bxs10q0611.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
________________________________________

FORM 10-Q
(Mark One)
 X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

OR

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

For the transition period from ________________    to    ________________

Commission File Number:  001-12991

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
(Address of principal executive offices)
(Zip Code)

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

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  [X]   No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  [X] Yes [  ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check One):  Large accelerated filer [X]  Accelerated filer [  ]  Non-accelerated filer (Do not check if a smaller reporting company) [  ]  Smaller reporting company [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X] 
 
 As of August 1, 2011, the registrant had outstanding 83,488,963 shares of common stock, par value $2.50 per share.
 
 
 
 

 
 
BANCORPSOUTH, INC.
TABLE OF CONTENTS

PART I.
       Financial Information  
Page
 
ITEM 1.
Financial Statements
 
   
Consolidated Balance Sheets June 30, 2011 and 2010 (Unaudited) and December 31, 2010
3
   
Consolidated Statements of Operations (Unaudited) Three Months and Six Months Ended June 30, 2011 and 2010
4
   
Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2011 and 2010
5
   
Notes to Consolidated Financial Statements (Unaudited)
6
 
ITEM 2.
Management's Discussion and Analysis of Financial
 
   
Condition and Results of Operations
34
 
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
67
 
ITEM 4.
Controls and Procedures
67
       
PART II.
        Other Information    
 
ITEM 1A.
Risk Factors
68
 
ITEM 6.
Exhibits
68
 
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 net interest revenue, estimates of fair value discount rates, fair values of  available-for-sale securities, 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, the Company’s ability to meet the challenges of the current economic cycle, 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, goodwill impairment, the Company’s reserve for losses from representation and warranty obligations, the impact of recent accounting pronouncements, 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 impact of the Federal Reserve’s new rules regarding overdraft payments on the Company’s service charge 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, concessions granted to borrowers experiencing financial difficulties, diversification of the Company’s revenue stream, liquidity needs and strategies, sources of funding, net interest margin, payment of dividends, the impact of federal and state regulatory requirements for capital on the Company’s ability to meet its cash obligations, the impact of pending litigation and the implementation and effect of remedial actions to address the material weakness in internal control over financial reporting. 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, conditions in the financial markets and economic conditions generally, the soundness of other financial institutions, the availability of capital on favorable terms if and when needed, liquidity risk, the credit risk associated with real estate construction, estimates of costs and values associated with acquisition and development loans in the Company’s loan portfolio, the adequacy of the Company’s allowance for credit losses to cover actual credit losses, governmental regulation and supervision of the Company’s operations, the susceptibility of the Company’s business to local economic conditions, the impact of recent legislation and regulations on service charges for core deposit accounts, 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, the impact of hurricanes or other adverse weather events, risks in connection with completed or potential acquisitions, dilution caused by the Company’s issuance of securities to raise capital or to acquire other banks, bank holding companies, financial holding companies and insurance agencies, restrictions on the Company’s ability to declare and pay dividends, the Company’s growth strategy, diversification in the types of financial services the Company offers, competition with other financial services companies, interruptions or breaches in security of the Company’s information systems, the failure of certain third party vendors to perform, the Company’s ability to improve its internal controls adequately, any requirement that the Company write down goodwill or other intangible assets, 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.

 
2

 

PART I.
 
FINANCIAL INFORMATION
 
                   
ITEM 1.  FINANCIAL STATEMENTS.
                 
                   
BANCORPSOUTH, INC. AND SUBSIDIARIES
 
Consolidated Balance Sheets
 
                   
   
June 30,
   
December 31,
   
June 30,
 
   
2011
   
2010
   
2010
 
   
(Unaudited)
      (1)    
(Unaudited)
 
   
(Dollars in thousands, except per share amounts)
 
ASSETS
                   
Cash and due from banks
  $ 166,761     $ 99,916     $ 370,499  
Interest bearing deposits with other banks
    304,344       172,170       111,040  
Held-to-maturity securities, at amortized cost
    -       1,613,019       1,147,157  
Available-for-sale securities, at fair value
    2,560,824       1,096,062       962,692  
  
Federal funds sold and securities purchased under agreement to resell
    -       150,000       75,000  
Loans and leases
    9,255,879       9,376,351       9,691,623  
  Less:  Unearned income
    41,326       43,244       44,721  
            Allowance for credit losses
    197,627       196,913       200,744  
Net loans
    9,016,926       9,136,194       9,446,158  
Loans held for sale
    70,519       93,697       95,987  
Premises and equipment, net
    328,075       332,890       336,645  
Accrued interest receivable
    55,525       61,025       63,862  
Goodwill
    271,297       270,097       270,097  
Bank owned life insurance
    197,028       194,064       190,828  
Other real estate owned
    151,204       133,412       67,560  
Other assets
    244,547       262,464       283,479  
TOTAL ASSETS
  $ 13,367,050     $ 13,615,010     $ 13,421,004  
                         
LIABILITIES
                       
Deposits:
                       
  Demand:  Noninterest bearing
  $ 2,096,655     $ 2,060,145     $ 1,897,977  
                  Interest bearing
    4,939,553       4,931,518       4,725,457  
  Savings
    944,993       863,034       770,112  
  Other time
    3,327,262       3,635,324       3,827,095  
Total deposits
    11,308,463       11,490,021       11,220,641  
 
Federal funds purchased and securities sold under agreement to repurchase
    426,097       440,593       481,109  
 
Short-term Federal Home Loan Bank and other short-term borrowings
    703       2,727       3,500  
Accrued interest payable
    11,348       14,336       17,508  
Junior subordinated debt securities
    160,312       160,312       160,312  
Long-term Federal Home Loan Bank borrowings
    35,000       110,000       110,749  
Other liabilities
    178,424       174,777       186,926  
TOTAL LIABILITIES
    12,120,347       12,392,766       12,180,745  
                         
SHAREHOLDERS' EQUITY
                       
Common stock, $2.50 par value per share
                       
   Authorized - 500,000,000 shares; Issued - 83,488,962,
                       
   83,481,737 and 83,481,738 shares, respectively
    208,722       208,704       208,704  
Capital surplus
    226,362       224,976       223,922  
Accumulated other comprehensive loss
    6,289       (14,453 )     (5,008 )
Retained earnings
    805,330       803,017       812,641  
TOTAL SHAREHOLDERS' EQUITY
    1,246,703       1,222,244       1,240,259  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 13,367,050     $ 13,615,010     $ 13,421,004  
                         
(1)  Derived from audited financial statements.
                       
                         
See accompanying notes to consolidated financial statements.
                       
 
 
3

 


BANCORPSOUTH, INC. AND SUBSIDIARIES
 
Consolidated Statements of Operations
 
(Unaudited)
 
                         
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(In thousands, except for per share amounts)
 
INTEREST REVENUE:
                       
Loans and leases
  $ 116,892     $ 124,621     $ 234,250     $ 251,577  
Deposits with other banks
    124       33       246       54  
 
Federal funds sold and securities purchased under agreement to resell
    35       143       166       225  
Held-to-maturity securities:
                               
  Taxable
    5,066       9,363       13,080       18,778  
  Tax-exempt
    2,291       2,412       5,638       4,873  
Available-for-sale securities:
                               
  Taxable
    10,451       8,030       19,036       16,415  
  Tax-exempt
    1,871       833       2,695       1,665  
Loans held for sale
    505       727       952       1,233  
  Total interest revenue
    137,235       146,162       276,063       294,820  
                                 
INTEREST EXPENSE:
                               
Deposits:
                               
  Interest bearing demand
    6,039       9,751       12,585       19,143  
  Savings
    810       915       1,636       1,804  
  Other time
    16,285       21,535       33,768       43,064  
 
Federal funds purchased and securities sold under agreement to repurchase
    135       215       287       443  
Federal Home Loan Bank borrowings
    1,194       1,553       2,717       3,433  
Junior subordinated debt
    2,860       2,862       5,719       5,717  
Other
    -       2       2       5  
  Total interest expense
    27,323       36,833       56,714       73,609  
  Net interest revenue
    109,912       109,329       219,349       221,211  
Provision for credit losses
    32,240       62,354       85,719       105,873  
  Net interest revenue, after provision for
                               
    credit losses
    77,672       46,975       133,630       115,338  
                                 
NONINTEREST REVENUE:
                               
Mortgage lending
    2,003       (2,304 )     9,584       2,721  
Credit card, debit card and merchant fees
    11,263       9,333       21,609       18,143  
Service charges
    16,556       18,953       31,924       35,215  
Trust income
    2,850       2,707       5,984       5,294  
Security gains (losses), net
    10,045       (585 )     10,062       712  
Insurance commissions
    22,941       21,666       45,490       43,334  
Other
    9,486       7,316       18,802       14,999  
  Total noninterest revenue
    75,144       57,086       143,455       120,418  
                                 
NONINTEREST EXPENSE:
                               
Salaries and employee benefits
    70,142       68,189       140,517       137,476  
Occupancy, net of rental income
    10,232       10,527       20,903       21,302  
Equipment
    5,595       5,877       11,253       11,616  
Deposit insurance assessments
    6,436       4,362       11,861       8,612  
Prepayment penalty on FHLB borrowings
    9,778       -       9,778       0  
Other
    34,886       31,061       72,767       61,493  
  Total noninterest expense
    137,069       120,016       267,079       240,499  
  Income (loss) before income taxes
    15,747       (15,955 )     10,006       (4,743 )
Income tax (benefit) expense
    2,921       (3,395 )     (2,326 )     (579 )
  Net income (loss)
  $ 12,826     $ (12,560 )   $ 12,332     $ (4,164 )
                                 
Earnings (loss) per share:  Basic
  $ 0.15     $ (0.15 )   $ 0.15     $ (0.05 )
                                        Diluted
  $ 0.15     $ (0.15 )   $ 0.15     $ (0.05 )
                                 
Dividends declared per common share
  $ 0.01     $ 0.22     $ 0.12     $ 0.44  
                                 
See accompanying notes to consolidated financial statements.
                         

 
4

 
BANCORPSOUTH, INC. AND SUBSIDIARIES
 
Consolidated Statements of Cash Flows
 
(Unaudited)
 
   
Six months ended
 
   
June 30,
 
   
2011
   
2010
 
   
(In thousands)
       
Operating Activities:
           
Net income (loss)
  $ 12,332     $ (4,164 )
  Adjustment to reconcile net income (loss) to net  cash provided by operating activities:
               
      Provision for credit losses
    85,719       105,873  
      Depreciation and amortization
    14,789       14,905  
      Deferred taxes
    (267 )     (6,732 )
      Amortization of intangibles
    1,687       1,999  
      Amortization of debt securities premium and discount, net
    13,936       2,418  
      Share-based compensation expense
    1,285       898  
      Security gains, net
    (10,062 )     (712 )
      Net deferred loan origination expense
    (4,384 )     (4,561 )
      Excess tax benefit from exercise of stock options
    (8 )     (21 )
      Decrease in interest receivable
    5,500       4,789  
      Decrease in interest payable
    (2,988 )     (2,080 )
      Realized gain on mortgages sold
    (14,225 )     (11,500 )
      Proceeds from mortgages sold
    483,065       494,449  
      Origination of mortgages held for sale
    (448,082 )     (497,981 )
      Increase in bank-owned life insurance
    (2,964 )     (3,058 )
      (Increase) decrease in prepaid pension asset
    (186 )     21  
      Decrease in prepaid deposit insurance assessments
    11,040       7,690  
      Other, net
    (1,035 )     (26,913 )
Net cash provided by operating activities
    145,152       75,320  
Investing activities:
               
Proceeds from calls and maturities of held-to-maturity securities
    135,781       290,273  
Proceeds from calls and maturities of available-for-sale securities
    131,124       66,708  
Proceeds from sales of available-for-sale securities
    180,057       91,533  
Purchases of held-to-maturity securities
    (151,105 )     (404,821 )
Purchases of available-for-sale securities
    (119,089 )     (157,397 )
Net decrease in short-term investments
    150,000       -  
Net decrease in loans and leases
    20,141       43,328  
Purchases of premises and equipment
    (10,520 )     (7,861 )
Proceeds from sale of premises and equipment
    1,693       73  
Contingency earn-out payment
    (1,200 )     -  
Other, net
    (31 )     (40 )
Net cash provided by (used in) investing activities
    336,851       (78,204 )
Financing activities:
               
Net (decrease) increase in deposits
    (181,558 )     542,939  
Net decrease in short-term debt and other liabilities
    (16,526 )     (260,767 )
Repayment of long-term debt
    (75,000 )     (22 )
Issuance of common stock
    110       534  
Excess tax benefit from exercise of stock options
    8       21  
Payment of cash dividends
    (10,018 )     (36,727 )
Net cash (used in) provided by financing activities
    (282,984 )     245,978  
                 
Increase in cash and cash equivalents
    199,019       243,094  
Cash and cash equivalents at beginning of period
    272,086       238,445  
Cash and cash equivalents at end of period
  $ 471,105     $ 481,539  
                 
See accompanying notes to consolidated financial statements.
               


 
5

 

BANCORPSOUTH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

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

The accompanying unaudited interim consolidated financial statements of BancorpSouth, Inc. (the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and follow general practices within the industries in which the Company operates.  For further information, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.  In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial statements have been included and all such adjustments were of a normal, recurring nature.  The results of operations for the three-month and six-month periods ended June 30, 2011 are not necessarily indicative of the results to be expected for the full year.  Certain 2010 amounts have been reclassified to conform with the 2011 presentation.
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, BancorpSouth Bank (the “Bank”) and Gumtree Wholesale Insurance Brokers, Inc., and the Bank’s wholly-owned subsidiaries, Century Credit Life Insurance Company, Personal Finance Corporation of Tennessee, BancorpSouth Insurance Services, Inc., BancorpSouth Investment Services, Inc., BancorpSouth Municipal Development Corporation and BancorpSouth Bank Securities Corporation.

NOTE 2 – LOANS AND LEASES

The Company’s loan and lease portfolio is disaggregated into the following segments:  commercial and industrial; real estate; credit card; and all other loans and leases.  The real estate segment is further disaggregated into the following classes:  consumer mortgage; home equity; agricultural; commercial and industrial-owner occupied; construction, acquisition and development; and commercial.  Certain loans within the prior period real estate consumer mortgage portfolio have been reclassified into the real estate construction acquisition and development portfolio in order to conform to current period presentation. This reclassification was determined necessary based on an analysis of the underlying uses of the collateral of the portfolios. The reclassification did not impact the overall amount of nonperforming loans nor did it impact the allowance for credit losses. A summary of gross loans and leases by segment and class as of the dates indicated follows:


   
June 30,
   
December 31,
 
   
2011
   
2010
   
2010
 
   
(In thousands)
 
                   
Commercial and industrial
  $ 1,540,048     $ 1,499,152     $ 1,505,471  
Real estate
                       
   Consumer mortgages
    1,971,499       1,981,475       1,951,563  
   Home equity
    531,787       555,281       543,272  
   Agricultural
    255,310       260,489       252,292  
   Commercial and industrial-owner occupied
    1,366,734       1,407,704       1,331,473  
   Construction, acquisition and development
    1,060,675       1,419,303       1,174,743  
   Commercial
    1,764,648       1,794,644       1,816,951  
Credit cards
    101,955       102,784       106,345  
All other
    663,223       670,791       694,241  
     Total
  $ 9,255,879     $ 9,691,623     $ 9,376,351  

 
6

 
    The following table shows the Company’s  loans and leases, net of unearned income, as of June 30, 2011 by segment, class and geographical location:
   
Alabama
                     
Greater
                         
   
and Florida
                     
Memphis
   
Northeast
   
Texas and
             
   
Panhandle
   
Arkansas
   
Mississippi
   
Missouri
   
Area
   
Tennessee
   
Louisiana
   
Other
   
Total
 
   
(In thousands)
       
Commercial and industrial
  $ 63,477     $ 219,533     $ 322,786     $ 85,073     $ 24,045     $ 84,544     $ 274,812     $ 452,416     $ 1,526,686  
Real estate
                                                                       
 Consumer mortgages
    114,266       273,338       779,838       66,163       87,596       164,453       412,493       73,352       1,971,499  
 Home equity
    64,043       43,224       178,305       29,297       73,790       79,307       62,617       1,204       531,787  
 Agricultural
    7,338       73,285       75,142       5,642       16,248       13,629       58,370       5,656       255,310  
 Commercial and industrial-owner occupied
    125,567       175,098       472,765       74,684       109,132       101,806       246,369       61,313       1,366,734  
 Construction, acquisition and development
    133,335       86,795       273,624       88,309       128,537       130,962       208,406       10,707       1,060,675  
 Commercial
    195,722       340,963       344,926       241,209       132,670       105,507       354,065       49,586       1,764,648  
Credit cards
    -       -       -       -       -       -       -       101,955       101,955  
All other
    14,936       42,680       79,088       1,409       48,596       28,516       29,521       390,513       635,259  
     Total
  $ 718,684     $ 1,254,916     $ 2,526,474     $ 591,786     $ 620,614     $ 708,724     $ 1,646,653     $ 1,146,702     $ 9,214,553  

The Company does not have any loan concentrations, other than those reflected in the preceding tables, which exceed 10% of total loans.  A substantial portion of construction, acquisition and development loans are secured by real estate in markets in which the Company is located.  Prior to March of 2010, some of these loans were structured with interest reserves to fund interest costs during the construction and development period.  The Company’s general loan policy was changed in March of 2010 to prohibit the use of interest reserves on loans made after that time.  Additionally, certain of these loans were structured with interest-only terms.  A portion of the consumer mortgage and commercial real estate portfolios originated through the permanent financing of construction, acquisition and development loans.  The prolonged economic downturn has negatively impacted many borrowers’ and guarantors’ ability to make payments under the terms of the loans as their liquidity has been depleted.  Accordingly, the ultimate collectability of a substantial portion of these loans and the recovery of a substantial portion of the carrying amount of other real estate owned are susceptible to changes in real estate values in the corresponding areas.  Continued economic distress could negatively impact additional borrowers’ and guarantors’ ability to repay their debt which would make more of the Company’s loans collateral dependent.
The following tables provide details regarding the aging of the Company’s loan and lease portfolio, net of unearned income, by segment and class at June 30, 2011 and December 31, 2010:

   
June 30, 2011
 
                                       
90+ Days
 
   
30-59 Days
   
60-89 Days
   
90+ Days
   
Total
         
Total
   
Past Due still
 
   
Past Due
   
Past Due
   
Past Due
   
Past Due
   
Current
   
Outstanding
   
Accruing
 
   
(In thousands)
 
Commercial and industrial
  $ 7,022     $ 1,691     $ 2,503     $ 11,216     $ 1,515,470     $ 1,526,686     $ 118  
Real estate
                                                       
Consumer mortgages
    14,463       7,639       12,713       34,815       1,936,684       1,971,499       2,482  
   Home equity
    2,779       348       912       4,039       527,748       531,787       242  
   Agricultural
    2,600       318       2,841       5,759       249,551       255,310       -  
   Commercial and industrial-owner occupied
    5,169       2,405       12,518       20,092       1,346,642       1,366,734       -  
   Construction, acquisition and development
    11,375       17,150       64,323       92,848       967,827       1,060,675       432  
   Commercial
    5,433       1,758       18,980       26,171       1,738,477       1,764,648       19  
Credit cards
    530       337       630       1,497       100,458       101,955       299  
All other
    2,725       312       894       3,931       631,328       635,259       388  
     Total
  $ 52,096     $ 31,958     $ 116,314     $ 200,368     $ 9,014,185     $ 9,214,553     $ 3,980  

 
7

 

   
December 31, 2010
 
                                       
90+ Days
 
   
30-59 Days
   
60-89 Days
   
90+ Days
   
Total
         
Total
   
Past Due still
 
   
Past Due
   
Past Due
   
Past Due
   
Past Due
   
Current
   
Outstanding
   
Accruing
 
   
(In thousands)
 
Commercial and industrial
  $ 13,037     $ 848     $ 12,000     $ 25,885     $ 1,465,298     $ 1,491,183     $ 675  
Real estate
                                                       
   Consumer mortgages
    16,937       4,481       20,640       42,058       1,909,505       1,951,563       6,521  
   Home equity
    1,258       800       755       2,813       540,459       543,272       173  
   Agricultural
    1,140       3,450       3,527       8,117       244,175       252,292       123  
   Commercial and industrial-owner occupied
    9,260       1,290       7,323       17,873       1,313,600       1,331,473       20  
   Construction, acquisition and development
    22,436       9,837       94,264       126,537       1,048,206       1,174,743       197  
   Commercial
    4,409       4,712       10,507       19,628       1,797,323       1,816,951       -  
Credit cards
    793       373       780       1,946       104,399       106,345       330  
All other
    2,058       1,117       847       4,022       661,263       665,285       461  
     Total
  $ 71,328     $ 26,908     $ 150,643     $ 248,879     $ 9,084,228     $ 9,333,107     $ 8,500  

