UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___to ___

BANCORPSOUTH, INC.

(Exact name of registrant as specified in its charter)

Mississippi		64-0659571
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
One Mississippi Plaza, 201 South Spring Street, Tupelo, Mississippi		38804 (Zip Code)
(Address of principal executive offices)

(662) 680-2000
(Registrant’s telephone number, including area code)

NOT APPLICABLE
(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Exchange Act). Yes o No þ

As of November 4, 2005, the Registrant had outstanding 78,275,899 shares of common stock, par value $2.50 per share.

 

 

BANCORPSOUTH, INC.
CONTENTS

				Page
PART I. Financial Information
ITEM 1.		Financial Statements
		Consolidated Condensed Balance Sheets (Unaudited) September 30, 2005 and December 31, 2004			3
		Consolidated Condensed Statements of Income (Unaudited) Three Months and Nine Months Ended September 30, 2005 and 2004			4
		Consolidated Condensed Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2005 and 2004			5
		Notes to Consolidated Condensed Financial Statements (Unaudited)			6
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
ITEM 3.		Quantitative and Qualitative Disclosures About Market Risk			28
ITEM 4.		Controls and Procedures			28
PART II. Other Information
ITEM 2.		Unregistered Sales of Equity Securities and Use of Proceeds			28
ITEM 6.		Exhibits			29
EX-31.1 SECTION 302 CEO CERTIFICATION
EX-31.2 SECTION 302 CFO CERTIFICATION
EX-32.1 SECTION 906 CEO CERTIFICATION
EX-32.2 SECTION 906 CFO CERTIFICATION

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,” “believe,” “estimate,” “expect,” “foresee,” “may,” “might,” “will,” “intend,” “could,” “would” or “plan,” or future or conditional verb tenses, and variations or negatives of such terms. These forward-looking statements include, without limitation, those relating to BancorpSouth’s contributions to the Basic Plan, settlement of insurance claims related to damage caused by Hurricane Katrina, adjustments to the value of buildings, furnishings and equipment as a result of damage caused by Hurricane Katrina, the aggregate impact of Hurricane Katrina on BancorpSouth’s financial condition and results of operations, key indicators of BancorpSouth’s financial performance (such as return on average assets and return on average shareholders’ equity), insurance commission revenue, capital resources, BancorpSouth’s financial products and services, liquidity and liquidity strategies, provision for credit losses, allowance for credit losses, future acquisitions, the effect of certain legal claims, the impact of federal and state regulatory requirements for capital, the impact and applicability of certain tax assessments and administrative appeals, additional share repurchases under BancorpSouth’s stock repurchase program and BancorpSouth’s future growth and profitability. 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 include, but are not limited to, the rate of economic recovery in the areas affected by Hurricane Katrina, the ability of BancorpSouth to obtain additional reliable information in areas affected by Hurricane Katrina, the ability of BancorpSouth to increase noninterest revenue and expand noninterest revenue business, the ability of BancorpSouth to fund growth with lower cost liabilities, the ability of BancorpSouth to maintain credit quality, the ability of BancorpSouth to provide and market competitive services and products, the ability of BancorpSouth to diversify revenue, the ability of BancorpSouth to attract, train and retain qualified personnel, the ability of BancorpSouth to expand geographically and enter fast-growing markets, changes in consumer preferences, changes in BancorpSouth’s operating or expansion strategy, changes in economic conditions and government fiscal and monetary policies, the ability of BancorpSouth to maintain sufficient asset quality and cost controls, fluctuations in prevailing interest rates and the ability of BancorpSouth to manage its assets and liabilities to limit exposure to changing interest rates, the ability of BancorpSouth to balance interest rate, credit, liquidity and capital risks, the ability of BancorpSouth’s borrowers to repay loans, changes in laws and regulations affecting financial institutions, the ability of BancorpSouth to identify and effectively integrate potential acquisitions, the ability of BancorpSouth to manage its growth and effectively serve an expanding customer and market base, geographic concentrations of BancorpSouth’s assets, availability of and costs associated with obtaining adequate and timely sources of liquidity, the ability of BancorpSouth to compete with other financial services companies, the ability of BancorpSouth to repurchase its common stock on favorable terms, possible adverse rulings, judgments, settlements and other outcomes of pending or threatened litigation or tax assessments, other factors generally understood to affect the financial condition or results of financial services companies and other factors detailed from time to time in BancorpSouth’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.

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

BANCORPSOUTH, INC.

Consolidated Condensed Balance Sheets

		September 30,				December 31,
		2005				2004
		(Unaudited)				(1)
		(In thousands)
ASSETS
Cash and due from banks		$	370,403			$	315,849
Interest bearing deposits with other banks			15,431				6,687
Held-to-maturity securities, at amortized cost			1,255,874				1,274,920
Available-for-sale securities, at fair value			1,455,856				1,681,729
Trading securities, at fair value			1,983				31,758
Federal funds sold and securities purchased under agreement to resell			194,186				27,414
Loans and leases			7,122,212				6,865,044
Less: Unearned interest			31,149				28,346
Allowance for credit losses			101,067				91,673
Net loans			6,989,996				6,745,025
Loans held for sale			78,970				85,225
Premises and equipment, net			240,141				228,524
Accrued interest receivable			71,046				66,471
Goodwill			109,239				109,719
Other assets			282,133				274,872
TOTAL ASSETS		$	11,065,258			$	10,848,193
LIABILITIES
Deposits:
Demand: Noninterest bearing		$	1,643,309			$	1,442,067
Interest bearing			2,902,527				2,754,535
Savings			711,909				762,989
Other time			3,963,522				4,099,500
Total deposits			9,221,267				9,059,091
Federal funds purchased and securities sold under agreement to repurchase			499,552				455,908
Other short-term borrowings			—				12,500
Accrued interest payable			25,821				17,939
Junior subordinated debt securities			138,145				138,145
Long-term debt			137,594				141,094
Other liabilities			102,001				107,088
TOTAL LIABILITIES			10,124,380				9,931,765
SHAREHOLDERS’ EQUITY
Common stock, $2.50 par value Authorized - 500,000,000 shares, Issued - 78,273,899 and 78,037,878 shares, respectively			195,685				195,095
Capital surplus			84,456				81,122
Accumulated other comprehensive loss			(10,313	)			(802	)
Retained earnings			671,050				641,013
TOTAL SHAREHOLDERS’ EQUITY			940,878				916,428
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	11,065,258			$	10,848,193

See accompanying notes to consolidated condensed financial statements.

