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 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
38
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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 $13.1 billion in assets at June 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 six-month periods
ended June 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 June 30, 2012 indicates decreases in
the allowance for credit losses, total NPLs and non-performing assets ("NPAs"),
and near-term past dues when compared to December 31, 2011 and June 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 June 30, 2012 compared to December 31, 2011 and June 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 second quarter and first six months of 2012, the Company's debit card
revenue decreased by $3.7 million and $6.8 million, respectively, compared to
the second quarter and first six 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.
39
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SELECTED FINANCIAL DATA
Three months ended Six months ended
June 30, June 30,
2012 2011 2012 2011
(Dollars in thousands, except per share data)
Earnings Summary:
Total interest revenue $ 123,204 $ 137,235 $ 248,579 $ 276,063
Total interest expense 18,463 27,323 38,228 56,714
Net interest income 104,741 109,912 210,351 219,349
Provision for credit losses 6,000 32,240 16,000 85,719
Noninterest income 66,468 75,144 138,828 143,455
Noninterest expense 136,506 137,069 272,186 267,079
Income before income taxes 28,703 15,747 60,993 10,006
Income tax expense (benefit) 8,079 2,921 17,503 (2,326 )
Net income $ 20,624 $ 12,826 $ 43,490$ 12,332
Balance Sheet - Period-end balances:
Total assets $ 13,147,818 $ 13,367,050 $ 13,147,818 $ 13,367,050
Total securities 2,462,831 2,560,824 2,462,831 2,560,824
Loans and leases, net of unearned income 8,732,395 9,214,553 8,732,395 9,214,553
Total deposits 10,956,337 11,308,463 10,956,337 11,308,463
Long-term debt 33,500 35,000 33,500 35,000
Total shareholders' equity 1,418,311 1,246,703
1,418,311 1,246,703
Balance Sheet-Average Balances:
Total assets $ 13,018,231 $ 13,365,560 $ 13,053,294 $ 13,452,183
Total securities 2,520,932 2,707,282 2,514,437 2,722,763
Loans and leases, net of unearned income 8,735,225 9,249,127 8,763,383 9,274,415
Total deposits 10,908,919 11,355,871 10,976,435 11,426,363
Long-term debt 33,500 89,395 33,500 99,641
Total shareholders' equity 1,403,733 1,222,281
1,383,721 1,220,851
Common Share Data:
Basic earnings per share $ 0.22 $ 0.15 $ 0.47 $ 0.15
Diluted earnings per share 0.22 0.15 0.47 0.15
Cash dividends per share 0.01 0.01 0.02 0.12
Book value per share 15.02 14.93 15.02 14.93
Dividend payout ratio 4.55 % 6.67 % 4.26 % 80.00 %
Financial Ratios (Annualized):
Return on average assets 0.64 % 0.38 % 0.67 % 0.18 %
Return on average shareholders' equity 5.91 4.21 6.32 2.04
Total shareholders' equity to total
assets 10.79 9.33 10.79 9.33
Tangible shareholders' equity to
tangible assets 8.80 7.32 8.80 7.32
Net interest margin-fully taxable
equivalent 3.65 3.71 3.65 3.70
Credit Quality Ratios (Annualized):
Net charge-offs to average loans and
leases 0.55 % 1.42 % 0.80 % 1.83 %
Provision for credit losses to average
loans and leases 0.27 1.39 0.37 1.85
Allowance for credit losses to net loans
and leases 2.01 2.14 2.01 2.14
Allowance for credit losses to NPLs 65.87 52.03 65.87 52.03
Allowance for credit losses to NPAs 42.83 37.21 42.83 37.21
NPLs to net loans and leases 3.06 4.12 3.06 4.12
NPAs to net loans and leases 4.70 5.76 4.70 5.76
Captial Adequacy:
Tier I capital 13.41 % 10.82 % 13.41 % 10.82 %
Total capital 14.66 12.08 14.66 12.08
Tier I leverage capital 10.07 8.22 10.07 8.22
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
40
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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:
June 30,
2012 2011
(Dollars, in thousands)
Tangible Assets:
Total assets $ 13,147,818 $ 13,367,050
Less: Goodwill 271,297 271,297 Other identifiable intangible assets 15,108
18,249
Total tangible assets $ 12,861,413 $ 13,077,504
Tangible Shareholders' Equity
Total shareholders' equity $ 1,418,311 $ 1,246,703
Less: Goodwill 271,297 271,297
Other identifiable intangible assets 15,108
18,249
Total tangible shareholders' equity $ 1,131,906 $
957,157
Tangible shareholders' equity to tangible assets 8.80 % 7.32 %
FINANCIAL HIGHLIGHTS
The Company reported net income of $20.6 million for the second quarter of 2012,
compared to net income of $12.8 for the same quarter of 2011. For the first six
months of 2012, the Company reported net income of $43.5 million compared to net
income of $12.3 million for the first six months of 2011. The decreased
provision for credit losses was the most significant factor contributing to the
increase in net income, as the charge in the second quarter and first six months
of 2012 was $6.0 million and $16.0 million, respectively, compared to a charge
of $32.2 million and $85.7 million during the second quarter and first six
months of 2011, respectively. Net charge-offs decreased to $11.9 million, or
0.55% of average loans and leases, during the second quarter of 2012, compared
to $32.9 million, or 1.42% of average loans and leases, during the second
quarter of 2011. For the six months ended June 30, 2012, net charge-offs
decreased to $35.3 million or 0.80% of average loans and leases, compared to
$85.0 million or 1.83% of average loans and leases for the six months ended June
30, 2011. The decrease in the provision for credit losses reflected the impact
of a significant decrease in NPL formation during the first six months of 2012
as NPLs decreased from $322.3 million at December 30, 2011 to $266.9 million at
June 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 $28.8 million to $104.3 million at June 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 $104.7 million for the second
quarter of 2012, a decrease of $5.2 million, or 4.7%, from $109.9 million for
the second quarter of 2011. Net interest revenue was $210.4 million for the
first six months of 2012, a decrease of $9.0 million, or 4.1%, from $219.3
million for the first six 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 $8.9 million, or 32.4%, in the
second quarter of 2012 compared to the second quarter of 2011 and a decrease in
interest expense of $18.5 million, or 32.6%, in the first six months of 2012
compared to the first six months of 2011. The decrease in
41
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net interest revenue for the second quarter and first six 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 as interest revenue decreased
$14.0 million, or 10.2%, in the second quarter of 2012 compared to the second
quarter of 2011 and decreased $27.5 million, or 10.0%, in the first six months
of 2012 compared to the first six months of 2011. Real estate construction,
acquisition and development loans decreased $73.3 million, or 8.1%, to $835.0
million at June 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 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 decreased $8.7 million, or 11.6%, for the
second quarter of 2012 compared to the second quarter of 2011 and decreased $4.6
million, or 3.2%, for the first six months of 2012 compared to the first six
months of 2011. One of the primary contributors to the decrease in noninterest
revenue was the decrease in securities gains, which reflected a decrease of $9.9
million, or 98.2%, for the second quarter of 2012 compared to the second quarter
of 2011 and a decrease of $9.8 million, or 97.5%, for the first six months of
2012 compared to the first six 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 June 30, 2011, December 31,
2011 and June 30, 2012.
The decrease in noninterest revenue was somewhat offset by the increase in
mortgage lending revenue to $11.0 million for the second quarter of 2012
compared to $2.0 million for the second quarter of 2011 and to $26.2 million for
the first six months of 2012 compared to $9.6 million for the first six months
of 2011. The increase in mortgage lending revenue was primarily related to the
increase in mortgage originations. Mortgage origination volume increased in the
second quarter of 2012 to $444.1 million from $245.3 million for the second
quarter of 2011 and increased in the first six months of 2012 to $839.2 million
compared to $448.1 million for the first six months of 2011. The increased level
of mortgage origination volume resulted in an increase in origination revenue to
$13.1 million in the second quarter of 2012 compared to $4.1 million in the
second quarter of 2011 and an increase to $22.8 million for the first six months
of 2012 compared to $7.3 million for the first six months of 2011.
Contributing to the decrease in noninterest revenue was the decrease in service
charges and credit card, debit card and merchant fees, as these noninterest
revenues decreased 22.8% and 17.6% in the aggregate in the second quarter and
first six months of 2012, respectively, compared to the second quarter and first
six months of 2011. Bank-owned life insurance revenue decreased 18.5% for the
second quarter of 2012 compared to the second quarter of 2011 and increased
53.8% for the first six months of 2012 compared to the first six months of 2011
as a result of the Company recording life insurance proceeds of approximately
$872,000 during the first three months of 2012 and approximately $478,000 during
the second quarter of 2011. There were no significant non-recurring noninterest
revenue items during the second quarter or first six months of 2012 and 2011.
Total noninterest expense remained relatively stable for the second quarter and
first six months of 2012 compared to the second quarter and first six months of
2011. Salaries and employee benefits expense increased to $77.7 million and
$152.6 million for the second quarter and first six months of 2012,
respectively, compared to $70.1 million and $140.5 million for the second
quarter and first six months of 2011. The increase in salaries and employee
benefits was primarily related to increases in employee benefits and incentive
compensation during the second quarter and first six months of 2012 compared to
the same periods of 2011. Foreclosed property expense increased 171.2% and 71.7%
for the second quarter and first six months of 2012, respectively, compared to
the second quarter and first six 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 six 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.
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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 six months ended June 30, 2012 and 2011:
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Three months ended June 30,
2012 2011
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
(Dollars in millions, yields on taxable equivalent basis)
ASSETS
Loans and leases (net
of unearned income)
(1)(2) $ 8,735.2 $ 108.6 5.03 % $ 9,249.1 $ 117.8 5.11 %
Loans held for sale 77.7 0.7 3.55 % 44.7 0.5 4.53 %
Held-to-maturity
securities:
Taxable (3) - - - 887.8 5.1 2.32 %
Non-taxable (4) - - - 209.8 3.5 6.74 %
Available-for-sale
securities:
Taxable (5) 2,068.7 10.3 2.00 % 1,432.8 10.5 2.94 %
Non-taxable (6) 452.2 6.5 5.76 % 176.9 2.9 6.53 %
Federal funds sold,
securities
purchased under
agreement to resell
and short-term
investments 574.6 0.3 0.27 % 226.6 0.2 0.28 %
Total interest
earning assets and
revenue 11,908.4 126.4 4.27 % 12,227.7 140.5 4.61 %
Other assets 1,295.0 1,350.8
Less: Allowance for
credit losses (185.2 ) (213.0 )
Total $ 13,018.2 $ 13,365.5
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Demand - interest
bearing $ 4,769.3 $ 4.1 0.35 % $ 4,977.8 $ 6.0 0.49 %
Savings 1,074.9 0.7 0.26 % 941.2 0.8 0.35 %
Other time 2,815.8 10.3 1.47 % 3,418.7 16.3 1.91 %
Federal funds
purchased, securities
sold under agreement
to repurchase,
short-term FHLB
borrowings
and other short
term borrowings 376.6 0.1 0.09 % 425.7 0.2 0.15 %
Junior subordinated
debt securities 160.3 2.9 7.22 % 160.3 2.9 7.16 %
Long-term FHLB
borrowings 33.5 0.4 4.19 % 89.4 1.1 5.27 %
Total interest
bearing liabilities
and expense 9,230.4 18.5 0.80 % 10,013.1 27.3 1.09 %
Demand deposits
-noninterest bearing 2,248.9 2,018.2
Other liabilities 135.2 112.0
Total liabilities 11,614.5 12,143.3
Shareholders' equity 1,403.7 1,222.2
Total $ 13,018.2 $ 13,365.5
Net interest
revenue-FTE $ 107.9 $ 113.2
Net interest
margin-FTE 3.65 % 3.71 %
Net interest rate
spread 3.47 % 3.51 %
Interest bearing
liabilities to
interest earning
assets 77.51 % 81.89 %
(1) Includes taxable equivalent adjustment to interest of $0.9 million for both the three months ended June 30, 2012 and 2011, using an
effective tax rate of 35%.
(2) Includes non-accrual loans.
(3) Includes taxable equivalent adjustment to interest of $0.1 million for the three months ended June 30, 2011 using an effective tax rate
of 35%.
(4) Includes taxable equivalent adjustments to interest of $1.2 million for the three months ended June 30, 2011 using an effective tax rate
of 35%.
(5) Includes taxable equivalent adjustment to interest of $0.1 million for the three months ended June 30, 2012 using an effective tax rate
of 35%.
(6) Includes taxable equivalent adjustment to interest of $2.3 million and $1.0 million for the three months ended June 30, 2012 and 2011,
respectively, using an effective tax rate of 35%.
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Six months ended June 30,
2012 2011
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
(Dollars in millions, yields on taxable equivalent basis)
ASSETS
Loans and leases (net
of unearned income)
(1)(2) $ 8,763.4 $ 218.4 5.01 % $ 9,274.4 $ 236.0 5.13 %
Loans held for sale 69.5 1.2 3.56 % 41.9 0.9 4.58 %
Held-to-maturity
securities:
Taxable (3) - - - 1,104.0 13.3 2.42 %
Non-taxable (4) - - - 269.9 8.7 6.48 %
Available-for-sale
securities:
Taxable (5) 2,063.8 21.6 2.10 % 1,224.8 19.1 3.14 %
Non-taxable (6) 450.6 13.0 5.81 % 124.1 4.1 6.74 %
Federal funds sold,
securities
purchased under
agreement to resell
and short-term
investments 589.3 0.8 0.27 % 271.7 0.4 0.31 %
Total interest
earning assets and
revenue 11,936.6 255.0 4.30 % 12,310.8 282.5 4.63 %
Other assets 1,310.4 1,356.9
Less: allowance for
credit losses (193.7 ) (215.5 )
Total $ 13,053.3 $ 13,452.2
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Demand - interest
bearing $ 4,864.7 $ 8.6 0.36 % $ 5,064.9 $ 12.6 0.50 %
Savings 1,051.3 1.4 0.27 % 919.4 1.6 0.36 %
Other time 2,866.3 21.5 1.51 % 3,485.8 33.8 1.95 %
Federal funds
purchased, securities
sold under agreement
to repurchase,
short-term FHLB
borrowings
and other short term
borrowings 368.1 0.2 0.09 % 429.7 0.3 0.16 %
Junior subordinated
debt securities 160.3 5.8 7.22 % 160.3 5.7 7.19 %
Long-term FHLB
borrowings 33.5 0.7 4.19 % 99.6 2.7 5.38 %
Total interest
bearing liabilities
and expense 9,344.2 38.2 0.82 % 10,159.7 56.7 1.13 %
Demand deposits
-noninterest bearing 2,194.1 1,956.3
Other liabilities 131.3 115.3
Total liabilities 11,669.6 12,231.3
Shareholders' equity 1,383.7 1,220.9
Total $ 13,053.3 $ 13,452.2
Net interest
revenue-FTE $ 216.8 $ 225.8
Net interest
margin-FTE 3.65 % 3.70 %
Net interest rate
spread 3.47 % 3.50 %
Interest bearing
liabilities
to interest earning
assets 78.28 % 82.53 %
(1) Includes taxable equivalent adjustment to interest of $1.7 million for both the six months ended June 30, 2012 and 2011 using an
effective tax rate of 35%.