The following tables provide details of the Company’s loan and lease portfolio, net of unearned income, by segment, class and internally assigned grade at June 30, 2011 and December 31, 2010:

 
   
June 30, 2011
 
         
Special
                               
   
Pass
   
Mention
   
Substandard
   
Doubtful
   
Loss
   
Impaired
   
Total
 
   
(In thousands)
 
Commercial and industrial
  $ 1,477,497     $ 1,312     $ 40,160     $ 1,282     $ 450     $ 5,985     $ 1,526,686  
Real estate
                                                       
  Consumer mortgage
    1,817,381       3,885       123,392       3,485       87       23,269       1,971,499  
  Home equity
    512,791       793       16,501       427       605       670       531,787  
  Agricultural
    229,001       2,486       16,507       -       -       7,316       255,310  
  Commercial and industrial-owner occupied
    1,269,218       2,304       73,272       651       99       21,190       1,366,734  
  Construction, acquisition and development
    728,194       20,348       114,222       594       286       197,031       1,060,675  
  Commercial
    1,606,844       9,130       102,762       59       -       45,853       1,764,648  
Credit Cards
    101,645       11       281       18       -       -       101,955  
All other
    613,573       76       18,847       411       9       2,343       635,259  
    Total
  $ 8,356,144     $ 40,345     $ 505,944     $ 6,927     $ 1,536     $ 303,657     $ 9,214,553  

   
December 31, 2010
 
         
Special
                               
   
Pass
   
Mention
   
Substandard
   
Doubtful
   
Loss
   
Impaired
   
Total
 
   
(In thousands)
 
Commercial and industrial
  $ 1,429,443     $ 5,764     $ 51,562     $ 1,577     $ 701     $ 2,136     $ 1,491,183  
Real estate
                                                       
  Consumer mortgage
    1,813,740       1,867       104,504       3,106       123       28,223       1,951,563  
  Home equity
    527,047       1,231       13,169       613       361       851       543,272  
  Agricultural
    226,054       309       21,614       -       20       4,295       252,292  
  Commercial and industrial-owner occupied
    1,250,265       1,422       62,783       900       30       16,073       1,331,473  
  Construction, acquisition and development
    845,725       1,882       138,929       2,243       1,046       184,918       1,174,743  
  Commercial
    1,688,228       5,565       86,358       98       495       36,207       1,816,951  
Credit Cards
    106,181       11       146       7       -       -       106,345  
All other
    641,292       35       22,735       477       44       702       665,285  
    Total
  $ 8,527,975     $ 18,086     $ 501,800     $ 9,021     $ 2,820     $ 273,405     $ 9,333,107  

 
8

 
The following tables provide details regarding impaired loans and leases, net of unearned income, by segment and class at June 30, 2011 and December 31, 2010:
 
   
June 30, 2011
 
         
Unpaid
         
Average Recorded Investment
   
Interest Income Recognized
 
   
Recorded
   
Principal
   
Related
   
Three months
   
Six months
   
Three months
   
Six months
 
   
Investment in
   
Balance of
   
Allowance for
   
ended
   
ended
   
ended
   
ended
 
   
Impaired Loans
   
Impaired Loans
   
Credit Losses
   
June 30, 2011
   
June 30, 2011
   
June 30, 2011
   
June 30, 2011
 
   
(In thousands)
 
With no related allowance:
                                         
Commercial and industrial
  $ 4,395     $ 6,269     $ -     $ 5,589     $ 4,258     $ 31     $ 36  
Real estate
                                                       
  Consumer mortgage
    15,758       19,023       -       27,727       23,897       195       259  
  Home equity
    456       561       -       632       489       -       -  
  Agricultural
    2,101       2,177       -       3,808       3,120       18       18  
  Commercial and industrial-owner occupied
    12,060       16,955       -       12,727       10,162       53       110  
  Construction, acquisition and development
    118,763       160,553       -       156,510       122,221       391       461  
  Commercial
    10,681       14,502       -       23,220       23,506       112       160  
All other
    819       5,297       -       2,283       1,535       51       59  
    Total
  $ 165,033     $ 225,337     $ -     $ 232,496     $ 189,188     $ 851     $ 1,103  
                                                         
With an allowance:
                                                       
Commercial and industrial
  $ 1,590     $ 1,688     $ 456     $ 3,794     $ 4,342     $ 5     $ 5  
Real estate
                                                       
  Consumer mortgage
    7,985       8,089       2,278       16,603       17,987       102       249  
  Home equity
    214       214       39       144       385       1       1  
  Agricultural
    5,215       5,690       1,729       4,202       3,887       4       18  
  Commercial and industrial-owner occupied
    9,130       9,450       3,151       12,191       12,150       45       58  
  Construction, acquisition and development
    78,268       85,856       27,721       87,236       95,224       572       965  
  Commercial
    35,172       37,386       10,642       34,377       31,134       183       399  
All other
    1,050       1,050       794       3,396       1,706       4       5  
    Total
  $ 138,624     $ 149,423     $ 46,810     $ 161,943     $ 166,815     $ 916     $ 1,700  
                                                         
Total:
                                                       
Commercial and industrial
  $ 5,985     $ 7,957     $ 456     $ 9,383     $ 8,600     $ 36     $ 41  
Real estate
                                                       
  Consumer mortgage
    23,743       27,112       2,278       44,330       41,884       297       508  
  Home equity
    670       775       39       776       874       1       1  
  Agricultural
    7,316       7,867       1,729       8,010       7,007       22       36  
Commercial and industrial-
     owner occupied
    21,190       26,405       3,151       24,918       22,312       98       168  
  Construction, acquisition and   development
    197,031       246,409       27,721       243,746       217,445       963       1,426  
  Commercial
    45,853       51,888       10,642       57,597       54,640       295       559  
All other
    1,869       6,347       794       5,679       3,241       55       64  
    Total
  $ 303,657     $ 374,760     $ 46,810     $ 394,439     $ 356,003     $ 1,767     $ 2,803  
 
 
9

 
   
December 31, 2010
 
         
Unpaid
       
   
Recorded
   
Principal
   
Related
 
   
Investment in
   
Balance of
   
Allowance for
 
   
Impaired Loans
   
Impaired Loans
   
Credit Losses
 
   
(In thousands)
 
With no related allowance:
                 
Commercial and industrial
  $ 1,457     $ 2,600     $ -  
Real estate
                       
  Consumer mortgage
    11,228       14,273       -  
  Home equity
    290       629       -  
  Agricultural
    1,439       1,981       -  
  Commercial and industrial-owner occupied
    10,920       12,371       -  
  Construction, acquisition and development
    80,204       120,938       -  
  Commercial
    15,795       20,478       -  
All other
    702       931       -  
    Total
  $ 122,035     $ 174,201     $ -  
                         
With an allowance:
                       
Commercial and industrial
  $ 679     $ 977     $ 125  
Real estate
                       
  Consumer mortgage
    16,995       16,644       4,226  
  Home equity
    561       561       41  
  Agricultural
    2,856       3,132       544  
  Commercial and industrial-owner occupied
    5,153       5,298       1,361  
  Construction, acquisition and development
    104,714       123,538       29,195  
  Commercial
    20,412       21,026       5,227  
All other
    -       -       -  
    Total
  $ 151,370     $ 171,176     $ 40,719  
                         
Total:
                       
Commercial and industrial
  $ 2,136     $ 3,577     $ 125  
Real estate
                       
  Consumer mortgage
    28,223       30,917       4,226  
  Home equity
    851       1,190       41  
  Agricultural
    4,295       5,113       544  
  Commercial and industrial-owner occupied
    16,073       17,669       1,361  
  Construction, acquisition and development
    184,918       244,476       29,195  
  Commercial
    36,207       41,504       5,227  
All other
    702       931       -  
    Total
  $ 273,405     $ 345,377     $ 40,719  

 
10

 
    The following tables provide details regarding impaired construction, acquisition and development loans and leases, net of unearned income, by collateral type at June 30, 2011 and December 31, 2010:

 
   
June 30, 2011
 
         
Unpaid
         
Average Recorded Investment
   
Interest Income Recognized
 
   
Recorded
   
Principal
   
Related
   
Three months
   
Six months
   
Three months
   
Six months
 
   
Investment in
   
Balance of
   
Allowance for
   
ended
   
ended
   
ended
   
ended
 
   
Impaired Loans
   
Impaired Loans
   
Credit Losses
   
June 30, 2011
   
June 30, 2011
   
June 30, 2011
   
June 30, 2011
 
   
(In thousands)
 
With no related allowance:
                                         
Multi-family construction
  $ 9,174     $ 11,756     $ -     $ 10,205     $ 9,466     $ -     $ -  
One-to-four family construction
    14,297       17,753       -       11,172       7,861       28       33  
Recreation and all other loans
    774       1,230       -       660       403       3       4  
Commercial construction
    8,157       12,097       -       20,194       15,974       53       55  
Commercial acquisition and development
    19,232       25,254       -       24,619       20,560       49       49  
Residential acquisition and development
    67,129       92,463       -       89,660       67,957       258       320  
    Total
  $ 118,763     $ 160,553     $ -     $ 156,510     $ 122,221     $ 391     $ 461  
                                                         
With an allowance:
                                                       
Multi-family construction
  $ -     $ -     $ -     $ 981     $ 1,184     $ -     $ -  
One-to-four family construction
    8,871       8,977       2,535       5,113       5,120       44       44  
Recreation and all other loans
    -       -       0       291       474       -       2  
Commercial construction
    8,460       12,532       2,264       7,210       8,452       25       70  
Commercial acquisition and development
    17,203       17,695       6,083       16,463       16,505       175       331  
Residential acquisition and development
    43,734       46,652       16,839       57,178       63,489       328       518  
    Total
  $ 78,268     $ 85,856     $ 27,721     $ 87,236     $ 95,224     $ 572     $ 965  
                                                         
Total:
                                                       
Multi-family construction
  $ 9,174     $ 11,756     $ -     $ 11,186     $ 10,650     $ -     $ -  
One-to-four family construction
    23,168       26,730       2,535       16,285       12,981       72       77  
Recreation and all other loans
    774       1,230       -       951       877       3       6  
Commercial construction
    16,617       24,629       2,264       27,404       24,426       78       125  
Commercial acquisition and development
    36,435       42,949       6,083       41,082       37,065       224       380  
Residential acquisition and development
    110,863       139,115       16,839       146,838       131,446       586       838  
    Total
  $ 197,031     $ 246,409     $ 27,721     $ 243,746     $ 217,445     $ 963     $ 1,426  
 
 
11

 

 
`
 
December 31, 2010
 
         
Unpaid
       
   
Recorded
   
Principal
   
Related
 
   
Investment in
   
Balance of
   
Allowance for
 
   
Impaired Loans
   
Impaired Loans
   
Credit Losses
 
   
(In thousands)
 
With no related allowance:
                 
Multi-family construction
  $ 8,293     $ 9,975     $ -  
One-to-four family construction
    6,511       11,749       -  
Recreation and all other loans
    392       580       -  
Commercial construction
    11,171       13,062       -  
Commercial acquisition and development
    7,897       12,501       -  
Residential acquisition and development
    45,940       73,071       -  
    Total
  $ 80,204     $ 120,938     $ -  
                         
With an allowance:
                       
Multi-family construction
  $ 1,904     $ 6,978     $ 4  
One-to-four family construction
    11,939       14,846       932  
Recreation and all other loans
    498       498       148  
Commercial construction
    12,459       12,612       5,246  
Commercial acquisition and development
    21,575       21,575       8,424  
Residential acquisition and development
    56,339       67,029       14,441  
    Total
  $ 104,714     $ 123,538     $ 29,195  
                         
Total:
                       
Multi-family construction
  $ 10,197     $ 16,953     $ 4  
One-to-four family construction
    18,450       26,595       932  
Recreation and all other loans
    890       1,078       148  
Commercial construction
    23,630       25,674       5,246  
Commercial acquisition and development
    29,472       34,076       8,424  
Residential acquisition and development
    102,279       140,100       14,441  
    Total
  $ 184,918     $ 244,476     $ 29,195  


Loans considered impaired under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310, Receivables (“FASB ASC 310”) are loans for which, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  The Company’s recorded investment in loans considered impaired at June 30, 2011 and December 31, 2010 was $303.7 million and $273.4 million, respectively.  At June 30, 2011 and December 31, 2010, $138.6 million and $151.4 million, respectively, of those impaired loans had a valuation allowance of $46.8 million and $40.7 million, respectively.  The remaining balance of impaired loans of $165.1 million and $122.0 million at June 30, 2011 and December 31, 2010, respectively, were carried at fair value, less estimated selling costs which approximated net realizable value.  Therefore, such loans did not have an associated valuation allowance.  Impaired loans that were characterized as troubled debt restructurings (“TDRs”) totaled $75.8 million and $63.7 million at June 30, 2011 and December 31, 2010, respectively.
Non-performing loans and leases (“NPLs”) consist of non-accrual loans and leases, loans and leases 90 days or more past due and still accruing, and loans and leases that have been restructured because of the borrower’s weakened financial condition.  The following table presents information concerning NPLs as of the dates indicated:
 
 
12

 
   
June 30,
   
December 31,
 
   
2011
   
2010
   
2010
 
   
(In thousands)
 
                   
Non-accrual loans and leases
  $ 331,076     $ 263,758     $ 347,499  
Loans and leases 90 days or more past due, still accruing
    3,980       17,696       8,500  
Restructured loans and leases still accruing
    44,786       20,813       38,376  
Total non-performing loans and leases
  $ 379,842     $ 302,267     $ 394,375  

The Bank’s policy for all loan classifications 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.  At June 30, 2011, the Company’s geographic NPL distribution was concentrated primarily in its Alabama and Tennessee markets, including the greater Memphis, Tennessee area, a portion of which is in northwest Mississippi.  The following table presents the Company’s nonaccrual loans and leases by segment and class as of the dates indicated:
 
   
June 30,
   
December 31,
 
   
2011
   
2010
   
2010
 
   
(In thousands)
 
Commercial and industrial
  $ 9,337     $ 6,280     $ 13,075  
Real estate
                       
   Consumer mortgages
    34,174       22,618       34,021  
   Home equity
    1,232       1,565       811  
   Agricultural
    8,526       3,972       7,589  
   Commercial and industrial-owner occupied
    26,387       12,061       20,338  
   Construction, acquisition and development
    200,434       174,725       211,547  
   Commercial
    48,571       38,921       57,766  
Credit cards
    546       726       720  
All other
    1,869       2,890       1,632  
     Total
  $ 331,076     $ 263,758     $ 347,499  


In the normal course of business, management grants concessions, which would not otherwise be considered, to borrowers that are experiencing financial difficulty.  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 interest for a specified period, 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 nonaccrual status, even after the restructure occurs.  As part of the credit approval process, the restructured loans are evaluated for adequate collateral protection in determining the appropriate accrual status at the time of restructure.  TDR loans may be returned to accrual status if there has been at least a six-month period of sustained repayment performance by the borrower.  During the second quarter and first six months of 2011, the most common concessions that were granted involved rescheduling payments of principal and interest over a longer amortization period, granting a period of reduced principal payment or interest only payment for a limited time period, or the rescheduling of payments in accordance with a bankruptcy plan.

 
13

 
NOTE 3 – ALLOWANCE FOR CREDIT LOSSES

The following tables summarize the changes in the allowance for credit losses by segment and class for the periods indicated:

 
   
Six months ended
 
   
June 30, 2011
 
   
Balance,
                     
Balance,
 
   
Beginning of
                     
End of
 
   
Period
   
Charge-offs
   
Recoveries
   
Provision
   
Period
 
   
(In thousands)
 
Commercial and industrial
  $ 22,479     $ (14,365 )   $ 773     $ 13,953     $ 22,840  
Real estate
                                       
  Consumer mortgage
    35,540       (4,889 )     363       6,031       37,045  
  Home equity
    7,305       (2,473 )     91       2,697       7,620  
  Agricultural
    4,997       (965 )     47       630       4,709  
  Commercial and industrial-owner occupied
    20,403       (4,944 )     194       8,991       24,644  
  Construction, acquisition and development
    59,048       (49,126 )     2,057       41,941       53,920  
  Commercial
    33,439       (6,111 )     405       7,560       35,293  
Credit Cards
    4,126       (1,606 )     494       473       3,487  
All other
    9,576       (5,524 )     574       3,443       8,069  
    Total
  $ 196,913     $ (90,003 )   $ 4,998     $ 85,719     $ 197,627  

 
   
Year ended
 
   
December 31, 2010
 
   
Balance,
                     
Balance,
 
   
Beginning of
                     
End of
 
   
Period
   
Charge-offs
   
Recoveries
   
Provision
   
Period
 
   
(In thousands)
 
Commercial and industrial
  $ 21,154     $ (11,879 )   $ 1,330     $ 11,874     $ 22,479  
Real estate
                                       
  Consumer mortgage
    37,048       (16,280 )     1,448       13,324       35,540  
  Home equity
    7,218       (5,215 )     179       5,123       7,305  
  Agricultural
    4,192       (1,201 )     12       1,994       4,997  
  Commercial and industrial-owner occupied
    22,989       (9,200 )     399       6,215       20,403  
  Construction, acquisition and development
    46,193       (122,596 )     1,706       133,745       59,048  
  Commercial
    26,694       (14,084 )     845       19,984       33,439  
Credit Cards
    3,481       (4,559 )     829       4,375       4,126  
All other
    7,074       (6,008 )     1,128       7,382       9,576  
    Total
  $ 176,043     $ (191,022 )   $ 7,876     $ 204,016     $ 196,913  

 
14

 
 
   
Six months ended
 
   
June 30, 2010
 
   
Balance,
                     
Balance,
 
   
Beginning of
                     
End of
 
   
Period
   
Charge-offs
   
Recoveries
   
Provision
   
Period
 
   
(In thousands)
 
Commercial and industrial
  $ 21,154     $ (7,275 )   $ 305     $ 8,334     $ 22,518  
Real estate
                                       
  Consumer mortgage
    37,048       (7,591 )     882       2,256       32,595  
  Home equity
    7,218       (2,285 )     95       1,751       6,779  
  Agricultural
    4,192       (680 )     -       255       3,767  
  Commercial and industrial-owner occupied
    22,989       (6,310 )     51       5,803       22,533  
  Construction, acquisition and development
    46,193       (49,090 )     267       70,935       68,305  
  Commercial
    26,694       (4,871 )     39       6,781       28,643  
Credit Cards
    3,481       (2,523 )     369       1,984       3,311  
All other
    7,074       (3,117 )     562       7,774       12,293  
    Total
  $ 176,043     $ (83,742 )   $ 2,570     $ 105,873     $ 200,744  

The following tables provide the allowance for credit losses by segment, class and impairment status as of the dates indicated:
 
   
June 30, 2011
 
   
Recorded
   
Allowance for
   
Allowance for
       
   
Balance of
   
Impaired Loans
   
All Other Loans
   
Total
 
   
Impaired Loans
   
and Leases
   
and Leases
   
Allowance
 
   
(In thousands)
 
Commercial and industrial
  $ 5,985     $ 456     $ 22,384     $ 22,840  
Real estate
                               
  Consumer mortgage
    23,743       2,278       34,767       37,045  
  Home equity
    670       39       7,581       7,620  
  Agricultural
    7,316       1,729       2,980       4,709  
  Commercial and industrial-owner occupied
    21,190       3,151       21,493       24,644  
  Construction, acquisition and development
    197,031       27,721       26,199       53,920  
  Commercial
    45,853       10,642       24,651       35,293  
Credit Cards
    -       -       3,487       3,487  
All other
    1,869       794       7,275       8,069  
    Total
  $ 303,657     $ 46,810     $ 150,817     $ 197,627  


 
15

 
 
   
December 31, 2010
 
   
Recorded
   
Allowance for
   
Allowance for
       
   
Balance of
   
Impaired Loans
   
All Other Loans
   
Total
 
   
Impaired Loans
   
and Leases
   
and Leases
   
Allowance
 
   
(In thousands)
 
Commercial and industrial
  $ 2,136     $ 125     $ 22,354     $ 22,479  
Real estate
                               
  Consumer mortgage
    28,223       4,226       31,314       35,540  
  Home equity
    851       41       7,264       7,305  
  Agricultural
    4,295       544       4,453       4,997  
  Commercial and industrial-owner occupied
    16,073       1,361       19,042       20,403  
  Construction, acquisition and development
    184,918       29,195       29,853       59,048  
  Commercial
    36,207       5,227       28,212       33,439  
Credit Cards
    -       -       4,126       4,126  
All other
    702       -       9,576       9,576  
    Total
  $ 273,405     $ 40,719     $ 156,194     $ 196,913  

Management evaluates impaired loans individually in determining the adequacy of the allowance for impaired loans.