BANCORPSOUTH, INC.

Consolidated Condensed Statements of Income

(Unaudited)

		Three months ended								Nine months ended
		September 30,								September 30,
		2005				2004				2005				2004
		(In thousands, except for per share amounts)
INTEREST REVENUE:
Loans and leases		$	115,800			$	93,759			$	329,479			$	277,367
Deposits with other banks			166				102				417				518
Federal funds sold and securities purchased under agreement to resell			1,061				111				1,649				922
Held-to-maturity securities:
Taxable			9,160				12,020				28,377				34,922
Tax-exempt			1,667				1,693				4,822				5,183
Available-for-sale securities:
Taxable			11,761				14,691				38,271				45,688
Tax-exempt			1,481				1,613				4,649				5,022
Loans held for sale			686				517				2,275				1,752
Total interest revenue			141,782				124,506				409,939				371,374
INTEREST EXPENSE:
Deposits			44,790				35,198				123,127				103,031
Federal funds purchased and securities sold under agreement to repurchase			3,692				1,336				8,443				3,499
Other			4,859				5,014				15,081				14,720
Total interest expense			53,341				41,548				146,651				121,250
Net interest revenue			88,441				82,958				263,288				250,124
Provision for credit losses			14,725				3,530				22,492				12,381
Net interest revenue, after provision for credit losses			73,716				79,428				240,796				237,743
NONINTEREST REVENUE:
Mortgage lending			4,207				(672	)			7,382				9,552
Service charges			15,860				15,965				46,997				46,340
Trust income			2,161				2,059				6,054				5,587
Security gains, net			20				146				461				822
Insurance commissions			14,830				14,366				45,187				42,056
Other			11,085				10,463				39,024				35,427
Total noninterest revenue			48,163				42,327				145,105				139,784
NONINTEREST EXPENSE:
Salaries and employee benefits			52,173				49,176				157,992				147,840
Occupancy, net of rental income			6,751				6,264				20,004				18,303
Equipment			5,501				5,390				16,588				16,486
Other			25,088				24,150				75,193				72,387
Total noninterest expense			89,513				84,980				269,777				255,016
Income before income taxes			32,366				36,775				116,124				122,511
Income tax expense			9,507				9,187				35,730				36,484
Net income		$	22,859			$	27,588			$	80,394			$	86,027
Earnings per share: Basic		$	0.29			$	0.36			$	1.03			$	1.12
Diluted		$	0.29			$	0.36			$	1.02			$	1.11
Dividends declared per common share		$	0.19			$	0.18			$	0.57			$	0.54

See accompanying notes to consolidated condensed financial statements.

BANCORPSOUTH, INC.

Consolidated Condensed Statements of Cash Flows

(Unaudited)

		Nine months ended
		September 30,
		2005				2004
		(In thousands)
Net cash provided by operating activities		$	141,870			$	86,076
Investing activities:
Proceeds from calls and maturities of held-to-maturity securities			204,162				256,920
Proceeds from calls and maturities of available-for-sale securities			239,847				221,795
Proceeds from sales of held-to-maturity securities			—				1,851
Proceeds from sales of available-for-sale and trading securities			36,804				489,953
Purchases of held-to-maturity securities			(189,245	)			(554,200	)
Purchases of available-for-sale securities			(42,938	)			(503,267	)
Net (increase) decrease in short-term investments			(166,772	)			60,113
Net increase in loans and leases			(261,962	)			(288,613	)
Purchases of premises and equipment			(30,406	)			(30,957	)
Proceeds from sale of premises and equipment			474				802
Net cash paid for acquisitions			(4,376	)			(4,009	)
Other, net			192				(4,640	)
Net cash used in investing activities			(214,220	)			(354,252	)
Financing activities:
Net increase in deposits			162,176				244,111
Net increase in short-term debt and other liabilities			30,431				59,110
Repayment of long-term debt			(3,500	)			(998	)
Issuance of common stock			4,423				1,960
Purchase of common stock			(7,103	)			(33,703	)
Payment of cash dividends			(50,779	)			(41,851	)
Net cash provided by financing activities			135,648				228,629
Increase (decrease) in cash and cash equivalents			63,298				(39,547	)
Cash and cash equivalents at beginning of period			322,536				379,026
Cash and cash equivalents at end of period		$	385,834			$	339,479

See accompanying notes to consolidated condensed financial statements.

BANCORPSOUTH, INC.

NOTE 1 — BASIS OF FINANCIAL STATEMENT PRESENTATION AND PRINCIPLES OF CONSOLIDATION

The unaudited interim consolidated condensed financial statements of BancorpSouth, Inc. (the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which it operates. For further information, refer to the audited consolidated financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2004. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated condensed financial statements have been included and all such adjustments were of a normal recurring nature. The results of operations for the three-month and nine-month periods ended September 30, 2005 are not necessarily indicative of the results to be expected for the full year. Certain 2004 amounts have been reclassified to conform with the 2005 presentation.

The consolidated condensed financial statements include the accounts of the Company, its wholly-owned subsidiaries, BancorpSouth Bank (the “Bank”) and Risk Advantage, Inc., and the Bank’s wholly-owned subsidiaries, Century Credit Life Insurance Company, Personal Finance Corporation, BancorpSouth Insurance Services, Inc., BancorpSouth Investment Services, Inc. and BancorpSouth Municipal Development Corporation.

