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BXS > SEC Filings for BXS > Form 10-K on 25-Feb-2014All Recent SEC Filings

Show all filings for BANCORPSOUTH INC

Form 10-K for BANCORPSOUTH INC


25-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OVERVIEW

The Company is a regional financial holding company with $13.0 billion in assets headquartered in Tupelo, Mississippi. The Company's wholly-owned banking subsidiary has commercial banking operations in Mississippi, Tennessee, Alabama, Arkansas, Texas, Louisiana, Florida, and Missouri. 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. The Bank's insurance agency subsidiary also operates an office in Illinois.


Management's discussion and analysis provides a narrative discussion of the Company's financial condition and results of operations for the previous three years. For a complete understanding of the following discussion, you should refer to the Consolidated Financial Statements and related Notes presented elsewhere in this Report. This discussion and analysis is based on reported financial information, and certain amounts for prior years have been reclassified to conform with the current financial statement presentation. 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. During recent years, the pressures of the national and regional economic cycle created a difficult operating environment for the financial services industry. The Company was not immune to such pressures and the economic downturn 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 Company's credit quality measures during 2010 and 2011, the Company's financial condition improved during 2012 and 2013, as reflected by decreases in the allowance for credit losses, net charge-offs, total non-performing loans and leases ("NPLs") and total non-performing assets ("NPAs"). Management believes that the Company is better positioned with respect to overall credit quality as evidenced by the improvement in credit quality metrics at December 31, 2013 compared to December 31, 2012 and December 31, 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.

The Company's debit card revenue remained relatively stable in 2013 compared to 2012. During 2012, the Company's debit card revenue decreased as a result of 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 the Company's 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 INFORMATION
                                                            At or for the Year Ended December 31,
                                          2013             2012             2011              2010              2009
Earnings Summary:                                      (Dollars in thousands, except per share amounts)
Interest revenue                     $     449,507    $     486,424     $     537,853     $     582,762    $     615,414
Interest expense                            50,558           71,833           102,940           141,620          170,515
Net interest revenue                       398,949          414,591           434,913           441,142          444,899
Provision for credit losses                  7,500           28,000           130,081           204,016          117,324
Net interest revenue, after
provision for credit losses                391,449          386,591           304,832           237,126          327,575
Noninterest revenue                        275,066          280,149           270,845           264,144          275,276
Noninterest expense                        534,849          549,193           533,633           487,033          490,017
Income before income taxes                 131,666          117,547            42,044            14,237          112,834
Income tax expense (benefit)                37,551           33,252             4,475            (8,705)          30,105
Net income                           $      94,115    $      84,295     $      37,569     $      22,942    $      82,729

Balance Sheet - Year-End Balances:
Total assets                         $  13,029,733    $  13,397,198    $   12,995,851    $   13,615,010    $  13,167,867
Total securities                         2,466,989        2,434,032         2,513,518         2,709,081        1,993,594
Loans and leases, net of unearned
income                                   8,958,015        8,636,989         8,870,311         9,333,107        9,775,136
Total deposits                          10,773,836       11,088,146        10,955,189        11,490,021       10,677,702
Long-term debt                              81,714           33,500            33,500           110,000          112,771
Total shareholders' equity               1,513,130        1,449,052         1,262,912         1,222,244        1,276,296

Balance Sheet - Average Balances:
Total assets                            13,068,568       13,067,276        13,280,047        13,304,836       13,203,659
Total securities                         2,561,918        2,490,898         2,620,404         2,157,096        2,179,479
Loans and leases, net of unearned
income                                   8,671,441        8,719,399         9,159,431         9,621,529        9,734,580
Total deposits                          10,877,366       10,936,694        11,251,406        11,107,445       10,155,730
Long-term debt                              53,050           33,500            66,673           111,547          290,582
Total shareholders' equity               1,478,429        1,413,667         1,240,768         1,241,321        1,255,605

Common Share Data:
Basic earnings per share           $          0.99  $          0.90  $           0.45  $           0.28  $          0.99
Diluted earnings per share                    0.99             0.90              0.45              0.27             0.99
Cash dividends per share                      0.12             0.04              0.14              0.88             0.88
Book value per share                         15.89            15.33             15.13             14.64            15.29
Tangible book value per share                12.60            12.23             11.68             11.17            11.78
Dividend payout ratio                        12.12             4.44             31.11            314.29            88.89

