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BXS > SEC Filings for BXS > Form 10-Q on 6-Aug-2013All Recent SEC Filings

Show all filings for BANCORPSOUTH INC

Form 10-Q for BANCORPSOUTH INC


6-Aug-2013

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 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 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 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 short-term and long-term impact of changes to banking capital standards on the


Company's regulatory capital and liquidity, the impact of regulations on service charges on the Company's core deposit accounts, the susceptibility of the Company's business to local economic and environmental conditions, the soundness of other financial institutions, changes in interest rates, the impact of monetary policies and economic factors on the Company's ability to attract deposits or make loans, volatility in capital and credit markets, reputational risk, the impact of 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, the Company's ability to adapt its products and services to evolving industry standards and consumer preferences, competition with other financial services companies, risks in connection with completed or potential acquisitions, the Company's growth strategy, interruptions or breaches in the Company's information system security, the failure of certain third party vendors to perform, unfavorable ratings by ratings agencies, dilution caused by the Company's issuance of any additional shares of its common stock to raise capital or acquire other banks, bank holding companies, financial holding companies and insurance agencies, 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 June 30, 2013. 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, 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, please refer to the unaudited consolidated financial statements for the three-month and six-month periods ended June 30, 2013 and 2012 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 was reflected in the credit quality measures during 2010 and 2011, the Company's financial condition improved during 2012 as reflected by decreases in the allowance for credit losses, net charge-offs, total NPLs and total non-performing assets ("NPAs"), when compared to 2011 and 2010. The Company's financial condition continued to improve during the first six months of 2013, as the allowance for credit losses, net charge-offs, total NPLs and total NPAs decreased at June 30, 2013 compared to December 31, 2012 and June 30, 2012. Management believes that the Company is better positioned with respect to overall credit quality as evidenced by this improvement in credit quality metrics at June 30, 2013 compared to December 31, 2012 and June 30, 2012. Management believes, however, that future weakness in the economic environment could adversely affect the strength of the credit quality of the Company's assets overall. Therefore, management will continue to focus on early identification and resolution of any credit issues.

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


The Company's debit card revenue remains relatively stable for the comparable three-month and six-month periods. During 2012, the Company's debit card revenue decreased as a result of the Federal Reserve's final rule implementing the Durbin Debt Interchange Amendment to the Dodd-Frank Act (the "Durbin Amendment"). The Federal Reserve's final rule implementing the Durbin Amendment has been challenged in court, including a recent lower court ruling adverse to the Federal Reserve's implementation and the determination of the final rule. The effect of this litigation, any appeals there from, if any, or any subsequent rule changes by the Federal Reserve are uncertain, but may impact debit card revenue in the future reporting periods.

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                   Six months ended
                                                June 30,                            June 30,
                                         2013              2012              2013              2012

                                               (Dollars in thousands, except per share data)

Earnings Summary:
Total interest revenue               $    112,009      $    123,204      $    225,036      $    248,579
Total interest expense                    13,796            18,463            28,745            38,228
Net interest income                       98,213           104,741           196,291           210,351
Provision for credit losses                3,000             6,000             7,000            16,000
Noninterest income                        76,109            66,468           147,427           138,828
Noninterest expense                      142,251           136,506           277,622           272,186
Income before income taxes                29,071            28,703            59,096            60,993
Income tax expense                         8,316             8,079            17,536            17,503
Net income                           $     20,755      $     20,624      $     41,560      $     43,490

Balance Sheet - Period-end
balances:
Total assets                        $  13,217,705     $  13,147,818     $  13,217,705     $  13,147,818
Total securities                       2,644,939         2,462,831         2,644,939         2,462,831
Loans and leases, net of unearned
income                                 8,678,714         8,732,395         8,678,714         8,732,395
Total deposits                        10,961,618        10,956,337        10,961,618        10,956,337
Long-term debt                            33,500            33,500            33,500            33,500
Total shareholders' equity             1,459,793         1,418,311         1,459,793         1,418,311

Balance Sheet-Average Balances:
Total assets                        $  13,146,040     $  13,018,231     $  13,195,345     $  13,053,294
Total securities                       2,616,274         2,520,932         2,568,609         2,514,437
Loans and leases, net of unearned
income                                 8,588,673         8,735,225         8,584,524         8,763,383
Total deposits                        10,938,489        10,908,919        11,014,317        10,976,435
Long-term debt                            33,500            33,500            33,500            33,500
Total shareholders' equity             1,475,211         1,403,733         1,468,712         1,383,721