Key employees and directors of the Company and its subsidiaries have been granted stock options under the Company’s stock incentive plans. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” for the three months and nine months ended September 30, 2005 and 2004:

		Three months ended								Nine months ended
		September 30,								September 30,
		2005				2004				2005				2004
		(In thousands, except per share amounts)
Net income, as reported		$	22,859			$	27,588			$	80,394			$	86,027
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(180	)			(188	)			(532	)			(567	)
Pro forma net income		$	22,679			$	27,400			$	79,862			$	85,460
Basic earnings per share: As reported		$	0.29			$	0.36			$	1.03			$	1.12
Pro forma			0.29				0.36				1.02				1.11
Diluted earnings per share: As reported		$	0.29			$	0.36			$	1.02			$	1.11
Pro forma			0.29				0.36				1.02				1.10

NOTE 2 — LOANS AND LEASES

The composition of the loan and lease portfolio by collateral type as of the dates indicated was as follows:

		September 30,								December 31,
		2005				2004				2004
		(In thousands)
Commercial and agricultural		$	861,700			$	774,987			$	765,096
Consumer and installment			388,347				436,798				415,615
Real estate mortgage:
1-4 Family			2,444,111				2,163,938				2,379,717
Other			3,110,961				2,892,332				3,013,514
Lease financing			282,643				255,125				262,035
Other			34,450				20,540				29,067
Total		$	7,122,212			$	6,543,720			$	6,865,044

The following table presents information concerning non-performing loans as of the dates indicated:

		September 30,								December 31,
		2005				2004				2004
		(In thousands)
Non-accrual loans		$	8,103			$	13,843			$	12,335
Loans 90 days or more past due			13,539				20,675				19,554
Restructured loans			2,240				2,164				2,107
Total non-performing loans		$	23,882			$	36,682			$	33,996

NOTE 3 — ALLOWANCE FOR CREDIT LOSSES

The following table summarizes the changes in the allowance for credit losses for the periods indicated:

		Nine months ended								Year ended
		September 30,								December 31,
		2005				2004				2004
		(In thousands)
Balance at beginning of period		$	91,673			$	92,112			$	92,112
Provision charged to expense			22,492				12,381				17,485
Recoveries			3,652				3,318				4,577
Loans and leases charged off			(16,750	)			(17,711	)			(24,130	)
Other, net			—				—				1,629
Balance at end of period		$	101,067			$	90,100			$	91,673

NOTE 4 — PER SHARE DATA

The computation of basic earnings per share is based on the weighted average number of common shares outstanding. The computation of diluted earnings per share is based on the weighted average number of common shares outstanding plus the shares resulting from the assumed exercise of all outstanding stock options using the treasury stock method.

The following tables provide a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the periods shown:

		Three months ended September 30,
		2005												2004
		Income				Shares				Per Share				Income				Shares				Per Share
		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
		(In thousands, except per share amounts)
Basic EPS
Income available to common shareholders		$	22,859				78,224			$	0.29			$	27,588				76,583			$	0.36
Effect of dilutive stock options			—				346								—				396
Diluted EPS
Income available to common shareholders plus assumed exercise		$	22,859				78,570			$	0.29			$	27,588				76,979			$	0.36

		Nine months ended September 30,
		2005												2004
		Income				Shares				Per Share				Income				Shares				Per Share
		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
		(In thousands, except per share amounts)
Basic EPS
Income available to common shareholders		$	80,394				78,216			$	1.03			$	86,027				77,104			$	1.12
Effect of dilutive stock options			—				344								—				411
Diluted EPS
Income available to common shareholders plus assumed exercise		$	80,394				78,560			$	1.02			$	86,027				77,515			$	1.11

NOTE 5 — COMPREHENSIVE INCOME

The following tables present the components of other comprehensive income and the related tax effects allocated to each component for the periods indicated:

		Three months ended September 30,
		2005												2004
		Before				Tax				Net				Before				Tax				Net
		tax				(expense)				of tax				tax				(expense)				of tax
		amount				benefit				amount				amount				benefit				amount
		(In thousands)
Unrealized gains on securities:
Unrealized (losses) gains arising during holding period		$	(4,364	)		$	1,671			$	(2,693	)		$	24,427			$	(9,344	)		$	15,083
Less: Reclassification adjustment for net (gains) losses realized in net income			(20	)			7				(13	)			(135	)			52				(83	)
Other comprehensive (loss) income		$	(4,384	)		$	1,678			$	(2,706	)		$	24,292			$	(9,292	)		$	15,000
Net income											22,859												27,588
Comprehensive income										$	20,153											$	42,588

		Nine months ended September 30,
		2005												2004
		Before				Tax				Net				Before				Tax				Net
		tax				(expense)				of tax				tax				(expense)				of tax
		amount				benefit				amount				amount				benefit				amount
		(In thousands)
Unrealized gains on securities:
Unrealized (losses) gains arising during holding period		$	(15,068	)		$	5,771			$	(9,297	)		$	(11,515	)		$	4,404			$	(7,111	)
Less: Reclassification adjustment for net (gains) losses realized in net income			(346	)			132				(214	)			(750	)			287				(463	)
Other comprehensive (loss) income		$	(15,414	)		$	5,903			$	(9,511	)		$	(12,265	)		$	4,691			$	(7,574	)
Net income											80,394												86,027
Comprehensive income										$	70,883											$	78,453

NOTE 6 — JUNIOR SUBORDINATED DEBT SECURITIES

In 2002, the Company issued $128,866,000 in 8.15% Junior Subordinated Debt Securities to BancorpSouth Capital Trust I (the “Trust”), a business trust. The Trust used the proceeds from the issuance of five million shares of 8.15% trust preferred securities, $25 face value per share, to acquire the 8.15% Junior Subordinated Debt Securities. Both the Junior Subordinated Debt Securities and the trust preferred securities mature on January 28, 2032 and are callable at the option of the Company after January 28, 2007.

