regional financial holding company headquartered in Tupelo, Mississippi with $13.2 billion in assets at September 30, 2012. BancorpSouth Bank (the "Bank"), the Company's wholly-owned banking subsidiary, has commercial banking operations in Mississippi, Tennessee, Alabama, Arkansas, Texas, Louisiana, Florida and Missouri. The Bank's insurance agency subsidiary also operates an office in Illinois. 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.
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 and nine-month periods ended September 30, 2012 and 2011 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 years 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 the past several years, the pressures of the national and regional economic cycle have created a difficult operating environment for the financial services industry. The Company is not immune to such pressures and the continuing economic downturn has had a negative impact on the Company and its customers in all of the markets that it serves. While this impact has been reflected in the credit quality measures during the past two years, the Company's financial condition at September 30, 2012 indicates decreases in the allowance for credit losses, total NPLs and total non-performing assets ("NPAs"), when compared to December 31, 2011 and September 30, 2011. Management believes that the Company is well positioned with respect to overall credit quality as evidenced by this improvement in credit quality metrics at September 30, 2012 compared to December 31, 2011 and September 30, 2011. 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. Therefore, management will continue to focus on early identification and resolution of any credit issues.
The largest source of the Company's revenue is derived from the operation of its principal operating subsidiary, the Bank. The financial condition and operating results of the Bank are affected by the level and volatility of interest rates on loans, investment securities, deposits and other borrowed funds, and the impact of economic downturns on loan demand, collateral value and creditworthiness of existing borrowers. The financial services industry is highly competitive and heavily regulated. The Company's success depends on its ability to compete aggressively within its markets while maintaining sufficient asset quality and cost controls to generate net income.
In the third quarter and first nine months of 2012, the Company's debit card revenue decreased by $3.6 million and $10.4 million, respectively, compared to the third quarter and first nine months of 2011. Management estimates that debit card revenue could be reduced by approximately $13.0 million in 2012 compared to 2011, as a result of the impact of the final rule implementing the Durbin Debt Interchange Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Durbin Amendment"). This estimate is based on management's assumptions that revenue associated with consumer signature activity would be 58% of the level prior to the implementation of the Durbin Amendment, revenue associated with business signature activity would be 12% of the level prior to the implementation of the Durbin Amendment and revenue associated with consumer and business PIN activity would be 80% of the level prior to the implementation of the Durbin Amendment.


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.

SELECTED FINANCIAL DATA

                                                  Three months ended                   Nine months ended
                                                     September 30,                       September 30,
                                               2012                2011              2012             2011
                                           (Dollars in thousands, except per
                                                      share data)

Earnings Summary:
Total interest revenue                     $     120,750       $     132,397     $    369,329     $    408,460
Total interest expense                            17,371              24,322           55,599           81,036
Net interest income                              103,379             108,075          313,730          327,424
Provision for credit losses                        6,000              25,112           22,000          110,831
Noninterest income                                70,420              62,055          209,248          205,510
Noninterest expense                              133,788             130,698          405,974          397,777
Income before income taxes                        34,011              14,320           95,004           24,326
Income tax expense                                10,186               2,386           27,689               60
Net income                                 $      23,825       $      11,934     $     67,315     $     24,266

Balance Sheet - Period-end balances:
Total assets                               $  13,235,737       $  13,198,518     $ 13,235,737     $ 13,198,518
Total securities                               2,483,606           2,481,555        2,483,606        2,481,555
Loans and leases, net of unearned income       8,679,969           9,055,905        8,679,969        9,055,905
Total deposits                                10,974,640          11,063,233       10,974,640       11,063,233
Long-term debt                                    33,500              33,500           33,500           33,500
Total shareholders' equity                     1,446,703           1,266,753        1,446,703        1,266,753

Balance Sheet-Average Balances:
Total assets                               $  13,019,016       $  13,174,655     $ 13,041,785     $ 13,358,657
Total securities                               2,481,201           2,529,482        2,503,278        2,657,629
Loans and leases, net of unearned income       8,716,646           9,138,414        8,747,690        9,228,583
Total deposits                                10,856,524          11,141,372       10,936,173       11,330,322
Long-term debt                                    33,500              34,984           33,500           77,852
Total shareholders' equity                     1,432,157           1,251,815        1,399,984        1,231,286

Common Share Data:
Basic earnings per share                   $        0.25       $        0.14     $       0.72     $       0.29
Diluted earnings per share                          0.25                0.14             0.72             0.29
Cash dividends per share                            0.01                0.01             0.03             0.13
Book value per share                               15.32               15.17            15.32            15.17
Dividend payout ratio                               4.00 %              7.14 %           4.17 %          44.83 %

Financial Ratios (Annualized):
Return on average assets                            0.73 %              0.36 %           0.69 %           0.24 %
Return on average shareholders' equity              6.62                3.78             6.42             2.63
Total shareholders' equity to total
assets                                             10.93                9.60            10.93             9.60
Tangible shareholders' equity to
tangible assets                                     8.91                7.58             8.91             7.58
Net interest margin-fully taxable
equivalent                                          3.55                3.66             3.62             3.69