Financial Ratios:
Return on average assets                     0.72%            0.65%             0.28%             0.17%            0.63%
Return on average shareholders'
equity                                       6.37%            5.96%             3.03%             1.85%            6.59%
Total shareholders' equity to
total assets                                11.61%           10.82%             9.72%             8.98%            9.69%
Tangible shareholders' equity to
tangible assets                              9.44%            8.83%             7.67%             7.00%            7.63%
Net interest margin-fully taxable
equivalent                                   3.43%            3.57%             3.69%             3.70%            3.77%

Credit Quality Ratios:
Net charge-offs to average loans
and leases                                   0.22%            0.67%             1.44%             1.90%            0.76%
Provision for credit losses to
average loans and leases                     0.09%            0.32%             1.42%             2.12%            1.21%
Allowance for credit losses to net
loans and leases                             1.71%            1.90%             2.20%             2.11%            1.80%
Allowance for credit losses to
NPLs                                       127.27%           70.42%            60.55%            49.93%           94.41%
Allowance for credit losses to
NPAs                                        80.76%           48.83%            39.33%            37.31%           71.64%
NPLs to net loans and leases                 1.34%            2.70%             3.63%             4.23%            1.91%
NPAs to net loans and leases                 2.12%            3.90%             5.59%             5.65%            2.51%

Capital Ratios:
Tier 1 capital                              12.99%           13.77%            11.77%            10.61%           11.17%
Total capital                               14.25%           15.03%            13.03%            11.87%           12.42%
Tier 1 leverage capital                      9.93%           10.25%             8.85%             8.07%            8.95%


In addition to financial ratios based on measures defined by 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 assets and tangible shareholders' equity as presented above to U.S. GAAP financial measure as reflected in the Company's consolidated financial statements:

                                                         December 31,
                             2013            2012            2011            2010            2009
                                                        (In thousands)
Tangible Assets:
Total assets             $  13,029,733   $  13,397,198   $  12,995,851   $  13,615,010   $  13,167,867
Less: Goodwill                286,800         275,173         271,297         270,097         270,097
Identifiable
intangible assets              26,079          17,329          16,613          19,624          23,533
Total tangible assets    $  12,716,854   $  13,104,696   $  12,707,941   $  13,325,289   $  12,874,237

Tangible Shareholders'
Equity:
Total shareholders'
equity                   $   1,513,130   $   1,449,052   $   1,262,912   $   1,222,244   $   1,276,296
Less: Goodwill                286,800         275,173         271,297         270,097         270,097
Identifiable
intangible assets              26,079          17,329          16,613          19,624          23,533
Total tangible
shareholders'
equity                   $   1,200,251   $   1,156,550   $     975,002   $     932,523   $     982,666

Total shares
outstanding                95,231,691      94,549,867      83,483,796      83,481,737      83,450,296

Tangible shareholders'
equity to
tangible assets                 9.44%           8.83%           7.67%           7.00%           7.63%

Tangible book value
per share                $       12.60   $       12.23   $       11.68   $       11.17   $       11.78

FINANCIAL HIGHLIGHTS

The Company reported net income of $94.1 million for 2013 compared to $84.3 million for 2012 and $37.6 million for 2011. The decreased provision for credit losses was the most significant factor contributing to the increase in earnings in both 2013 compared to 2012 and 2012 compared to 2011, as the provision for credit losses was $7.5 million in 2013 compared to $28.0 million in 2012 and $130.1 million in 2011. Net charge-offs decreased to $18.7 million, or 0.22% of average loans and leases, in 2013 from $58.7 million, or 0.67% of average loans and leases, in 2012 and $131.9 million, or 1.44% of average loans and leases, in 2011. The decrease in the provision for credit losses from 2012 to 2013 and from 2011 to 2012 reflected the impact of significant decreases in NPL formation during both 2013 and 2012, as NPLs decreased to $120.4 million at December 31, 2013 after having decreased to $233.6 million at December 31, 2012 from $322.3 million at December 31, 2011. The impact of the economic environment continues to be evident on real estate consumer mortgage, commercial and 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 additional loan loss provisions or charge-offs to reflect the decline in real estate values. During 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 of $49.0 million, or 73.6%, to $17.6 million at December 31, 2013 from $66.6 million at December 31, 2012.