(2) Includes non-accrual loans.
(3) Includes taxable equivalent adjustments to interest of $0.2 million for the six months ended June 30, 2011 using an effective tax
rate of 35%.
(4) Includes taxable equivalent adjustments to interest of $3.0 million for the six months ended June 30, 2011 using an effective tax
rate of 35%.
(5) Includes taxable equivalent adjustment to interest of $0.2 million for the six months ended June 30, 2012 using an effective tax rate
of 35%.
(6) Includes taxable equivalent adjustment to interest of $4.5 million and $1.5 million for the six months ended June 30, 2012 and 2011,
respectively, using an effective tax rate of 35%.
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Net interest revenue-FTE for the three-month period ended June 30, 2012
decreased $5.3 million, or 4.7%, compared to the same period in 2011. Net
interest revenue-FTE for the six-month period ended June 30, 2012 decreased $9.0
million, or 4.0%, compared to the same period in 2011. The decrease in net
interest revenue-FTE was primarily a result of the increase in short-term
investments resulting from excess liquidity coupled with the continued lack of
loan growth, as the short-term investments had lower average rates earned than
the average rates paid on interest bearing liabilities.
Interest revenue-FTE for the three-month period ended June 30, 2012 decreased
$14.1 million, or 10.0%, compared to the same period in 2011. Interest
revenue-FTE for the six-month period ended June 30, 2012 decreased $27.5
million, or 9.7%, compared to the same period in 2011. The decrease in interest
revenue-FTE for these periods was a result of the increase in lower rate
securities combined with the declining loan yields, as interest rates continued
to be at historically low levels resulting in a decrease in the yield on average
interest-earning assets of 34 basis points for the second quarter of 2012
compared to the same period in 2011 and of 33 basis points for the first six
months of 2012 compared to the same period in 2011. Average interest-earning
assets decreased $319.3 million, or 2.6%, for the three-month period ended June
30, 2012, compared to the same period in 2011. Average interest-earning assets
decreased $374.2 million, or 3.0%, for the six-month period ended June 30, 2012,
compared to the same period in 2011. The decrease in average interest-earning
assets for these periods was primarily a result of the larger decrease in net
loans and leases and securities than the increase in short-term investment
resulting from excess liquidity.
Interest expense for the three-month period ended June 30, 2012 decreased $8.9
million, or 32.4%, compared to the same period in 2011. Interest expense for the
six-month period ended June 30, 2012 decreased $18.5 million, or 32.6%, compared
to the same period in 2011. The decrease in interest expense for these periods
was a result of the increase in average lower cost savings deposits combined
with the decrease in interest bearing and other time deposit and their
corresponding rates, coupled with the decrease in higher rate long-term FHLB
borrowings. This activity resulted in an overall decrease in the average rate
paid of 29 basis points for the second quarter of 2012 compared to the second
quarter of 2011 and 31 basis points for the first six months of 2012 compared to
the first six months of 2011. Average interest bearing liabilities decreased
$782.7 million, or 7.8%, for the three-month period ended June 30, 2012 compared
to the same period in 2011. Average interest bearing liabilities decreased
$815.5 million, or 8.0%, for the six-month period ended June 30, 2012 compared
to the same period in 2011. The decrease in average interest bearing liabilities
for these periods was a result of increases in average lower cost savings
deposits being more than offset by decreases in average interest bearing demand
deposits, other time deposits, short-term borrowings and long-term borrowings.
Net interest margin was 3.65% for the three months ended June 30, 2012, a
decrease of six basis points from 3.71% for the three months ended June 30,
2011. Net interest margin was also 3.65% for the six months ended June 30, 2012,
a decrease of five basis points from 3.70% for the six months ended June 30,
2011. The slight decrease in the net interest margin for these periods was
primarily a result of weak loan demand and an increase in short-term investments
having lower yields than those earned on the loan portfolio.
Interest Rate Sensitivity
The interest rate sensitivity gap is the difference between the maturity or
repricing opportunities of interest sensitive assets and interest sensitive
liabilities for a given period of time. A prime objective of the Company's
asset/liability management is to maximize net interest margin while maintaining
a reasonable mix of interest sensitive assets and liabilities. The following
table presents the Company's interest rate sensitivity at June 30, 2012:
46
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Interest Rate
Sensitivity - Maturing or Repricing Opportunities
91 Days Over One
0 to 90 to Year to Over
Days One Year Five Years Five Years
(In thousands)
Interest earning assets:
Interest bearing deposits with banks $ 603,458 $ - $ - $ -
Available-for-sale and trading securities 111,583 271,442 1,270,545 809,261
Loans and leases, net of unearned income 3,902,067 1,710,612 2,730,619 389,097
Loans held for sale 87,771 359 2,086 17,918
Total interest earning assets 4,704,879 1,982,413 4,003,250 1,216,276
Interest bearing liabilities:
Interest bearing demand deposits and savings 5,865,498 - - -
Other time deposits 576,516 1,090,487 1,111,583 209
Federal funds purchased and securities
sold under agreement to repurchase,
short-term FHLB borrowings and other
short-term borrowings 363,490 - - -
Long-term FHLB borrowings and junior
subordinated debt securities - - 3,500 190,312
Other - - 61 -
Total interest bearing liabilities 6,805,504 1,090,487 1,115,144 190,521
Interest rate sensitivity gap $ (2,100,625 ) $ 891,926 $ 2,888,106 $ 1,025,755
Cumulative interest sensitivity gap $ (2,100,625 ) $
(1,208,699 ) $ 1,679,407$ 2,705,162
In the event interest rates increase after June 30, 2012, based on this interest
rate sensitivity gap, the Company could experience decreased net interest
revenue in the following one-year period, as the cost of funds could increase at
a more rapid rate than interest revenue on interest-earning assets. However, the
Company's historical repricing sensitivity on interest bearing demand deposits
and savings suggests that these deposits, while having the ability to reprice in
conjunction with rising market rates, often exhibit less repricing sensitivity
to a change in market rates, thereby somewhat reducing the exposure to rising
interest rates. In the event interest rates decline after June 30, 2012, based
on this interest rate sensitivity gap, it is possible that the Company could
experience slightly increased net interest revenue in the following one-year
period. However, any potential benefit to net interest revenue in a falling rate
environment is mitigated by implied rate floors on interest bearing demand
deposits and savings resulting from the historically low interest rate
environment. It should be noted that the balances shown in the table above are
at June 30, 2012 and may not be reflective of positions at other times during
the year or in subsequent periods. Allocations to specific interest rate
sensitivity periods are based on the earlier of maturity or repricing
dates. The elevated liability sensitivity in the 0 to 90 day category as
compared to other categories was primarily a result of the Company's utilization
of shorter term, lower cost deposits to fund earning assets.
As of June 30, 2012, the Bank had $1.8 billion in variable rate loans with
interest rates determined by a floor, or minimum rate. This portion of the loan
portfolio had an average interest rate earned of 4.60%, an average maturity of
31 months and a fully-indexed interest rate of 3.72% at June 30, 2012. The
fully-indexed interest rate is the interest rate that these loans would be
earning without the effect of interest rate floors. While the Bank benefits from
interest rate floors in the current interest rate environment, loans currently
earning their floored interest rate may not experience an immediate impact on
the interest rate earned should key indices rise. Key indices include, but are
not limited to, the Bank's prime rate, the Wall Street Journal prime rate and
the London Interbank Offering Rate. At June 30, 2012, the Company had $880.9
million, $1.1 billion and $705.3 million in variable rate loans with interest
rates tied to the Bank's prime rate, the Wall Street Journal prime rate and the
London Interbank Offering Rate, respectively. The Bank's net interest margin may
be negatively impacted by the timing and magnitude of a rise in key indices.
47
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Interest Rate Risk Management
Interest rate risk refers to the potential changes in net interest income and
Economic Value of Equity ("EVE") resulting from adverse movements in interest
rates. EVE is defined as the net present value of the balance sheet's cash
flow. EVE is calculated by discounting projected principal and interest cash
flows under the current interest rate environment. The present value of asset
cash flows less the present value of liability cash flows derives the net
present value of the Company's balance sheet. The Company's Asset / Liability
Committee utilizes financial simulation models to measure interest rate
exposure. These models are designed to simulate the cash flow and accrual
characteristics of the Company's balance sheet. In addition, the models
incorporate assumptions about the direction and volatility of interest rates,
the slope of the yield curve, and the changing composition of the Company's
balance sheet arising from both strategic plans and customer behavior. Finally,
management makes assumptions regarding loan and deposit growth, pricing, and
prepayment speeds.
The sensitivity analysis included in the tables below delineates the percentage
change in net interest income and EVE derived from instantaneous parallel rate
shifts of plus and minus 400, 300, 200 and 100 basis points. The impact of minus
400, 300, 200 and 100 basis point rate shocks as of June 30, 2012 and 2011 was
not considered meaningful because of the historically low interest rate
environment. However, the risk exposure should be mitigated by any downward rate
shifts. Variances were calculated from the base case scenario, which reflected
prevailing market rates, and the net interest income forecasts used in the
calculations spanned 12 months for each scenario. For the tables below,
management assumed all non-maturity deposits had an average life of one day for
calculating EVE. In addition, management assumed a beta value of 1, or 100%, for
all non-term deposits for purposes of calculating net interest income
instantaneous rate shocks. "Beta," in the context of deposit rates, is defined
as the percentage change in interest rate paid given a change in market
rates. Calculations using the aforementioned assumptions are designed to
delineate maximum risk exposure.
Net Interest Income
% Variance from Base Case Scenario
Rate Shock June 30, 2012 June 30, 2011
+400 basis points -11.9% -15.6%
+300 basis points -9.5% -12.2%
+200 basis points -7.1% -9.0%
+100 basis points -4.0% -5.1%
-100 basis points NM NM
-200 basis points NM NM
-300 basis points NM NM
-400 basis points NM NM
NM=not meaningful
Economic Value of Equity
% Variance from Base Case Scenario
Rate Shock June 30, 2012 June 30, 2011
+400 basis points -9.7% -3.8%
+300 basis points -7.9% -2.9%
+200 basis points -5.9% -2.2%
+100 basis points -3.4% -1.4%
-100 basis points NM NM
-200 basis points NM NM
-300 basis points NM NM
-400 basis points NM NM
NM=not meaningful
48--------------------------------------------------------------------------------
In addition to instantaneous rate shocks, the Company monitors interest rate
exposure through simulations of gradual interest rate changes over a 12-month
time horizon. The results of these analyses are included in the following table:
Net Interest Income
% Variance from Base Case Scenario
Rate Ramp June 30, 2012 June 30, 2011
+200 basis points -5.9% -6.8%
-200 basis points NM NM
NM=not meaningful
For the tables below, average life assumptions and beta values for non-maturity
deposits were estimated based on the historical behavior. Calculations using
these assumptions are designed to delineate more precise risk exposure under the
various shock scenarios. While the falling rate shocks are not considered
meaningful in the historically low interest rate environment, the risk profile
would be negatively impacted by downward rate shifts under these assumptions.
Net Interest Income
% Variance from Base Case Scenario
Rate Shock June 30, 2012 June 30, 2011+400 basis points 12.6% NA
+300 basis points 13.8% NA
+200 basis points 12.2% NA
+100 basis points 5.6% NA
-100 basis points NM NM
-200 basis points NM NM
-300 basis points NM NM
-400 basis points NM NM
NM=not meaningful
NA=not available
Economic Value of Equity
% Variance from Base Case Scenario
Rate Shock June 30, 2012 June 30, 2011
+400 basis points 11.0% NA
+300 basis points 9.6% NA
+200 basis points 7.4% NA
+100 basis points 3.4% NA
-100 basis points NM NM
-200 basis points NM NM
-300 basis points NM NM
-400 basis points NM NM
NM=not meaningful
NA=not available
Net Interest Income
% Variance from Base Case Scenario
Rate Ramp June 30, 2012 June 30, 2011
+200 basis points 1.6% NA
-200 basis points NM NM
NM=not meaningful
NA=not available
49--------------------------------------------------------------------------------
Provision for Credit Losses and Allowance for Credit Losses
In the normal course of business, the Bank assumes risks in extending
credit. The Bank manages these risks through underwriting in accordance with its
lending policies, loan review procedures and the diversification of its loan and
lease portfolio. Although it is not possible to predict credit losses with
certainty, management regularly reviews the characteristics of the loan and
lease portfolio to determine its overall risk profile and quality.