NOTE 4 – OTHER REAL ESTATE OWNED

The following table presents the activity in other real estate owned for the periods indicated:

 
   
Six months ended
   
Year ended
 
   
June 30,
   
December 31,
 
   
2011
   
2010
   
2010
 
   
(In thousands)
 
Balance at beginning of period
  $ 133,412     $ 59,265     $ 59,265  
Additions to foreclosed properties
                       
     New foreclosed properties
    59,663       37,105       129,796  
Reductions in foreclosed properties
                       
     Sales
    (34,663 )     (24,332 )     (45,217 )
     Writedowns
    (7,208 )     (4,478 )     (10,432 )
Balance at end of period
  $ 151,204     $ 67,560     $ 133,412  
 
 
16

 

    The following table presents the other real estate owned by geographical location, segment and class at June 30, 2011:

 
   
Alabama
                     
Greater
                         
   
and Florida
                     
Memphis
   
Northeast
   
Texas and
             
   
Panhandle
   
Arkansas
   
Mississippi
   
Missouri
   
Area
   
Tennessee
   
Louisiana
   
Other
   
Total
 
   
(In thousands)
 
Commercial and industrial
  $ 439     $ 18     $ -     $ -     $ 946     $ -     $ -     $ -     $ 1,403  
Real estate
                                                                       
   Consumer mortgages
    3,985       327       3,391       762       6,078       2,642       1,120       1,649       19,954  
   Home equity
    -       58       291       -       -       368       -       -       717  
   Agricultural
    950       87       2,081       -       1,551       -       -       -       4,669  
   Commercial and industrial-owner occupied
    930       109       1,740       79       3,515       446       228       292       7,339  
   Construction, acquisition and development
    9,334       2,231       26,052       2,952       49,562       14,931       2,669       621       108,352  
   Commercial
    2,757       1,725       1,112       451       1,215       203       584       -       8,047  
All other
    172       44       312       195       -       -       -       -       723  
     Total
  $ 18,567     $ 4,599     $ 34,979     $ 4,439     $ 62,867     $ 18,590     $ 4,601     $ 2,562     $ 151,204  

The Company incurred total foreclosed property expenses of $3.8 million for each of the three months ended June 30, 2011 and 2010.  Realized net losses on dispositions and holding losses on valuations of these properties, a component of total foreclosed property expenses, were $2.1 million and $3.2 million for the three months ended June 30, 2011 and 2010, respectively.  The Company incurred total foreclosed property expenses of $10.8 million and $7.4 million for the six months ended June 30, 2011 and 2010, respectively.  Realized net losses on dispositions and holding losses on valuations of these properties, a component of total foreclosed property expenses, were $7.6 million and $5.9 million for the six months ended June 30, 2011 and 2010, respectively.

NOTE 5 – SECURITIES

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 as of June 30, 2011.  The Company reclassed held-to-maturity securities with amortized cost of $1.6 billion and fair value of $1.7 billion to available-for-sale resulting in an increase in other comprehensive income of $19.7 million during the second quarter of 2011.  Amortized cost and estimated fair values of held-to-maturity securities as of December 31, 2010 follow:

 
   
December 31, 2010
 
         
Gross
   
Gross
   
Estimated
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(In thousands)
 
U.S. Government agencies
  $ 1,246,649     $ 27,082     $ 4,320     $ 1,269,411  
Obligations of states and political subdivisions
    366,370       4,286       7,376       363,280  
    Total
  $ 1,613,019     $ 31,368     $ 11,696     $ 1,632,691  

Gross gains of approximately $37,000 and no gross losses were recognized on held-to-maturity securities during the first six months of 2011 prior to the reclassification of held-to-maturity securities to available-for-sale securities.  Gross gains of approximately $45,000 and no gross losses were recognized during the first six months of 2010.  These gains and losses were a result of held-to-maturity securities being called prior to maturity.
 
 
17

 
A comparison of amortized cost and estimated fair values of available-for-sale securities as of June 30, 2011 and December 31, 2010 follows:
 
   
June 30, 2011
 
         
Gross
   
Gross
   
Estimated
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(In thousands)
 
U.S. Government agencies
  $ 1,565,900     $ 33,475     $ 144     $ 1,599,231  
Government agency issued residential
                               
   mortgage-backed securities
    425,416       6,847       1,861       430,402  
Government agency issued commercial
                               
   mortgage-backed securities
    30,420       1,325       118       31,627  
Obligations of states and political subdivisions
    472,860       14,727       934       486,653  
Other
    12,161       750       -       12,911  
    Total
  $ 2,506,757     $ 57,124     $ 3,057     $ 2,560,824  

 
   
December 31, 2010
 
         
Gross
   
Gross
   
Estimated
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(In thousands)
 
U.S. Government agencies
  $ 416,005     $ 17,153     $ -     $ 433,158  
Government agency issued residential
                               
   mortgage-backed securities
    498,874       5,954       1,599       503,229  
Government agency issued commercial
                               
   mortgage-backed securities
    29,582       676       264       29,994  
Obligations of states and political subdivisions
    110,946       965       1,746       110,165  
Other
    18,943       573       -       19,516  
    Total
  $ 1,074,350     $ 25,321     $ 3,609     $ 1,096,062  


Gross gains of $10.3 million and gross losses of approximately $260,000 were recognized on available-for-sale securities during the first six months of 2011, while gross gains of $2.0 million and gross losses of $1.3 million were recognized during the first six months of 2010.
The amortized cost and estimated fair value of available-for-sale securities at June 30, 2011 by contractual maturity are shown below.  Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Equity securities are considered as maturing after ten years.
 
   
June 30, 2011
         
Estimated
   
Weighted
   
Amortized
   
Fair
   
Average
   
Cost
   
Value
   
Yield
   
(Dollars in thousands)
Maturing in one year or less
  $ 330,416     $ 337,666       5.09 %
Maturing after one year through five years
    1,443,567       1,468,183       2.00  
Maturing after five years through ten years
    266,506       273,532       3.48  
Maturing after ten years
    466,268       481,443       5.61  
    Total
  $ 2,506,757     $ 2,560,824          

 
18

 
 
The following tables summarize information pertaining to temporarily impaired available-for-sale securities with continuous unrealized loss positions at June 30, 2011 and December 31, 2010:

 
   
June 30, 2011
 
   
Continuous Unrealized Loss Position
             
   
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
   
(In thousands)
 
Available-for-sale securities:
                                   
U.S. Government agencies
  $ 79,782     $ (144 )   $ -     $ -     $ 79,782     $ (144 )
Government agency issued residential
                                               
  mortgage-backed securities
    140,877       (1,861 )     -       -       140,877       (1,861 )
Government agency issued commercial
                                               
  mortgage-backed securities
    2,097       (35 )     3,963       (83 )     6,060       (118 )
Obligations of states and
                                            -  
  political subdivisions
    35,576       (814 )     1,248       (120 )     36,824       (934 )
Other
    -       -       -       -       -       -  
    Total
  $ 258,332     $ (2,854 )   $ 5,211     $ (203 )   $ 263,543     $ (3,057 )
 

 
   
December 31, 2010
 
   
Continuous Unrealized Loss Position
             
   
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
   
(In thousands)
 
Held-to-maturity securities:
                                   
U.S. Government agencies
  $ -     $ -     $ -     $ -     $ -     $ -  
Obligations of states and
                                               
 political subdivisions
    20,322       332       9,327       338       29,649       670  
    Total
  $ 20,322     $ 332     $ 9,327     $ 338     $ 29,649     $ 670  
                                                 
                                                 
Available-for-sale securities:
                                               
U.S. Government agencies
  $ 48,881     $ 207     $ -     $ -     $ 48,881     $ 207  
Government agency issued residential
                                               
  mortgage-backed securities
    6,320       122       -       -       6,320       122  
Government agency issued commercial
                                               
  mortgage-backed securities
    1,384       19       2,598       66       3,982       85  
Obligations of states and
                                            -  
  political subdivisions
    36,704       297       2,459       205       39,163       502  
Collateralized debt obligations
    -       -       5       1       5       1  
Other
    -       -       -       -       -       -  
    Total
  $ 93,289     $ 645     $ 5,062     $ 272     $ 98,351     $ 917  

Based upon a review of the credit quality of these securities, and considering that the issuers were in compliance with the terms of the securities, management had no intent to sell these securities, and it was more likely than not that the Company would not be required to sell the securities prior to recovery of costs. Therefore, the impairments related to these securities were determined to be temporary.  No other-than-temporary impairment has been recorded during 2011.

 
19

 

NOTE 6 – PER SHARE DATA

The computation of basic earnings per share (“EPS”) is based on the weighted average number of shares of common stock outstanding.  The computation of diluted earnings per share is based on the weighted average number of shares of common stock outstanding plus the shares resulting from the assumed exercise of all outstanding share-based awards using the treasury stock method.  Weighted-average antidilutive stock options for 3.0 million shares of Company common stock for both the three months and six months ended June 30, 2011, with a weighted average exercise price of $21.03 and $21.01 per share for the three months and six months ended June 30, 2011, respectively, were excluded from diluted shares.  Because of  the net loss attributable to common shareholders for the three and six months ended June 30, 2010, no potentially dilutive shares were included in the loss per share calculations as including such shares would have been antidilutive.  Weighted-average antidilutive stock options for 2.6 million and 2.7 million shares of Company common stock with a weighted average exercise price of $22.39 and $22.36 per share for the three months and six months ended June 30, 2010, respectively, were excluded from diluted shares.  There were no antidilutive other equity awards for the three months and six months ended June 30, 2011.  Antidilutive other equity awards of approximately 99,000 and 270,000 shares of Company common stock for the three months and six months ended June 30, 2010 were also excluded from diluted shares.  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 June 30,
 
   
2011
   
2010
 
   
Income
   
Shares
   
Per Share
   
Income
   
Shares
   
Per Share
 
   
(Numerator)
   
(Denominator)
   
Amount
   
(Numerator)
   
(Denominator)
   
Amount
 
Basic EPS
 
(In thousands, except per share amounts)
 
Income (loss) available to common
                                   
   shareholders
  $ 12,826       83,454     $ 0.15     $ (12,560 )     83,429     $ (0.15 )
Effect of dilutive share-
                                               
  based awards
    -       60               -       -          
                                                 
Diluted EPS
                                               
Income (loss) available to common
                                               
   shareholders plus assumed
                                               
   exercise of all outstanding
                                               
   share-based awards
  $ 12,826       83,514     $ 0.15     $ (12,560 )     83,429     $ (0.15 )
 
   
Six months ended June 30,
 
   
2011
   
2010
 
   
Income
   
Shares
   
Per Share
   
Income
   
Shares
   
Per Share
 
   
(Numerator)
   
(Denominator)
   
Amount
   
(Numerator)
   
(Denominator)
   
Amount
 
Basic EPS
 
(In thousands, except per share amounts)
 
Income (loss) available to common
                                   
   shareholders
  $ 12,332       83,451     $ 0.15     $ (4,164 )     83,416     $ (0.05 )
Effect of dilutive share-
                                               
  based awards
    -       59               -       -          
                                                 
Diluted EPS
                                               
Income (loss) available to common
                                               
   shareholders plus assumed
                                               
   exercise of all outstanding
                                               
   share-based awards
  $ 12,332       83,510     $ 0.15     $ (4,164 )     83,416     $ (0.05 )


 
20

 
NOTE 7 – 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 June 30,
 
   
2011
   
2010
 
   
Before
 
Tax
   
Net
   
Before
 
Tax
   
Net
 
   
tax
   
(expense)
   
of tax
   
tax
   
(expense)
   
of tax
 
   
amount
   
benefit
   
amount
   
amount
   
benefit
   
amount
 
Net unrealized gains on available-for-
 
(In thousands)
 
sale securities:
                                   
Unrealized gains (losses) arising during
                                   
  holding period
  $ 46,461     $ (17,781 )   $ 28,680     $ 7,889     $ (3,015 )   $ 4,874  
Less:  Reclassification adjustment for
                                               
  net (gains) losses realized in net income
    (10,045 )     3,842       (6,203 )     585       (224 )     361  
Recognized employee benefit plan
                                               
net periodic benefit cost
    633       (242 )     391       652       (250 )     402  
Other comprehensive income (loss)
  $ 37,049     $ (14,181 )   $ 22,868     $ 9,126     $ (3,489 )   $ 5,637  
Net income (loss)
                    12,826                       (12,560 )
Comprehensive income (loss)
                  $ 35,694                     $ (6,923 )

 
   
Six months ended June 30,
 
   
2011
   
2010
 
   
Before
 
Tax
   
Net
   
Before
 
Tax
   
Net
 
   
tax
   
(expense)
   
of tax
   
tax
   
(expense)
   
of tax
 
   
amount
   
benefit
   
amount
   
amount
   
benefit
   
amount
 
Net unrealized gains on available-for-
 
(In thousands)
 
sale securities:
                                   
Unrealized gains (losses) arising
                                   
  during holding period
  $ 42,417     $ (16,244 )   $ 26,173     $ 4,931     $ (1,884 )   $ 3,047  
Less:  Reclassification adjustment for
                                               
  net (gains) losses realized in net income
    (10,062 )     3,849       (6,213 )     (712 )     272       (440 )
Recognized employee benefit plan
                                               
net periodic benefit cost
    1,266       (484 )     782       1,286       (492 )     794  
Other comprehensive income
  $ 33,621     $ (12,879 )   $ 20,742     $ 5,505     $ (2,104 )   $ 3,401  
Net income
                    12,332                       (4,164 )
Comprehensive income
                  $ 33,074                     $ (763 )

Included with unrealized gains (losses) arising during holding period is an increase in other comprehensive income related to the transfer of held-to-maturity securities to the available-for-sale category.

NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS

The carrying amounts of goodwill by operating segment for the six months ended June 30, 2011 were as follows:
 
   
Community
   
Insurance
       
   
Banking
   
Agencies
   
Total
 
   
(In thousands)
             
Balance as of December 31, 2010
  $ 217,618     $ 52,479     $ 270,097  
Goodwill recorded during the period
    -       1,200       1,200  
Balance as of June 30, 2011
  $ 217,618     $ 53,679     $ 271,297  

 
21

 

The goodwill recorded in the insurance agency segment during the first six months of 2011 was related to an earn-out payment associated with an insurance agency acquired during the first quarter of 2008.
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.  The Company performed a complete goodwill impairment analysis for all of its reporting segments during the second quarter of 2011 because volatile market conditions caused the Company’s market value to fall below book value.  Based on this analysis, no goodwill impairment was recorded during the six months ended June 30, 2011 because the estimated fair value of each of the Company’s reporting segments exceeded its respective carrying values by more than 15%.
In the current environment, forecasting cash flows, credit losses and growth in addition to valuing the Company’s assets with any degree of assurance is very difficult and subject to significant changes over very short periods of time.  Management will continue to update its analysis as circumstances change.  If market conditions continue to be volatile and unpredictable, impairment of goodwill related to the Company’s reporting segments may be necessary in future periods.
The following tables present information regarding the components of the Company’s identifiable intangible assets for the dates and periods indicated:
 
   
As of
   
As of
 
   
June 30, 2011
   
December 31, 2010
 
   
Gross Carrying
   
Accumulated
   
Gross Carrying
   
Accumulated
 
   
Amount
   
Amortization
   
Amount
   
Amortization
 
Amortized intangible assets:
 
(In thousands)
 
Core deposit intangibles
  $ 27,801     $ 20,231     $ 27,801     $ 19,716  
Customer relationship intangibles
    32,749       22,814       32,511       21,661  
Non-solicitation intangibles
    75       19       -       -  
Total
  $ 60,625     $ 43,064     $ 60,312     $ 41,377  
                                 
Unamortized intangible assets:
                               
Trade names
  $ 688     $ -     $ 688     $ -  
 
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Aggregate amortization expense for:
 
(In thousands)
 
Core deposit intangibles
  $ 248     $ 323     $ 515     $ 662  
Customer relationship intangibles
    575       661       1,153       1,337  
Non-solicitation intangibles
    9       -       19       -  
Total
  $ 832     $ 984     $ 1,687     $ 1,999  

 
22

 
    The following table presents information regarding estimated amortization expense on the Company’s amortizable identifiable intangible assets for the year ending December 31, 2011 and the succeeding four years:

 
         
Customer
   
Non-
       
   
Core Deposit
   
Relationship
   
Solicitation
       
   
Intangibles
   
Intangibles
   
Intangibles
   
Total
 
Estimated Amortization Expense:
 
(In thousands)
       
For year ending December 31, 2011
  $ 1,016     $ 2,223     $ 38     $ 3,277  
For year ending December 31, 2012
    946       1,905       37       2,888  
For year ending December 31, 2013
    582       1,632       -       2,214  
For year ending December 31, 2014
    526       1,398       -       1,924  
For year ending December 31, 2015
    157       1,136       -       1,293  

NOTE 9 – PENSION BENEFITS

The following table presents the components of net periodic benefit costs for the periods indicated:
 
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(In thousands)
 
Service cost
  $ 2,082     $ 1,921     $ 4,164     $ 3,724  
Interest cost
    2,028       1,931       4,056       3,838  
Expected return on assets
    (3,713 )     (3,529 )     (7,426 )     (7,016 )
Amortization of unrecognized transition amount
    5       3       10       8  
Recognized prior service cost
    50       85       100       170  
Recognized net loss
    578       564       1,156       1,108  
Net periodic benefit costs
  $ 1,030     $ 975     $ 2,060     $ 1,832  


NOTE 10 – RECENT PRONOUNCEMENTS

In January 2010, the FASB issued an accounting standards update (“ASU”) regarding fair value measurements and disclosures.  This ASU revises two disclosure requirements concerning fair value measurements and clarifies two others.  The ASU requires expanded disclosures related to significant transfers in and out of Level 1 and Level 2 fair value measurement and the reasons for the transfers, as well as the clarifications of existing disclosures and was effective for interim or annual reporting periods beginning after December 15, 2009.  The new disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements are effective for interim or annual reporting periods beginning after December 15, 2010.  This ASU impacts disclosures only and is included in Note 14 below.  The new ASU did not have an impact on the financial position or results of operations of the Company.
In July 2010, the FASB issued a new accounting standard regarding disclosures about the credit quality of financing receivables and the allowance for credit losses.  This new accounting standard amends existing accounting literature regarding disclosures about the credit quality of financing receivables and the allowance for credit losses to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses.  This new accounting standard is effective for fiscal years and interim reporting periods ending on or after December 15, 2010.  This new accounting standard regarding disclosures about the credit quality of financing receivables and the allowance for credit losses impacts disclosures only and is included in Notes 2 and 3 above.  The new accounting standard did not have an impact on the financial position or results of operations of the Company.
In April 2011, the FASB issued an ASU regarding a creditor’s determination of whether a restructuring should be considered a TDR.  This ASU provides additional guidance related to determining whether a creditor has granted a concession, including factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant.  The ASU also prohibits creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower and adds factors for creditors
 
 
23

 
 to use in determining whether a borrower is experiencing financial difficulties.  The ASU ends the deferral of activity-based disclosures about TDRs that are part of the new credit-quality disclosure requirements.  The ASU is effective for interim and annual periods beginning on or after June 15, 2011.  The Company is currently assessing the impact of the adoption of this ASU on the financial position and results of operations of the Company.
In April 2011, the FASB issued an ASU regarding reconsideration of effective control for repurchase agreements.  This ASU removes from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion.  Other criteria applicable to the assessment of effective control are not changed by this ASU.  The ASU is effective for the first interim or annual period beginning on or after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date.  Early adoption is not permitted.  The new ASU is not expected to have a material impact on the financial position and results of operations of the Company.
In May 2011, the FASB issued an ASU regarding amendments to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”).  This ASU provides amendments to ensure that fair value has the same meaning in U.S. GAAP and IFRS and that their respective fair value measurements and disclosure requirements are the same.  The ASU is effective during interim and annual periods beginning after December 15, 2011 and should be applied prospectively.  Early adoption is not permitted.  The Company is currently assessing the impact on this new ASU on the financial position and results of operations of the Company.
In June 2011, the FASB issued an ASU regarding the presentation of comprehensive income.  This ASU amends existing guidance and eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholder’s equity.  The ASU requires that comprehensive income be presented in either a single continuous statement of in two separate but consecutive statements.  The ASU is effective for interim and annual periods beginning on or after December 15, 2011.  The adoption of this ASU is expected to change the manner in which the Company’s other comprehensive income is disclosed and will have no impact on the financial position and results of operations of the Company.