Common Share Data:
Basic earnings per share             $       0.22      $       0.22      $       0.44      $       0.47
Diluted earnings per share                  0.22              0.22              0.44              0.47
Cash dividends per share                    0.01              0.01              0.02              0.02
Book value per share                       15.34             15.02             15.34             15.02
Tangible book value per share              12.28             11.99             12.28             11.99
Dividend payout ratio                       4.59  %           4.58  %           4.59  %           4.26  %

Financial Ratios (Annualized):
Return on average assets                    0.63  %           0.64  %           0.64  %           0.67  %
Return on average shareholders'
equity                                      5.64              5.91              5.71              6.32
Total shareholders' equity to
total assets                               11.04             10.79             11.04             10.79
Tangible shareholders' equity to
tangible assets                             9.04              8.80              9.04              8.80
Net interest margin-fully taxable
equivalent                                  3.36              3.65              3.37              3.65

Credit Quality Ratios
(Annualized):
Net charge-offs to average loans
and leases                                  0.21  %           0.55  %           0.24  %           0.80  %
Provision for credit losses to
average loans and leases                    0.14              0.27              0.16              0.37
Allowance for credit losses to
net loans and leases                        1.86              2.01              1.86              2.01
Allowance for credit losses to
NPLs                                       95.90             65.87             95.90             65.87
Allowance for credit losses to
NPAs                                       62.82             42.83             62.82             42.83
NPLs to net loans and leases                1.94              3.06              1.94              3.06
NPAs to net loans and leases                2.95              4.70              2.95              4.70

Captial Adequacy:
Tier 1 capital                             14.21  %          13.41  %          14.21  %          13.41  %
Total capital                              15.47             14.66             15.47             14.66
Tier 1 leverage capital                    10.58             10.07             10.58             10.07


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

                                                              June 30,
                                                    2013                   2012

                                          (Dollars in thousands, except per share data)
Tangible Assets:
Total assets                                  $  13,217,705         $    13,147,818
Less: Goodwill                                     275,173                 271,297
Other identifiable intangible assets                15,865                  15,108
Total tangible assets                         $  12,926,667         $    12,861,413

Tangible Shareholders' Equity
Total shareholders' equity                    $   1,459,793         $     1,418,311
Less: Goodwill                                     275,173                 271,297
Other identifiable intangible assets                15,865                  15,108
Total tangible shareholders' equity           $   1,168,755         $     1,131,906

Total shares outstanding                        95,190,797              94,436,377

Tangible shareholders' equity to tangible
assets                                                9.04    %               8.80  %

Tangible book value per share                 $       12.28          $        11.99

FINANCIAL HIGHLIGHTS

The Company reported net income of $20.8 million for the second quarter of 2013, compared to net income of $20.6 million for the same quarter of 2012. For the first six months of 2013, the Company reported net income of $41.6 million compared to net income of $43.5 million for the first six months of 2012. A factor contributing to the decrease in net income was the decrease in net interest income, as net interest revenue was $98.2 million for the second quarter of 2013, compared to $104.7 million for the second quarter of 2012 and was $196.3 million for the first six months of 2013 compared to $210.4 million for the first six months of 2012. The decrease in net interest revenue was partially offset by the decrease in the provision for credit losses, as the provision in the second quarter of 2013 was $3.0 million, compared to a provision of $6.0 million for the second quarter of 2012. The provision was $7.0 million for the first six months of 2013 compared to $16.0 million for the first six months of 2012. The decrease in the provision for credit losses reflected the impact of a decrease in NPL formation during the first six months of 2013, as NPLs decreased from $233.6 million at December 31, 2012 to $167.9 million at June 30, 2013. Net charge-offs decreased to $4.6 million, or 0.21% of average loans and leases, during the second quarter of 2013, compared to $11.9 million, or 0.55% of average loans and leases, during the second quarter of 2012 and decreased to $10.4 million, or 0.24% of average loans and leases, for the first six months of 2013 compared to $35.3 million, or 0.80% of average loans and leases, for the first six months of 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. Prior to 2012, many of these loans had become collateral-dependent, requiring recognition of an impairment loss to reflect


the decline in real estate values. During 2012 and the first six months of 2013, the Company 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 by $27.3 million to $39.3 million at June 30, 2013 from $66.6 million at December 31, 2012 and a decrease of $65.0 million from $104.3 million at June 30, 2012.