The provision for credit losses is the periodic cost of providing an allowance
or reserve for estimated probable losses on loans and leases. The Bank's Board
of Directors has appointed a loan loss reserve valuation committee (the "Loan
Loss Committee"), which bases its estimates of credit losses on three primary
components: (1) estimates of inherent losses that may exist in various segments
of performing loans and leases; (2) specifically identified losses in
individually analyzed credits; and (3) qualitative factors that may impact the
performance of the loan and lease portfolio. Factors such as financial condition
of the borrower and guarantor, recent credit performance, delinquency,
liquidity, cash flows, collateral type and value are used to assess credit
risk. Expected loss estimates are influenced by the historical losses
experienced by the Bank for loans and leases of comparable creditworthiness and
structure. Specific loss assessments are performed for loans and leases of
significant size and delinquency based upon the collateral protection and
expected future cash flows to determine the amount of impairment under FASB ASC
310, Receivables ("FASB ASC 310"). In addition, qualitative factors such as
changes in economic and business conditions, concentrations of risk, loan and
lease growth, acquisitions and changes in portfolio risk resulting from
regulatory changes are considered in determining the adequacy of the level of
the allowance for credit losses.
Attention is paid to the quality of the loan and lease portfolio through a
formal loan review process. An independent loan review department of the Bank is
responsible for reviewing the credit rating and classification of individual
credits and assessing trends in the portfolio, adherence to internal credit
policies and procedures and other factors that may affect the overall adequacy
of the allowance for credit losses. The Loan Loss Committee is responsible for
ensuring that the allowance for credit losses provides coverage of both known
and inherent losses. The Loan Loss Committee meets at least quarterly to
determine the amount of adjustments to the allowance for credit losses. The
Loan Loss Committee is composed of senior management from the Bank's loan
administration and finance departments. In 2010, the Bank established a real
estate risk management group and an Impairment Committee. The real estate risk
management group oversees compliance with regulations and U.S. GAAP related to
lending activities where real estate is the primary collateral. The Bank's Board
of Directors has appointed an impairment committee (the "Impairment Committee"),
which is responsible for evaluating loans that have been specifically identified
through various channels, including examination of the Bank's watch list, past
due listings, findings of the internal loan review department, loan officer
assessments and loans to borrowers or industries known to be experiencing
problems. For all loans identified, the responsible loan officer in conjunction
with his or her credit administrator is required to prepare an impairment
analysis to be reviewed by the Impairment Committee. The Impairment Committee
deems that a loan is impaired if it is probable that the Company will be unable
to collect all the contractual principal and interest on the loan. The
Impairment Committee also evaluates the circumstances surrounding the loan in
order to determine if the loan officer used the most appropriate method for
assessing the impairment of the loan (i.e., present value of expected future
cash flows, observable market price or fair value of the underlying
collateral). The Impairment Committee meets on a monthly basis.
If concessions are granted to a borrower as a result of its financial
difficulties, the loan is classified as a TDR and analyzed for possible
impairment as part of the credit approval process. TDRs are reserved in
accordance with FASB ASC 310 in the same manner as impaired loans that are not
TDRs. Should the borrower's financial condition, collateral protection or
performance deteriorate, warranting reassessment of the loan rating or
impairment, additional reserves may be required.
Loans of $200,000 or more that become 60 or more days past due are identified
for review by the Impairment Committee, which decides whether an impairment
exists and to what extent a specific allowance for credit loss should be
made. Loans that do not meet these requirements may also be identified by
management for impairment review, particularly if the loan is a small loan that
is part of a larger relationship. Loans subject to such review are evaluated as
to collateral dependency, current collateral value, guarantor or other financial
support and likely disposition. Each such loan is individually evaluated for
impairment. The impairment evaluation of real estate loans generally focuses on
the fair value of underlying collateral obtained from appraisals, as the
repayment of these loans may be dependent on the liquidation of the
collateral. In certain circumstances, other information such as comparable sales
data is deemed to be a more reliable indicator of fair value of the underlying
collateral than the most recent appraisal. In these instances, such information
is used in determining the impairment recorded
50
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for the loan. As the repayment of commercial and industrial loans is generally
dependent upon the cash flow of the borrower or guarantor support, the
impairment evaluation generally focuses on the discounted future cash flows of
the borrower or guarantor support, as well as the projected liquidation of any
pledged collateral. The Impairment Committee reviews the results of each
evaluation and approves the final impairment amounts, which are then included in
the analysis of the adequacy of the allowance for credit losses in accordance
with FASB ASC 310. Loans identified for impairment are placed in non-accrual
status.
The Company's policy is to obtain an appraisal at the time of loan origination
for real estate collateral securing a loan of $250,000 or more, consistent with
regulatory guidelines. The Company's policy is to obtain an updated appraisal
when certain events occur, such as the refinancing of the debt, the renewal of
the debt or events that indicate potential impairment. A new appraisal is
generally ordered for loans greater than $200,000 that have characteristics of
potential impairment such as delinquency or other loan-specific factors
identified by management, when a current appraisal (dated within the prior 12
months) is not available or when a current appraisal uses assumptions that are
not consistent with the expected disposition of the loan collateral. In order to
measure impairment properly at the time that a loan is deemed to be impaired, a
staff appraiser may estimate the collateral fair value based upon earlier
appraisals, sales contracts, approved foreclosure bids, comparable sales,
officer estimates or current market conditions until a new appraisal is
received. This estimate can be used to determine the extent of the impairment on
the loan. After a loan is deemed to be impaired, it is management's policy to
obtain an updated appraisal on at least an annual basis. Management performs a
review of the pertinent facts and circumstances of each impaired loan, such as
changes in outstanding balances, information received from loan officers and
receipt of re-appraisals, on a monthly basis. As of each review date, management
considers whether additional impairment should be recorded based on recent
activity related to the loan-specific collateral as well as other relevant
comparable assets. Any adjustment to reflect further impairments, either as a
result of management's periodic review or as a result of an updated appraisal,
are made through recording additional loan loss provisions or charge-offs.
At June 30, 2012, impaired loans totaled $200.4 million, which was net of
cumulative charge-offs of $59.3 million. Additionally, the Company had specific
reserves for impaired loans of $23.9 million included in the allowance for
credit losses. Impaired loans at June 30, 2012 were primarily from the Company's
commercial and residential real estate construction, acquisition and development
portfolios. Impaired loan charge-offs are determined necessary when management
does not anticipate any future recovery of collateral values. The loans were
evaluated for impairment based on the fair value of the underlying collateral
securing the loan. As part of the impairment review process, appraisals are used
to determine the property values. The appraised values that are used are
generally based on the disposition value of the property, which assumes Bank
ownership of the property "as-is" and a 180-360 day marketing period. If a
current appraisal or one with an inspection date within the past 12 months using
the necessary assumptions is not available, a new third-party appraisal is
ordered. In cases where an impairment exists and a current appraisal is not
available at the time of review, a staff appraiser may determine an estimated
value based upon earlier appraisals, the sales contract, approved foreclosure
bids, comparable sales, comparable appraisals, officer estimates or current
market conditions until a new appraisal is received. After a new appraisal is
received, the value used in the review will be updated and any adjustments to
reflect further impairments are made. Appraisals are obtained from
state-certified appraisers based on certain assumptions which may include
foreclosure status, bank ownership, other real estate owned ("OREO") marketing
period of 180 days, costs to sell, construction or development status and the
highest and best use of the property. A staff appraiser may make adjustments to
appraisals based on sales contracts, comparable sales and other pertinent
information if an appraisal does not incorporate the effect of these
assumptions.
When a guarantor is relied upon as a source of repayment, it is the Company's
policy to analyze the strength of the guaranty. This analysis varies based on
circumstances, but may include a review of the guarantor's personal and business
financial statements and credit history, a review of the guarantor's tax returns
and the preparation of a cash flow analysis of the guarantor. Management will
continue to update its analysis on individual guarantors as circumstances
change. Because of the continued weakness in the economy, subsequent analyses
may result in the identification of the inability of some guarantors to perform
under the agreed upon terms.
Any loan or portion thereof which is classified as "loss" by regulatory
examiners or which is determined by management to be uncollectible, because of
factors such as the borrower's failure to pay interest or principal, the
borrower's financial condition, economic conditions in the borrower's industry
or the inadequacy of underlying collateral, is charged off.
51
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The following table provides an analysis of the allowance for credit losses for
the periods indicated:
Three months ended Six months ended
June 30, June 30,
2012 2011 2012 2011
(Dollars in thousands)
Balance, beginning of period $ 181,777 $ 198,333 $ 195,118 $ 196,913
Loans and leases charged off:
Commercial and industrial (1,582 ) (5,556 ) (5,854 ) (14,365 )
Real estate
Consumer mortgages (2,818 ) (1,629 ) (7,034 ) (4,889 )
Home equity (536 ) (1,391 ) (1,387 ) (2,473 )
Agricultural (386 ) (373 ) (482 ) (965 )
Commercial and industrial-owner
occupied (2,732 ) (3,228 ) (6,600 ) (4,944 )
Construction, acquisition and
development (9,560 ) (16,783 ) (20,954 ) (49,126 )
Commercial real estate (3,260 ) (1,597 ) (6,069 ) (6,111 )
Credit cards (588 ) (725 ) (1,150 ) (1,606 )
All other (438 ) (4,971 ) (1,196 ) (5,524 )
Total loans charged off (21,900 ) (36,253 ) (50,726 ) (90,003 )
Recoveries:
Commercial and industrial 1,040 589 2,582 773
Real estate
Consumer mortgages 438 220 761 363
Home equity 78 46 393 91
Agricultural 53 45 63 47
Commercial and industrial-owner
occupied 1,514 21 1,865 194
Construction, acquisition and
development 1,955 1,493 4,110 2,057
Commercial real estate 4,504 392 4,887 405
Credit cards 121 239 239 494
All other 267 262 555 574
Total recoveries 9,970 3,307 15,455 4,998
Net charge-offs (11,930 ) (32,946 ) (35,271 ) (85,005 )
Provision charged to operating expense 6,000 32,240 16,000 85,719
Balance, end of period $ 175,847 $ 197,627 $ 175,847 $ 197,627
Average loans for period $ 8,735,225 $ 9,249,127 $ 8,763,383 $ 9,274,415
Ratios:
Net charge-offs to average loans
(annualized) 0.55 % 1.42 % 0.80 % 1.83 %
Provision for credit losses to average
loans and
leases, net of unearned income
(annualized) 0.27 % 1.39 % 0.37 % 1.85 %
Allowance for credit losses to loans and
leases, net of unearned income 2.01 % 2.14 % 2.01 % 2.14 %
Allowance for credit losses to net
charge-offs (annualized) 368.50 % 149.96 % 249.28 % 116.24 %
Net charge-offs decreased $21.0 million, or 63.8%, in the second quarter of 2012
compared to the second quarter of 2011 and decreased $49.7 million, or 58.5%, in
the first six months of 2012 compared to the first six months of 2011. Decreases
in net charge-offs in the second quarter and first six months of 2012
contributed to a lower provision for credit losses of $6.0 million and $16.0
million during the second quarter and first six months of 2012 compared to a
provision of $32.2 million and $85.7 million in the same periods of
2011. Annualized net charge-offs as a percentage of average loans and leases
decreased to 0.55% and 0.80% for the second quarter and
52
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first six months of 2012, respectively, compared to 1.42% and 1.83% for the
second quarter and first six months of 2011, respectively. These decreases were
primarily a result of decreased losses within the real estate construction,
acquisition and development segment of the Company's loan and lease
portfolio. The losses experienced in this segment were primarily a result of the
weakened financial condition of the corresponding borrowers and
guarantors. These borrowers' weakened state hindered their ability to service
their loans with the Company, which caused a number of loans to become
collateral dependent. Once it is determined a loan's repayment is dependent upon
the underlying collateral, the loan is charged down to net realizable value or a
specific reserve is allocated to the loan. This process resulted in a decreased
level of charge-offs in the first six months of 2012 compared to the first six
months of 2011 as updated appraisals came in closer to loan carrying
values. Total recoveries increased by $6.7 million for the three-month period
ended June 30, 2012, compared to the same period of 2011 and $10.5 million for
the six-month period ended June 30, 2012, compared to the same period of 2011.
The provision for credit losses decreased to $6.0 million and $16.0 million for
the second quarter and first six months of 2012, respectively, compared to $32.2
million and $85.7 million for the second quarter and first six months of 2011,
respectively. The decrease in the provision for credit losses was a result of
the decrease in net charge-offs, a decline in the formation of new non-accrual
loans, including fewer loans being identified for impairment, continued
stabilization in values of previously impaired loans, and a significant decrease
in NPLs.
As of June 30, 2012, 83.4% of nonaccrual loans had been charged down to net
realizable value or had specific reserves to reflect recent appraised
values. This resulted in impaired loans having an aggregate net book value of
68% of their contractual principal balance at June 30, 2012. As of June 30,
2011, 91.7% of nonaccrual loans had been charged down to net realizable value or
had specific reserves to reflect recent appraised values. This resulted in
impaired loans having an aggregate net book value of 69% of their contractual
principal balance at June 30, 2011. Non-accrual loans not impaired are loans
that either fall below the impairment threshold or are not determined to be
collaterally dependant.