The primary source of revenue for the Company is 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 for 2013 was $398.9 million, compared to $414.6 million for 2012 and $434.9 million for 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. One of the


Company's long-term objectives is to manage those assets and liabilities to maximize net interest revenue, while balancing interest rate, credit, liquidity and capital risks. The 3.8% decrease in net interest revenue in 2013 compared to 2012 was a result of the decrease in interest expense being more than offset by the decrease in interest revenue as the yield on earning assets declined by a greater amount than that of interest-bearing liabilities. The decline in earning asset yield was primarily a result of the balance in short-term investments, which is the lowest yielding earning asset, combined with declining loan yields as interest rates continued to be at historically low levels. The Company experienced a decrease in interest paid on junior subordinated debt resulting from the redemption of 8.15% trust preferred securities in the third quarter of 2013, as well as an increase in lower rate savings deposits and a decrease in higher rate average demand and other time deposits which resulted in a decrease in interest expense of $21.3 million, or 29.6%, in 2013 compared to 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 for 2013 was $275.1 million, compared to $280.1 million for 2012 and $270.8 million for 2011. One of the primary contributors to the decrease in noninterest revenue from 2012 to 2013 was the decrease in mortgage lending revenue to $45.0 million in 2013 compared to $56.9 million in 2012. The decrease in mortgage lending revenue was primarily related to the decrease in mortgage originations. Mortgage origination volume decreased by approximately $600 million in 2013 to $1.4 billion from $2.0 billion in 2012. The decreased level of mortgage origination volume resulted in a decrease in origination revenue to $26.1 million in 2013 from $53.3 million in 2012. The decrease in mortgage lending revenue in 2013 compared to 2012 was somewhat offset by the change in fair value of Mortgage servicing rights ("MSRs"). The fair value of MSRs increased $8.9 million in 2013 compared to a decrease of $3.2 million in 2012.

Service charges decreased 7.0% in 2013 compared to 2012 and 14.7% in 2012 compared to 2011 as a result of a decrease in insufficient fund fees and a lower volume of items processed. Changes in banking regulations and, in particular, the Federal Reserve's rules pertaining to certain overdraft payments on consumer accounts and the FDIC's Overdraft Payment Programs and Consumer Protection Final Overdraft Payment Supervisory Guidance, resulted in the continued decreases in insufficient fund fees. While service charges and mortgage lending revenue decreased in 2013 compared to 2012, insurance commissions increased 8.4% to $97.7 million in 2013 from $90.1 million in 2012 after increasing 3.7% from $86.9 million in 2011. The increase in insurance commissions was a result of new policies and growth from existing customers coupled with the revenue contributed by the acquisition of certain assets of The Securance Group, Inc. in July 2012 and GEM in December 2013.

Noninterest expense for 2013 was $534.8 million, a decrease of 2.6% from $549.2 million for 2012, which was an increase of 2.9% from $533.6 million for 2011. The decrease in noninterest expense in 2013 compared to 2012 was primarily a result of decreases in deposit insurance assessments and foreclosed property expense. Deposit insurance assessments decreased $4.7 million, or 28.7%, in 2013 compared to 2012 and decreased $4.8 million, or 22.7%, in 2012 compared to 2011 as a result of improvement evidenced in various variables utilized by the FDIC in calculating the deposit insurance assessment. Foreclosed property expense decreased $27.7 million, or 70.2%, to $11.7 million in 2013 compared to $39.4 million in 2012 primarily as a result of the Company experiencing lower losses on the sale and smaller writedowns of OREO. The decrease in noninterest expense was somewhat offset by a pre-tax charge of $10.9 million that was recorded during the second quarter of 2013 related to additional benefits offered under the voluntary early retirement program and a pre-tax charge of $2.9 million that was recorded during the third quarter of 2013 to write-off unamortized issuance costs related to the redemption of 8.15% trust preferred securities in the third quarter of 2013. No such voluntary early retirement program or redemption and resulting write-off of unamortized issuance costs were recorded in 2012 and 2011. Legal expenses increased $11.1 million, or 118.8%, in 2013 compared to 2012 as a result of a charge of $10.7 million to legal expense during 2013 that was recorded to increase the litigation accrual related to various legal matters after only increasing approximately $164,000, or 1.8% in 2012 compared to 2011. Income tax expense increased in 2013 and 2012 primarily as a result of the increase in pre-tax income in 2013 compared to 2012 and in 2012 compared to 2011. The major components of net income are discussed in more detail in the various sections that follow.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's consolidated financial statements are prepared in accordance with U.S. GAAP, which require the Company to make estimates and assumptions (see Note 1 to the Company's Consolidated Financial Statements included elsewhere in this Report). Management believes that its determination of the allowance for credit losses, valuation of OREO, the annual goodwill impairment assessment, the assessment for other-than-temporary impairment of


securities, the valuation of MSRs and the estimation of pension and other postretirement benefit amounts involve a higher degree of judgment and complexity than the Company's other significant accounting policies. Further, these estimates can be materially impacted by changes in market conditions or the actual or perceived financial condition of the Company's borrowers, subjecting the Company to significant volatility of earnings.