NOTE 11 - SEGMENT REPORTING

The Company is a financial holding company with subsidiaries engaged in the business of banking and activities closely related to banking.  The Company determines reportable segments based upon the services offered, the significance of those services to the Company’s financial condition and operating results and management’s regular review of the operating results of those services.  The Company’s primary segment is Community Banking, which includes providing a full range of deposit products, commercial loans and consumer loans.  The Company has also designated two additional reportable segments -- Insurance Agencies and General Corporate and Other.  The Company’s insurance agencies serve as agents in the sale of title insurance, commercial lines of insurance and full lines of property and casualty, life, health and employee benefits products and services.  The General Corporate and Other operating segment includes leasing, mortgage lending, trust services, credit card activities, investment services and other activities not allocated to the Community Banking or Insurance Agencies operating segments.

 
 
24

 
Results of operations and selected financial information by operating segment for the three-month and six-month periods ended June 30, 2011 and 2010 were as follows:
 
               
General
       
   
Community
   
Insurance
   
Corporate
       
   
Banking
   
Agencies
   
and Other
   
Total
 
   
(In thousands)
 
Three months ended June 30, 2011:
                       
Results of Operations
                       
Net interest revenue
  $ 102,880     $ 84     $ 6,948     $ 109,912  
Provision for credit losses
    32,534       -       (294 )     32,240  
Net interest revenue after provision for credit losses
    70,346       84       7,242       77,672  
Noninterest revenue
    40,913       22,890       11,341       75,144  
Noninterest expense
    91,936       19,011       26,122       137,069  
Income (loss) before income taxes
    19,323       3,963       (7,539 )     15,747  
Income tax expense (benefit)
    4,063       1,576       (2,718 )     2,921  
Net income (loss)
  $ 15,260     $ 2,387     $ (4,821 )   $ 12,826  
Selected Financial Information
                               
Total assets at end of period
  $ 10,483,137     $ 171,122     $ 2,712,791     $ 13,367,050  
Depreciation and amortization
    6,107       972       1,069       8,148  
                                 
Three months ended June 30, 2010:
                               
Results of Operations
                               
Net interest revenue
  $ 99,271     $ 146     $ 9,912     $ 109,329  
Provision for credit losses
    58,789       -       3,565       62,354  
Net interest revenue after provision for credit losses
    40,482       146       6,347       46,975  
Noninterest revenue
    27,474       21,625       7,987       57,086  
Noninterest expense
    77,975       18,074       23,967       120,016  
(Loss) income before income taxes
    (10,019 )     3,697       (9,633 )     (15,955 )
Income tax (benefit) expense
    (2,132 )     1,457       (2,720 )     (3,395 )
Net (loss) income
  $ (7,887 )   $ 2,240     $ (6,913 )   $ (12,560 )
Selected Financial Information
                               
Total assets at end of period
  $ 10,956,724     $ 173,210     $ 2,291,070     $ 13,421,004  
Depreciation and amortization
    6,678       1,104       564       8,346  

 
25

 
               
General
       
   
Community
   
Insurance
   
Corporate
       
   
Banking
   
Agencies
   
and Other
   
Total
 
   
(In thousands)
 
Six months ended June 30, 2011:
                       
Results of Operations
                       
Net interest revenue
  $ 205,543     $ 179     $ 13,627     $ 219,349  
Provision for credit losses
    85,775       -       (56 )     85,719  
Net interest revenue after provision for credit losses
    119,768       179       13,683       133,630  
Noninterest revenue
    68,905       45,427       29,123       143,455  
Noninterest expense
    174,654       37,063       55,362       267,079  
Income (loss) before income taxes
    14,019       8,543       (12,556 )     10,006  
Income tax expense (benefit)
    1,962       3,401       (7,689 )     (2,326 )
Net income (loss)
  $ 12,057     $ 5,142     $ (4,867 )   $ 12,332  
Selected Financial Information
                               
Total assets at end of period
  $ 10,483,137     $ 171,122     $ 2,712,791     $ 13,367,050  
Depreciation and amortization
    12,381       1,946       2,149       16,476  
                                 
Six months ended June 30, 2010:
                               
Results of Operations
                               
Net interest revenue
  $ 200,611     $ 294     $ 20,306     $ 221,211  
Provision for credit losses
    100,738       -       5,135       105,873  
Net interest revenue after provision for credit losses
    99,873       294       15,171       115,338  
Noninterest revenue
    53,766       43,359       23,293       120,418  
Noninterest expense
    155,585       35,477       49,437       240,499  
(Loss) income before income taxes
    (1,946 )     8,176       (10,973 )     (4,743 )
Income tax (benefit) expense
    (238 )     3,239       (3,580 )     (579 )
Net (loss) income
  $ (1,708 )   $ 4,937     $ (7,393 )   $ (4,164 )
Selected Financial Information
                               
Total assets at end of period
  $ 10,956,724     $ 173,210     $ 2,291,070     $ 13,421,004  
Depreciation and amortization
    13,634       2,164       1,106       16,904  

The increased net income of the Community Banking operating segment for the three months and six months ended June 30, 2011 was primarily related to the decrease in the provision for credit losses.

NOTE 12 – MORTGAGE SERVICING RIGHTS

Mortgage servicing rights (“MSRs”), which are recognized as a separate asset on the date the corresponding mortgage loan is sold, are recorded at fair value as determined at each accounting period end.  An estimate of the fair value of the Company’s MSRs is determined utilizing assumptions about factors such as mortgage interest rates, discount rates, mortgage loan prepayment speeds, market trends and industry demand.  Data and assumptions used in the fair value calculation related to MSRs as of the dates indicated were as follows:

 
   
June 30,
   
December 31,
 
   
2011
   
2010
   
2010
 
   
(Dollars in thousands)
 
Unpaid principal balance
  $ 4,026,851     $ 3,552,221     $ 3,870,872  
Weighted-average prepayment speed (CPR)
    15.4       21.1       15.6  
Discount rate (annual percentage)
    10.3       10.3       10.3  
Weighted-average coupon interest rate (percentage)
    5.2       5.5       5.2  
Weighted-average remaining maturity (months)
    315.0       321.0       315.0  
Weighted-average servicing fee (basis points)
    28.2       28.8       28.4  
 
Because the valuation is determined by using discounted cash flow models, the primary risk inherent in valuing the MSRs is the impact of fluctuating interest rates on the estimated life of the servicing revenue stream.  The use of different estimates or assumptions could also produce different fair values.  The Company does not
 
 
26

hedge the change in fair value of MSRs and, therefore, the Company is susceptible to significant fluctuations in the fair value of its MSRs in changing interest rate environments.
The Company has only one class of mortgage servicing asset comprised of closed end loans for one-to-four family residences, secured by first liens.  The following table presents the activity in this class for the periods indicated:
 
   
2011
   
2010
 
   
(In thousands)
 
Fair value as of January 1
  $ 38,642     $ 35,560  
Additions:
               
   Origination of servicing assets
    4,811       4,859  
Changes in fair value:
               
   Due to payoffs/paydowns
    (2,690 )     (2,736 )
   Due to change in valuation inputs or assumptions
               
     used in the valuation model
    (1,299 )     (8,315 )
   Other changes in fair value
    (9 )     (5 )
Fair value as of June 30
  $ 39,455     $ 29,363  
 
All of the changes to the fair value of the MSRs are recorded as part of mortgage lending noninterest revenue on the income statement.  As part of mortgage lending noninterest revenue, the Company recorded contractual servicing fees of $2.9 million and $2.6 million and late and other ancillary fees of approximately $311,000 and $333,000 for the three months ended June 30, 2011 and 2010, respectively.  The Company recorded contractual servicing fees of $5.7 million and $5.1 million and late and other ancillary fees of approximately $632,000 and $684,000 for the six months ended June 30, 2011 and 2010, respectively.

NOTE 13 – DERIVATIVE INSTRUMENTS

The derivatives held by the Company include commitments to fund fixed-rate mortgage loans to customers and forward commitments to sell individual fixed-rate mortgage loans.  The Company’s objective in obtaining the forward commitments is to mitigate the interest rate risk associated with the commitments to fund the fixed-rate mortgage loans.  Both the commitments to fund fixed-rate mortgage loans and the forward commitments to sell individual fixed-rate mortgage loans are reported at fair value, with adjustments being recorded in current period earnings, and are not accounted for as hedges.  At June 30, 2011, the notional amount of forward commitments to sell individual fixed-rate mortgage loans was $131.1 million with a carrying value and fair value reflecting a loss of approximately $149,000.  At June 30, 2010, the notional amount of forward commitments to sell individual fixed-rate mortgage loans was $158.4 million with a carrying value and fair value reflecting a loss of $1.8 million.  At June 30, 2011, the notional amount of commitments to fund individual fixed-rate mortgage loans was $83.6 million with a carrying value and fair value reflecting a gain of approximately $990,000.  At June 30, 2010, the notional amount of commitments to fund individual fixed-rate mortgage loans was $127.8 million with a carrying value and fair value reflecting a gain of $2.2 million.
The Company also enters into derivative financial instruments in the form of interest rate swaps to meet the financing, interest rate and equity risk management needs of its customers.  Upon entering into these interest rate swaps to meet customer needs, the Company enters into offsetting positions to minimize interest rate and equity risk to the Company.  These derivative financial instruments are reported at fair value with any resulting gain or loss recorded in current period earnings.  These instruments and their offsetting positions are recorded in other assets and other liabilities on the consolidated balance sheets.  As of June 30, 2011, the notional amount of customer related derivative financial instruments was $504.3 million with an average maturity of 68 months, an average interest receive rate of 2.5% and an average interest pay rate of 6.0%.

NOTE 14 – FAIR VALUE DISCLOSURES

“Fair value” is defined by FASB ASC 820, Fair Value Measurements and Disclosure (“FASB ASC 820”), as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  FASB ASC 820 establishes a fair value hierarchy that prioritizes the
 
 
27

inputs to valuation techniques used to measure fair value.  The hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available.  Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity.  Unobservable inputs are inputs that reflect the reporting entity’s assumptions about the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances.  The hierarchy is broken down into the following three levels, based on the reliability of inputs:

Level 1:  Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.

Level 2:  Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data.

Level 3:  Significant unobservable inputs for the asset or liability that reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.

Determination of Fair Value

The Company uses the valuation methodologies listed below to measure different financial instruments at fair value.  An indication of the level in the fair value hierarchy in which each instrument is generally classified is included.  Where appropriate, the description includes details of the valuation models, the key inputs to those models as well as any significant assumptions.

Available-for-sale securities.  Available-for-sale securities are recorded at fair value on a recurring basis.  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.  The Company’s available-for-sale securities that are traded on an active exchange, such as the New York Stock Exchange, are classified as Level 1.  Available-for-sale securities valued using matrix pricing are classified as Level 2.  Available-for-sale securities valued using matrix pricing that has been adjusted to compensate for the present value of expected cash flows, market liquidity, credit quality and volatility are classified as Level 3.

Mortgage servicing rights.  The Company records MSRs at fair value on a recurring basis with subsequent remeasurement of MSRs based on change in fair value.  An estimate of the fair value of the Company’s MSRs is determined by utilizing assumptions about factors such as mortgage interest rates, discount rates, mortgage loan prepayment speeds, market trends and industry demand.  All of the Company’s MSRs are classified as Level 3.

Derivative instruments.  The Company’s derivative instruments consist of commitments to fund fixed-rate mortgage loans to customers and forward commitments to sell individual fixed-rate mortgage loans.  Fair value of these derivative instruments is measured on a recurring basis using recent observable market prices.  The Company also enters into interest rate swaps to meet the financing, interest rate and equity risk management needs of its customers.  The fair value of these instruments is either an observable market price or a discounted cash flow valuation using the terms of swap agreements but substituting original interest rates with prevailing interest rates.   The Company’s interest rate swaps, commitments to fund fixed-rate mortgage loans to customers and forward commitments to sell individual fixed-rate mortgage loans are classified as Level 3.

Loans held for sale.  Loans held for sale are carried at the lower of cost or estimated fair value and are subject to nonrecurring fair value adjustments.  Estimated fair value is determined on the basis of existing commitments or the current market value of similar loans.  All of the Company’s loans held for sale are classified as Level 2.

Impaired loans.  Loans considered impaired under FASB ASC 310 are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the
 
 
28

 
contractual terms of the loan agreement.  Impaired loans are subject to nonrecurring fair value adjustments to reflect (1) partial write-downs that are based on the observable market price or current appraised value of the collateral, or (2) the full charge-off of the loan carrying value.  All of the Company’s impaired loans are classified as Level 3.

Other real estate owned.  Other real estate owned (“OREO”) is carried at the lower of cost or estimated fair value, less estimated selling costs and is subject to nonrecurring fair value adjustments.  Estimated fair value is determined on the basis of independent appraisals and other relevant factors.  All of the Company’s OREO is classified as Level 3.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The following tables present the balances of the assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and 2010:

 
   
June 30, 2011
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
 
(In thousands)
 
Available-for-sale securities:
                       
   U.S. Government agencies
  $ -     $ 1,599,231     $ -     $ 1,599,231  
   Government agency issued residential
                               
     mortgage-backed securities
    -       430,402       -       430,402  
   Government agency issued commercial
                               
     mortgage-backed securities
    -       31,627       -       31,627  
   Obligations of states and
                               
     political subdivisions
    -       486,653       -       486,653  
   Other
    703       12,208       -       12,911  
Mortgage servicing rights
    -       -       39,455       39,455  
Derivative instruments
    -       -       40,338       40,338  
     Total
  $ 703     $ 2,560,121     $ 79,793     $ 2,640,617  
Liabilities:
                               
Derivative instruments
  $ -     $ -     $ 39,931     $ 39,931  

 
 
29

 
   
June 30, 2010
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
 
(In thousands)
 
Available-for-sale securities:
                       
   U.S. Government agencies
  $ -     $ 492,175     $ -     $ 492,175  
   Government agency issued residential
                               
     mortgage-backed securities
    -       319,918       -       319,918  
   Government agency issued commercial
                               
     mortgage-backed securities
    -       23,703       -       23,703  
   Obligations of states and
                               
     political subdivisions
    -       110,244       -       110,244  
 Collateralized debt obligations                     812        812   
   Other
    437       15,403       -       15,840  
Mortgage servicing rights
    -       -       29,363       29,363  
Derivative instruments
    -       -       46,083       46,083  
     Total
  $ 437     $ 961,443     $ 76,258     $ 1,038,138  
Liabilities:
                               
Derivative instruments
  $ -     $ -     $ 46,231     $ 46,231
 
The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the six-month periods ended June 30, 2011 and 2010:
 
   
Mortgage
         
Available-
 
   
Servicing
   
Derivative
   
for-sale
 
   
Rights
   
Instruments
   
Securities
 
   
(In thousands)
 
Balance at December 31, 2010
  $ 38,642     $ 2,685     $ -  
     Year to date net gains (losses) included in:
                       
        Net income
    813       (2,278 )     -  
        Other comprehensive income
    -       -       -  
     Purchases, sales, issuances and settlements, net
    -       -       -  
     Transfers in and/or out of Level 3
    -       -       -  
Balance at June 30, 2011
  $ 39,455     $ 407     $ -  
Net unrealized gains included in net income for the
                       
     quarter relating to assets and liabilities held at June 30, 2011
  $ 3,839     $ 53     $ -  
 
   
Mortgage
         
Available-
 
   
Servicing
   
Derivative
   
for-sale
 
   
Rights
   
Instruments
   
Securities
 
   
(In thousands)
 
Balance at December 31, 2009
  $ 35,560     $ 844     $ 2,125  
     Year to date net gains (losses) included in:
                       
        Net income (loss)
    (6,197 )     (992 )     (1,313 )
        Other comprehensive income (loss)
    -       -       -  
     Purchases, sales, issuances and settlements, net
    -       -       -  
     Transfers in and/or out of Level 3
    -       -       -  
Balance at June 30, 2010
  $ 29,363     $ (148 )   $ 812  
Net unrealized losses included in net income (loss) for the
                       
     quarter relating to assets and liabilities held at June 30, 2010
  $ (8,315 )   $ (726 )   $ -  


 
30

 
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The following tables present the balances of assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2011 and 2010:
 
   
June 30, 2011
 
                           
Total
 
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Losses
 
Assets:
 
(In thousands)
 
Loans held for sale
  $ -     $ 70,519     $ -     $ 70,519     $ -  
Impaired loans
    -       -       303,657       303,657       (46,810 )
Other real estate owned
    -       -       151,204       151,204       (12,860 )


 
   
June 30, 2010
 
                           
Total
 
   
Level 1
   
Level 2
   
Level 3
   
Total
   
Losses
 
Assets:
 
(In thousands)
 
Loans held for sale
  $ -     $ 95,987     $ -     $ 95,987     $ -  
Impaired loans
    -       -       188,291       188,291       (40,721 )
Other real estate owned
    -       -       67,560       67,560       (7,148 )



Fair Value of Financial Instruments

FASB ASC 825, Financial Instruments (“FASB ASC 825”), requires that the Company disclose estimated fair values for its financial instruments.  Fair value estimates, methods and assumptions are set forth below for the Company's financial instruments.

Held-to-maturity securities.  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

Loans and Leases.  Fair values are estimated for portfolios of loans and leases with similar financial characteristics.  The fair value of loans and leases is calculated by discounting scheduled cash flows through the estimated maturity using rates the Company would currently offer customers based on the credit and interest rate risk inherent in the loan or lease.  Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market and borrower information.  Estimated maturity represents the expected average cash flow period, which in some instances is different than the stated maturity.  This entrance price approach results in a calculated fair value that would be different than an exit or estimated actual sales price approach and such differences could be significant.

Deposit Liabilities.  Under FASB ASC 825, the fair value of deposits with no stated maturity, such as noninterest bearing demand deposits, interest bearing demand deposits and savings, is equal to the amount payable on demand as of the reporting date.  The fair value of certificates of deposit is based on the discounted value of contractual cash flows.  The discount rate is estimated using the prevailing rates offered for deposits of similar maturities.

Debt.  The carrying amounts for federal funds purchased and repurchase agreements approximate fair value because of their short-term maturity.  The fair value of the Company’s fixed-term Federal Home Loan Bank (“FHLB”) advances is based on the discounted value of contractual cash flows.  The discount rate is estimated using the prevailing rates available for advances of similar maturities.  The fair value of the Company’s junior subordinated debt is based on market prices or dealer quotes.

Lending Commitments.  The Company’s lending commitments are negotiated at prevailing market rates and are relatively short-term in nature.  As a matter of policy, the Company generally makes commitments for fixed-rate
 
 
31

 
 loans for relatively short periods of time.  Therefore, the estimated value of the Company’s lending commitments approximates the carrying amount and is immaterial to the financial statements.