Credit Quality Ratios (Annualized):
Net charge-offs to average loans and
leases                                              0.59 %              1.01 %           0.73 %           1.56 %
Provision for credit losses to average
loans and leases                                    0.28                1.10             0.34             1.60
Allowance for credit losses to net loans
and leases                                          1.95                2.21             1.95             2.21
Allowance for credit losses to NPLs                68.34               55.04            68.34            55.04
Allowance for credit losses to NPAs                45.01               38.00            45.01            38.00
NPLs to net loans and leases                        2.85                4.01             2.85             4.01
NPAs to net loans and leases                        4.33                5.80             4.33             5.80

Captial Adequacy:
Tier I capital                                     13.55 %             11.36 %          13.55 %          11.36 %
Total capital                                      14.81               12.62            14.81            12.62
Tier I leverage capital                            10.21                8.66            10.21             8.66

In addition to financial ratios based on measures defined by accounting principles generally accepted in the United States ("U.S. GAAP"), the Company utilizes tangible shareholders' equity and tangible asset measures when evaluating the performance of the Company. Tangible shareholders' equity is defined by the Company as total


shareholders' equity less goodwill and identifiable intangible assets. Tangible assets are defined by the Company as total assets less goodwill and identifiable intangible assets. Management believes the ratio of tangible shareholders' equity to tangible assets to be an important measure of financial strength of the Company. The following table reconciles tangible assets and tangible shareholders' equity as presented above to U.S. GAAP financial measures as reflected in the Company's unaudited consolidated financial statements:

                                                           September 30,
                                                       2012             2011
                                                      (Dollars, in thousands)
Tangible Assets:
  Total assets                                     $ 13,235,737     $ 13,198,518
  Less: Goodwill                                        275,173          271,297
      Other identifiable intangible assets               17,932           17,426
  Total tangible assets                            $ 12,942,632     $ 12,909,795

Tangible Shareholders' Equity
  Total shareholders' equity                       $  1,446,703     $  1,266,753
  Less: Goodwill                                        275,173          271,297
      Other identifiable intangible assets               17,932           17,426
  Total tangible shareholders' equity              $  1,153,598     $    978,030


Tangible shareholders' equity to tangible assets           8.91 %           7.58 %

FINANCIAL HIGHLIGHTS

The Company reported net income of $23.8 million for the third quarter of 2012, compared to net income of $11.9 for the same quarter of 2011. For the first nine months of 2012, the Company reported net income of $67.3 million compared to net income of $24.3 million for the first nine months of 2011. The decreased provision for credit losses was the most significant factor contributing to the increase in net income, as the provision in the third quarter and first nine months of 2012 was $6.0 million and $22.0 million, respectively, compared to a provision of $25.1 million and $110.8 million during the third quarter and first nine months of 2011, respectively. Net charge-offs decreased to $12.8 million, or 0.59% of average loans and leases, during the third quarter of 2012, compared to $23.1 million, or 1.01% of average loans and leases, during the third quarter of 2011. For the nine months ended September 30, 2012, net charge-offs decreased to $48.1 million or 0.73% of average loans and leases, compared to $108.1 million or 1.56% of average loans and leases for the nine months ended September 30, 2011. The decrease in the provision for credit losses reflected the impact of a decrease in NPL formation during the first nine months of 2012 as NPLs decreased from $322.3 million at December 30, 2011 to $247.3 million at September 30, 2012. The impact of the economic environment continues to be evident on real estate construction, acquisition and development loans and more specifically on residential construction, acquisition and development loans. Many of these loans have become collateral-dependent, requiring recognition of an impairment loss to reflect the decline in real estate values. The Company has continued its focus on improving credit quality and reducing NPLs especially in the real estate construction, acquisition and development loan portfolio as evidenced by the decrease in that portfolio's nonaccrual loans of $40.7 million to $92.4 million at September 30, 2012 from $133.1 million at December 31, 2011.
The primary source of revenue for the Company is the net interest revenue earned by the Bank. Net interest revenue is the difference between interest earned on loans, investments and other earning assets and interest paid on deposits and other obligations. Net interest revenue was $103.4 million for the third quarter of 2012, a decrease of $4.7 million, or 4.3%, from $108.1 million for the third quarter of 2011. Net interest revenue was $313.7 million for the first nine months of 2012, a decrease of $13.7 million, or 4.2%, from $327.4 million for the first nine months of 2011. 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 objective is to manage those assets and liabilities to maximize net interest revenue, while balancing interest rate, credit, liquidity and capital risks. The Company experienced an increase in lower rate savings deposits