Allowance for Credit Losses

The allowance for credit losses is established through the provision for credit losses, which is a charge against earnings. Provisions for credit losses are made to reserve for estimated probable losses on loans and leases. The allowance for credit losses is a significant estimate and is regularly evaluated by the Company for adequacy by taking into consideration factors such as changes in the nature and volume of the loan and lease portfolio; trends in actual and forecasted portfolio credit quality, including delinquency, charge-off and bankruptcy rates; and current economic conditions that may affect a borrower's ability to pay. In determining an adequate allowance for credit losses, management makes numerous assumptions, estimates and assessments. The use of different estimates or assumptions could produce different provisions for credit losses. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Provision for Credit Losses and Allowance for Credit Losses" included herein for more information. At December 31, 2013, the allowance for credit losses was $153.2 million, representing 1.71% of total loans and leases, net of unearned income.

Other Real Estate Owned

OREO, consisting of assets that have been acquired through foreclosure or in satisfaction of loans, is carried at the lower of cost or fair value, less estimated selling costs. Fair value is based on independent appraisals and other relevant factors. OREO is revalued on an annual basis or more often if market conditions necessitate. Valuation adjustments required at foreclosure are charged to the allowance for credit losses. Subsequent valuation adjustments on the periodic revaluation of the property are charged to net income as noninterest expense. Significant judgments and complex estimates are required in estimating the fair value of OREO, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility, as experienced during the past two years. As a result, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of OREO.

Goodwill

The Company's policy is to assess goodwill for impairment at the reporting segment level on an annual basis or sooner if an event occurs or circumstances change which indicate that the fair value of a reporting segment is below its carrying amount. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. Accounting standards require management to estimate the fair value of each reporting segment in assessing impairment at least annually. The Company's annual assessment date is during the Company's fourth quarter. The Company performed a qualitative assessment of whether it was more likely than not that a reporting segment's fair value was less than its carrying value during the fourth quarter of 2013. Based on this assessment, it was determined that the Company's reporting segments' fair value exceeded their carrying value. Therefore, the two-step quantitative goodwill impairment test was not deemed necessary and no goodwill impairment was recorded during 2013.

In the current environment, forecasting cash flows, credit losses and growth in addition to valuing the Company's assets with any degree of assurance is very difficult and subject to significant changes over very short periods of time. Management will continue to update its analysis as circumstances change. If market conditions continue to be volatile and unpredictable, impairment of goodwill related to the Company's reporting segments may be necessary in future periods. Goodwill was $286.8 million at December 31, 2013.

Assessment for Other-Than-Temporary Impairment of Securities

Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. The term "other-than-temporary" is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near-term recovery of value are not necessarily favorable. Management reviews criteria such as the magnitude and duration of the decline, as well as the reasons for the decline, and whether the Company would be required to sell the securities before a full recovery of costs in order to predict whether the loss in value is other-than-temporary. Once a decline in value is determined to be other-than-temporary, the impairment is separated into (a) the amount of the impairment related to the credit loss and (b) the amount of the impairment related to all other factors. The value of the security is reduced by the other-than-temporary impairment with the amount of the impairment related to credit loss recognized as a charge to earnings and the amount of the impairment related to all other factors recognized in other comprehensive income.


Mortgage Servicing Rights

The Company recognizes as assets the rights to service mortgage loans for others, known as MSRs. The Company records MSRs at fair value on a recurring basis with subsequent remeasurement of MSRs based on change in fair value in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 860, Transfers and Servicing ("FASB ASC 860").
An estimate of the fair value of the Company's MSRs is determined utilizing assumptions about factors such as mortgage interest rates, discount rates, mortgage loan prepayment speeds, market trends and industry demand. Because the valuation is determined by using discounted cash flow models, the primary risk inherent in valuing the MSRs is the impact of fluctuating interest rates on the estimated life of the servicing revenue stream. The use of different estimates or assumptions could also produce different fair values. The Company does not hedge the change in fair value of MSRs and, therefore, the Company is susceptible to significant fluctuations in the fair value of its MSRs in changing interest rate environments. At December 31, 2013, the Company's mortgage servicing asset was valued at $54.7 million. . . .

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