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 $98.2 million for the second quarter of 2013, a decrease of $6.5 million, or 6.2%, from $104.7 million for the second quarter of 2012. Net interest revenue was $196.3 million for the first six months of 2013, a decrease of $14.1 million, or 6.7%, from $210.4 million for the first six months of 2012. 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 decrease in net interest revenue for the second quarter and first six months of 2013 compared to the second quarter and first six months of 2012 was a result of 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 $11.2 million, or 9.1%, in the second quarter of 2013 compared to the second quarter of 2012 and decreased $23.5 million, or 9.5%, for the first six months of 2013 compared to the first six months of 2012. While loan demand has been weak, the Company has managed to replace some loan runoff with new loan production, primarily in its Alabama, Greater Memphis Area, Texas and Louisiana markets. The decrease in interest revenue was somewhat offset by the decrease in interest expense, as the Company experienced an increase in lower rate savings deposits and noninterest demand deposits and a decrease in higher rate other time deposits, which resulted in a decrease in interest expense of $4.7 million, or 25.3%, in the second quarter of 2013 compared to the second quarter of 2012 and a decrease of $9.5 million, or 24.8%, for the first six months of 2013 compared to the first six months of 2012.

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 $9.6 million, or 14.5%, for the second quarter of 2013 compared to the second quarter of 2012 and increased $8.6 million, or 6.2%, for the first six months of 2013 compared to the first six months of 2012. One of the primary contributors to the increase in noninterest revenue for these periods was the increase in mortgage lending revenue to $17.9 million for the second quarter of 2013 compared to $11.0 million for the second quarter of 2012 and to $30.2 million for the first six months of 2013 compared to $26.2 million for the first six months of 2012. The increase in mortgage lending revenue for these periods was primarily related to the change in fair value of MSRs which increased due to the increase in interest rates. The fair value of MSRs increased $5.3 million during the second quarter of 2013 compared to a decrease of $3.8 million during the second quarter of 2012 and increased $6.3 million for the first six months of 2013 compared to a decrease of approximately $140,000 for the first six months of 2012. Mortgage origination volume remained relatively stable, decreasing 2.0% to $435.0 million for the second quarter of 2013 compared to $444.1 million for the second quarter of 2012 and increasing 2.6% to $860.8 million for the first six months of 2013 compared to $839.2 million for the first six months of 2012.

Also contributing to the increase in noninterest revenue was the increase in insurance commissions, which increased 12.6% to $25.9 million for the second quarter of 2013 compared to $23.0 million for the second quarter of 2012 and increased 13.9% to $52.5 million for the first six months of 2013 compared to $46.1 million for the first six months of 2012. The increase in insurance commissions was primarily a result of new policies written and growth from existing customers. The increase in noninterest revenue was partially offset by the decrease of 6.4% in service charges to $12.8 million in the second quarter of 2013 from $13.7 million in the second quarter of 2012 and the decrease of 11.0% to $25.7 million for the first six months of 2013 compared to $28.8 million for the first six months of 2012. There were no significant non-recurring noninterest revenue items during the first six months of 2013 or 2012.

Total noninterest expense increased 4.2% to $142.3 million for the second quarter of 2013 compared to $136.5 million for the second quarter of 2013 and increased 2.0% to $277.6 million for the first six months of 2013 compared to $272.2 million for the first six months of 2012. Salaries and employee benefits expense increased to $78.3 million for the second quarter of 2013 compared to $77.7 million for the second quarter of 2012 and increased to $157.7 million for the first six months of 2013 compared to $152.6 million for the first six months of 2012. The


increase in salaries and employee benefits for these periods was primarily related to increases in employee benefits and commissions during the second quarter of 2013 compared to the same period of 2012. Additionally, a pre-tax charge of $10.9 million was recorded during the second quarter of 2013 related to additional benefits offered under the voluntary early retirement program that was offered to certain employees that met job classification, age and years-of-service criteria. No such expenses were recorded during 2012. Legal expense increased to $3.9 million in the second quarter of 2013 from approximately $981,000 in the second quarter of 2012 and increased to $13.3 million for the first six months of 2013 compared to $3.2 million for the first six months of 2012. The increase in legal expense was primarily a result of a charge of $7.8 million to legal expense that was recorded to increase the litigation accrual related to various legal matters.

The increase in noninterest expense was somewhat offset by the decrease in foreclosed property expense. Foreclosed property expense decreased 68.0% to $3.2 million for the second quarter of 2013 compared to $10.2 million for the second quarter of 2012 and decreased 69.9% to $5.6 million for the first six months of 2013 compared to $18.6 million for the first six months of 2012. Foreclosed property expense decreased primarily as a result of the Company experiencing lower losses on the sale and smaller writedowns of OREO. 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 below.

RESULTS OF OPERATIONS

Net Interest Revenue

Net interest revenue is the difference between interest revenue earned on assets, such as loans, leases and securities, and interest expense 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 . . .

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