Pursuant to the merger with Business Holding Corporation (“BHC”) on December 31, 2004, the Company assumed the liability for $6,186,000 in Junior Subordinated Debt Securities issued to Business Holding Company Trust I, a statutory trust. Business Holding Company Trust I used the proceeds from the issuance of 6,000 shares of trust preferred securities to acquire the Junior Subordinated Debt Securities. Both the Junior Subordinated Debt Securities and the trust preferred securities mature on April 7, 2034, and are callable at the option of the Company, in whole or in part, on any January 7, April 7, July 7, or October 7 on or after April 7, 2009. The Junior Subordinated Debt Securities and the trust preferred securities pay a per annum rate of interest, reset quarterly, equal to the three-month London Interbank Offered Rate (“LIBOR”) plus 2.80% from January 30, 2004 to April 7, 2009 and thereafter at LIBOR plus 2.85%.

Pursuant to the merger with Premier Bancorp, Inc. (“Premier”) on December 31, 2004, the Company assumed the liability for $3,093,000 in Junior Subordinated Debt Securities issued to Premier Bancorp Capital Trust I, a statutory trust. Premier Bancorp Capital Trust I used the proceeds from the issuance of 3,000 shares of trust preferred securities to acquire the Junior Subordinated Debt Securities. Both the Junior Subordinated Debt Securities and the trust preferred securities mature on November 7, 2032, and are callable at the option of the Company, in whole or in part, on any February 7, May 7, August 7 or November 7 on or after November 7, 2007. The Junior Subordinated

Debt Securities and the trust preferred securities pay a per annum rate of interest, reset quarterly, equal to the three-month LIBOR plus 3.45%.

NOTE 7 — GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the nine months ended September 30, 2005 were as follows:

						General
		Community				Corporate
		Banking				and Other				Total
		(In thousands)
Balance as of December 31, 2004		$	78,831			$	30,888			$	109,719
Goodwill acquired during the period			—				4,365				4,365
Goodwill reclassified as other identifiable intangible assets			(4,845	)			—				(4,845	)
Balance as of September 30, 2005		$	73,986			$	35,253			$	109,239

The following tables present information regarding the components of the Company’s identifiable intangible assets for the dates indicated:

		As of								As of
		September 30, 2005								December 31, 2004
		Gross Carrying				Accumulated				Gross Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
		(In thousands)
Amortized intangible assets:
Core deposit intangibles		$	16,935			$	8,853			$	11,549			$	7,034
Customer relationship intangibles			22,890				7,426				22,257				5,393
Mortgage servicing rights			99,795				57,788				97,252				51,323
Non-solicitation intangibles			50				29				50				10
Total		$	139,670			$	74,096			$	131,108			$	63,760
Unamortized intangible assets:
Trade names		$	688			$	—			$	688			$	—
Pension plan intangibles			1,234				—				1,234				—
Total		$	1,922			$	—			$	1,922			$	—

		Three months ended								Nine months ended
		September 30,								September 30,
		2005				2004				2005				2004
		(In thousands)
Aggregate amortization expense for:
Core deposit intangibles		$	602			$	338			$	1,819			$	1,036
Customer relationship intangibles			643				712				2,033				2,258
Mortgage servicing rights			2,140				2,413				6,465				7,865
Non-solicitation intangibles			6				4				19				4
Total		$	3,391			$	3,467			$	10,336			$	11,163

At September 30, 2005 and December 31, 2004, aggregate impairment for mortgage servicing rights was approximately $6,008,000 and $11,457,000, respectively.

The following table presents information regarding estimated amortization expense on the Company’s amortizable identifiable intangible assets for the year ended December 31, 2005, and the succeeding four years:

10

						Customer								Non-
		Core Deposit				Relationship				Mortgage				Solicitation
		Intangibles				Intangibles				Servicing Rights				Intangibles				Total
		(In thousands)
Estimated Amortization Expense:
For year ended December 31, 2005		$	2,421			$	2,658			$	9,100			$	25			$	14,204
For year ended December 31, 2006			2,088				2,319				7,300				15				11,722
For year ended December 31, 2007			1,882				2,009				5,800				—				9,691
For year ended December 31, 2008			1,611				1,776				4,700				—				8,087
For year ended December 31, 2009			1,429				1,523				3,700				—				6,652

NOTE 8 — PENSION AND OTHER POSTRETIREMENT BENEFITS

The following tables present the components of net periodic benefit costs for the periods indicated:

		Pension Benefits								Other Benefits
		Three months ended								Three months ended
		September 30,								September 30,
		2005				2004				2005				2004
		(In thousands)
Service cost		$	1,820			$	1,379			$	1			$	—
Interest cost			1,360				1,277				37				41
Expected return on assets			(1,262	)			(1,323	)			—				—
Amortization of unrecognized transition amount			4				4				—				—
Recognized prior service cost			63				29				198				198
Recognized net loss			516				389				—				—
Net periodic benefit costs		$	2,501			$	1,755			$	236			$	239

		Pension Benefits								Other Benefits
		Nine months ended								Nine months ended
		September 30,								September 30,
		2005				2004				2005				2004
		(In thousands)
Service cost		$	4,608			$	3,975			$	3			$	—
Interest cost			3,680				3,425				111				123
Expected return on assets			(4,088	)			(3,571	)			—				—
Amortization of unrecognized transition amount			14				14				—				—
Recognized prior service cost			187				187				594				594
Recognized net loss			946				851				—				—
Net periodic benefit costs		$	5,347			$	4,881			$	708			$	717

The Company previously disclosed in its financial statements for the year ended December 31, 2004 that it expected to contribute approximately $8.6 million to the BancorpSouth, Inc. Retirement Plan (the “Basic Plan”) in 2005. The Company presently anticipates contributing approximately $10.8 million to the Basic Plan in 2005.

NOTE 9 — RECENT PRONOUNCEMENTS

No recently issued accounting pronouncements were adopted by the Company during the third quarter of 2005.