The following table presents carrying and fair value information at June 30, 2011 and December 31, 2010:
 
 
   
June 30, 2011
   
December 31, 2010
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
   
Value
   
Value
   
Value
   
Value
 
Assets:
 
(In thousands)
 
Cash and due from banks
  $ 166,761     $ 166,761     $ 99,916     $ 99,916  
Interest bearing deposits with other banks
    304,344       304,344       172,170       172,170  
Held-to-maturity securities
    -       -       1,613,019       1,632,691  
Available-for-sale securities
    2,560,824       2,560,824       1,096,062       1,096,062  
Federal funds sold and securities
                               
   purchased under agreement to resell
    -       -       150,000       150,000  
Net loans and leases
    9,016,926       9,068,597       9,136,194       9,187,064  
Loans held for sale
    70,519       70,566       93,697       94,001  
                                 
Liabilities:
                               
Noninterest bearing deposits
    2,096,655       2,096,655       2,060,145       2,060,145  
Savings and interest bearing deposits
    5,884,546       5,884,546       5,794,552       5,794,552  
Other time deposits
    3,327,262       3,380,016       3,635,324       3,677,796  
Federal funds purchased and securities
                               
   sold under agreement to repurchase
                               
   and other short-term borrowings
    426,800       426,261       443,320       443,081  
Long-term debt and other borrowings
    195,386       199,036       270,392       286,993  
                                 
Derivative instruments:
                               
Forward commitments to sell fixed rate
                               
   mortgage loans
    (149 )     (149 )     2,499       2,499  
Commitments to fund fixed rate
                               
   mortgage loans
    990       990       639       639  
Interest rate swap position to receive
    39,149       39,149       38,347       38,347  
Interest rate swap position to pay
    (39,583 )     (39,583 )     (38,800 )     (38,800 )


NOTE 15 – OTHER NONINTEREST REVENUE AND EXPENSE

The following table details other noninterest revenue for the three months and six months ended June 30, 2011 and 2010:
 
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(In thousands)
 
Annuity fees
  $ 1,094     $ 698     $ 2,390     $ 1,479  
Brokerage commissions and fees
    1,437       1,419       3,075       2,736  
Bank-owned life insurance
    2,223       1,972       3,922       3,641  
Other miscellaneous income
    4,732       3,227       9,415       7,143  
   Total other noninterest income
  $ 9,486     $ 7,316     $ 18,802     $ 14,999  
 
 
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The following table details other noninterest expense for the three months and six months ended June 30, 2011 and 2010:
 
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(In thousands)
 
Advertising
  $ 1,291     $ 1,196     $ 2,180     $ 1,852  
Foreclosed property expense
    3,765       3,813       10,847       7,351  
Telecommunications
    2,036       2,494       4,179       4,694  
Public relations
    1,554       1,656       3,068       3,304  
Data processing
    2,365       1,594       4,666       3,064  
Computer software
    1,899       1,900       3,747       3,604  
Amortization of intangibles
    833       984       1,687       1,999  
Legal fees
    1,095       1,313       3,681       2,641  
Postage and shipping
    1,171       1,178       2,468       2,538  
Other miscellaneous expense
    18,877       14,933       36,244       30,446  
   Total other noninterest expense
  $ 34,886     $ 31,061     $ 72,767     $ 61,493  


NOTE 16 – COMMITMENTS AND CONTINGENT LIABILITIES

The Company and its subsidiaries are engaged in lines of business that are heavily regulated and involve a large volume of financial transactions with numerous customers through offices in nine states.  Although the Company and its subsidiaries have developed policies and procedures to minimize the impact of legal noncompliance and other disputes, litigation presents an ongoing risk.
On May 12, 2010, the Company and its Chief Executive Officer, President and Chief Financial Officer were named in a purported 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. The plaintiff seeks class certification, an unspecified amount of damages and awards of costs and attorneys’ fees and such other equitable relief as the Court may deem just and proper.  No class has been certified and, at this stage of the lawsuit, management cannot determine the probability of an unfavorable outcome to the Company.  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 Securities and Exchange Commission had issued an Order of Investigation related to the Company’s delay in filing its Annual Report on Form 10-K for year ended December 31, 2009 and related matters.  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 two Arkansas customers 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 case was transferred to pending multi-district litigation in the U.S. District Court for the Southern District of Florida.  No class has been certified and, at this stage of the lawsuit, management of the Company cannot determine the probability of an unfavorable outcome to the Company.  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.
 
 
33

 
Otherwise, the Company and its subsidiaries are defendants in various lawsuits arising out of the normal course of business, including claims against entities to which the Company is a successor as a result of business combinations.  In the opinion of management, the ultimate resolution of these lawsuits should not have a material adverse effect on the Company’s business, consolidated financial position or results of operations.  It is possible, however, that future developments could result in an unfavorable ultimate 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 particular quarterly reporting period.  Litigation is inherently uncertain, and management of the Company cannot make assurances that the Company will prevail in any of these actions, nor can it reasonably estimate the amount of damages that the Company might incur.


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 headquartered in Tupelo, Mississippi with $13.4 billion in assets at June 30, 2011.  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, 2011 and 2010 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.
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 few 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.  The impact was reflected in a decline in credit quality and increases in the Company’s measures of non-performing loans and leases (“NPLs”) and net charge-offs, compared to the first six months of 2010.  While NPLs and net charge-offs have increased, management believes that the Company is well positioned with respect to overall credit quality as evidenced by the improvement in credit quality metrics at June 30, 2011 compared to December 31, 2010 and March 31, 2011.  Management believes, however, that continued weakness in the economic environment could adversely affect the strength of the credit quality of the Company’s assets overall.  Therefore, management is working to improve and enhance the Company’s existing processes in order to focus on early identification and resolution of any credit issues.
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, collateral values 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.
On April 27, 2011, a series of powerful storms and tornadoes moved through the Southeast, resulting in unprecedented loss of life and property damage.  Other than scattered power outages and minor wind damage, the operations of the Company were not impacted.
On June 29, 2011, the Federal Reserve released its final rule implementing the Durbin Debit Interchange Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Durbin amendment”).  The final rule set a base interchange rate of $0.21 cents per transaction, plus an additional five basis points of the transaction cost for fraud charges. The Federal Reserve also approved an interim final rule that allows for an upward
 
 
34

adjustment of no more than $0.01 on the debit interchange fee for implementing certain fraud prevention standards. Additionally, the Federal Reserve adopted requirements that issuers include two unaffiliated networks for routing debit transactions, one that is signature-based and one that is personal identification number based.  The effective date for the final and interim final rules of the Durbin Amendment is October 1, 2011. The Company estimates that debit card revenue could be reduced in 2011 by approximately $3.5 million and could be reduced in 2012 by more than $15.0 million.
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.
 
 
35

 
 
SELECTED FINANCIAL QUARTERLY DATA
                       
                         
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Dollars in thousands, except per share data)
 
                         
Earnings Summary:
                       
Total interest revenue
  $ 137,235     $ 146,162     $ 276,063     $ 294,820  
Total interest expense
    27,323       36,833       56,714       73,609  
Net interest income
    109,912       109,329       219,349       221,211  
Provision for credit losses
    32,240       62,354       85,719       105,873  
Noninterest income
    75,144       57,086       143,455       120,418  
Noninterest expense
    137,069       120,016       267,079       240,499  
Income (loss) before income taxes
    15,747       (15,955 )     10,006       (4,743 )
Income tax (benefit) expense
    2,921       (3,395 )     (2,326 )     (579 )
Net income (loss)
  $ 12,826     $ (12,560 )   $ 12,332     $ (4,164 )
                                 
Balance Sheet - Period-end balances:
                               
Total assets
  $ 13,367,050     $ 13,421,004     $ 13,367,050     $ 13,421,004  
Total securities
    2,560,824       2,109,849       2,560,824       2,109,849  
Loans and leases, net of unearned income
    9,214,553       9,646,902       9,214,553       9,646,902  
Total deposits
    11,308,463       11,220,641       11,308,463       11,220,641  
Long-term debt
    35,000       110,749       35,000       110,749  
Total shareholders' equity
    1,246,703       1,240,259       1,246,703       1,240,259  
                                 
Balance Sheet-Average Balances:
                               
Total assets
  $ 13,365,560     $ 13,223,506     $ 13,452,183     $ 13,175,605  
Total securities
    2,707,282       2,051,283       2,722,763       2,025,250  
Loans and leases, net of unearned income
    9,249,127       9,703,253       9,274,415       9,734,994  
Total deposits
    11,355,871       11,075,655       11,426,363       10,977,508  
Long-term debt
    89,395       112,731       99,641       112,747  
Total shareholders' equity
    1,222,281       1,245,786       1,220,851       1,255,543  
                                 
Common Share Data:
                               
Basic (loss) earnings per share
  $ 0.15     $ (0.15 )   $ 0.15     $ (0.05 )
Diluted (loss) earnings per share
    0.15       (0.15 )     0.15       (0.05 )
Cash dividends per share
    0.01       0.22       0.12       0.44  
Book value per share
    14.93       14.86       14.93       14.86  
Dividend payout ratio
    6.67 %   NM%       80.0 %   NM%  
                                 
Financial Ratios (Annualized):
                               
Return on average assets
    0.38 %     (0.38 )%     0.18 %     (0.06 )%
Return on average shareholders' equity
    4.21       (4.04 )     2.04       (0.67 )
Total shareholders' equity to total assets
    9.33       9.24       9.33       9.24  
Tangible shareholders' equity to tangible assets
    7.32       7.23       7.32       7.23  
Net interest margin-fully taxable equivalent
    3.71       3.71       3.70       3.79  
                                 
Credit Quality Ratios (Annualized):
                               
Net charge-offs to average loans and leases
    1.42 %     2.08 %     1.83 %     1.67 %
Provision for credit losses to average loans and leases
    1.39       2.57       1.85       2.18  
Allowance for credit losses to net loans and leases
    2.14       2.08       2.14       2.08  
Allowance for credit losses to NPLs
    52.03       66.41       52.03       66.41  
Allowance for credit losses to non-performing assets ("NPAs")
    37.21       54.28       37.21       54.28  
NPLs to net loans and leases
    4.12       3.13       4.12       3.13  
NPAs to net loans and leases
    5.76       3.83       5.76       3.83  
                                 
Captial Adequacy:
                               
Tier I capital
    10.82 %     10.53 %     10.82 %     10.53 %
Total capital
    12.08       11.79       12.08       11.79  
Tier I leverage capital
    8.22       8.35       8.22       8.35  
                                 
NM=Not meaningful
                               

 
36

 
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 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,
 
2011
 
2010
 
(In thousands)
Tangible Assets:
         
   Total assets
 $13,367,050
  $
13,421,004
 
   Less:  Goodwill
 271,297
   
 270,097
 
            Other identifiable intangible assets
 18,249
   
 21,534
 
   Total tangible assets
 $13,077,504
  $
13,129,373
 
           
Tangible Shareholders' Equity
         
   Total shareholders' equity
 $1,246,703
  $
1,240,259
 
   Less:  Goodwill
 271,297
   
 270,097
 
            Other identifiable intangible assets
 18,249
   
 21,534
 
   Total tangible shareholders' equity
 $957,157
  $
948,628
 


FINANCIAL HIGHLIGHTS

The Company reported net income of $12.8 million for the second quarter of 2011, compared to a net loss of $12.6 million for the same quarter of 2010.  For the first six months of 2011, the Company reported net income of $12.3 million compared to a net loss of $4.2 million for the first six months of 2010.  The 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 2011 was $32.2 million and $85.7 million, respectively, compared to a charge of $62.4 million and $105.9 million during the second quarter and first six months of 2010, respectively.  Net charge-offs decreased to $32.9 million, or 1.42% of average loans and leases, during the second quarter of 2011, compared to $50.5 million, or 2.08% of average loans and leases, during the second quarter of 2010.  For the six months ended June 30, 2011, net charge-offs increased slightly to $85.0 million or 1.83% of average loans and leases, compared to $81.2 million or 1.67% of average loans and leases for the six months ended June 30, 2010.  The decrease in the provision reflected the impact of a significant decrease in NPL formation during the second quarter of 2011 as NPLs decreased from $394.4 million at December 30, 2010 and $425.0 million at March 31, 2011 to $379.8 million at June 30, 2011.  However, NPLs at June 30, 2011 compared to June 30, 2010 NPLs reflected an increase of $77.6 million or 25.7%, as the length and severity of the recession, as well as the lackluster current economic environment affected a larger portion of the Company’s borrowers.  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 and consumer mortgage loans.  Many of these loans have become collateral-dependent, requiring recognition of an impairment loss to reflect the decline in real estate values.
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 $109.9 million for the second quarter of 2011, an increase of $0.6 million, or 0.5% from $109.3 million for the second quarter of 2010.  Net interest revenue was $219.3 million for the first six months of 2011, a decrease of $1.9 million, or 0.8% from $221.2 million for the first six months of 2010.  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
 
 
37

interest rate, credit, liquidity and capital risks.  The Company experienced an increase in lower rate demand and time deposits and a decrease in higher rate other time deposits, which resulted in a decrease in interest expense of $9.5 million, or 25.8%, in the second quarter of 2011 compared to the second quarter of 2010 and a decrease of $16.9 million, or 23.0%, in the first six months of 2011 compared to the first six months of 2010.  The increase in net interest revenue for the second quarter of 2011 compared to the second quarter of 2010 was a result of interest rates paid on interest bearing liabilities, particularly interest bearing demand deposits, decreasing at a more rapid rate than the interest rates earned on interest earning assets.  However, for the first six months of 2011, the decrease in interest expense was more than offset by the decrease in interest revenue that resulted from the declining interest rate environment combined with the low loan demand and increase in NPLs as interest revenue decreased $18.8 million, or 6.4%, in the first six months of 2011 compared to the first six months of 2010.  While loan demand has been weak, the Company has managed to replace some loan runoff with new loan production, primarily in its east Texas, Louisiana and Arkansas 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 increased $18.1 million, or 31.6%, for the second quarter of 2011 compared to the second quarter of 2010 and increased $23.0 million, or 19.1%, for the first six months of 2011 compared to the first six months of 2010.  One of the primary contributors to the increase in noninterest revenue was the increase in securities gains, which reflected a net gain of $10.0 million in the second quarter of 2011 compared to a net loss of $0.6 million in the second quarter of 2010 and a net gain of $10.1 million for the first six months of 2011 compared to net gains of $0.7 million for the first six months of 2010.  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.
Noninterest revenue was also impacted by mortgage lending revenue, which increased to $2.0 million for the second quarter of 2011 compared to a loss of $2.3 million for the second quarter of 2010.  Mortgage lending revenue increased to $9.6 million for the first six months of 2011 compared to $2.7 million for the first six months of 2010.  The increase in mortgage lending revenue was primarily related to the fair value adjustment of MSRs as the fair value of MSRs decreased $3.8 million during the second quarter of 2011 compared to a decrease of $8.3 million for the second quarter of 2010 and decreased $1.3 million for the first six months of 2011 compared to $8.3 million for the first six months of 2010.  Mortgage originations decreased in the second quarter of 2011 to $245.3 million from $290.6 million for the second quarter of 2010.
Credit card, debit card and merchant fees, trust income and insurance commissions increased 9.9% in the aggregate in the second quarter of 2011 compared to the second quarter of 2010 and increased 9.5% in the aggregate during the first six months of 2011 compared to the first six months of 2010.  The increase in noninterest revenue was offset slightly by a 5.5% decrease in service charges during the first quarter of 2011 compared to the first quarter of 2010, as a result of a lower volume of items processed and mandated changes in overdraft regulations.  There were no significant non-recurring noninterest revenue items during the second quarter or first six months of 2011 or 2010.
Noninterest expense increased 14.2% to $137.1 million for the second quarter of 2011 compared to $120.0 million for the second quarter of 2010 and increased 11.1% to $267.1 million for the first six months of 2011 compared to $240.5 million for the first six months of 2010.  The increase in noninterest expense for the second quarter and first six months of 2011 was primarily related to the $9.8 million prepayment penalty related to the early repayment of FHLB advances.  While foreclosed property expense decreased approximately $48,000, or 1.3%, for the second quarter of 2011 compared to the second quarter of 2010, foreclosed property expense increased 47.6% to $10.8 million for the first six months of 2011 from $7.4 million for the first six months of 2010.  The increase for the first six months of 2011 compared to the same period of 2010 was primarily as a result of the Company experiencing writedowns of other real estate owned because of the decline in property values attributable to the prevailing economic environment.  Deposit insurance assessments also increased 47.5% to $6.4 million for the second quarter of 2011 from $4.4 million for the second quarter of 2010 and increased 37.7% to $11.9 million for the first six months of 2011 compared to $8.6 million for the first six months of 2010 as a result of deposit growth and a slightly higher assessment rate.  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.
The total shareholders’ equity to total assets ratio was 9.33% and 9.24% at June 30, 2011 and June 30, 2010, respectively.  Interest bearing demand deposits, noninterest bearing demand deposits and savings deposits
 
 
38

increased 4.5%, 10.5% and 22.7%, respectively,  at June 30, 2011 compared to June 30, 2010 while higher rate other time deposits decreased 13.1% at June 30, 2011 compared to June 30, 2010.  During the second quarter of 2011, the Company repaid FHLB advances totaling $75.0 million resulting in a decrease in long-term FHLB borrowings of 68.4% to $35.0 million at June 30, 2011 compared to $110.7 million at June 30, 2010.

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, 2011 and 2010:
 
 
39

 
 
   
Three months ended June 30,
 
   
2011
   
2010
 
   
Average
         
Yield/
   
Average
         
Yield/
 
   
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
ASSETS
 
(Dollars in millions, yields on taxable equivalent basis)
 
Loans and leases (net of unearned
                                   
  income) (1)(2)
  $ 9,249.1     $ 117.8       5.11 %   $ 9,703.3     $ 125.4       5.18 %
Loans held for sale
    44.7       0.5       4.53 %     60.1       0.7       4.84 %
Held-to-maturity securities:
                                               
  Taxable (3)
    887.8       5.1       2.32 %     939.0       9.5       4.05 %
  Non-taxable (4)
    209.8       3.5       6.74 %     218.8       3.7       6.80 %
Available-for-sale securities:
                                               
  Taxable
    1,432.8       10.5       2.94 %     821.1       8.1       3.92 %
  Non-taxable (5)
    176.9       2.9       6.53 %     72.4       1.3       7.09 %
Federal funds sold, securities
                                               
  purchased under agreement to resell
                                               
  and short-term investments
    226.6       0.2       0.28 %     295.6       0.1       0.24 %
  Total interest earning
                                               
    assets and revenue
    12,227.7       140.5       4.61 %     12,110.3       148.8       4.93 %
Other assets
    1,350.8                       1,329.5                  
Less:  allowance for credit losses
    (213.0 )                     (216.3 )                
                                                 
    Total
  $ 13,365.5                     $ 13,223.5                  
                                                 
LIABILITIES AND
                                               
SHAREHOLDERS' EQUITY
                                               
Deposits:
                                               
  Demand - interest bearing
  $ 4,977.8     $ 6.0       0.49 %   $ 4,635.1     $ 9.7       0.84 %
  Savings
    941.2       0.8       0.35 %     770.7       0.9       0.48 %
  Other time
    3,418.7       16.3       1.91 %     3,814.3       21.5       2.26 %
Federal funds purchased, securities
                                               
  sold under agreement to repurchase,
                                               
  short-term FHLB borrowings
                                               
  and other short term borrowings
    425.7       0.2       0.15 %     486.3       0.3       0.22 %
Junior subordinated debt securities
    160.3       2.9       7.16 %     160.3       2.9       7.16 %
Long-term  FHLB borrowings
    89.4       1.1       5.27 %     112.7       1.5       5.36 %
  Total interest bearing
                                               
    liabilities and expense
    10,013.1       27.3       1.09 %     9,979.4       36.8       1.48 %
Demand deposits -
                                               
  noninterest bearing
    2,018.2                       1,855.6                  
Other liabilities
    112.0                       142.7                  
  Total liabilities
    12,143.3                       11,977.7                  
Shareholders' equity
    1,222.2                       1,245.8                  
  Total
  $ 13,365.5                     $ 13,223.5                  
Net interest revenue-FTE
          $ 113.2                     $ 112.0          
Net interest margin-FTE
                    3.71 %                     3.71 %
Net interest rate spread
                    3.51 %                     3.45 %
Interest bearing liabilities to
                                               
   interest earning assets
                    81.89 %                     82.40 %
(1) Includes taxable equivalent adjustment to interest of $0.9 million and $0.8 million for the three months ended
         
June 30, 2011 and June 30, 2010using 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 and 2010
 
     using an effective tax rate of 35%.
                                               
(4) Includes taxable equivalent adjustments to interest of $1.2 million and $1.3 million for the three months ended
         
June 30, 2011 and 2010, respectively, using an effective tax rate of 35%.
                                 
(5) Includes taxable equivalent adjustment to interest of $1.0 million and $0.4 million for the three months ended
         
June 30, 2011 and 2010, respectively, using an effective tax rate of 35%.
                                 