and a decrease in higher rate other time deposits, which resulted in a decrease in interest expense of $7.0 million, or 28.6%, in the third quarter of 2012 compared to the third quarter of 2011 and a decrease in interest expense of $25.4 million, or 31.4%, in the first nine months of 2012 compared to the first nine months of 2011. The decrease in net interest revenue for the third quarter and first nine months of 2012 was a result of the decrease in interest expense being more than offset by the decrease in interest revenue that resulted from the declining interest rate environment combined with the low loan demand and loans re-pricing at lower rates, both at maturity and, in some cases, prior to maturity. Interest revenue decreased $11.6 million, or 8.8%, in the third quarter of 2012 compared to the third quarter of 2011 and decreased $39.1 million, or 9.6%, in the first nine months of 2012 compared to the first nine months of 2011. Real estate construction, acquisition and development loans decreased $84.7 million, or 9.3%, to $823.7 million at September 30, 2012 from $908.4 million at December 31, 2011. While loan demand has been weak, the Company has managed to replace some loan runoff with new loan production, primarily in its Alabama, Texas and Louisiana markets.
The Company attempts 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. Noninterest revenue increased $8.4 million, or 13.5%, for the third quarter of 2012 compared to the third quarter of 2011 and increased $3.7 million, or 1.8%, for the first nine months of 2012 compared to the first nine months of 2011. One of the primary contributors to the increase in noninterest revenue was the increase in mortgage lending revenue to $13.5 million for the third quarter of 2012 compared to a loss of $1.4 million for the third quarter of 2011 and to $39.7 million for the first nine months of 2012 compared to $8.1 million for the first nine months of 2011. The increase in mortgage lending revenue was primarily related to the increase in mortgage originations. Mortgage origination volume increased in the third quarter of 2012 to $607.9 million from $374.8 million for the third quarter of 2011 and increased in the first nine months of 2012 to $1.4 billion compared to $822.9 million for the first nine months of 2011. The increased level of mortgage origination volume resulted in an increase in origination revenue to $15.3 million in the third quarter of 2012 compared to $8.7 million in the third quarter of 2011 and an increase to $38.2 million for the first nine months of 2012 compared to $16.0 million for the first nine months of 2011. Also contributing to the increase in mortgage lending revenue for the comparable three-month and nine-month periods was the change in fair value of MSRs. The fair value of MSRs decreased $3.2 million in the third quarter of 2012 compared to $11.7 million in the third quarter of 2011 and decreased $3.3 million for the first nine months of 2012 compared to $13.0 million for the first nine months of 2011.
The increase in noninterest revenue was somewhat offset by the decrease in securities gains, service charges and credit card, debit card and merchant fees. Securities gains reflected a decrease of $2.0 million, or 98.1%, for the third quarter of 2012 compared to the third quarter of 2011 and a decrease of $11.8 million, or 97.6%, for the first nine months of 2012 compared to the first nine months of 2011. During the second quarter of 2011, the Company determined that it no longer had the intent to hold until maturity all securities that were previously classified as held-to-maturity. As a result of this determination, all securities were classified as available-for-sale and recorded at fair value at September 30, 2011, December 31, 2011 and September 30, 2012.
Service charges and credit card, debit card and merchant fees decreased 25.9% and 20.6% in the aggregate in the third quarter and first nine months of 2012, respectively, compared to the third quarter and first nine months of 2011. Bank-owned life insurance revenue remained relatively stable for the third quarter of 2012 compared to the third quarter of 2011 and increased 9.2% for the first nine months of 2012 compared to the first nine months of 2011 as a result of the Company recording life insurance proceeds of approximately $872,000 during the first nine months of 2012 and approximately $478,000 during the first nine months of 2011. There were no significant non-recurring noninterest revenue items during the third quarter or first nine months of 2012 and 2011. Total noninterest expense remained relatively stable for the third quarter and first nine months of 2012 compared to the third quarter and first nine months of 2011. Salaries and employee benefits expense increased to $74.8 million and $227.4 million for the third quarter and first nine months of 2012, respectively, compared to $71.9 million and $212.4 million for the third quarter and first nine months of 2011. The increase in salaries and employee benefits was primarily related to increases in employee benefits and incentive compensation during the third quarter and first nine months of 2012 compared to the same periods of 2011. Foreclosed property expense increased 43.8% and 61.6% for the third quarter and first nine months of 2012, respectively, compared to the third quarter and first nine months of 2011. Foreclosed property expense increased for these periods primarily as a result of the Company experiencing losses on the sale and larger writedowns of other real estate owned. During the second quarter of 2011, the Company recorded $9.8 million in expenses related to the early repayment of FHLB


advances. No early repayments were made during the first nine months of 2012. The Company continues to focus attention on controlling noninterest expense. 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 and liquidity risk. Net interest margin is determined by dividing fully taxable equivalent net interest revenue by average earning assets. For purposes of the following discussion, revenue from tax-exempt loans and investment securities has been adjusted to a fully taxable equivalent ("FTE") basis, using an effective tax rate of 35%. The following tables present average interest earning assets, average interest bearing liabilities, net interest revenue-FTE, net interest margin-FTE and net interest rate spread for the three months and nine months ended September 30, 2012 and 2011:


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