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BXS > SEC Filings for BXS > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for BANCORPSOUTH INC

Form 10-Q for BANCORPSOUTH INC


7-Nov-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, the impact of litigation regarding debit card fees and the impact of certain claims, 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 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 $12.9 billion in assets at September 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 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 nine-month periods ended September 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 nine months of 2013, as the allowance for credit losses, net charge-offs, total NPLs and total NPAs decreased at September 30, 2013 compared to December 31, 2012 and September 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 September 30, 2013 compared to December 31, 2012 and September 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 nine-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 lower court ruling adverse to the Federal Reserve's implementation of the final rule. The effect of this litigation, appeals therefrom, or any subsequent rule changes by the Federal Reserve are uncertain, but may impact debit card revenue in 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                     Nine months ended
                                             September 30,                         September 30,
                                       2013                2012               2013              2012

                                              (Dollars in thousands, except per share data)

Earnings Summary:
Total interest revenue            $    111,961       $      120,750       $    336,997      $    369,329
Total interest expense                 11,720               17,371             40,465            55,599
Net interest income                   100,241              103,379            296,532           313,730
Provision for credit losses               500                6,000              7,500            22,000
Noninterest income                     62,514               70,420            209,941           209,248
Noninterest expense                   129,397              133,788            407,019           405,974
Income before income taxes             32,858               34,011             91,954            95,004
Income tax expense                      8,001               10,186             25,537            27,689
Net income                        $     24,857       $       23,825       $     66,417      $     67,315

Balance Sheet - Period-end
balances:
Total assets                     $  12,916,153       $   13,235,737      $  12,916,153     $  13,235,737
Total securities                    2,554,156            2,483,606          2,554,156         2,483,606
Loans and leases, net of
unearned income                     8,773,115            8,679,969          8,773,115         8,679,969
Total deposits                     10,717,946           10,974,640         10,717,946        10,974,640
Long-term debt                         83,500               33,500             83,500            33,500
Total shareholders' equity          1,480,611            1,446,703          1,480,611         1,446,703

Balance Sheet-Average
Balances:
Total assets                     $  12,928,505       $   13,019,016      $  13,106,798     $  13,041,785
Total securities                    2,598,786            2,481,201          2,578,778         2,503,278
Loans and leases, net of
unearned income                     8,682,966            8,716,646          8,617,699         8,747,690
Total deposits                     10,745,945           10,856,524         10,923,877        10,936,173
Long-term debt                         62,848               33,500             43,390            33,500
Total shareholders' equity          1,474,047            1,432,157          1,470,510         1,399,984

Common Share Data:
Basic earnings per share          $       0.26       $         0.25       $       0.70      $       0.72
Diluted earnings per share               0.26                 0.25               0.70              0.72
Cash dividends per share                 0.05                 0.01               0.07              0.03
Book value per share                    15.55                15.32              15.55             15.32
Tangible book value per share           12.50                12.22              12.50             12.22
Dividend payout ratio                   19.15   %             3.96   %          10.03  %           4.17  %

Financial Ratios
(Annualized):
Return on average assets                 0.76   %             0.73   %           0.68  %           0.69  %
Return on average
shareholders' equity                     6.69                 6.62               6.04              6.42
Total shareholders' equity to
total assets                            11.46                10.93              11.46             10.93
Tangible shareholders' equity
to tangible assets                       9.43                 8.91               9.43              8.91
Net interest margin-fully
taxable equivalent                       3.45                 3.55               3.40              3.62

Credit Quality Ratios
(Annualized):
Net charge-offs to average
loans and leases                         0.35   %             0.59   %           0.28  %           0.73  %
Provision for credit losses
to average loans and leases              0.02                 0.28               0.12              0.34
Allowance for credit losses
to net loans and leases                  1.76                 1.95               1.76              1.95
Allowance for credit losses
to NPLs                                106.68                68.34             106.68             68.34
Allowance for credit losses
to NPAs                                 69.61                45.01              69.61             45.01
NPLs to net loans and leases             1.65                 2.85               1.65              2.85
NPAs to net loans and leases             2.52                 4.33               2.52              4.33