 
 
40

 
   
Six months ended June 30,
 
   
2011
   
2010
 
   
Average
         
Yield/
   
Average
         
Yield/
 
   
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
ASSETS
 
(Dollars in millions, yields on taxable equivalent basis)
 
Loans and leases (net of unearned
                                   
  income) (1)(2)
  $ 9,274.4     $ 236.0       5.13 %   $ 9,735.0     $ 253.2       5.24 %
Loans held for sale
    41.9       0.9       4.58 %     51.6       1.2       4.82 %
Held-to-maturity securities:
                                               
  Taxable (3)
    1,104.0       13.3       2.42 %     895.5       19.0       4.28 %
  Non-taxable (4)
    269.9       8.7       6.48 %     217.0       7.5       6.97 %
Available-for-sale securities:
                                               
  Taxable
    1,224.8       19.1       3.14 %     840.3       16.4       3.94 %
  Non-taxable (5)
    124.1       4.1       6.74 %     72.4       2.6       7.13 %
Federal funds sold, securities
                                               
  purchased under agreement to resell
                                               
  and short-term investments
    271.7       0.4       0.31 %     233.5       0.3       0.24 %
  Total interest earning
                                               
    assets and revenue
    12,310.8       282.5       4.63 %     12,045.3       300.2       5.03 %
Other assets
    1,356.9                       1,335.0                  
Less:  allowance for credit losses
    (215.5 )                     (204.7 )                
                                                 
    Total
  $ 13,452.2                     $ 13,175.6                  
                                                 
LIABILITIES AND
                                               
SHAREHOLDERS' EQUITY
                                               
Deposits:
                                               
  Demand - interest bearing
  $ 5,064.9     $ 12.6       0.50 %   $ 4,601.7     $ 19.1       0.84 %
  Savings
    919.4       1.6       0.36 %     759.6       1.8       0.48 %
  Other time
    3,485.8       33.8       1.95 %     3,778.3       43.1       2.30 %
Federal funds purchased, securities
                                               
  sold under agreement to repurchase,
                                               
  short-term FHLB borrowings
                                               
  and other short term borrowings
    429.7       0.3       0.16 %     525.1       0.9       0.33 %
Junior subordinated debt securities
    160.3       5.7       7.19 %     160.3       5.7       7.19 %
Long-term  FHLB borrowings
    99.6       2.7       5.38 %     112.8       3.0       5.42 %
  Total interest bearing
                                               
    liabilities and expense
    10,159.7       56.7       1.13 %     9,937.8       73.6       1.49 %
Demand deposits -
                                               
  noninterest bearing
    1,956.3                       1,837.9                  
Other liabilities
    115.3                       144.4                  
  Total liabilities
    12,231.3                       11,920.1                  
Shareholders' equity
    1,220.9                       1,255.5                  
  Total
  $ 13,452.2                     $ 13,175.6                  
Net interest revenue-FTE
          $ 225.8                     $ 226.6          
Net interest margin-FTE
                    3.70 %                     3.79 %
Net interest rate spread
                    3.50 %                     3.54 %
Interest bearing liabilities to
                                               
   interest earning assets
                    82.53 %                     82.50 %
(1) Includes taxable equivalent adjustment to interest of $1.7 million and $1.6 million for the six months ended
         
June 30, 2010 and 2009, respectively, 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 nine months ended June 30, 2011 and 2010,
 
respectively, using an effective tax rate of 35%.
                                         
(4) Includes taxable equivalent adjustments to interest of $3.0 million and $2.6 million for the six months ended
         
June 30, 2010 and 2009, respectively, using an effective tax rate of 35%.
                                 
(5) Includes taxable equivalent adjustment to interest of $1.5 million and $0.9 million for the six months ended
         
June 30, 2010 and 2009, respectively, using an effective tax rate of 35%.
                                 
 
 
41

 
 
Net interest revenue-FTE for the three-month period ended June 30, 2011 increased $1.2 million, or 1.1% compared to the same period in 2010.  Net interest revenue-FTE for the six-month period ended June 30, 2011 decreased approximately $784,000, or 0.4% compared to the same period in 2010.  The increase in net interest revenue-FTE for the second quarter of 2011 compared to the same period in 2010 was primarily a result of the increase in lower rate demand deposits and the decrease in higher rate long-term FHLB borrowings, which more than offset the decrease in average rates earned on loans and securities.  The slight decrease in net interest revenue-FTE for the six months ended 2011 compared to the same period in 2010 was primarily a result of the increase in NPLs during the first quarter of 2011, as well as the deposit growth, which combined with a lack of loan growth, resulted in an increase in average short-term investments that had lower average rates earned than the average rates paid on the deposit growth.
Interest revenue-FTE for the three-month period ended June 30, 2011 decreased $8.3 million, or 5.6%, compared to the same period in 2010.  Interest revenue-FTE for the six-month period ended June 30, 2011 decreased $17.7 million, or 5.9% compared to the same period in 2010.  The decrease in interest revenue-FTE for the second quarter of 2011 compared to the same period in 2010 was a result of the increase in lower rate securities, combined with the declining loan yields as interest rates continue to be at historically low levels resulting in a decrease in the yield on average interest-earning assets of 32 basis points for the second quarter of 2011, compared to the same period in 2010.  The decrease in interest revenue-FTE for the first six months of 2011 compared to the same period in 2010 was a result of the increase in lower rate securities and short-term investments, combined with the declining loan yields resulting in a decrease in the yield on average interest-earning assets of 40 basis points for the first six months of 2011 compared to the first six months of 2010.  Average interest-earning assets increased $117.4 million, or 1.0%, for the three-month period ended June 30, 2011, compared to the same period in 2010 and increased $265.5 million, or 2.2% for the six-month period ended June 30, 2011, compared to the same period in 2010.  The increase in average interest earning assets for the second quarter and first six months of 2011 compared to the same period in 2010 was primarily a result of the increase in short-term investments and securities, which was attributable to continued deposit growth, combined with a decrease in net loans and leases.
Interest expense for the three-month period ended June 30, 2011 decreased $9.5 million, or 25.8%, compared to the same period in 2010.  Interest expense for the six-month period ended June 30, 2011 decreased $16.9 million, or 23.0%, compared to the same period in 2010.  The decrease in interest expense for the second quarter and first six months of 2011 compared to the same periods in 2010 was a result of the increase in lower cost interest bearing demand deposits combined with the decrease in other time deposit rates resulting in an overall decrease in the average rate paid of 39 basis points for the second quarter of 2011 compared to the second quarter of 2010 and an overall decrease in the average rate paid of 37 basis points for the first six months of 2011 compared to the first six months of 2010.  Average interest bearing liabilities increased $33.6 million, or 0.3%, for the three-month period ended June 30, 2011 compared to the same period in 2010 and increased $221.9 million for the six-month period ended June 30, 2011 compared to the same period in 2010.  The increase in average interest bearing liabilities for the second quarter and first six months of 2011 was primarily a result of the increase in lower cost interest bearing demand deposits and savings deposits, offset by a decrease in other time deposits, short-term borrowings and long-term borrowings.
Net interest margin was 3.71% for both the three months ended June 30, 2011 and 2010.  Net interest margin decreased to 3.70% for the six months ended June 30, 2011 from 3.79% for the six months ended June 30, 2010.  The decrease in the net interest margin for the first six months of 2011 compared to the same period in 2010 was primarily a result of the combination of increased deposits and weak loan demand resulting in higher levels of short-term investments with relatively low yields and higher levels of held-to-maturity and available-for-sale investments with lower yields than 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, 2011:
 
 
42

 
 
   
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
  $ 304,344     $ -     $ -     $ -  
Available-for-sale and trading securities
    162,594       201,320       1,357,245       839,665  
Loans and leases, net of unearned income
    4,491,649       1,725,636       2,714,929       282,339  
Loans held for sale
    48,663       315       1,872       19,669  
  Total interest earning assets
    5,007,250       1,927,271       4,074,046       1,141,673  
Interest bearing liabilities:
                               
Interest bearing demand deposits and savings
    5,884,546       -       -       -  
Other time deposits
    764,958       1,557,226       1,004,612       466  
Federal funds purchased and securities
                               
  sold under agreement to repurchase,
                               
  short-term FHLB borrowings and other
                               
  short-term borrowings
    426,097       703       -       -  
Long-term FHLB borrowings and junior
                               
  subordinated debt securities
    -       -       5,000       190,312  
Other
    -       -       74       -  
  Total interest bearing liabilities
    7,075,601       1,557,929       1,009,686       190,778  
Interest rate sensitivity gap
  $ (2,068,351 )   $ 369,342     $ 3,064,360     $ 950,895  
Cumulative interest sensitivity gap
  $ (2,068,351 )   $ (1,699,009 )   $ 1,365,351     $ 2,316,246  

In the event interest rates increase after June 30, 2011, based on this interest rate sensitivity gap, the Company would likely experience decreased net interest revenue in the following one-year period, as the cost of funds would increase at a more rapid rate than interest revenue on interest-earning assets.  Conversely, in the event interest rates decline after June 30, 2011, based on this interest rate sensitivity gap, it is likely that the Company would experience slightly increased net interest revenue in the following one-year period.  It should be noted that the balances shown in the table above are at June 30, 2011 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 increased liability sensitivity in the 0 to 90 day category as compared to other categories was primarily a result of the Company’s utilization of core deposit growth, particularly in short-term demand deposits, to repay borrowings and to fund assets during the first six months of 2011.
As of June 30, 2011, the Bank had $2.2 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 4.63%, an average maturity of 27 months and a fully-indexed interest rate of 3.79% at June 30, 2011.  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 Wall Street Journal prime rate, the Bank’s prime rate and the London Interbank Offering Rate.  At June 30, 2011, the Company had $1.3 billion, $1.3 billion and $733.0 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.

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
 
 
43

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 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, 2011 and 2010 was not considered meaningful because of the historically low interest rate environment.  Variances were calculated from the base case scenario, which reflected prevailing market rates.  Management assumed all non-maturity deposits have an average life of one day for calculating EVE, which management believes is the most conservative approach.

 
 
Net Interest Income
 
% Variance from Base Case Scenario
Rate Shock
June 30, 2011
 
June 30, 2010
+400 basis points
-15.6%
 
NA
+300 basis points
-12.2%
 
NA
+200 basis points
-9.0%
 
-4.9%
+100 basis points
-5.1%
 
-2.5%
 -100 basis points
NM
 
NM
 
 
 
Economic Value of Equity
 
% Variance from Base Case Scenario
Rate Shock
June 30, 2011
 
June 30, 2010
+400 basis points
-3.8%
 
NA
+300 basis points
-2.9%
 
NA
+200 basis points
-2.2%
 
-10.8%
+100 basis points
-1.4%
 
-5.7%
 -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
     


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, 2011
 
June 30, 2010
+200 basis points
-6.8%
 
-4.1%
-200 basis points
NM
 
NM
NM=not meaningful
 
 
 



 
44

 
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 Impairment Committee 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 the applicable 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 of 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 determined to be impaired are reserved in accordance with FASB ASC 310 in the same manner as impaired loans which 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.  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 for the loan.  As the repayment of commercial and industrial loans is generally
 
 
45

 
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, the unavailability of a current appraisal dated within the prior 12 months or the inconsistency between current appraisal assumptions and 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 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, 2011, impaired loans totaled $303.7 million, which was net of cumulative charge-offs of $71.1 million.  Additionally, the Company had specific reserves for impaired loans of $46.8 million included in the allowance for credit losses.  Impaired loans at June 30, 2011 were primarily from the Company’s consumer real estate or residential construction, acquisition and development real estate portfolios.  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-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 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.
 
 
46

 
 
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,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Dollars in thousands)
             
Balance, beginning of period
  $ 198,333     $ 188,884     $ 196,913     $ 176,043  
                                 
Loans and leases charged off:
                               
Commercial and industrial
    (5,556 )     (5,106 )     (14,365 )     (7,275 )
Real estate
                               
   Consumer mortgages
    (1,629 )     (2,993 )     (4,889 )     (7,591 )
   Home equity
    (1,391 )     (602 )     (2,473 )     (2,285 )
   Agricultural
    (373 )     (473 )     (965 )     (680 )
   Commercial and industrial-owner occupied
    (3,228 )     (3,845 )     (4,944 )     (6,310 )
   Construction, acquisition and development
    (16,783 )     (33,321 )     (49,126 )     (49,090 )
   Commercial
    (1,597 )     (2,593 )     (6,111 )     (4,871 )
Credit cards
    (725 )     (1,363 )     (1,606 )     (2,523 )
All other
    (4,971 )     (2,067 )     (5,524 )     (3,117 )
  Total loans charged off
    (36,253 )     (52,363 )     (90,003 )     (83,742 )
                                 
Recoveries:
                               
Commercial and industrial
    589       242       773       305  
Real estate
                               
   Consumer mortgages
    220       818       363       882  
   Home equity
    46       43       91       95  
   Agricultural
    45       -       47       -  
   Commercial and industrial-owner occupied
    21       44       194       51  
   Construction, acquisition and development
    1,493       211       2,057       267  
   Commercial
    392       27       405       39  
Credit cards
    239       219       494       369  
All other
    262       265       574       562  
  Total recoveries
    3,307       1,869       4,998       2,570  
                                 
Net charge-offs
    (32,946 )     (50,494 )     (85,005 )     (81,172 )
                                 
Provision charged to operating expense
    32,240       62,354       85,719       105,873  
Balance, end of period
  $ 197,627     $ 200,744     $ 197,627     $ 200,744  
                                 
Average loans for period
  $ 9,249,127     $ 9,703,253     $ 9,274,415     $ 9,734,994  
                                 
Ratios:
                               
Net charge-offs to average loans (annualized)
    1.42 %     2.08 %     1.83 %     1.67 %
Provision for credit losses to average loans and
                               
   leases, net of unearned income (annualized)
    1.39 %     2.57 %     1.85 %     2.18 %
Allowance for credit losses to loans and
                               
   leases, net of unearned income
    2.14 %     2.08 %     2.14 %     2.08 %
Allowance for credit losses to net charge-
                               
   offs (annualized)
    149.96 %     99.39 %     116.24 %     123.65 %

While net charge-offs increased $3.8 million, or 4.7%, for the first six months of 2011 compared to the first six months of 2010, net charge-offs decreased $17.5 million, or 34.8%, in the second quarter of 2011 compared to the second quarter of 2010.  Decreases in net charge-offs in the second quarter of 2011 resulted in a provision for credit losses of $32.2 million during the second quarter of 2011 compared to a provision of $62.4 million in the
 
 
47

same quarter of 2010.  Annualized net charge-offs as a percentage of average loans and leases decreased to 1.42% for the second quarter of 2011 compared to 2.08% for the second quarter of 2010.  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 second quarter of 2011 compared to the second of 2010 as updated appraisals came in closer to loan carrying values.  The decreased level of charge-offs resulted in an increase in the ratio of the allowance for credit losses to annualized charge-offs for the second quarter of 2011 compared to the same period in 2010.  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 as of June 30, 2011.  This resulted in impaired loans having an aggregate net book value of 69% of their contractual principal balance at June 30, 2011.  As of June 30, 2010, 71.4% of nonaccrual loans had been charged down to net realizable value or had specific reserves to reflect recent appraised values as of June 30, 2010.  This resulted in impaired loans having an aggregate net book value of 61% of their contractual principal balance at June 30, 2010.  Non-accrual loans not impaired are loans 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,
 
   
2011
   
2010
   
2010
 
   
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
  $ 22,840       16.6 %   $ 22,518       15.5 %   $ 22,479       16.1 %
Real estate
                                               
   Consumer mortgages
    37,045       21.3 %     32,595       20.4 %     35,540       20.8 %
   Home equity
    7,620       5.8 %     6,779       5.7 %     7,305       5.8 %
   Agricultural
    4,709       2.8 %     3,767       2.7 %     4,997       2.7 %
   Commercial and industrial-owner occupied
    24,644       14.8 %     22,533       14.5 %     20,403       14.2 %
   Construction, acquisition and development
    53,920       11.5 %     68,305       14.6 %     59,048       12.5 %
   Commercial
    35,293       19.1 %     28,643       18.5 %     33,439       19.4 %
Credit cards
    3,487       1.1 %     3,311       1.1 %     4,126       1.1 %
All other
    8,069       7.0 %     12,293       7.0 %     9,576       7.4 %
     Total
  $ 197,627       100.0 %   $ 200,744       100.0 %   $ 196,913       100.0 %
 
 
48

 
Noninterest Revenue

The components of noninterest revenue for the three months and six months ended June 30, 2011 and 2010 and the corresponding percentage changes are shown in the follow­ing tables:

 
   
Three months ended
       
   
June 30,
       
   
2011
   
2010
   
% Change
 
   
(Dollars in thousands)
       
Mortgage lending
  $ 2,003     $ (2,304 )   NM%  
Credit card, debit card and merchant fees
    11,263       9,333       20.7  
Service charges
    16,556       18,953       (12.6 )
Trust income
    2,850       2,707       5.3  
Securities gains, net
    10,045       (585 )  
NM
 
Insurance commissions
    22,941       21,666       5.9  
Annuity fees
    1,094       698       56.7  
Brokerage commissions and fees
    1,437       1,419       1.3  
Bank-owned life insurance
    2,223       1,972       12.7  
Other miscellaneous income
    4,732       3,227       46.6  
Total noninterest revenue
  $ 75,144     $ 57,086       31.6 %

 
   
Six months ended
       
   
June 30,
       
   
2011
   
2010
   
% Change
 
   
(Dollars in thousands)
       
Mortgage lending
  $ 9,584     $ 2,721       252.2 %
Credit card, debit card and merchant fees
    21,609       18,143       19.1  
Service charges
    31,924       35,215       (9.3 )
Trust income
    5,984       5,294       13.0  
Securities gains, net
    10,062       712       1,313.2  
Insurance commissions
    45,490       43,334       5.0  
Annuity fees
    2,390       1,479       61.6  
Brokerage commissions and fees
    3,075       2,736       12.4  
Bank owned life insurance
    3,922       3,641       7.7  
Other miscellaneous income
    9,415       7,143       31.8  
Total noninterest revenue
  $ 143,455     $ 120,418       19.1 %
NM=Not meaningful
                       


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 a changing interest rate environment.  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
 
 
49

the mortgage loan or to reimburse the investor for losses incurred (i.e., make whole requests) if such failure cannot be cured by the Company within the specified period following discovery.  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 losses were recognized related to repurchased or make whole loans.
 At June 30, 2011, the Company had reserved approximately $880,000 for potential losses from representation and warranty obligations.  The reserve is 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.  A mortgage loan foreclosure committee of the Bank reviews all delinquent loans before beginning the foreclosure process.  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 $245.3 million and $290.6 million produced origination revenue of $4.1 million and $4.5 million for the quarters ended June 30, 2011 and 2010, respectively.  Mortgage loan origination volumes of $448.1 million and $498.0 million produced origination revenue of $7.3 million and $8.0 million for the six months ended June 30, 2011 and 2010, respectively.  The decrease in customer demand for refinancing contributed to the decrease in mortgage loan origination volumes and the corresponding decrease in origination revenue for the second quarter and first six months of 2011 compared to the second quarter and first six months of 2010.
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 $3.2 million and $2.9 million for the quarters ended June 30, 2011 and 2010, respectively.  For the six months ended June 30, 2011 and 2010, revenue from the servicing of loans was $6.3 million and $5.8 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 impacted by principal payments, prepayments and payoffs on loans in the servicing portfolio.  Decreases in value from principal payments, prepayments and payoffs were $1.4 million for both quarters ended June 30, 2011 and 2010.  Decreases in value from principal payments, prepayments and payoffs were $2.7 million for both the six months ended June 30, 2011 and 2010.  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 and $8.3 million for the second quarter of 2011 and 2010, respectively, and decreased $1.3 million and $8.3 million for the first six months of 2011 and 2010, respectively.
The following tables present the Company’s mortgage lending operations for the three months and six months ended June 30, 2011 and 2010:

 
50

 
 
   
Three months ended
       
   
June 30,
       
   
2011
       
2010
   
% Change
 
   
(Dollars in thousands)
       
Production revenue:
                     
   Origination
  $ 4,066         $ 4,532       (10.3 )%
   Servicing
    3,166           2,921       8.4  
   Payoffs/Paydowns
    (1,390 )         (1,434 )     (3.1 )
     Total
    5,842           6,019       (2.9 )
Market value adjustment
    (3,839 )         (8,323 )     (53.9 )
Mortgage lending revenue
  $ 2,003         $ (2,304 )  
NM
 
                             
   
(Dollars in millions)
         
Origination volume
  $ 245         $ 291       (15.8 )
                             
                             
Mortgage loans serviced at period-end
  $ 4,027         $ 3,552       13.4  
 

 
   
Six months ended
       
   
June 30,
       
   
2011
         
2010
   
% Change
 
   
(Dollars in thousands)
       
Production revenue:
                       
   Origination
  $ 7,290           $ 7,958       (8.4 )%
   Servicing
    6,283             5,814       8.1  
   Payoffs/Paydowns
    (2,690 )           (2,736 )     (1.7 )
     Total
    10,883             11,036       (1.4 )
Market value adjustment
    (1,299 )           (8,315 )     (84.4 )
Mortgage lending revenue
  $ 9,584           $ 2,721       252.2  
                               
   
(Dollars in millions)
         
Origination volume
  $ 448           $ 498       (10.0 )
                               
Mortgage loans serviced at period-end
  $ 4,027           $ 3,552       13.4  
                               
NM=Not meaningful
                             
 
 
Credit card, debit card and merchant fees increased for the comparable three-month and six-month periods as a result of an increase in the number and monetary volume of items processed.  When the Durbin Debit Interchange Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act is implemented on October 1, 2011 by the Federal Reserve, the Company estimates that debit card revenue could be reduced in 2011 by $3.5 million and could be reduced in 2012 by more than $15.0 million.  Service charges on deposit accounts, which include insufficient fund fees, decreased for the comparable three-month and six-month periods of 2011 and 2010 as a result of a lower volume of items processed and mandated changes in overdraft regulations.  Recent changes in banking regulations, the FDIC’s guidance and, in particular, the Federal Reserve’s new rules pertaining to certain overdraft payments on consumer accounts are estimated to decrease service charge revenue by $9.0 million 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.
Trust income increased by 5.3% and 13.0% for the comparable three-month and six-month periods of 2011 and 2010 primarily as a result of increases in the value of assets under management or in custody.  Net security gains of $10.0 million and $10.1 million for the three-month and six-month periods ending June 30, 2011 were primarily a result of sales of available-for-sale securities, some of which were previously classified as held-to-maturity.
Insurance commissions increased slightly for the comparable three-month and six-month periods of 2011 and 2010 as a result of new policies written during 2011.  Annuity fees increased by 56.7% and 61.6% for the
 