The breakdown of the allowance by loan and lease category is based, in part, on
evaluations of specific loan and lease histories and on economic conditions
within specific industries or geographical areas. Accordingly, because all of
these conditions are subject to change, the allocation is not necessarily
indicative of the breakdown of any future allowance or losses. The following
table presents (i) the breakdown of the allowance for credit losses by segment
and class and (ii) the percentage of each segment and class in the loan and
lease portfolio to total loans and leases at the dates indicated:
June 30, December 31,
2012 2011 2011
Allowance % of Allowance % of Allowance % of
for Total for Total for Total
Credit Loans Credit Loans Credit Loans
Losses and Leases Losses and Leases Losses and Leases
(Dollars in thousands)
Commercial and
industrial $ 25,815 17.2 % $ 22,840 16.6 % $ 20,724 16.6 %
Real estate
Consumer mortgages 34,431 21.7 % 37,045 21.3 % 36,529 21.8 %
Home equity 7,336 5.7 % 7,620 5.8 % 8,630 5.8 %
Agricultural 3,259 2.9 % 4,709 2.8 % 3,921 2.7 %
Commercial and
industrial-owner
occupied 17,359 14.7 % 24,644 14.8 % 21,929 14.6 %
Construction,
acquisition and
development 32,755 9.5 % 53,920 11.5 % 45,562 10.2 %
Commercial real
estate 37,166 19.9 % 35,293 19.1 % 39,444 19.7 %
Credit cards 3,159 1.2 % 3,487 1.1 % 4,021 1.2 %
All other 14,567 7.2 % 8,069 7.0 % 14,358 7.4 %
Total $ 175,847 100.0 % $ 197,627 100.0 % $ 195,118 100.0 %
53--------------------------------------------------------------------------------
Noninterest Revenue
The components of noninterest revenue for the three months and six months ended
June 30, 2012 and 2011 and the corresponding percentage changes are shown in the
following tables:
Three months ended
June 30,
2012 2011 % Change
(Dollars in thousands)
Mortgage lending $ 11,040 $ 2,003 451.2 %
Credit card, debit card and merchant fees 7,787 11,263 (30.9 )
Service charges 13,697 16,556 (17.3 )
Trust income 3,139 2,850 10.1
Securities gains, net 177 10,045 (98.2 )
Insurance commissions 22,964 22,941 0.1
Annuity fees 635 1,094 (42.0 )
Brokerage commissions and fees 1,779 1,437 23.8
Bank-owned life insurance 1,812 2,223 (18.5 )
Other miscellaneous income 3,438 4,732 (27.3 )
Total noninterest revenue $ 66,468 $ 75,144 (11.5 ) %
Six months ended
June 30,
2012 2011 % Change
(Dollars in thousands)
Mortgage lending $ 26,182 $ 9,584 173.2 %
Credit card, debit card and merchant fees 15,310 21,609 (29.1 )
Service charges 28,813 31,924 (9.7 )
Trust income 5,421 5,984 (9.4 )
Securities gains, net 251 10,062 (97.5 )
Insurance commissions 46,117 45,490 1.4
Annuity fees 1,277 2,390 (46.6 )
Brokerage commissions and fees 3,217 3,075 4.6
Bank owned life insurance 4,425 3,922 12.8
Other miscellaneous income 7,815 9,415 (17.0 )
Total noninterest revenue $ 138,828 $ 143,455 (3.2 ) %
The Company's revenue from mortgage lending typically fluctuates as mortgage
interest rates change and is primarily attributable to two activities -
origination and sale of new mortgage loans and servicing mortgage loans. Since
the Company does not hedge the change in fair value of its MSRs, mortgage
revenue can be significantly affected by changes in the valuation of MSRs in
changing interest rate environments. The Company's normal practice is to
originate mortgage loans for sale in the secondary market and to either retain
or release the associated MSRs with the loan sold. 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 FASB ASC 860, Transfers and Servicing.
In the course of conducting the Company's mortgage lending activities of
originating mortgage loans and selling those loans in the secondary market,
various representations and warranties are made to the purchasers of the
mortgage loans. These representations and warranties also apply to underwriting
the real estate appraisal opinion of value for the collateral securing these
loans. Under the representations and warranties, failure by the Company to
comply with the underwriting and/or appraisal standards could result in the
Company being required to repurchase the mortgage loan or to reimburse the
investor for losses incurred (i.e., make whole requests) if such failure cannot
54
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be cured by the Company within the specified period following discovery. During
the first six months of 2012, nine mortgage loans totaling $1.4 million were
repurchased or otherwise settled as a result of underwriting and appraisal
standard exceptions or make whole requests. A loss of approximately $283,000 was
recognized related to these repurchased or make whole loans. During the first
six months of 2011, no mortgage loans were repurchased or otherwise settled as a
result of underwriting and appraisal standard exceptions or make whole
requests. Therefore, no loss was recognized related to repurchased or make whole
loans.
At June 30, 2012, the Company had reserved approximately $959,000 for potential
losses from representation and warranty obligations. The reserve was based on
the Company's repurchase and loss trends, and quantitative and qualitative
factors that may result in anticipated losses different than historical loss
trends, including loan vintage, underwriting characteristics and macroeconomic
trends.
Management believes that the Company's foreclosure process related to mortgage
loans continues to operate effectively. Before beginning the foreclosure
process, a mortgage loan foreclosure committee of the Bank reviews the
identified delinquent loan. All documents and activities related to the
foreclosure process are executed in-house by mortgage department personnel.
Origination revenue, a component of mortgage lending revenue, is comprised of
gains or losses from the sale of the mortgage loans originated, origination
fees, underwriting fees and other fees associated with the origination of
loans. Mortgage loan origination volumes of $444.1 million and $245.3 million
produced origination revenue of $13.1 million and $4.1 million for the quarters
ended June 30, 2012 and 2011, respectively. Mortgage loan origination volumes of
$839.2 million and $448.1 million produced origination revenue of $22.8 million
and $7.3 million for the six months ended June 30, 2012 and 2011,
respectively. The increase in mortgage origination revenue was a direct result
of the increase in mortgage loan origination volumes for the second quarter and
first six months of 2012 compared to the second quarter and first six months of
2011.
Revenue from the servicing process, another component of mortgage lending
revenue, includes fees from the actual servicing of loans. Revenue from the
servicing of loans was $3.5 million and $3.2 million for the quarters ended June
30, 2012 and 2011, respectively. For the six months ended June 30, 2012 and
2011, revenue from the servicing of loans was $6.9 million and $6.3 million,
respectively.
Changes in the fair value of the Company's MSRs are generally a result of
changes in mortgage interest rates from the previous reporting date. An increase
in mortgage interest rates typically results in an increase in the fair value of
the MSRs while a decrease in mortgage interest rates typically results in a
decrease in the fair value of MSRs. The fair value of MSRs is also impacted by
principal payments, prepayments and payoffs on loans in the servicing
portfolio. Decreases in value from principal payments, prepayments and payoffs
were $1.7 million and $1.4 million for the quarters ended June 30, 2012 and
2011, respectively. Decreases in value from principal payments, prepayments and
payoffs were $3.5 million and $2.7 million for the six months ended June 30,
2012 and 2011, respectively. The Company does not hedge the change in fair value
of its MSRs and is susceptible to significant fluctuations in their value in a
changing interest rate environment. Reflecting this sensitivity to interest
rates, the fair value of MSRs decreased $3.8 million for both the second quarter
of 2012 and 2011, respectively, and decreased approximately $140,000 and $1.3
million for the first six months of 2012 and 2011, respectively.
55
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The following tables present the Company's mortgage lending operations for the
three months and six months ended June 30, 2012 and 2011:
Three months ended
June 30,
2012 2011 % Change
(Dollars in thousands)
Mortgage revenue:
Origination $ 13,119 $ 4,066 222.7 %
Servicing 3,495 3,166 10.4
Payoffs/Paydowns (1,737) (1,390 ) 25.0
Total 14,877 5,842 154.7
MSR market value adjustment (3,837) (3,839 ) (0.1 )
Mortgage lending revenue $ 11,040 $ 2,003 451.2 %
(Dollars in millions)
Origination volume $ 444 $ 245 81.2 %
Six months ended
June 30,
2012 2011 % Change
(Dollars in thousands)
Mortgage revenue:
Origination $ 22,839 $ 7,290 213.3 %
Servicing 6,946 6,283 10.6
Payoffs/Paydowns (3,463) (2,690 ) 28.7
Total 26,322 10,883 141.9
MSR market value adjustment (140) (1,299 ) (89.2 )
Mortgage lending revenue $ 26,182 $ 9,584 173.2
(Dollars in millions)
Origination volume $ 839 $ 448 87.3
Mortgage loans serviced at period-end $ 4,601 $ 4,027 14.3
Credit card, debit card and merchant fees decreased for the comparable
three-month and six-month periods as a result of the impact of the
implementation of the Durbin Amendment with that decrease somewhat offset by the
increase in the number and monetary volume of items processed. As a result of
the impact of the Durbin Amendment implementation, among other factors, debit
card revenue decreased by $3.7 million and $6.8 million for the second quarter
and first six months of 2012, respectively, compared to the second quarter and
first six months of 2011. Management estimates that debit card revenue could be
reduced in 2012 by approximately $13.0 million as a result of the impact of the
Durbin Amendment.
Recent 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 a decrease in insufficient fund fees
for the second quarter of 2012 compared to the second quarter of 2011. As a
result, service charges on deposit accounts, which include insufficient fund
fees, decreased for the three-month and six-month periods ended June 30, 2012
compared to the same periods in 2011. The Company has taken steps to mitigate
the impact of these new regulations on the Company's service charge revenue by
offering new deposit products to customers.
While trust income increased during the second quarter of 2012 compared to the
second quarter of 2011, trust income decreased for the six-month periods ended
June 30, 2012 and 2011 primarily as a result of decreases in the assets under
management or in custody combined with non-recurring fees received in the first
six months of
56
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2011 and not received during the first six months of 2012. Net security gains of
approximately $177,000 and $251,000 for the three-month and six-month periods
ended June 30, 2012, respectively, were a result of calls and sales of
available-for-sale securities. Net security gains of $10.0 million and $10.1
million for the three-month and six-month periods ending June 30, 2011,
respectively, were primarily a result of sales of available-for-sale securities,
some of which were previously classified as held-to-maturity.
Insurance commissions remained relatively stable for the comparable three-month
and six-month periods. Annuity fees decreased by 42.0% and 46.6% for the
comparable three-month and six-month periods, respectively, as a result of fewer
annuity sales combined with reduced commissions on those sales. Brokerage
commissions and fees increased by 23.8% and 4.6% for the comparable three-month
and six-month periods, respectively, as a result of the increase in sales of
real estate investment trust products. Bank-owned life insurance revenue
decreased 18.5% for the comparable three-month periods and increased 12.8% for
the comparable six-month periods as a result of the Company recording life
insurance proceeds of approximately $478,000 during the second quarter of 2011
and approximately $872,000 during the first six months of 2012. Other
miscellaneous income, which includes safe deposit box rental income, gain or
loss on disposal of assets, and other non-recurring revenue items, decreased by
27.3% and 17.0% for the comparable three-month and six-month periods of 2012 and
2011, respectively, primarily as a result of a $1.1 million gain on the
disposition of fixed assets during the second quarter of 2011.
Noninterest Expense
The components of noninterest expense for the three months and six months ended
June 30, 2012 and 2011 and the corresponding percentage changes are shown in the
following tables:
Three months ended
June 30,
2012 2011 % Change
(Dollars in thousands)
Salaries and employee benefits $ 77,661 $ 70,142 10.7 %
Occupancy, net 10,487 10,232 2.5
Equipment 5,124 5,595 (8.4 )
Deposit insurance assessments 3,994 6,436 (37.9 )
Prepayment penalty on FHLB borrowings - 9,778 NM
Advertising 902 1,291 (30.1 )
Foreclosed property expense 10,212 3,765 171.2
Telecommunications 2,023 2,036 (0.6 )
Public relations 1,355 1,554 (12.8 )
Data processing 2,444 2,365 3.3
Computer software 1,786 1,899 (6.0 )
Amortization of intangibles 742 833 (10.9 )
Legal fees 981 1,158 (15.3 )
Postage and shipping 1,033 1,171 (11.8 )
Other miscellaneous expense 17,762 18,814 (5.6 )
Total noninterest expense $ 136,506 $ 137,069 (0.4 ) %
57
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Six months ended
June 30,
2012 2011 % Change
(Dollars in thousands)
Salaries and employee benefits $ 152,592$ 140,517 8.6 %
Occupancy, net of rental income
20,553 20,903 (1.7 )
Equipment 10,457 11,253 (7.1 )
Deposit insurance assessments 9,377 11,861 (20.9 )
Prepayment penalty on FHLB borrowings - 9,778 NM
Advertising 1,743 2,180 (20.0 )
Foreclosed property expense 18,621 10,847 71.7
Telecommunications 4,229 4,179 1.2
Public relations 2,821 3,068 (8.1 )
Data processing 5,208 4,666 11.6
Computer software 3,589 3,747 (4.2 )
Amortization of intangibles 1,505 1,687 (10.8 )
Legal 3,197 3,756 (14.9 )
Postage and shipping 2,288 2,468 (7.3 )
Other miscellaneous expense 36,006 36,169 (0.5 )
Total noninterest expense $ 272,186 $ 267,079 1.9 %
NM=Not meaningful
Salaries and employee benefits expense for the three months and six months ended
June 30, 2012 increased compared to the same period in 2011, primarily because
of increased employee benefits and incentive compensation. Equipment expense
decreased for the comparable three-month and six-month periods primarily because
of decreased depreciation. Deposit insurance assessments decreased for the
comparable three-month and six-month periods as a result of improvement
evidenced in various variables utilized by the FDIC in calculating the deposit
insurance assessment. 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 2012.
Foreclosed property expense increased for the three months and six months ended
June 30, 2012 compared to the same periods in 2011, as the Company experienced
losses on the sale and larger writedowns of other real estate owned as a result
of the decline in property values attributable to the prevailing economic
environment combined with increased other foreclosed property expenses as a
result of the increase in the number of properties owned. During the first six
months of 2012, the Company added $17.7 million to other real estate owned
through foreclosures. Sales of other real estate owned in the first six months
of 2012 were $37.9 million resulting in a net loss of $3.5 million. The
components of foreclosed property expense for the three months and six months
ended June 30, 2012 and 2011 and the percentage change between periods are shown
in the following tables:
Three months ended
June 30,
2012 2011 % Change
(Dollars in thousands)
Loss (gain) on sale of other real estate owned $ 2,708 $
(140 ) NM %
Writedown of other real estate owned 4,932 2,272 117.1
Other foreclosed property expense 2,572 1,633 57.5
Total foreclosed property expense $ 10,212 $ 3,765 171.2 %
58--------------------------------------------------------------------------------
Six months ended
June 30,
2012 2011 % Change
(Dollars in thousands)
Loss on sale of other real estate owned $ 3,478 $ 352
NM %
Writedown of other real estate owned 9,924 7,208
37.7
Other foreclosed property expense 5,219 3,287
58.8
Total foreclosed property expense $ 18,621 $ 10,847
71.7 %
NM=Not meaningful
While the Company experienced some fluctuations in various components of other
noninterest expense, including advertising, data processing, legal fees and
amortization of intangibles, total noninterest expense remained relatively
stable for the three months and six months ended June 30, 2012, compared with
the same periods in 2011.