Captial Adequacy:
Tier 1 capital                          13.25   %            13.55   %          13.25  %          13.55  %
Total capital                           14.50                14.81              14.50             14.81
Tier 1 leverage capital                  9.93                10.21               9.93             10.21

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:

                                                            September 30,
                                                    2013                   2012

                                          (Dollars in thousands, except per share data)
Tangible Assets:
Total assets                                  $  12,916,153         $    13,235,737
Less: Goodwill                                     275,173                 275,173
Other identifiable intangible assets                15,179                  17,932
Total tangible assets                         $  12,625,801         $    12,942,632

Tangible Shareholders' Equity:
Total shareholders' equity                    $   1,480,611         $     1,446,703
Less: Goodwill                                     275,173                 275,173
Other identifiable intangible assets                15,179                  17,932
Total tangible shareholders' equity           $   1,190,259         $     1,153,598

Total shares outstanding                        95,211,602              94,440,710

Tangible shareholders' equity to tangible
assets                                                9.43    %               8.91  %

Tangible book value per share                 $       12.50          $        12.22

FINANCIAL HIGHLIGHTS

The Company reported net income of $24.9 million for the third quarter of 2013, compared to net income of $23.8 million for the same quarter of 2012. For the first nine months of 2013, the Company reported net income of $66.4 million compared to net income of $67.3 million for the first nine months of 2012. A factor contributing to the decrease in net income for the nine months ended September 30, 2013 was the decrease in net interest income, as net interest revenue was $100.2 million for the third quarter of 2013, compared to $103.4 million for the third quarter of 2012 and was $296.5 million for the first nine months of 2013 compared to $313.7 million for the first nine months of 2012. The decrease in net interest revenue was offset by the decrease in the provision for credit losses, as the provision in the third quarter of 2013 was $0.5 million, compared to a provision of $6.0 million for the third quarter of 2012. The provision was $7.5 million for the first nine months of 2013 compared to $22.0 million for the first nine months of 2012. The decrease in the provision for credit losses reflected the impact of a decrease in NPL formation during the first nine months of 2013, as NPLs decreased from $233.6 million at December 31, 2012 to $144.3 million at September 30, 2013. Net charge-offs decreased to $7.6 million, or 0.35% of average loans and leases, during the third quarter of 2013, compared to $12.8 million, or 0.59% of average loans and leases, during the third quarter of 2012 and decreased to $18.0 million, or 0.28% of average loans and leases, for the first nine months of 2013 compared to $48.1 million, or 0.73% of average loans and leases, for the first nine months of 2012.

The impact of the economic environment continues to be evident on real estate construction, acquisition and development loans and more particularly 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 nine 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 $40.5 million to $26.1 million at September 30, 2013 from $66.6 million at December 31, 2012 and a decrease of $66.2 million from $92.4 million at September 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 $100.2 million for the third quarter of 2013, a decrease of $3.1 million, or 3.0%, from $103.4 million for the third quarter of 2012. Net interest revenue was $296.5 million for the first nine months of 2013, a decrease of $17.2 million, or 5.5%, from $313.7 million for the first nine 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 third quarter and first nine months of 2013 compared to the third quarter and first nine months of 2012 was primarily a result of the larger decrease in interest revenue than the decrease in interest expense as the yield on earning assets declined by a greater amount than that of interest-bearing liabilities. The decline in earning asset yields was primarily a result of the balance in short-term investments which is the lowest yielding earning asset. Yields on interest-bearing liabilities decreased as a result of the redemption of the 8.15% trust preferred securities.