 
51

 comparable three-month and six-month periods of 2011 and 2010 as a result of customers shifting funds from lower rate deposit accounts to higher rate annuity products.  Brokerage commissions and fees remained relatively stable for the comparable three month periods of 2011 and 2010 and increased by 12.4% for the comparable six-month periods of 2011 and 2010 because activity increased subsequent to the first quarter of 2010 as the financial markets recovered somewhat.  Bank-owned life insurance revenue increased 12.7% and 7.7% for the comparable three-month and six-month periods of 2011 and 2010 as a result of the Company recording life insurance proceeds of approximately $478,000 during the first six months of 2011.  Other miscellaneous income, which includes safe deposit box rental income, gain or loss on disposal of assets, and other non-recurring revenue items, increased by 46.6% and 31.8% for the comparable three-month and six-month periods of 2011 and 2010 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, 2011 and 2010 and the corresponding percentage changes are shown in the follow­ing tables:

 
   
Three months ended
       
   
June 30,
       
   
2011
   
2010
   
% Change
 
   
(Dollars in thousands)
       
Salaries and employee benefits
  $ 70,142     $ 68,189       2.9 %
Occupancy, net
    10,232       10,527       (2.8 )
Equipment
    5,595       5,877       (4.8 )
Deposit insurance assessments
    6,436       4,362       47.5  
Prepayment penalty on FHLB borrowings
    9,778       -    
NM
 
Advertising
    1,291       1,196       7.9  
Foreclosed property expense
    3,765       3,813       (1.3 )
Telecommunications
    2,036       2,494       (18.4 )
Public relations
    1,554       1,656       (6.2 )
Data processing
    2,365       1,594       48.4  
Computer software
    1,899       1,900       (0.1 )
Amortization of intangibles
    833       984       (15.3 )
Legal fees
    1,095       1,313       (16.6 )
Postage and shipping
    1,171       1,178       (0.6 )
Other miscellaneous expense
    18,877       14,933       26.4  
Total noninterest expense
  $ 137,069     $ 120,016       14.2 %
                         


 
52

 
   
Six months ended
       
   
June 30,
       
   
2011
   
2010
   
% Change
 
   
(Dollars in thousands)
       
Salaries and employee benefits
  $ 140,517     $ 137,476       2.2 %
Occupancy, net of rental income
    20,903       21,302       (1.9 )
Equipment
    11,253       11,616       (3.1 )
Deposit insurance assessments
    11,861       8,612       37.7  
Prepayment penalty on FHLB borrowings
    9,778       -    
NM
 
Advertising
    2,180       1,852       17.7  
Foreclosed property expense
    10,847       7,351       47.6  
Telecommunications
    4,179       4,694       (11.0 )
Public relations
    3,068       3,304       (7.1 )
Data processing
    4,666       3,064       52.3  
Computer software
    3,747       3,604       4.0  
Amortization of intangibles
    1,687       1,999       (15.6 )
Legal
    3,681       2,641       39.4  
Postage and shipping
    2,468       2,538       (2.8 )
Other miscellaneous expense
    36,244       30,446       19.0  
Total noninterest expense
  $ 267,079     $ 240,499       11.1 %
NM=Not meaningful
                       

Salaries and employee benefits expense for the three months and six months ended June 30, 2011 increased slightly compared to the same periods in 2010, primarily because of a slight increase in the number of employees combined with an increase in insurance commissions as insurance revenue increased over the same periods.  Equipment expense decreased for the comparable three-month and six-month periods primarily because of decreased depreciation.  The increase in deposit insurance assessments for the three months and six months ended June 30, 2011 compared to the same period in 2010 was a result of deposit growth and a slightly higher assessment rate.  The deposit insurance assessment recorded during the second quarter of 2011 was based on the redefined assessment base and the new scorecard method to calculate the initial assessment rate as this new method became effective for assessment calculations beginning with the second quarter of 2011.  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 2010.
While foreclosed property expense decreased slightly for the three months ended June 30, 2011 compared to the same period in 2010, foreclosed property expense increased for the six months ended June 30, 2011 compared to the same period in 2010 as the Company experienced larger writedowns of other real estate owned as a result of the decline in property values attributable to the prevailing economic environment.  During the first six months of 2011, the Company added $59.7 million to other real estate owned through foreclosures.  Sales of other real estate owned in the first six months of 2011 were $34.7 million resulting in a net loss of approximately $352,000.  The components of foreclosed property expense for the three months and six months ended June 30, 2011 and 2010 and the percentage change between periods are shown in the following tables:

   
Three months ended
       
   
June 30,
       
   
2011
   
2010
   
% Change
   
(Dollars in thousands)
       
(Gain) loss on sale of other real estate owned
  $ (140 )   $ 830       (116.9 )%
Writedown of other real estate owned
    2,272       2,388       (4.9 )
Other foreclosed property expense
    1,633       595       174.5  
Total foreclosed property expense
  $ 3,765     $ 3,813       (1.3 )%

 
53

 

   
Six months ended
       
   
June 30,
       
   
2011
   
2010
   
% Change
   
(Dollars in thousands)
       
Loss on sale of other real estate owned
  $ 352     $ 1,455       (75.8 )%
Writedown of other real estate owned
    7,208       4,478       61.0  
Other foreclosed property expense
    3,287       1,418       131.8  
Total foreclosed property expense
  $ 10,847     $ 7,351       47.6 %


While the Company experienced some fluctuations in various components of other noninterest expense, including advertising, telecommunications, data processing, legal fees and amortization of intangibles, the increase in other noninterest expense for the three months and six months ended June 30, 2011, compared with the same period in 2010, was primarily related to the increases in accounting expenses, consulting expenses and pre-foreclosure related expenses.

Income Tax

The Company recorded income tax expense of $2.9 million for the second quarter of 2011, compared to an income tax benefit of $3.4 million for the second quarter of 2010.  For the six-month period ended June 30, 2011 and 2010, income tax benefit was $2.3 million and approximately $578,000, respectively.  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, 2011.  The primary differences between the Company’s recorded benefit for the first six months of 2011, and the benefit that would have resulted from applying the U.S. statutory tax rate of 35% to the Company’s pre-tax loss are primarily the effect 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, 2011 were $12.2 billion, or 90.9% of total assets, compared with $12.5 billion, or 91.5% of total assets, at December 31, 2010.

Loans and Leases

The Bank’s loan and lease portfolio represents the largest single component of the Company’s earning asset base, comprising 75.6% of average earning assets during the second quarter of 2011.  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 $9.2 billion at June 30, 2011, representing a 1.3% decrease from $9.3 billion at December 31, 2010.  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; however, the Company was able to replace some loan runoff with new loan production, particularly out of its east Texas, Louisiana and Arkansas markets.
 
 
54

 
 
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,
 
   
2011
   
2010
   
2010
 
   
(In thousands)
 
                   
Commercial and industrial
  $ 1,540,048     $ 1,499,152     $ 1,505,471  
Real estate
                       
   Consumer mortgages
    1,971,499       1,981,475       1,951,563  
   Home equity
    531,787       555,281       543,272  
   Agricultural
    255,310       260,489       252,292  
   Commercial and industrial-owner occupied
    1,366,734       1,407,704       1,331,473  
   Construction, acquisition and development
    1,060,675       1,419,303       1,174,743  
   Commercial
    1,764,648       1,794,644       1,816,951  
Credit cards
    101,955       102,784       106,345  
All other
    663,223       670,791       694,241  
     Total
  $ 9,255,879     $ 9,691,623     $ 9,376,351  
 
 

The following table shows the Company’s net loans and leases by segment, class and geographical location as of June 30, 2011:

   
Alabama
                     
Greater
                         
   
and Florida
                     
Memphis
   
Northeast
   
Texas and
             
   
Panhandle
   
Arkansas
   
Mississippi
   
Missouri
   
Area
   
Tennessee
   
Louisiana
   
Other
   
Total
 
   
(In thousands)
       
Commercial and industrial
  $ 63,477     $ 219,533     $ 322,786     $ 85,073     $ 24,045     $ 84,544     $ 274,812     $ 452,416     $ 1,526,686  
Real estate
                                                                       
   Consumer mortgages
    114,266       273,338       779,838       66,163       87,596       164,453       412,493       73,352       1,971,499  
   Home equity
    64,043       43,224       178,305       29,297       73,790       79,307       62,617       1,204       531,787  
   Agricultural
    7,338       73,285       75,142       5,642       16,248       13,629       58,370       5,656       255,310  
   Commercial and industrial-owner occupied
    125,567       175,098       472,765       74,684       109,132       101,806       246,369       61,313       1,366,734  
   Construction, acquisition and development
    133,335       86,795       273,624       88,309       128,537       130,962       208,406       10,707       1,060,675  
   Commercial
    195,722       340,963       344,926       241,209       132,670       105,507       354,065       49,586       1,764,648  
Credit cards
    -       -       -       -       -       -       -       101,955       101,955  
All other
    14,936       42,680       79,088       1,409       48,596       28,516       29,521       390,513       635,259  
     Total
  $ 718,684     $ 1,254,916     $ 2,526,474     $ 591,786     $ 620,614     $ 708,724     $ 1,646,653     $ 1,146,702     $ 9,214,553  

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, 2011:


 
55

 
         
One Year
   
One to
   
After
       
   
Past Due
   
or Less
   
Five Years
   
Five Years
   
Total
 
   
(In thousands)
 
Commercial and industrial
  $ 10,851     $ 975,292     $ 419,552     $ 120,991     $ 1,526,686  
Real estate
                                       
   Consumer mortgages
    8,628       460,507       1,220,811       281,553       1,971,499  
   Home equity
    632       114,047       417,063       45       531,787  
   Agricultural
    1,044       75,606       147,381       31,279       255,310  
   Commercial and industrial-owner occupied
    8,068       261,436       869,039       228,191       1,366,734  
   Construction, acquisition and development
    74,109       641,789       327,897       16,880       1,060,675  
   Commercial
    8,182       334,875       1,259,342       162,249       1,764,648  
Credit cards
    -       101,955       -       -       101,955  
All other
    691       250,447       329,401       54,720       635,259  
     Total
  $ 112,205     $ 3,215,954     $ 4,990,486     $ 895,908     $ 9,214,553  
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 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 increased 2.4% during the first six months of 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 2011 increasing by 1.0% when compared to December 31, 2010, as the housing sector slowed and lower long-term mortgage rates were available. 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.
Real Estate – Agricultural - Agricultural loans include loans to purchase agricultural land and production lines secured by farm land.  Agricultural loans outstanding remained stable during the first six months of 2011.
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 increased 2.7% during the first six months of 2011.
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 remained slow during 2010,
 
 
56

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 9.7% during the first six months of 2011.
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.  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.
At June 30, 2011, the Company had $34.0 million in construction, acquisition and development loans that provided for the use of interest reserves with approximately $204,000 and $484,000 recognized as interest income during the second quarter and first six months of 2011, respectively.  The amount of construction, acquisition and development loans with interest reserves that were on non-accrual status was $12.8 million at June 30, 2011.  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 troubled debt restructuring (“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. Each factor must be acceptable under the Company’s lending policy and risk review.
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
 
 
57

 loans.  Construction, acquisition and development loans were $1.06 billion at June 30, 2011 and $1.17 billion at December 31, 2010.  The following table shows the Company’s construction, acquisition and development portfolio by geographical location at June 30, 2011:


   
Alabama
                     
Greater
                         
Real Estate Construction,
 
and Florida
                     
Memphis
   
Northeast
   
Texas and
             
Acquisition and Development
 
Panhandle
   
Arkansas
   
Mississippi
   
Missouri
   
Area
   
Tennessee
   
Louisiana
   
Other
   
Total
 
   
(In thousands)
             
Multi-family construction
  $ -     $ -     $ 9,185     $ 8,667     $ 741     $ 98     $ 232     $ 193     $ 19,116  
One-to-four family construction
    32,746       18,881       48,004       9,676       13,104       36,626       37,768       2,004       198,809  
Recreation and all other loans
    1,158       10,292       33,901       597       2,977       983       15,789       669       66,366  
Commercial construction
    18,922       9,079       37,222       18,145       17,156       30,021       28,665       1,624       160,834  
Commercial acquisition and development
    12,031       21,316       51,069       25,978       33,965       25,214       50,640       2,247       222,460  
Residential acquisition and development
    68,478       27,227       94,243       25,246       60,594       38,020       75,312       3,970       393,090  
     Total
  $ 133,335     $ 86,795     $ 273,624     $ 88,309     $ 128,537     $ 130,962     $ 208,406     $ 10,707     $ 1,060,675  

The following table shows the maturity distribution of the Company’s construction, acquisition and development portfolio as of June 30, 2011:


Real Estate Construction,
       
One Year
   
One to
   
After
       
Acquisition and Development
 
Past Due
   
or Less
   
Five Years
   
Five Years
   
Total
 
   
(In thousands)
 
Multi-family construction
  $ 9,174     $ 9,844     $ 98     $ -     $ 19,116  
One-to-four family construction
    4,242       177,685       16,009       873       198,809  
Recreation and all other loans
    58       22,982       42,122       1,204       66,366  
Commercial construction
    11,655       85,255       55,145       8,779       160,834  
Commercial acquisition and development
    18,832       97,164       104,428       2,036       222,460  
Residential acquisition and development
    30,148       248,859       110,095       3,988       393,090  
     Total
  $ 74,109     $ 641,789     $ 327,897     $ 16,880     $ 1,060,675  
                                         
Impaired  loans
  $ 66,663     $ 82,622     $ 11,394     $ 374     $ 161,053  
Other non-accrual loans
    7,446       667       1,441       196       9,750  
     Total Non-accrual loans
  $ 74,109     $ 83,289     $ 12,835     $ 570     $ 170,803  
All of the $74.1 million in past due construction, acquisition and development loans are included in nonaccrual loans at June 30, 2011.  Approximately 60.5% of the loans included in the construction, acquisition and development portfolio are 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.
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 decreased 2.9% during the first six months of 2011.
 
 
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Credit Cards - Credit cards include consumer and business MasterCard and Visa accounts and private label accounts for local merchants.  The Bank offers credit cards primarily to its deposit and loan customers.  Credit card balances decreased 4.1% during the first six months of 2011.
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 4.5% during the first six months of 2011.
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.  The Bank’s NPAs consist of NPLs and other real estate owned, which consists of foreclosed properties.  The Bank's NPAs, which are carried either in the loan account or other real estate owned on the consolidated balance sheets, depending on foreclosure status, were as follows as of the dates presented:

   
June 30,
   
December 31,
 
   
2011
   
2010
   
2010
 
   
(Dollars in thousands)
 
Non-accrual loans and leases
  $ 331,076     $ 263,758     $ 347,499  
Loans 90 days or more past due, still accruing
    3,980       17,696       8,500  
Restructured loans and leases, but accruing
    44,786       20,813       38,376  
Total NPLs
    379,842       302,267       394,375  
                         
Other real estate owned
    151,204       67,560       133,412  
Total NPAs
  $ 531,046     $ 369,827     $ 527,787  
                         
NPLs to net loans and leases
    4.12 %     3.13 %     4.23 %
NPAs to net loans and leases
    5.76 %     3.83 %     5.65 %


NPLs decreased 3.7% to $379.8 million at June 30, 2011 compared to $394.4 million at December 31, 2010 and increased 25.7% compared to $302.3 million at June 30, 2010.  Included in NPLs at June 30, 2011 were $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, and were net of $71.1 million in partial charge-downs previously taken on these impaired loans.  NPLs at December 31, 2010 included $273.4 million of loans that are impaired.  These impaired loans had a specific reserve of $40.7 million included in the allowance for credit losses of $196.9 million at December 31, 2010.  NPLs at June 30, 2010 included $188.3 million of loans that are impaired.  These impaired loans had a specific reserve of $40.7 million included in the allowance for credit losses of $200.8 million at June 30, 2010.  The significant increase in restructured loans and leases still accruing at June 30, 2011 compared to June 30, 2010 reflects the increase in loans which meet the criteria for disclosure as TDRs because payment terms or pricing have been modified by the Company or by orders under bankruptcy proceedings but which demonstrate sufficient performance or collateral to support the remaining principal and accrued interest.

 
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The following table provides additional details related to the Company’s non-performing loans and leases and the allowance for credits losses at the dates indicated:

   
June 30,
   
December 31,
 
   
2011
   
2010
   
2010
 
   
(Dollars in thousands)
 
                   
Unpaid principal balance of impaired loans
  $ 374,760     $ 243,221     $ 345,377  
Cumulative charge offs on impaired loans
    71,103       54,930       71,972  
Outstanding balance of impaired loans
    303,657       188,291       273,405  
                         
Other non-accrual loans and leases not impaired
    27,419       75,467       74,094  
                         
     Total non-accrual loans and leases
  $ 331,076     $ 263,758     $ 347,499  
                         
Allowance for impaired loans
    46,810       40,721       40,719  
                         
     Nonaccrual loans and leases, net of specific reserves
  $ 284,266     $ 223,037     $ 306,780  
                         
Loans and leases 90+ past due, still accruing
    3,980       17,696       8,500  
Restructured loans and leases, still accruing
    44,786       20,813       38,376  
                         
     Total non-performing loans and leases
  $ 379,842     $ 302,267     $ 394,375  
                         
Allowance for impaired loans
  $ 46,810     $ 40,721     $ 40,719  
Allowance for all other loans and leases
    150,817       160,053       156,194  
                         
     Total Allowance for Credit Losses
  $ 197,627     $ 200,774     $ 196,913  
                         
                         
Outstanding balance of impaired loans
  $ 303,657     $ 188,291     $ 273,405  
Allowance for impaired loans
    46,810       40,721       40,719  
                         
     Net book value of impaired loans
  $ 256,847     $ 147,570     $ 232,686  
                         
                         
Net book value of impaired loans as a %
                       
     of unpaid principal balance
    69 %     61 %     67 %
                         
Coverage of other non-accrual loans and leases not impaired
                       
     by the allowance for all other loans and leases
    550 %     212 %     211 %
                         
Coverage of non-performing loans and leases not impaired
                       
     by the allowance for all other loans and leases
    198 %     140 %     129 %

While non-accrual loans decreased at June 30, 2011 compared to December 31, 2010, the increase in non-accrual loans during the second quarter of 2011 compared to the second quarter of 2010 was reflective of the continuing effects of the prevailing economic environment on the Bank’s loan portfolio, as a significant portion of the increase 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 2010 and the first six months of 2011 and certain other borrower specific factors.  Of the Bank’s construction, acquisition and development loans, which totaled $1.1 billion at June 30, 2011, $392.8 million represented loans made by the Bank’s locations in Alabama and Tennessee, including the greater Memphis, Tennessee area, a portion of which is in northwest Mississippi.  Residential acquisition and development loans were
 
 
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the largest component of the Bank’s construction, acquisition and development loans and totaled $393.1 million at June 30, 2011 with 42.5% of such loans made by the Bank’s locations in Alabama 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 Company’s total NPLs of $379.8 million at June 30, 2011, $183.4 million, or 48.3%, 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 and Tennessee which are being 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 commercial and industrial and commercial real estate classes, some of which are participations with other financial institutions that pre-date our acquisition of The Signature Bank in 2007.  The following table presents the Company’s NPLs by geographical location at June 30, 2011:

         
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
  $ 718,684     $ 221     $ 67,087     $ 5,745     $ 73,053       10.2 %
Arkansas
    1,254,916       37       13,719       9,122       22,878       1.8  
Mississippi
    2,526,474       464       43,518       6,538       50,520       2.0  
Missouri
    591,786       22       43,128       12,659       55,809       9.4  
Greater Memphis Area
    620,614       163       71,975       2,378       74,516       12.0  
Northeast Tennessee
    708,724       20       31,933       3,905       35,858       5.1  
Texas and Louisiana
    1,646,653       80       53,243       776       54,099       3.3  
Other
    1,146,702       2,973       6,473       3,663       13,109       1.1  
     Total
  $ 9,214,553     $ 3,980     $ 331,076     $ 44,786     $ 379,842       4.1 %