NOTE 10 — BUSINESS COMBINATIONS

On December 31, 2004, Premier, a bank holding company with approximately $160 million in assets headquartered in Brentwood, Tennessee, merged with and into the Company. Pursuant to the merger, Premier’s subsidiary, Premier Bank of Brentwood, merged with and into the Bank. Consideration paid to complete this transaction consisted of 669,891 shares of the Company’s common stock in addition to cash paid to the Premier shareholders in the aggregate amount of $14,794,000. This transaction was accounted for as a purchase. This acquisition was not material to the financial position and had no impact on the results of operations of the Company in 2004.

On December 31, 2004, BHC, a bank holding company with approximately $170 million in assets headquartered in Baton Rouge, Louisiana, merged with and into the Company. Pursuant to the merger, BHC’s subsidiary, The Business Bank, merged with and into the Bank. Consideration paid to complete this transaction consisted of 762,978 shares of the Company’s common stock in addition to cash paid to the BHC shareholders in the aggregate amount of $16,696,000. This transaction was accounted for as a purchase. This acquisition was not material to the financial position and had no impact on the results of operations of the Company in 2004.

The impact on the results of operations from these acquisitions were not material to the results of operations of the Company for the period ended September 30, 2005 and, therefore, no pro forma presentation for the 2004 periods presented herein have been made.

On August 10, 2005, the Company and American State Bank Corporation (“ASB”) signed a definitive merger agreement pursuant to which ASB will merge with and into the Company, subject to ASB shareholder and regulatory approval. ASB is a financial holding company with approximately $343 million in assets headquartered in Jonesboro, Arkansas. The transaction is expected to be completed in the fourth quarter of 2005.

NOTE 11 — SEGMENT REPORTING

The Company’s principal activity is community banking, which includes providing a full range of deposit products, commercial loans and consumer loans. The general corporate and other operating segment includes leasing, mortgage lending, trust services, credit card activities, insurance services, investment services and other activities not allocated to community banking.

Results of operations and selected financial information by operating segment for the three-month and nine-month periods ended September 30, 2005 and 2004 were as follows:

						General
		Community				Corporate
		Banking				and Other				Total
		(In thousands)
Three months ended September 30, 2005:
Results of Operations
Net interest revenue		$	80,572			$	7,869			$	88,441
Provision for credit losses			14,658				67				14,725
Net interest revenue after provision for credit losses			65,914				7,802				73,716
Noninterest revenue			23,852				24,311				48,163
Noninterest expense			58,876				30,637				89,513
Income before income taxes			30,890				1,476				32,366
Income taxes			9,073				434				9,507
Net income		$	21,817			$	1,042			$	22,859
Selected Financial Information
Total assets (at end of period)		$	9,261,286			$	1,803,972			$	11,065,258
Depreciation and amortization			6,065				3,470				9,535
Three months ended September 30, 2004:
Results of Operations
Net interest revenue		$	75,727			$	7,231			$	82,958
Provision for credit losses			3,467				63				3,530
Net interest revenue after provision for credit losses			72,260				7,168				79,428
Noninterest revenue			24,307				18,020				42,327
Noninterest expense			54,298				30,682				84,980
Income before income taxes			42,269				(5,494	)			36,775
Income taxes			10,559				(1,372	)			9,187
Net income		$	31,710			$	(4,122	)		$	27,588
Selected Financial Information
Total assets (at end of period)		$	8,957,144			$	1,651,006			$	10,608,150
Depreciation and amortization			5,558				3,823				9,381

						General
		Community				Corporate
		Banking				and Other				Total
		(In thousands)
Nine months ended September 30, 2005:
Results of Operations
Net interest revenue		$	240,369			$	22,919			$	263,288
Provision for credit losses			22,356				136				22,492
Net interest revenue after provision for credit losses			218,013				22,783				240,796
Noninterest revenue			73,828				71,277				145,105
Noninterest expense			176,364				93,413				269,777
Income before income taxes			115,477				647				116,124
Income taxes			35,531				199				35,730
Net income		$	79,946			$	448			$	80,394
Selected Financial Information
Total assets (at end of period)		$	9,261,286			$	1,803,972			$	11,065,258
Depreciation and amortization			18,159				10,573				28,732
Nine months ended September 30, 2004:
Results of Operations
Net interest revenue		$	227,238			$	22,886			$	250,124
Provision for credit losses			11,222				1,159				12,381
Net interest revenue after provision for credit losses			216,016				21,727				237,743
Noninterest revenue			73,469				66,315				139,784
Noninterest expense			160,643				94,373				255,016
Income before income taxes			128,842				(6,331	)			122,511
Income taxes			38,369				(1,885	)			36,484
Net income		$	90,473			$	(4,446	)		$	86,027
Selected Financial Information
Total assets (at end of period)		$	8,957,144			$	1,651,006			$	10,608,150
Depreciation and amortization			16,682				12,161				28,843

NOTE 12 — COMMITMENTS AND CONTINGENT LIABILITIES

The State Tax Commission of the State of Mississippi completed its audit of the Bank’s state income tax return for the tax years 1998 through 2001 in the second quarter of 2004. As a result of this audit, the State Tax Commission assessed the Bank additional taxes of approximately $5.4 million along with interest and penalties totaling approximately $3.8 million. Based on the advice of legal counsel, management believes that there is no substantial basis for the position taken by the Mississippi State Tax Commission and that the Company has meritorious defenses to dispute this assessment of additional taxes. The Company is in the midst of the administrative appeals process and a final decision has not been rendered by the State Tax Commission. There can be no assurance that the Company will be successful in having the assessment reduced on appeal. The Company’s potential exposure with regard to this assessment will be the additional tax, interest and penalties assessed in May 2004 plus interest that will continue to accrue from May 2004 through the appeals process and legal costs associated with the appeal. Management does not believe that the outcome of this matter will have a material effect on the Company’s consolidated financial position, although any significant additional assessment could have a materially adverse effect on earnings in the period in which it is recorded.