Income Tax
The Company recorded income tax expense of $8.1 million for the second quarter
of 2012, compared to an income tax expense of $2.9 million for the second
quarter of 2011. For the six-month period ended June 30, 2012, income tax
expense was $17.5 million compared to an income tax benefit of $2.3 million for
the six months ended June 30, 2011. Because of the volatility on the Company's
earnings, the Company's tax calculations were based on actual results of
operations, including tax preference items through June 30, 2012. The primary
differences between the Company's recorded expense for the first six months of
2012 and the expense that would have resulted from applying the U.S. statutory
tax rate of 35% to the Company's pre-tax income were primarily the effects of
tax-exempt income and other tax preference items.
FINANCIAL CONDITION
The percentage of earning assets to total assets measures the effectiveness of
management's efforts to invest available funds into the most efficient and
profitable uses. Earning assets at June 30, 2012 were $11.9 billion, or 90.6% of
total assets, compared with $11.8 billion, or 90.6% of total assets, at December
31, 2011.
Loans and Leases
The Bank's loan and lease portfolio represents the largest single component of
the Company's earning asset base, comprising 73.4% of average earning assets
during the second quarter of 2012. The Bank's lending activities include both
commercial and consumer loans and leases. Loan and lease originations are
derived from a number of sources, including direct solicitation by the Bank's
loan officers, existing depositors and borrowers, builders, attorneys, walk-in
customers and, in some instances, other lenders, real estate broker referrals
and mortgage loan companies. The Bank has established systematic procedures for
approving and monitoring loans and leases that vary depending on the size and
nature of the loan or lease, and applies these procedures in a disciplined
manner. The Company's loans and leases are widely diversified by borrower and
industry. Loans and leases, net of unearned income, totaled $8.7 billion at June
30, 2012, representing a 1.6% decrease from $8.9 billion at December 31,
2011. The decrease in loans and leases, net of unearned income, was primarily a
result of continued low loan demand in the markets served by the Company,
combined with the strategic runoff of real estate construction, acquisition and
development loans, as well as NPLs and other criticized loans; however, the
Company was able to replace some loan runoff with new loan production,
particularly in its Mississippi, Texas and Louisiana markets.
59
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The following table shows the composition of the Company's gross loans and
leases by segment and class at the dates indicated:
June 30, December 31,
2012 2011 2011
(In thousands)
Commercial and industrial $ 1,507,382 $ 1,540,048 $ 1,484,967
Real estate
Consumer mortgages 1,904,420 1,971,499 1,945,190
Home equity 496,245 531,787 514,362
Agricultural 251,975 255,310 239,487
Commercial and industrial-owner occupied 1,288,887 1,366,734 1,301,575
Construction, acquisition and development 835,022 1,060,675 908,362
Commercial real estate 1,748,748 1,764,648 1,754,022
Credit cards 101,085 101,955 106,281
All other 637,878 663,223 657,012
Total $ 8,771,642 $ 9,255,879 $ 8,911,258
The following table shows the Company's net loans and leases by segment, class
and geographical location as of June 30, 2012:
Alabama Greater
and Florida Memphis Texas and
Panhandle Arkansas* Mississippi* Missouri Area Tennessee* Louisiana Other Total
(In thousands)
Commercial and
industrial $ 57,950 $ 191,231 $ 340,454 $ 56,176 $ 17,036 $ 83,517 $ 248,738 $ 502,576 $ 1,497,678
Real estate
Consumer
mortgages 104,590 266,625 748,850 44,442 83,380 161,013 448,735 46,785 1,904,420
Home equity 59,969 38,511 168,552 24,417 66,302 74,942 61,547 2,005 496,245
Agricultural 6,632 81,867 68,990 3,439 9,497 14,043 62,527 4,980 251,975
Commercial and
industrial-owner
occupied 116,744 159,231 454,193 81,542 90,680 89,351 250,432 46,714 1,288,887
Construction,
acquisition and
development 95,278 60,747 251,977 44,756 91,437 88,684 174,818 27,325 835,022
Commercial
real estate 190,195 346,586 360,704 204,377 115,061 101,883 377,008 52,934 1,748,748
Credit cards - - - - - - - 101,085 101,085
All other 30,890 86,350 190,620 6,852 56,187 49,481 95,729 92,226 608,335
Total $ 662,248 $ 1,231,148 $ 2,584,340 $ 466,001 $ 529,580 $ 662,914 $ 1,719,534 $ 876,630 $ 8,732,395
* Excludes the Greater Memphis Area.
The maturity distribution of the Bank's loan portfolio is one factor in
management's evaluation by collateral type of the risk characteristics of the
loan and lease portfolio. The following table shows the maturity distribution of
the Company's loans and leases, net of unearned income, as of June 30, 2012:
One Year One to After
Past Due or Less Five Years Five Years Total
(In thousands)
Commercial and industrial $ 13,724 $ 960,966 $ 398,224 $ 124,764 $ 1,497,678
Real estate
Consumer mortgages 8,771 425,571 1,128,607 341,471 1,904,420
Home equity - 120,209 375,996 40 496,245
Agricultural 2,382 68,545 134,187 46,861 251,975
Commercial and
industrial-owner occupied 9,515 276,090 680,738 322,544 1,288,887
Construction, acquisition and
development 15,154 474,930 313,733 31,205 835,022
Commercial real estate 13,878 427,100 1,082,549 225,221 1,748,748
Credit cards - 101,085 - - 101,085
All other 830 216,776 351,319 39,410 608,335
Total $ 64,254 $ 3,071,272 $ 4,465,353 $ 1,131,516 $ 8,732,395
Commercial and Industrial - Commercial and industrial loans are loans and leases
to finance business operations, equipment and owner-occupied facilities
primarily for small and medium-sized enterprises. These include both lines of
credit for terms of one year or less and term loans which are amortized over the
useful life of
60
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the assets financed. Personal guarantees are generally required for these loans.
Also included in this category are loans to finance agricultural production and
business credit card lines. Commercial and industrial loans outstanding remained
stable during the first six months of 2012, increasing by 1.6% at June 30, 2012
compared to December 31, 2011.
Real Estate - Consumer Mortgages - Consumer mortgages are first- or
second-lien loans to consumers secured by a primary residence or second home.
These loans are generally amortized over terms up to 15 or 20 years with
maturities of three to five years. The loans are generally secured by properties
located within the local market area of the community bank which originates and
services the loan. These loans are underwritten in accordance with the Bank's
general loan policies and procedures which require, among other things, proper
documentation of each borrower's financial condition, satisfactory credit
history and property value. Consumer mortgages outstanding remained stable
during the first six months of 2012, decreasing by 2.1% at June 30, 2012
compared to December 31, 2011. In addition to loans originated through the
Bank's branches, the Bank originates and services consumer mortgages sold in the
secondary market which are underwritten and closed pursuant to investor and
agency guidelines. The Bank's exposure to sub-prime mortgages is minimal.
Real Estate - Home Equity - Home equity loans include revolving credit lines
which are secured by a first or second lien on a borrower's residence. Each loan
is underwritten individually by lenders who specialize in home equity lending
and must conform to Bank lending policies and procedures for consumer loans as
to borrower's financial condition, ability to repay, satisfactory credit history
and the condition and value of collateral. Properties securing home equity loans
are generally located in the local market area of the Bank branch or office
originating and servicing the loan. The Bank has not purchased home equity loans
from brokers or other lending institutions. Home equity loans outstanding
decreased 3.5% during the first six months of 2012.
Real Estate - Agricultural - Agricultural loans include loans to purchase
agricultural land and production lines secured by farm land. Agricultural loans
outstanding increased 5.2% during the first six months of 2012.
Real Estate - Commercial and Industrial-Owner Occupied - Commercial and
industrial-owner occupied loans include loans secured by business facilities to
finance business operations, equipment and owner-occupied facilities primarily
for small and medium-sized enterprises. These include both lines of credit for
terms of one year or less and term loans which are amortized over the useful
life of the assets financed. Personal guarantees are generally required for
these loans. Commercial and industrial-owner occupied loans remained stable
during the first six months of 2012, decreasing 1.0%.
Real Estate - Construction, Acquisition and Development - Construction,
acquisition and development loans include both loans and credit lines for the
purpose of purchasing, carrying and developing land into commercial developments
or residential subdivisions. Also included are loans and lines for construction
of residential, multi-family and commercial buildings. These loans are often
structured with interest reserves to fund interest costs during the construction
and development period. Additionally, certain loans are structured with interest
only terms. The Bank primarily engages in construction and development lending
only in local markets served by its branches. The weakened economy and housing
market has negatively impacted builders and developers in particular. Sales of
finished houses slowed during 2009 and activity has remained slow since then,
which has resulted in lower demand for residential lots and development
land. The Company curtailed the origination of new construction, acquisition and
development loans significantly during 2009 and the Company has continued to
maintain that strategy. Construction, acquisition and development loans
decreased 8.1% during the first six months of 2012.
The underwriting process for construction, acquisition and development loans
with interest reserves is essentially the same as that for a loan without
interest reserves and may include analysis of borrower and guarantor financial
strength, market demand for the proposed project, experience and success with
similar projects, property values, time horizon for project completion and the
availability of permanent financing once the project is completed. The Company's
general loan policy prohibits the use of interest reserves on loans originated
after March 2010. Construction, acquisition and development loans, with or
without interest reserves, are inspected periodically to ensure that the project
is on schedule and eligible for requested draws. Inspections may be performed by
construction inspectors hired by the Company or by appropriate loan officers and
are done periodically to monitor the progress of a particular project. These
inspections may also include discussions with project managers and
engineers. For performing construction, acquisition and development loans,
interest is generally recognized as interest income as it is
earned. Non-performing construction, acquisition and development loans are
placed on non-accrual status and interest income is not recognized, except in
those situations where principal is expected to be received in full. In such
situations, interest income is recognized as payment is received.
61
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At June 30, 2012, the Company had $23.6 million in construction, acquisition and
development loans that provided for the use of interest reserves with
approximately $163,000 and $361,000 recognized as interest income during the
second quarter and first six months of 2012, respectively. The amount of
construction, acquisition and development loans with interest reserves that were
on non-accrual status was $1.8 million at June 30, 2012. Interest income is not
recognized on construction, acquisition and development loans with interest
reserves that are in non-accrual status. Loans with interest reserves normally
have a budget that includes the various cost components involved in the project.
Interest is such a cost, along with hard and other soft costs. The Company's
policy is to allow interest reserves only during the construction phase.
So that interest capitalization is appropriate, interest reserves are not
included for any renewal period after construction is completed or otherwise
ceases, requiring borrowers to make interest payments no less than
quarterly. Loans for which construction is complete, or has ceased, and where
interest payments are not made on a timely basis are usually considered
non-performing and are placed in nonaccrual status. Procedures are in place to
restrict the structuring of a loan with terms that do not require performance
until the end of the loan term, as well as to restrict the advancement of funds
to keep a loan from becoming non-performing with any such advancement identified
as a TDR.
On a case-by-case basis, a construction, acquisition and development loan may be
extended, renewed or restructured. Loans are sometimes extended for a short
period of time (generally 90 days or less) beyond the contractual maturity to
facilitate negotiations or allow the borrower to gain other financing or acquire
more recent note-related information, such as appraisals or borrower financial
statements. These short-term extensions are not ordinarily accounted for as TDRs
if the loan and project are performing in accordance with the terms of the loan
agreement and/or promissory note. Construction, acquisition and development
loans may be renewed when the borrower has satisfied the terms and conditions of
the original loan, including payment of interest, and when management believes
that the borrower is able to continue to meet the terms of the renewed note
during the renewal period. Many loans are structured to mature at the conclusion
of the construction or development period or at least annually. If concessions
are granted to a borrower as a result of its financial difficulties, the loan is
classified as a TDR and analyzed for impairment.
The Bank's real estate risk management group is responsible for reviewing and
approving the structure and classification of all construction, acquisition and
development loan renewals and modifications above a threshold of $500,000. The
analysis performed by the real estate risk management group may include the
review of updated appraisals, borrower and guarantor financial condition,
construction status and proposed loan structure. If the new terms of the loan
meet the criteria of a TDR as set out in FASB ASC 310, the loan is identified as
such.
Each construction, acquisition and development loan is underwritten to address:
(i) the desirability of the project, its market viability and projected
absorption period; (ii) the creditworthiness of the borrower and the guarantor
as to liquidity, cash flow and assets available to ensure performance of the
loan; (iii) equity contribution to the project; (iv) the developer's experience
and success with similar projects; and (v) the value of the collateral.
The construction, acquisition and development portfolio may be further
categorized by risk characteristics into the following six categories:
commercial acquisition and development, residential acquisition and development,
multi-family construction, one-to-four family construction, commercial
construction and recreation and all other loans. Construction, acquisition and
development loans were $835.0 million at June 30, 2012 and $908.4 million at
December 31, 2011. The following table shows the Company's construction,
acquisition and development portfolio by geographical location and performing
status at June 30, 2012:
62
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Real Estate
Construction, Alabama Greater
Acquisition and and Florida Memphis Texas and
Development Panhandle Arkansas* Mississippi* Missouri Area Tennessee* Louisiana Other Total
(In thousands)
Performing:
Multi-family
construction $ - $ - $ 10 $ - $ - $ 1,710 $ 658 $ - $ 2,378
One-to-four
family
construction 20,874 10,965 41,925 3,529 7,947 33,072 34,232 13,821 166,365
Recreation and
all other loans 2,046 8,565 31,321 309 2,577 3,769 16,224 - 64,811
Commercial
construction 13,646 5,230 44,714 1,431 7,801 6,209 27,844 1,736 108,611
Commercial
acquisition and
development 12,189 16,088 51,667 12,101 24,219 11,861 31,340 1,104 160,569
Residential
acquisition and
development 28,181 18,423 74,188 14,968 22,390 18,287 39,897 5,728 222,062
Total $ 76,936 $ 59,271 $ 243,825 $ 32,338 $ 64,934 $ 74,908 $ 150,195 $ 22,389 $ 724,796
Non-performing:
Multi-family
construction $ - $ - $ - $ - $ - $ - $ - $ - $ -
One-to-four
family
construction 4,791 291 1,911 2,778 2,317 2,106 769 1,320 16,283
Recreation and
all other loans - 39 - - 823 181 179 - 1,222
Commercial
construction 42 153 - 1,088 - 2,440 595 - 4,318
Commercial
acquisition and
development 2,556 72 1,376 2,248 7,238 3,960 2,989 1,562 22,001
Residential
acquisition and
development 10,953 921 4,865 6,304 16,125 5,089 20,091 2,054 66,402
Total $ 18,342 $ 1,476 $ 8,152 $ 12,418 $ 26,503 $ 13,776 $ 24,623 $ 4,936 $ 110,226
Total:
Multi-family
construction $ - $ - $ 10 $ - $ - $ 1,710 $ 658 $ - $ 2,378
One-to-four
family
construction 25,665 11,256 43,836 6,307 10,264 35,178 35,001 15,141 182,648
Recreation and
all other loans 2,046 8,604 31,321 309 3,400 3,950 16,403 - 66,033
Commercial
construction 13,688 5,383 44,714 2,519 7,801 8,649 28,439 1,736 112,929
Commercial
acquisition and
development 14,745 16,160 53,043 14,349 31,457 15,821 34,329 2,666 182,570
Residential
acquisition and
development 39,134 19,344 79,053 21,272 38,515 23,376 59,988 7,782 288,464
Total $ 95,278 $ 60,747 $ 251,977 $ 44,756 $ 91,437 $ 88,684 $ 174,818 $ 27,325 $ 835,022
* Excludes the Greater Memphis Area.