Interest revenue decreased $8.8 million, or 7.3%, in the third quarter of 2013 compared to the third quarter of 2012 and decreased $32.3 million, or 8.8%, for the first nine months of 2013 compared to the first nine months of 2012. 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 $5.7 million, or 32.5%, in the third quarter of 2013 compared to the third quarter of 2012 and a decrease of $15.1 million, or 27.2%, for the first nine months of 2013 compared to the first nine months of 2012. The Company also redeemed the 8.15% trust preferred securities during the third quarter of 2013, which contributed to the reduction in interest expense for the third quarter and first nine months of 2013.

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 decreased $7.9 million, or 11.2%, for the third quarter of 2013 compared to the third quarter of 2012 and remained relatively stable for the first nine months of 2013 compared to the first nine months of 2012. One of the primary contributors to the decrease in noninterest revenue for the third quarter of 2013 compared to the third quarter of 2012 was the decrease in mortgage lending revenue to $5.1 million for the third quarter of 2013 compared to $13.5 million for the third quarter of 2012. Mortgage lending revenue also decreased to $35.4 million for the first nine months of 2013 compared to $39.7 million for the first nine months of 2012. The decrease in mortgage lending revenue for these periods was primarily related to the decrease in mortgage origination revenue. Mortgage origination volume decreased 43.8% to $341.9 million for the third quarter of 2013 compared to $607.9 million for the third quarter of 2012 and decreased 16.9% to $1.2 billion for the first nine months of 2013 compared to $1.4 billion for the first nine months of 2012. The decrease in mortgage lending revenue was somewhat offset by the change in fair value of MSRs. The fair value of MSRs decreased approximately $240,000 during the third quarter of 2013 compared to a decrease of $3.2 million during the third quarter of 2012 and increased $6.0 million for the first nine months of 2013 compared to a decrease of $3.3 million for the first nine months of 2012. The decrease in mortgage lending revenue for the first nine months of 2013 compared to the first nine months of 2012 was more than offset by the increase in insurance commissions, which increased 9.6% to $76.3 million for the first nine months of 2013 compared to $69.6 million for the first nine months of 2012. The increase in insurance commissions was primarily a result of policies written for and growth from existing customers. There were no significant non-recurring noninterest revenue items during the first nine months of 2013 or 2012.

Total noninterest expense decreased 3.3% to $129.4 million for the third quarter of 2013 compared to $133.8 million for the third quarter of 2012 and increased 0.3% to $407.0 million for the first nine months of 2013 compared to $406.0 million for the first nine months of 2012. Salaries and employee benefits expense decreased to $73.5 million for the third quarter of 2013 compared to $74.8 million for the third quarter of 2012 and increased to $231.2 million for the first nine months of 2013 compared to $227.4 million for the first nine months of 2012. The decrease in salaries and employee benefits for the third quarter of 2013 compared to the third quarter of 2012 was primarily related to decreases in employee salaries resulting from a reduction in workforce after the voluntary early retirement program was accepted by certain employees that met job classification, age and years-of-service criteria in the second quarter of 2013. The increase in salaries and employee benefits for the first nine months of 2013 compared to the first nine months of 2012 was primarily related to increases in employee benefits and commissions


during the first and second quarter of 2013 compared to the same period in 2012. 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 previously mentioned, and a pre-tax charge of $2.9 million was recorded during the third quarter of 2013 to write-off unamortized issuance costs related to the redemption of the 8.15% trust preferred securities. No such voluntary early retirement program or redemption and resulting write-off of unamortized issuance costs were recorded in 2012.

Legal expense increased to $4.6 million in the third quarter of 2013 from $3.0 million in the third quarter of 2012 and increased to $17.9 million for the first nine months of 2013 compared to $6.2 million for the first nine months of 2012. The increase in legal expense was primarily a result of a charge of $10.7 million to legal expense during the first nine months of 2013 that was recorded to increase the litigation accrual related to various legal matters.

Noninterest expense was also impacted by the decrease in foreclosed property expense. Foreclosed property expense decreased 62.5% to $3.3 million for the third quarter of 2013 compared to $8.8 million for the third quarter of 2012 and decreased 67.5% to $8.9 million for the first nine months of 2013 compared to $27.4 million for the first nine 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 . . .

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