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

OVERVIEW

BancorpSouth, Inc. (the “Company”) is a regional financial holding company with approximately $11.1 billion in assets and is headquartered in Tupelo, Mississippi. BancorpSouth Bank (the “Bank”), the Company’s wholly-owned banking subsidiary, has commercial banking operations in Mississippi, Tennessee, Alabama, Arkansas,

Texas and Louisiana. 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 of the Company. For a complete understanding of the following discussion, you should refer to the unaudited consolidated condensed financial statements for the three-month and nine-month periods ended September 30, 2005 and 2004 and the notes to such financial statements found in “Item 1. Financial Statements” of this report. This discussion and analysis is based on reported financial information, and certain amounts for prior periods have been reclassified to conform with the current financial statement presentation. 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.

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. Most of the revenue of the Company 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 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.

During the third quarter of 2005, a significant and unpredictable event occurred that had a material impact on the Company’s operating results. That event was Hurricane Katrina and its devastating impact on the Mississippi Gulf Coast region. The Company operated 13 banking locations along the Mississippi Gulf Coast at the time of the hurricane and all of the locations were damaged, some more severely than others. However, within one week of the hurricane, some of the banking locations had reopened and by the end of the third quarter only three branches and a loan production office were not open. Approximately 6% of the Bank’s loans and approximately 5% of the Bank’s deposits are located in the Mississippi Gulf Coast area. One of the agencies that comprises part of the Company’s insurance subsidiary is headquartered on the Mississippi Gulf Coast and its operations were also impacted by the hurricane. The agency’s disaster recovery plan was quickly implemented and it was fully operational within a day of the hurricane, servicing its customers and processing claims.

The Company’s physical properties are covered by insurance. Assessments to determine the extent of the damages caused by Hurricane Katrina to the Company’s buildings, furnishings and equipment have not been completed as of the date of this report. The Company’s management is working with the Company’s insurance carrier and expects to have its claims settled in due course. The Company has not written down any of its buildings, furnishings or equipment as of September 30, 2005, pending completion of damage assessments, nor has it recognized a receivable for insurance proceeds. Such adjustments, when made, are not expected to be material to the financial condition or results of operations of the Company.

Management of the Company has determined that the impact of Hurricane Katrina reduced the Company’s net income by approximately $7.9 million, or $0.10 per diluted share, for the third quarter of 2005. The reduced net income is a result of an increase in provision for credit losses related to the hurricane, assistance for employees and others in the hurricane-affected area and lost noninterest revenue, a significant portion of which resulted from the Bank’s waiver of certain fees and service charges for people and businesses in the hurricane-affected area. The Bank also extended loan payment dates for those customers in the hurricane-affected area. These items are discussed in more detail in the appropriate sections below.

The aggregate impact of the hurricane on the Company’s financial condition and results of operations may not be known for some time and must be measured by the extent of damage to the Company’s properties, the extent of damage to the properties of the Company’s customers, including property pledged to the Bank as collateral, uncertainty regarding the final settlement of insurance claims, the impact of government and other forms of

assistance, and the uncertainty regarding the expected rate of economic recovery in the region affected by Hurricane Katrina.

The tables below summarize the Company’s net income, net income per share, return on average assets and return on average shareholders’ equity for the three months and nine months ended September 30, 2005 and 2004. Management believes these amounts and ratios are key indicators of the Company’s financial performance.

		Three months ended
		September 30,
(Dollars in thousands, except per share amounts)		2005				2004				% Change
Net income		$	22,859			$	27,588				(17.14	)%
Net income per share: Basic		$	0.29			$	0.36				(19.44	)
Diluted		$	0.29			$	0.36				(19.44	)
Return on average assets (annualized)			0.83	%			1.04	%			(20.19	)
Return on average shareholders’ equity (annualized)			9.70	%			12.77	%			(24.04	)

		Nine months ended
		September 30,
(Dollars in thousands, except per share amounts)		2005				2004				% Change
Net income		$	80,394			$	86,027				(6.55	)%
Net income per share: Basic		$	1.03			$	1.12				(8.04	)
Diluted		$	1.02			$	1.11				(8.11	)
Return on average assets (annualized)			0.99	%			1.09	%			(9.17	)
Return on average shareholders’ equity (annualized)			11.61	%			13.19	%			(11.98	)

Net income decreased for the three months and nine months ended September 30, 2005 compared to the three months and nine months ended September 30, 2004. The decrease in net income is primarily attributable to the substantial impact of Hurricane Katrina on the Company’s markets, employees and customers. The Company increased the provision for credit losses by approximately $10.38 million pre-tax, primarily as a result of the hurricane’s impact on the Mississippi Gulf Coast region. Also, hurricane relief efforts, assistance for affected employees and lost non-interest revenue related to the waiver of certain fees and service charges for people and businesses in the affected area resulted in a decrease in pre-tax earnings of approximately $2.38 million. Overall, the Company experienced a reduction in net income by approximately $0.10 per diluted share as a result of the hurricane.

The Company’s primary source of revenue, net interest revenue earned by the Bank, reflected continued positive trends for the three months and nine months ended September 30, 2005 compared to the same periods of 2004. Net interest revenue is the difference between interest earned on loans and investments and interest paid on deposits and other obligations. The Company’s net interest revenue was positively impacted by increases in interest rates as well as the increased loan demand resulting from favorable economic activity throughout most of the Bank’s markets. These factors combined to increase the Company’s net interest revenue to $88.44 million for the third quarter of 2005, a $5.48 million, or 6.61%, increase from $82.96 million for the third quarter of 2004. Net interest revenue increased to $263.29 million for the first nine months of 2005, a $13.16 million, or 5.26%, increase from $250.12 million for the first nine months of 2004. In recent years, the Company has taken steps to diversify its revenue stream by increasing its noninterest revenue from mortgage lending activities, insurance agency activities, brokerage activities, and other bank-related fees. These diversification efforts resulted in an increase in insurance commissions and brokerage activities for the three months and nine months ended September 30, 2005 as compared to the same periods of 2004. While total noninterest income increased 13.79% and 3.81% for the third quarter and first nine months of 2005, respectively, compared to the same periods of 2004, those increases were impacted by a decrease of 0.66% in service charges for the third quarter of 2005 as compared to the third quarter of 2004, as well as the decrease of 22.72% in mortgage lending for the first nine months of 2005 compared to the same period of 2004. The decrease in service charges for the third quarter of 2005 resulted from the waiver of certain fees and

service charges for people and businesses in the areas affected by Hurricane Katrina. The decrease in mortgage lending activities for the first nine months of 2005 resulted from reversal of previous impairment of the Company’s mortgage servicing asset of $3.05 million compared to a reversal of previous impairment of $4.81 million for the first nine months of 2004.