The following table shows the maturity distribution of the Company's
construction, acquisition and development portfolio as of June 30, 2012:
Real Estate Construction, One Year One to After
Acquisition and Development Past Due or Less Five Years Five Years Total
(Inthousands)
Outstanding loan balances:
Multi-family construction $ - $ 1,498 $ 880 $ - $ 2,378
One-to-four family construction 3,163 153,533 24,348 1,604 182,648
Recreation and all other loans - 11,324 48,912 5,797 66,033
Commercial construction 878 55,771 41,178 15,102 112,929
Commercial acquisition and
development 752 80,295 98,970 2,553 182,570
Residential acquisition and
development 10,361 172,509 99,445 6,149 288,464
Total $ 15,154 $ 474,930 $ 313,733 $ 31,205 $ 835,022
Non-accrual loans:
Multi-family construction $ - $ - $ - $ - $ -
One-to-four family construction 3,068 8,938 3,264 220 15,490
Recreation and all other loans - 360 20 - 380
Commercial construction 721 2,440 1,157 - 4,318
Commercial acquisition and
development 708 15,121 5,912 - 21,741
Residential acquisition and
development 8,982 48,746 4,626 - 62,354
Total $ 13,479 $ 75,605 $ 14,979 $ 220 $ 104,283
As of June 30, 2012, approximately 56.9% of the loans included in the
construction, acquisition and development portfolio were scheduled to mature
within one year. Many of these maturities are expected to occur prior to the
completion of the related projects; and it is therefore expected that these
loans will be renewed for an additional period of time. The Company's loan
policy requires that updated appraisals from qualified third party appraisers be
obtained for any real estate loan renewed for loans over $250,000. If the
borrower is experiencing financial difficulties, and the renewal is made with
concessions, the loan is considered to be a TDR. These TDRs are tested for
impairment by assessing the estimated disposal value of the collateral from the
recent appraisal or by assessing the present value of the discounted cash flows
expected on these loans.
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The following table presents the activity in the construction, acquisition and
development nonaccrual loans for the six-months ended June 30, 2012:
(In thousands)
Balance at December 31, 2011 $ 133,110
Additions to CAD nonaccruals:
Formation of new nonaccrual loans
15,984
Reductions in CAD nonaccruals:
Charge-offs (20,832 )
Foreclosures to OREO (6,345 )
Payments (25,308 )
Transfers to accrual status (546 )
Transfer from other loan category 8,220
Balance at June 30, 2012 $ 104,283
The five largest credits that made up the construction, acquisition and
development nonaccrual loan balance at June 30, 2012 were located throughout the
Company's geographical locations and in various stages of development and
maturity. The five largest credits made up 23.9% of the total construction,
acquisition and development nonaccrual loan balance at June 30, 2012.
Real Estate - Commercial - Commercial loans include loans to finance
income-producing commercial and multi-family properties. Lending in this
category is generally limited to properties located in the Bank's trade area
with only limited exposure to properties located elsewhere but owned by
in-market borrowers. Loans in this category include loans for neighborhood
retail centers, medical and professional offices, single retail stores,
warehouses and apartments leased generally to local businesses and residents.
The underwriting of these loans takes into consideration the occupancy and
rental rates as well as the financial health of the borrower. The Bank's
exposure to national retail tenants is minimal. The Bank has not purchased
commercial real estate loans from brokers or third-party originators. Commercial
loans remained stable during the first six months of 2012, decreasing 0.3% at
June 30, 2012 compared to December 31, 2011.
Credit Cards - Credit cards include consumer and business MasterCard and Visa
accounts. The Bank offers credit cards primarily to its deposit and loan
customers. Credit card balances decreased 4.9% during the first six months of
2012.
All Other - All other loans and leases include consumer installment loans and
loans and leases to state, county and municipal governments and non-profit
agencies. Consumer installment loans and leases include term loans of up to five
years secured by automobiles, boats and recreational vehicles. The Bank offers
lease financing for vehicles and heavy equipment to state, county and municipal
governments and medical equipment to healthcare providers across the southern
states. All other loan and lease balances decreased 3.0% during the first six
months of 2012.
NPLs consist of non-accrual loans and leases, loans and leases 90 days or more
past due, still accruing, and accruing loans and leases that have been
restructured (primarily in the form of reduced interest rates and modified
payment terms) because of the borrower's or guarantor's weakened financial
condition or bankruptcy proceedings. The Bank's policy provides that loans and
leases are generally placed in non-accrual status if, in management's opinion,
payment in full of principal or interest is not expected or payment of principal
or interest is more than 90 days past due, unless the loan or lease is both
well-secured and in the process of collection. NPAs consist of NPLs and other
real estate owned, which consists of foreclosed properties. NPAs, which are
carried either in the loan account or other real estate owned on the Company's
consolidated balance sheets, depending on foreclosure status, were as follows as
of the dates presented:
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June 30, December 31,
2012 2011 2011
(Dollars in thousands)
Non-accrual loans and leases $ 240,246 $ 331,076 $ 276,798
Loans 90 days or more past due, still accruing 1,632 3,980 3,434
Restructured loans and leases, still accruing 25,071 44,786 42,018
Total NPLs 266,949 379,842 322,250
Other real estate owned 143,615 151,204 173,805
Total NPAs $ 410,564 $ 531,046 $ 496,055
NPLs to net loans and leases 3.06 % 4.12 % 3.63 %
NPAs to net loans and leases 4.70 % 5.76 % 5.59 %
NPLs decreased 17.2% to $266.9 million at June 30, 2012 compared to $322.3
million at December 31, 2011 and decreased 29.7% compared to $379.8 million at
June 30, 2011. Included in NPLs at June 30, 2012 were $200.4 million of loans
that were impaired. These impaired loans had a specific reserve of $23.9 million
included in the allowance for credit losses of $175.8 million at June 30, 2012,
and were net of $59.3 million in partial charge-downs previously taken on these
impaired loans. NPLs at December 31, 2011 included $234.9 million of loans that
were impaired. These impaired loans had a specific reserve of $39.7 million
included in the allowance for credit losses of $195.1 million at December 31,
2011. NPLs at June 30, 2011 included $303.7 million of loans that were
impaired. These impaired loans had a specific reserve of $46.8 million included
in the allowance for credit losses of $197.6 million at June 30, 2011.
65
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and the allowance for credits losses at the dates indicated:
June 30, December 31,
2012 2011 2011
(Dollars in thousands)
Unpaid principal balance of impaired loans $ 259,703 $ 374,760 $ 287,099
Cumulative charge offs on impaired loans 59,326 71,103 52,176
Outstanding balance of impaired loans 200,377 303,657 234,923
Other non-accrual loans and leases not impaired 39,869 27,419
41,875
Total non-accrual loans and leases $ 240,246 $ 331,076 $ 276,798
Allowance for impaired loans 23,939 46,810 39,708
Nonaccrual loans and leases, net of specific
reserves $ 216,307 $
284,266 $ 237,090
Loans and leases 90 days or more past due, still
accruing 1,632 3,980 3,434
Restructured loans and leases, still accruing 25,071 44,786 42,018
Total non-performing loans and leases $ 266,949 $
379,842 $ 322,250
Allowance for impaired loans $ 23,939 $ 46,810 $ 39,708
Allowance for all other loans and leases 151,908 150,817 155,410
Total allowance for credit losses $ 175,847 $
197,627 $ 195,118
Outstanding balance of impaired loans $ 200,377 $ 303,657 $ 234,923
Allowance for impaired loans 23,939 46,810 39,708
Net book value of impaired loans $ 176,438 $
256,847 $ 195,215
Net book value of impaired loans as a %
of unpaid principal balance 68 % 69 % 68 %
Coverage of other non-accrual loans and leases not
impaired
by the allowance for all other loans and leases 381 % 550 %
371 %
Coverage of non-performing loans and leases not
impaired
by the allowance for all other loans and leases 228 % 198 %
178 %
Non-accrual loans at June 30, 2012 reflected a decrease of $36.6 million, or
13.2%, compared to December 30, 2011 and a decrease of $90.8 million, or 27.4%,
compared to June 30, 2011. The Bank's NPL levels over the past several years
have been reflective of the continuing effects of the prevailing economic
environment on the Bank's loan portfolio, as a significant portion of the prior
increases in the Bank's NPLs was attributable to problems developing for
established customers with real estate related loans, particularly residential
construction and development loans, primarily in the Bank's more urban markets.
These problems resulted primarily from the decreased liquidity of certain
borrowers and third party guarantors, as well as the declines in appraised real
estate values for loans which became collateral dependent during the past two
years and certain other borrower specific factors. The decrease in non-accrual
loans was primarily recognized in the real estate construction, acquisition and
development portfolio as non-accrual loans related to this portfolio decreased
$28.8 million, or 21.7%, to $104.3
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million at June 30, 2012 compared to $133.1 million at December 31, 2011 and
decreased $96.2 million, or 48.0%, compared to $200.4 million at June 30, 2011.
Of the Bank's construction, acquisition and development loans, which totaled
$835.0 million at June 30, 2012, $450.2 million represented loans made by the
Bank's locations in Alabama, Texas, Louisiana and Tennessee, including the
greater Memphis, Tennessee area, a portion of which is in northwest Mississippi
and Arkansas. Residential acquisition and development loans were the largest
component of the Bank's construction, acquisition and development loans and
totaled $288.5 million at June 30, 2012 with 55.8% of such loans made by the
Bank's locations in Alabama, Texas, Louisiana and Tennessee. These areas have
experienced a higher incidence of NPLs, primarily as a result of a severe
downturn in the housing market in these regions. Of the Bank's total NPLs of
$266.9 million at June 30, 2012, $149.5 million, or 56.0%, were loans made
within these markets. These markets continue to be affected by high inventories
of unsold homes, unsold lots and undeveloped land intended for use as housing
developments. Unlike the Bank's NPL concentrations in Alabama, Texas, Louisiana
and Tennessee which have been affected by the severe downturn in the housing
market, the Bank's NPLs in Missouri are generally a result of borrowers
experiencing financial difficulties, or difficulties with a specific project,
rather than problems more associated with product types in specific geographic
areas. The Bank's NPLs in Missouri are represented by fewer and larger
individual credits in the construction, acquisition and development and
commercial real estate classes, some of which pre-date the Bank's acquisition of
The Signature Bank in 2007. The following table presents the NPLs by
geographical location at June 30, 2012:
90+ Days Restructured NPLs as a
Past Due still Non-accruing Loans, still % of
Outstanding Accruing Loans accruing NPLs Outstanding
(Dollars in thousands)
Alabama and Florida Panhandle $ 662,248 $ - $ 41,017 $ 1,533 $ 42,550 6.4 %
Arkansas* 1,231,148 12 19,293 2,628 21,933 1.8
Mississippi* 2,584,340 - 35,888 4,059 39,947 1.5
Missouri 466,001 - 32,687 7,075 39,762 8.5
Greater Memphis Area 529,580 - 33,066 4,781 37,847 7.1
Tennessee* 662,914 - 25,682 1,909 27,591 4.2
Texas and Louisiana 1,719,534 - 40,843 670 41,513 2.4
Other 876,630 1,620 11,770 2,416 15,806 1.8
Total $ 8,732,395 $ 1,632 $ 240,246 $ 25,071 $ 266,949 3.1 %
* Excludes the Greater Memphis Area.
Other real estate owned decreased by $7.6 million to $143.6 million at June 30,
2012 compared to $151.2 million at June 30, 2011 and decreased by $30.2 million
compared to $173.8 million at December 31, 2011. Other real estate owned
decreased as a result of sales of foreclosed properties exceeding new
foreclosures. Writedowns were the result of continuing processes to value these
properties at fair value. The Bank recorded losses from the loans that were
secured by these foreclosed properties in the allowance for credit losses at the
time of foreclosure.
The ultimate impact of the economic downturn on the Company's financial
condition and results of operations will depend on its severity and
duration. Continued weakness in the economy could adversely affect the Bank's
volume of NPLs. The Bank will continue to focus on improving and enhancing
existing processes related to the early identification and resolution of
potential credit problems. Loans identified as meeting the criteria set out in
FASB ASC 310 are identified as TDRs. The concessions granted most frequently for
TDRs involve reductions or delays in required payments of principal and/or
interest for a specified time, the rescheduling of payments in accordance with a
bankruptcy plan or the charge-off of a portion of the loan. In most cases, the
conditions of the credit also warrant non-accrual status, even after the
restructure occurs. TDR loans may be returned to accrual status in years after
the restructure if there has been at least a six-month sustained period of
repayment performance under the restructured loan terms by the borrower and the
interest rate at the time of restructure was at or above market for a comparable
loan. For reporting purposes, if a restructured loan is 90 days or more past due
or has been placed in non-accrual status, the restructured loan is included in
the loans 90 days or more past due category or the non-accrual loan category of
NPAs. Total restructured loans were $91.7 million and $104.7 million at June 30,
2012 and December 31, 2011, respectively. Restructured loans of $66.6 million
and $62.7 million were included in the non-accrual loan category at June 30,
2012 and December 31, 2011, respectively.
At June 30, 2012, the Company did not have any concentration of loans or leases
in excess of 10% of total loans and leases outstanding which were not otherwise
disclosed as a category of loans or leases. Loan concentrations are considered
to exist when there are amounts loaned to multiple borrowers engaged in similar
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activities which would cause them to be similarly impacted by economic or other
conditions. The Bank conducts business in a geographically concentrated area and
has a significant amount of loans secured by real estate to borrowers in varying
activities and businesses, but does not consider these factors alone in
identifying loan concentrations. The ability of the Bank's borrowers to repay
loans is somewhat dependent upon the economic conditions prevailing in the
Bank's market areas.
The Company utilizes an internal loan classification system to grade loans
according to certain credit quality indicators. These credit quality indicators
include, but are not limited to, recent credit performance, delinquency,
liquidity, cash flows, debt coverage ratios, collateral type and loan-to-value
ratio. The following table provides details of the Company's loan and lease
portfolio, net of unearned income, by segment, class and internally assigned
grade at June 30, 2012:
Special
Pass Mention Substandard Doubtful Loss Impaired Total
(In thousands)
Commercial and
industrial $ 1,426,787 $ 12,480 $ 46,512 $ 959 $ 34 $ 10,906 $ 1,497,678
Real estate
Consumer
mortgage 1,720,260 29,254 132,775 4,748 302 17,081 1,904,420
Home equity 472,291 3,476 17,759 908 243 1,568 496,245
Agricultural 225,886 2,989 15,687 20 - 7,393 251,975
Commercial and
industrial-owner
occupied 1,158,082 25,740 83,048 276 28 21,713 1,288,887
Construction,
acquisition and
development 607,942 26,947 99,471 589 20 100,053 835,022
Commercial real
estate 1,515,262 48,217 144,301 71 199 40,698 1,748,748
Credit Cards 101,085 - - - - - 101,085
All other 572,073 18,060 16,425 803 9 965 608,335
Total $ 7,799,668 $ 167,163 $ 555,978 $ 8,374 $ 835 $ 200,377 $ 8,732,395
In the normal course of business, management becomes aware of possible credit
problems in which borrowers exhibit potential for the inability to comply with
the contractual terms of their loans and leases, but which currently do not yet
meet the criteria for disclosure as NPLs. However, based upon past experiences,
some of these loans and leases with potential weaknesses will ultimately be
restructured or placed in non-accrual status. At June 30, 2012, the Bank had
$7.1 million of potential problem loans or leases or loans and leases with
potential weaknesses that were not included in the non-accrual loans and leases
or in the loans 90 days or more past due categories. These loans or leases are
included in the above rated categories. Loans with identified weaknesses based
upon analysis of the credit quality indicators are included in the loans 90 days
or more past due category or in the non-accrual loan and lease category which
would include impaired loans.
The following table provides details regarding the aging of the Company's loan
and lease portfolio, net of unearned income, by internally assigned grade at
June 30, 2012:
30-59 Days 60-89 Days 90+ Days
Current Past Due Past Due Past Due Total
(In thousands)
Pass $ 7,789,340 $ 10,297 $ 31 $ - $ 7,799,668
Special Mention 160,526 2,555 2,506 1,576 167,163
Substandard 528,022 11,337 4,014 12,605 555,978
Doubtful 6,187 697 482 1,008 8,374
Loss 614 - 19 202 835
Impaired 140,146 10,435 5,579 44,217 200,377
Total $ 8,624,835 $ 35,321 $ 12,631 $ 59,608 $ 8,732,395
While increases of 34.1% were realized in the Special Mention category, the
Substandard and Impaired categories decreased 15.1% and 14.7% at June 30, 2012.
Respectively, compared to December 31, 2011. Of the $167.2 million of Special
Mention loans and leases, 96.0% remained current as to scheduled repayment of
principal and interest, with 0.9% of such loans or leases having outstanding
balances that were 90 days or more past due at June 30, 2012. Of the $556.0
million of Substandard loans and leases, 95.0% remained current as to scheduled
repayment of principal and interest, with only 2.3% having outstanding balances
that were 90 days or more past due at June 30, 2012. Of the $200.4 million of
impaired loans and leases, 70.0% remained current as to scheduled repayment of
principal and/or interest, with 22.1% having outstanding balances that were 90
days or more past due at June 30, 2012.
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Collateral for some of the Bank's loans and leases is subject to fair value
evaluations that fluctuate with market conditions and other external factors. In
addition, while the Bank has certain underwriting obligations related to such
evaluations, the evaluations of some real property and other collateral are
dependent upon third-party independent appraisers employed either by the Bank's
customers or as independent contractors of the Bank. During the current economic
cycle, some subsequent fair value appraisals have reported lower values than
were originally reported. These declining collateral values could impact future
losses and recoveries.
The following table provides additional details related to the make-up of the
Company's loan and lease portfolio, net of unearned income, and the distribution
of NPLs at June 30, 2012:
90+ Days Restructured NPLs as a
Loans and leases, net of Past Due still Non-accruing Loans, still % of
unearned income Outstanding Accruing Loans accruing NPLs Outstanding
(Dollars in thousands)
Commercial and industrial $ 1,497,678 $ - $ 13,156 $ 443 $ 13,599 0.9 %
Real estate
Consumer mortgages 1,904,420 1,141 35,660 2,591 39,392 2.1
Home equity 496,245 - 2,995 - 2,995 0.6
Agricultural 251,975 - 8,390 456 8,846 3.5
Commercial and
industrial-owner occupied 1,288,887 - 26,957 4,999 31,956 2.5
Construction,
acquisition and
development 835,022 - 104,283 5,943 110,226 13.2
Commercial real estate 1,748,748 - 44,359 7,636 51,995 3.0
Credit cards 101,085 324 364 2,173 2,861 2.8
All other 608,335 167 4,082 830 5,079 0.8
Total $ 8,732,395 $ 1,632 $ 240,246 $ 25,071 $ 266,949 3.1 %
The following table provides additional details related to the make-up of the
Company's real estate construction, acquisition and development loan class and
the distribution of NPLs at June 30, 2012:
Real Estate
Construction, 90+ Days Restructured NPLs as a
Acquisition and Past Due still Non-accruing Loans, still % of
Development Outstanding Accruing Loans accruing NPLs Outstanding
(Dollars in thousands)
Multi-family
construction $ 2,378 $ - $ - $ - $ - - %
One-to-four family
construction 182,648 - 15,490 793 16,283 8.9
Recreation and all other
loans 66,033 - 380 842 1,222 1.9
Commercial construction 112,929 - 4,318 - 4,318 3.8
Commercial acquisition
and development 182,570 - 21,741 260 22,001 12.1
Residential acquisition
and development 288,464 - 62,354 4,048 66,402 23.0
Total $ 835,022 $ - $ 104,283 $ 5,943 $ 110,226 13.2 %
Securities
The Company uses the Bank's securities portfolios to make various term
investments, to provide a source of liquidity and to serve as collateral to
secure certain types of deposits. Available-for-sale securities were $2.5
billion at both June 30, 2012 and December 31, 2011. Available-for-sale
securities, which are subject to possible sale, are recorded at fair value. At
June 30, 2012, the Company held no securities whose decline in fair value was
considered other than temporary.
The following table shows the available-for-sale securities portfolio by credit
rating as obtained from Moody's rating service as of June 30, 2012:
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Amortized Cost Estimated Fair Value
Amount % Amount %
(Dollars in thousands)
Available-for-sale Securities:
Aaa $ 1,879,680 78.5 % $ 1,918,587 77.9 %
Aa1 to Aa3 216,240 9.0 % 230,440 9.4 %
A1 to A3 26,600 1.1 % 27,573 1.1 %
Baa1 to Baa2 6,017 0.3 % 6,342 0.3 %
Ba1 to Ba3 - - - -
Caa1 66 - 131 -
Not rated (1) 265,313 11.1 % 279,758 11.3 %
Total $ 2,393,916 100.0 % $ 2,462,831 100.0 %
(1) Not rated securities primarily consist of Mississippi and Arkansas municipal bonds.
Of the securities not rated by Moody's, bonds with a book value of $91.0 million
and a market value of $97.3 million were rated A- or better by Standard and
Poor's.
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 unit 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. No events occurred during the second quarter or first
six months of 2012 that indicated the necessity of an earlier goodwill
impairment assessment.
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. As 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 $271.3 million at both June 30, 2012
and December 31, 2011.
Other Real Estate Owned
Other real estate owned totaled $143.6 million and $173.8 million at June 30,
2012 and December 31, 2011, respectively. Other real estate owned at June 30,
2012 had aggregate loan balances at the time of foreclosure of $281.7
million. Other real estate owned at December 31, 2011 had aggregate loan
balances at time of foreclosure of $319.1 million. The following table presents
the other real estate owned by segment, class and geographical location at June
30, 2012:
Alabama Greater
and Florida Memphis Texas and
Panhandle Arkansas* Mississippi* Missouri Area Tennessee* Louisiana Other Total
(In thousands)
Commercial and
industrial $ 564 $ 212 $ - $ - $ 814 $ - $ - $ - $ 1,590
Real estate
Consumer
mortgages 2,457 469 2,612 - 2,334 1,402 188 2,470 11,932
Home equity - - 220 - - - - - 220
Agricultural 894 - - - 1,154 2,352 - - 4,400
Commercial and
industrial-owner
occupied 554 448 2,337 76 1,814 163 149 246 5,787
Construction,
acquisition and
development 18,459 2,042 19,152 1,395 45,532 15,775 2,215 737 105,307
Commercial
real estate 784 1,677 2,281 304 7,425 - 231 - 12,702
All other 47 60 243 116 1,177 - 2 32 1,677
Total $ 23,759 $ 4,908 $ 26,845 $ 1,891 $ 60,250 $ 19,692 $ 2,785 $ 3,485 $ 143,615
* Excludes the Greater Memphis Area.
Because of the relatively high number of the Bank's NPLs that have been
determined to be collaterally dependent, management expects the resolution of a
significant number of these loans to necessitate foreclosure proceedings
resulting in a further additions to in other real estate owned. While management
expects future foreclosure activity in virtually all loan categories, the
magnitude of nonperforming loans in the construction,
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acquisition and development portfolio indicated that a majority of additions to
OREO in the near-term will be from that category.
At the time of foreclosure, the fair value of construction, acquisition and
development properties is typically determined by an appraisal performed by a
third party appraiser holding professional certifications. Such appraisals are
then reviewed and evaluated by the Company's internal appraisal group. A
disposition value appraisal using a 180-360 day marketing period is typically
ordered and the OREO is recorded at the time of foreclosure at its disposition
value less estimated selling costs. For residential subdivisions that are not
completed, the appraisals reflect the uncompleted status of the subdivision.
To ensure that OREO is carried at the lower of cost or fair value less estimated
selling costs on an ongoing basis, new appraisals are obtained on at least an
annual basis and the OREO carrying values are adjusted accordingly. The type of
appraisals typically used for these periodic reappraisals are Restricted Use
Appraisals, meaning the appraisal is for client use only. Other indications of
fair value are also used to ensure that OREO is carried at the lower of cost or
fair value. These include listing the property with a broker and acceptance of
an offer to purchase from a third party. If a parcel of OREO is listed with a
broker at an amount less than the current carrying value, the carrying value is
immediately adjusted to reflect the list price less estimated selling costs and
if an offer to purchase is accepted at a price less that the current carrying
value, the carrying value is immediately adjusted to reflect that sales price,
less estimated selling costs. The majority of the properties in OREO are
actively marketed using a combination of real estate brokers, bank staff who are
familiar with the particular properties and/or third parties.
Deposits and Other Interest-Bearing Liabilities
Deposits originating within the communities served by the Bank continue to be
the Bank's primary source of funding its earning assets. The Company has been
able to compete effectively for deposits in its primary market areas, while
continuing to manage the exposure to rising interest rates. The distribution
and market share of deposits by type of deposit and by type of depositor are
important considerations in the Company's assessment of the stability of its
fund sources and its access to additional funds. Furthermore, management shifts
the mix and maturity of the deposits depending on economic conditions and loan
and investment policies in an attempt, within set policies, to minimize cost and
maximize net interest margin.
The following table presents the Company's noninterest bearing, interest
bearing, savings and other time deposits as of the dates indicated and the
percentage change between dates:
June 30, December 31,
2012 2011 % Change
(Dollars in millions)
Noninterest bearing demand $ 2,312 $ 2,270 1.9 %
Interest bearing demand 4,782 4,707 1.6
Savings 1,083 991 9.3
Other time 2,779 2,987 (7.0 )
Total deposits $ 10,956 $ 10,955 0.0 %
Total deposits remained relatively stable at June 30, 2012 compared to December
31, 2011, increasing by $1.1 million. The average maturity of time deposits at
June 30, 2012 was approximately 15 months, compared to 14 months at December 31,
2011.
Liquidity and Capital Resources
One of the Company's goals is to provide adequate funds to meet increases in
loan demand or any potential increase in the normal level of deposit
withdrawals. This goal is accomplished primarily by generating cash from the
Bank's operating activities and maintaining sufficient short-term liquid
assets. These sources, coupled with a stable deposit base and a historically
strong reputation in the capital markets, allow the Company to fund earning
assets and maintain the availability of funds. Management believes that the
Bank's traditional sources of maturing loans and investment securities, sales of
loans held for sale, cash from operating activities and a strong base of core
deposits are adequate to meet the Company's liquidity needs for normal
operations over both the short-term and the long-term.