The increase in other real estate owned in the first six months of 2011 reflected the general slow-down in the residential real estate sector in certain of the Bank’s markets, resulting in increased foreclosures.  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 if there has been at least a six-month sustained period of repayment performance by the borrower.  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.  Restructured loans of $81.1 million and $83.4 million were included in the non-accrual loan category at June 30, 2011 and December 31, 2010, respectively.
At June 30, 2011, 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 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.
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
 
 
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do not yet meet the criteria for disclosure as NPLs.  Historically, some of these loans and leases are ultimately restructured or placed in non-accrual status.  At June 30, 2011, the Bank had $12.6 million of potential problem loans or leases that were not included in the non-accrual loans and leases or in the loans 90 days or more past due categories, but for which management had concerns as to the ability of such borrowers to comply with the contractual terms of their loans and leases.
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, 2011:

                                     
         
90+ Days
         
Restructured
         
NPLs as a
 
         
Past Due still
   
Non-accruing
   
Loans, still
         
% of
 
Loans and leases, net of unearned income
 
Outstanding
   
Accruing
   
Loans
   
accruing
   
NPLs
   
Outstanding
 
   
(Dollars in thousands)
 
Commercial and industrial
  $ 1,526,686     $ 118     $ 9,337     $ 500     $ 9,955       0.7 %
Real estate
                                               
   Consumer mortgages
    1,971,499       2,482       34,174       2,041       38,697       2.0  
   Home equity
    531,787       242       1,232       -       1,474       0.3  
   Agricultural
    255,310       -       8,526       760       9,286       3.6  
   Commercial and industrial-owner occupied
    1,366,734       -       26,387       5,938       32,325       2.4  
   Construction, acquisition and development
    1,060,675       432       200,434       5,410       206,276       19.4  
   Commercial
    1,764,648       19       48,571       17,452       66,042       3.7  
Credit cards
    101,955       299       546       2,758       3,603       3.5  
All other
    635,259       388       1,869       9,927       12,184       1.9  
     Total
  $ 9,214,553     $ 3,980     $ 331,076     $ 44,786     $ 379,842       4.1 %

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, 2011:


         
90+ Days
         
Restructured
         
NPLs as a
Real Estate Construction,
       
Past Due still
   
Non-accruing
   
Loans, still
         
% of
Acquisition and Development
 
Outstanding
   
Accruing
   
Loans
   
accruing
   
NPLs
   
Outstanding
   
(Dollars in thousands)
Multi-family construction
  $ 19,116     $ -     $ 9,174     $ -     $ 9,174       48.0 %
One-to-four family construction
    198,809       -       24,537       1,697       26,234       13.2  
Recreation and all other loans
    66,366       2       774       24       800       1.2  
Commercial construction
    160,834       -       16,618       -       16,618       10.3  
Commercial acquisition and development
    222,460       -       37,207       1,415       38,622       17.4  
Residential acquisition and development
    393,090       430       112,124       2,274       114,828       29.2  
     Total
  $ 1,060,675     $ 432     $ 200,434     $ 5,410     $ 206,276       19.4 %

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. In evaluating the balance sheet during June of 2011, the Company determined that it may be in the Company’s best interest to prepay some long-term FHLB borrowings.  In the course of that evaluation, the Company determined certain securities classified as held-to-maturity should be sold as their term more closely aligned with the FHLB borrowings assisting in the mitigation of
 
 
62

interest rate risk.  As a result, the Company transferred all held-to-maturity securities to the available-for-sale category during the second quarter of 2011.  Held-to-maturity securities were $1.6 billion at December 31, 2010.  Available-for-sale securities were $2.6 billion at June 30, 2011 compared to $1.1 billion at December 31, 2010 with the increase primarily resulting from the transfer of all held-to-maturity securities to the available-for-sale category during the second quarter of 2011.  Available-for-sale securities, which are subject to possible sale, are recorded at fair value.  At June 30, 2011, 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, 2011:

   
Amortized Cost
   
Estimated Fair Value
 
   
Amount
   
%
   
Amount
   
%
 
Available-for-sale Securities:
 
(Dollars in thousands)
 
Aaa
  $ 2,050,991       81.8 %   $ 2,090,868       81.7 %
Aa1 to Aa3
    185,245       7.4 %     191,727       7.4 %
A1 to A3
    17,025       0.7 %     17,403       0.7 %
Baa1
    6,678       0.3 %     6,777       0.3 %
Ba1 to Ba3
    496       0.0 %     528          
Caa1
    66       0.0 %     131       -  
Not rated (1)
    246,256       9.8 %     253,390       9.9 %
   Total
  $ 2,506,757       100.0 %   $ 2,560,824       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 $78.0 million and a market value of $80.6 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.  The Company performed a complete goodwill impairment analysis for all of its reporting segments during the second quarter of 2011 because volatile market conditions caused the Company’s market value to fall below book value.  Based on this analysis, no goodwill impairment was recorded during the six months ended June 30, 2011 because the estimated fair value of each of the Company’s reporting segments exceeded its respective carrying values by more than 15%.
In the current environment, forecasting cash flows, credit losses and growth in addition to valuing the Company’s assets with any degree of assurance is very difficult and subject to significant changes over very short periods of time.  Management will continue to update its analysis as circumstances change.  If market conditions continue to be volatile and unpredictable, impairment of goodwill related to the Company’s reporting segments may be necessary in future periods.  Goodwill was $271.3 million and $270.1 million at June 30, 2011 and December 31, 2010, respectively.

Other Real Estate Owned

Other real estate owned was $151.2 million and $133.4 million at June 30, 2011 and December 31, 2010, respectively.  Other real estate owned at June 30, 2011 had aggregate loan balances at the time of foreclosure of $263.5 million.  Other real estate owned at December 31, 2010 had aggregate loan balances at time of foreclosure of $237.2 million.  The following table presents the other real estate owned by segment, class and geographical location at June 30, 2011:

 
63

 
   
Alabama
                     
Greater
                         
   
and Florida
                     
Memphis
   
Northeast
   
Texas and
             
   
Panhandle
   
Arkansas
   
Mississippi
   
Missouri
   
Area
   
Tennessee
   
Louisiana
   
Other
   
Total
 
   
(In thousands)
 
Commercial and industrial
  $ 439     $ 18     $ -     $ -     $ 946     $ -     $ -     $ -     $ 1,403  
Real estate
                                                                       
   Consumer mortgages
    3,985       327       3,391       762       6,078       2,642       1,120       1,649       19,954  
   Home equity
    -       58       291       -       -       368       -       -       717  
   Agricultural
    950       87       2,081       -       1,551       -       -       -       4,669  
   Commercial and industrial-owner occupied
    930       109       1,740       79       3,515       446       228       292       7,339  
   Construction, acquisition and development
    9,334       2,231       26,052       2,952       49,562       14,931       2,669       621       108,352  
   Commercial
    2,757       1,725       1,112       451       1,215       203       584       -       8,047  
All other
    172       44       312       195       -       -       -       -       723  
     Total
  $ 18,567     $ 4,599     $ 34,979     $ 4,439     $ 62,867     $ 18,590     $ 4,601     $ 2,562     $ 151,204  
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 increase in other real estate owned.

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,
       
   
2011
   
2010
   
% Change
 
   
(Dollars in millions)
       
Noninterest bearing demand
  $ 2,097     $ 2,060       1.8 %
Interest bearing demand
    4,939       4,932       0.1  
Savings
    945       863       9.5  
Other time
    3,327       3,635       (8.5 )
Total deposits
  $ 11,308     $ 11,490       (1.6 )%

Total deposits remained virtually unchanged at June 30, 2011 compared to December 31, 2010.  The average maturity of time deposits at June 30, 2011 was approximately 13 months, compared to 14 months at December 31, 2010.

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
 
 
64

deposits are adequate to meet the Company’s liquidity needs for normal operations over both the short-term and the long-term.
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 Federal Home Loan Bank (“FHLB”) which provides access to short-term and long-term borrowings and 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 approximately $703,000 at June 30, 2011 and $2.7 million at December 31, 2010.  The Company had federal funds purchased and securities sold under agreement to repurchase of $426.1 million and $440.6 million at June 30, 2011 and December 31, 2010, respectively.  The Company repaid $75.0 million in long-term borrowings during the second quarter of 2011 reducing long-term borrowings to $35.0 million at June 30, 2011 compared to $110.0 million at December 31, 2010.  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, 2011.
The Company had non-binding federal funds borrowing arrangements with other banks aggregating $725.0 million at June 30, 2011.  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 and qualifying non-cumulative perpetual preferred stock, 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, 2011 and December 31, 2010 as follows:


 
65

 
   
June 30, 2011
   
December 31, 2010
 
   
Amount
   
Ratio
   
Amount
   
Ratio
 
   
(Dollars in thousands)
 
BancorpSouth, Inc.
                       
   Tier I capital (to risk-weighted assets)
  $ 1,075,337       10.82 %   $ 1,070,744       10.61 %
   Total capital (to risk-weighted assets)
    1,200,629       12.08       1,197,626       11.87  
   Tier I leverage capital (to average assets)
    1,075,337       8.22       1,070,744       8.07  


The Federal Deposit Insurance Corporation’s (“FDIC”) 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, 2011 and December 31, 2010 as follows:


   
June 30, 2011
   
December 31, 2010
 
   
Amount
   
Ratio
   
Amount
   
Ratio
 
   
(Dollars in thousands)
 
BancorpSouth Bank
                       
   Tier I capital (to risk-weighted assets)
  $ 1,046,607       10.54 %   $ 1,040,714       10.32 %
   Total capital (to risk-weighted assets)
    1,171,899       11.81       1,167,596       11.58  
   Tier I leverage capital (to average assets)
    1,046,607       8.03       1,040,714       7.87  


There are various legal and regulatory limits on the extent to which the Bank may pay dividends or otherwise supply funds to the Company.  In addition, federal and state regulatory agencies have the authority to condition, require advanced consent and/or prevent a bank, bank holding company or financial holding company from paying a dividend or engaging in any other activity that, in the opinion of the agency, would constitute an unsafe or unsound practice.  Management does not expect these limitations to cause a material adverse effect with regard to the Company’s ability to meet its cash obligations.

Uses of Capital

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.  The Company 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 March 21, 2007, the Company announced a new stock repurchase program whereby the Company may acquire up to three million shares of its common stock in the open market at prevailing market prices or in privately negotiated transactions during the period from May 1, 2007 through April 30, 2009.  The original expiration date for this stock repurchase program was extended until April 30, 2011.  At the expiration of this stock repurchase program, 460,700 shares had been repurchased.

Certain Litigation Contingencies

The Company and its subsidiaries are engaged in lines of business that are heavily regulated and involve a large volume of financial transactions with numerous customers through offices in nine states.  Although the Company and its subsidiaries have developed policies and procedures to minimize the impact of legal noncompliance and other disputes, litigation presents an ongoing risk.
On May 12, 2010, the Company and its Chief Executive Officer, President and Chief Financial Officer were named in a purported 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. The plaintiff seeks class certification, an unspecified amount of damages and awards of costs and attorneys’ fees and
 
 
66

such other equitable relief as the Court may deem just and proper.  No class has been certified and, at this stage of the lawsuit, management cannot determine the probability of an unfavorable outcome to the Company.  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 Securities and Exchange Commission had issued an Order of Investigation related to the Company’s delay in filing its Annual Report on Form 10-K for year ended December 31, 2009 and related matters.  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 two Arkansas customers 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 case was transferred to pending multi-district litigation in the U.S. District Court for the Southern District of Florida.  No class has been certified and, at this stage of the lawsuit, management of the Company cannot determine the probability of an unfavorable outcome to the Company.  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.
Otherwise, the Company and its subsidiaries are defendants in various lawsuits arising out of the normal course of business, including claims against entities to which the Company is a successor as a result of business combinations.  In the opinion of management, the ultimate resolution of these lawsuits should not have a material adverse effect on the Company’s business, consolidated financial position or results of operations.  It is possible, however, that future developments could result in an unfavorable ultimate 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 particular quarterly reporting period.  Litigation is inherently uncertain, and management of the Company cannot make assurances that the Company will prevail in any of these actions, nor can it reasonably estimate the amount of damages that the Company might incur.

CRITICAL ACCOUNTING POLICIES

During the three months ended June 30, 2011, 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, 2010.


 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

During the three months ended June 30, 2011, there were no significant changes to the quantitative and qualitative disclosures about market risks presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.


ITEM 4.  CONTROLS AND PROCEDURES.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, except for the remediation efforts management continued during the first six months of 2011 related to a material weakness in internal control over financial reporting
 
 
67

identified as of December 31, 2009 and 2010, and reported in the Company’s Annual Reports on Form 10-K for the years ended December 31, 2009 and 2010.  Following management’s initial determination of the material weakness as of December 31, 2009, management began taking steps to remediate the material weakness.  These ongoing efforts included the following:

·  
The creation of a real estate risk management group which oversees compliance with laws, regulations and U.S. GAAP related to lending activities;
·  
Testing of significant loans, with a focus on higher risk loans, for impairment on a monthly basis;
·  
Reporting by management to the Board of Directors on a quarterly basis regarding significant problem loans and potentially problematic portfolios;
·  
Additional resources committed to the Bank’s appraisal group, as necessary, for compliance with appraisal policies and procedures;
·  
Additional personnel committed to the Company’s independent loan review function;
·  
New leadership for the independent loan review function; and
·  
Migration to a risk-based approach for timing of loan review.

Management anticipates that these remedial actions will strengthen the Company’s internal control over financial reporting and will, over time, address the material weakness that was identified as of December 31, 2010. Because some of these remedial actions will take place on a quarterly basis, their successful implementation will continue to be evaluated before management is able to conclude that the material weakness has been remediated. The Company cannot provide any assurance that these remediation efforts will be successful or that the Company’s internal control over financial reporting will be effective as a result of these efforts.

Evaluation of Disclosure Controls and Procedures

As of June 30, 2011, the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13(a)-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation and the identification of a material weakness in the Company’s internal control over financial reporting as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in its reports that it files or submits under the Exchange Act is recorded, processed, summarized and reporting within the time periods specified in the Securities Exchange Commission rules and forms.

PART II
OTHER INFORMATION
 
 
ITEM 1A.  RISK FACTORS.

There have been no material changes from the risk factors previously disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2010.


ITEM 6.  EXHIBITS.

(3)
(a)
Restated Articles of Incorporation, as amended. (1)
 
(b)   Bylaws, as amended and restated. (2)
 
(c)   Amendment No. 1 to Amended and Restated Bylaws. (3)
 
(d)   Amendment No. 2 to Amended and Restated Bylaws. (4)
 
(e)   Amendment No. 3 to Amended and Restated Bylaws. (4)
(4)
(a)
Specimen Common Stock Certificate. (5)
 
68

 
 
(b)
Amended and Restated Certificate of Trust of BancorpSouth Capital Trust I. (6)
 
(c)
Second Amended and Restated Trust Agreement of BancorpSouth Capital Trust I, dated as of January 28, 2002, between BancorpSouth, Inc., The Bank of New York, The Bank of New York (Delaware) and the Administrative Trustees named therein. (7)
 
(d)
Junior Subordinated Indenture, dated as of January 28, 2002, between BancorpSouth, Inc. and The Bank of New York. (7)
 
(e)
Guarantee Agreement, dated as of January 28, 2002, between BancorpSouth, Inc. and The Bank of New York. (7)
 
(f)    Junior Subordinated Debt Security Specimen. (7)
 
(g)   Trust Preferred Security Certificate for BancorpSouth Capital Trust I. (7)
 
(h)
Certain instruments defining the rights of certain holders of long-term debt securities of the Registrant are omitted pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The Registrant hereby agrees to furnish copies of these instruments to the SEC upon request.
(10.1)
Amendment to BancorpSouth, Inc. Long-Term Equity Incentive Plan. (8)
(31.1)
Certification of the Chief Executive Officer of BancorpSouth, Inc. pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
(31.2)
Certification of the Chief Financial Officer of BancorpSouth, Inc. pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
(32.1)
Certification of the Chief Executive Officer of BancorpSouth, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
(32.2)
Certification of the Chief Financial Officer of BancorpSouth, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
(101)**
Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2010, is formatted in XBRL (Extensible Business Reporting Language) interactive data files: (i) the Consolidated Balance Sheets as of September 30, 2010 and 2009, and December 31, 2009, (ii) the Consolidated Statements of Income for each of the three-month and nine-month periods ended September 30, 2010 and 2009, (iii) the Consolidated Statements of Cash Flows for each of the nine-month periods ended September 30, 2010 and 2009, and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text.*

____________________________
(1)
Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2009 (file number 1-12991) and incorporated by reference thereto.
(2)
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998 (file number 1-12991) and incorporated by reference thereto.
(3)
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (file number 1-12991) and incorporated by reference thereto.
(4)
Filed as exhibits 3.1 and 3.2 to the Company’s Current Report on Form 8-K filed on January 26, 2007 (file number 1-12991) and incorporated by reference thereto.
(5)
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1994 (file number 0-10826) and incorporated by reference thereto.
(6)
Filed as exhibit 4.12 to the Company’s registration statement on Form S-3 filed on November 2, 2001 (Registration No. 33-72712) and incorporated by reference thereto.
(7)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on January 28, 2002 (file number 1-12991) and incorporated by reference thereto.
 (8)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on April 8, 2011 (file number 1-12991) and incorporated by reference thereto.
*             Filed herewith.
**
As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.



 
69

 


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BancorpSouth, Inc.                                                      
           (Registrant)

DATE:  August 5, 2011                                                                                       /s/ William L. Prater  
William L. Prater
Treasurer and
Chief Financial Officer


 
70

 


INDEX TO EXHIBITS

Exhibit No.
 
Description

(3)
(a)
Restated Articles of Incorporation, as amended. (1)
 
(b)   Bylaws, as amended and restated. (2)
 
(c)   Amendment No. 1 to Amended and Restated Bylaws. (3)
 
(d)   Amendment No. 2 to Amended and Restated Bylaws. (4)
 
(e)   Amendment No. 3 to Amended and Restated Bylaws. (4)
(4)
(a)
Specimen Common Stock Certificate. (5)
 
(b)
Amended and Restated Certificate of Trust of BancorpSouth Capital Trust I. (6)
 
(c)
Second Amended and Restated Trust Agreement of BancorpSouth Capital Trust I, dated as of January 28, 2002, between BancorpSouth, Inc., The Bank of New York, The Bank of New York (Delaware) and the Administrative Trustees named therein. (7)
 
(d)
Junior Subordinated Indenture, dated as of January 28, 2002, between BancorpSouth, Inc. and The Bank of New York. (7)
 
(e)
Guarantee Agreement, dated as of January 28, 2002, between BancorpSouth, Inc. and The Bank of New York. (7)
 
(f)   Junior Subordinated Debt Security Specimen. (7)
 
(g)   Trust Preferred Security Certificate for BancorpSouth Capital Trust I. (7)
 
(h)
Certain instruments defining the rights of certain holders of long-term debt securities of the Registrant are omitted pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The Registrant hereby agrees to furnish copies of these instruments to the SEC upon request.
 (10.1)
Amendment to BancorpSouth, Inc. Long-Term Equity Incentive Plan. (8)
(31.1)
Certification of the Chief Executive Officer of BancorpSouth, Inc. pursuant to Rule 13a-14 or 15d- 14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
(31.2)
Certification of the Chief Financial Officer of BancorpSouth, Inc. pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
(32.1)
Certification of the Chief Executive Officer of BancorpSouth, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
(32.2)
Certification of the Chief Financial Officer of BancorpSouth, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
(101)**
Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2010, is formatted in XBRL (Extensible Business Reporting Language) interactive data files: (i) the Consolidated Balance Sheets as of September 30, 2010 and 2009, and December 31, 2009, (ii) the Consolidated Statements of Income for each of the three-month and nine-month periods ended September 30, 2010 and 2009, (iii) the Consolidated Statements of Cash Flows for each of the nine-month periods ended September 30, 2010 and 2009, and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text.*

_____________________________
(1)
Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2009 (file number 1-12991) and incorporated by reference thereto.
(2)
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998 (file number 1-12991) and incorporated by reference thereto.
(3)
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (file number 1-12991) and incorporated by reference thereto.
(4)
Filed as exhibits 3.1 and 3.2 to the Company’s Current Report on Form 8-K filed on January 26, 2007 (File number 1-12991) and incorporated by reference thereto.
 
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(5)
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1994 (file number 0-10826) and incorporated by reference thereto.
(6)
Filed as exhibit 4.12 to the Company’s registration statement on Form S-3 filed on November 2, 2001 (Registration No. 33-72712) and incorporated by reference thereto.
(7)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on January 28, 2002 (file number 1-12991) and incorporated by reference thereto.
 (8)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on April 8, 2011 (file number 1-12991) and incorporated by reference thereto.
*           Filed herewith.
**
As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.


 
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