Improved asset quality allowed annualized net charge-offs to fall to 0.25% of average loans for the first nine months of 2005 from 0.30% of average loans for the first nine months of 2004. Noninterest expense totaled $89.51 million for the third quarter of 2005 compared to $84.98 million for the third quarter of 2004, an increase of $4.53 million, or 5.33%. For the first nine months of 2005 and 2004, noninterest expense totaled $269.78 million and $255.02 million, respectively, representing an increase of 5.79%. The increase in noninterest expense for the third quarter and first nine months of 2005 resulted primarily from the impact of costs related to the integration and operation of Premier Bancorp, Inc. and Business Holding Corporation that were acquired and merged into the Company on December 31, 2004, increased costs related to additional locations and facilities added since September 30, 2004 and expenses related to the Company’s hurricane relief efforts and assistance for affected employees. The major components of net income are discussed in more detail in the various sections that follow.

CRITICAL ACCOUNTING POLICIES

During the nine months ended September 30, 2005, 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, 2004.

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 by changes in the amount and composition of interest earning assets and interest bearing liabilities. The Company’s long-term objective is to manage those assets and liabilities to maximize net interest revenue, while balancing interest rate, credit, liquidity and capital risks. For purposes of the following discussion, revenue from tax-exempt loans and investment securities has been adjusted to a fully taxable equivalent basis, using an effective tax rate of 35%.

Net interest revenue was $90.75 million for the three months ended September 30, 2005, compared to $85.27 million for the same period in 2004, representing an increase of $5.48 million, or 6.43%. For the first nine months of 2005 and 2004, net interest revenue was $270.12 million and $257.18 million, respectively, representing an increase of $12.94 million or 5.03%. The increase in net interest revenue for the third quarter and first nine months of 2005 is related to the combination of growth in loans during a rising interest rate environment and the Company’s continued focus on funding this growth with maturing investment securities and lower-cost liabilities.

Interest revenue increased $17.28 million, or 13.62%, to $144.09 million for the three months ended September 30, 2005 from $126.81 million for the three months ended September 30, 2004. The increase in interest revenue for the three months ended September 30, 2005 is attributable to a $212.87 million, or 2.18%, increase in average interest earning assets to $9.96 billion for the third quarter of 2005 from $9.75 billion for the third quarter of 2004 and an increase in the yield of those assets of 57 basis points to 5.74% for the third quarter of 2005 from 5.17% for the third quarter of 2004. For the first nine months of 2005 and 2004, interest revenue was $416.77 million and $378.43 million, respectively, representing an increase of $38.34 million, or 10.13%.

Interest expense increased $11.79 million, or 28.38%, to $53.34 million for the three months ended September 30, 2005 from $41.55 million for the three months ended September 30, 2004. Average interest bearing liabilities increased $24.55 million, or 0.30%, to $8.34 billion for the third quarter of 2005 from $8.31 billion for the third quarter of 2004. The average rate paid on those liabilities also increased 55 basis points to 2.54% for the third quarter of 2005 from 1.99% for the third quarter of 2004. For the first nine months of 2005 and 2004, interest

expense was $146.65 million and $121.25 million, respectively, representing an increase of $25.40 million or 20.95%. The increase in interest expense for the first nine months of 2005 as compared to the first nine months of 2004 is attributable to a $59.55 million, or 0.72%, increase in average interest bearing liabilities to $8.35 billion for the first nine months of 2005 from $8.29 billion for the first nine months of 2004 and an increase in the average rate paid on those liabilities of 40 basis points to 2.35% for the first nine months of 2005 from 1.95% for the first nine months of 2004.

The relative performance of the Company’s lending and deposit-raising functions is frequently measured by two calculations — net interest margin and net interest rate spread. Net interest margin is determined by dividing fully taxable equivalent net interest revenue by average earning assets. Net interest rate spread is the difference between the average fully taxable equivalent yield earned on interest earning assets and the average rate paid on interest bearing liabilities. Net interest margin is generally greater than the net interest rate spread because of the additional income earned on those assets funded by noninterest bearing liabilities.

Net interest margin for the third quarter of 2005 and 2004 was 3.61% and 3.48%, respectively, representing an increase of 13 basis points. Net interest margin increased from the comparable prior-year quarter for the third time since the third quarter of 2002. Net interest rate spread for the third quarter of 2005 was 3.20%, an increase of 2 basis points from 3.18% for the same period of 2004. The increase in net interest margin and net interest rate spread was primarily a result of the larger increase in the average rate earned on interest earning assets, from 5.17% for the third quarter of 2004 to 5.74% for the third quarter of 2005, than the increase in the average rate paid on interest bearing liabilities from 1.99% for the third quarter of 2004 to 2.54% for the third quarter of 2005. For the first nine months of 2005 and 2004, net interest margin was 3.64% and 3.52%, respectively, representing an increase of 12 basis points. Net interest rate spread for the nine months ended September 30, 2005 was 3.26%, an increase of 3 basis points from 3.23% for the same period of 2004. The increase in net interest margin and net interest rate spread was primarily a result of the larger increase in the average rate earned on interest earning assets, from 5.18% for the first nine months of 2004 to 5.61% for the first nine months of 2005, than the increase in the average rate paid on interest bearing liabilities from 1.95% for the first nine months of 2004 to 2.35% for the first nine months of 2005. The earning asset yield increase for the third quarter and first nine months of 2005 was a result of the favorable economic activity throughout most of the Bank’s markets driving increased interest rates as well as stronger loan demand. The Company has also maintained a conservative stance in the average maturity of its investment assets mitigating the Company’s liability-sensitivity as interest rates have increased.