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To provide additional liquidity, the Company utilizes short-term financing
through the purchase of federal funds and securities sold under agreement to
repurchase. All securities sold under agreements to repurchase are accounted for
as collateralized financing transactions and are recorded at the amounts at
which the securities were acquired or sold plus accrued interest. Further, the
Company maintains a borrowing relationship with the FHLB which provides access
to short-term and long-term borrowings. The Company also has access to the
Federal Reserve discount window and other bank lines. The Company had short-term
borrowings from the FHLB totaling $1.5 million at both June 30, 2012 and
December 31, 2011. The Company had federal funds purchased and securities sold
under agreement to repurchase of $362.0 million and $373.9 million at June 30,
2012 and December 31, 2011, respectively. The Company had long-term borrowings
from the FHLB totaling $33.5 million at both June 30, 2012 and December 31,
2011. The Company has pledged eligible mortgage loans to secure the FHLB
borrowings and had $3.0 billion in additional borrowing capacity under the
existing FHLB borrowing agreement at June 30, 2012.
The Company had non-binding federal funds borrowing arrangements with other
banks aggregating $556.0 million at June 30, 2012. Secured borrowing
arrangements utilizing the Company's securities portfolio provide substantial
additional liquidity to the Company. Such arrangements typically provide for
borrowings of 95% to 98% of the unencumbered fair value of the Company's federal
government and government agencies securities portfolio. The ability of the
Company to obtain funding from these or other sources could be negatively
affected should the Company experience a substantial deterioration in its
financial condition or its debt rating, or should the availability of short-term
funding become restricted as a result of the disruption in the financial
markets. Management does not anticipate any short- or long-term changes to its
liquidity strategies and believes that the Company has ample sources to meet the
liquidity challenges caused by current economic conditions. The Company
utilizes, among other tools, maturity gap tables, interest rate shock scenarios
and an active asset and liability management committee to analyze, manage and
plan asset growth and to assist in managing the Company's net interest margin
and overall level of liquidity.
Off-Balance Sheet Arrangements
In the ordinary course of business, the Company enters into various off-balance
sheet commitments and other arrangements to extend credit that are not reflected
in the consolidated balance sheets of the Company. The business purpose of these
off-balance sheet commitments is the routine extension of credit. While most of
the commitments to extend credit are made at variable rates, included in these
commitments are forward commitments to fund individual fixed-rate mortgage
loans. Fixed-rate lending commitments expose the Company to risks associated
with increases in interest rates. As a method to manage these risks, the Company
enters into forward commitments to sell individual fixed-rate mortgage
loans. The Company also faces the risk of deteriorating credit quality of
borrowers to whom a commitment to extend credit has been made; however, no
significant credit losses are expected from these commitments and arrangements.
Regulatory Requirements for Capital
The Company is required to comply with the risk-based capital guidelines
established by the Board of Governors of the Federal Reserve System. These
guidelines apply a variety of weighting factors that vary according to the level
of risk associated with the assets. Capital is measured in two "Tiers": Tier I
consists of common shareholders' equity, qualifying non-cumulative perpetual
preferred stock and minority interest in consolidated subsidiaries, less
goodwill and certain other intangible assets; and Tier II consists of general
allowance for losses on loans and leases, "hybrid" debt capital instruments and
all or a portion of other subordinated capital debt, depending upon remaining
term to maturity. Total capital is the sum of Tier I and Tier II capital. The
required minimum ratio levels to be considered adequately capitalized for the
Company's Tier I capital, total capital, as a percentage of total risk-adjusted
assets, and Tier I leverage capital (Tier I capital divided by total assets,
less goodwill) are 4%, 8% and 4%, respectively. The Company exceeded the
required minimum levels for these ratios at June 30, 2012 and December 31, 2011
as follows:
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June 30, 2012 December 31, 2011
Amount Ratio Amount Ratio
(Dollars in thousands)
BancorpSouth, Inc. Tier I capital (to risk-weighted assets) $ 1,282,653 13.40 % $ 1,129,746 11.77 %
Total capital (to risk-weighted assets) 1,402,573 14.66
1,250,801 13.03
Tier I leverage capital (to average assets) 1,282,653 10.07
1,129,746 8.85
The FDIC's capital-based supervisory system for insured financial institutions
categorizes the capital position for banks into five categories, ranging from
"well capitalized" to "critically undercapitalized." For a bank to be classified
as "well capitalized," the Tier I capital, total capital and leverage capital
ratios must be at least 6%, 10% and 5%, respectively. The Bank met the criteria
for the "well capitalized" category at June 30, 2012 and December 31, 2011 as
follows:
June 30, 2012 December 31, 2011
Amount Ratio Amount Ratio
(Dollars in thousands)
BancorpSouth Bank
Tier I capital (to risk-weighted assets) $ 1,150,487 12.04 % $ 1,099,369 11.46 %
Total capital (to risk-weighted assets) 1,270,971 13.30
1,220,424 12.73
Tier I leverage capital (to average assets) 1,150,487 9.09
1,099,369 8.67
Federal and state banking laws and regulations and state corporate laws restrict
the amount of dividends that the Company may declare and pay. For example, under
guidance issued by the Federal Reserve, as a bank holding company, the Company
is required to consult with the Federal Reserve before declaring dividends and
is to consider eliminating, deferring or reducing dividends if (i) the Company's
net income available to shareholders for the past four quarters, net of
dividends previously paid during that period, is not sufficient to fully fund
the dividends, (ii) the Company's prospective rate of earnings retention is not
consistent with its capital needs and overall current and prospective financial
condition, or (iii) the Company will not meet, or is in danger of not meeting,
its minimum regulatory capital adequacy ratios.
In addition, the Company needs the approval of the Federal Reserve and the Bank
needs the approval of the FDIC before paying cash dividends. Further, the Bank's
board of directors has approved a resolution requested by the FDIC and the
Mississippi Department of Banking and Consumer Finance such that the declaration
and payment of dividends will be limited to the Bank's current net operating
income and conditioned upon the prior written consent of the regulators and
maintenance of minimum capital ratios. Finally, the Company's board of directors
has approved a resolution requested by the Federal Reserve such that the Company
needs the prior approval of the Federal Reserve before making any declaration or
payment of dividends on any of its capital stock.
Uses of Capital
Subject to pre-approval of the Federal Reserve and other banking regulators, the
Company may pursue acquisitions of depository institutions and businesses
closely related to banking that further the Company's business strategies,
including FDIC-assisted transactions. Management anticipates that consideration
for any transactions other than FDIC-assisted transactions would include shares
of the Company's common stock, cash or a combination thereof.
On January 24, 2012, the Company completed an underwritten public offering of
10,952,381 shares of Company common stock at a public offering price of $10.50
per share. The gross proceeds from the offering, before expenses, were $109.3
million. Offering expenses were approximately $575,000. The proceeds from the
offering have been and will be used by the Company for general corporate
purposes, including to maintain certain capital levels and liquidity at the
Company, potentially provide equity capital to the Bank, fund growth either
organically or through the acquisition of other financial institutions,
insurance agencies, or other businesses that are closely aligned to the
operations of the Company, and fund investments in its subsidiaries.
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Certain Litigation Contingencies
The nature of the Company's business ordinarily results in a certain amount of
claims, litigation, investigations and legal and administrative investigations
and proceedings. Although the Company and its subsidiaries have developed
policies and procedures to minimize the impact of legal noncompliance and other
disputes, and endeavored to provide reasonable insurance coverage, litigation
and regulatory actions present an ongoing risk.
The Company and its subsidiaries are engaged in lines of business that are
heavily regulated and involve a large volume of financial transactions and
potential transactions with numerous customers or applicants. From time to time,
borrowers, customers, former employees and other third parties have brought
actions against the Company or its subsidiaries, in some cases claiming
substantial damages. Financial services companies are subject to the risk of
class action litigation and, from time to time, the Company and its subsidiaries
are subject to such actions brought against it. Additionally, the Bank is, and
management expects it to be, engaged in a number of foreclosure proceedings and
other collection actions as part of its lending and leasing collections
activities, which, from time to time, have resulted in counterclaims against the
Bank. Various legal proceedings have arisen and may arise in the future out of
claims against entities to which the Company is a successor as a result of
business combinations. The Company's insurance has deductibles, and will likely
not cover all such litigation or other proceedings or the costs of defense. The
Company and its subsidiaries may also be subject to enforcement actions by
federal or state regulators, including the Securities and Exchange Commission,
the Federal Reserve, the FDIC, the Consumer Financial Protection Bureau, the
Department of Justice, state attorneys general and the Mississippi Department of
Banking and Consumer Finance.
When and as the Company determines it has meritorious defenses to the claims
asserted, it vigorously defends against such claims. The Company will consider
settlement of claims when, in management's judgment and in consultation with
counsel, it is in the best interests of the Company to do so.
The Company cannot predict with certainty the cost of defense, the cost of
prosecution or the ultimate outcome of litigation and other proceedings filed by
or against it, its directors, management or employees, including remedies or
damage awards. On at least a quarterly basis, the Company assesses its
liabilities and contingencies in connection with outstanding legal proceedings
as well as certain threatened claims (which are not considered incidental to the
ordinary conduct of the Company's business) utilizing the latest and most
reliable information available. For matters where a loss is not probable or the
amount of the loss cannot be estimated, no accrual is established. For matters
where it is probable the Company will incur a loss and the amount can be
reasonably estimated, the Company establishes an accrual for the loss. Once
established, the accrual is adjusted periodically to reflect any relevant
developments. The actual cost of any outstanding legal proceedings or threatened
claims, however, may turn out to be substantially higher than the amount
accrued. Further, the Company's insurance will not cover all such litigation,
other proceedings or claims, or the costs of defense.
While the final outcome of any legal proceedings is inherently uncertain, based
on the information available, advice of counsel and available insurance
coverage, management believes that the litigation-related expense accrued as of
June 30, 2012 is adequate and that any incremental liability arising from the
Company's legal proceedings and threatened claims, including the matters
described herein and those otherwise arising in the ordinary course of business,
will not have a material adverse effect on the Company's business or
consolidated financial condition. It is possible, however, that future
developments could result in an unfavorable outcome for or resolution of any one
or more of the lawsuits in which the Company or its subsidiaries are defendants,
which may be material to the Company's results of operations for a given fiscal
period.
On May 12, 2010, the Company and its Chief Executive Officer, President and
Chief Financial Officer were named in a class action lawsuit filed in the U.S.
District Court for the Middle District of Tennessee on behalf of certain
purchasers of the Company's common stock. On September 17, 2010, an Executive
Vice President of the Company was added as a party to the lawsuit. The amended
complaint alleges that the defendants issued materially false and misleading
statements regarding the Company's business and financial results. In
particular, the allegations relate to the Company's recording and reporting of
its unaudited financial statements, including the allowance and provision for
credit losses, and its internal control over financial reporting leading up to
the filing of the Company's Annual Report on Form 10-K for the year ended
December 31, 2009. The plaintiff sought class certification, an unspecified
amount of damages and awards of costs and attorneys' fees and other equitable
relief. On May 24, 2012, the Company reached a settlement with the
plaintiff. Pursuant to the terms of the settlement, subject to final court
approval, the Company's insurance carriers have funded the settlement payment,
other than an immaterial amount of incidental expenses that the Company has
covered. On July 11, 2012, the court preliminarily
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approved the settlement on the terms submitted by the parties and set a final
settlement hearing for October 31, 2012. If settled on the terms preliminarily
approved by the court, the settlement will not have a material adverse effect on
the Company's business, consolidated financial position or results of
operations.
On August 16, 2011, a shareholder filed a putative derivative action purportedly
on behalf of the Company in the Circuit Court of Lee County, Mississippi,
against certain current and past executive officers and the members of the Board
of Directors of the Company. The plaintiff in this shareholder derivative
lawsuit asserts that the individual defendants violated their fiduciary duties
based upon substantially the same facts as alleged in the purported class action
lawsuit described above. The plaintiff is seeking to recover damages in an
unspecified amount and equitable and/or injunctive relief. Although it is not
possible to predict the ultimate resolution or financial liability with respect
to this litigation, management is currently of the opinion that the outcome of
this lawsuit will not have a material adverse effect on the Company's business,
consolidated financial position or results of operations.
In November 2010, the Company was informed that the Atlanta Regional Office of
the SEC had issued an Order of Investigation concerning the Company. This
investigation is ongoing and is primarily focused on the Company's recording and
reporting of its unaudited financial statements, including the allowance and
provision for credit losses, its internal control over financial reporting and
its communications with the independent auditors prior to the filing of the
Company's Annual Report on Form 10-K for the year ended December 31, 2009. In
connection with its investigation, the SEC issued subpoenas for documents and
testimony, with which the Company has fully complied. The Company is cooperating
fully with the SEC. No claims have been made by the SEC against the Company or
against any individuals affiliated with the Company. At this time, it is not
possible to predict when or how the investigation will be resolved or the cost
or potential liabilities associated with this matter.
On May 18, 2010, the Bank was named as a defendant in a purported class action
lawsuit filed by an Arkansas customer of the Bank in the U.S. District Court for
the Northern District of Florida. The suit challenges the manner in which
overdraft fees were charged and the policies related to posting order of debit
card and ATM transactions. The suit also makes a claim under Arkansas' consumer
protection statute. The plaintiff is seeking to recover damages in an
unspecified amount and equitable relief. The case was transferred to pending
multi-district litigation in the U.S. District Court for the Southern District
of Florida. On May 4, 2012, the judge presiding over the multi-district
litigation entered an order certifying a class in this case. The Company has
filed a petition for leave to appeal the class certification order, which, if
granted, would provide the Company with an immediate right to appeal the class
certification order. At this stage of the lawsuit, management of the Company
cannot determine the probability of an unfavorable outcome to the Company. There
are significant uncertainties involved in any purported class action
litigation. Although it is not possible to predict the ultimate resolution or
financial liability with respect to this litigation, management is currently of
the opinion that the outcome of this lawsuit will not have a material adverse
effect on the Company's business, consolidated financial position or results of
operations. However, there can be no assurance that an adverse outcome or
settlement would not have a material adverse effect on the Company's
consolidated results of operations for a given fiscal period.
CRITICAL ACCOUNTING POLICIES
During the three months ended June 30, 2012, there was no significant change in
the Company's critical accounting policies and no significant change in the
application of critical accounting policies as presented in the Company's Annual
Report on Form 10-K for the year ended December 31, 2011.