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 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 September 30, 2005:

		Interest Rate Sensitivity - Maturing or Repricing Opportunities
						91 Days				Over 1
		0 to 90				to				Year to				Over
		Days				1 Year				5 Years				5 Years
		(In thousands)
Interest earning assets:
Interest bearing deposits with banks		$	15,431			$	—			$	—			$	—
Federal funds sold and securities purchased under agreement to resell			194,186				—				—				—
Held-to-maturity securities			119,106				180,736				739,320				216,712
Available-for-sale and trading securities			86,041				196,051				787,704				388,043
Loans and leases, net of unearned interest			3,686,233				1,359,080				1,953,802				91,948
Loans held for sale			78,970				—				—				—
Total interest earning assets			4,179,967				1,735,867				3,480,826				696,703
Interest bearing liabilities:
Interest bearing demand deposits and savings			3,261,323				353,113				—				—
Other time deposits			745,221				1,625,317				1,591,712				1,272
Federal funds purchased and securities sold under agreement to repurchase and other short-term borrowings			499,552				—				—				—
Long-term debt and junior subordinated debt securities			447				1,386				59,079				214,827
Other			23				81				301				83
Total interest bearing liabilities			4,506,566				1,979,897				1,651,092				216,182
Interest rate sensitivity gap		$	(326,599	)		$	(244,030	)		$	1,829,734			$	480,521
Cumulative interest sensitivity gap		$	(326,599	)		$	(570,629	)		$	1,259,105			$	1,739,626

Provision for Credit Losses and Allowance for Credit Losses

The provision for credit losses is the annual cost of providing an allowance or reserve for estimated probable losses on loans and leases. The Bank employs a systematic methodology for determining its allowance for credit losses that considers both qualitative and quantitative factors and requires that management make material estimates and assumptions that are particularly susceptible to significant change. Some of the quantitative factors considered by the Bank include loan and lease growth, changes in nonperforming and past due loans and leases, historical loan and lease loss experience, delinquencies, management’s assessment of loan and lease portfolio quality, the value of collateral and concentrations of loans and leases to specific borrowers or industries. Some of the qualitative factors that the Bank considers include existing general economic conditions and the inherent risks of individual loans and leases.

The allowance for credit losses is based principally upon the Bank’s loan and lease classification system, delinquencies and historic loss rates. The Bank has a disciplined approach for assigning credit ratings and classifications to individual credits. Each credit is assigned a grade by the appropriate loan officer, which serves as a basis for the credit analysis of the entire portfolio. The assigned grade reflects the borrower’s creditworthiness, collateral values, cash flows and other factors. An independent loan review department 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. The work of the loan review department is supplemented by governmental regulatory agencies during their periodic examinations of the Bank. This provides an additional independent level of review. The loss factors assigned to each classification are based upon the attributes of the loans and leases typically assigned to each grade (such as loan to collateral values and borrower creditworthiness). Management periodically reviews the loss factors assigned

in light of the general economic environment and overall condition of the loan and lease portfolio and modifies the loss factors assigned to each classification as it deems appropriate. The overall allowance generally includes a component representing the results of other analyses intended to ensure that the allowance is adequate to cover other probable losses inherent in the portfolio. This component considers analyses of changes in credit risk resulting from the differing underwriting criteria in acquired loan and lease portfolios, industry concentrations, changes in the mix of loans and leases originated, overall credit criteria and other economic indicators.

The provision for credit losses, net charge-offs and net charge-offs as a percentage of average loans and leases for the three months and nine months ended September 30, 2005 and 2004, as well as the allowance for credit losses as a percentage of loans and leases outstanding at September 30, 2005 and 2004 are shown in the following tables:

		Three months ended
		September 30,
		2005				2004				% Change
		(Dollars in thousands)
Provision for credit losses		$	14,725			$	3,530				317.14	%
Net charge-offs		$	4,734			$	3,967				19.33
Net charge-offs as a percentage of average loans and leases (annualized)			0.27	%			0.25	%			8.00

		Nine months ended
		September 30,
		2005				2004				% Change
		(Dollars in thousands)
Provision for credit losses		$	22,492			$	12,381				81.67	%
Net charge-offs		$	13,098			$	14,393				(9.00	)
Net charge-offs as a percentage of average loans and leases (annualized)			0.25	%			0.30	%			(16.67	)
Allowance for credit losses as a percentage of loans and leases outstanding at period end			1.43	%			1.38	%			3.62

The provision for credit losses increased for the three-month and nine-month periods ended September 30, 2005 compared to the three-month and nine-month periods ended September 30, 2004, reflecting the $10.38 million pre-tax increase in the provision for credit losses, primarily as a result of Hurricane Katrina’s impact on the Mississippi Gulf Coast region. The additional provision for credit losses related to the hurricane was based on the most recent information available. There can be no assurance that the provision will not change as we complete a more thorough assessment of the loans in the affected region. While net charge-offs increased 19.33% for the three-month period ended September 30, 2005 compared to the same period in 2004, net charge-offs decreased 9.00% for the nine-month period ended September 30, 2005 compared to the nine-month period ended September 30, 2004. The Company’s credit quality remains strong as evidenced by the significant decrease in non-performing loans, down 34.89% compared to non-performing loans at September 30, 2004. The Company has not quantified the impact on non-performing loans of extending loan payment dates for customers in the hurricane affected area.

The allocation of the allowance by loan and lease category is based, in part, on evaluations of specific loans’ and leases’ past 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 (a) the allocation of the allowance for credit losses by loan and lease category and (b) the percentage of each category in the loan and lease portfolio to total loans and leases at the dates indicated: