bxs10k1212.htm

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

FORM 10-K
(Mark One)
 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
 
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  1-12991
 
BANCORPSOUTH, INC.
 
 
                                                                               
(Exact name of registrant as specified in its charter)
 
                                             Mississippi                                                                    64-0659571
                                                                      
                 (State or other jurisdiction of                                                                                      (I.R.S. Employer Identification No.)
                              incorporation or organization)

                                  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

Securities registered pursuant to Section 12(b) of the Act:
                                                                                                                                     Name of Each Exchange on
                                        Title of Each Class                                                                            Which Registered
                                                                                                                                                                                                                                                                    
                            Common stock, $2.50 par value                                                                                              New York Stock Exchange
                            Guarantee of 8.15% Preferred Securities                                                           New York Stock Exchange
                            of BancorpSouth Capital Trust I

Securities registered pursuant to Section 12(g) of the Act:  None.


(Cover Page Continued on Next Page)



 




 
 
 



(Continued from Cover Page)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [X]  No [  ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes [  ]  No [X]

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).  Yes [X]  No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

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 definition 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 [  ]  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]
 
 
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 30, 2012 was approximately $1,309,000,000, based on the last reported sale price per share of the registrant’s common stock as reported on the New York Stock Exchange on June 30, 2012.

As of February 15, 2013, the registrant had outstanding 94,565,599 shares of common stock, par value $2.50 per share.

                                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement used in connection with the regis­trant's 2013 Annual Meeting of Shareholders, to be held April 24, 2013, are incorporated by reference into Part III of this Report.
 
 
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                                                       BANCORPSOUTH, INC.
                                                                 FORM 10-K
                                  For the Fiscal Year Ended December 31, 2012

                                                        TABLE OF CONTENTS
PART I
      
       
Item
1.
Business
4
Item
1A.
Risk Factors
11
Item
1B.
Unresolved Staff Comments
22
Item
2.
Properties
22
Item
3.
Legal Proceedings
22
Item          4.    Mine Safety Disclosures  23
       
PART II
      
       
Item
5.
Market for the Registrant's Common Equity, Related Stockholder Matter, and Issuer Purchases of  Equity Securities
24
Item
6.
Selected Financial Data
25
Item
7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
25
Item
7A.
Quantitative and Qualitative Disclosures About Market Risk
68
Item
8.
Financial Statements and Supplementary Data
70
Item
9.
Changes in Disagreements with Accountants on Accounting and Financial Disclosure
129
Item
9A.
Controls and Procedures
129
Item
9B.
Other Information
130
       
       
PART III
      
       
Item
10.
Directors, Executive Officers and Corporate
Governance
 
130
Item
11.
Executive Compensation
131
Item
12.
Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder
Matters
 
 
131
Item
13.
Certain Relationships, Related Transactions and
Director Independence
 
132
Item
14.
Principal Accountant Fees and Services
132
       
       
PART IV
      
       
Item
15.
Exhibits and Financial Statement Schedules
132
       
       
       
       
       
       
       


 
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PART I

ITEM 1.  BUSINESS.

GENERAL

BancorpSouth, Inc. (the “Company”) is a financial holding company incorporated in 1982.  Through its principal bank subsidiary, BancorpSouth Bank (the “Bank”), the Company conducts commercial banking and financial services operations in Mississippi, Tennessee, Alabama, Arkansas, Texas, Louisiana, Florida, Missouri and Illinois.  At December 31, 2012, the Company and its subsidiaries had total assets of $13.4 billion and total deposits of $11.1 billion.  The Company’s principal office is located at One Mississippi Plaza, 201 South Spring Street, Tupelo, Mississippi 38804 and its telephone number is (662) 680-2000.
The Company’s Internet website address is www.bancorpsouth.com.  The Company makes available its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports free of charge on its website on the Investor Relations webpage under the caption “SEC Filings” as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”).  The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file or furnish information electronically with the SEC at www.sec.gov.  The Company’s website and the information contained therein or linked thereto are not intended to be incorporated into this Annual Report on Form 10-K (this “Report”).

DESCRIPTION OF BUSINESS

The Bank has its principal office in Tupelo, Lee County, Mississippi, and conducts a general commercial banking, trust and insurance business through 284 offices in Mississippi, Tennessee, Alabama, Arkansas, Texas, Louisiana, Florida, Missouri and Illinois. The Bank has grown through the acquisition of other banks and insurance agencies and through the opening of new branches and offices.
The Bank and its subsidiaries provide a range of financial services to individuals and small-to-medium size businesses. The Bank operates investment services and insurance agency subsidiaries which engage in investment brokerage services and sales of other insurance products.  The Bank’s trust department offers a variety of services including personal trust and estate services, certain employee benefit accounts and plans, including individual retirement accounts, and limited corporate trust functions.  All of the Company’s assets are located in the United States and all of its revenues generated from external customers originate within the United States.
The Company has registered the trademarks “BancorpSouth,” both typed form and design, and “Bank of Mississippi,” both typed form and design, with the U.S. Patent and Trademark Office.  The trademark “BancorpSouth” will expire in 2024 and “Bank of Mississippi” will expire in 2020 unless the Company extends these trademarks for additional ten-year periods.  Registrations of these trademarks with the U.S. Patent and Trademark Office generally may be renewed and continue indefinitely, provided that the Company continues to use these trademarks and files appropriate maintenance and renewal documentation with the U.S. Patent and Trademark Office at times required by the federal trademark laws and regulations.

COMPETITION

Vigorous competition exists in all major areas where the Bank is engaged in business. The Bank competes for available loans and depository accounts with state and national commercial banks, as well as savings and loan associations, insurance companies, credit unions, money market mutual funds, automobile finance companies and finan­cial services companies.  None of these competitors is dominant in the entire area served by the Bank.
The principal areas of competition in the banking industry center on a financial institution's ability and willingness to provide credit on a timely and competitively priced basis, to offer a sufficient range of deposit and investment opportunities at competitive prices and maturities, and to offer personal and other services of sufficient quality and at competitive prices.  Management believes that the Company and its subsidiaries can compete effectively in all these areas.


 
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REGULATION AND SUPERVISION

This section provides a brief summary of the regulatory environment in which the Company and its subsidiaries operate and is not designed to be a complete discussion of all statutes and regulations affecting such operations, including those statutes and regulations specifically mentioned herein.  Changes in applicable laws, and their application by regulatory and law enforcement agencies, cannot necessarily be predicted, but could have a material effect on the business and results of the Company and its subsidiaries.
The Company is subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”).  The Company is required to file annual reports with the Federal Reserve and such other information as the Federal Reserve may require.  The Federal Reserve also conducts examinations of the Company.
In 2004, pursuant to the Gramm-Leach-Bliley Act of 1999 (“GLBA”), the Company elected to be a financial holding company regulated as such under the Bank Holding Company Act of 1956 (the “Bank Holding Company Act”). Financial holding company powers relate to financial activities that are determined by the Federal Reserve to be financial in nature, incidental to an activity that is financial in nature or complementary to a financial activity (provided that the complementary activity does not pose a safety and soundness risk).  GLBA expressly characterizes certain activities as financial in nature, including lending activities, underwriting and selling insurance, providing financial or investment advice, securities underwriting, dealing and making markets in securities and merchant banking. According to Federal Reserve policy and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), a financial holding company must act as a source of financial strength to its subsidiary banks and commit resources to support each such subsidiary.
The Bank is incorporated under the laws of the State of Mississippi and is subject to the applicable provisions of Mississippi banking laws and the laws of the various states in which it operates, as well as federal law.  The Bank is subject to the supervision of the Mississippi Department of Banking and Consumer Finance and to regular examinations by that department.  Deposits in the Bank are insured by the Federal Deposit Insurance Corporation (the “FDIC”) and, therefore, the Bank is subject to the provisions of the Federal Deposit Insurance Act and to examination by the FDIC.  FDIC regulations require that management report annually on its responsibility for preparing its institution’s financial statements, and establishing and maintaining an internal control structure and procedures for financial reporting and compliance with designated laws and regulations concerning safety and soundness.  The Bank is not a member of the Federal Reserve.
The Company and the Bank are subject to the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”). Among other things, FDICIA provides a framework for a system of supervisory actions based primarily on the capital levels of financial institutions. FDICIA identifies five capital categories for insured depository institutions (“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized”) and requires the respective federal regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within such categories. Capital is measured in two “Tiers” – Tier 1 capital consists of common shareholders’ equity and qualifying non-cumulative perpetual preferred stock, less goodwill and certain other intangible assets, and Tier 2 capital 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 the remaining term to maturity. Total capital is the sum of Tier 1 and Tier 2 capital. For an insured financial institution to be classified as “well capitalized,” the Tier 1 capital, total capital and Tier 1 leverage capital (Tier 1 capital divided by the difference of total assets less goodwill) ratios must be at least 6%, 10% and 5%, respectively. The Bank exceeded the criteria for the “well capitalized” category at December 31, 2012. The Company is required to comply with the risk-based capital guidelines established by the Federal Reserve and with other tests relating to capital adequacy that the Federal Reserve adopts from time to time.  See Note 21 to the Company’s Consolidated Financial Statements included in this Report for a discussion of the Company’s capital amounts and ratios.
In September 2010, the oversight body of the Basel Committee announced a package of reforms, commonly referred to as Basel III, that will substantially increase existing capital requirements as well as add liquidity requirements for financial institutions in the United States and around the world. Basel III would require capital to be held in the form of tangible common equity, generally increase the required capital ratios, phase out certain kinds of intangibles treated as capital and certain types of instruments, like trust preferred securities, and change the risk weightings of assets used to determine required capital ratios. Basel III is presently the subject of notices of proposed rulemaking released in June 2012 by federal banking agencies. The comment period for these notices of proposed rulemaking ended on October 22, 2012. Basel III was intended to be implemented in phases
 
 
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beginning January 1, 2013 and to be fully implemented on a global basis on January 1, 2019. On November 9, 2012, however, the U.S. federal banking agencies indefinitely delayed the January 1, 2013 implementation date.
FDICIA provides for a risk-based deposit insurance premium structure for insured financial institutions.  The FDIC generally provides deposit insurance up to $250,000 per customer per institution for depository accounts held at insured financial institutions. Substantially all of the deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory rating.  As a result of the Dodd-Frank Act, institutions with total consolidated assets of $10 billion or more are required to bear a greater portion of the costs associated with increasing the DIF’s reserve ratio.
The Dodd-Frank Act established the independent Consumer Financial Protection Bureau with broad authority to implement new or revise existing consumer protection regulations, to examine and enforce compliance with federal consumer laws and regulations, including being tasked with protecting consumers from unfair, deceptive and abusive financial products and practices. The Dodd-Frank Act also created the Financial Stability Oversight Council to focus on identifying, monitoring and addressing systemic risks in the financial system. The Financial Stability Oversight Council is tasked with recommending increasingly strict rules for capital, leverage and other requirements based on a company’s size and complexity. The Dodd-Frank Act also includes provisions that, among other things, reorganize bank supervision and strengthen the Federal Reserve.
The Dodd-Frank Act eliminated many of the remaining regulations that limited the ability of a bank to open branches in different states.  The Dodd-Frank Act included savings associations and industrial loan companies, as well as banks, in the nationwide deposit limitation. Consequently, no acquisition of any financial institution can be approved if the effect of the acquisition would be to increase the acquirer’s nationwide deposits to more than 10% of all deposits. In addition, pursuant to the Durbin Debt Interchange Amendment to the Dodd-Frank Act (the “Durbin Amendment”), the Dodd-Frank Act requires fees charged for debit card transactions, commonly referred to as interchange fees, to be both “reasonable and proportional” to the cost incurred by the card issuer. Under the Durbin Amendment, the Federal Reserve’s final rule set a base interchange rate of $0.21 per transaction, plus an additional five basis points of the transaction cost for fraud charges. An upward adjustment of no more than $0.01 on the debit interchange fee is also allowed for implementing certain fraud prevention standards. Additionally, issuers are required to include two unaffiliated networks for routing debit transactions, one that is signature-based and one that is personal identification number based.
Further, the Dodd-Frank Act provided that the appropriate federal regulators must establish standards prohibiting as an unsafe and unsound practice any compensation plan of a bank holding company or other “covered financial institution” that provides an insider or other employee with “excessive compensation” or could lead to a material financial loss to such firm. Prior to the implementation of the Dodd-Frank Act, the bank regulatory agencies promulgated the Interagency Guidance on Sound Incentive Compensation Policies, which requires financial institutions to establish metrics for measuring the impact of activities to achieve incentive compensation with the related risk to the financial institution of such behavior.
The Company is a legal entity that is separate and distinct from its subsidiaries.  There are various legal limitations on the extent to which the Bank may extend credit, pay dividends or otherwise supply funds to the Company or its affiliates.  In particular, the Bank is subject to certain restrictions imposed by federal law, including without limitation, sections 23A and 23B of the Federal Reserve Act, on any extensions of credit to the Company or, with certain exceptions, other affiliates.
The primary source of funds for dividends paid to the Company’s shareholders has been dividends paid to the Company by the Bank.  Various federal and state laws limit the amount of dividends that the Bank may pay to the Company without regulatory approval.  Under Mississippi law, the Bank must obtain approval of the Commissioner of the Mississippi Department of Banking and Consumer Finance prior to paying any dividend on the Bank’s common stock.  Under FDICIA, the Bank may not pay any dividends if, after paying the dividend, it would be undercapitalized under applicable capital requirements.  The FDIC also has the authority to prohibit the Bank from engaging in business practices that the FDIC considers to be unsafe or unsound, which, depending on the financial condition of the Bank, could include the payment of dividends.  In 2011, the Bank’s board of directors adopted a resolution requested by the FDIC and the Mississippi Department of Banking and Consumer Finance that, among other things, limits the declaration and payment of dividends in and requires maintenance of enhanced capital ratios.
 
 
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    In addition, the Federal Reserve has the authority to prohibit the payment of dividends by a bank holding company if its actions constitute unsafe or unsound practices. The Federal Reserve has issued a policy statement, Supervisory Release 09-4 (“SR 09-4”), on the payment of cash dividends by bank holding companies, which outlines the Federal Reserve’s view that a bank holding company that is experiencing earnings weaknesses or other financial pressures should not pay cash dividends that exceed its net income, that are inconsistent with its capital position or that could only be funded in ways that weaken its financial health, such as by borrowing or selling assets.  The Federal Reserve has indicated that, in some instances, it may be appropriate for a bank holding company to eliminate its dividends. Further, in the current financial and economic environment, the Federal Reserve has indicated that bank and financial holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.  In 2011, the board of directors of the Company adopted a resolution requested by the Federal Reserve Bank that, among other things, requires that the Company obtain prior written approval of the Federal Reserve Bank before taking a number of actions, including declaring and paying dividends to the Company’s shareholders, making distributions in connection with outstanding trust preferred securities and redeeming outstanding equity securities.
The Community Reinvestment Act of 1977 (“CRA”) and its implementing regulations provide an incentive for regulated financial institutions to meet the credit needs of their local community or communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of such financial institutions.  The regulations provide that the appropriate regulatory authority will assess reports under CRA in connection with applications for establishment of domestic branches, acquisitions of banks or mergers involving financial holding companies.  An unsatisfactory rating under CRA may serve as a basis to deny an application to acquire or establish a new bank, to establish a new branch or to expand banking services.  As of December 31, 2012, the Company had a “satisfactory” rating under CRA.
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, as extended and revised by the PATRIOT Improvement and Reauthorization Act of 2005 (the “USA Patriot Act”), requires each financial institution to: (i) establish an anti-money laundering program; (ii) establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign financial institutions; and (iii) avoid establishing, maintaining, administering or managing correspondent accounts in the United States for, or on behalf of, foreign financial institutions that do not have a physical presence in any country.  The USA Patriot Act also requires that financial institutions follow certain minimum standards to verify the identity of customers, both foreign and domestic, when a customer opens an account.  In addition, the USA Patriot Act contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.
The activities of the Company and its subsidiaries are also subject to regulation under various federal laws and regulations thereunder, including the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Electronic Funds Transfer Act, the Currency and Foreign Transactions Reporting Act, the National Flood Insurance Act of 1968 and the Real Estate Settlement Procedures Act, among others, as well as various state laws.
GLBA and other federal and state laws, as well as various regulations and guidelines adopted by the Federal Reserve and the FDIC, provide for minimum standards of privacy to protect the confidentiality of the non-public personal information of customers and to regulate the use of such information by financial institutions.  The Company and its subsidiaries have adopted a customer information security program to comply with these regulatory requirements.
The Bank’s insurance subsidiaries are regulated by the insurance regulatory authorities and applicable laws and regulations of the states in which they operate.
BancorpSouth Investment Services, Inc., the Bank’s investment services subsidiary, is regulated as a registered investment adviser and broker-dealer by federal and state securities regulations and self-regulatory authorities.
    The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) is applicable to all companies with equity or debt securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, the Sarbanes-Oxley Act established: (i) requirements for audit committees, including independence, expertise and responsibilities; (ii) certification and related responsibilities regarding financial statements for the
 
 
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Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) standards for auditors and regulation of audits; (iv) disclosure and reporting obligations for the reporting company and its directors and executive officers; and (v) civil and criminal penalties for violation of the securities laws.
    In addition, there have been a number of legislative and regulatory proposals that could have an impact on the operation of financial holding companies and their bank and non-bank subsidiaries.  Management is not able to predict whether or in what form these proposals may be adopted in the future and, if adopted, what their effect will be on the Company and its subsidiaries.

LENDING ACTIVITIES

The Bank’s lending activities include both commercial and consumer loans.  Loan 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 that vary depending on the size and nature of the loan, and applies these procedures in a disciplined manner.

Commercial Lending
The Bank offers a variety of commercial loan services including term loans, lines of credit, equipment and receivable financing and agricultural loans.  A broad range of short-to-medium term commercial loans, both secured and unsecured, are made available to businesses for working capital (including inventory and receivables), business expansion (including acquisition and development of real estate and improvements), and the purchase of equipment and machinery.  The Bank also makes construction loans to real estate developers for the acquisition, development and construction of residential subdivisions.
Commercial loans are granted based on the borrower’s ability to generate cash flow to support its debt obligations and other cash related expenses.  A borrower’s ability to repay commercial loans is substantially dependent on the success of the business itself and on the quality of its management.  As a general practice, the Bank takes as collateral a security interest in any available real estate, equipment, inventory, receivables or other personal property, although such loans may also be made infrequently on an unsecured basis.  In many instances, the Bank requires personal guarantees of its commercial loans to provide additional credit support.
The Bank has had very little exposure as an agricultural lender.  Crop production loans have been either fully supported by the collateral and financial strength of the borrower, or a 90% loan guaranty has been obtained through the Farm Service Agency on such loans.

Residential Consumer Lending
A portion of the Bank’s lending activities consists of the origination of fixed and adjustable rate residential mortgage loans secured by owner-occupied property located in the Bank’s primary market areas.  Home mortgage lending is unique in that a broad geographic territory may be served by originators working from strategically placed offices either within the Bank’s traditional banking facilities or from other locations.  In addition, the Bank offers construction loans, second mortgage loans and home equity lines of credit.
The Bank finances the construction of individual, owner-occupied houses on the basis of written underwriting and construction loan management guidelines.  First mortgage construction loans are made to qualified individual borrowers and are generally supported by a take-out commitment from a permanent lender.  The Bank makes residential construction loans to individuals who intend to erect owner-occupied housing on a purchased parcel of real estate.  The construction phase of these loans has certain risks, including the viability of the contractor, the contractor’s ability to complete the project and changes in interest rates.
In most cases, the Bank sells its mortgage loans with terms of 15 years or more in the secondary market and either retains or releases the right to service those loans.  The sale of mortgage loans to the secondary market allows the Bank to manage the interest rate risks related to such lending operations.  Generally, after the sale of a loan with servicing retained, the Bank’s only involvement is to act as a servicing agent.  In certain cases, the Bank may be required to repurchase mortgage loans upon which customers have defaulted that were previously sold in the secondary market if these loans did not meet the underwriting standards of the entity that purchased the loans.  Any such loans are held by the Bank in its mortgage loan portfolio.
 
 
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Non-Residential Consumer Lending
Non-residential consumer loans made by the Bank include loans for automobiles, recreation vehicles, boats, personal (secured and unsecured) and deposit account secured loans.  Non-residential consumer loans are attractive to the Bank because they typically have a shorter term and carry higher interest rates than those charged on other types of loans.
The Bank also issues credit cards solicited on the basis of applications received through referrals from the Bank’s branches and other marketing efforts.  The Bank generally has a small portfolio of credit card receivables outstanding.  Credit card lines are underwritten using conservative credit criteria, including past credit history and debt-to-income ratios, similar to the credit policies applicable to other personal consumer loans.
The Bank grants consumer loans based on employment and financial information solicited from prospective borrowers as well as credit records collected from various reporting agencies.  Financial stability and credit history of the borrower are the primary factors the Bank considers in granting such loans.  The availability of collateral is also a factor considered in making such loans.  The geographic area of the borrower is another consideration, with preference given to borrowers in the Bank’s primary market areas.

OTHER FINANCIAL SERVICES

The Bank’s insurance service subsidiary serves as an agent in the sale of title insurance, commercial lines of insurance and a full line of property and casualty, life, health and employee benefits products and services and operates in Mississippi, Tennessee, Alabama, Arkansas, Texas, Louisiana, Missouri and Illinois.
The Bank’s investment services subsidiary provides brokerage, investment advisory and asset management services and operates in certain communities in Mississippi, Tennessee, Alabama, Arkansas, Louisiana, Texas, Florida and Missouri.
See Note 22 to the Company’s Consolidated Financial Statements included elsewhere in this Report for financial information about each segment of the Company, as defined by U.S. generally accepted accounting principles (“U.S. GAAP”).

ASSET QUALITY

Management seeks to maintain a high quality of assets through conservative underwriting and sound lending practices.  Management intends to follow this policy even though it may result in foregoing the funding of higher yielding loans.  Management believes that the Bank has adequate underwriting and loan administration policies in place and personnel to manage the associated risks prudently.
In an effort to maintain the quality of the loan portfolio, management seeks to limit high risk loans.  These loans include loans to provide initial equity and working capital to new businesses with no other capital strength, loans secured by unregistered stock, loans for speculative transactions in stock, land or commodity markets, loans to borrowers or the taking of collateral outside the Bank’s primary market areas, loans dependent on secondary liens as primary collateral and non-recourse loans.  To the extent risks are identified, additional precautions are taken in order to reduce the Bank’s risk of loss.  Commercial loans entail certain additional risks because they usually involve large loan balances to single borrowers or a related group of borrowers, resulting in a more concentrated loan portfolio.  Further, because payment of these loans is usually dependent upon the successful operation of the commercial enterprise, the risk of loss with respect to these loans may increase in the event of adverse conditions in the economy.
The Bank's management and lending officials focus much of their efforts and resources on loan underwriting and credit quality monitoring policies and practices. The Bank's Board of Directors approves all loan underwriting and credit quality monitoring policies and procedures.   Loan status and monitoring is handled through the Bank’s loan administration department.  Additionally, 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.  Various levels of review are made to identify weak financial performance.  These reviews include monitoring of past due reporting, the internal loan rating system, loan review reports, the various loan committee functions and periodic asset quality rating committee meetings.  Senior loan officers have established a review process with the objective of identifying, evaluating and initiating necessary corrective action for problem loans.  The results of loan reviews are reported to the Audit Committee of both the Company’s and the
 
 
 
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  Bank’s Board of Directors.  This process is an integral element of the Bank’s loan program.  Nonetheless, management maintains a cautious outlook in anticipating the potential effects of uncertain economic conditions (both locally and nationally) and the possibility of more stringent regulatory standards.

RECENT ACQUISITIONS

On July 2, 2012, the Company purchased certain assets of The Securance Group, Inc.,an independent insurance agency with locations in Brewton, Montgomery and Troy, Alabama. Consideration paid to complete this transaction consisted of cash paid to The Securance Group shareholders in the aggregate amount of approximately $6,750,000.  The provisions of the related purchase agreement also provide for additional aggregate consideration of up to $2,000,000 in cash to be paid in three annual installments if certain performance criteria are met. This acquisition was not material to the financial position or results of operations of the Company.

EMPLOYEES

At December 31, 2012, the Company and its subsidiaries had approximately 4,231 full-time equivalent employees. The Company and its subsidiaries are not a party to any collective bargaining agreements and employee relations are considered to be good.

EXECUTIVE OFFICERS OF THE REGISTRANT

Information follows concerning the executive officers of the Company:



 
Name
  
Offices Held
  
Age
         
James D. Rollins III
  
Chief Executive Officer
of the Company and the Bank;
Director of the Company
54
         
 
Aubrey B. Patterson
 
 
  
Chairman of the Board of
Directors of the Company and the Bank;
Director of the Company
 
70
         
James V. Kelley
  
President and Chief Operating Officer
of the Company and the Bank;
Director of the Company
63
         
William L. Prater
  
Treasurer and Chief Financial
Officer of the Company; Executive
Vice President, Chief Financial
 Officer and Cashier of the Bank
52
         
Larry Bateman
  
Executive Vice President of the Company
and Vice Chairman of the Bank
63
       
W. James Threadgill, Jr.
  
Executive Vice President of the
Company and Vice Chairman of
the Bank
58
         
Gordon Lewis
  
Executive Vice President of the Company
 and Vice Chairman of the Bank
63
 
 
10
 
 
         
James Ronald Hodges
  
Executive Vice President of the
Company and Vice Chairman and
Chief Lending Officer of the Bank
60
         
Cathy S. Freeman
  
Executive Vice President and
Corporate Secretary of the Company
and the Bank
47
         
Carol Waddle
  
Executive Vice President of the Company
and Executive Vice President, Audit and
Loan Review of the Bank
51
         


 
 
None of the executive officers of the Company is related by blood, marriage or adoption to any other executive officer or to any of the Company’s directors or nominees for election at the 2013 annual meeting of shareholders.  There are no arrangements or understandings between any of the executive officers and any other person pursuant to which any individual was or is to be selected as an officer. The executive officers of the Company are appointed by the Board of Directors at its first meeting following the annual meeting of shareholders, and they hold office until the next annual meeting or until their successors are duly appointed and qualified.
Effective November 27, 2012, Mr. Rollins was appointed Chief Executive Officer of the Bank and the Company.  Prior to joining the Company, Mr. Rollins served as President and Chief Operating Officer of Prosperity Bancshares, Inc. for at least the preceding five years.
Mr. Patterson has served as Chairman of the Board of Directors of the Company and the Bank for at least the past five years and served as Chief Executive Officer of the Bank and the Company for at least the past five years until November 27, 2012, the effective date of his retirement from such office.
Mr. Kelley has served as President and Chief Operating Officer of the Bank and the Company for at least the past five years.
Mr. Prater joined the Company on September 1, 2008 and served as Executive Vice President until June 30, 2009, when he was named Treasurer and Chief Financial Officer of the Company and Executive Vice President, Chief Financial Officer and Cashier of the Bank.  Prior to joining the Company, Mr. Prater most recently served as Executive Vice President of Finance at Regions Bank.
Mr. Bateman has served as Executive Vice President of the Company and Vice Chairman of the Bank for at least the past five years.
Mr. Threadgill has served as Executive Vice President of the Company and Vice Chairman of the Bank for at least the past five years.
Mr. Lewis has served as Executive Vice President of the Company and Vice Chairman of the Bank for at least the past five years.
Mr. Hodges had served as Regional and Area Loan Administrator for at least three years prior to April 2010, when he was named Senior Executive Vice President of the Bank and Deputy to the Company’s Chief Lending Officer.  Mr. Hodges served in that capacity until September 2011, when he was named Executive Vice President of the Company and Vice Chairman and Chief Lending Officer of the Bank.
Mrs. Freeman has served as Executive Vice President of the Company and the Bank for at least the past five years.
Ms. Waddle had served as Senior Vice President and General Auditor of the Company for at least two years prior to January 27, 2010, when she was named Senior Vice President of the Company and Senior Vice President, Audit and Loan Review of the Bank.  Ms. Waddle served in that capacity until January 2012, when she was named Executive Vice President of the Company and Executive Vice President, Audit and Loan Review of the Bank.
 
ITEM 1A.  RISK FACTORS.

Certain statements contained in this Annual 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 Exchange Act. These forward-looking statements may be identified by reference to a future period(s) or by the use of forward-looking terminology, such as “anticipate,” “believe,” “estimate,” “expect,” “plan,” “predict,”

 
 
11
 
 
 “foresee,” “may,” “might,” “will,” “would,” “should,” “could” or “intend,” future or conditional verb tenses, and variations or negatives of such terms. These forward-looking statements include, without limitation, those relating to the Company’s trademarks, the Company’s ability to compete effectively, the effect of changes in laws, governmental regulations and legislative proposals affecting financial institutions, examinations by federal regulators, commercial loans, repurchase of mortgage loans, the impact of economic conditions in the Company’s market area and the economic downturn, identification and resolution of credit issues, debit card revenues, the use of non-U.S. GAAP financial measures, the effect of certain claims, legal and administrative proceedings and pending litigation, reserves for troubled debt restructurings, diversification of revenue stream, the Company’s policy regarding asset quality, the Company’s policy regarding underwriting and lending practices, critical and significant accounting policies, allowance for credit losses, other real estate owned, impairment of goodwill, other-than-temporary impairment of securities, valuation of mortgage servicing rights, pension and other postretirement benefit amounts, net interest revenue, net interest margin, interest rate sensitivity, the impact of the historically low interest rate environment, credit quality, credit losses, determination of collateral fair value, analysis of guarantors, compliance with underwriting and/or appraisal standards, potential losses from representation and warranty obligations, the Company’s foreclosure process, inspection and review of construction, acquisition and development loans, maturity and renewal of construction, acquisition and development loans, deferred tax assets, unrecognized tax benefits, disputed tax positions, junior subordinated debt securities, capital resources, sources of liquidity and liquidity strategies, sources of maturing loans and investment securities, the Company’s ability to obtain funding, the ability to declare and/or pay dividends, credit losses from off-balance sheet commitments and arrangements, future acquisitions and consideration to be used therefor, the impact of recent accounting pronouncements, amortization expense of amortizable identifiable intangible assets, interest income, valuation of stock options, fair value of loans and leases, fair value of held-to-maturity and available-for-sale securities, maturities of available-for-sale securities, appraisal adjustments, concessions granted for troubled debt restructurings, value of investment securities, contributions to pension plans, related party transactions, impaired loans, nonperforming loans and leases, non-accrual loans and leases, economic value of equity, future lease payments, the use of proceeds from the underwritten public offering of the Company’s common stock, deposits, the Company’s operating results and financial condition, and amendments to the Company’s code of business conduct and ethics or waiver of a provision thereof.
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 due to a variety of factors.  These factors include, but are not limited to, the following:

·  
Local, regional and national economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact;
·  
The ability of the Company to increase noninterest revenue and expand noninterest revenue business;
·  
Changes in general business or economic conditions or government fiscal and monetary policies;
·  
Fluctuations in prevailing interest rates and the effectiveness of the Company’s interest rate hedging strategies;
·  
The ability of the Company to maintain credit quality;
·  
The ability of the Company to provide and market competitive products and services;
·  
Changes in the Company’s operating or expansion strategy;
·  
Geographic concentration of the Company’s assets and susceptibility to economic downturns in that area;
·  
The availability of and costs associated with maintaining and/or obtaining adequate and timely sources of liquidity;
·  
Volatility and disruption in national and international financial markets;
·  
Government intervention in the U.S. financial system;
·  
Laws and regulations affecting financial institutions in general;
·  
The ability of the Company to operate and integrate new technology;
·  
The ability of the Company to manage its growth and effectively serve an expanding customer and market base;
·  
The ability of the Company to attract, train and retain qualified personnel;
·  
Changes in consumer preferences;
·  
The ability of the Company to collect amounts due under loan agreements and to attract deposits;
·  
Legislation and court decisions related to the amount of damages recoverable in legal proceedings;
 
 
12
 
 
·  
Possible adverse rulings, judgments, settlements and other outcomes of pending litigation; and
·  
Other factors generally understood to affect the financial results of financial services companies.

 
    The Company undertakes no obligation to update its forward-looking statements to reflect events or circumstances that occur after the date of this Report.
In addition to the factors listed above that could influence the forward-looking statements in this Report, management believes that the risk factors set forth below should be considered in evaluating the Company’s business.  Other relevant risk factors are outlined below and may be supplemented from time to time in the Company’s filings with the SEC.

Our financial performance may be adversely affected by conditions in the financial markets and economic conditions generally.
Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, is highly dependent upon the business environment in the markets where we operate and in the United States as a whole. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence, limitations on the availability or increases in the cost of credit and capital, increases in inflation or interest rates, natural disasters or a combination of these or other factors.
Since mid-2007, the financial services industry and the securities markets generally have been materially and adversely affected by significant declines in the values of nearly all asset classes and by a serious lack of liquidity. The global markets have been characterized by substantially increased volatility and an overall loss of investor confidence. Market conditions have led to the failure or merger of a number of prominent financial institutions. Financial institution failures or near-failures have resulted in further losses as a consequence of defaults on securities issued by them and defaults under contracts entered into with such entities as counterparties. Furthermore, declining asset values, defaults on mortgages and consumer loans, and the lack of market and investor confidence, as well as other factors, have all combined to increase credit default swap spreads and to cause rating agencies to lower credit ratings. Despite recent stabilization in asset prices, economic performance and significant declines in Federal Reserve borrowing rates, there remains a risk of continued asset and economic deterioration, which may increase the cost and decrease the availability of liquidity. Additionally, some banks and other lenders have suffered significant losses and they have become reluctant to lend, even on a secured basis, because of capital limitations, potentially increased risks of default and the impact of declining asset values on collateral. The foregoing has significantly weakened the strength and liquidity of some financial institutions worldwide.
In addition, certain European nations continue to experience varying degrees of financial stress. Despite various assistance packages, market concerns over the direct and indirect exposure of European banks and insurers to these European nations and each other have resulted in a widening of credit spreads and increased costs of funding for some European financial institutions. Risks related to the European economic crisis have had, and are likely to continue to have, a negative impact on global economic activity and the financial markets.
There can be no assurance that global market and economic conditions will improve in the near term.  Such conditions could adversely affect the credit quality of our loans, our results of operations and our financial condition.

Our provision and allowance for credit losses may not be adequate to cover actual credit losses.
We make various assumptions and judgments about the collectability of our loan and lease portfolio and utilize these assumptions and judgments when determining the provision and allowance for credit losses. The determination of the appropriate level of the provision for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the amount reserved in the allowance for credit losses. In addition, bank regulatory agencies periodically review our provision and the total allowance for credit losses and may require an increase in the allowance for credit losses or future provisions for credit losses, based on judgments different than those of management. Any increases in the provision or allowance for credit losses will result in a decrease in our net income and, potentially, capital, and may have a material adverse effect on our financial condition and results of
 
 
13
 
 
 operations. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Provision for Credit Losses and Allowance for Credit Losses” included herein for more information regarding our process for determining the appropriate level of the provision and allowance for credit losses.

 
We make and hold in our portfolio a significant number of real estate construction, acquisition and development loans, which are based upon estimates of costs and values associated with the completed project and which pose more credit risk than other types of loans typically made by financial institutions.
At December 31, 2012, we had a balance of $735.8 million in real estate construction, acquisition and development loans, representing 8.5% of our total loan portfolio. These real estate construction, acquisition and development loans have certain risks that are not present in other types of loans. The primary credit risks associated with real estate construction, acquisition and development loans are underwriting, project risks and market risks. Project risks include cost overruns, borrower credit risk, project completion risk, general contractor credit risk and environmental and other hazard risks. Market risks are risks associated with the sale of the completed residential and commercial units. They include affordability risk, which means the risk that borrowers cannot obtain affordable financing, product design risk, and risks posed by competing projects. Real estate construction, acquisition and development loans also involve additional risks because funds are advanced upon the security of the project, which is of uncertain value prior to its completion, and costs may exceed realizable values in declining real estate markets. Because of the uncertainties inherent in estimating construction costs and the realizable market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, real estate construction, acquisition and development loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated or market values or rental rates decline, we may have inadequate security for the repayment of the loan upon completion of construction of the project. If we are forced to foreclose on a project prior to or at completion due to a default, there can be no assurance that we will be able to recover all of the unpaid balance and accrued interest on the loan as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it. The adverse effects of the foregoing matters upon our real estate construction, acquisition and development portfolio could necessitate a further increase in non-performing loans related to this portfolio and these non-performing loans may result in a material level of charge-offs, which may have a material adverse effect on our financial condition and results of operations. At December 31, 2012, non-accrual real estate construction, acquisition and development loans totaled $66.6 million.
As a result of the downturn in the housing market, demand for construction, acquisition and development loans has been declining, a trend that management expects to continue. The decline in this portfolio presents an additional challenge to maintaining and growing our earning assets.

We hold a significant amount of other real estate owned and may acquire and hold significant additional amounts, which could lead to increased operating expenses and vulnerability to additional declines in real property values.
As our business necessitates, we foreclose on and take title to real estate serving as collateral for loans.  At December 31, 2012, we had $103.2 million of other real estate owned, compared to $173.8 million at December 31, 2011. Significant other real estate owned balances have resulted in substantial noninterest expenses as we incur costs to manage, maintain and dispose of foreclosed properties. We expect that our earnings will continue to be negatively affected by various expenses associated with other real estate owned, including personnel costs, insurance and taxes, completion and repair costs, valuation adjustments and other expenses associated with real property ownership, as well as by the funding costs associated with other real estate owned assets and any unfavorable pricing in connection with the disposition of foreclosed properties. The expenses associated with holding a significant amount of other real estate owned could have a material adverse effect on our results of operations and financial condition.
Other real estate is reported at the lower of cost or fair value, less estimated selling costs. Fair value is determined on the basis of current appraisals, comparable sales and other estimates of value obtained principally from independent sources. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is charged to the allowance for credit losses. Subsequent valuation adjustments on the
 
 
14
 
 
 periodic revaluation of the property will result in additional charges, with a corresponding write-down expense. Significant judgments and complex estimates are required in estimating the fair value of other real estate owned, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility, as we have experienced during the past few years. In response to market conditions and other economic factors, we may utilize alternative sale strategies other than orderly disposition as part of our other real estate owned disposition strategy, such as immediate liquidation sales. As a result, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of other real estate owned.  A significant increase in the rate of foreclosures on real estate collateral with reported fair values less than the loan balances, a substantial additional decline in the value of our holdings of other real estate owned or our failure to realize net proceeds from sales of substantial amounts of other real estate owned equal to or greater than our reported values, or some combination of these, could have a material adverse effect on our financial condition.

Our ability to declare and pay dividends is limited.
There can be no assurance of whether or when we may pay dividends on our common stock in the future. Future dividends, if any, will be declared and paid at the discretion of our board of directors and will depend on a number of factors. Historically, our principal source of funds used to pay cash dividends on our common equity has been dividends received from the Bank. Although the Bank’s asset quality, earnings performance, liquidity and capital requirements will be taken into account before we declare or pay any future dividends on our common stock, our board of directors will also consider our liquidity and capital requirements and our board of directors could determine to declare and pay dividends without relying on dividend payments from the Bank.
Federal and state banking laws and regulations and state corporate laws restrict the amount of dividends we may declare and pay. For example, under guidance issued by the Federal Reserve Board, as a bank holding company, we are required to consult with the Federal Reserve before declaring dividends and are to consider eliminating, deferring or reducing dividends if (i) our net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends, (ii) our prospective rate of earnings retention is not consistent with our capital needs and overall current and prospective financial condition, or (iii) we will not meet, or are in danger of not meeting, our minimum regulatory capital adequacy ratios.
In addition, we need the approval of the Federal Reserve and the Bank needs the approval of the FDIC before paying cash dividends. Further, the Bank’s board of directors has approved a resolution requested by the FDIC and the Mississippi Department of Banking and Consumer Finance such that the declaration and payment of dividends will be limited to the Bank’s current net operating income and conditioned upon the prior written consent of the regulators and maintenance of minimum capital ratios. Finally, our board of directors has approved a resolution requested by the Federal Reserve such that we need the prior approval of the Federal Reserve before making any declaration or payment of dividends on any of our capital stock.

We may become involved in legal or administrative proceedings filed by or against us.
The nature of our business ordinarily results in a certain amount of claims, litigation, investigations and legal and administrative investigations and proceedings. Although we have developed policies and procedures to minimize the impact of legal noncompliance and other disputes and endeavored to provide reasonable insurance coverage, litigation and regulatory actions present an ongoing risk.
We cannot predict with certainty the cost of defense, the cost of prosecution or the ultimate outcome of litigation and other proceedings filed by or against us, our directors, management or employees, including remedies or damage awards. On at least a quarterly basis, we assess our liabilities and contingencies in connection with outstanding legal proceedings as well as certain threatened claims (which are not considered incidental to the ordinary conduct of our business) utilizing the latest and most reliable information available. For matters where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established. For matters where it is probable we will incur a loss and the amount can be reasonably estimated, we establish an accrual for the loss. Once established, the accrual is adjusted periodically to reflect any relevant developments. The actual cost of any outstanding legal proceedings or threatened claims, however, may turn out to be substantially higher than the amount accrued. Further, our insurance will not cover all such litigation, other proceedings or claims, or the costs of defense. While the final outcome of any legal proceedings is inherently uncertain, based on the information available, advice of counsel and available insurance coverage, management believes that the litigation-related expense we have accrued is adequate and that any incremental liability arising from pending legal proceedings and threatened claims and those otherwise arising in the ordinary course of business, will not have a material adverse
 
 
15
 
 
 effect on our business or consolidated financial condition. It is possible, however, that future developments could result in an unfavorable outcome for or resolution of any one or more of the lawsuits in which the Company or its subsidiaries are defendants, which may be material to the Company’s results of operations for one or more quarterly reporting periods.  See “Item 3. Legal Proceedings” included herein for more information regarding material pending legal proceedings.
 
We may elect or be compelled to seek additional capital in the future, but that capital may not be available on favorable terms when it is needed.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. In addition, we may elect to raise additional capital to support our business or to finance any acquisitions or we may otherwise elect or be required to raise additional capital. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control, and on our financial performance. Accordingly, we cannot provide assurance of our ability to raise additional capital if needed or to be able to do so on terms acceptable to us. If we cannot raise additional capital on favorable terms when needed, it may have a material adverse effect on our financial condition and results of operations.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on the liquidity of the Bank and/or the Company. Our access to funding sources in amounts adequate to finance our activities or the terms of which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. A decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated could detrimentally impact our access to liquidity sources. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets.

Our operations are subject to extensive governmental regulation and supervision.
We elected to be a financial holding company pursuant to the GLBA and the Bank Holding Company Act. The Bank is a Mississippi state banking corporation. Both the Company and the Bank are subject to extensive governmental regulation, supervision, legislation and control. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not security holders. These laws and regulations limit the manner in which we operate, including the amount of loans we can originate, interest we can charge on loans and fees we can charge for certain services.
The Company and the Bank are currently well capitalized under applicable guidelines.  Our business could be negatively affected, however, if the Company or the Bank fails to remain well capitalized.  For example, because the Bank and its subsidiaries are well capitalized and we qualify as a financial holding company, we are permitted to engage in a broader range of activities than are permitted to a bank holding company.  Loss of financial holding company status would require that we either cease these broader activities or divest certain of the Bank’s subsidiaries if we desire to continue such activities.
Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. It is possible that there will be continued changes to the banking and financial institutions regulatory regimes in the future. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other
things. We cannot predict the extent to which the government and governmental organizations may change any of these laws or controls. We also cannot predict how such changes would adversely affect our business and prospects.
 
The Dodd-Frank Act and related rules and regulations may adversely affect our business, financial condition and results of operations.
The Dodd-Frank Act contains a variety of far-reaching changes and reforms for the financial services industry and directs federal regulatory agencies to study the effects of, and issue implementing regulations for, these
 
 
16
 
 
 reforms. Many of the provisions of the Dodd-Frank Act could have a direct effect on our performance and, in some cases, impact our ability to conduct business. Examples of these provisions include, but are not limited to:
·  
Creation of the Financial Stability Oversight Council that may recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity;
·  
Application of the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank and financial holding companies, such as the Company;
·  
Changes to deposit insurance assessments;
·  
Regulation of proprietary trading;
·  
Repeal of the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts;
·  
Establishment of the Consumer Financial Protection Bureau with broad authority to implement new consumer protection regulations and, for bank and financial holding companies with $10 billion or more in assets, to examine and enforce compliance with federal consumer laws;
·  
Implementation of risk retention rules for loans (excluding qualified residential mortgages) that are sold by a bank;
·  
Implementation of annual stress tests for all state member banks with assets exceeding $10 billion and
·  
Regulation of debit-card interchange fees.
Many of these provisions have already been the subject of proposed and final rules by the FDIC and Federal Reserve. Many other provisions, however, remain subject to regulatory rulemaking and implementation, the effects of which are not yet known. The provisions of the Dodd-Frank Act and any rules adopted to implement those provisions as well as any additional legislative or regulatory changes may impact the profitability of our business, may require that we change certain of our business practices, may materially affect our business model or affect retention of key personnel, may require us to raise additional capital and could expose us to additional costs (including increased compliance costs). These and other changes may also require us to invest significant management attention and resources to make any necessary changes and may adversely affect our ability to conduct our business as previously conducted or our financial condition and results of operations.

The short-term and long-term impact of changes to banking capital standards could negatively impact our regulatory capital and liquidity.
In September 2010, the oversight body of the Basel Committee announced a package of reforms, commonly referred to as Basel III, that will substantially increase existing capital requirements as well as add liquidity requirements for financial institutions.  Basel III would require capital to be held in the form of tangible common equity, generally increase the required capital ratios, phase out certain kinds of intangibles treated as capital and  certain types of instruments, like trust preferred securities, and change the risk weightings of assets used to determine required capital ratios. While we cannot predict the final form the revised capital and liquidity regulations will take, the new standards will likely require that we maintain more capital and manage the configuration of our assets and liabilities in order to comply with new liquidity requirements, which could have a material adverse effect on our liquidity, capital resources, results of operations and financial condition.  See “Item 1. Business - Regulation and Supervision” included herein for more information regarding Basel III.

We obtain a significant portion of our noninterest revenue through service charges on core deposit accounts, and regulations impacting service charges could reduce our fee income.
A significant portion of our noninterest revenue is derived from service charge income. Management anticipates that changes in banking regulations and, in particular, the Federal Reserve’s rules pertaining to certain overdraft payments on consumer accounts and the FDIC’s Overdraft Payment Programs and Consumer Protection Final Overdraft Payment Supervisory Guidance, will have an adverse impact on our service charge income. Additionally, changes in customer behavior as well as increased competition from other financial institutions may result in declines in deposit accounts or in overdraft frequency resulting in a decline in service charge income. A reduction in deposit account fee income could have a material adverse effect on our earnings.
 
 
17
 
 
 

Because of the geographic concentration of our assets, our business is highly susceptible to local economic conditions.
Our business is primarily concentrated in selected markets in Mississippi, Tennessee, Alabama, Arkansas, Texas, Louisiana, Florida, Missouri and Illinois. As a result of this geographic concentration, our financial condition and results of operations depend largely upon economic conditions in these market areas. Deterioration in economic conditions in the markets we serve could result in one or more of the following: an increase in loan delinquencies; an increase in problem assets and foreclosures; a decrease in the demand for our products and services; and a decrease in the value of collateral for loans, especially real estate collateral, in turn reducing customers’ borrowing power, the value of assets associated with problem loans and collateral coverage.
 
We may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral we hold cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure owed to us. Any such losses could have a material adverse affect on our financial condition and results of operations.

Changes in interest rates could have an adverse impact on our results of operations and financial condition.
Our earnings and financial condition are dependent to a large degree upon net interest income, which is the difference or spread between interest earned on loans, securities and other interest-earning assets and interest paid on deposits, borrowings and other interest-bearing liabilities. When market rates of interest change, the interest we receive on our assets and the interest we pay on our liabilities may fluctuate. This can cause decreases in our spread and can adversely affect our earnings and financial condition.
Interest rates are highly sensitive to many factors including:
· The rate of inflation;
· Economic conditions;
· Federal monetary policies; and
· Stability of domestic and foreign markets.
The Bank originates residential mortgage loans for sale and for our portfolio. The origination of residential mortgage loans is highly dependent on the local real estate market and the level of interest rates. Increasing interest rates tend to reduce the origination of loans for sale and fee income, which we report as gain on sale of loans. Decreasing interest rates generally result in increased prepayments of loans and mortgage-backed securities, as borrowers refinance their debt in order to reduce their borrowing cost. This typically leads to reinvestment at lower rates than the loans or securities were paying. Changes in market interest rates could also reduce the value of our financial assets. Our financial condition and results of operations could be adversely affected if we are unsuccessful in managing the effects of changes in interest rates.
 
Monetary policies and economic factors may limit our ability to attract deposits or make loans.
The monetary policies of federal regulatory authorities, particularly the Federal Reserve, and economic conditions in our service area and the United States generally, affect our ability to attract deposits and extend loans. We cannot predict either the nature or timing of any changes in these monetary policies and economic conditions, including the Federal Reserve’s interest rate policies, or their impact on our financial performance. The banking business is subject to various material business risks, which have become more acute during the current environment of economic slowdown and recession. In the current economic environment, foreclosures have increased and such conditions could also lead to a potential decline in deposits and demand for loans.
Volatility in capital and credit markets could adversely affect our business.
The capital and credit markets have been experiencing volatility and disruption for several years. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

 
18
 
 

Reputational risk may impact our results.
Our ability to originate and maintain accounts is highly dependent upon customer and other external perceptions of our business practices and/or our financial health. Adverse perceptions regarding our business practices and/or our financial health could damage our reputation in both the customer and funding markets, leading to difficulties in generating and maintaining accounts as well as in financing them. Adverse developments with respect to the customer or other external perceptions regarding the practices of our competitors, or our industry as a whole, may also adversely impact our reputation. While we carefully monitor internal and external developments for areas of potential reputational risk and have established governance structures to assist in evaluating such risks in our business practices and decisions, adverse reputational impacts on third parties with whom we have important relationships may also adversely impact our reputation. Adverse impacts on our reputation, or the reputation of our industry, may also result in greater regulatory and/or legislative scrutiny, which may lead to laws, regulations or regulatory actions that may change or constrain the manner in which we engage with our customers and the products and services we offer. Adverse reputational impacts or events may also increase our litigation risk.

Hurricanes or other adverse weather events could negatively affect local economies where we maintain branch offices or cause disruption or damage to our branch office locations, which could have an adverse effect on our business or results of operations.
We have operations in Mississippi, Alabama, Louisiana, Texas and Florida, which include areas susceptible to hurricanes or tropical storms. Such weather conditions can disrupt our operations, result in damage to our branch office locations or negatively affect the local economies in which we operate. We cannot predict whether or to what extent damage caused by future hurricanes, tropical storms or other adverse weather events will affect our operations or the economies in our market areas, but such weather conditions could result in a decline in loan originations and an increase in the risk of delinquencies, foreclosures or loan losses. Our business or results of operations may be adversely affected by these and other negative effects of devastating hurricanes or storms.

We could be required to write down goodwill and other intangible assets.
When we acquire a business, a portion of the purchase price of the acquisition is generally allocated to goodwill and other identifiable intangible assets. The amount of the purchase price that is allocated to goodwill and other intangible assets is determined by the excess of the purchase price over the net identifiable assets acquired. At December 31, 2012, our goodwill and other identifiable intangible assets were $292.5 million. Under current accounting standards, if we determine goodwill or intangible assets are impaired because, for example, the acquired business does not meet projected revenue targets or certain key employees leave, we are required to write down the carrying value of these assets. We conduct a review at least annually to determine whether goodwill is impaired.  Our annual goodwill impairment evaluation performed during the fourth quarter of 2012 indicated no impairment of goodwill for our reporting segments. We cannot provide assurance, however, that we will not be required to take an impairment charge in the future. Any impairment charge would have an adverse effect on our shareholders’ equity and financial results and could cause a decline in our stock price.

Diversification in types of financial services may adversely affect our financial performance.
As part of our business strategy, we may further diversify our lines of business into areas that are not traditionally associated with the banking business. As a result, we would need to manage the development of new business lines in which we have not previously participated. Each new business line would require the investment of additional capital and the significant involvement of our senior management to develop and integrate the service subsidiaries with our traditional banking operations. We can offer no assurances that we will be able to develop and integrate new services without adversely affecting our financial performance.
 
Maintaining or increasing our market share may depend upon our ability to adapt our products and services to evolving industry standards and consumer preferences.
Our success depends, in part, on our ability to adapt our products and services as well as our distribution of them to evolving industry standards and consumer preferences. Payment methods have evolved with the advancement of technology, such as consumer use of smart phones and PayPal accounts to pay bills, thereby increasing competitive pressure in the delivery of financial products and services. The development and adoption by us of new technologies could require us to make substantial expenditures to modify our existing products and services. Further, we might not be successful in developing or introducing new products and services, adapting to changing consumer preferences and spending and saving habits, achieving market acceptance or regulatory

 
 
19
 
 
 approval, or sufficiently maintaining and growing a loyal customer base. Our inability to adapt to evolving industry standards and consumer preferences could have an adverse impact on our financial condition and results of operations.

We compete with other financial holding companies, bank holding companies, banks, insurance and financial services companies.
The banking, insurance and financial services businesses are extremely competitive in our service areas in Mississippi, Tennessee, Alabama, Arkansas, Texas, Louisiana, Florida, Missouri and Illinois. We compete, and will continue to compete, with well-established banks, credit unions, insurance agencies and other financial institutions, some of which have significantly greater resources and lending limits. Some of our competitors provide certain services that we do not provide.

We face risks in connection with completed or potential acquisitions.
Historically, we have grown through the acquisition of other financial institutions as well as the development of de novo offices. If appropriate opportunities present themselves, we intend to pursue additional acquisitions in the future that we believe are strategic, including possible FDIC-assisted transactions. There can be no assurance that we will be able to identify, negotiate or finance potential acquisitions successfully or integrate such acquisitions with our current business.
Upon completion of an acquisition, we are faced with the challenges of integrating the operations, services, products, personnel and systems of acquired companies into our business, which may divert management’s attention from ongoing business operations. The success of our acquisitions is often dependent on the continued employment of key employees of the acquired business. If certain key employees were to leave, we could conclude that the value of an acquired business has decreased and that the related goodwill has been impaired. We cannot assure you that we will be successful in effectively integrating any acquisition into the operations of our business or in retaining key employees. Moreover, there can be no assurance that the anticipated benefits of any acquisition will be realized.

Our growth strategy includes risks that could have an adverse effect on financial performance.
An element of our growth strategy is the acquisition of additional banks (which might include the acquisition of bank assets and liabilities in FDIC-assisted transactions), bank holding companies, financial holding companies, insurance agencies and/or other businesses related to the financial services industry that may complement our organizational structure in order to achieve greater economies of scale. We cannot assure you that appropriate growth opportunities will continue to exist, that we will be able to acquire banks, insurance agencies, bank holding companies and/or financial holding companies that satisfy our criteria or that any such acquisitions will be on terms favorable to us. Further, our growth strategy requires that we continue to hire qualified personnel, while concurrently expanding our managerial and operational infrastructure. We cannot assure you that we will be able to hire and retain qualified personnel or that we will be able to successfully expand our infrastructure to accommodate future acquisitions or growth. As a result of these factors, we may not realize the expected economic benefits associated with our acquisitions. This could have a material adverse effect on our financial performance.

We may experience interruptions or breaches in our information system security.
We rely heavily on communications and information systems to conduct our business and also continue expanding our customers' capabilities to utilize the internet and other technological channels to transact business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. Cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to our information technology systems to sophisticated and targeted measures known as advanced persistent threats.  While we have experienced, and expect to continue to experience, these types of threats and incidents, none of them to date have had a material adverse effect on our financial condition or results of operations.  Although we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, data encryption, vulnerability assessments, monitoring of our information technology networks and systems and maintenance of backup and protective systems), cyber incidents, depending on their nature and scope, could potentially result in the misappropriation, distruction, corruption or unavailability of critical data and confidential, sensitive or proprietary information (our own or that of our customers or other third parties) and, the disruption of our business operations. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of these information systems, there can be no assurance that any such failures, interruptions or security breaches will not
 
 
20
 
 
 occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of these information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

We may be adversely affected by the failure of certain third party vendors to perform.
We rely upon certain third party vendors to provide products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to the risk that these vendors might not perform in accordance with applicable contractual arrangements or service level agreements. We maintain a system of policies and procedures designed to monitor vendor risks. While we believe these policies and procedures help to mitigate risk, the failure of an external vendor to perform in accordance with applicable contractual arrangements or service level agreements could be disruptive to our operations, which could have a material adverse effect on our financial condition and results of operations.
 
We and/or the holders of certain classes of our securities could be adversely affected by unfavorable ratings from rating agencies.
Our ability to access the capital markets is important to our overall funding profile. This access is affected by the ratings assigned by rating agencies to us, certain of our subsidiaries and particular classes of securities we issue. A downgrade to our or our subsidiaries’ credit rating could affect our ability to access the capital markets, increase our borrowing costs and negatively impact our profitability. Additionally, a downgrade of the credit rating of any particular security issued by us or our subsidiaries could negatively affect the ability of the holders of that security to sell the securities and the prices at which any such securities may be sold.

Issuing additional shares of our common stock to acquire other banks, bank holding companies, financial holding companies and/or insurance agencies may result in dilution for existing shareholders and may adversely affect the market price of our stock.
In connection with our growth strategy, we have issued, and may issue in the future, shares of our common stock to acquire additional banks, bank holding companies, financial holding companies, insurance agencies and/or other businesses related to the financial services industry that may compliment our organizational structure. Resales of substantial amounts of common stock in the public market and the potential of such sales could adversely affect the prevailing market price of our common stock and impair our ability to raise additional capital through the sale of equity securities. We usually must pay an acquisition premium above the fair market value of acquired assets for the acquisition of banks, bank holding companies, financial holding companies and insurance agencies. Paying this acquisition premium, in addition to the dilutive effect of issuing additional shares, may also adversely affect the prevailing market price of our common stock.

Anti-takeover provisions may discourage a change of our control.
Our governing documents and certain agreements to which we are a party contain provisions that make a change-in-control difficult to accomplish, and may discourage a potential acquirer. These include a classified or “staggered” board of directors, change-in-control agreements with members of management and supermajority voting requirements. These anti-takeover provisions may have an adverse effect on the market for our common stock.

Securities that we issue, including our common stock, are not FDIC insured.
    Securities that we issue, including our common stock, are not savings or deposit accounts or other obligations of any bank and are not insured by the FDIC or any other governmental agency or instrumentality or any private insurer and are subject to investment risk, including the possible loss of your investment.
 
We may issue debt or equity securities or securities convertible into equity securities, any of which may be senior to our common stock as to distributions and in liquidation, which could negatively affect the value of our common stock.
In the future, we may attempt to increase our capital resources by entering into debt or debt-like financing that is unsecured or secured by all or up to all of our assets, or by issuing additional debt or equity securities, which could include issuances of secured or unsecured commercial paper, medium-term notes, senior notes, subordinated notes, preferred stock or securities convertible into or exchangeable for equity securities. In the event of our liquidation, our lenders and holders of our debt and preferred securities would receive a distribution of our available
 
 
21
 
 
 
assets before distributions to the holders of our common stock. Because any decision to incur debt or issue securities in future offerings will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any such future offerings and debt financings. Further, market conditions could require us to accept less favorable terms for the issuance of our securities in the future.


ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.



ITEM 2. PROPERTIES.

The physical properties of the Company are held by its subsidiaries as follows:

     a.  
The Bank - The main office is located at One Mississippi Plaza, 201 South Spring Street in the central business district of Tupelo, Mississippi in a seven-floor, modern, glass, concrete and steel office building owned by the Bank.  The Bank occupies approximately 80% of the space, with the remainder leased to various unaffiliated tenants.

The Bank owns 233 of its 255 branch banking facilities. The remaining 22 branch banking facilities are occupied under leases with unexpired terms ranging from one to 11 years.  The Bank also owns other buildings that provide space for computer operations, lease servicing, mortgage lending, warehouse needs and other general purposes.

Management considers all of the Bank’s owned buildings and leased premises to be in good condition.

 
b.
BancorpSouth Insurance Services, Inc. - This wholly-owned subsidiary of the Bank owns five of the 29 offices it occupies.  It leases 24 offices that have unexpired terms varying in duration from one to nine years.

ITEM 3. LEGAL PROCEEDINGS.
 
 
The nature of the Company’s business ordinarily results in a certain amount of claims, litigation, investigations and legal and administrative investigations and proceedings. Although the Company and its subsidiaries have developed policies and procedures to minimize the impact of legal noncompliance and other disputes, and endeavored to provide reasonable insurance coverage, litigation and regulatory actions present an ongoing risk.
 
The Company and its subsidiaries are engaged in lines of business that are heavily regulated and involve a large volume of financial transactions and potential transactions with numerous customers or applicants. From time to time, borrowers, customers, former employees and other third parties have brought actions against the Company or its subsidiaries, in some cases claiming substantial damages. Financial services companies are subject to the risk of class action litigation and, from time to time, the Company and its subsidiaries are subject to such actions brought against it. Additionally, the Bank is, and management expects it to be, engaged in a number of foreclosure proceedings and other collection actions as part of its lending and leasing collections activities, which, from time to time, have resulted in counterclaims against the Bank. Various legal proceedings have arisen and may arise in the future out of claims against entities to which the Company is a successor as a result of business combinations. The Company’s insurance has deductibles, and will likely not cover all such litigation or other proceedings or the costs of defense. The Company and its subsidiaries may also be subject to enforcement actions by federal or state regulators, including the Securities and Exchange Commission, the Federal Reserve, the FDIC, the Consumer Financial Protection Bureau, the Department of Justice, state attorneys general and the Mississippi Department of Banking and Consumer Finance.
 
 
 
22
 
 
 
When and as the Company determines it has meritorious defenses to the claims asserted, it vigorously defends against such claims. The Company will consider settlement of claims when, in management’s judgment and in consultation with counsel, it is in the best interests of the Company to do so.
In May 2010, the Company and certain of its officers were named in a class action lawsuit filed in the U.S. District Court for the Middle District of Tennessee on behalf of certain purchasers of the Company’s common stock. The plaintiff alleged that the defendants issued materially false and misleading statements regarding the Company’s business and financial results. In particular, the allegations relate to the Company’s recording and reporting of its unaudited financial statements, including the allowance and provision for credit losses, and its internal control over financial reporting leading up to the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The plaintiff sought class certification, an unspecified amount of damages and awards of costs and attorneys’ fees and other equitable relief.  In May 2012, the defendants reached a settlement with the plaintiff, the terms of which were granted final approval on October 31, 2012.  Pursuant to the terms of the settlement, the Company’s insurance carriers funded the settlement payment, other than an immaterial amount of incidental expenses.  This settlement did not have a material adverse effect on the Company’s business, consolidated financial position or results of operations.
On August 16, 2011, a shareholder filed a putative derivative action purportedly on behalf of the Company in the Circuit Court of Lee County, Mississippi, against certain current and past executive officers and the members of the Board of Directors of the Company. The plaintiff in this shareholder derivative lawsuit asserts that the individual defendants violated their fiduciary duties based upon substantially the same facts as alleged in the purported class action lawsuit described above. The plaintiff is seeking to recover damages in an unspecified amount and equitable and/or injunctive relief. Although it is not possible to predict the ultimate resolution or financial liability with respect to this litigation, management is currently of the opinion that the outcome of this lawsuit will not have a material adverse effect on the Company’s business, consolidated financial position or results of operations.
In November 2010, the Company was informed that the Atlanta Regional Office of the SEC had issued an Order of Investigation concerning the Company.  This investigation is ongoing and is primarily focused on the Company’s recording and reporting of its unaudited financial statements, including the allowance and provision for credit losses, its internal control over financial reporting and its communications with the independent auditors prior to the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.  In connection with its investigation, the SEC issued subpoenas for documents and testimony, with which the Company has fully complied.  The Company is cooperating fully with the SEC. No claims have been made by the SEC against the Company or against any individuals affiliated with the Company. At this time, it is not possible to predict when or how the investigation will be resolved or the cost or potential liabilities associated with this matter.
On May 18, 2010, the Bank was named as a defendant in a purported class action lawsuit filed by an Arkansas customer of the Bank in the U.S. District Court for the Northern District of Florida. The suit challenges the manner in which overdraft fees were charged and the policies related to posting order of debit card and ATM transactions. The suit also makes a claim under Arkansas’ consumer protection statute. The plaintiff is seeking to recover damages in an unspecified amount and equitable relief. The case was transferred to pending multi-district litigation in the U.S. District Court for the Southern District of Florida. On May 4, 2012, the judge presiding over the multi-district litigation entered an order certifying a class in this case.  The Bank has filed a petition for leave to appeal the class certification order, which, if granted, would provide the Bank with an immediate right to appeal the class certification order.  At this stage of the lawsuit, management of the Company cannot determine the probability of an unfavorable outcome to the Company. There are significant uncertainties involved in any purported class action litigation.  Although it is not possible to predict the ultimate resolution or financial liability with respect to this litigation, management is currently of the opinion that the outcome of this lawsuit will not have a material adverse effect on the Company’s business, consolidated financial position or results of operations. However, there can be no assurance that an adverse outcome or settlement would not have a material adverse effect on the Company’s consolidated results of operations for a given fiscal period.

ITEM  4.  MINE SAFETY DISCLOSURES.

Not applicable.
 
 
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PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

MARKET FOR COMMON STOCK

The common stock of the Company trades on the New York Stock Exchange under the symbol “BXS.”  The following table sets forth, for the quarters indicated, the range of sale prices of the Company’s common stock as reported on the New York Stock Exchange:
 


     
High
    
Low
  
2012
Fourth
   $ 15.00     $ 12.55  
 
Third
     15.69       13.81  
 
Second
     14.70       12.40  
 
First
     14.21       10.85  
                   
2011
Fourth
   $ 11.39     $ 8.23  
 
Third
     14.35       8.61  
 
Second
     16.25       11.57  
 
First
     16.75       14.71  


HOLDERS OF RECORD

As of February 15, 2013, there were 8,172 shareholders of record of the Company’s common stock.

DIVIDENDS

The Company declared cash dividends each quarter in an aggregate annual amount of $0.04 and $0.14 per share during 2012 and 2011, respectively.  Future dividends, if any, will vary depending on the Company’s profitability, anticipated capital requirements and applicable federal and state regulations. The Company is further restricted by the Federal Reserve’s authority to limit or prohibit the payment of dividends, as outlined in SR 09-4.  The board of directors of the Company has adopted a resolution requested by the Federal Reserve Bank that, among other things, requires that the Company obtain prior written approval of the Federal Reserve Bank before taking a number of actions, including declaring and paying dividends to the Company’s shareholders, making distributions in connection with outstanding trust preferred securities and redeeming outstanding equity securities.  The Bank’s board of directors has adopted a resolution requested by the FDIC and the Mississippi Department of Banking and Consumer Finance that, among other things, limits the declaration and payment of dividends and requires maintenance of enhanced capital ratios.  There can be no assurance that the Federal Reserve Bank, the FDIC or the Mississippi Department of Banking and Consumer Finance will not limit or prohibit future dividends.  See “Item 1. Business – Regulation and Supervision” included herein for more information on restrictions and limitations on the Company’s ability to pay dividends.

ISSUER PURCHASES OF EQUITY SECURITIES

The Company made the following purchases of its common stock during the quarter ended December 31, 2012:
 
 
24
 
 
 

   
Total Number
        
   
of Shares
    
Average Price
  
Period
  
Purchased (1)
    
Paid per Share
  
October 1 - October 31
     -     $ -  
November 1 - November 30
     -       -  
December 1 - December 31
     5,158       14.54  
                 
Total
     5,158          
                 
(1)  This represents 5,158 shares redeemed from an employee during the fourth quarter of 2012 for tax withholding purposes upon vesting of restricted stock.
    
 
 
          

ITEM 6. SELECTED FINANCIAL DATA.
 
 
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Selected Financial Information” for the Selected Financial Data.
 

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

OVERVIEW

The Company is a regional financial holding company with $13.4 billion in assets headquartered in Tupelo, Mississippi.  The Company’s wholly-owned banking subsidiary has commercial banking operations in Mississippi, Tennessee, Alabama, Arkansas, Texas, Louisiana, Florida, and Missouri.  The Bank and its 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.  The Bank’s insurance agency subsidiary also operates an office in Illinois.
Management’s discussion and analysis provides a narrative discussion of the Company’s financial condition and results of operations for the previous three years.  For a complete understanding of the following discussion, you should refer to the Consolidated Financial Statements and related Notes presented elsewhere in this Report.  This discussion and analysis is based on reported financial information, and certain amounts for prior years have been reclassified to conform with the current financial statement presentation.  The information that follows is provided to enhance comparability of financial information between years and to provide a better understanding of the Company’s operations.
As a financial holding company, the financial condition and operating results of the Company are heavily influenced by economic trends nationally and in the specific markets in which the Company’s subsidiaries provide financial services.  Generally, during the past several years, the pressures of the national and regional economic cycle have created a difficult operating environment for the financial services industry.  The Company is not immune to such pressures and the continuing economic downturn has had a negative impact on the Company and its customers in all of the markets that it serves.  While this impact has been reflected in the Company’s credit quality measures during the past two years, the Company’s allowance for credit losses, net charge-offs, total non-performing loans and leases (“NPLs”) and total non-performing assets (“NPAs”) decreased at December 31, 2012, when compared to December 31, 2011 and 2010.  Management believes that the Company is better positioned with respect to overall credit quality as evidenced by the improvement in credit quality metrics at December 31, 2012 compared to December 31, 2011.  Management believes, however, that continued weakness in the economic environment could adversely affect the strength of the credit quality of the Company’s assets overall.  Therefore, management will continue to focus on early identification and resolution of any credit issues.
The largest source of the Company’s revenue is derived from the operation of its principal operating subsidiary, the Bank.  The financial condition and operating results of the Bank are affected by the level and volatility of interest rates on loans, investment securities, deposits and other borrowed funds, and the impact of economic downturns on loan demand, collateral value and creditworthiness of existing borrowers.  The financial services industry is highly competitive and heavily regulated.  The Company’s success depends on its ability to
 
 
25
 
 
 compete aggressively within its markets while maintaining sufficient asset quality and cost controls to generate net income.
During 2012, the Company’s debit card revenue decreased by $10.2 million compared to 2011 as a result of the impact of the Durbin Amendment.  The $10.2 million decrease is based on management’s assumptions that revenue associated with consumer signature activity would be 58% of the level prior to the implementation of the Durbin Amendment, revenue associated with business signature activity would be 12% of the level prior to the implementation of the Durbin Amendment and revenue associated with consumer and business PIN activity would be 80% of the level prior to the implementation of the Durbin Amendment.
The information that follows is provided to enhance comparability of financial information between periods and to provide a better understanding of the Company’s operations.
 
 
 
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SELECTED FINANCIAL INFORMATION
                              
   
At or for the Year Ended December 31,
  
   
2012
    
2011
    
2010
    
2009
    
2008
  
Earnings Summary:
  
(Dollars in thousands, except per share amounts)
  
Interest revenue
   $ 486,424     $ 537,853     $ 582,762     $ 615,414     $ 705,413  
Interest expense
     71,833       102,940       141,620       170,515       264,577  
Net interest revenue
     414,591       434,913       441,142       444,899       440,836  
Provision for credit losses
     28,000       130,081       204,016       117,324       56,176  
Net interest revenue, after
                                        
  provision for credit losses
     386,591       304,832       237,126       327,575       384,660  
Noninterest revenue
     280,149       270,845       264,144       275,276       245,607  
Noninterest expense
     549,193       533,633       487,033       490,017       455,913  
Income before income taxes
     117,547       42,044       14,237       112,834       174,354  
Income tax expense (benefit)
     33,252       4,475       (8,705 )     30,105       53,943  
Net income
   $ 84,295     $ 37,569     $ 22,942     $ 82,729     $ 120,411  
                                         
Balance Sheet - Year-End Balances:
                                        
Total assets
   $ 13,397,198     $ 12,995,851     $ 13,615,010     $ 13,167,867     $ 13,480,218  
Total securities
     2,434,032       2,513,518       2,709,081       1,993,594       2,316,380  
Loans and leases, net of unearned income
     8,636,989       8,870,311       9,333,107       9,775,136       9,691,277  
Total deposits
     11,088,146       10,955,189       11,490,021       10,677,702       9,711,872  
Long-term debt
     33,500       33,500       110,000       112,771       286,312  
Total shareholders' equity
     1,449,052       1,262,912       1,222,244       1,276,296       1,240,260  
                                         
Balance Sheet - Average Balances:
                                        
Total assets
     13,067,276       13,280,047       13,304,836       13,203,659       13,200,801  
Total securities
     2,490,898       2,620,404       2,157,096       2,179,479       2,417,390  
Loans and leases, net of unearned income
     8,719,399       9,159,431       9,621,529       9,734,580       9,429,963  
Total deposits
     10,936,694       11,251,406       11,107,445       10,155,730       9,803,999  
Long-term debt
     33,500       66,673       111,547       290,582       278,845  
Total shareholders' equity
     1,413,667       1,240,768       1,241,321       1,255,605       1,224,280  
                                         
Common Share Data:
                                        
Basic earnings per share
   $ 0.90     $ 0.45     $ 0.28     $ 0.99     $ 1.46  
Diluted earnings per share
     0.90       0.45       0.27       0.99       1.45  
Cash dividends per share
     0.04       0.14       0.88       0.88       0.87  
Book value per share
     15.33       15.13       14.64       15.29       14.92  
Tangible book value per share
     12.23       11.68       11.17       11.78       11.35  
Dividend payout ratio
     4.44       31.11       314.29       88.89       60.00  
                                         
Financial Ratios:
                                        
Return on average assets
     0.65 %     0.28 %     0.17 %     0.63 %     0.91 %
Return on average shareholders' equity
     5.96 %     3.03 %     1.85 %     6.59 %     9.84 %
Total shareholders' equity to total assets
     10.82 %     9.72 %     8.98 %     9.69 %     9.20 %
Tangible shareholders' equity to tangible assets
     8.83 %     7.67 %     7.00 %     7.63 %     7.15 %
Net interest margin-fully taxable equivalent
     3.57 %     3.69 %     3.70 %     3.77 %     3.75 %
                                         
Credit Quality Ratios:
                                        
Net charge-offs to average loans and leases
     0.67 %     1.44 %     1.90 %     0.76 %     0.40 %
Provision for credit losses to average loans and leases
     0.32 %     1.42 %     2.12 %     1.21 %     0.60 %
Allowance for credit losses to net loans and leases
     1.90 %     2.20 %     2.11 %     1.80 %     1.37 %
Allowance for credit losses to NPLs
     70.42 %     60.55 %     49.93 %     94.41 %     207.45 %
Allowance for credit losses to NPAs
     48.83 %     39.33 %     37.31 %     71.64 %     120.36 %
NPLs to net loans and leases
     2.70 %     3.63 %     4.23 %     1.91 %     0.66 %
NPAs to net loans and leases
     3.90 %     5.59 %     5.65 %     2.51 %     1.14 %
                                         
Capital Ratios:
                                        
Tier 1 capital
     13.77 %     11.77 %     10.61 %     11.17 %     10.79 %
Total capital
     15.03 %     13.03 %     11.87 %     12.42 %     12.04 %
Tier 1 leverage capital
     10.25 %     8.85 %     8.07 %     8.95 %     8.65 %

 
 
27
 
 
In addition to financial ratios based on measures defined by 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 important to investors who are interested in evaluating the adequacy of the Company’s capital levels.  Tangible book value per share is defined by the Company as tangible shareholders’ equity divided by total common shares outstanding.  Management believes that tangible book value per share is important to investors who are interested in changes from period to period in book value per share exclusive of changes in intangible assets.  The following table reconciles tangible assets and tangible shareholders’ equity as presented above to U.S. GAAP financial measure as reflected in the Company’s unaudited consolidated financial statements:


   
December 31,
  
   
2012
    
2011
    
2010
    
2009
    
2008
  
   
(In thousands)
  
Tangible Assets:
                              
   Total assets
   $ 13,397,198     $ 12,995,851     $ 13,615,010     $ 13,167,867     $ 13,480,218  
   Less:  Goodwill
     275,173       271,297       270,097       270,097       268,966  
               Identifiable intangible assets
     17,329       16,613       19,624       23,533       28,164  
   Total tangible assets
   $ 13,104,696     $ 12,707,941     $ 13,325,289     $ 12,874,237     $ 13,183,088  
                                         
Tangible Shareholders' Equity
                                        
   Total shareholders' equity
   $ 1,449,052     $ 1,262,912     $ 1,222,244     $ 1,276,296     $ 1,240,260  
   Less:  Goodwill
     275,173       271,297       270,097       270,097       268,966  
               Identifiable intangible assets
     17,329       16,613       19,624       23,533       28,164  
   Total tangible shareholders' equity
   $ 1,156,550     $ 975,002     $ 932,523     $ 982,666     $ 943,130  
                                         
Total shares outstanding
     94,437,552       83,483,796       83,481,737       83,450,296       83,105,100  
                                         
Tangible shareholders' equity to
                                        
   tangible assets
     8.83 %     7.67 %     7.00 %     7.63 %     7.15 %
                                         
Tangible book value per share
   $ 12.25     $ 11.68     $ 11.17     $ 11.78     $ 11.35  


FINANCIAL HIGHLIGHTS

The Company reported net income of $84.3 million for 2012 compared to $37.6 million for 2011 and $22.9 million for 2010.  The decreased provision for credit losses was the most significant factor contributing to the increase in earnings in both 2012 compared to 2011 and 2011 compared to 2010, as the provision for credit losses was $28.0 million in 2012 compared to $130.1 million in 2011 and $204.0 million in 2010.  Net charge-offs decreased to $58.7 million, or 0.67% of average loans and leases, in 2012 from $131.9 million, or 1.44% of average loans and leases, in 2011 compared to $183.1 million, or 1.90% of average loans and leases, in 2010.   The decrease in the provision for credit losses from 2011 to 2012 and from 2010 to 2011 reflected the impact of significant decreases in NPL formation during both 2012 and 2011, as NPLs decreased to $233.6 million at December 31, 2012 after having decreased to $322.3 million at December 31, 2011 from $394.4 million at December 30, 2010.  The impact of the economic environment continues to be evident on real estate consumer mortgage, commercial and construction, acquisition and development loans and more specifically on residential construction, acquisition and development loans.  Prior to 2012, many of these loans had become collateral-dependant, requiring recognition of additional loan loss provisions or charge-offs to reflect the decline in real estate values.  During 2012, the Company continued its focus on improving credit quality and reducing NPLs, especially in the real estate construction, acquisition and development loan portfolio, as evidenced by the decrease in that portfolio’s nonaccrual loans of $66.5 million to $66.6 million at December 31, 2012 from $133.1 million at December 31, 2011.
    The primary source of revenue for the Company is net interest revenue earned by the Bank.  Net interest revenue is the difference between interest earned on loans, investments and other earning assets and interest paid on
 
 
28
 
 
deposits and other obligations.  Net interest revenue for 2012 was $414.6 million, compared to $434.9 million for 2011 and $441.1 million for 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.  One of the Company’s long-term objectives is to manage those assets and liabilities to maximize net interest revenue, while balancing interest rate, credit, liquidity and capital risks.  The Company experienced an increase in lower rate savings deposits and a decrease in higher rate average demand deposits, other time deposits and long-term borrowing, which resulted in a decrease in interest expense of $31.1 million, or 30.2%, in 2012 compared to 2011.  The 4.7% decrease in net interest revenue in 2012 compared to 2011 was a result of the decrease in interest expense being more than offset by the decrease in interest revenue that resulted from the declining interest rate environment combined with the low loan demand and loans re-pricing at lower rates, both at maturity and, in some cases, prior to maturity, as interest revenue decreased $51.4 million, or 9.6%, in 2012 compared to 2011.  While loan demand has been weak, the Company has managed to replace some loan runoff with new loan production, primarily in its Alabama, Texas and Louisiana markets.
The Company attempts to diversify its revenue stream by increasing the amount of revenue received from mortgage lending operations, insurance agency activities, brokerage and securities activities and other activities that generate fee income.  Management believes this diversification is important to reduce the impact of fluctuations in net interest revenue on the overall operating results of the Company.   Noninterest revenue for 2012 was $280.1 million, compared to $270.8 million for 2011 and $264.1 million for 2010.  One of the primary contributors to the increase in noninterest revenue was the increase in mortgage lending revenue to $56.9 million in 2012 compared to $17.1 million in 2011.  The increase in mortgage lending revenue was primarily related to the increase in mortgage originations.  Mortgage origination volume increased in 2012 to $2.0 billion from $1.2 billion in 2011.  The increased level of mortgage origination volume resulted in an increase in origination revenue to $53.3 million in 2012 from $24.3 million in 2011.  Also contributing to the increase in mortgage lending revenue in 2012 compared to 2011 was the change in fair value of MSRs.  The fair value of MSRs decreased $3.2 million in 2012 compared to a decrease of $14.0 million in 2011.
The increase in noninterest revenue was somewhat offset by the decreases in securities gains, service charges and credit card, debit card and merchant fees.  Securities gains decreased to approximately $442,000 in 2012 from $12.1 million in 2011.  During the second quarter of 2011, the Company determined that it no longer had the intent to hold until maturity all securities that were previously classified as held-to-maturity.  As a result of this determination, all securities were classified as available-for-sale and recorded at fair value at December 31, 2012 and 2011.
Service charges and credit card, debit card and merchant fee income decreased 14.7% and 25.2%, respectively, in 2012 compared to 2011. Service charges decreased primarily as a result of a lower volume of items processed and changes in banking regulations related to overdraft fees.  Credit card, debit card and merchant fee income decreased primarily as a result of the impact of the implementation of the Durbin Amendment, which reduced debit card revenue by $10.2 million in 2012.  Insurance commissions increased 3.7%  in 2012 compared to 2011 and increased 5.8% in 2011 compared to 2010 as a result of new policies written and growth from existing customers coupled with the revenue contributed by the acquisition of certain assets of The Securance Group, Inc. on July 2, 2012.  Other miscellaneous income decreased 8.9% in 2012 compared to 2011 primarily as a result of gains of $2.2 million on the dispositions of fixed assets during 2011.  No such gains were recognized in 2012.
Noninterest expense for 2012 was $549.2 million, an increase of 2.9% from $533.6 million for 2011, which was an increase of 9.6% from $487.0 million for 2010.  The increase in noninterest expense in 2012 compared to 2011 was primarily a result of increases in salaries and employee benefits and foreclosed property expense.  The increase in salaries and employee benefits was primarily related to increases in employee benefits and incentive compensation during 2012 compared to 2011, including the cost of employee health care benefits and pension expenses.   Foreclosed property expense increased $11.6 million, or 41.8%, to $39.4 million in 2012 compared to $27.8 million in 2011 primarily as a result of the Company experiencing losses on the sale of other real estate owned (“OREO”).    This increase was somewhat offset by the decreases in prepayment penalty on Federal Home Loan Bank (“FHLB”) borrowings, deposit insurance assessments and other miscellaneous expense.  A $9.8 million prepayment penalty was recorded in 2011 related to the early repayment of FHLB advances during the second quarter of 2011, and no such prepayment was recorded in 2012.  The decrease in deposit insurance assessments in 2012 compared to 2011 was a result of improvement evidenced in various variables utilized by the FDIC in calculating the deposit insurance assessment.  Other miscellaneous expense in 2011 included $3.1 million recorded as a result of the closure of 22 branch offices during the third quarter of 2011 under the Company’s branch optimization project with no such expense recorded in 2012.  Income tax expense increased in 2012 and 2011
 
 
29
 
 
primarily as a result of the increase in pretax income in 2012 compared to 2011 and in 2011 compared to 2010.  The major components of net income are discussed in more detail in the various sections that follow.
The Company continued its commitment to maintaining a strong capital base as its total shareholders’ equity to total assets ratio was 10.82%, 9.72%, and 8.98% at December 31, 2012, 2011 and 2010, respectively.  Also, noninterest bearing demand deposits and savings deposits increased 12.1% and 15.5%, respectively, at December 31, 2012 compared to December 31, 2011.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s consolidated financial statements are prepared in accordance with U.S. GAAP, which require the Company to make estimates and assumptions (see Note 1 to the Company’s Consolidated Financial Statements included elsewhere in this Report).  Management believes that its determination of the allowance for credit losses, valuation of other real estate owned, the annual goodwill impairment assessment, the assessment for other-than-temporary impairment of securities, the valuation of mortgage servicing rights and the estimation of pension and other postretirement benefit amounts involve a higher degree of judgment and complexity than the Company’s other significant accounting policies.  Further, these estimates can be materially impacted by changes in market conditions or the actual or perceived financial condition of the Company’s borrowers, subjecting the Company to significant volatility of earnings.

Allowance for Credit Losses
The allowance for credit losses is established through the provision for credit losses, which is a charge against earnings.  Provisions for credit losses are made to reserve for estimated probable losses on loans and leases.  The allowance for credit losses is a significant estimate and is regularly evaluated by the Company for adequacy by taking into consideration factors such as changes in the nature and volume of the loan and lease portfolio; trends in actual and forecasted portfolio credit quality, including delinquency, charge-off and bankruptcy rates; and current economic conditions that may affect a borrower’s ability to pay.  In determining an adequate allowance for credit losses, management makes numerous assumptions, estimates and assessments.  The use of different estimates or assumptions could produce different provisions for credit losses.  See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Provision for Credit Losses and Allowance for Credit Losses” included herein for more information.  At December 31, 2012, the allowance for credit losses was $164.5 million, representing 1.90% of total loans and leases, net of unearned income.

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

Goodwill
The Company’s policy is to assess goodwill for impairment at the reporting segment level on an annual basis or sooner if an event occurs or circumstances change which indicate that the fair value of a reporting segment is below its carrying amount.  Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value.  Accounting standards require management to estimate the fair value of each reporting segment in assessing impairment at least annually.  The Company’s annual assessment date is during the Company’s fourth quarter.  The Company’s annual goodwill impairment evaluation performed during the fourth quarter of 2012 indicated no impairment of goodwill for its reporting segments as the estimated fair value exceeded the respective carrying value by 23% for the Company’s Community Banking reporting segment and by 26% for the Company’s Insurance Agencies reporting segment.  Therefore, no goodwill impairment was recorded during 2012.
 
 
 
30
 
 
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 $275.2 million at December 31, 2012.

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

Mortgage Servicing Rights
The Company recognizes as assets the rights to service mortgage loans for others, known as mortgage servicing rights (“MSRs”).  The Company records MSRs at fair value on a recurring basis with subsequent remeasurement of MSRs based on change in fair value in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 860, Transfers and Servicing (“FASB ASC 860”).  An estimate of the fair value of the Company’s MSRs is determined utilizing assumptions about factors such as mortgage interest rates, discount rates, mortgage loan prepayment speeds, market trends and industry demand.  Because the valuation is determined by using discounted cash flow models, the primary risk inherent in valuing the MSRs is the impact of fluctuating interest rates on the estimated life of the servicing revenue stream.  The use of different estimates or assumptions could also produce different fair values.  The Company does not hedge the change in fair value of MSRs and, therefore, the Company is susceptible to significant fluctuations in the fair value of its MSRs in changing interest rate environments.  At December 31, 2012, the Company’s mortgage servicing asset was valued at $37.9 million.

Pension and Postretirement Benefits
Accounting for pension and other postretirement benefit amounts is another area where the accounting guidance requires management to make various assumptions in order to appropriately value any related asset or liability.  Estimates that the Company makes to determine pension-related assets and liabilities include actuarial assumptions, expected long-term rate of return on plan assets, rate of compensation increase for participants and discount rate.  Estimates that the Company makes to determine asset and liability amounts for other postretirement benefits include actuarial assumptions and a discount rate.  Changes in these estimates could impact earnings.  For example, lower expected long-term rates of return on plan assets could negatively impact earnings, as would lower estimated discount rates or higher rates of compensation increase.  In estimating the projected benefit obligation, actuaries must make assumptions about such factors as mortality rate, turnover rate, retirement rate, disability rate and the rate of compensation increases.  The Company accounts for the over-funded or under-funded status of its defined benefit and postretirement plans as an asset or liability in its consolidated balance sheets and recognizes changes in that funded status in the year in which the changes occur through comprehensive income as required by FASB ASC 715, Compensation – Retirement Benefits (“FASB ASC 715”).  In accordance with FASB ASC 715, the Company calculates the expected return on plan assets each year based on the balance in the pension asset portfolio at the beginning of the year and the expected long-term rate of return on that portfolio.  In determining the reasonableness of the expected rate of return, the Company considers a variety of factors including the actual return earned on plan assets, historical rates of return on the various asset classes of which the plan portfolio is comprised and current/prospective capital market conditions and economic forecasts.  The Company used an expected rate of return of 6% on plan assets for 2012.  The discount rate is the rate used to determine the present value of the Company’s future benefit obligations for its pension and other postretirement benefit plans.  The Company determines the discount rate to be used to discount plan liabilities at the measurement date with the assistance of its actuary using the actuary’s proprietary model.  The Company developed a level equivalent yield using its actuary’s
 
 
 
31
 
 
model as of December 30, 2012 and the expected cash flows from the BancorpSouth, Inc. Retirement Plan (the “Basic Plan”), the BancorpSouth, Inc. Restoration Plan (the “Restoration Plan”) and the BancorpSouth, Inc. Supplemental Executive Retirement Plan (the “Supplemental Plan”).  Based on this analysis, the Company established its discount rate assumptions for determination of the projected benefit obligation at 4.05% for the Basic Plan, 3.65% for the Restoration Plan and 2.85% for the Supplemental Plan based on a December 31, 2012 measurement date.

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.  One of the Company’s long-term objectives 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 table presents average interest earning assets, average interest bearing liabilities, net interest revenue-FTE, net interest margin-FTE and net interest rate spread for the three years ended December 31, 2012:
 
 
32
 

   
2012
    
2011
    
2010
  
(Taxable equivalent basis)
  
Average
          
Yield/
    
Average
          
Yield/
    
Average
          
Yield/
  
   
Balance
    
Interest
    
Rate
    
Balance
    
Interest
    
Rate
    
Balance
    
Interest
    
Rate
  
ASSETS
  
(Dollars in thousands, yields on taxable equivalent basis)
  
Loans and leases (net of unearned
                                                      
  income) (1)(2)
   $ 8,719,399     $ 428,998       4.92 %   $ 9,159,431     $ 464,413       5.07 %   $ 9,621,529     $ 500,108       5.20 %
Loans held for sale
     91,215       3,033       3.33 %     53,504       2,219       4.15 %     68,980       3,024       4.38 %
Held-to-maturity securities:
                                                                        
  Taxable (3)
     -       -       -       547,471       13,266       2.42 %     985,606       36,718       3.73 %
  Non-taxable (4)
     -       -       -       133,827       8,673       6.48 %     236,530       16,014       6.77 %
Available-for-sale securities:
                                                                        
  Taxable (5)
     2,035,628       39,849       1.96 %     1,667,936       44,243       2.65 %     863,091       32,033       3.71 %
  Non-taxable (6)
     455,270       25,627       5.63 %     271,170       16,897       6.23 %     71,869       5,039       7.01 %
Federal funds sold, securities
                                                                        
purchased under agreement to resell
                                                                  
  and short-term investments
     659,459       1,714       0.26 %     310,052       868       0.28 %     376,328       961       0.26 %
  Total interest earning
                                                                        
    assets and revenue
     11,960,971       499,221       4.17 %     12,143,391       550,579       4.53 %     12,223,933       593,897       4.86 %
Other assets
     1,290,436                       1,347,685                       1,293,963                  
Less:  allowance for credit losses
     (184,131 )                     (211,029 )                     (213,060 )                
                                                                         
    Total
   $ 13,067,276                     $ 13,280,047                     $ 13,304,836                  
                                                                         
LIABILITIES AND
                                                                        
SHAREHOLDERS' EQUITY
                                                                        
Deposits:
                                                                        
                                                                         
  Demand - interest bearing
   $ 4,784,011     $ 16,111       0.34 %   $ 4,907,058     $ 22,646       0.46 %   $ 4,649,235     $ 35,187       0.76 %
  Savings
     1,078,302       2,697       0.25 %     943,317       3,211       0.34 %     784,504       3,576       0.46 %
  Other time
     2,773,953       39,797       1.43 %     3,322,733       61,709       1.86 %     3,782,727       83,999       2.22 %
Federal funds purchased,securities
                                                                        
sold under agreement to repurchase,
                                                                  
  short-term FHLB borrowings
                                                                        
  and other short term borrowings
     382,167       330       0.09 %     437,589       555       0.13 %     539,524       1,384       0.26 %
Junior subordinated debt securities
     160,312       11,502       7.17 %     160,312       11,451       7.14 %     160,312       11,461       7.15 %
Long-term  FHLB borrowings
     33,500       1,396       4.17 %     66,673       3,368       5.05 %     111,547       6,013       5.38 %
  Total interest bearing
                                                                        
    liabilities and expense
     9,212,245       71,833       0.78 %     9,837,682       102,940       1.05 %     10,027,849       141,620       1.41 %
Demand deposits -
                                                                        
  noninterest bearing
     2,300,428                       2,078,298                       1,890,979                  
Other liabilities
     140,936                       123,299                       144,687                  
  Total liabilities
     11,653,609                       12,039,279                       12,063,515                  
Shareholders' equity
     1,413,667                       1,240,768                       1,241,321                  
  Total
   $ 13,067,276                     $ 13,280,047                     $ 13,304,836                  
Net interest revenue-FTE
           $ 427,388                     $ 447,639                     $ 452,277          
Net interest margin-FTE
                     3.57 %                     3.69 %                     3.70 %
Net interest rate spread
                     3.39 %                     3.49 %                     3.45 %
Interest bearing liabilities to
                                                                        
   interest earning assets
                     77.02 %                     81.01 %                     82.03 %
(1) Includes taxable equivalent adjustment to interest of approximately $3,387,000, $3,337,000 and $3,326,000 in 2012, 2011 and 2010, respectively, using an effective tax rate of 35%.
  
(2) Non-accrual loans are included in Loans and leases (net of unearned income).
                                                  
(3) Includes taxable equivalent adjustments to interest of approximately $186,000 in 2011 and $440,000 in 2010 using an effective tax rate of 35%.
                  
(4) Includes taxable equivalent adjustments to interest of approximately $3,035,000 and $5,605,000 in 2011 and 2010, respectively, using an effective tax rate of 35%.
          
(5) Includes taxable equivalent adjustment to interest of approximately $441,000 and $254,000 in 2012 and 2011, respectively, using an effective tax rate of 35%.
          
(6) Includes taxable equivalent adjustment to interest of approximately $8,969,000, $5,914,000 and $1,764,000 in 2012, 2011 and 2010, respectively, using an effective tax rate of 35%.
  

Net interest revenue-FTE decreased 4.5% to $427.4 million in 2012 from $447.6 million in 2011, which represented a decrease of 1.0% from $452.3 million in 2010.  The decrease in net interest revenue-FTE for 2012 compared to 2011 was primarily a result of the increase in short-term investments resulting from excess liquidity coupled with the continued lack of loan growth, as the short-term investments had lower average rates earned than the average rates paid on interest bearing liabilities.  The decrease in net interest revenue-FTE for 2011 compared to
 
 
33
 
 
2010 was primarily a result of decreased net loans and leases combined with the continued declining loan yeilds and the increase in average lower rate securities.  The decrease in net interest revenue in 2011 was somewhat offset by the decrease in higher rate long-term FHLB borrowings and other time deposits, resulting in a decrease in interest expense related to those borrowings to $3.4 million for 2011 compared to $6.0 million for 2010.  The yield on interest earning assets declined 36 basis points to 4.17% in 2012 from 4.53% in 2011, which exceeded the decline of 27 basis points in the average rate paid on interest bearing libilities to .78% in 2012 from 1.05% in 2011.  The yield on interest earning assets declined 33 basis points to 4.53% in 2011 from 4.86% in 2010 and the average rate paid on interest bearing liabilities declined 36 basis points to 1.05% in 2011 compared to 1.41% in 2010.  The declining loan yields experienced by the Company in 2012 and 2011 were a result of reduced interest rates with this decline being somewhat offset by the mpact of the interest rate floors evident on a portion of the Company's variable rate loans.  The effect of the interest rate floors on the Company's variable rate loans is more fully discussed in "Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Interest Rate Sensitivity."
Interest revenue-FTE decreased 9.3% to $499.2 million in 2012 from $550.6 million in 2011, which represented a decrease of 7.3% from $593.9 million in 2010.  The decreases in interest revenue-FTE in 2012 and 2011 were primarily a result of the declining loan yields on decreased net loans and leases, as interest rates were at historically low levels with the 2012 decrease also impacted by increased lower rate short-term investments, resulting in an overall decrease in the yield on average interest earning assets of 36 basis points during 2012 and 33 basis points during 2011.  Average interest earning assets decreased $182.4 million, or 1.5%, to $12.0 billion in 2012 and decreased $80.5 million, or 0.7%, to $12.1 billion in 2011 from $12.2 billion in 2010.  The decrease in average interest-earning assets during 2012 was primarily a result of the larger decrease in net loans and leases and securities than the increase in short-term investments resulting from excess liquidity.  The decrease in average interest earning assets during 2011 was primarily a result of the larger decreases in net loans and leases and short-term investments than the increase in securities, as the decrease in deposits resulted in less funds to invest in securities.
Interest expense decreased 30.2% to $71.8 million in 2012 from $102.9 million in 2011, which represented a decrease of 27.3% from $141.6 million in 2010.  The decrease in interest expense during 2012 was a result of the increase in average lower cost savings deposits combined with the decrease in interest bearing and other time deposits and their corresponding rates, coupled with the decrease in higher rate long-term FHLB borrowings, resulting in an overall decrease in the average rate paid of 27 basis points.  The decrease in interest expense during 2011 was a result of the increase in average lower cost interest bearing demand deposits combined with the decrease in other time deposit rates and the decrease in average long-term deposits and long-term deposit rates, resulting in an overall decrease in the average rate paid of 36 basis points.  Average interest bearing liabilities decreased $625.4 million, or 6.4%, to $9.2 billion in 2012 after decreasing $190.2 million, or 1.9%, from $10.0 billion in 2010.  The decrease in average interest bearing liabilities in 2012 compared to 2011 was a result of increases in average lower cost savings deposits being more than offset by decreases in average interest bearing demand deposits, other time deposits, short-term borrowings and long-term borrowings.  The decrease in interest bearing liabilities in 2011 compared to 2010 was primarily a result of the decrease in short-term and long-term borrowings.
Net interest margin-FTE for 2012 was 3.57%, a decrease of 12 basis points from 3.69% for 2011, which represented a decrease of one basis point from 3.70% for 2010.  The decrease in the net interest margin-FTE for 2012 was primarily a result of weak loan demand, competitive pressure on loan pricing resulting in loans re-pricing at lower rates, both at maturity and, in some cases, prior to maturity and an increase in short-term investments having lower yields than those earned on the loan portfolio.  The slight decrease in the net interest margin-FTE for 2011 compared to 2010 was primarily a result of the combination of increased average deposits and weak loan demand resulting in higher levels of average investments with lower yields than those earned on the loan portfolio.  During 2011, the Company was somewhat able to mitigate the effect of lower loan yields by increasing lower cost demand deposits and decreasing higher rate time deposits.
Net interest revenue-FTE may also be analyzed by segregating the rate and volume components of interest revenue and interest expense.  The table below presents an analysis of rate and average volume change in net interest revenue from 2011 to 2012 and from 2010 to 2011.  Changes that are not solely a result of volume or rate have been allocated to volume.
 
 
 
34
 

   
2012 over 2011 - Increase (Decrease)
    
2011 over 2010 - Increase (Decrease)
  
(Taxable equivalent basis)
  
Volume
    
Rate
    
Total
    
Volume
    
Rate
    
Total
  
INTEREST REVENUE
  
(In thousands)
  
Loans and leases (net of unearned
                                    
  income)
   $ (21,650 )   $ (13,765 )   $ (35,415 )   $ (23,430 )   $ (12,265 )   $ (35,695 )
Loans held for sale
     1,254       (440 )     814       (642 )     (163 )     (805 )
Held-to-maturity securities:
                                                
  Taxable
     -       (13,266 )     (13,266 )     (10,617 )     (12,835 )     (23,452 )
  Non-taxable
     -       (8,673 )     (8,673 )     (6,656 )     (685 )     (7,341 )
Available-for-sale securities:
                                                
  Taxable
     7,198       (11,592 )     (4,394 )     21,349       (9,139 )     12,210  
  Non-taxable
     10,363       (1,633 )     8,730       12,419       (561 )     11,858  
Federal funds sold, securities
                                                
  purchased under agreement to
                                                
  resell and short-term investments
     908       (62 )     846       (186 )     93       (93 )
  Total decrease
     (1,927 )     (49,431 )     (51,358 )     (7,763 )     (35,555 )     (43,318 )
                                                 
INTEREST EXPENSE
                                                
Demand deposits - interest bearing
     (414 )     (6,121 )     (6,535 )     1,190       (13,731 )     (12,541 )
Savings deposits
     338       (852 )     (514 )     541       (906 )     (365 )
Other time deposits
     (7,873 )     (14,039 )     (21,912 )     (8,543 )     (13,747 )     (22,290 )
Federal funds purchased, securities
                                                
sold under agreement to repurchase,
                                          
  short-term FHLB borrowings and
                                                
  other short term borrowings
     (48 )     (177 )     (225 )     (129 )     (700 )     (829 )
Junior subordinated debt
                                                
  securities
     -       51       51       -       (10 )     (10 )
Long-term FHLB borrowings
     (1,382 )     (590 )     (1,972 )     (2,278 )     (367 )     (2,645 )
  Total decrease
     (9,379 )     (21,728 )     (31,107 )     (9,219 )     (29,461 )     (38,680 )
                                                 
Total net increase (decrease)
   $ 7,452     $ (27,703 )   $ (20,251 )   $ 1,456     $ (6,094 )   $ (4,638 )

Interest Rate Sensitivity
The interest rate sensitivity gap is the difference between the maturity or repricing opportunities of interest sensitive assets and interest sensitive liabilities for a given period of time.  A prime objective of asset/liability management is to maximize net interest margin while maintaining a reasonable mix of interest sensitive assets and liabilities.  The following table presents the Company’s interest rate sensitivity at December 31, 2012:

 
35
 

   
Interest Rate Sensitivity - Maturing or Repricing
  
         
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
   $ 979,800     $ -     $ -     $ -  
Available-for-sale securities
     194,662       359,427       1,051,941       828,002  
Loans and leases, net of unearned income
     3,747,301       1,536,738       2,834,598       518,352  
Loans held for sale
     102,308       543       3,133       23,154  
  Total interest earning assets
     5,024,071       1,896,708       3,889,672       1,369,508  
INTEREST BEARING LIABILITIES:
                                
Interest bearing demand and
                                
  savings deposits
     5,945,281       -       -       -  
Other time deposits
     435,221       1,081,520       1,080,743       212  
Federal funds purchased, securities
                                
  sold under agreement to repurchase,
                                
  short-term FHLB borrowings and
                                
  other short-term borrowings
     414,611       -       -       -  
Long-term FHLB borrowings and junior
                                
  subordinated debt securities
     -       -       3,500       190,312  
Other
     -       -       55       -  
  Total interest bearing liabilities
     6,795,113       1,081,520       1,084,298       190,524  
Interest rate sensitivity gap
   $ (1,771,042 )   $ 815,188     $ 2,805,374     $ 1,178,984  
Cumulative interest sensitivity gap
   $ (1,771,042 )   $ (955,854 )   $ 1,849,520     $ 3,028,504  


In the event interest rates increase after December 31, 2012, based on this interest rate sensitivity gap, the Company could experience decreased net interest revenue in the following one-year period, as the cost of funds would increase at a more rapid rate than interest revenue on interest earning assets.  However, the Company’s historical repricing sensitivity on interest bearing demand deposits and savings suggests that these deposits, while having the ability to reprice in conjunction with rising market rates, often exhibit less repricing sensitivity to a change in market rates, thereby somewhat reducing the exposure to rising interest rates.  In the event interest rates decline after December 31, 2012, based on this interest rate sensitivity gap, it is possible that the Company could experience slightly increased net interest revenue in the following one-year period.  However, any potential benefit to net interest revenue in a falling rate environment is mitigated by implied rate floors on interest bearing demand deposits and savings resulting from the historically low interest rate environment.  It should be noted that the balances shown in the table above are at December 31, 2012 and may not be reflective of positions at other times during the year or in subsequent periods.  Allocations to specific interest rate sensitivity periods are based on the earlier of maturity or repricing dates.  The elevated liability sensitivity in the 0 to 90 day category as compared to other categories was primarily a result of the Company’s utilization of shorter term, lower cost deposits to fund earning assets.
As of December 31, 2012, the Bank had $1.8 billion in variable rate loans with interest rates determined by a floor, or minimum rate.  This portion of the loan portfolio had an average interest rate earned of 4.53%, an average maturity of 31 months and a fully-indexed interest rate of 3.72% at December 31, 2012.  The fully-indexed interest rate is the interest rate that these loans would be earning without the effect of interest rate floors.  While the Bank benefits from interest rate floors in the current interest rate environment, loans currently earning their floored interest rate may not experience an immediate impact on the interest rate earned should key indices rise.  Key indices include, but are not limited to, the Bank’s prime rate, the Wall Street Journal prime rate and the London Interbank Offering Rate.  At December 31, 2012, the Company had $784.7 million, $1.1 billion and $699.8 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.

 
 
36
 
 
Interest Rate Risk Management
Interest rate risk refers to the potential changes in net interest income and Economic Value of Equity (“EVE”) resulting from adverse movements in interest rates.  EVE is defined as the net present value of the balance sheet’s cash flow.  EVE is calculated by discounting projected principal and interest cash flows under the current interest rate environment.  The present value of asset cash flows less the present value of liability cash flows derives the net present value of the Company’s balance sheet.  The Company’s Asset / Liability Committee utilizes financial simulation models to measure interest rate exposure.  These models are designed to simulate the cash flow and accrual characteristics of the Company’s balance sheet.  In addition, the models incorporate assumptions about the direction and volatility of interest rates, the slope of the yield curve, and the changing composition of the Company’s balance sheet arising from both strategic plans and customer behavior.  Finally, management makes assumptions regarding loan and deposit growth, pricing, and prepayment speeds.
The sensitivity analysis included in the tables below delineates the percentage change in net interest income and EVE derived from instantaneous parallel rate shifts of plus and minus 400, 300, 200 and 100 basis points.  The impact of minus 400, 300, 200 and 100 basis point rate shocks as of December 31, 2012 and 2011 was not considered meaningful because of the historically low interest rate environment.  However, the risk exposure would be mitigated by any downward rate shifts.  Variances were calculated from the base case scenario, which reflected prevailing market rates, and the net interest income forecasts used in the calculations spanned 12 months for each scenario.  For the tables below, management assumed all non-maturity deposits had an average life of one day for calculating EVE.  In addition, management assumed a beta value of 1, or 100%, for all non-term deposits for purposes of calculating net interest income instantaneous rate shocks.  “Beta,” in the context of deposit rates, is defined as the percentage change in interest rate paid given a change in market rates.  Calculations using the aforementioned assumptions are designed to delineate maximum risk exposure.


   
Net Interest Income
  
   
% Variance from Base Case Scenario
  
Rate Shock
  
December 31, 2012
    
December 31, 2011
  
+400 basis points
     -7.1 %     -14.7 %
+300 basis points
     -6.0 %     -11.7 %
+200 basis points
     -4.8 %     -8.7 %
+100 basis points
     -2.9 %     -4.9 %
 -100 basis points
  
NM
    
NM
  
 -200 basis points
  
NM
    
NM
  
 -300 basis points
  
NM
    
NM
  
 -400 basis points
  
NM
    
NM
  
NM=not meaningful
          


   
Economic Value of Equity
  
   
% Variance from Base Case Scenario
  
Rate Shock
  
December 31, 2012
    
December 31, 2011
  
+400 basis points
     -9.2 %     -36.7 %
+300 basis points
     -7.6 %     -28.8 %
+200 basis points
     -5.7 %     -20.3 %
+100 basis points
     -3.2 %     -10.9 %
 -100 basis points
  
NM
    
NM
  
 -200 basis points
  
NM
    
NM
  
 -300 basis points
  
NM
    
NM
  
 -400 basis points
  
NM
    
NM
  
NM=not meaningful
          


 
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:
 
 
37
 
 
   
Net Interest Income
  
   
% Variance from Base Case Scenario
  
Rate Ramp
  
December 31, 2012
    
December 31, 2011
  
+200 basis points
     -5.3 %     -6.7 %
 -200 basis points
  
NM
    
NM
  
NM=not meaningful
          


For the tables below, average life assumptions and beta values for non-maturity deposits were estimated based on the historical behavior rather than assuming an average life of one day and a beta value of 1, or 100%.  Historical behavior suggests that non-maturity deposits have longer average lives for which to discount expected cash flows and lower beta values for which to re-price expected cash flows.  The former results in a higher premium derived from the present value calculation, while the latter results in a slower rate of change and lower change in interest rate paid given a change in market rates.  Both have a positive impact on the EVE calculation for rising rate shocks.  Calculations using these assumptions are designed to delineate more precise risk exposure under the various shock scenarios.  While the falling rate shocks are not considered meaningful in the historically low interest rate environment, the risk profile would be negatively impacted by downward rate shifts under these assumptions.


   
Net Interest Income
   
% Variance from Base Case Scenario
Rate Shock
  
December 31, 2012
  
December 31, 2011
+400 basis points
     24.1 %
NA
+300 basis points
     21.3 %
NA
+200 basis points
     17.4 %
NA
+100 basis points
     8.1 %
NA
 -100 basis points
  
NM
  
NM
 -200 basis points
  
NM
  
NM
 -300 basis points
  
NM
  
NM
 -400 basis points
  
NM
  
NM
NM=not meaningful
          
NA=not available
          


   
Economic Value of Equity
   
% Variance from Base Case Scenario
Rate Shock
  
December 31, 2012
  
December 31, 2011
+400 basis points
     27.1 %
NA
+300 basis points
     22.6 %
NA
+200 basis points
     15.9 %
NA
+100 basis points
     12.7 %
NA
 -100 basis points
  
NM
  
NM
 -200 basis points
  
NM
  
NM
 -300 basis points
  
NM
  
NM
 -400 basis points
  
NM
  
NM
NM=not meaningful
          
NA=not available
          


   
Net Interest Income
   
% Variance from Base Case Scenario
Rate Ramp
  
December 31, 2012
  
December 31, 2011
+200 basis points
     8.1 %
NA
 -200 basis points
  
NM
  
NM
NM=not meaningful
          
NA=not available
          



 
38
 

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 “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 his 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 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 troubled debt restructuring (“TDR”) and analyzed for possible impairment as part of the credit approval process.  TDRs are reserved in accordance with FASB ASC 310 in the same manner as impaired loans that are not TDRs.  Should the borrower’s financial condition, collateral protection or performance deteriorate, warranting reassessment of the loan rating or impairment, additional reserves may be required.
Loans of $500,000 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 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 dependent upon the cash flow of the borrower or guarantor support, the impairment evaluation generally focuses on
 
 
39
 
 
 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 $500,000 that have characteristics of potential impairment, such as delinquency or other loan-specific factors identified by management, when a current appraisal (dated within the prior 12 months) is not available or when a current appraisal uses assumptions that are not consistent with the expected disposition of the loan collateral.  In order to measure impairment properly at the time that a loan is deemed to be impaired, a staff appraiser may estimate the collateral fair value based upon earlier appraisals, sales contracts, approved foreclosure bids, comparable sales, officer estimates or current market conditions until a new appraisal is received.  This estimate can be used to determine the extent of the impairment on the loan.  After a loan is deemed to be impaired, it is management’s policy to obtain an updated appraisal on at least an annual basis.  Management performs a review of the pertinent facts and circumstances of each impaired loan, such as changes in outstanding balances, information received from loan officers, and receipt of re-appraisals, on a monthly basis.  As of each review date, management considers whether additional impairment should be recorded based on recent activity related to the loan-specific collateral as well as other relevant comparable assets.  Any adjustment to reflect further impairments, either as a result of management’s periodic review or as a result of an updated appraisal, are made through recording additional loan loss provisions.
At December 31, 2012, impaired loans totaled $156.7 million, which was net of cumulative charge-offs of $49.3 million.  Additionally, the Company had specific reserves related to impaired loans of $10.5 million included in the allowance for credit losses.  Impaired loans at December 31, 2012 were primarily from the Company’s residential construction, acquisition and development real estate and commercial real estate portfolios.  Impaired loan charge-offs are determined necessary when management does not anticipate any future recovery of collateral values.  The loans were evaluated for impairment based on the fair value of the underlying collateral securing the loan.  As part of the impairment review process, appraisals are used to determine the property values.  The appraised values that are used are generally based on the disposition value of the property, which assumes Bank ownership of the property “as-is” and a 180-360 day marketing period.  If a current appraisal or one with an inspection date within the past 12 months using the necessary assumptions is not available, a new third-party appraisal is ordered.  In cases where an impairment exists and a current appraisal is not available at the time of review, a staff appraiser may determine an estimated value based upon earlier appraisals, the sales contract, approved foreclosure bids, comparable sales, comparable appraisals, officer estimates or current market conditions until a new appraisal is received.  After a new appraisal is received, the value used in the review will be updated and any adjustments to reflect further impairments are made.  Appraisals are obtained from state-certified appraisers based on certain assumptions which may include foreclosure status, bank ownership, other real estate owned 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.
An analysis of the allowance for credit losses for the five years ended December 31, 2012 is provided in the following table:
 
 
 
40
 

   
2012
    
2011
    
2010
    
2009
    
2008
  
   
(Dollars in thousands)
  
Balance, beginning of period
   $ 195,118     $ 196,913     $ 176,043     $ 132,793     $ 115,197  
                                         
Loans and leases charged off:
                                        
Commercial and industrial
     (12,362 )     (17,337 )     (11,879 )     (9,534 )     (7,124 )
Real estate
                                        
  Consumer mortgages
     (13,122 )     (10,186 )     (25,639 )     (13,917 )     (8,161 )
  Home equity
     (2,721 )     (5,852 )     (5,215 )     (5,372 )     (1,307 )
  Agricultural
     (1,240 )     (3,420 )     (1,201 )     (848 )     (381 )
  Commercial and industrial-owner occupied
     (9,015 )     (10,302 )     (9,200 )     (4,033 )     (1,970 )
  Construction, acquisition and development
     (33,085 )     (67,362 )     (113,237 )     (32,638 )     (15,332 )
  Commercial
     (12,728 )     (17,436 )     (14,084 )     (3,584 )     (814 )
Credit cards
     (2,221 )     (3,072 )     (4,559 )     (4,770 )     (3,636 )
All other
     (2,904 )     (7,088 )     (6,008 )     (3,517 )     (3,342 )
Total loans and leases charged off
     (89,398 )     (142,055 )     (191,022 )     (78,213 )     (42,067 )
                                         
Recoveries:
                                        
Commercial and industrial
     7,096       1,567       1,330       761       1,134  
Real estate
                                        
  Consumer mortgages
     1,836       1,111       1,448       824       532  
  Home equity
     496       185       179       109       30  
  Agricultural
     126       123       12       2       -  
  Commercial and industrial-owner occupied
     2,696       393       399       297       75  
  Construction, acquisition and development
     8,407       3,951       1,706       128       263  
  Commercial
     8,538       1,045       845       189       23  
Credit cards
     527       803       829       617       319  
All other
     1,024       1,001       1,128       1,212       1,537  
Total recoveries
     30,746       10,179       7,876       4,139       3,913  
                                         
Net charge-offs
     (58,652 )     (131,876 )     (183,146 )     (74,074 )     (38,154 )
                                         
Provision charged to operating expense
     28,000       130,081       204,016       117,324       56,176  
Other, net
     -       -       -       -       (426 )
Balance, end of period
   $ 164,466     $ 195,118     $ 196,913     $ 176,043     $ 132,793  
                                         
Loans and leases, net of unearned
                                        
   income - average
   $ 8,719,399     $ 9,159,431     $ 9,621,529     $ 9,734,580     $ 9,429,963  
                                         
Loans and leases, net of unearned
                                        
   income - period end
   $ 8,636,989     $ 8,870,311     $ 9,333,107     $ 9,775,136     $ 9,691,277  
                                         
RATIOS
                                        
Net charge-offs to average loans and leases
     0.67 %     1.44 %     1.90 %     0.76 %     0.40 %
Provision for credit losses to average
                                        
   loans and leases, net of unearned income
     0.32 %     1.42 %     2.12 %     1.21 %     0.60 %
Allowance for credit losses to loans and
                                        
   leases, net of unearned income
     1.90 %     2.20 %     2.11 %     1.80 %     1.37 %
Allowance for credit losses to net charge-
                                        
   offs (annualized)
     280.41 %     147.96 %     107.52 %     237.66 %     348.04 %

Net charge-offs decreased $73.2 million, or 55.5%, in 2012 compared to 2011, and decreased $51.3 million, or 28.0%, in 2011 compared to 2010.  Net charge-offs as a percentage of average loans and leases decreased to 0.67% in 2012 compared to 1.44% in 2011 after having decreased from 1.90% in 2010.  These decreases were primarily a result of decreased losses within the real estate construction, acquisition and
 
 
41
 
 
 development segments 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 decreased levels of charge-offs in 2012 and 2011, as updated apraisals came in closer to loan carrying values.  The decreased level of charge-offs in 2012 and 2011 resulted in increases in the ratio of the allowance for credit losses to annualized charge-offs to 280.41% in 2012 and 147.96% in 2011 compared to 107.52% in 2010.
The provision for credit losses decreased $102.1 million to $28.0 million in 2012 compared to $130.1 million in 2011 after having decreased from $204.0 million in 2010 as a result of decreases in net charge-offs, declines in the formation of new non-accrual loans, including fewer loans being identified for impairment, continued stabilization in values of previously impaired loans, and significant decreases in NPLs.  As of December 31, 2012 and 2011, 76% and 85%, respectively, of nonaccrual loans had been charged down to net realizable value or had specific reserves to reflect recent appraised values.  As a result, impaired loans had an aggregate net book value of 71% and 68% of their contractual principal balance at December 31, 2012 and 2011, respectively.  Nonaccrual loans not impaired are loans that either fall below the impairment threshold or are not determined to be collaterally dependant.
The allowance for credit losses decreased $30.7 million to $164.5 million at December 31, 2012 compared to $195.1 million at December 31, 2011 after decreasing only $1.8 million from $196.9 million at December 31, 2010.  The decrease in the allowance for credit losses at December 31, 2012 compared to December 31, 2011 and 2010 was a result of improving credit metrics in 2012, including reductions in classified, non-performing and impaired loans and lower net charge-off levels in 2012 compared to 2011 and 2010.  For more information about the Company’s classified, non-performing and impaired loans, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Loans and Leases” of this Report.
The breakdown of the allowance by loan and lease segment and class 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 for losses.  The following tables present (i) the breakdown of the allowance for credit losses by loan and lease 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 at December 31 of each of the years indicated:

   
2012
  
2011
    
2010
         
% of Loans
        
% of Loans
          
% of Loans
   
Allowance
    
in Each
  
Allowance
    
in Each
    
Allowance
    
in Each
   
for
    
Category
  
for
    
Category
    
for
    
Category
   
Credit
    
to Total
  
Credit
    
to Total
    
Credit
    
to Total
   
Loss
    
Loans
  
Loss
    
Loans
    
Loss
    
Loans
   
(Dollars in thousands)
Commercial and industrial
   $ 23,286       17.1 %   $ 20,724       16.6 %     22,479       16.1 %
Real estate
                                                
  Consumer mortgages
     35,966       21.6       36,529       21.8       35,540       20.8  
  Home equity
     6,005       5.6       8,630       5.8       7,305       5.8  
  Agricultural
     3,301       3.0       3,921       2.7       4,997       2.7  
  Commercial and industrial-owner occupied
     20,178       15.4       21,929       14.6       20,403       14.2  
  Construction, acquisition and development
     21,905       8.5       45,562       10.2       59,048       12.5  
  Commercial
     40,081       20.2       39,444       19.7       33,439       19.4  
Credit cards
     3,611       1.2       4,021       1.2       4,126       1.1  
All other
     10,133       7.4       14,358       7.4       9,576       7.4  
     Total
   $ 164,466       100.0 %   $ 195,118       100.0 %     196,913       100.0 %


 
42
 
 
   
2009
  
2008
         
% of Loans
        
% of Loans
   
Allowance
    
in Each
  
Allowance
    
in Each
   
for
    
Category
  
for
    
Category
   
Credit
    
to Total
  
Credit
    
to Total
   
Loss
    
Loans
  
Loss
    
Loans
   
(Dollars in thousands)
Commercial and industrial
   $ 21,154       15.1 %   $ 19,150       14.7 %
Real estate
                                
  Consumer mortgages
     37,048       20.5       31,158       21.5  
  Home equity
     7,218       5.6       5,689       5.3  
  Agricultural
     4,192       2.7       3,167       2.4  
  Commercial and industrial-owner occupied
     22,989       14.7       17,982       15.0  
  Construction, acquisition and development
     46,193       14.9       29,771       17.4  
  Commercial
     26,694       18.4       17,899       16.1  
Credit cards
     3,481       1.1       1,572       1.0  
All other
     7,074       7.0       6,405       6.6  
     Total
   $ 176,043       100.0 %   $ 132,793       100.0 %


Noninterest Revenue
The components of noninterest revenue for the years ended December 31, 2012, 2011 and 2010 and the percentage change between such years are shown in the follow­ing table:


   
2012
    
2011
    
2010
  
   
Amount
    
% Change
    
Amount
    
% Change
    
Amount
  
   
(Dollars in thousands)
  
Mortgage lending
   $ 56,919       233.5 %   $ 17,069       (42.6 ) %   $ 29,745  
Credit card, debit card and merchant fees
     31,705       (25.2 )     42,373       12.5       37,663  
Service charges
     56,877       (14.7 )     66,670       (5.7 )     70,690  
Trust income
     11,913       (2.2 )     12,186       9.3       11,149  
Securities gains, net
     442       (96.4 )     12,127       372.1       2,569  
Insurance commissions
     90,138       3.7       86,918       5.8       82,172  
Annuity fees
     2,243       (32.5 )     3,323       34.3       2,474  
Brokerage commissions and fees
     6,714       13.5       5,918       7.4       5,512  
Bank-owned life insurance
     8,074       5.4       7,662       (1.0 )     7,737  
Other miscellaneous income
     15,124       (8.9 )     16,599       15.0       14,433  
                                         
Total noninterest revenue
   $ 280,149       3.4 %   $ 270,845       2.5 %   $ 264,144  

The Company’s revenue from mortgage lending typically fluctuates as mortgage interest rates change and is primarily attributable to two activities - origination and sale of new mortgage loans and servicing mortgage loans.  Since the Company does not hedge the change in fair value of its MSRs, mortgage revenue can be significantly affected by changes in the valuation of MSRs in changing interest rate environments.  The Company’s normal practice is to originate mortgage loans for sale in the secondary market and to either retain or release the associated MSRs with the loan sold.  The Company records MSRs at fair value on a recurring basis with subsequent remeasurement of MSRs based on change in fair value in accordance with FASB ASC 860.   For more information about the Company’s treatment of MSRs, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates – Mortgage Servicing Rights” of this Report.
 
 
 
43
 
  
      In the course of conducting the Company’s mortgage lending activities of originating mortgage loans and selling those loans in the secondary market, various representations and warranties are made to the purchasers of the mortgage loans.  These representations and warranties also apply to underwriting the real estate appraisal opinion of value for the collateral securing these loans.  Under the representations and warranties, failure by the Company to comply with the underwriting and/or appraisal standards could result in the Company being required to repurchase the mortgage loan or to reimburse the investor for losses incurred (i.e., make whole requests) if such failure cannot be cured by the Company within the specified period following discovery.  During 2012, 14 mortgage loans totaling $2.1 million were repurchased or otherwise settled as a result of underwriting and appraisal standard exceptions or make whole requests.  Losses of approximately $782,000 were recognized related to these repurchased and make whole loans.  During 2011, seven mortgage loans totaling approximately $803,000 were repurchased or otherwise settled as a result of underwriting and appraisal standard exceptions or make whole requests.  Losses of approximately $181,000 were recognized related to these repurchased and make whole loans.
At December 31, 2012, the Company had reserved approximately $729,000 for potential losses from representation and warranty obligations, compared to a reserve of approximately $959,000 at December 31, 2011.  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.  The decrease in the reserve at December 31, 2012 compared to December 31, 2011 was primarily related to a global repurchase settlement with a third party of approximately $795,000 which limits liability for previously sold mortgage loans.  Under the terms of this agreement, loans sold prior to December 2012 are not eligible for repurchase indemnification or make whole.
Management believes that the Company’s foreclosure process related to mortgage loans continues to operate effectively.  Before beginning the foreclosure process, a mortgage loan foreclosure committee of the Bank reviews the identified delinquent loan.  All documents and activities related to the foreclosure process are executed in-house by mortgage department personnel.
Origination revenue, a component of mortgage lending revenue, is comprised of gains or losses from the sale of the mortgage loans originated, origination fees, underwriting fees and other fees associated with the origination of loans.  Mortgage loan origination volumes of $2.0 billion, $1.2 billion and $1.4 billion produced origination revenue of $53.3 million, $24.3 million and $28.6 million for 2012, 2011 and 2010, respectively.  The increase in mortgage origination revenue in 2012 compared to 2011 was a direct result of the increase in mortgage loan origination volumes during 2012 compared to 2011.  The decrease in customer demand for refinancing contributed to the decrease in mortgage loan origination volumes and the corresponding decrease in origination revenue in 2011 compared to 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 $14.4 million, $12.9 million and $11.9 million for 2012, 2011 and 2010, 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 $7.6 million, $6.2 million and $6.8 million for 2012, 2011 and 2010, respectively.  The Company does not hedge the change in fair value of its MSRs and is susceptible to significant fluctuations in their value in changing interest rate environments.  Reflecting this sensitivity to interest rates, the fair value of MSRs decreased $3.2 million, $14.0 million and $4.0 million in 2012, 2011 and 2010, respectively.


 
44
 


    The following table presents the Company’s mortgage lending operations for 2012, 2011 and 2010:

   
2012
  
2011
  
2010
  
   
Amount
    
% Change
  
Amount
    
% Change
  
Amount
  
   
(Dollars in thousands)
  
Production revenue:
                              
  Origination
   $ 53,296       119.5 %   $ 24,286       (15.2 ) %   $ 28,635  
  Servicing
     14,435       11.6       12,929       8.5       11,920  
  Payoffs/Paydowns
     (7,649 )     (23.8 )     (6,180 )     9.7       (6,781 )
    Total
     60,082       93.6       31,035       (8.1 )     33,774  
Market value adjustment
     (3,163 )     77.4       (13,966 )     (246.6 )     (4,029 )
Mortgage lending revenue
   $ 56,919       233.5     $ 17,069       (42.6 )   $ 29,745  
                                         
   
(Dollars in millions)
  
Origination volume
   $ 1,996       64.6     $ 1,213       (15.8 )   $ 1,440  
                                         
Outstanding principal balance of
                                        
   mortgage loans serviced at year-end
   $ 5,059       17.8     $ 4,293       10.9     $ 3,871  

Credit card, debit card and merchant fees decreased in 2012 compared to 2011 as a result of the impact of the implementation of the Durbin Amendment, which was somewhat offset by the increases in the number and monetary volume of items processed.  Credit card, debit card and merchant fees increased in 2011 compared to 2010 as a result of an increase in the number and monetary volume of items processed.  As a result of the impact of the Durbin Amendment implementation, among other factors, debit card revenue decreased by $10.2 million in 2012 and by $3.0 million in 2011.
Changes in banking regulations and, in particular, the Federal Reserve’s rules pertaining to certain overdraft payments on consumer accounts and the FDIC’s Overdraft Payment Programs and Consumer Protection Final Overdraft Payment Supervisory Guidance, resulted in a decrease in insufficient fund fees during 2012 compared to 2011 and in 2011 compared to 2010.  As a result, service charges on deposit accounts, which include insufficient fund fees, decreased in 2012 when compared to 2011 and in 2011 compared to 2010.  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 decreased in 2012 compared to 2011 primarily as a result of decreases in the value of assets under management or in custody, as revenue is earned on assets under management, combined with non-recurring fees received during 2011 that were not received during 2012.  Trust income increased in 2011 compared to 2010 primarily as a result of increases in the value of assets under management or in custody, as well as non-recurring fees received during 2011 that were not received during 2010.
Net securities gains of approximately $442,000, $12.1 million and $2.6 million were recorded in 2012, 2011 and 2010, respectively.  These amounts reflected the sales and calls of securities from the available-for-sale portfolio and held-to-maturity portfolio.  Some of the sales of available-for-sale securities in 2011 were previously classified as held-to-maturity, because 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.  Any sales of held-to-maturity securities occurred within three months of maturity and were so near maturity that management believed changes in interest rates would not have a significant impact on fair value.  The security activity in 2010 included an other-than-temporary impairment charge of $2.1 million with no other-than-temporary impairment charge recorded in 2012 or 2011.  The other-than-temporary impairment charge related to the Company’s investment in pooled trust preferred securities.  The fair value of these securities was negatively impacted by prevailing market conditions.  Subsequent to the other-than-temporary charges in 2010, the pooled trust preferred securities had no remaining book value.
Insurance commissions increased 3.7%  in 2012 compared to 2011 and increased 5.8% in 2011 compared to 2010 as a result of new policies written and growth from existing customers coupled with the revenue contributed by the acquisition of certain assets of The Securance Group, Inc. on July 2, 2012.  Annuity fees decreased 32.5% in 2012 compared to 2011 as a result of fewer annuity sales combined with reduced commissions on those sales.  Annuity fees increased 34.3% in 2011 compared to 2010 as a result of customers shifting funds from lower rate
 
 
 
45
 
 
deposit accounts to higher rate annuity products.  Brokerage commisions and fees increased in 2012 compared to 2011 as a result of the increase in sales of real estate investment trust products and increased in 2011 compared to 2010 because activity increased subsequent to the first quarter of 2010 as the financial markets recovered somewhat.  Bank-owned life insurance revenue increased 5.4% in 2012 compared to 2011 as a result of the Company recording life insurance proceeds of approximately $872,000 during 2012 compared to recording life insurance proceeds of approximately $658,000 during 2011.  Bank-owned life insurance revenue remained relatively stable in 2011 compared to 2010.
Other miscellaneous income includes safe deposit box rental income, gain or loss on disposal of assets, and other non-recurring revenue items.  Other miscellaneous income decreased 8.9% in 2012 compared to 2011 and increased 15.0% in 2011 compared to 2010 primarily as a result of gains of $2.2 million on the dispositions of fixed assets during 2011.

Noninterest Expense
The components of noninterest expense for the years ended December 31, 2012, 2011 and 2010 and the percentage change between years are shown in the following table:


   
2012
    
2011
    
2010
  
   
Amount
    
% Change
    
Amount
    
% Change
    
Amount
  
   
(Dollars in thousands)
  
Salaries and employee benefits
   $ 304,624       7.7 %   $ 282,880       4.1 %   $ 271,688  
Occupancy, net
     42,140       (0.5 )     42,362       (1.5 )     43,008  
Equipment
     20,849       (4.0 )     21,707       (3.9 )     22,598  
Deposit insurance assessments
     16,478       (22.7 )     21,316       10.7       19,259  
Prepayment penalty on FHLB borrowings
     -    
NM
       9,778    
NM
       -  
Advertising
     4,869       (4.5 )     5,098       (4.8 )     5,354  
Foreclosed property expense
     39,406       41.8       27,796       51.4       18,355  
Telecommunications
     8,515       1.5       8,386       (11.4 )     9,466  
Public relations
     5,434       (5.1 )     5,727       (5.9 )     6,088  
Data Processing
     10,234       5.8       9,677       59.5       6,068  
Computer software
     7,476       (0.3 )     7,502       2.3       7,334  
Amortization of intangibles
     3,222       (3.1 )     3,324       (15.0 )     3,909  
Legal fees
     9,334       1.8       9,170       50.3       6,102  
Postage and shipping
     4,465       (7.2 )     4,812       (4.6 )     5,044  
Other miscellaneous expense
     72,147       (2.6 )     74,098       18.1       62,760  
Total noninterest expense
   $ 549,193       2.9 %   $ 533,633       9.6 %   $ 487,033  
NM = not meaningful
                                        

Salaries and employee benefits increased in 2012 compared to 2011 because of increased employee benefits and incentive compensation.  Salaries and employee benefits increased slightly in 2011 compared to 2010 primarily because of an increase in insurance commissions as insurance revenue increased over the same periods combined with an increase in the cost of employee health care benefits and pension expenses.  Pension plan costs, a component of salaries and employee benefits expense, increased in 2012 to $10.9 million after increasing in 2011 to $4.9 million from $3.7 million in 2010.  Occupancy expense remained relatively stable in 2012, 2011 and 2010.
Equipment expense decreased in 2012 and 2011 as a result of a decrease in depreciation expense coupled with the Company’s continued focus on controlling such expenses.  The decrease in deposit insurance assessments in 2012 compared to 2011 was a result of improvement evidenced in various variables utilized by the FDIC in calculating the deposit insurance assessment.  The increase in deposit insurance assessments in 2011 compared to 2010 was primarily a result of a slightly higher assessment rate.  Effective as of the second quarter of 2011, the FDIC bases the deposit insurance assessment on a redefined assessment base and a new scorecard method to calculate the assessment rate.  During the second quarter of 2011, the Company recorded $9.8 million in expenses related to the early repayment of FHLB advances.  No early repayments were made during 2012 or 2010.
Foreclosed property expense increased in 2012 and 2011 as the Company experienced losses on the sale and larger writedowns of OREO as a result of the decline in property values attributable to the prevailing economic
 
 
 
46
 
 
environment combined with the increased other foreclosed property expenses as a result of the increase in the number of OREO properties during 2011 and the first half of 2012.  During 2012, the Company added $32.4 million to OREO through foreclosure.  Sales of OREO in 2012 were $81.2 million resulting in a net loss on sale of OREO of $8.4 million.  The components of foreclosed property expense for the years ended December 31, 2012, 2011 and 2010 and the percentage change between years are shown in the following table:
   
2012
  
2011
  
2010
  
   
Amount
    
% Change
  
Amount
    
% Change
  
Amount
  
   
(Dollars in thousands)
  
Loss on sale of other real estate owned
   $ 8,446       682.8 %   $ 1,079       (71.3 ) %   $ 3,762  
Writedown of other real estate owned
     21,726       6.7       20,353       95.1       10,432  
Other foreclosed property expense
     9,234       45.1       6,364       52.9       4,161  
Total foreclosed property expense
   $ 39,406       41.8 %   $ 27,796       51.4 %   $ 18,355  

While the Company experienced some fluctuations in various components of other noninterest expense, including public relations, data processing, postage and shipping and amortization of intangibles, total noninterest expense remained relatively stable during 2012 compared to 2011.  The increase in the other components of noninterest expense in 2011 compared to 2012 primarily related to market increases and general inflation in the cost of services and supplies purchased by the Company during 2011, as well as accruals for litigation contingencies and a one-time expense of $3.1 million related to the closure of 22 branch offices under the Company’s branch optimization project.

Income Taxes
The Company recorded income tax expense of $33.3 million in 2012 compared to an income tax expense of $4.4 million in 2011 and an income tax benefit of $8.7 million in 2010.  The increase in income tax expense in 2012 was primarily a result of the increase in pre-tax income, which increased 179.5% in 2012 compared to 2011.  The increase in income tax expense in 2011 was primarily a result of the increase in pre-tax income, which increased 195.3% in 2011 compared to 2010, while tax preference items, such as tax-exempt interest income, remained relatively consistent with prior years.  The primary differences between the Company’s recorded expense for 2012 and the expense that would have resulted from applying the U.S. statutory tax rate of 35% to the Company’s pre-tax income were the effects of tax-exempt income and other tax preference items.

FINANCIAL CONDITION

The percentage of earning assets to total assets measures the effectiveness of management’s efforts to invest available funds into the most efficient and profitable uses.  Earning assets at December 31, 2012 were $12.2 billion, or 90.9% of total assets, compared with $11.8 billion, or 90.6% of total assets, at December 31, 2011.

Loans and Leases
The Bank’s loan and lease portfolio represents the largest single component of the Company’s earning asset base, comprising 72.9% of average earning assets during 2012.  The Bank’s lending activities include both commercial and consumer loans and leases.  Loan and lease originations are derived from a number of sources, including direct solicitation by the Bank’s loan officers, existing depositors and borrowers, builders, attorneys, walk-in customers and, in some instances, other lenders, real estate broker referrals and mortgage loan companies.  The Bank has established systematic procedures for approving and monitoring loans and leases that vary depending on the size and nature of the loan or lease, and applies these procedures in a disciplined manner.  The Company’s loans and leases are widely diversified by borrower and industry.  Loans and leases, net of unearned income, totaled $8.6 billion at December 31, 2012, representing a 2.6% decrease from $8.9 billion at December 31, 2011.  The decrease in loans and leases, net of unearned income, was primarily a result of continued low loan demand in the markets served by the Company; however, the Company was able to replace some loan runoff with new loan production, particularly in its Alabama, Texas and Louisiana markets.


 
47
 

The following table shows the composition of the Company’s gross loans and leases by collateral type at December 31 for the years indicated:

                               
   
2012
    
2011
    
2010
    
2009
    
2008
  
   
(In thousands)
  
                               
Commercial and industrial
   $ 1,484,788     $ 1,484,967     $ 1,505,471     $ 1,484,011     $ 1,433,690  
Real estate
                                        
  Consumer mortgages
     1,873,875       1,945,190       1,978,145       2,017,067       2,096,568  
  Home equity
     486,074       514,362       543,272       550,085       511,480  
  Agricultural
     256,196       239,487       252,292       262,069       234,024  
  Commercial and industrial-
                                        
     owner occupied
     1,333,103       1,301,575       1,331,473       1,449,554       1,465,027  
  Construction, acquisition and
                                        
     development
     735,808       908,362       1,148,161       1,459,503       1,689,719  
  Commercial
     1,748,881       1,754,022       1,816,951       1,806,766       1,568,956  
Credit cards
     104,884       106,281       106,345       108,086       93,650  
All other
     649,143       657,012       694,241       685,845       647,753  
Total gross loans and leases
   $ 8,672,752     $ 8,911,258     $ 9,376,351     $ 9,822,986     $ 9,740,867  


The following table shows the Company’s net loans and leases by collateral type as of December 31, 2012 by geographical location:


 
Alabama
                      
Greater
                          
 
and Florida
                      
Memphis
          
Texas and
              
 
Panhandle
    
Arkansas*
    
Mississippi*
    
Missouri
    
Area
    
Tennessee*
    
Louisiana
    
Other
    
Total
  
 
(In thousands)
        
Commercial and industrial
 $ 70,132     $ 149,418     $ 386,799     $ 35,240     $ 17,170     $ 74,300     $ 249,405     $ 494,147     $ 1,476,611  
Real estate
                                                                      
   Consumer mortgages
   109,585       262,899       709,251       44,513       79,221       160,906       454,607       52,893       1,873,875  
   Home equity
   60,037       38,082       164,019       22,520       64,710       73,351       62,649       706       486,074  
   Agricultural
   7,461       79,269       68,298       3,782       11,948       13,941       66,979       4,518       256,196  
   Commercial and industrial-owner occupied
   120,318       155,015       494,957       77,951       88,980       89,935       253,088       52,859       1,333,103  
   Construction, acquisition and development
   92,454       68,034       217,763       35,880       77,091       93,414       141,206       9,966       735,808  
   Commercial
   208,676       331,575       353,067       189,993       104,101       98,811       392,027       70,631       1,748,881  
Credit cards**
   -       -       -       -       -       -       -       104,884       104,884  
All other
   32,122       82,825       180,836       8,210       54,332       50,815       97,473       114,944       621,557  
     Total
 $ 700,785     $ 1,167,117     $ 2,574,990     $ 418,089     $ 497,553     $ 655,473     $ 1,717,434     $ 905,548     $ 8,636,989  
                                                                       
*  Excludes the Greater Memphis Area
                                                                
** Credit card receivables are spread across all geographic regions but are not viewed by the Company's management as part of the geographic breakdown.
          

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 remained stable during 2012 increasing by 0.2% at December 31, 2012 compared to December 31, 2011.
Real Estate – Consumer Mortgages - Consumer mortgages are first- or second-lien loans to consumers secured by a primary residence or second home. These loans are generally amortized over terms up to 15 or 20 years with maturities of three to five years.  The loans are generally secured by properties located generally 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 relatively stable, decreasing by 3.7% at December 31, 2012 compared to December 31, 2011.  In addition to loans originated through the Bank’s branches, the Bank originates and services consumer mortgages sold in the secondary market which are underwritten and closed pursuant to investor and agency guidelines.  The Bank’s exposure to sub-prime mortgages is minimal.
Real Estate – Home Equity - Home equity loans include revolving credit lines which are secured by a first or second lien on a borrower’s residence. Each loan is underwritten individually by lenders who specialize in home
 
 
 
48
 
 
equity lending and must conform to Bank lending policies and procedures for consumer loans as to borrower's financial condition, ability to repay, satisfactory credit history and the condition and value of collateral.  Properties securing home equity loans are generally located in the local market area of  the Bank branch or office originating and servicing the loan.  The Bank has not purchased home equity loans from brokers or other lending institutions.  Home equity loans outstanding decreased 5.5% from December 31, 2011 to December 31, 2012. 
    Real Estate – Agricultural - Agricultural loans include loans to purchase agricultural land and production lines secured by farm land.  Agricultural loans outstanding increased 7.0% from December 31, 2011 to December 31, 2012.
    Real Estate – Commercial and Industrial-Owner Occupied - Commercial and industrial-owner occupied loans include loans secured by business facilities to finance business operations, equipment and owner-occupied facilities primarily for small and medium-sized enterprises. These include both lines of credit for terms of one year or less and term loans which are amortized over the useful life of the assets financed. Personal guarantees are generally required for these loans.  Commercial and industrial-owner occupied loans remained stable during 2012, increasing 2.4% from December 31, 2011 to December 31, 2012.
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. Prior to March 2010, these loans were often structured with interest reserves to fund interest costs during the construction and development period.  Additionally, certain loans are structured with interest only terms.  The Bank primarily engages in construction and development lending only in local markets served by its branches. The weakened economy and housing market has negatively impacted builders and developers in particular.  Sales of finished houses slowed during 2009 and activity has remained relatively slow since then, which has resulted in lower demand for residential lots and development land.  The Company curtailed the origination of new construction, acquisition and development loans significantly during 2009 and the Company has continued to maintain that strategy.  Construction, acquisition and development loans decreased 19.0% from December 31, 2011 to December 31, 2012.
The underwriting process for construction, acquisition and development loans with interest reserves is essentially the same as that for a loan without interest reserves and may include analysis of borrower and guarantor financial strength, market demand for the proposed project, experience and success with similar projects, property values, time horizon for project completion and the availability of permanent financing once the project is completed.  The Company’s loan policy generally prohibits the use of interest reserves on loans originated after March 2010.  Construction, acquisition and development loans, with or without interest reserves, are inspected periodically to ensure that the project is on schedule and eligible for requested draws.  Inspections may be performed by construction inspectors hired by the Company or by appropriate loan officers and are done periodically to monitor the progress of a particular project.  These inspections may also include discussions with project managers and engineers.  For performing construction, acquisition and development loans, interest is generally recognized as interest income as it is earned.  Non-performing construction, acquisition and development loans are placed on non-accrual status and interest income is not recognized, except in those situations where principal is expected to be received in full.  In such situations, interest income is recognized as payment is received.
At December 31, 2012, the Company had $11.8 million in construction, acquisition and development loans that provided for the use of interest reserves with approximately $584,000 recognized as interest income during 2012.  The amount of such loans with interest reserves that were on non-accrual status was $1.6 million at December 31, 2012.  Interest income is not being 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 considered non-performing and are generally placed in nonaccrual status.  Procedures are in place to restrict the structuring of a loan with terms that do not require performance until the end of the loan term, as well as to restrict the advancement of funds to keep a loan from becoming non-performing with any such advancement identified as a TDR.
On a case-by-case basis, a construction, acquisition and development loan may be extended, renewed or restructured.  Loans are sometimes extended for a short period of time (generally 90 days or less) beyond the
 
 
 
49
 

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 consistent with 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 is further categorized by risk characteristics into the following six categories: commercial acquisition and development; residential acquisition and development; multi-family construction; one-to-four family construction; commercial construction; and recreation and all other loans.  Construction, acquisition and development loans were $735.8 million and $908.4 million at December 31, 2012 and 2011, respectively.  The following table shows the Company’s net loans and leases in the construction, acquisition and development portfolio by geographical location at December 31, 2012:


   
Alabama
                      
Greater
                          
Real Estate Construction,
  
and Florida
                      
Memphis
          
Texas and
              
Acquisition and Development
  
Panhandle
    
Arkansas*
    
Mississippi*
    
Missouri
    
Area
    
Tennessee*
    
Louisiana
    
Other
    
Total
  
Performing:
  
(In thousands)
        
Multi-family construction
   $ -     $ -     $ 10     $ -     $ -     $ 4,550     $ 1,982     $ -     $ 6,542  
One-to-four family construction
     23,399       11,962       40,781       5,342       8,155       41,344       34,930       89       166,002  
Recreation and all other loans
     1,520       8,709       12,610       301       3,120       3,552       13,851       -       43,663  
Commercial construction
     15,024       11,694       38,822       2,023       7,690       7,849       23,287       1,821       108,210  
Commercial acquisition and development
     12,019       16,913       50,102       8,099       18,962       12,360       23,998       1,298       143,751  
Residential acquisition and development
     23,264       17,354       67,656       8,089       19,963       16,558       38,018       4,740       195,642  
     Total
   $ 75,226     $ 66,632     $ 209,981     $ 23,854     $ 57,890     $ 86,213     $ 136,066     $ 7,948     $ 663,810  
                                                                         
Non-performing:
                                                                        
Multi-family construction
   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
One-to-four family construction
     3,649       227       2,167       2,698       1,896       117       254       382       11,390  
Recreation and all other loans
     -       17       44       -       777       167       172       -       1,177  
Commercial construction
     2,650       150       -       91       -       2,379       619       -       5,889  
Commercial acquisition and development
     3,049       93       1,369       1,658       6,824       2,442       2,359       1       17,795  
Residential acquisition and development
     7,880       916       4,202       7,579       9,704       2,096       1,735       1,635       35,747  
     Total
   $ 17,228     $ 1,403     $ 7,782     $ 12,026     $ 19,201     $ 7,201     $ 5,139     $ 2,018     $ 71,998  
                                                                         
Total:
                                                                        
Multi-family construction
   $ -     $ -     $ 10     $ -     $ -     $ 4,550     $ 1,982     $ -     $ 6,542  
One-to-four family construction
     27,048       12,189       42,948       8,040       10,051       41,461       35,184       471       177,392  
Recreation and all other loans
     1,520       8,726       12,654       301       3,897       3,719       14,023       -       44,840  
Commercial construction
     17,674       11,844       38,822       2,114       7,690       10,228       23,906       1,821       114,099  
Commercial acquisition and development
     15,068       17,006       51,471       9,757       25,786       14,802       26,357       1,299       161,546  
Residential acquisition and development
     31,144       18,270       71,858       15,668       29,667       18,654       39,753       6,375       231,389  
     Total
   $ 92,454     $ 68,035     $ 217,763     $ 35,880     $ 77,091     $ 93,414     $ 141,205     $ 9,966     $ 735,808  
                                                                         
*  Excludes the Greater Memphis Area
                                                                        




 
50
 


The following table shows the maturity distribution of the Company’s net loans and leases in the construction, acquisition and development portfolio as of December 31, 2012:

Real Estate Construction,
        
One Year
    
One to
    
After
        
Acquisition and Development
  
Past Due
    
or Less
    
Five Years
    
Five Years
    
Total
  
Outstanding loan balances:
  
(In thousands)
  
Multi-family construction
   $ -     $ 4,479     $ 2,063     $ -     $ 6,542  
One-to-four family construction
     1,366       161,548       14,197       281       177,392  
Recreation and all other loans
     777       12,759       25,692       5,612       44,840  
Commercial construction
     1,695       59,874       36,033       16,497       114,099  
Commercial acquisition and development
     8,689       73,772       76,645       2,440       161,546  
Residential acquisition and development
     2,709       136,417       85,005       7,258       231,389  
     Total
   $ 15,236     $ 448,849     $ 239,635     $ 32,088     $ 735,808  
                                         
Non-accrual loans:
                                        
Multi-family construction
   $ -     $ -     $ -     $ -     $ -  
One-to-four family construction
     862       7,205       2,338       204       10,609  
Recreation and all other loans
     777       340       43       -       1,160  
Commercial construction
     1,695       2,509       1,685       -       5,889  
Commercial acquisition and development
     7,729       5,472       4,136       -       17,337  
Residential acquisition and development
     2,538       26,066       3,036       -       31,640  
     Total
   $ 13,601     $ 41,592     $ 11,238     $ 204     $ 66,635  
As of December 31, 2012, 61.0% of the loans in the construction, acquisition and development portfolio were scheduled to mature within one year.  Many of these maturities may occur prior to the completion of the related projects; and management expects 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 over $250,000 that is renewed.  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.
The following table presents the activity in the construction, acquisition and development nonaccrual loans for 2012:

   
(In thousands)
  
Balance at December 31, 2011
   $ 133,110  
Additions to construction, acquisition and development nonaccruals:
        
Formation of new nonaccrual loans
     25,567  
Reductions in construction, acquisition and development nonaccruals:
        
Charge-offs
     (32,823 )
Foreclosures to OREO
     (10,679 )
Payments
     (56,611 )
Transfers to accrual status
     (872 )
Transfer from other loan category
     8,943  
Balance at December 31, 2012
   $ 66,635  

The five largest credits that made up the construction, acquisition and development nonaccrual loan balance at December 31, 2012 were located throughout the Company’s geographical locations and in various stages of development and maturity.  The five largest credits made up 10.4% of the total construction, acquisition and development nonaccrual loan balance at December 31, 2012.
Real Estate – Commercial - Commercial loans include loans to finance income-producing commercial and multi-family properties.  Lending in this category is generally limited to properties located in the Company’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
 
 
51
 
 
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.  Real estate-commercial loans remained stable during 2012, decreasing 0.3% at December 31, 2012 compared to December 31, 2011.
    Credit Cards - Credit cards include consumer and business MasterCard and Visa accounts.  The Bank offers credit cards primarily to its deposit and loan customers.  Credit card balances remained stable in 2012, decreasing 1.3% at December 31, 2012 compared to December 31, 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 remained stable during 2012, decreasing 0.9% at December 31, 2012 compared to December 31, 2011.
The maturity distribution of the Company’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 December 31, 2012:


   
One Year
    
One to
    
After
  
   
or Less
    
Five Years
    
Five Years
  
   
(In thousands)
  
Commercial and industrial
   $ 918,311     $ 422,443     $ 135,857  
Real estate
                        
  Consumer mortgages
     434,002       1,057,930       381,943  
  Home equity
     113,303       372,600       171  
  Agricultural
     65,622       135,520       55,054  
  Commercial and industrial-owner occupied
     253,294       672,319       407,490  
  Construction, acquisition and development
     464,085       239,636       32,087  
  Commercial
     410,818       1,010,203       327,860  
Credit cards
     104,884       -       -  
All other
     211,090       339,517       70,950  
Total loans and leases, net of unearned income
   $ 2,975,409     $ 4,250,168     $ 1,411,412  


The interest rate sensitivity of the Company’s loan and lease portfolio is important in the management of net interest margin.  The Bank attempts to manage the relationship between the interest rate sensitivity of its assets and liabilities to produce an effective interest differential that is not significantly impacted by the level of interest rates.  The following table shows the interest rate sensitivity of the Company’s loans and leases, net of unearned income, due after one year as of December 31, 2012:

   
Fixed
    
Variable
  
   
Rate
    
Rate
  
   
(In thousands)
  
   
Loan and lease portfolio
  Due after one year
   $ 4,014,514     $ 2,193,483  


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 Company’s policy provides that loans and leases are generally placed in non-accrual status if, in management’s opinion, payment in full of principal or interest is not expected or payment of principal or interest is more than 90 days past due, unless the loan or lease is both well-secured and in the process of collection.  NPAs consist of NPLs and other real estate owned, which consists of foreclosed properties.  NPAs, which are carried either in the loan account or other real estate owned on the Company’s consolidated balance sheets, depending on foreclosure status, were as follows at the end of each year presented:

 
 
52
 
 
   
2012
    
2011
    
2010
    
2009
    
2008
  
   
(Dollars in thousands)
  
Non-accrual loans and leases
   $ 207,241     $ 276,798     $ 347,499     $ 144,013     $ 28,168  
Loans 90 days or more past due, still accruing
     1,210       3,434       8,500       36,301       33,373  
Restructured loans and leases, but accruing
     25,099       42,018       38,376       6,161       2,472  
Total NPLs
     233,550       322,250       394,375       186,475       64,013  
                                         
Other real estate owned
     103,248       173,805       133,412       59,265       46,317  
Total NPAs
   $ 336,798     $ 496,055     $ 527,787     $ 245,740     $ 110,330  
                                         
NPLs to net loans and leases
     2.70 %     3.63 %     4.23 %     1.91 %     0.66 %
NPAs to net loans and leases
     3.90 %     5.59 %     5.65 %     2.51 %     1.14 %

NPLs decreased 27.5% in 2012 compared to 2011 and decreased 18.3% in 2011 compared to 2010.  Other real estate owned decreased 40.6% in 2012 compared to 2011 after increasing 30.3% in 2011 compared to 2010.  Included in NPLs at December 31, 2012 were $156.7 million of loans that were impaired.  These impaired loans had a specific reserve of $10.5 million included in the allowance for credit losses of $164.5 million at December 31, 2012, and were net of $49.3 million in partial charge-downs previously taken on these impaired loans.    NPLs at December 31, 2011 included $234.9 million of loans that were impaired and had a specific reserve of $39.7 million included in the allowance for credit losses of $195.2 million at December 31, 2011.  While restructured loans and leases still accruing decreased in 2012, the increase in restructured loans and leases still accruing in 2011 and 2010 reflected the increase in loans which met the criteria for disclosure as TDRs because payment terms or pricing had been modified by the Company or by orders under bankruptcy proceedings but which demonstrated sufficient performance to support the remaining principal and accrued interest.
The following table provides additional details related to the Company’s NPLs and the allowance for credits losses at December 31 for the years indicated:
 
 
 
53
 
 
       
   
2012
    
2011
  
   
(Dollars in thousands)
  
             
Unpaid principal balance of impaired loans
   $ 206,072     $ 287,099  
Cumulative charge offs on impaired loans
     49,344       52,176  
Outstanding balance of impaired loans
     156,728       234,923  
                 
Other non-accrual loans and leases not impaired
     50,513       41,875  
                 
     Total non-accrual loans and leases
   $ 207,241     $ 276,798  
                 
Allowance for impaired loans
     10,541       39,708  
                 
     Nonaccrual loans and leases, net of specific reserves
   $ 196,700     $ 237,090  
                 
Loans and leases 90+ past due, still accruing
     1,210       3,434  
Restructured loans and leases, still accruing
     25,099       42,018  
                 
     Total non-performing loans and leases
   $ 233,550     $ 322,250  
                 
Allowance for impaired loans
   $ 10,541     $ 39,708  
Allowance for all other loans and leases
     153,925       155,410  
                 
     Total allowance for credit losses
   $ 164,466     $ 195,118  
                 
                 
Outstanding balance of impaired loans
   $ 156,728     $ 234,923  
Allowance for impaired loans
     10,541       39,708  
                 
     Net book value of impaired loans
   $ 146,187     $ 195,215  
                 
                 
Net book value of impaired loans as a %
                
     of unpaid principal balance
     71 %     68 %
                 
Coverage of other non-accrual loans and leases not impaired
                
     by the allowance for all other loans and leases
     305 %     371 %
                 
Coverage of non-performing loans and leases not impaired
                
     by the allowance for all other loans and leases
     200 %     178 %
 
 

Non-accrual loans at December 31, 2012 reflected a decrease of $70.0 million, or 25.1%, to $207.2 million from $276.8 million at December 31, 2011 after decreasing $70.7 million, or 20.4%, from $347.5 million at December 31, 2010.  The Bank’s NPL levels over the past several years have been reflective of the continuing effects of the prevailing economic environment on the Bank’s loan portfolio, as a significant portion of the prior increases in the Bank’s NPLs was attributable to problems developing for established customers with real estate related loans, particularly residential construction and development loans, primarily in the Bank’s more urban markets. These problems resulted primarily from the decreased liquidity of certain borrowers and third party guarantors, as well as the declines in appraised real estate values for loans which became collateral dependent during the past two years and certain other borrower specific factors.  The decrease in non-accrual loans during 2012 and 2011 was primarily recognized in the real estate construction, acquisition and development portfolio, as non-accrual loans in this portfolio decreased $66.5 million, or 49.9% to $66.6 million at December 31, 2012 after decreasing $78.4 million, or 37.1%, to $133.1 million at December 31, 2011 from $211.5 million at December 31, 2010.  The decrease in the real estate construction, acquisition and development portfolio resulted from charge-offs
 
 
 
 
 
 
of previous non-accrual loans and a reduction in the non-accrual formation related to the real estate construction, acquisition and development portfolio combined with payment received on existing non-accrual loans.
    Of the construction, acquisition and development portfolio, which totaled $735.8 million at December 31, 2012, $480.7 million represented loans made by the Bank’s locations in Alabama, Mississippi and Tennessee, including the greater Memphis, Tennessee area, a portion of which is in northwest Mississippi and Arkansas.  Residential acquisition and development loans were the largest component of the real estate construction, acquisition and development portfolio and totaled $231.4 million at December 31, 2012 with $151.3 million, or 65.4%, of such loans made by the Bank’s locations in Alabama, Mississippi 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 $233.6 million at December 31, 2012, $121.4 million, or 52.0%, were loans made within these markets.  These markets continue to be affected by high inventories of unsold homes, unsold lots and undeveloped land intended for use as housing developments.  Unlike the Bank’s NPL concentrations in Alabama, Mississippi and Tennessee which are being affected by the severe downturn in the housing market, the Missouri market’s NPLs 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 NPLs in the Missouri market are represented by fewer and larger individual credits in the commercial real estate portfolio, some of which pre-date our acquisition of The Signature Bank in 2007.  The following table presents the Company’s NPLs by geographical location at December 31, 2012:

         
90+ Days
          
Restructured
          
NPLs as a
  
         
Past Due still
    
Non-accruing
    
Loans, still
          
% of
  
   
Outstanding
    
Accruing
    
Loans
    
accruing
    
NPLs
    
Outstanding
  
   
(Dollars in thousands)
  
Alabama and Florida Panhandle
   $ 700,785     $ -     $ 37,616     $ 3,620     $ 41,236       5.9 %
Arkansas*
     1,167,117       74       24,174       3,700       27,948       2.4  
Mississippi*
     2,574,990       9       33,631       6,697       40,337       1.6  
Missouri
     418,089       -       35,732       3,111       38,843       9.3  
Greater Memphis Area
     497,553       14       24,629       4,222       28,865       5.8  
Tennessee*
     655,473       -       17,183       1,223       18,406       2.8  
Texas and Louisiana
     1,717,434       10       21,162       291       21,463       1.2  
Other
     905,548       1,103       13,114       2,235       16,452       1.8  
     Total
   $ 8,636,989     $ 1,210     $ 207,241     $ 25,099     $ 233,550       2.7 %
                                                 
*Excludes the Greater Memphis Area
                                                

Other real estate owned decreased by $70.6 million to $103.2 million at December 31, 2012 compared to December 31, 2011 which was an increase of $40.4 million from $133.4 million at December 31, 2010.  The decrease in other real estate owned in 2012 was a result of sales of foreclosed properties exceeding new foreclosures.  Writedowns were the result of continuing processes to value these properties at fair value.  The Bank recorded losses from the loans that were secured by these foreclosed properties in the allowance for credit losses at the time of foreclosure.
The ultimate impact of the economic downturn on the Company’s financial condition and results of operations will depend on its severity and duration.  Continued weakness in the economy could adversely affect the Bank’s volume of NPLs. The Bank will continue to focus on improving and enhancing existing processes related to the early identification and resolution of potential credit problems.  Loans identified as meeting the criteria set out in FASB ASC 310 are identified as TDRs.  The concessions granted most frequently for TDRs involve reductions or delays in required payments of principal and/or interest for a specified time, the rescheduling of payments in accordance with a bankruptcy plan or the charge-off of a portion of the loan.  In most cases, the conditions of the credit also warrant non-accrual status, even after the restructure occurs.  TDR loans may be returned to accrual status in years after the restructure if there has been at least a six-month sustained period of repayment performance under the restructured loan terms by the borrower and the interest rate at the time of restructure was at or above market for a comparable loan.  For reporting purposes, if a restructured loan is 90 days or more past due or has been placed in non-accrual status, the restructured loan is included in the loans 90 days or more past due category or the non-accrual loan category of NPAs.  Total restructured loans were $81.4 million and $104.7 million at December 31, 2012 and 2011, respectively.  Restructured loans of $56.2 million and $62.7 million were included in the non-accrual loan category at December 31, 2012 and 2011, respectively.
The total amount of interest earned on NPLs was $4.3 million, $12.6 million, $11.2 million, $4.1 million and approximately $495,000 in 2012, 2011, 2010, 2009 and 2008, respectively.  The gross interest income that
 
 
 
55
 
 
would have been recorded under the original terms of those loans and leases if they had been performing amounted to approximately $15.6 million, $18.7 million, $21.7 million, $8.4 million and $1.8 million in 2012, 2011, 2010, 2009 and 2008, respectively.
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 contractual terms of the loan agreement.  Loans the Bank considered impaired, which were included in NPLs, totaled $156.7 million, $234.9 million, $273.4 million, $128.5 million and $25.5 million at December 31, 2012, 2011, 2010, 2009 and 2008, respectively, with a valuation allowance of $10.5 million, $39.7 million, $40.7 million, $22.7 million and $9.1 million, respectively.
At December 31, 2012, the Company did not have any concentration of loans or leases in excess of 10% of total loans and leases outstanding which were not otherwise disclosed as a category of loans or leases.  Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions.  The Bank conducts business in a geographically concentrated area and has a significant amount of loans secured by real estate to borrowers in varying activities and businesses, but does not consider these factors alone in identifying loan concentrations.  The ability of the Bank’s borrowers to repay loans is somewhat dependent upon the economic conditions prevailing in the Bank’s market areas.
The Company utilizes an internal loan classification system to grade loans according to certain credit quality indicators.  These credit quality indicators include, but are not limited to, recent credit performance, delinquency, liquidity, cash flows, debt coverage ratios, collateral type and loan-to-value ratio.  The following table provides details of the Company’s loan and lease portfolio, net of unearned income, by segment, class and internally assigned grade at December 31, 2012:

         
Special
                                
   
Pass
    
Mention
    
Substandard
    
Doubtful
    
Loss
    
Impaired
    
Total
  
   
(In thousands)
  
Commercial and industrial
   $ 1,426,498     $ 14,663     $ 29,876     $ 729     $ -     $ 4,845     $ 1,476,611  
Real estate
                                                        
  Consumer mortgage
     1,691,682       32,840       131,141       2,907       198       15,107       1,873,875  
  Home equity
     461,151       4,791       17,619       1,057       76       1,380       486,074  
  Agricultural
     227,138       5,729       17,947       -       -       5,382       256,196  
  Commercial and industrial-owner occupied
     1,202,111       31,087       82,816       369       -       16,720       1,333,103  
  Construction, acquisition and development
     567,881       30,846       75,031       715       -       61,335       735,808  
  Commercial
     1,524,262       53,455       120,591       160       -       50,413       1,748,881  
Credit cards
     104,884       -       -       -       -       -       104,884  
All other
     600,807       8,397       10,196       601       10       1,546       621,557  
    Total
   $ 7,806,414     $ 181,808     $ 485,217     $ 6,538     $ 284     $ 156,728     $ 8,636,989  

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 at the time do not yet meet the criteria for disclosure as NPLs.  However, based upon past experiences, some of these loans and leases with potential weaknesses will ultimately be restructured or placed in non-accrual status.  At December 31, 2012, the Bank had $5.9 million of potential problem loans or leases or loans and leases with potential weaknesses that were not included in the non-accrual loans and leases or in the loans 90 days or more past due categories.  These loans or leases are included in the above rated categories.  Loans with identified weaknesses based upon analysis of the credit quality indicators are included in the 90 days or more past due category or in the non-accrual loan and lease category which includes impaired loans.  See Note 5 to the Company’s Consolidated Financial Statements included elsewhere in this Report for additional information regarding the Company’s internal loan classification system.
The following table provides details regarding the aging of the Company’s loan and lease portfolio, net of unearned income, by internally assigned grade at December 31, 2012:
 

 
 
56
 
 
         
30-59 Days
    
60-89 Days
    
90+ Days
        
   
Current
    
Past Due
    
Past Due
    
Past Due
    
Total
  
   
(In thousands)
  
Pass
   $ 7,799,802     $ 6,605     $ 7     $ -     $ 7,806,414  
Special Mention
     180,025       1,009       774       -       181,808  
Substandard
     445,425       20,155       5,894       13,743       485,217  
Doubtful
     5,384       331       200       623       6,538  
Loss
     182       20       16       66       284  
Impaired
     113,987       1,195       4,633       36,913       156,728  
     Total
   $ 8,544,805     $ 29,315     $ 11,524     $ 51,345     $ 8,636,989  

While an increase of 45.8% occurred in the Special Mention category, all other loan grade categories decreased at December 31, 2012 compared to December 31, 2011, specifically the Substandard and Impaired categories which decreased 25.9% and 33.3%, respectively.  Of the $181.8 million of Special Mention loans and leases, 99.0% remained current as to scheduled repayment of principal and interest, with no Special Mention loans having outstanding balances that were 90 days or more past due at December 31, 2012.  Of the $485.2 million of Substandard loans and leases, 91.8% remained current as to scheduled repayment of principal and interest, with only 2.8% having outstanding balances that were 90 days or more past due at December 31, 2012.  Of the $156.7 million of Impaired loans and leases, 72.7% remained current as to scheduled repayment of principal and/or interest, with 23.6% having outstanding balances that were 90 days or more past due at December 31, 2012.
The following table provides details regarding the aging of the Company’s nonaccrual loans and leases by segment and class at December 31, 2012:

   
30-59 Days
    
60-89 Days
    
90+ Days
    
Total
          
Total
  
   
Past Due
    
Past Due
    
Past Due
    
Past Due
    
Current
    
Outstanding
  
   
(In thousands)
  
Commercial and industrial
   $ 745     $ 182     $ 3,704     $ 4,631     $ 4,680     $ 9,311  
Real estate
                                                
   Consumer mortgages
     1,316       4,762       13,308       19,386       16,747       36,133  
   Home equity
     334       232       350       916       2,581       3,497  
   Agricultural
     94       102       3,936       4,132       3,455       7,587  
   Commercial and industrial-owner occupied
     292       287       2,914       3,493       17,417       20,910  
   Construction, acquisition and development
     584       2,426       14,790       17,800       48,835       66,635  
   Commercial
     3,498       2,133       10,469       16,100       41,556       57,656  
Credit cards
     26       55       246       327       88       415  
All other
     185       111       418       714       4,383       5,097  
     Total
   $ 7,074     $ 10,290     $ 50,135     $ 67,499     $ 139,742     $ 207,241  
At December 31, 2012, 56.0% of nonaccrual loans and leases were considered paying as agreed.  Nonaccrual loans that are considered paying as agreed include loans that are less than 30 days delinquent, require payments at least quarterly and are not being reviewed for restructure.
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 Company’s loan and lease portfolio, net of unearned income, and the distribution of NPLs at December 31, 2012:
 
 
57
 

                                     
         
90+ Days
          
Restructured
          
NPLs as a
  
         
Past Due still
    
Non-accruing
    
Loans, but
          
% of
  
Loans and leases, net of unearned income
  
Outstanding
    
Accruing
    
Loans
    
Accruing
    
NPLs
    
Outstanding
  
   
(Dollars in thousands)
  
Commercial and industrial
   $ 1,476,611     $ 414     $ 9,311     $ 519     $ 10,244       0.7 %
Real estate
                                                
   Consumer mortgages
     1,873,875       512       36,133       4,041       40,686       2.2  
   Home equity
     486,074       -       3,497       -       3,497       0.7  
   Agricultural
     256,196       10       7,587       445       8,042       3.1  
   Commercial and industrial-owner occupied
     1,333,103       19       20,910       7,332       28,261       2.1  
   Construction, acquisition and development
     735,808       -       66,635       5,363       71,998       9.8  
   Commercial
     1,748,881       -       57,656       4,540       62,196       3.6  
Credit cards
     104,884       228       415       1,877       2,520       2.4  
All other
     621,557       27       5,097       982       6,106       1.0  
     Total
   $ 8,636,989     $ 1,210     $ 207,241     $ 25,099     $ 233,550       2.7 %

The following table provides selected characteristics of the Company’s real estate construction, acquisition and development loans at December 31, 2012:

         
90+ Days
          
Restructured
          
NPL as a
Real Estate Construction,
        
Past Due still
    
Non-accruing
    
Loans, but
          
% of
Acquisition and Development
  
Outstanding
    
Accruing
    
Loans
    
Accruing
    
NPLs
    
Outstanding
   
(Dollars in thousands)
Multi-family construction
   $ 6,542     $ -     $ -     $ -     $ -       - %
One-to-four family construction
     177,392       -       10,609       781       11,390       6.4  
Recreation and all other loans
     44,840       -       1,160       17       1,177       2.6  
Commercial construction
     114,099       -       5,889       -       5,889       5.2  
Commercial acquisition and development
     161,546       -       17,337       458       17,795       11.0  
Residential acquisition and development
     231,389       -       31,640       4,107       35,747       15.4  
     Total
   $ 735,808     $ -     $ 66,635     $ 5,363     $ 71,998       9.8 %

Securities
The Company uses the Bank’s securities portfolio 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 the second quarter of 2011, management determined that it would be in the Company’s best interest to prepay a portion of its long-term FHLB borrowings.  In the course of that evaluation, management also determined certain securities classified as held-to-maturity should be sold as their terms more closely aligned with the FHLB borrowings which assisted in the mitigation of interest rate risk.  Based on the change in intent not to hold to maturity, the Company transferred all held-to-maturity securities to the available-for-sale category during the second quarter of 2011.  The following tables show the carrying value of the Company’s held-to-maturity and available-for-sale securities by investment category at December 31, 2012, 2011, and 2010:


   
2012
    
2011
    
2010
  
   
(In thousands)
  
Held-to-maturity Securities:
                  
U. S. Government agency
                  
  securities
   $ -     $ -     $ 1,246,649  
Taxable obligations of states
                        
  and political subdivisions
     -       -       37,103  
Tax-exempt obligations of states
                        
  and political subdivisions
     -       -       329,267  
                         
                  Total
   $ -     $ -     $ 1,613,019  
 

 
 
58
 

   
2012
    
2011
    
2010
  
   
(In thousands)
  
Available-for-sale Securities:
                  
U. S. Government agency
                  
  securities
   $ 1,401,996     $ 1,501,243     $ 433,158  
Government agency issued residential
                        
  mortgage-backed securities
     366,875       404,610       503,229  
Government agency issued commercial
                        
  mortgage-backed securities
     91,445       34,599       29,994  
Taxable obligations of states
                        
  and political subdivisions
     110,731       113,343       38,019  
Tax-exempt obligations of states
                        
  and political subdivisions
     455,142       450,177       72,146  
Collateralized debt obligations
     -       -       -  
Other securities
     7,843       9,546       19,516  
                         
                  Total
   $ 2,434,032     $ 2,513,518     $ 1,096,062  


A portion of the Company's securities portfolio continues to be tax-exempt.  Investments in tax-exempt securities totaled $455.1 million at December 31, 2012, compared to $450.2 million at the end of 2011 and $401.4 million at the end of 2010.  The Company invests only in investment grade securities, with the exception of obligations of certain counties and municipalities within the Company’s market area, and avoids other high yield non-rated securities and investments.
At December 31, 2012, the Company’s available-for-sale securities totaled $2.4 billion.  These securities, which are subject to possible sale, are recorded at fair value.  At December 31, 2012, the Company held no securities whose decline in fair value was considered other than temporary.
The following table shows the maturities and weighted average yields at December 31, 2012 for the carrying value of the available-for-sale securities:


   
Securities Maturing
  
         
After One
    
After Five
              
   
Within
    
But Within
    
But Within
    
After
        
   
One Year
    
Five Years
    
Ten Years
    
Ten Years
    
Total
  
   
(Dollars in thousands)
  
Available-for-sale Securities:
                              
U. S. Government agency
                              
  securities
   $ 435,627     $ 946,307     $ 20,062     $ -     $ 1,401,996  
Government agency issued residential
                                        
  mortgage-backed securities
     102,497       131,201       25,270       107,907       366,875  
Government agency issued commercial
                                        
  mortgage-backed securities
     -       1,884       73,774       15,787       91,445  
Obligations of states and political
                                        
  subdivisions
     23,781       129,012       59,423       353,657       565,873  
Other
     -       20       86       7,737       7,843  
Total
   $ 561,905     $ 1,208,424     $ 178,615     $ 485,088     $ 2,434,032  
                                         
Weighted average yield
     1.90 %     1.68 %     3.23 %     5.39 %        

The yield on tax-exempt obligations of states and political subdivisions has been adjusted to a taxable equivalent basis using a 35% tax rate.
Net unrealized gains on available-for-sale securities as of December 31, 2012 totaled $68.1 million.  Net unrealized gains on available-for-sale securities as of December 31, 2011 totaled $65.5 million.
 
 
 
59
 
  
      The following table shows the available-for-sale securities portfolio by credit rating as obtained from Moody’s Investors Services as of December 31, 2012:


   
Amortized Cost
    
Estimated Fair Value
  
   
Amount
    
% of Total
    
Amount
    
% of Total
  
Available-for-sale Securities:
  
(Dollars in thousands)
  
Aaa
   $ 1,865,615       78.9 %   $ 1,901,099       78.10 %
Aa1 to Aa3
     217,692       9.2 %     233,486       9.59 %
A1 to A3
     24,873       1.1 %     26,375       1.08 %
Baa1 to Baa2
     5,936       0.3 %     6,056       0.25 %
Not rated (1)
     251,846       10.6 %     267,016       10.97 %
   Total
   $ 2,365,962       100.0 %   $ 2,434,032       100.00 %
                                 
(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 $83.7 million and a market value of $90.1 million were rated A- or better by Standard & Poor’s Rating Services.

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 segments 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’s annual goodwill impairment evaluation performed during the fourth quarter of 2012 indicated no impairment of goodwill for its reporting segments as the estimated fair value exceeded the respective carrying value by 23% for the Company’s Community Banking reporting segment and by 26% for the Company’s Insurance Agencies reporting segment.  Therefore, no goodwill impairment was recorded.
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 $275.2 million and $271.3 million at December 31, 2012 and December 31, 2011, respectively.

Other Real Estate Owned
OREO was $103.2 million and $173.8 million at December 31, 2012 and 2011, respectively.  OREO at December 31, 2012 had aggregate loan balances at the time of foreclosure of $234.8 million.  The following table presents the Company’s OREO by geographical location and collateral type at December 31, 2012:

   
Alabama
                      
Greater
                          
   
and Florida
                      
Memphis
          
Texas and
              
   
Panhandle
    
Arkansas*
    
Mississippi*
    
Missouri
    
Area
    
Tennessee*
    
Louisiana
    
Other
    
Total
  
   
(In thousands)
        
Commercial and industrial
   $ 395     $ -     $ 106     $ -     $ -     $ -     $ -     $ -     $ 501  
Real estate
                                                                        
   Consumer mortgages
     1,714       173       2,220       -       961       624       760       3,665       10,117  
   Home equity
     -       -       -       -       -       -       -       -       -  
   Agricultural
     856       -       99       -       1,089       2,169       212       -       4,425  
   Commercial and industrial-owner occupied
     155       146       1,602       -       2,630       66       146       -       4,745  
   Construction, acquisition and development
     13,610       1,430       15,659       734       35,717       9,535       1,844       448       78,977  
   Commercial
     478       1,420       3       263       819       76       176       -       3,235  
All other
     46       16       227       92       734       12       89       32       1,248  
     Total
   $ 17,254     $ 3,185     $ 19,916     $ 1,089     $ 41,950     $ 12,482     $ 3,227     $ 4,145     $ 103,248  
                                                                         
*  Excludes the Greater Memphis Area
                                                                        
 

Because of the relatively high number of the Bank’s NPLs that have been determined to be collaterally dependent, management expects the resolution of a significant number of these loans to necessitate foreclosure proceedings resulting in further additions to OREO.  While management expects future foreclosure activity in
 
 
60
 
 
virtually all loan categories, the magnitude of NPLs in the construction, acquisition and development portfolio at December 31, 2012 indicated that a majority of additions to OREO in the near-term might be from that category.
At the time of foreclosure, the fair value of construction, acquisition and development properties is typically determined by an appraisal performed by a third party appraiser holding professional certifications.  Such appraisals are then reviewed and evaluated by the Company’s internal appraisal group.  A disposition value appraisal using a 180-360 day marketing period is typically ordered and the OREO is recorded at the time of foreclosure at its disposition value less estimated selling costs.  For residential subdivisions that are not completed, the appraisals reflect the uncompleted status of the subdivision.
To attempt to ensure that OREO is carried at the lower of cost or fair value less estimated selling costs on an ongoing basis, new appraisals are obtained on at least an annual basis and the OREO carrying values are adjusted accordingly.  The type of appraisals typically used for these periodic reappraisals are “Restricted Use Appraisals,” meaning the appraisal is for client use only.   Other indications of fair value are also used to attempt to ensure that OREO is carried at the lower of cost or fair value.  These include listing the property with a broker and acceptance of an offer to purchase from a third party.  If an OREO property is listed with a broker at an amount less than the current carrying value, the carrying value is immediately adjusted to reflect the list price less estimated selling costs and if an offer to purchase is accepted at a price less that the current carrying value, the carrying value is immediately adjusted to reflect that sales price, less estimated selling costs.  The majority of the properties in OREO are actively marketed using a combination of real estate brokers, bank staff who are familiar with the particular properties and/or third parties.

Deposits
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 effectively compete 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 Bank’s noninterest bearing, interest bearing, savings and other time deposits at December 31, 2012, 2011 and 2010 and the percentage change between years:


   
2012
  
2011
  
2010
  
   
Amount
    
% Change
  
Amount
    
% Change
  
Amount
  
   
(Dollars in millions)
  
Noninterest bearing deposits
   $ 2,545       12.1 %   $ 2,270       10.2 %   $ 2,060  
Interest bearing deposits
     4,799       2.0       4,707       (4.6 )     4,932  
Savings
     1,146       15.6       991       14.8       863  
Other time
     2,598       (13.0 )     2,987       (17.8 )     3,635  
Total deposits
   $ 11,088       1.2     $ 10,955       (4.7 )   $ 11,490  

Total deposits remained relatively stable at December 31, 2012 compared to December 31, 2011, increasing by $133.0 million.  The 4.7% decrease in deposits at December 31, 2011 compared to December 31, 2010 was primarily a result of the decrease in other time deposits of 17.8% to $2.9 billion at December 31, 2011 from $3.6 billion at December 31, 2010.
The following table presents the classification of the Bank’s deposits on an average basis for the three years ended December 31, 2012:


 
61
 
 
   
2012
    
2011
    
2010
  
   
Average
    
Average
    
Average
    
Average
    
Average
    
Average
  
   
Amount
    
Rate
    
Amount
    
Rate
    
Amount
    
Rate
  
   
(Dollars in thousands)
  
Noninterest bearing demand deposits
   $ 2,300,428       -     $ 2,078,298       -     $ 1,890,979       -  
Interest bearing demand deposits
     4,784,011       0.34 %     4,907,058       0.46 %     4,649,235       0.76 %
Savings deposits
     1,078,302       0.25 %     943,317       0.34 %     784,504       0.46 %
Other time deposits
     2,773,953       1.43 %     3,322,733       1.86 %     3,782,727       2.22 %
                                                 
    Total deposits
   $ 10,936,694             $ 11,251,406             $ 11,107,445          
The Bank’s other time deposits of $100,000 and greater, including certificates of deposits of $100,000 and greater, at December 31, 2012 had maturities as follows:


Maturing in
  
Amount
  
   
(In thousands)
  
Three months or less
   $ 181,138  
Over three months through six months
     176,226  
Over six months through 12 months
     318,576  
Over 12 months
     547,430  
Total
   $ 1,223,370  

The average maturity of time deposits at December 31, 2012 was approximately 15 months, compared to approximately 14 months at December 31, 2011.

Liquidity and Capital Resources
One of the Company's goals is to provide adequate funds to meet increases in loan demand or any potential increase in the normal level of deposit withdrawals.  This goal is accomplished primarily by generating cash from the Bank’s operating activities and maintaining sufficient short-term liquid assets.  These sources, coupled with a stable deposit base and a historically strong reputation in the capital markets, allow the Company to fund earning assets and maintain the availability of funds.  Management believes that the Bank’s traditional sources of maturing loans and investment securities, sales of loans held for sale, cash from operating activities and a strong base of core deposits are adequate to meet the Company’s liquidity needs for normal operations over both the short-term and the long-term.
To provide additional liquidity, the Company utilizes short-term financing through the purchase of federal funds and securities sold under agreement to repurchase.  All securities sold under agreements to repurchase are accounted for as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest.  Further, the Company maintains a borrowing relationship with the FHLB which provides access to short-term and long-term borrowings.  The Company also has access to the Federal Reserve discount window and other bank lines.  The Company had no short-term borrowings from the FHLB at December 31, 2012, compared to $1.5 million at December 31, 2011.  During the second quarter of 2011, the Company repaid $75.0 million in long-term borrowings from the FHLB decreasing the outstanding balance of long-term borrowings to $33.5 million.  The Company did not repay any long-term borrowings during 2012, and had an outstanding balance of $33.5 million at December 31, 2012.  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 December 31, 2012.  The Company had federal funds purchased and securities sold under agreement to repurchase of $414.6 million and $373.9 million at December 31, 2012 and 2011, respectively.
The Company had non-binding federal funds borrowing arrangements with other banks aggregating $659.0 million at December 31, 2012.  Secured borrowing arrangements utilizing the Company’s securities portfolio also 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.  
 

 
62
 
 
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 the 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 on the consolidated balance sheets of the Company.  The business purpose of these off-balance sheet commitments is the routine extension of credit.  As of December 31, 2012, commitments to extend credit included $130.9 million for letters of credit and $2.0 billion for interim mortgage financing, construction credit, credit card and other revolving line of credit arrangements.  While most of the commitments to extend credit were made at variable rates, included in these commitments were forward commitments to fund individual fixed-rate mortgage loans of $198.3 million at December 31, 2012, with a carrying value and fair value reflecting a gain of $4.1 million, which has been recognized in the Company’s results of operations.  Fixed-rate lending commitments expose the Company to risks associated with increases in interest rates.  As a method to manage these risks, the Company also enters into forward commitments to sell individual fixed-rate mortgage loans.  At December 31, 2012, the Company had $231.2 million in such commitments to sell, with a carrying value and fair value reflecting a loss of approximately $536,000, which has been recognized in the Company’s results of operations.  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 1 consists of common shareholders’ equity and qualifying non-cumulative perpetual preferred stock, less goodwill and certain other intangible assets; and Tier 2 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 1 and Tier 2 capital.  The required minimum ratio levels to be considered adequately capitalized for the Company’s Tier 1 capital, total capital, as a percentage of total risk-adjusted assets, and Tier 1 leverage capital (Tier 1 capital divided by total assets, less goodwill) are 4%, 8% and 4%, respectively.  The Company exceeded the required minimum levels for these ratios at December 31, 2012 and 2011 as follows:

   
December 31, 2012
    
December 31, 2011
  
   
Amount
    
Ratio
    
Amount
    
Ratio
  
   
(Dollars in thousands)
  
BancorpSouth, Inc.
                        
   Tier 1 capital (to risk-weighted assets)
   $ 1,316,905       13.77 %   $ 1,129,746       11.77 %
   Total capital (to risk-weighted assets)
     1,437,320       15.03       1,250,801       13.03  
   Tier 1 leverage capital (to average assets)
     1,316,905       10.25       1,129,746       8.85  


The FDIC’s capital-based supervisory system for insured financial in­stitutions categorizes the capital position for banks into five categories, ranging from “well capitalized” to “critically undercapitalized.”  For a bank to be classified as “well capitalized,” the Tier 1 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 December 31, 2012 and 2011 as follows:

   
December 31, 2012
    
December 31, 2011
  
   
Amount
    
Ratio
    
Amount
    
Ratio
  
   
(Dollars in thousands)
  
BancorpSouth Bank
                        
   Tier 1 capital (to risk-weighted assets)
   $ 1,191,567       12.48 %   $ 1,099,369       11.46 %
   Total capital (to risk-weighted assets)
     1,311,840       13.74       1,220,424       12.73  
   Tier 1 leverage capital (to average assets)
     1,191,567       9.34       1,099,369       8.67  


 
 
63
 
   
     Federal and state banking laws and regulations and state corporate laws restrict the amount of dividends that the Company may declare and pay. For example, under guidance issued by the Federal Reserve Board, as a bank holding company, the Company required to consult with the Federal Reserve before declaring dividends and is to consider eliminating, deferring or reducing dividends if (i) the Company’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends, (ii) the Company’s prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial condition, or (iii) the Company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
In addition, the Company needs the approval of the Federal Reserve and the Bank needs the approval of the FDIC before paying cash dividends. Further, the Bank’s board of directors has approved a resolution requested by the FDIC and the Mississippi Department of Banking and Consumer Finance such that the declaration and payment of dividends will be limited to the Bank’s current net operating income and conditioned upon the prior written consent of the regulators and maintenance of minimum capital ratios. Finally, the Company’s board of directors has approved a resolution requested by the Federal Reserve such that the Company needs the prior approval of the Federal Reserve before making any declaration or payment of dividends on any of its capital stock.

Uses of Capital
Subject to pre-approval of the Federal Reserve and other banking regulators, the Company may pursue acquisitions of depository institutions and businesses closely related to banking that further the Company’s business strategies, including FDIC-assisted transactions.  Management anticipates that consideration for any transactions other than FDIC-assisted transactions would include shares of the Company’s common stock, cash or a combination thereof.
On January 24, 2012, the Company completed an underwritten public offering of 10,952,381 shares of Company common stock at a public offering price of $10.50 per share.  The gross proceeds from the offering, before expenses, were $109.3 million.  Offering expenses were approximately $575,000.  The proceeds from the offering have been and will be used by the Company for general corporate purposes, including to maintain certain capital levels and liquidity at the Company, potentially provide equity capital to the Bank, fund growth either organically or through the acquisition of other financial institutions, insurance agencies, or other businesses that are closely aligned to the operations of the Company, and fund investments in its subsidiaries.
In 2002, the Company issued $128.9 million in 8.15% Junior Subordinated Debt Securities to BancorpSouth Capital Trust I (the “Trust”), a business trust.  The Trust used the proceeds from the issuance of five million shares of 8.15% trust preferred securities, $25 face value per share, to acquire the 8.15% Junior Subordinated Debt Securities.  Both the Junior Subordinated Debt Securities and the trust preferred securities mature on January 28, 2032, and are callable at the option of the Company upon obtaining approval of the Federal Reserve.  The $125.0 million in trust preferred securities issued by the Trust qualifies as Tier 1 capital under Federal Reserve Board guidelines.
The Company assumed $6.2 million in Junior Subordinated Debt Securities and the related $6.0 million in trust preferred securities pursuant to the merger on December 31, 2004 with Business Holding Corporation.  The Company also assumed $6.7 million in Junior Subordinated Debt Securities and the related $6.5 million in trust preferred securities pursuant to the merger on December 1, 2005 with American State Bank Corporation and $18.5 million in Junior Subordinated Debt Securities and the related $18.0 million in trust preferred securities pursuant to the merger on March 1, 2007 with City Bancorp.  The Company’s $30.5 million in assumed trust preferred securities qualifies as Tier 1 capital under Federal Reserve Board guidelines.  The $30.5 million in assumed trust preferred securities are currently callable at the option of the Company upon obtaining approval of the Federal Reserve.  See Note 12 to the Company’s Consolidated Financial Statements included elsewhere in this Report for additional information regarding Junior Subordinated Debt Securities.

Contractual Obligations
The Company has contractual obligations to make future payments on debt and lease agreements.  See Notes 10, 11, 12 and 24 to the Company’s Consolidated Financial Statements included elsewhere in this Report for further disclosures regarding contractual obligations.  The following table summarizes the Company’s contractual obligations at December 31, 2012:
 
 
 
64
 

   
Payment Due by Period
  
         
Less than
    
One to Three
    
Three to Five
    
More than
  
   
Total
    
One Year
    
Years
    
Years
    
Five Years
  
Contractual obligations:
  
(In thousands)
  
Deposit maturities
   $ 11,088,146     $ 10,007,190     $ 824,594     $ 256,149     $ 213  
Junior subordinated debt
     160,312       -       -       -       160,312  
Long-term FHLB borrowings
     33,500       -       3,500       -       30,000  
Short-term FHLB and other borrowings
     63       18       36       9       -  
Operating lease obligations
     17,363       5,072       5,102       2,812       4,377  
Purchase obligations
     38,891       27,983       6,716       2,999       1,193  
Total contractual obligations
   $ 11,338,275     $ 10,040,263     $ 839,948     $ 261,969     $ 196,095  

The Company’s operating lease obligations represent short and long-term operating lease and rental payments for facilities, certain software and data processing and other equipment.  Purchase obligations represent obligations to purchase goods and services that are legally binding and enforceable on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.  The purchase obligation amounts presented above primarily relate to certain contractual payments for services provided related to information technology.

Certain Litigation Contingencies
The nature of the Company’s business ordinarily results in a certain amount of claims, litigation, investigations and legal and administrative investigations and proceedings. Although the Company and its subsidiaries have developed policies and procedures to minimize the impact of legal noncompliance and other disputes, and endeavored to provide reasonable insurance coverage, litigation and regulatory actions present an ongoing risk.
The Company and its subsidiaries are engaged in lines of business that are heavily regulated and involve a large volume of financial transactions and potential transactions with numerous customers or applicants. From time to time, borrowers, customers, former employees and other third parties have brought actions against the Company or its subsidiaries, in some cases claiming substantial damages. Financial services companies are subject to the risk of class action litigation and, from time to time, the Company and its subsidiaries are subject to such actions brought against it. Additionally, the Bank is, and management expects it to be, engaged in a number of foreclosure proceedings and other collection actions as part of its lending and leasing collections activities, which, from time to time, have resulted in counterclaims against the Bank. Various legal proceedings have arisen and may arise in the future out of claims against entities to which the Company is a successor as a result of business combinations. The Company’s insurance has deductibles, and will likely not cover all such litigation or other proceedings or the costs of defense. The Company and its subsidiaries may also be subject to enforcement actions by federal or state regulators, including the Securities and Exchange Commission, the Federal Reserve, the FDIC, the Consumer Financial Protection Bureau, the Department of Justice, state attorneys general and the Mississippi Department of Banking and Consumer Finance.
When and as the Company determines it has meritorious defenses to the claims asserted, it vigorously defends against such claims. The Company will consider settlement of claims when, in management’s judgment and in consultation with counsel, it is in the best interests of the Company to do so.
The Company cannot predict with certainty the cost of defense, the cost of prosecution or the ultimate outcome of litigation and other proceedings filed by or against it, its directors, management or employees, including remedies or damage awards. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with outstanding legal proceedings as well as certain threatened claims (which are not considered incidental to the ordinary conduct of the Company’s business) utilizing the latest and most reliable information available. For matters where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established. For matters where it is probable the Company will incur a loss and the amount can be reasonably estimated, the Company establishes an accrual for the loss. Once established, the accrual is adjusted periodically to reflect any relevant developments. The actual cost of any outstanding legal proceedings or threatened claims, however, may turn out to be substantially higher than the amount accrued. Further, the Company’s insurance will not cover all such litigation, other proceedings or claims, or the costs of defense.
 
 
 
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    While the final outcome of any legal proceedings is inherently uncertain, based on the information available, advice of counsel and available insurance coverage, management believes that the litigation-related expense accrued as of December 31, 2012 is adequate and that any incremental liability arising from the Company’s legal proceedings and threatened claims, including the matters described herein and those otherwise arising in the ordinary course of business, will not have a material adverse effect on the Company's business or consolidated financial condition. It is possible, however, that future developments could result in an unfavorable outcome for or resolution of any one or more of the lawsuits in which the Company or its subsidiaries are defendants, which may be material to the Company’s results of operations for a given fiscal period.
On August 16, 2011, a shareholder filed a putative derivative action purportedly on behalf of the Company in the Circuit Court of Lee County, Mississippi, against certain current and past executive officers and the members of the Board of Directors of the Company. The plaintiff in this shareholder derivative lawsuit asserts that the individual defendants violated their fiduciary duties based upon substantially the same facts as alleged in the now settled securities class action lawsuit described in Item 3 Legal Proceedings above. The plaintiff is seeking to recover damages in an unspecified amount and equitable and/or injunctive relief. Although it is not possible to predict the ultimate resolution or financial liability with respect to this litigation, management is currently of the opinion that the outcome of this lawsuit will not have a material adverse effect on the Company’s business, consolidated financial position or results of operations.
In November 2010, the Company was informed that the Atlanta Regional Office of the SEC had issued an Order of Investigation concerning the Company.  This investigation is ongoing and is primarily focused on the Company’s recording and reporting of its unaudited financial statements, including the allowance and provision for credit losses, its internal control over financial reporting and its communications with the independent auditors prior to the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.  In connection with its investigation, the SEC issued subpoenas for documents and testimony, with which the Company has fully complied.  The Company is cooperating fully with the SEC. No claims have been made by the SEC against the Company or against any individuals affiliated with the Company. At this time, it is not possible to predict when or how the investigation will be resolved or the cost or potential liabilities associated with this matter.
On May 18, 2010, the Bank was named as a defendant in a purported class action lawsuit filed by an Arkansas customer of the Bank in the U.S. District Court for the Northern District of Florida. The suit challenges the manner in which overdraft fees were charged and the policies related to posting order of debit card and ATM transactions. The suit also makes a claim under Arkansas’ consumer protection statute. The plaintiff is seeking to recover damages in an unspecified amount and equitable relief. The case was transferred to pending multi-district litigation in the U.S. District Court for the Southern District of Florida. On May 4, 2012, the judge presiding over the multi-district litigation entered an order certifying a class in this case.  The Bank has filed a petition for leave to appeal the class certification order, which, if granted, would provide the Bank with an immediate right to appeal the class certification order.  At this stage of the lawsuit, management of the Company cannot determine the probability of an unfavorable outcome to the Company. There are significant uncertainties involved in any purported class action litigation.  Although it is not possible to predict the ultimate resolution or financial liability with respect to this litigation, management is currently of the opinion that the outcome of this lawsuit will not have a material adverse effect on the Company’s business, consolidated financial position or results of operations. However, there can be no assurance that an adverse outcome or settlement would not have a material adverse effect on the Company’s consolidated results of operations for a given fiscal period.

 
Recent Pronouncements
In January 2010, the Company adopted a new accounting standard regarding accounting for transfers of financial assets.  This new accounting standard eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets.  The adoption of this new accounting standard regarding accounting for transfers of financial assets has had no material impact on the financial position or results of operations of the Company.
In January 2010, the Company adopted a new accounting standard regarding consolidation of variable interest entities.  This new accounting standard amends existing accounting literature regarding consolidation of variable interest entities to improve financial reporting by enterprises involved with variable interest entities and to
 

 
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provide more relevant and reliable information to users of financial statements.  The adoption of this new accounting standard regarding consolidation of variable interest entities has had no material impact on the financial position or results of operations of the Company.
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.  This 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 to the Company’s Consolidated Financial Statements included in this Report.  This 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 5 and 6 to the Company’s Consolidated Financial Statements included in this Report.  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 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.  This ASU did not have a material impact on the financial position or 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.  This ASU did not 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.  This ASU did not have a material impact 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.  This ASU requires that comprehensive income be presented in either a single continuous statement or in two separate but consecutive statements.  This ASU is effective for interim and annual periods beginning on or after December 15, 2011.  The adoption of this ASU changed the manner in which the Company’s other comprehensive income is disclosed and did not have an impact on the financial position and results of operations of the Company.
In September 2011, the FASB issued an ASU regarding goodwill impairment.  This ASU gives companies the option to perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value
 
 
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is less than its carrying value as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This ASU is effective for interim and annual periods beginning after December 15, 2011.  This ASU did not have a material impact on the financial position and results of operations of the Company.
In July 2012, the FASB issued an ASU regarding indefinite-lived intangible assets impairment.  This ASU permits companies to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test on that asset.  This ASU is effective for interim and annual periods beginning after September 15, 2012.  Early adoption is permitted.  This ASU did not have a material impact on the financial position and results of operations of the Company.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Market risk reflects the risk of economic loss resulting from changes in interest rates and market prices.  This risk of loss can be reflected in either reduced potential net interest revenue in future periods or diminished market values of financial assets.
The Company’s market risk arises primarily from interest rate risk that is inherent in its lending, investment and deposit taking activities.  Financial institutions derive their income primarily from the excess of interest collected over interest paid.  The rates of interest the Company earns on certain of its assets and owes on certain of its liabilities are established contractually for a period of time.  Because market interest rates change over time, the Company is exposed to lower profit margins (or losses) if it cannot adapt to interest rate changes.  Several techniques might be used by a financial institution to minimize interest rate risk.  One approach used by the Company is to periodically analyze its assets and liabilities and make future financing and investing decisions based on payment streams, interest rates, contractual maturities, repricing opportunities and estimated sensitivity to actual or potential changes in market interest rates.  Such activities fall under the broad definition of asset/liability management.  The Company’s primary asset/liability management technique is the measurement of its asset/liability sensitivity, that is, the difference between the amounts of interest-sensitive assets and liabilities that will be refinanced (repriced) during a given period.  If the asset amount to be repriced exceeds the corresponding liability amount for a certain day, month, year or longer period, the Company is in an asset-sensitive position.  In this situation, net interest revenue would increase if market interest rates rose or decrease if market interest rates fell.  If, alternatively, more liabilities than assets will reprice, the Company is in a liability-sensitive position.  Accordingly, net interest revenue would decline when rates rose and increase when rates fell.  These examples assume that interest-rate changes for assets and liabilities are of the same magnitude, whereas actual interest-rate changes generally differ in magnitude for assets and liabilities.
Management seeks to manage interest rate risk through the utilization of various tools that include matching repricing periods for new assets and liabilities and managing the composition and size of the investment portfolio so as to reduce the risk in the deposit and loan portfolios, while at the same time maximizing the yield generated from the portfolio.
Mortgage servicing rights (“MSRs”) are sensitive to changes in interest rates.  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 Company does not hedge the change in fair value of its MSRs and is susceptible to significant fluctuations in their value in changing interest rate environments.
The Company enters into interest rate swaps (derivative financial instruments) to meet the financing, interest rate and equity risk management needs of its customers.  Upon entering into these instruments to meet customer needs, the Company enters into offsetting positions to minimize interest rate and equity risk to the Company.  These instruments are reported at fair value and the value of these positions, which are offsetting, are recorded in other assets and other liabilities on the consolidated balance sheets.
    The table below provides information about the Company’s financial instruments that are sensitive to changes in interest rates as of December 31, 2012.  The expected maturity categories take into account repricing opportunities as well as contractual maturities.  For core deposits without contractual maturities (e.g., interest bearing checking, savings and money market accounts), the table presents cash flows based on management’s judgment concerning their most likely runoff or repricing behaviors.  The fair value of loans, deposits and other
 
 
 
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borrowings are based on the discounted value of expected cash flows using a discount rate that is commensurate with the maturity.  The fair value of securities is based on market prices or dealer quotes.

                                                 
                                             
Fair value
  
   
Principal Amount Maturing/Repricing in:
          
December 31,
  
   
2013
    
2014
    
2015
    
2016
    
2017
    
Thereafter
    
Total
    
2012
  
Rate-sensitive assets:
  
(Dollars in thousands)
  
Fixed interest rate loans and leases
   $ 1,374,232     $ 785,267     $ 724,301     $ 856,718     $ 968,609     $ 679,619     $ 5,388,746     $ 5,303,520  
Average interest rate
     5.13 %     5.39 %     5.29 %     4.95 %     4.59 %     4.64 %     5.00 %        
Variable interest rate loans and leases
   $ 2,836,902     $ 61,634     $ 39,787     $ 38,009     $ 108,166     $ 292,883     $ 3,377,381     $ 3,536,986  
Average interest rate
     4.29 %     5.17 %     5.32 %     4.98 %     3.79 %     4.74 %     4.35 %        
Fixed interest rate securities
   $ 480,374     $ 506,384     $ 312,160     $ 161,364     $ 61,265     $ 844,415     $ 2,365,962     $ 2,434,032  
Average interest rate
     2.27 %     1.95 %     2.06 %     2.98 %     1.36 %     3.86 %     2.77 %        
Other interest bearing assets
   $ 979,800       -       -       -       -       -     $ 979,800     $ 979,800  
Average interest rate
     0.25 %     -       -       -       -       -       0.25 %        
                                                                 
Mortgage servicing rights (1)
     -       -       -       -       -       -     $ 37,882     $ 37,882  
                                                                 
Rate-sensitive liabilities:
                                                                
Savings and  interest bearing checking
   $ 5,945,281       -       -       -       -       -     $ 5,945,281     $ 5,945,281  
Average interest rate
     0.27 %     -       -       -       -       -       0.27 %        
Fixed interest rate time deposits
   $ 1,516,740     $ 577,392     $ 247,202     $ 120,322     $ 135,827     $ 213     $ 2,597,696     $ 2,634,099  
Average interest rate
     0.76 %     2.09 %     2.63 %     1.76 %     1.32 %     9.74 %     1.31 %        
Fixed interest rate borrowings
     -       -       3,555     $ -       -     $ 158,866     $ 162,421     $ 173,626  
Average interest rate
     -       -       4.85  %     -       -       7.38 %     7.32 %        
Variable interest rate borrowings
   $ 371,094     $ 39,800     $ 3,717       -       -       31,446     $ 446,057     $ 445,845  
Average interest rate
     0.07 %     0.09 %     -       -       -       2.98  %     0.28 %        
                                                                 
Rate-sensitive off balance sheet items:
                                                          
Commitments to extend credit for single
                                                          
    family mortgage loans
   $ 198,313       -       -       -       -       -     $ 198,313     $ 198,313  
Average interest rate
     3.20 %     -       -       -       -       -       3.20 %        
Forward contracts to sell individual fixed
                                                          
    rate mortgage loans
   $ 231,197       -       -       -       -       -     $ 231,197     $ 231,197  
Average interest rate
     2.87 %     -       -       -       -       -       2.87 %        
Interest rate swap position to receive
   $ 496,196       -       -       -       -       -     $ 496,196     $ 51,517  
Average interest rate
     2.55 %     -       -       -       -       -       2.55 %        
Interest rate swap position to pay
   $ 496,196       -       -       -       -       -     $ 496,196     $ (52,154 )
Average interest rate
     5.67 %     -       -       -       -       -       5.67 %        
                                                                 
(1) Mortgage servicing rights represent a non-financial asset that is rate-sensitive in that its value is dependent upon the underlying mortgage loans being
  
serviced that are rate-sensitive.
                                                                

For additional information about the Company’s market risk and its strategies for minimizing this risk, see  “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Interest Rate Sensitivity” and “– Interest Rate Risk Management” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Securities.”

 
 
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SELECTED QUARTERLY FINANCIAL DATA


Summary of Quarterly Results
                        
   
Quarter Ended
  
   
March 31
    
June 30
    
Sept. 30
    
Dec. 31
  
2012
  
(In thousands, except per share amounts)
  
Interest revenue
   $ 125,375     $ 123,204     $ 120,750     $ 117,095  
Net interest revenue
     105,610       104,741       103,379       100,861  
Provision for credit losses
     10,000       6,000       6,000       6,000  
Income before income taxes
     32,290       28,703       34,011       22,543  
Income tax expense
     9,424       8,079       10,186       5,563  
Net income
     22,866       20,624       23,825       16,980  
Earnings per share: Basic
     0.25       0.22       0.25       0.18  
                                   Diluted
     0.25       0.22       0.25       0.18  
Dividends per share
     0.01       0.01       0.01       0.01  
2011
                                
Interest revenue
   $ 138,828     $ 137,235     $ 132,397     $ 129,393  
Net interest revenue
     109,437       109,912       108,075       107,489  
Provision for credit losses
     53,479       32,240       25,112       19,250  
(Loss) income before income taxes
     (5,741 )     15,747       14,320       17,718  
Income tax (benefit) expense
     (5,247 )     2,921       2,386       4,415  
Net (loss) income
     (494 )     12,826       11,934       13,303  
(Loss) earnings per share: Basic
     (0.01 )     0.15       0.14       0.16  
                                               Diluted
     (0.01 )     0.15       0.14       0.16  
Dividends per share
     0.11       0.01       0.01       0.01  


 
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. The Company’s internal control over financial reporting includes those policies and procedures that:
 
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
 
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
 
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
 
Based on management’s assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2012.
 
The Company’s independent registered public accounting firm has issued a report on the effectiveness of the Company’s internal control over financial reporting. That report appears on page 72 of this Report.

 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
BancorpSouth, Inc.:

We have audited BancorpSouth, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). BancorpSouth, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, BancorpSouth, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of BancorpSouth, Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and our report dated February 25, 2013 expressed an unqualified opinion on those consolidated financial statements.


/s/ KPMG LLP

Memphis, Tennessee
February 25, 2013

 

 
 
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Report Of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
BancorpSouth, Inc.:
 
 We have audited the accompanying consolidated balance sheets of BancorpSouth, Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BancorpSouth, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), BancorpSouth, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 2013 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.


/s/ KPMG LLP

Memphis, Tennessee
February 25, 2013




 
73
 



Consolidated Balance Sheets
            
BancorpSouth, Inc. and Subsidiaries
  
December 31,
  
   
2012
    
2011
  
Assets
  
(In thousands)
  
Cash and due from banks
   $ 223,814     $ 195,681  
Interest bearing deposits with other banks
     979,800       303,663  
Available-for-sale securities (amortized cost
                
   of $2,365,962 and $2,448,051, respectively)
     2,434,032       2,513,518  
Loans and leases
     8,672,752       8,911,258  
    Less:  Unearned income
     35,763       40,947  
              Allowance for credit losses
     164,466       195,118  
    Net loans and leases
     8,472,523       8,675,193  
Loans held for sale
     129,138       83,458  
Premises and equipment, net
     319,456       323,383  
Accrued interest receivable
     44,356       51,266  
Goodwill
     275,173       271,297  
Bank-owned life insurance
     231,120       200,085  
Other real estate owned
     103,248       173,805  
Other assets
     184,538       204,502  
                 
    Total Assets
   $ 13,397,198     $ 12,995,851  
                 
Liabilities and Shareholders' Equity
                
Deposits:
                
  Demand:
                
    Noninterest bearing
   $ 2,545,169     $ 2,269,799  
    Interest bearing
     4,799,496       4,706,825  
  Savings
     1,145,785       991,702  
  Other time
     2,597,696       2,986,863  
    Total deposits
     11,088,146       10,955,189  
Federal funds purchased and securities sold under
                
  agreement to repurchase
     414,611       373,933  
Short-term Federal Home Loan Bank borrowings and
                
  other short-term borrowings
     -       1,500  
Accrued interest payable
     6,140       8,644  
Junior subordinated debt securities
     160,312       160,312  
Long-term Federal Home Loan Bank borrowings
     33,500       33,500  
Other liabilities
     245,437       199,861  
    Total Liabilities
     11,948,146       11,732,939  
Shareholders' Equity
                
Common stock, $2.50 par value
                
    Authorized - 500,000,000 shares; Issued - 94,549,867 and
                
      83,483,796 shares, respectively
     236,375       208,709  
Capital surplus
     311,909       227,567  
Accumulated other comprehensive loss
     (8,646 )     (2,261 )
Retained earnings
     909,414       828,897  
    Total Shareholders' Equity
     1,449,052       1,262,912  
Commitments and contingencies
                
    Total Liabilities and Shareholders' Equity
   $ 13,397,198     $ 12,995,851  
                 
See accompanying notes to consolidated financial statements.
                

 

 
 
74
 
 
Consolidated Statements of Income
                  
BancorpSouth, Inc. and Subsidiaries
  
Year Ended December 31,
  
   
2012
    
2011
    
2010
  
Interest Revenue
  
(In thousands, except per share amounts)
  
Loans and leases
   $ 425,611     $ 461,076     $ 496,782  
Deposits with other banks
     1,711       701       355  
Federal funds sold and securities purchased
                        
   under agreement to resell
     3       167       606  
Held-to-maturity securities:
                        
  Taxable
     -       13,080       36,278  
  Tax-exempt
     -       5,638       10,409  
Available-for-sale securities:
                        
  Taxable
     39,408       43,989       32,033  
  Tax-exempt
     16,658       10,983       3,275  
Loans held for sale
     3,033       2,219       3,024  
    Total interest revenue
     486,424       537,853       582,762  
Interest Expense
                        
Deposits:
                        
  Interest bearing demand
     16,111       22,646       35,187  
  Savings
     2,697       3,211       3,576  
  Other time
     39,797       61,709       83,999  
Federal funds purchased and securities sold
                        
  under agreement to repurchase
     274       458       841  
FHLB borrowings
     1,446       3,459       6,545  
Junior subordinated debt
     11,502       11,451       11,461  
Other
     6       6       11  
    Total interest expense
     71,833       102,940       141,620  
    Net interest revenue
     414,591       434,913       441,142  
Provision for credit losses
     28,000       130,081       204,016  
    Net interest revenue, after provision for credit losses
     386,591       304,832       237,126  
Noninterest Revenue
                        
Mortgage lending
     56,919       17,069       29,745  
Credit card, debit card and merchant fees
     31,705       42,373       37,663  
Service charges
     56,877       66,670       70,690  
Trust income
     11,913       12,186       11,149  
Securities gains (losses), net
     442       12,127       2,569  
Insurance commissions
     90,138       86,918       82,172  
Other
     32,155       33,502       30,156  
    Total noninterest revenue
     280,149       270,845       264,144  
Noninterest Expense
                        
Salaries and employee benefits
     304,624       282,880       271,688  
Occupancy, net of rental income
     42,140       42,362       43,008  
Equipment
     20,849       21,707       22,598  
Deposit insurance assessments
     16,478       21,316       19,259  
Prepayment penalty on FHLB borrowings
     -       9,778       -  
Other
     165,102       155,590       130,480  
    Total noninterest expense
     549,193       533,633       487,033  
    Income before income taxes
     117,547       42,044       14,237  
Income tax expense (benefit)
     33,252       4,475       (8,705 )
    Net Income
   $ 84,295     $ 37,569     $ 22,942  
                         
Net Income Per Share: Basic
   $ 0.90     $ 0.45     $ 0.28  
                                       Diluted
   $ 0.90     $ 0.45     $ 0.27  
                         
See accompanying notes to consolidated financial statements.
                  

 
 
75
 
 
Consolidated Statements of Comprehensive Income
  
BancorpSouth, Inc. and Subsidiaries
  
   
                     
     
Year Ended December 31,
  
     
2012
    
2011
    
2010
  
     
(In thousands)
  
Net income
   $ 84,295     $ 37,569     $ 22,942  
                           
Other comprehensive income, net of tax
                        
  Unrealized gains on securities
 
     1,599       26,989       (5,165 )
  Pension and other postretirement benefits
 
     (7,984 )     (14,797 )     (879 )
Other comprehensive income
     (6,385 )     12,192       (6,044 )
Comprehensive income
   $ 77,910     $ 49,761     $ 16,898  
See accompanying notes to consolidated financial statements.
                          

 
 
76
 
 
Consolidated Statements of Shareholders' Equity
                    
BancorpSouth, Inc. and Subsidiaries
                    
Accumulated
              
Years Ended December 31, 2012, 2011 and 2010
                
Other
              
   
Common Stock
    
Capital
    
Comprehensive
    
Retained
        
   
Shares
    
Amount
    
Surplus
    
Income (Loss)
    
Earnings
    
Total
  
   
(Dollars in thousands, except per share amounts)
  
Balance, December 31, 2009
     83,450,296     $ 208,626     $ 222,547     $ (8,409 )   $ 853,532     $ 1,276,296  
  Net income
     -       -       -       -       22,942       22,942  
  Change in fair value of available-for-sale
                                                
    securities, net of tax effect of ($3,219)
     -       -       -       (5,165 )     -       (5,165 )
  Change in pension funding status, net of
                                                
    tax effect of ($544)
     -       -       -       (879 )     -       (879 )
  Comprehensive income
                                             16,898  
Exercise of stock options
     26,441       65       355       -       -       420  
Income tax benefit from exercise
                                                
  of stock options
     -       -       44       -       -       44  
Recognition of stock compensation
     5,000       13       2,030       -       -       2,043  
Cash dividends declared, $0.88 per share
     -       -       -       -       (73,457 )     (73,457 )
Balance, December 31, 2010
     83,481,737       208,704       224,976       (14,453 )     803,017       1,222,244  
  Net income
     -       -       -       -       37,569       37,569  
  Change in fair value of available-for-sale
                                                
    securities, net of tax effect of $16,766
     -       -       -       26,989       -       26,989  
  Change in pension funding status, net of
                                                
    tax effect of ($9,166)
     -       -       -       (14,797 )     -       (14,797 )
  Comprehensive income
                                             49,761  
Exercise of stock options
     2,217       5       15       -       -       20  
Income tax benefit from exercise
                                                
  of stock options
     -       -       (50 )     -       -       (50 )
Recognition of stock compensation
     5,000       13       2,670       -       -       2,683  
Repurchase of stock
     (5,158 )     (13 )     (44 )                     (57 )
Cash dividends declared, $0.14 per share
     -       -       -       -       (11,689 )     (11,689 )
Balance, December 31, 2011
     83,483,796       208,709       227,567       (2,261 )     828,897       1,262,912  
  Net income
     -       -       -       -       84,295       84,295  
  Change in fair value of available-for-sale
                                                
    securities, net of tax effect of $1,002
     -       -       -       1,599       -       1,599  
  Change in pension funding status, net of
                                                
    tax effect of ($4,946)
     -       -       -       (7,984 )     -       (7,984 )
  Comprehensive income
                                             77,910  
Issuance of stock
     10,952,381       27,381       81,296                       108,677  
Exercise of stock options
     6,533       17       67       -       -       84  
Income tax expense from exercise
                                                
  of stock options
             -       (32 )     -       -       (32 )
Recognition of stock compensation
     112,315        281        3,073       -       -       3,354  
Repurchase of stock
     (5,158 )     (13 )     (62 )                     (75 )
Cash dividends declared, $0.04 per share
     -       -       -       -       (3,778 )     (3,778 )
Balance, December 31, 2012
     94,549,867     $ 236,375     $ 311,909     $ (8,646 )   $ 909,414     $ 1,449,052  
                                                 
See accompanying notes to consolidated financial statements.
                                          

 
 
 
77
 
 
 
Consolidated Statements of Cash Flows
                  
BancorpSouth, Inc. and Subsidiaries
  
Year Ended December 31,
  
   
2012
    
2011
    
2010
  
Operating Activities:
  
(In thousands)
  
Net income
   $ 84,295     $ 37,569     $ 22,942  
  Adjustment to reconcile net income to net
                        
    cash provided by operating activities:
                        
      Provision for credit losses
     28,000       130,081       204,016  
      Depreciation and amortization
     27,720       28,890       29,763  
      Deferred taxes
     (3,749 )     (6,568 )     (16,050 )
      Amortization of intangibles
     3,222       3,324       3,909  
      Amortization of debt securities premium and discount, net
     13,422       19,176       5,111  
      Share-based compensation expense
     1,886       2,683       2,043  
      Security gains, net
     (442 )     (12,127 )     (2,569 )
      Net deferred loan origination expense
     (7,944 )     (8,357 )     (8,948 )
      Excess tax expense (benefit) from exercise of stock options
     32       50       (44 )
      Decrease in interest receivable
     6,910       9,759       7,626  
      Decrease in interest payable
     (2,504 )     (5,692 )     (5,252 )
      Realized gain on mortgages sold
     (68,114 )     (36,968 )     (35,087 )
      Proceeds from mortgages sold
     2,019,225       1,262,709       1,462,230  
      Origination of mortgages held for sale
     (1,996,479 )     (1,212,548 )     (1,440,206 )
      Increase in bank-owned life insurance
     (31,035 )     (6,021 )     (6,293 )
      Decrease in prepaid pension asset
     16,795       25,056       1,596  
      Decrease in prepaid deposit insurance assessments
     11,086       20,088       17,299  
      Other, net
     31,005       5,321       (18,088 )
        Net cash provided by operating activities
     133,331       256,425       223,998  
Investing Activities:
                        
  Proceeds from calls and maturities of held-to-maturity securities
     -       135,781       600,231  
  Proceeds from calls and maturities of available-for-sale securities
     520,952       387,105       161,654  
  Proceeds from sales of available-for-sale securities
     3,628       274,807       136,769  
  Purchases of held-to-maturity securities
     -       (151,105 )     (1,180,677 )
  Purchases of available-for-sale securities
     (455,740 )     (414,269 )     (444,321 )
  Net decrease (increase) in short-term investments
     -       150,000       (75,000 )
  Net decrease in loans and leases
     253,171       298,884       193,684  
  Purchases of premises and equipment
     (24,680 )     (20,475 )     (19,609 )
  Proceeds from sale of premises and equipment
     1,136       2,363       486  
  Acquisition of businesses, net of cash acquired
     (5,971 )     -       -  
  Contingency earn-out payment
     -       (1,200 )     -  
  Other, net
     (23 )     (51 )     (68 )
        Net cash provided by (used in) investing activities
     292,473       661,840       (626,851 )
Financing Activities:
                        
  Net increase (decrease) in deposits
     132,957       (534,832 )     812,319  
  Net increase (decrease) in short-term debt and other liabilities
     39,165       (69,399 )     (302,799 )
  Repayment of long-term debt
     -       (75,000 )     (33 )
  Issuance of common stock
     110,229       20       420  
  Repurchase of common stock
     (75 )     (57 )     -  
  Excess tax (benefit) expense from exercise of stock options
     (32 )     (50 )     44  
  Payment of cash dividends
     (3,778 )     (11,689 )     (73,457 )
        Net cash provided by (used in) financing activities
     278,466       (691,007 )     436,494  
Increase in Cash and Cash Equivalents
     704,270       227,258       33,641  
Cash and Cash Equivalents at Beginning of Year
     499,344       272,086       238,445  
Cash and Cash Equivalents at End of Year
   $ 1,203,614     $ 499,344     $ 272,086  
                         
See accompanying notes to consolidated financial statements.
                        
 


 
 
78
 
 
Notes to Consolidated Financial Statements
BancorpSouth, Inc. and Subsidiaries
December 31, 2012, 2011 and 2010

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of BancorpSouth, Inc. (the “Company”) have been prepared in conformity with U.S. GAAP.  In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheets and revenues and expenses for the periods reported.  Actual results could differ significantly from those estimates.  The Company’s subsidiaries are engaged in the business of banking, insurance, brokerage and other activities closely related to banking.  The Company and its subsidiaries are subject to the regulations of certain federal and state regulatory agencies and undergo periodic examinations by those regulatory agencies.  The following is a summary of the Company’s more significant accounting and reporting policies.

Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, BancorpSouth Bank and its wholly owned subsidiaries (the “Bank”) and Gumtree Wholesale Insurance Brokers, Inc.  All significant intercompany accounts and transactions have been eliminated in consolidation.

Cash Flow Disclosures
Cash equivalents include cash and amounts due from banks, including interest bearing deposits with other banks.  The Company paid interest of $74.3 million, $108.6 million and $146.9 million and income taxes of $28.1 million, $11.6 million and $1.9 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Securities
Securities are classified as either held-to-maturity, trading or available-for-sale.  Held-to-maturity securities are debt securities for which the Company has the ability and management has the intent to hold to maturity.  They are reported at amortized cost.  Trading securities are debt and equity securities that are bought and held principally for the purpose of selling them in the near term.  They are reported at fair value, with unrealized gains and losses included in earnings.  Available-for-sale securities are debt and equity securities not classified as either held-to-maturity securities or trading securities.  They are reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of tax, as a separate component of shareholders’ equity until realized.  Gains and losses on securities are determined on the identified certificate basis.  Amortization of premium and accretion of discount are computed using the interest method.
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 reclassified 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.  The Company did not have any securities classified as held-to-maturity at December 31, 2012 and 2011.
Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary.  The term “other-than-temporary” is not intended to indicate a permanent decline in value.  Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment.  Management reviews criteria such as the magnitude and duration of the decline, as well as the reasons for the decline, and whether the Company would be required to sell the securities before a full recovery of costs in order to predict whether the loss in value is other-than-temporary.  Once a decline in value is determined to be other-than-temporary, the impairment is separated into (a) the amount of the impairment related to the credit loss and (b) the amount of the impairment related to all other factors.  The value of the security is reduced by the other-than-temporary impairment with the amount of the impairment related to credit loss recognized as a charge to earnings and the amount of the impairment related to all other factors recognized in other comprehensive income.

Securities Purchased and Sold Under Agreements to Resell or Repurchase
Securities purchased under agreements to resell are accounted for as short-term investments and securities sold under agreements to repurchase are accounted for as collateralized financing transactions and are recorded at
 
 
 
79
 
 
 the amounts at which the securities were acquired or sold plus accrued interest.  The securities pledged as collateral are generally U.S. government and federal agency securities.

Loans and Leases
Loans and leases are recorded at the face amount of the notes reduced by collections of principal. Loans and leases include net unamortized deferred origination costs and fees. Net deferred origination costs and fees are recognized as a component of income using the effective interest method.  In the event of a loan pay-off, the remaining net deferred origination costs and fees are automatically recognized into income and/or expense.  Where doubt exists as to the collectibility of the loans and leases, interest income is recorded as payment is received.  Interest is recorded monthly as earned on all other loans.
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 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 dependent upon the cash flow of the borrower or guarantor support, the impairment evaluation generally focuses on the discounted future cash flows of the borrower or guarantor support, as well as the projected liquidation of any pledged collateral.  The Impairment Committee reviews the results of each evaluation and approves the final impairment amounts, which are then included in the analysis of the adequacy of the allowance for credit losses in accordance with FASB ASC 310.  Loans identified for impairment are placed in non-accrual status.
The Company’s policy is to obtain an appraisal at the time of loan origination for real estate collateral securing a loan of $250,000 or more, consistent with regulatory guidelines. The Company’s policy is to obtain an updated appraisal when certain events occur, such as the refinancing of the debt, the renewal of the debt or events that indicate potential impairment.  A new appraisal is generally ordered for loans greater than $200,000 that have characteristics of potential impairment, such as delinquency or other loan-specific factors identified by management, when a current appraisal (dated within the prior 12 months) is not available or when a current appraisal uses assumptions that are not consistent with the expected disposition of the loan collateral.  In order to measure impairment properly at the time that a loan is deemed to be impaired, a staff appraiser may estimate the collateral fair value based upon earlier appraisals, sales contracts, approved foreclosure bids, comparable sales, officer estimates or current market conditions until a new appraisal is received.  This estimate can be used to determine the extent of the impairment on the loan.  After a loan is deemed to be impaired, it is management’s policy to obtain an updated appraisal on at least an annual basis.  Management performs a review of the pertinent facts and circumstances of each impaired loan, such as changes in outstanding balances, information received from loan officers, and receipt of re-appraisals, on a monthly basis.  As of each review date, management considers whether additional impairment should be recorded based on recent activity related to the loan-specific collateral as well as other relevant comparable assets.  Any adjustment to reflect further impairments, either as a result of management’s periodic review or as a result of an updated appraisal, are made through recording additional loan loss provisions or charge-offs.
At December 31, 2012, impaired loans totaled $156.7 million, which was net of cumulative charge-offs of $49.3 million.  Additionally, the Company had specific reserves of $10.5 million included in the allowance for credit losses.  Impaired loans at December 31, 2012 were primarily from the Company’s residential construction, acquisition and development and commercial real estate portfolios.  Impaired loan charge-offs are determined necessary when management does not anticipate any future recovery of collateral values.  The loans were evaluated for impairment based on the fair value of the underlying collateral securing the loan.  As part of the impairment review process, appraisals are used to determine the property values.  The appraised values that are used are generally based on the disposition value of the property, which assumes Bank ownership of the property “as-is” and a 180-360 day marketing period.  If a current appraisal or one with an inspection date within the past 12 months using the necessary assumptions is not available, a new third-party appraisal is ordered.  In cases where an impairment exists and a current appraisal is not available at the time of review, a staff appraiser may determine an estimated value based upon earlier appraisals, the sales contract, approved foreclosure bids, comparable sales,
 

 
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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, the Company analyzes 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.
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.  Once placed in non-accrual status, all accrued but uncollected interest related to the current fiscal year is reversed against the appropriate interest and fee income on loans and leases account with any accrued but uncollected interest related to prior fiscal years reversed against the allowance for credit losses account.
In the normal course of business, management grants concessions to borrowers, which would not otherwise be considered, where the borrowers 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 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 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 in years after the restructure if there has been at least a six-month sustained period of repayment performance under the restructured loan terms by the borrower and the interest rate at the time of restructure was at or above market for a comparable loan.  During 2012, the most common concessions 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.

Provision and Allowance for Credit Losses
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.  In addition, qualitative factors such as changes in economic and business conditions, portfolio 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
 

 
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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 his 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 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.  TDRs not determined to have an impairment are reserved consistent with loans of similar risk, performance and structure.  Should the borrower’s financial condition, collateral protection or performance deteriorate, warranting reassessment of the loan rating or impairment, additional reserves may be required.
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.  In addition, bank regulatory agencies periodically review the Bank’s allowance for credit losses and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on judgments different than those of management.

Loans Held for Sale
Mortgages originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate.  Estimated fair value is determined on the basis of existing commitments or the current market value of similar loans.  Loan sales are recognized when the transaction closes, the proceeds are collected, ownership is transferred and, through the sales agreement, continuing involvement consists of the right to service the loan for a fee for the life of the loan, if applicable.  Gains on the sale of loans held for sale are recorded as part of mortgage lending revenue on the statement of income.
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.  Every loan closed by the Bank’s mortgage center is run through a government agency automated underwriting system.  Any exceptions noted during this process are remedied prior to sale.  These representations and warranties also apply to underwriting the real estate appraisal opinion of value for the collateral securing these loans.  Under the representations and warranties, failure by the Company to comply with the underwriting and/or appraisal standards could result in the Company being required to repurchase the mortgage loan or to reimburse the investor for losses incurred (i.e., make whole requests) if such failure cannot be cured by the Company within the specified period following discovery.  During 2012, 14 mortgage loans totaling $2.1 million were repurchased or otherwise settled as a result of underwriting and appraisal standard exceptions or make whole requests.  Losses of approximately $782,000 were recognized related to these repurchased and make whole loans.  During 2011, seven mortgage loans totaling approximately $803,000 were repurchased or otherwise settled as a result of underwriting and appraisal standard exceptions or make whole requests.  Losses of approximately $181,000 were recognized related to these repurchased and make whole loans.  At December 31, 2012, the Company had reserved approximately $729,000 for potential losses from representation and warranty obligations.
Government National Mortgage Association (“GNMA”) optional repurchase programs allow financial institutions to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for which the institution provides servicing.  At the servicer’s option and without GNMA’s prior authorization, the servicer may repurchase such a delinquent loan for an amount equal to 100% of the remaining principal balance of the loan.  Under FASB ASC 860, this buy-back option is considered a conditional option until the delinquency criteria are met, at which time the option becomes unconditional.  When the Company is deemed to have regained effective control over these loans under the unconditional buy-back option, the loans can no longer be reported as
 

 
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sold and must be brought back onto the balance sheet as loans held for sale, regardless of whether the Company intends to exercise the buy-back option.  These loans are reported as held for sale in accordance with U.S. GAAP with the offsetting liability being reported as other liabilities.  At December 31, 2012, the amount of loans subject to buy back was $21.8 million.

 
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization.  Provisions for depreciation and amortization, computed using straight-line methods, are charged to expense over the shorter of the lease term or the estimated useful lives of the assets.  Costs of major additions and improvements are capitalized.  Expen­ditures for routine maintenance and repairs are charged to expense as incurred.

Other Real Estate Owned
Real estate acquired through foreclosure, consisting of properties obtained through foreclosure proceedings or acceptance of a deed in lieu of foreclosure, is reported on an individual asset basis at the lower of cost or fair value, less estimated selling costs.  Fair value is determined on the basis of current appraisals, comparable sales and other estimates of value obtained principally from independent sources.  Any excess of the loan balance at the time of foreclosure over the fair value of the real estate held as collateral is charged to the allowance for credit losses.  Based upon management’s evaluation of the real estate acquired through foreclosure, additional expense may be recorded and included in other noninterest expense when necessary in an amount sufficient to reflect any declines in estimated fair value.  Gains and losses realized on the disposition of the properties are included in other noninterest expense.

Goodwill and Other Intangible Assets
Goodwill represents costs in excess of the fair value of net assets acquired in connection with purchase business combinations.  Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of FASB ASC 350, Intangibles – Goodwill and Other.  Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FASB ASC 360, Property, Plant and Equipment.  Goodwill and other intangible assets are reviewed annually within the fourth quarter for possible impairment, or sooner if a goodwill impairment indicator is identified.  If impaired, the asset is written down to its estimated fair value.  No impairment charges have been recognized through December 31, 2012.  See Note 9, Goodwill and Other Intangible Assets, for additional information.

Mortgage Servicing Rights
The Company recognizes as assets the rights to service mortgage loans for others, known as MSRs.  The Company records MSRs at fair value on a recurring basis with subsequent remeasurement of MSRs based on change in fair value in accordance with FASB ASC 860.  An estimate of the fair value of the Company’s MSRs is determined utilizing assumptions about factors such as mortgage interest rates, discount rates, mortgage loan prepayment speeds, market trends and industry demand.  Because the valuation is determined by using discounted cash flow models, the primary risk inherent in valuing the MSRs is the impact of fluctuating interest rates on the estimated life of the servicing revenue stream.  The use of different estimates or assumptions could also produce different fair values.  The Company does not hedge the change in fair value of MSRs and, therefore, the Company is susceptible to significant fluctuations in the fair value of its MSRs in changing interest rate environments.  MSRs are included in the other assets category of the consolidated balance sheet.  Changes in the fair value of MSRs are recorded as part of mortgage lending noninterest revenue on the consolidated statement of income.
 
 
Pension and Postretirement Benefits Accounting
The Company accounts for its defined benefit pension plans using an actuarial model as required by FASB ASC 715.  This model uses an approach that allocates pension costs over the service period of employees in the plan.  The Company also accounts for its other postretirement benefits using the requirements of FASB ASC 715.  FASB ASC 715 requires the Company to recognize net periodic postretirement benefit costs as employees render the services necessary to earn their postretirement benefits.  The principle underlying the accounting as required by FASB ASC 715 is that employees render service ratably over the service period and, therefore, the income statement effects of the Company’s defined benefit pension and postretirement benefit plans should follow the same
 
 
 
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pattern.  The Company accounts for the over-funded or under-funded status of its defined benefit and other postretirement plans as an asset or liability in its consolidated balance sheets and recognizes changes in that funded status in the year in which the changes occur through comprehensive income, as required by FASB ASC 715.
The discount rate is the rate used to determine the present value of the Company’s future benefit obligations for its pension and other postretirement benefit plans.  The Company determines the discount rate to be used to discount plan liabilities at the measurement date with the assistance of its actuary using the actuary’s proprietary model.  The Company developed a level equivalent yield using its actuary’s model as of December 31, 2012 model and the expected cash flows from the BancorpSouth, Inc. Retirement Plan (the “Basic Plan”), the BancorpSouth, Inc. Restoration Plan (the “Restoration Plan”) and the BancorpSouth, Inc. Supplemental Executive Retirement Plan (the “Supplemental Plan”).  Based on this analysis, the Company established its discount rate assumptions for determination of the projected benefit obligation at 4.05% for the Basic Plan, 3.65% for the Restoration Plan and 2.85% for the Supplemental Plan based on a December 31, 2012 measurement date.

Stock-Based Compensation
At December 31, 2012, the Company had three stock-based employee compensation plans.  The Company recognizes compensation costs related to these stock-based employee compensation plans in accordance with FASB ASC 718, Compensation – Stock Compensation (“FASB ASC 718”).  The Company recognized compensation costs for unvested awards of $1.9 million, $2.1 million and $2.1 million in 2012, 2011 and 2010, respectively.  See Note 16, Stock Incentive and Stock Option Plans, for further disclosures regarding stock-based compensation.

Derivative Instruments
The derivative instruments 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.
The Company also enters into derivative financial instruments to meet the financing, interest rate and equity risk management needs of its customers.  Upon entering into these instruments 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 December 31, 2012, the notional amount of customer related derivative financial instruments was $496.2 million with an average maturity of 59.9 months, an average interest receive rate of 2.5% and an average interest pay rate of 5.7%.

Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.  Deferred tax assets and liabilities are included in the other assets and other liabilities category of the consolidated balance sheet as applicable.

Insurance Commissions
Commission income is recorded as of the effective date of insurance coverage or the billing date, whichever is later.  Contingent commissions and commissions on premiums billed and collected directly by insurance companies are recorded as revenue when received, which is our first notification of amounts earned.  The income effects of subsequent premium and fee adjustments are recorded when the adjustments become known.

Recent Pronouncements
In January 2010, the Company adopted a new accounting standard regarding accounting for transfers of financial assets.  This new accounting standard eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance
 
 
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 information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets.  The adoption of this new accounting standard regarding accounting for transfers of financial assets has had no material impact on the financial position or results of operations of the Company.
 
In January 2010, the Company adopted a new accounting standard regarding consolidation of variable interest entities.  This new accounting standard amends existing accounting literature regarding consolidation of variable interest entities to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements.  The adoption of this new accounting standard regarding consolidation of variable interest entities has had no material impact on the financial position or results of operations of the Company.
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.  This 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.  This 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 5 and 6 below.  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 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.  This ASU did not have a material impact on the financial position or 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.  This ASU did not 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.  This ASU did not have a material impact 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
 
 
 
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part of the statement of changes in shareholder’s equity.  This ASU requires that comprehensive income be presented in either a single continuous statement or in two separate but consecutive statements.  This ASU is effective for interim and annual periods beginning on or after December 15, 2011.  The adoption of this ASU changed the manner in which the Company’s other comprehensive income is disclosed and did not have an impact on the financial position and results of operations of the Company.
In September 2011, the FASB issued an ASU regarding goodwill impairment.  This ASU gives companies the option to perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying value as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This ASU is effective for interim and annual periods beginning after December 15, 2011.  This ASU did not have a material impact on the financial position and results of operations of the Company.
In July 2012, the FASB issued an ASU regarding indefinite-lived intangible assets impairment.  This ASU permits companies to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test on that asset.  This ASU is effective for interim and annual periods beginning after September 15, 2012.  Early adoption is permitted.  This ASU did not have a material impact on the financial position and results of operations of the Company.

(2)  BUSINESS COMBINATIONS
On July 2, 2012, the Company purchased certain assets of The Securance Group, Inc., an independent insurance agency with locations in Brewton, Montgomery and Troy, Alabama. Consideration paid to complete this transaction consisted of cash paid to The Securance Group shareholders in the aggregate amount of approximately $6,750,000.  The provisions of the related purchase agreement also provide for additional aggregate consideration of up to $2,000,000 in cash to be paid in three annual installments if certain performance criteria are met. This acquisition was not material to the financial position or results of operations of the Company.
The Company completed no material acquisition during 2010 or 2011.

(3) HELD-TO-MATURITY 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 reclassified 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.  The Company did not have any securities classified as held-to-maturity at December 31, 2012 and 2011.
Gross gains of approximately $37,000 and no gross losses were recognized on held-to-maturity securities in 2011 prior to the reclassification of held-to-maturity securities to available-for-sale securities.  These gains and losses were a result of held-to-maturity securities being called prior to maturity.

(4) AVAILABLE-FOR-SALE SECURITIES
A comparison of amortized cost and estimated fair values of available-for-sale securities as of December 31, 2012 and 2011 follows:
 

 
 
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2012
  
         
Gross
    
Gross
    
Estimated
  
   
Amortized
    
Unrealized
    
Unrealized
    
Fair
  
   
Cost
    
Gains
    
Losses
    
Value
  
   
(In thousands)
  
U.S. Government agencies
   $ 1,380,979     $ 21,081     $ 64     $ 1,401,996  
Government agency issued residential
                                
  mortgage-backed securities
     358,677       8,457       259       366,875  
Government agency issued commercial
                                
  mortgage-backed securities
     87,314       4,266       135       91,445  
Obligations of states and political subdivisions
     531,940       34,049       116       565,873  
Other
     7,052       791       -       7,843  
    Total
   $ 2,365,962     $ 68,644     $ 574     $ 2,434,032  


   
2011
  
         
Gross
    
Gross
    
Estimated
  
   
Amortized
    
Unrealized
    
Unrealized
    
Fair
  
   
Cost
    
Gains
    
Losses
    
Value
  
   
(In thousands)
  
U.S. Government agencies
   $ 1,471,920     $ 29,347     $ 24     $ 1,501,243  
Government agency issued residential
                                
  mortgage-backed securities
     394,894       9,786       70       404,610  
Government agency issued commercial
                                
  mortgage-backed securities
     31,161       3,438       -       34,599  
Obligations of states and political subdivisions
     541,138       22,705       323       563,520  
Other
     8,938       608       -       9,546  
    Total
   $ 2,448,051     $ 65,884     $ 417     $ 2,513,518  

At December 31, 2012, the Company’s available-for-sale securities included FHLB stock with a carrying value of $6.8 million compared to a required investment of $6.6 million.  FHLB stock is carried at amortized cost in the financial statements.
Gross gains of approximately $480,000 and gross losses of approximately $38,000 were recognized in 2012, gross gains of $12.4 million and gross losses of approximately $327,000 were recognized in 2011 and gross gains of  $4.5 million and gross losses of $2.1 million were recognized in 2010 on available-for-sale securities.  The gross losses of $2.1 million in 2010 were the result of the other-than-temporary impairment charge related to credit losses on the Company’s investment in pooled trust preferred securities.  The fair value of these securities was negatively impacted by market conditions.  Subsequent to the other-than-temporary charges in 2010, the securities had no remaining book value.  No other-than-temporary impairment was recorded in 2011 and 2012.
Available-for-sale securities with a carrying value of $1.7 billion at December 31, 2012 were pledged to secure public and trust funds on deposit and for other purposes.  Included in available-for-sale securities at December 31, 2012, were securities with a carrying value of $273.6 million issued by a political subdivision within the State of Mississippi and securities with a carrying value of $141.5 million issued by a political subdivision within the State of Arkansas.
The amortized cost and estimated fair value of available-for-sale securities at December 31, 2012 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.
 
 

 
 
87
 
 
         
Estimated
    
Weighted
   
Amortized
    
Fair
    
Average
   
Cost
    
Value
    
Yield
   
(Dollars in thousands)
Maturing in one year or less
   $ 450,236     $ 453,843       1.77 %
Maturing after one year through five years
     1,055,838       1,077,403       1.61  
Maturing after five years through ten years
     341,992       357,489       4.00  
Maturing after ten years
     517,896       545,297       4.25  
    Total
   $ 2,365,962     $ 2,434,032          


A summary of temporarily impaired available-for-sale investments with continuous unrealized loss positions at December 31, 2012 and 2011 follows:


   
2012
  
   
Less Than 12 Months
    
12 Months or Longer
    
Total
  
   
Fair
    
Unrealized
    
Fair
    
Unrealized
    
Fair
    
Unrealized
  
   
Value
    
Losses
    
Value
    
Losses
    
Value
    
Losses
  
   
(In thousands)
  
U.S. Government agencies
   $ 47,395     $ 64     $ -     $ -     $ 47,395     $ 64  
Government agency issued residential
                                                
  mortgage-backed securities
     55,939       145       2,839       114       58,778       259  
Government agency issued commercial
                                                
  mortgage-backed securities
     26,239       135       -       -       26,239       135  
Obligations of states and
                                                
  political subdivisions
     9,247       73       313       43       9,560       116  
Other
     -       -       -       -       -       -  
    Total
   $ 138,820     $ 417     $ 3,152     $ 157     $ 141,972     $ 574  

   
2011
  
   
Less Than 12 Months
    
12 Months or Longer
    
Total
  
   
Fair
    
Unrealized
    
Fair
    
Unrealized
    
Fair
    
Unrealized
  
   
Value
    
Losses
    
Value
    
Losses
    
Value
    
Losses
  
   
(In thousands)
  
U.S. Government agencies
   $ 34,850     $ 24     $ -     $ -     $ 34,850     $ 24  
Government agency issued residential
                                                
  mortgage-backed securities
     -       -       3,751       70       3,751       70  
Government agency issued commercial
                                                
  mortgage-backed securities
     -       -       -       -       -       -  
Obligations of states and
                                                
  political subdivisions
     20,820       144       9,214       179       30,034       323  
Other
     -       -       -       -       -       -  
    Total
   $ 55,670     $ 168     $ 12,965     $ 249     $ 68,635     $ 417  

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 was recorded in 2012.

(5) 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.  A summary of gross loans and leases by segment and class at December 31, 2012 and 2011 follows:
 
 
 
88
 

 
   
2012
    
2011
  
   
(In thousands)
  
Commercial and industrial
   $ 1,484,788     $ 1,484,967  
Real estate
                
  Consumer mortgage
     1,873,875       1,945,190  
  Home equity
     486,074       514,362  
  Agricultural
     256,196       239,487  
  Commercial and industrial-owner occupied
     1,333,103       1,301,575  
  Construction, acquisition and development
     735,808       908,362  
  Commercial
     1,748,881       1,754,022  
Credit Cards
     104,884       106,281  
All other
     649,143       657,012  
    Total
   $ 8,672,752     $ 8,911,258  

 
    The following table shows the Company’s loans and leases, net of unearned income, as of December 31, 2012 by geographical location:

   
Alabama
                      
Greater
                          
   
and Florida
                      
Memphis
          
Texas and
              
   
Panhandle
    
Arkansas*
    
Mississippi*
    
Missouri
    
Area
    
Tennessee*
    
Louisiana
    
Other
    
Total
  
   
(In thousands)
        
Commercial and industrial
   $ 70,132     $ 149,418     $ 386,799     $ 35,240     $ 17,170     $ 74,300     $ 249,405     $ 494,147     $ 1,476,611  
Real estate
                                                                        
   Consumer mortgages
     109,585       262,899       709,251       44,513       79,221       160,906       454,607       52,893       1,873,875  
   Home equity
     60,037       38,082       164,019       22,520       64,710       73,351       62,649       706       486,074  
   Agricultural
     7,461       79,269       68,298       3,782       11,948       13,941       66,979       4,518       256,196  
   Commercial and industrial-owner occupied
     120,318       155,015       494,957       77,951       88,980       89,935       253,088       52,859       1,333,103  
   Construction, acquisition and development
     92,454       68,034       217,763       35,880       77,091       93,414       141,206       9,966       735,808  
   Commercial
     208,676       331,575       353,067       189,993       104,101       98,811       392,027       70,631       1,748,881  
Credit cards**
     -       -       -       -       -       -       -       104,884       104,884  
All other
     32,122       82,825       180,836       8,210       54,332       50,815       97,473       114,944       621,557  
     Total
   $ 700,785     $ 1,167,117     $ 2,574,990     $ 418,089     $ 497,553     $ 655,473     $ 1,717,434     $ 905,548     $ 8,636,989  
                                                                         
*  Excludes the Greater Memphis Area
                                                                        
** Credit card receivables are spread across all geographic regions but are not viewed by the Company's management as part of the geographic breakdown.
          

The Company’s loan concentrations which exceed 10% of total loans are reflected in the preceding tables.  A substantial portion of construction, acquisition and development loans are secured by real estate in markets in which the Company is located.  The Company’s loan policy generally prohibits the use of interest reserves on loans made after March 2010.  Certain of the construction, acquisition and development 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 these areas.  Continued economic distress could negatively impact additional borrowers’ and guarantors’ ability to repay their debt which will make more of the Company’s loans collateral dependent.




 
89
 

 

The following table provides details regarding the aging of the Company’s loan and lease portfolio, net of unearned income, at December 31, 2012:


   
2012
  
                                       
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
   $ 3,531     $ 476     $ 4,118     $ 8,125     $ 1,468,486     $ 1,476,611     $ 414  
Real estate
                                                        
   Consumer mortgages
     11,308       3,643       13,821       28,772       1,845,103       1,873,875       512  
   Home equity
     1,337       371       350       2,058       484,016       486,074       -  
   Agricultural
     400       287       3,946       4,633       251,563       256,196       10  
   Commercial and industrial-owner occupied
     2,629       3,587       2,933       9,149       1,323,954       1,333,103       19  
   Construction, acquisition and development
     2,547       2,472       14,790       19,809       715,999       735,808       -  
   Commercial
     4,673       56       10,469       15,198       1,733,683       1,748,881       -  
Credit cards
     536       379       473       1,388       103,496       104,884       228  
All other
     2,354       253       445       3,052       618,505       621,557       27  
     Total
   $ 29,315     $ 11,524     $ 51,345     $ 92,184     $ 8,544,805     $ 8,636,989     $ 1,210  

   
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
   $ 5,571     $ 4,209     $ 4,193     $ 13,973     $ 1,459,755     $ 1,473,728     $ 12  
Real estate
                                                        
   Consumer mortgages
     15,740       6,485       14,569       36,794       1,908,396       1,945,190       2,974  
   Home equity
     1,837       265       594       2,696       511,666       514,362       -  
   Agricultural
     666       54       719       1,439       238,048       239,487       -  
   Commercial and industrial-owner occupied
     2,199       844       12,977       16,020       1,285,555       1,301,575       -  
   Construction, acquisition and development
     4,826       4,955       33,584       43,365       864,997       908,362       -  
   Commercial
     3,778       2,702       9,397       15,877       1,738,145       1,754,022       -  
Credit cards
     595       303       697       1,595       104,686       106,281       299  
All other
     2,124       390       1,579       4,093       623,211       627,304       149  
     Total
   $ 37,336     $ 20,207     $ 78,309     $ 135,852     $ 8,734,459     $ 8,870,311     $ 3,434  

The Company utilizes an internal loan classification system to grade loans according to certain credit quality indicators.  These credit quality indicators include, but are not limited to, recent credit performance, delinquency, liquidity, cash flows, debt coverage ratios, collateral type and loan-to-value ratio.  The Company’s internal loan classification system is compatible with classifications used by the FDIC, as well as other regulatory agencies.  Loans may be classified as follows:

Pass:  Loans which are performing as agreed with few or no signs of weakness.  These loan show sufficient cash flow, capital and collateral to repay the loan as agreed.

Special Mention:  Loans where potential weaknesses have developed which could cause a more serious problem if not corrected.

Substandard:  Loans where well-defined weaknesses exist that require corrective action to prevent further deterioration.

Doubtful:  Loans having all the characteristics of Substandard and which have deteriorated to a point where collection and liquidation in full is highly questionable.

Loss:  Loans that are considered uncollectible or with limited possible recovery.

Impaired:  Loans for which it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement and for which a specific impairment reserve has been considered.


 
90
 


The following table provides details of the Company’s loan and lease portfolio, net of unearned income, by segment, class and internally assigned grade at December 31, 2012 and 2011:

   
December 31, 2012
  
         
Special
                                
   
Pass
    
Mention
    
Substandard
    
Doubtful
    
Loss
    
Impaired
    
Total
  
   
(In thousands)
  
Commercial and industrial
   $ 1,426,498     $ 14,663     $ 29,876     $ 729     $ -     $ 4,845     $ 1,476,611  
Real estate
                                                        
  Consumer mortgage
     1,691,682       32,840       131,141       2,907       198       15,107       1,873,875  
  Home equity
     461,151       4,791       17,619       1,057       76       1,380       486,074  
  Agricultural
     227,138       5,729       17,947       -       -       5,382       256,196  
  Commercial and industrial-owner occupied
     1,202,111       31,087       82,816       369       -       16,720       1,333,103  
  Construction, acquisition and development
     567,881       30,846       75,031       715       -       61,335       735,808  
  Commercial
     1,524,262       53,455       120,591       160       -       50,413       1,748,881  
Credit cards
     104,884       -       -       -       -       -       104,884  
All other
     600,807       8,397       10,196       601       10       1,546       621,557  
    Total
   $ 7,806,414     $ 181,808     $ 485,217     $ 6,538     $ 284     $ 156,728     $ 8,636,989  

   
December 31, 2011
  
         
Special
                                
   
Pass
    
Mention
    
Substandard
    
Doubtful
    
Loss
    
Impaired
    
Total
  
   
(In thousands)
  
Commercial and industrial
   $ 1,415,731     $ 4,947     $ 43,549     $ 1,263     $ 405     $ 7,833     $ 1,473,728  
Real estate
                                                        
  Consumer mortgage
     1,742,593       17,914       148,267       4,434       189       31,793       1,945,190  
  Home equity
     492,235       2,775       17,050       1,134       493       675       514,362  
  Agricultural
     213,280       3,795       19,296       20       -       3,096       239,487  
  Commercial and industrial-owner occupied
     1,167,220       18,280       90,778       496       -       24,801       1,301,575  
  Construction, acquisition and development
     619,497       23,429       136,412       845       -       128,179       908,362  
  Commercial
     1,501,196       37,409       179,295       -       -       36,122       1,754,022  
Credit cards
     105,867       41       175       188       10       -       106,281  
All other
     587,970       16,104       20,263       470       73       2,424       627,304  
    Total
   $ 7,845,589     $ 124,694     $ 655,085     $ 8,850     $ 1,170     $ 234,923     $ 8,870,311  

Loans considered impaired under 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 December 31, 2012 and 2011 was $156.7 million and $234.9 million, respectively.  At December 31, 2012 and 2011, $41.0 million and $117.7 million, respectively, of those impaired loans had a valuation allowance of $10.5 million and $39.7 million, respectively.  The remaining balance of impaired loans of $115.7 million and $117.2 million at December 31, 2012 and 2011, respectively, were charged down to the underlying collateral’s 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 TDRs totaled $47.3 million and $58.0 million at December 31, 2012 and 2011, respectively.  The average recorded investment in impaired loans during 2012 and 2011 was $196.9 million and $309.6 million, respectively.


 
91
 

    The following tables provide details regarding impaired loans and leases, net of unearned income, by segment and class at December 31, 2012 and 2011:

   
December 31, 2012
  
         
Unpaid
                    
   
Recorded
    
Principal
    
Related
              
   
Investment
    
Balance of
    
Allowance
    
Average
    
Interest
  
   
in Impaired
    
Impaired
    
for Credit
    
Recorded
    
Income
  
   
Loans
    
Loans
    
Losses
    
Investment
    
Recognized
  
   
(In thousands)
  
With no related allowance:
                              
Commercial and industrial
   $ 2,557     $ 4,169     $ -     $ 2,779     $ 12  
Real estate
                                        
  Consumer mortgage
     11,307       15,464       -       11,762       77  
  Home equity
     934       1,078       -       858       6  
  Agricultural
     4,435       6,292       -       3,527       8  
  Commercial and industrial-owner occupied
     13,018       16,551       -       12,674       123  
  Construction, acquisition and development
     47,982       69,331       -       54,085       324  
  Commercial
     33,952       45,722       -       19,824       199  
All other
     1,544       2,165       -       848       9  
    Total
   $ 115,729     $ 160,772     $ -     $ 106,357     $ 758  
                                         
With an allowance:
                                        
Commercial and industrial
   $ 2,288     $ 2,288     $ 1,241     $ 5,368     $ 38  
Real estate
                                        
  Consumer mortgage
     3,800       3,914       1,103       10,323       88  
  Home equity
     446       446       111       569       5  
  Agricultural
     947       947       92       1,468       12  
  Commercial and industrial-owner occupied
     3,702       4,737       864       9,977       65  
  Construction, acquisition and development
     13,353       16,257       4,350       45,582       377  
  Commercial
     16,461       16,709       2,720       16,953       204  
All other
     2       2       60       324       3  
    Total
   $ 40,999     $ 45,300     $ 10,541     $ 90,564     $ 792  
                                         
Total:
                                        
Commercial and industrial
   $ 4,845     $ 6,457     $ 1,241     $ 8,147     $ 50  
Real estate
                                        
  Consumer mortgage
     15,107       19,378       1,103       22,085       165  
  Home equity
     1,380       1,524       111       1,427       11  
  Agricultural
     5,382       7,239       92       4,995       20  
  Commercial and industrial-owner occupied
     16,720       21,288       864       22,651       188  
  Construction, acquisition and development
     61,335       85,588       4,350       99,667       701  
  Commercial
     50,413       62,431       2,720       36,777       403  
All other
     1,546       2,167       60       1,172       12  
    Total
   $ 156,728     $ 206,072     $ 10,541     $ 196,921     $ 1,550  
 
 

 
 
92
 

   
December 31, 2011
  
         
Unpaid
                    
   
Recorded
    
Principal
    
Related
              
   
Investment
    
Balance of
    
Allowance
    
Average
    
Interest
  
   
in Impaired
    
Impaired
    
for Credit
    
Recorded
    
Income
  
   
Loans
    
Loans
    
Losses
    
Investment
    
Recognized
  
   
(In thousands)
  
With no related allowance:
                              
Commercial and industrial
   $ 4,874     $ 6,854     $ -     $ 3,879     $ 78  
Real estate
                                        
  Consumer mortgage
     16,883       19,538       -       19,628       397  
  Home equity
     627       771       -       541       1  
  Agricultural
     1,549       2,676       -       2,502       20  
  Commercial and industrial-owner occupied
     6,973       9,191       -       11,598       185  
  Construction, acquisition and development
     69,843       89,782       -       107,596       941  
  Commercial
     15,184       24,198       -       20,702       311  
All other
     1,284       1,668       -       1,169       67  
    Total
   $ 117,217     $ 154,678     $ -     $ 167,615     $ 2,000  
                                         
With an allowance:
                                        
Commercial and industrial
   $ 2,959     $ 3,301     $ 4,071     $ 3,558     $ 49  
Real estate
                                        
  Consumer mortgage
     14,910       16,224       4,386       14,960       323  
  Home equity
     48       276       48       504       3  
  Agricultural
     1,547       1,547       380       3,164       18  
  Commercial and industrial-owner occupied
     17,828       21,085       3,601       10,329       146  
  Construction, acquisition and development
     58,336       67,426       21,581       80,957       1,651  
  Commercial
     20,938       21,422       5,324       27,210       851  
All other
     1,140       1,140       317       1,307       8  
    Total
   $ 117,706     $ 132,421     $ 39,708     $ 141,989     $ 3,049  
                                         
Total:
                                        
Commercial and industrial
   $ 7,833     $ 10,155     $ 4,071     $ 7,437     $ 127  
Real estate
                                        
  Consumer mortgage
     31,793       35,762       4,386       34,588       720  
  Home equity
     675       1,047       48       1,045       4  
  Agricultural
     3,096       4,223       380       5,666       38  
  Commercial and industrial-owner occupied
     24,801       30,276       3,601       21,927       331  
  Construction, acquisition and development
     128,179       157,208       21,581       188,553       2,592  
  Commercial
     36,122       45,620       5,324       47,912       1,162  
All other
     2,424       2,808       317       2,476       75  
    Total
   $ 234,923     $ 287,099     $ 39,708     $ 309,604     $ 5,049  

 
 
 
93
 


    The following tables provide details regarding impaired real estate construction, acquisition and development loans and leases, net of unearned income, by collateral type at December 31, 2012 and 2011:

   
December 31, 2012
  
         
Unpaid
                    
   
Recorded
    
Principal
    
Related
              
   
Investment
    
Balance of
    
Allowance
    
Average
    
Interest
  
   
in Impaired
    
Impaired
    
for Credit
    
Recorded
    
Income
  
   
Loans
    
Loans
    
Losses
    
Investment
    
Recognized
  
   
(In thousands)
  
With no related allowance:
                              
Multi-family construction
   $ -     $ -     $ -     $ -     $ -  
One-to-four family construction
     8,475       13,586       -       8,070       53  
Recreation and all other loans
     1,117       1,335       -       623       5  
Commercial construction
     5,714       6,646       -       3,585       51  
Commercial acquisition and development
     13,753       15,786       -       12,145       63  
Residential acquisition and development
     18,923       31,978       -       29,662       152  
    Total
   $ 47,982     $ 69,331     $ -     $ 54,085     $ 324  
                                         
With an allowance:
                                        
Multi-family construction
   $ -     $ -     $ -     $ -     $ -  
One-to-four family construction
     1,130       1,475       290       4,094       29  
Recreation and all other loans
     -       -       -       69       -  
Commercial construction
     -       -       0       1,255       15  
Commercial acquisition and development
     1,711       1,960       563       9,206       74  
Residential acquisition and development
     10,512       12,822       3,497       30,958       259  
    Total
   $ 13,353     $ 16,257     $ 4,350     $ 45,582     $ 377  
                                         
Total:
                                        
Multi-family construction
   $ -     $ -     $ -     $ -     $ -  
One-to-four family construction
     9,605       15,061       290       12,164       82  
Recreation and all other loans
     1,117       1,335       -       692       5  
Commercial construction
     5,714       6,646       -       4,840       66  
Commercial acquisition and development
     15,464       17,746       563       21,351       137  
Residential acquisition and development
     29,435       44,800       3,497       60,620       411  
    Total
   $ 61,335     $ 85,588     $ 4,350     $ 99,667     $ 701  

 
 
94
 

 
   
December 31, 2011
  
         
Unpaid
                    
   
Recorded
    
Principal
    
Related
              
   
Investment
    
Balance of
    
Allowance
    
Average
    
Interest
  
   
in Impaired
    
Impaired
    
for Credit
    
Recorded
    
Income
  
   
Loans
    
Loans
    
Losses
    
Investment
    
Recognized
  
   
(In thousands)
  
With no related allowance:
                              
Multi-family construction
   $ 1,067     $ 2,259     $ -     $ 5,474     $ 18  
One-to-four family construction
     7,931       9,313       -       9,269       94  
Recreation and all other loans
     372       545       -       491       9  
Commercial construction
     633       917       -       9,663       83  
Commercial acquisition and development
     17,130       19,855       -       20,640       99  
Residential acquisition and development
     42,710       56,893       -       62,059       638  
    Total
   $ 69,843     $ 89,782     $ -     $ 107,596     $ 941  
                                         
With an allowance:
                                        
Multi-family construction
   $ -     $ -     $ -     $ 571     $ -  
One-to-four family construction
     5,313       6,083       1,589       5,334       108  
Recreation and all other loans
     -       -       -       271       2  
Commercial construction
     4,387       5,128       886       7,289       126  
Commercial acquisition and development
     5,091       7,728       1,418       12,965       429  
Residential acquisition and development
     43,545       48,487       17,688       54,527       986  
    Total
   $ 58,336     $ 67,426     $ 21,581     $ 80,957     $ 1,651  
                                         
Total:
                                        
Multi-family construction
   $ 1,067     $ 2,259     $ -     $ 6,045     $ 18  
One-to-four family construction
     13,244       15,396       1,589       14,603       202  
Recreation and all other loans
     372       545       -       762       11  
Commercial construction
     5,020       6,045       886       16,952       209  
Commercial acquisition and development
     22,221       27,583       1,418       33,605       528  
Residential acquisition and development
     86,255       105,380       17,688       116,586       1,624  
    Total
   $ 128,179     $ 157,208     $ 21,581     $ 188,553     $ 2,592  

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 at December 31, 2012 and 2011:

   
2012
    
2011
  
   
(In thousands)
  
Non-accrual loans and leases
   $ 207,241     $ 276,798  
Loans and leases 90 days or more past due, still accruing
     1,210       3,434  
Restructured loans and leases still accruing
     25,099       42,018  
    Total
   $ 233,550     $ 322,250  


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 December 31, 2012, the Company’s geographic NPL distribution was concentrated primarily in its Alabama, Mississippi and Tennessee markets, including the greater Memphis, Tennessee area, a portion of which is in northwest Mississippi and Arkansas.  The following table presents the Company’s nonaccrual loans and leases by segment and class at December 31, 2012 and 2011:
 

 
 
95
 
 
   
2012
    
2011
  
   
(In thousands)
  
Commercial and industrial
   $ 9,311     $ 12,260  
Real estate
                
   Consumer mortgages
     36,133       47,878  
   Home equity
     3,497       2,036  
   Agricultural
     7,587       4,179  
   Commercial and industrial-owner occupied
     20,910       33,112  
   Construction, acquisition and development
     66,635       133,110  
   Commercial
     57,656       40,616  
Credit cards
     415       594  
All other
     5,097       3,013  
     Total
   $ 207,241     $ 276,798  

The total amount of interest earned on NPLs was $4.3 million, $12.6 million and $11.2 million in 2012, 2011 and 2010, respectively.  The gross interest income which would have been recorded under the original terms of those loans and leases amounted to $15.6 million, $18.7 million and $21.7 million in 2012, 2011 and 2010, respectively.
In the normal course of business, management will sometime grant concessions, which normally would not otherwise be considered, to borrowers that are experiencing financial difficulty.  Restructured 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 recorded as non-accrual may be returned to accrual status in years after the restructure if there has been at least a six-month period of sustained repayment performance by the borrower under the restructured loan terms and the interest rate at the time of restructure was at or above market for a comparable loan.  During 2012, 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.
The following tables summarize the financial effect of TDRs for the years ended December 31, 2012 and 2011:

   
December 31, 2012
  
         
Pre-Modification
    
Post-Modification
  
   
Number
    
Outstanding
    
Outstanding
  
   
of
    
Recorded
    
Recorded
  
   
Contracts
    
Investment
    
Investment
  
   
(Dollars in thousands)
  
Commercial and industrial
     8     $ 1,686     $ 1,348  
Real estate
                        
   Consumer mortgages
     38       9,875       9,109  
   Agricultural
     2       853       861  
   Commercial and industrial-owner occupied
     30       14,367       13,741  
   Construction, acquisition and development
     37       21,583       21,159  
   Commercial
     12       8,159       8,132  
All other
     9       1,855       1,692  
     Total
     136     $ 58,378     $ 56,042  

 
 
96
 

 
   
December 31, 2011
  
         
Pre-Modification
    
Post-Modification
  
   
Number
    
Outstanding
    
Outstanding
  
   
of
    
Recorded
    
Recorded
  
   
Contracts
    
Investment
    
Investment
  
   
(Dollars in thousands)
  
Commercial and industrial
     7     $ 3,142     $ 2,374  
Real estate
                        
   Consumer mortgages
     35       6,901       6,424  
   Agricultural
     4       2,650       1,479  
   Commercial and industrial-owner occupied
     29       13,330       11,740  
   Construction, acquisition and development
     30       23,863       19,228  
   Commercial
     24       16,121       15,046  
All other
     7       2,957       2,406  
     Total
     136     $ 68,964     $ 58,697  

The following tables summarize TDRs modified during 2012 and 2011 for which there was a payment default (i.e., 30 days or more past due at any given time during 2012 or 2011):

   
Year ended December 31, 2012
  
   
Number of
    
Recorded
  
   
Contracts
    
Investment
  
   
(Dollars in thousands)
  
Commercial and industrial
     2     $ 179  
Real estate
                
   Consumer mortgages
     18       2,096  
   Agricultural
     1       170  
   Commercial and industrial-owner occupied
     11       2,659  
   Construction, acquisition and development
     21       5,503  
   Commercial
     4       2,525  
All other
     1       7  
     Total
     58     $ 13,139  


   
Year ended December 31, 2011
  
   
Number of
    
Recorded
  
   
Contracts
    
Investment
  
   
(Dollars in thousands)
  
Commercial and industrial
     4     $ 1,506  
Real estate
                
   Consumer mortgages
     4       1,563  
   Agricultural
     3       1,382  
   Commercial and industrial-owner occupied
     6       1,683  
   Construction, acquisition and development
     13       3,622  
   Commercial
     3       2,946  
All other
     1       302  
     Total
     34     $ 13,004  



 
97
 

(6)  ALLOWANCE FOR CREDIT LOSSES
The following table summarizes the changes in the allowance for credit losses for the years ended December 31, 2012, 2011 and 2010:

   
2012
    
2011
    
2010
  
   
(In thousands)
  
Balance at beginning of year
   $ 195,118     $ 196,913     $ 176,043  
Provision charged to expense
     28,000       130,081       204,016  
Recoveries
     30,746       10,179       7,876  
Loans and leases charged off
     (89,398 )     (142,055 )     (191,022 )
Balance at end of year
   $ 164,466     $ 195,118     $ 196,913  


The following tables summarize the changes in the allowance for credit losses by segment and class for 2012 and 2011:

   
2012
  
   
Balance,
                      
Balance,
  
   
Beginning of
                      
End of
  
   
Period
    
Charge-offs
    
Recoveries
    
Provision
    
Period
  
   
(In thousands)
  
Commercial and industrial
   $ 20,724     $ (12,362 )   $ 7,096     $ 7,828     $ 23,286  
Real estate
                                        
  Consumer mortgage
     36,529       (13,122 )     1,836       10,723       35,966  
  Home equity
     8,630       (2,721 )     496       (400 )     6,005  
  Agricultural
     3,921       (1,240 )     126       494       3,301  
  Commercial and industrial-owner occupied
     21,929       (9,015 )     2,696       4,568       20,178  
  Construction, acquisition and development
     45,562       (33,085 )     8,407       1,021       21,905  
  Commercial
     39,444       (12,728 )     8,538       4,827       40,081  
Credit cards
     4,021       (2,221 )     527       1,284       3,611  
All other
     14,358       (2,904 )     1,024       (2,345 )     10,133  
    Total
   $ 195,118     $ (89,398 )   $ 30,746     $ 28,000     $ 164,466  


   
2011
  
   
Balance,
                      
Balance,
  
   
Beginning of
                      
End of
  
   
Period
    
Charge-offs
    
Recoveries
    
Provision
    
Period
  
   
(In thousands)
  
Commercial and industrial
   $ 22,479     $ (17,337 )   $ 1,567     $ 14,015     $ 20,724  
Real estate
                                        
  Consumer mortgage
     35,540       (10,186 )     1,111       10,064       36,529  
  Home equity
     7,305       (5,852 )     185       6,992       8,630  
  Agricultural
     4,997       (3,420 )     123       2,221       3,921  
  Commercial and industrial-owner occupied
     20,403       (10,302 )     393       11,435       21,929  
  Construction, acquisition and development
     59,048       (67,362 )     3,951       49,925       45,562  
  Commercial
     33,439       (17,436 )     1,045       22,396       39,444  
Credit cards
     4,126       (3,072 )     803       2,164       4,021  
All other
     9,576       (7,088 )     1,001       10,869       14,358  
    Total
   $ 196,913     $ (142,055 )   $ 10,179     $ 130,081     $ 195,118  



 
 
98
 
The following tables provide the allowance for credit losses by segment and class based on impairment status at December 31, 2012 and 2011:

   
December 31, 2012
  
   
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
   $ 4,845     $ 1,241     $ 22,045     $ 23,286  
Real estate
                                
  Consumer mortgage
     15,107       1,103       34,863       35,966  
  Home equity
     1,380       111       5,894       6,005  
  Agricultural
     5,382       92       3,209       3,301  
  Commercial and industrial-owner occupied
     16,720       864       19,314       20,178  
  Construction, acquisition and development
     61,335       4,350       17,555       21,905  
  Commercial
     50,413       2,720       37,361       40,081  
Credit cards
     -       -       3,611       3,611  
All other
     1,546       60       10,073       10,133  
    Total
   $ 156,728     $ 10,541     $ 153,925     $ 164,466  


   
December 31, 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
   $ 7,833     $ 4,071     $ 16,653     $ 20,724  
Real estate
                                
  Consumer mortgage
     31,793       4,386       32,143       36,529  
  Home equity
     675       48       8,582       8,630  
  Agricultural
     3,096       380       3,541       3,921  
  Commercial and industrial-owner occupied
     24,801       3,601       18,328       21,929  
  Construction, acquisition and development
     128,179       21,581       23,981       45,562  
  Commercial
     36,122       5,324       34,120       39,444  
Credit cards
     -       -       4,021       4,021  
All other
     2,424       317       14,041       14,358  
    Total
   $ 234,923     $ 39,708     $ 155,410     $ 195,118  

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

 
 
99
 

(7)  OTHER REAL ESTATE OWNED
The following table presents the activity in other real estate owned for the years ended December 31, 2012 and 2011:

   
2012
    
2011
  
   
(In Thousands)
  
Balance at beginning of year
   $ 173,805     $ 133,412  
Additions to foreclosed properties
                
     New foreclosed property
     32,389       125,234  
Reductions in foreclosed properties
                
     Sales
     (81,220 )     (64,488 )
     Writedowns
     (21,726 )     (20,353 )
Balance at end of year
   $ 103,248     $ 173,805  

Substantially all of these amounts related to construction, acquisition and development projects that were either completed or were in various stages of construction during the year presented.  The following table presents the other real estate owned by geographical location and collateral type at December 31, 2012:

   
Alabama
                      
Greater
                          
   
and Florida
                      
Memphis
          
Texas and
              
   
Panhandle
    
Arkansas*
    
Mississippi*
    
Missouri
    
Area
    
Tennessee*
    
Louisiana
    
Other
    
Total
  
   
(In thousands)
        
Commercial and industrial
   $ 395     $ -     $ 106     $ -     $ -     $ -     $ -     $ -     $ 501  
Real estate
                                                                        
   Consumer mortgages
     1,714       173       2,220       -       961       624       760       3,665       10,117  
   Home equity
     -       -       -       -       -       -       -       -       -  
   Agricultural
     856       -       99       -       1,089       2,169       212       -       4,425  
   Commercial and industrial-owner occupied
     155       146       1,602       -       2,630       66       146       -       4,745  
   Construction, acquisition and development
     13,610       1,430       15,659       734       35,717       9,535       1,844       448       78,977  
   Commercial
     478       1,420       3       263       819       76       176       -       3,235  
All other
     46       16       227       92       734       12       89       32       1,248  
     Total
   $ 17,254     $ 3,185     $ 19,916     $ 1,089     $ 41,950     $ 12,482     $ 3,227     $ 4,145     $ 103,248  
                                                                         
*  Excludes the Greater Memphis Area
                                                                        

The Company incurred total foreclosed property expenses of $39.4 million, $27.8 million and $18.4 million in 2012, 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 $30.2 million, $21.4 million and $14.2 million in 2012, 2011 and 2010, respectively.

(8)  PREMISES AND EQUIPMENT
A summary by asset classification at December 31, 2012 and 2011 follows:

   
Estimated
              
   
Useful Life
              
   
(Years)
    
2012
    
2011
  
         
(In thousands)
  
Land
     N/A     $ 76,611     $ 73,978  
Buildings and improvements
     10-40       317,824       305,814  
Leasehold improvements
     10-39       9,759       9,626  
Equipment, furniture and fixtures
     3-12       280,423       273,449  
Construction in progress
     N/A       7,363       14,317  
     Subtotal
             691,980       677,184  
Accumulated depreciation and amortization
             372,524       353,801  
     Premises and equipment, net
           $ 319,456     $ 323,383  


 
100
 
 
(9)  GOODWILL AND OTHER INTANGIBLE ASSETS
    The following tables present the changes in the carrying amount of goodwill by operating segment for the years ended December 31, 2012 and 2011:


   
2012
  
   
Community
    
Insurance
        
   
Banking
    
Agencies
    
Total
  
   
(In thousands)
  
Balance as of January 1, 2012
   $ 217,618     $ 53,679     $ 271,297  
Goodwill recorded during the year
     -       3,876       3,876  
Balance as of December 31, 2012
   $ 217,618     $ 57,555     $ 275,173  



   
2011
  
   
Community
    
Insurance
        
   
Banking
    
Agencies
    
Total
  
   
(In thousands)
  
Balance as of January 1, 2011
   $ 217,618     $ 52,479     $ 270,097  
Goodwill recorded during the year
     -       1,200       1,200  
Balance as of December 31, 2011
   $ 217,618     $ 53,679     $ 271,297  

The goodwill recorded in the Company’s Insurance Agencies reporting segment during 2012 was related to an insurance agency acquired during the third quarter of 2012.  The goodwill recorded in this reporting segment during 2011 was related to an earn-out payment associated with an insignificant 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 segment is below its carrying amount.  Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value.  Accounting standards require management to estimate the fair value of each reporting segment in assessing impairment at least annually.  The Company’s annual assessment date is during the Company’s fourth quarter.  The Company’s annual goodwill impairment evaluation performed during the fourth quarter of 2012 indicated no impairment of goodwill for its reporting segments as the estimated fair value exceeded its respective carrying value by 23% for the Company’s Community Banking reporting segment and by 26% for the Company’s Insurance Agencies reporting segment.  Therefore, no goodwill impairment was recorded during 2012.  The Company’s annual goodwill impairment evaluation for 2011 also indicated no impairment of goodwill for its reporting segments.  The Company will continue to test reporting segment goodwill for potential impairment on an annual basis in the Company’s fourth quarter, or sooner if a goodwill impairment indicator is identified.
In the current economic environment, forecasting cash flows, credit losses and growth in addition to valuing the Company’s assets with any degree of assurance is very difficult and subject to significant changes over very short periods of time.  Management will continue to update its analysis as circumstances change.  As market conditions continue to be volatile and unpredictable, impairment of goodwill related to the Company’s reporting segments may be necessary in future periods.
The following tables present information regarding the components of the Company’s identifiable intangible assets included in the other assets category on the consolidated balance sheet for the years ended December 31, 2012 and 2011:

 
 
101
 

 
   
Year ended
    
Year ended
  
   
December 31, 2012
    
December 31, 2011
  
   
Gross Carrying
    
Accumulated
    
Gross Carrying
    
Accumulated
  
   
Amount
    
Amortization
    
Amount
    
Amortization
  
Amortized intangible assets:
  
(In thousands)
  
Core deposit intangibles
   $ 27,801     $ 21,674     $ 27,801     $ 20,728  
Customer relationship intangibles
     36,239       26,098       32,749       23,935  
Non-solicitation intangibles
     525       151       75       38  
Total
   $ 64,565     $ 47,923     $ 60,625     $ 44,701  
                                 
Unamortized intangible assets:
                                
Trade names
   $ 688     $ -     $ 688     $ -  
                                 
   
Year ended
                  
   
December 31,
                  
      2012       2011                  
Aggregate amortization expense for:
  
(In thousands)
                  
Core deposit intangibles
   $ 946     $ 1,012                  
Customer relationship intangibles
     2,163       2,274                  
Non-solicitation intangibles
     113       38                  
Total
   $ 3,222     $ 3,324                  

The following table presents information regarding estimated amortization expense of the Company’s amortizable identifiable intangible assets for the year ending December 31, 2013, and the succeeding four years:


   
Core
    
Customer
    
Non-
        
   
Deposit
    
Relationship
    
Solicitation
        
   
Intangibles
    
Intangibles
    
Intangibles
    
Total
  
Estimated amortization expense:
  
(In thousands)
  
For the year ending December 31, 2013
   $ 582     $ 2,101     $ 150     $ 2,833  
For the year ending December 31, 2014
     526       1,820       150       2,496  
For the year ending December 31, 2015
     487       1,497       75       2,059  
For the year ending December 31, 2016
     451       1,161       -       1,612  
For the year ending December 31, 2017
     419       992       -       1,411  



(10) TIME DEPOSITS AND SHORT-TERM DEBT
Certificates of deposit and other time deposits of $100,000 or more amounting to $1.2 billion and $1.4 billion were outstanding at December 31, 2012 and 2011, respectively.  Total interest expense relating to certificates of deposit and other time deposits of $100,000 or more totaled $20.8 million, $28.7 million and $41.7 million for the years ended December 31, 2012, 2011 and 2010, respectively.


 
102
 

    For time deposits with a remaining maturity of more than one year at December 31, 2012, the aggregate amount of time deposits maturing in each of the following five years is presented in the following table:

 
 
Maturing in
  
Amount
  
   
(In thousands)
  
2014
   $ 577,392  
2015
     247,202  
2016
     120,322  
2017
     135,827  
2018
     71  
Thereafter
     142  
  Total
   $ 1,080,956  

The following tables present information relating to short-term debt for the years ended December 31, 2012, 2011 and 2010:

   
2012
  
                           
Maximum
  
   
End of Period
  
Daily Average
  
Outstanding
  
         
Interest
        
Interest
  
at any
  
   
Balance
    
Rate
  
Balance
    
Rate
  
Month End
  
   
(Dollars in thousands)
  
Federal funds purchased
   $ -       - %   $ 1,180       0.32 %   $ -  
Securities sold under agreement to repurchase
     414,611       0.07       379,871       0.07       423,553  
Short-term FHLB advances
     -       -       1,053       4.71       1,500  
    Total
   $ 414,611             $ 382,104             $ 425,053  


   
2011
  
                           
Maximum
  
   
End of Period
  
Daily Average
  
Outstanding
  
         
Interest
        
Interest
  
at any
  
   
Balance
    
Rate
  
Balance
    
Rate
  
Month End
  
   
(Dollars in thousands)
  
                               
Securities sold under agreement to repurchase
   $ 373,933       0.07 %   $ 435,931       0.10 %   $ 493,157  
Short-term FHLB advances
     1,500       4.71       1,580       5.72       2,723  
    Total
   $ 375,433             $ 437,511             $ 495,880  


   
2010
  
                           
Maximum
  
   
End of Period
  
Daily Average
  
Outstanding
  
         
Interest
        
Interest
  
at any
  
   
Balance
    
Rate
  
Balance
    
Rate
  
Month End
  
   
(Dollars in thousands)
  
Federal funds purchased
   $ -       - %   $ 877       0.11 %   $ -  
Securities sold under agreement to repurchase
     440,593       0.15       486,621       0.17       514,659  
Short-term FHLB advances
     2,727       5.72       51,638       1.03       152,738  
    Total
   $ 443,320             $ 539,136             $ 667,397  

 
 
103
 
 
    Federal funds purchased generally mature the day following the date of purchase while securities sold under repurchase agreements generally mature within 30 days from the date of sale.  Federal Reserve discount window borrowings generally mature within 90 days following the date of purchase and short-term FHLB borrowings generally mature within 30 days following the date of purchase.  At December 31, 2012, the Bank had established non-binding federal funds borrowing lines of credit with other banks aggregating $659.0 million.
 
(11) LONG-TERM FEDERAL HOME LOAN BANK BORROWINGS
The Bank has entered into a blanket floating lien security agreement with the FHLB of Dallas.  Under the terms of this agreement, the Bank is required to maintain sufficient collateral to secure borrowings in an aggregate amount of the lesser of 75% of the book value (i.e., unpaid principal balance) of the Bank’s eligible mortgage loans pledged as collateral or 35% of the Bank’s assets.  At December 31, 2012, there were no call features on long-term FHLB borrowings.
At December 31, 2012, the FHLB fixed-term advances were repayable as follows:


Final due date
  
Interest rate
    
Amount
  
         
(In thousands)
  
2015
     4.69%-5.06 %   $ 3,500  
Thereafter
     4.08 %     30,000  
  Total
           $ 33,500  


(12) JUNIOR SUBORDINATED DEBT SECURITIES
In 2002, the Company issued $128.9 million in 8.15% Junior Subordinated Debt Securities to BancorpSouth Capital Trust I (the “Trust”), a business trust. The Trust used the proceeds from the issuance of five million shares of 8.15% trust preferred securities, $25 face value per share, to acquire the 8.15% Junior Subordinated Debt Securities. Both the Junior Subordinated Debt Securities and the trust preferred securities mature on January 28, 2032, and are callable at the option of the Company.
Pursuant to the merger with Business Holding Corporation on December 31, 2004, the Company assumed the liability for $6.2 million in Junior Subordinated Debt Securities issued to Business Holding Company Trust I, a statutory trust.  Business Holding Company Trust I used the proceeds from the issuance of 6,000 shares of trust preferred securities to acquire the Junior Subordinated Debt Securities.  Both the Junior Subordinated Debt Securities and the trust preferred securities mature on April 7, 2034, and are callable at the option of the Company, in whole or in part, on any January 7, April 7, July 7 or October 7.  The Junior Subordinated Debt Securities and the trust preferred securities pay a per annum rate of interest, reset quarterly, equal to the three month London Interbank Offered Rate (“LIBOR”) plus 2.85%.
           Pursuant to the merger with American State Bank Corporation on December 1, 2005, the Company assumed the liability for $6.7 million in Junior Subordinated Debt Securities issued to American State Capital Trust I, a statutory trust.  American State Capital Trust I used the proceeds from the issuance of 6,500 shares of trust preferred securities to acquire the Junior Subordinated Debt Securities.  Both the Junior Subordinated Debt Securities and the trust preferred securities mature on April 7, 2034, and are callable at the option of the Company, in whole or in part, on July 7, October 7, January 7 or April 7.  The Junior Subordinated Debt Securities and the trust preferred securities pay a per annum rate of interest, reset quarterly, equal to the three month LIBOR plus 2.80%.
Pursuant to the merger with City Bancorp on March 1, 2007, the Company assumed the liability for $8.2 million in Junior Subordinated Debt Securities issued to Signature Bancshares Preferred Trust I, a statutory trust.  Signature Bancshares Preferred Trust I used the proceeds from the issuance of 8,000 shares of trust preferred securities to acquire the Junior Subordinated Debt Securities.  Both the Junior Subordinated Debt Securities and the trust preferred securities mature on October 8, 2033, and are callable at the option of the Company, in whole or in part, on any January 8, April 8, July 8 or October 8.  The Junior Subordinated Debt Securities and the trust preferred securities pay a per annum rate of interest, reset quarterly, equal to the three-month LIBOR plus 3.00%.
Pursuant to the merger with City Bancorp on March 1, 2007, the Company also assumed the liability for $10.3 million in Junior Subordinated Debt Securities issued to City Bancorp Preferred Trust I, a statutory trust.  City Bancorp Preferred Trust I used the proceeds from the issuance of 10,000 shares of trust preferred securities to acquire the Junior Subordinated Debt Securities.  Both the Junior Subordinated Debt Securities and the trust preferred securities mature on March 15, 2035, and are callable at the option of the Company, in whole or in part, 
 

 
104
 
 
on any March 15, June 15, September 15, or December 15.  The Junior Subordinated Debt Securities and the trust preferred securities pay a per annum rate of interest, reset quarterly, equal to the three-month LIBOR plus 2.2%.

(13) INCOME TAXES
Total income taxes for the years ended December 31, 2012, 2011 and 2010 were allocated as follows:


   
2012
    
2011
    
2010
  
   
(In thousands)
  
Income tax expense (benefit)
   $ 33,252     $ 4,475     $ (8,705 )
Shareholders' equity for other comprehensive income
     (3,943 )     7,600       (3,763 )
Shareholders' equity for stock option plans
     32       (7 )     (44 )
        Total
   $ 29,341     $ 12,068     $ (12,512 )

           The components of income tax expense (benefit) attributable to operations were as follows for the years ended December 31, 2012, 2011 and 2010:


   
2012
    
2011
    
2010
  
Current:
  
(In thousands)
  
  Federal
   $ 34,316     $ 5,643     $ 8,865  
  State
     3,389       5,400       (1,520 )
Deferred:
                        
  Federal
     (4,964 )     (1,626 )     (13,848 )
  State
     511       (4,942 )     (2,202 )
        Total
   $ 33,252     $ 4,475     $ (8,705 )
 
 
Income tax expense (benefit) differed from the amount computed by applying the U.S. federal income tax rate of 35% to income before income taxes resulting from the following:


   
2012
    
2011
    
2010
  
   
(In thousands)
  
Tax expense at statutory rates
   $ 41,141     $ 14,715     $ 4,983  
Increase (decrease) in taxes resulting from:
                        
  State income taxes, net of federal tax benefit
     2,453       266       (2,419 )
  Tax-exempt interest revenue
     (7,789 )     (7,881 )     (6,605 )
  Tax-exempt earnings on life insurance
     (2,790 )     (2,647 )     (2,659 )
  Deductible dividends paid on 401(k) plan
     (100 )     (331 )     (1,972 )
  Other, net
     337       353       (33 )
        Total
   $ 33,252     $ 4,475     $ (8,705 )
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2012 and 2011 were as follows:

 

 
 
105
 
 
   
2012
    
2011
  
Deferred tax assets:
  
(In thousands)
  
  Loans, principally due to allowance
            
     for credit losses
   $ 62,206     $ 73,911  
  Other real estate owned
     13,027       10,429  
  Mark to market - securities
     4,160       4,165  
  Accrued liabilities, principally due to
                
    compensation arrangements and vacation accruals
     19,564       10,681  
  Other
     217       312  
  Investments, principally due to interest income recognition
     516       -  
  State tax credits (net of federal benefit)
     428       1,040  
  Unrecognized pension expense
     31,374       26,428  
    Total gross deferred tax assets
     131,492       126,966  
    Less:  valuation allowance
     -       -  
    Deferred tax assets
   $ 131,492     $ 126,966  
Deferred tax liabilities:
                
  Lease transactions
   $ 34,532     $ 37,509  
  Employment benefits
     22,392       26,991  
  Premises and equipment, principally due
                
    to differences in depreciation
     26,824       27,221  
  Mortgage servicing rights
     14,313       11,405  
  Intangible assets
     10,439       10,336  
  Investments, principally due to interest income recognition
     -       147  
  Deferred loan points
     2,650       2,656  
  Other assets, principally due to expense recognition
     767       525  
  Unrealized net losses on available-for-sale securities
     26,066       25,064  
      Total gross deferred tax liabilities
     137,983       141,854  
      Net deferred tax liabilities
   $ (6,491 )   $ (14,888 )


The Company has a deferred state tax asset of approximately $428,000 resulting from state tax credit carryforwards.  These carryforwards expire in 2031 and 2032.
Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences existing at December 31, 2012.
The following table presents the activity in unrecognized tax benefits for 2012, 2011 and 2010:

   
2012
    
2011
    
2010
  
   
(In thousands)
  
Unrecognized tax benefit, January 1
   $ 1,102     $ 355     $ 355  
Gross increases - tax positions in prior period
     199       873       -  
Gross decreases - tax positions in prior period
     -       (355 )     -  
Gross increases - tax positions in current period
     270       229       -  
Settlements
     -       -       -  
Lapse of statute of limitations
     -       -       -  
Unrecognized tax benefit, December 31
   $ 1,571     $ 1,102     $ 355  

The balance of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $1.6 million, $1.1 million and approximately $355,000 at both December 31, 2012, 2011 and 2010, respectively.
The Company recognizes accrued interest related to unrecognized tax benefits and penalties as a component of other noninterest expense.  The Company accrued interest related to the uncertain tax benefits noted above of approximately $329,000, $26,000 and $28,000 during 2012, 2011, and 2010.  The company recognized a
 
 
106
 
 
total liability for interest of approximately $560,000, $231,000 and $191,000, at December 31, 2012, 2011 and 2010, respectively.
    Management does not expect that unrecognized tax benefits will significantly increase or decrease within the next 12 months.
    The Company is subject to taxation in the United States and various states and local jurisdictions.  The Company files a consolidated United States federal return.  Based on the laws of the applicable state where the Company conducts business operations, the Company and its applicable subsidiaries either file a consolidated, combined or separate return.  The tax years that remain open for examination for the Company’s major jurisdictions of the United States - Mississippi, Arkansas, Tennessee, Alabama, Louisiana and Missouri - are 2009, 2010 and 2011.  With few exceptions, the Company is no longer subject to United States federal, states or local examinations by tax authorities for years before 2009.  Currently, there are disputed tax positions taken in previously filed tax returns with certain states, including positions regarding the allocation of income and expenses.  The Company continues to evaluate these positions and intends to contest the proposed adjustments made by these tax authorities.  The Company does not anticipate that the ultimate resolution of these examinations will result in a material impact on the financial position or results of operations of the Company.

(14)  PENSION, OTHER POST RETIREMENT BENEFIT AND PROFIT SHARING PLANS
The Basic Plan is a non-contributory defined benefit pension plan managed by a trustee covering substantially all full-time employees who have at least one year of service and have attained the age of 21.  For such employees hired prior to January 1, 2006, benefits are based on years of service and the employee’s compensation until January 1, 2017, at which time benefits will be based on a 2.5% cash balance formula.  For such employees hired on or after January 1, 2006, benefits accrue based on a cash balance formula, effective January 1, 2012.  The Company's funding policy is to contribute to the Basic Plan the amount that meets the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Company determines to be appropriate. The difference between the plan assets and projected benefit obligation is included in other assets or other liabilities, as appropriate. Actuarial assumptions are evaluated periodically.
The Restoration Plan provides for the payment of retirement benefits to certain participants in the Basic Plan.  The Restoration Plan is a non-qualified plan that covers any employee whose benefit under the Basic Plan is limited by the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and any employee who elects to participate in the BancorpSouth, Inc. Deferred Compensation Plan, which reduces the employee’s benefit under the Basic Plan.  For such employees hired prior to January 1, 2006, benefits are based on years of service and the employee’s compensation until January 1, 2017, at which time benefits will be based on a 2.5% cash balance formula.  For such employees hired on or after January 1, 2006, benefits accrue based on a cash balance formula, effective January 1, 2012.  The Supplemental Plan is a non-qualified defined benefit supplemental retirement plan for certain key employees.  Benefits commence when the employee retires and are payable over a period of ten years.
The Company uses a December 31 measurement date for its pension and other benefit plans.


 
107
 
 
A summary of the three defined benefit retirement plans at and for the years ended December 31, 2012, 2011 and 2010 follows:

   
Pension Benefits
  
   
2012
    
2011
    
2010
  
Change in benefit obligations:
  
(In thousands)
  
Projected benefit obligations at beginning of year
   $ 182,362     $ 156,595     $ 134,892  
Service cost
     9,670       8,107       7,449  
Interest cost
     8,104       8,327       7,676  
Amendments
     300       (8,494 )     -  
Actuarial loss
     22,417       22,253       11,457  
Benefits paid
     (8,232 )     (4,197 )     (4,879 )
Administrative expenses paid
     (817 )     (229 )     -  
Projected benefit obligations at end of year
   $ 213,804     $ 182,362     $ 156,595  
Change in plans' assets:
                        
Fair value of plans' assets at beginning of year
   $ 195,004     $ 197,536     $ 180,217  
Actual return on assets
     16,631       1,347       21,488  
Employer contributions
     1,118       547       710  
Benefits paid
     (8,232 )     (4,197 )     (4,879 )
Administrative expenses paid
     (817 )     (229 )     -  
Fair value of plans' assets at end of year
   $ 203,704     $ 195,004     $ 197,536  
Funded status:
                        
Projected benefit obligations
   $ (213,804 )   $ (182,362 )   $ (156,595 )
Fair value of plans' assets
     203,704       195,004       197,536  
Unrecognized transition amount
     -       -       -  
Unrecognized prior service cost
     -       -       -  
Unrecognized actuarial loss
     -       -       -  
Net amount recognized
   $ (10,100 )   $ 12,642     $ 40,941  


Amounts recognized in the consolidated balance sheets consisted of:


   
Pension Benefits
  
   
2012
    
2011
    
2010
  
   
(In thousands)
  
Prepaid benefit cost
   $ 94,046     $ 102,307     $ 104,749  
Accrued benefit liability
     (22,123 )     (20,572 )     (18,678 )
Intangible asset
     -       -       -  
Accumulated other comprehensive
                        
  income adjustment
     (82,023 )     (69,093 )     (45,130 )
Net amount recognized
   $ (10,100 )   $ 12,642     $ 40,941  


Pre-tax amounts recognized in accumulated other comprehensive income consisted of:


   
Year ended December 31,
  
   
2012
    
2011
  
   
(In thousands)
  
             
Net transition obligation
   $ 37     $ 55  
Net prior service benefit
     (6,134 )     (6,901 )
Net actuarial loss
     88,120       75,939  
Total accumulated other comprehensive income
   $ 82,023     $ 69,093  

 
 
108
 
 
The net transition obligation, net prior service credit and net actuarial loss that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are approximately $18,000, $768,000 and $6,099,000, respectively.
The components of net periodic benefit cost at December 31, 2012, 2011 and 2010 were as follows:


   
Pension Benefits
  
   
2012
    
2011
    
2010
  
Components of net periodic benefit cost:
  
(In thousands)
  
Service cost
   $ 9,670     $ 8,107     $ 7,449  
Interest cost
     8,104       8,327       7,676  
Expected return on assets
     (11,263 )     (14,864 )     (14,032 )
Amortization of unrecognized transition amount
     18       18       18  
Recognized prior service (benefit) cost
     (768 )     31       341  
Recognized net loss
     4,868       3,264       2,218  
Special termination benefit
     300       -       -  
Net periodic benefit cost
   $ 10,929     $ 4,883     $ 3,670  


The weighted-average assumptions used to determine benefit obligations at December 31, 2012 and 2011 were as follows:

   
Basic Plan
    
Restoration Plan
    
Supplemental Plan
  
   
2012
    
2011
    
2012
    
2011
    
2012
    
2011
  
Discount rate
     4.05 %     4.80 %     3.65 %     4.45 %     2.85 %     3.85 %
Rate of compensation increase*
     3.00 %     2.00 %     3.00 %     2.00 %     3.00 %     2.00 %
                                                 
* 3.00% rate of compensation increase used for 2012 and beyond.
                          

The weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31, 2012, 2011 and 2010 were as follows:

   
Basic Plan
  
   
2012
    
2011
    
2010
  
Discount rate
     4.80 %     5.50 %     6.00 %
Rate of compensation increase
     3.00 %     3.00 %     3.00 %
Expected rate of return on plan assets
     6.00 %     8.00 %     8.00 %


   
Restoration Plan
  
   
2012
    
2011
    
2010
  
Discount rate
     4.45 %     5.15 %     5.85 %
Rate of compensation increase
     3.00 %     3.00 %     3.00 %
Expected rate of return on plan assets
     N/A       N/A       N/A  


 
   
Supplemental Plan
  
   
2012
    
2011
    
2010
  
Discount rate
     3.85 %     4.50 %     5.35 %
Rate of compensation increase
     3.00 %     3.00 %     3.00 %
Expected rate of return on plan assets
     N/A       N/A       N/A  
N/A = not applicable
                        


 
109
 

    The following table presents information related to the Restoration Plan and Supplemental Plan that had accumulated benefit obligations in excess of plan assets at December 31, 2012 and 2011:


   
2012
    
2011
  
   
(In thousands)
  
Projected benefit obligation
   $ 32,659     $ 26,712  
Accumulated benefit obligation
     31,154       25,409  
Fair value of assets
     -       -  


The following table presents information related to the Company’s defined benefit pension plans at December 31, 2012 and 2011:

             
   
2012
    
2011
  
   
(In thousands)
  
Accumulated benefit obligation
   $ 205,298     $ 172,439  


In selecting the expected long-term rate of return on assets used for the Basic Plan, the Company considered the average rate of earnings expected on the funds invested or to be invested to provide for the benefits of the plan.  This included considering the trust asset allocation and the expected returns likely to be earned over the life of the plan.  This basis is consistent with the prior year.  The discount rate is the rate used to determine the present value of the Company’s future benefit obligations for its pension and other postretirement benefit plans.  The discount rate used to discount plan liabilities is determined by matching the timing and duration of expected cash flows of the Company’s pension obligations to a yield curve generated from a broad portfolio of high-quality fixed income debt instruments.
The Company’s pension plan weighted-average asset allocations at December 31, 2012 and 2011 and the Company’s target allocations for 2013, by asset category, were as follows:

   
Plan assets at December 31
    
Target for
  
Asset category:
  
2012
    
2011
    
2013
  
                   
Equity securities
     32.92 %     36.87 %     33 %
Debt securities
     61.19 %     58.16 %     67 %
Cash and equivalents
     5.89 %     4.97 %     0 %
Total
     100.00 %     100.00 %        

Equity securities held in the Basic Plan included shares of the Company’s common stock with a fair value of $1.2 million (0.58% of total plan assets) and approximately $907,000 (0.46% of total plan assets) at December 31, 2012 and 2011, respectively.  An analysis by management is performed annually to determine whether the Company will make a contribution to the Basic Plan.
The following table presents information regarding expected future benefit payments, which reflect expected service, as appropriate:


   
Pension
  
   
Benefits
  
Expected future benefit payments:
  
(In thousands)
  
2013
   $ 10,560  
2014
     11,650  
2015
     13,238  
2016
     11,965  
2017
     12,285  
2018-2022
     66,277  



 
110
 
 
The following table presents the fair value of each major category of plan assets held in the Basic Plan at December 31, 2012 and 2011:

   
Pension Benefits
  
   
2012
    
2011
  
Investments, at fair value:
  
(In thousands)
  
Cash
   $ 88     $ -  
U.S. agency debt obligations
     49,886       70,757  
Mutual funds
     138,904       112,995  
Common stock of BancorpSouth, Inc.
     1,196       907  
Money market funds
     9,356       4,701  
Brokered certificates of deposit
     3,784       4,965  
   Total investments, at fair value
     203,214       194,325  
Accrued interest and dividends
     490       679  
Fair value of plan assets
   $ 203,704     $ 195,004  

Fair values are determined based on valuation techniques categorized as follows:  Level 1 means the use of quoted prices for identical instruments in active markets; Level 2 means the use of quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable; Level 3 means the use of unobservable inputs.  Quoted market prices, when available, are used to value investments.  Pension plan investments include funds which invest in various types of investment securities and in various companies within various markets.  Investment securities are exposed to several risks, such as interest rate, market and credit risks.  Because of the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported.
The following table sets forth by level, within the FASB ASC 820, Fair Value Measurements and Disclosure (“FASB ASC 820”), fair value hierarchy, the plan investments at fair value as of December 31, 2012 and 2011:

   
December 31, 2012
  
   
Level 1
    
Level 2
    
Level 3
    
Total
  
   
(In thousands)
  
U.S. agency debt obligations
   $ -     $ 49,886     $ -     $ 49,886  
Mutual funds
     138,904       -       -       138,904  
Common stock of BancorpSouth, Inc.
     1,196       -       -       1,196  
Money market funds
     -       9,356       -       9,356  
Brokered certificates of deposit
     -       3,784       -       3,784  
     Total
   $ 140,100     $ 63,026     $ -     $ 203,126  


   
December 31, 2011
  
   
Level 1
    
Level 2
    
Level 3
    
Total
  
   
(In thousands)
  
U.S. agency debt obligations
   $ -     $ 70,757     $ -     $ 70,757  
Mutual funds
     112,995       -       -       112,995  
Common stock of BancorpSouth, Inc.
     907       -       -       907  
Money market funds
     -       4,701       -       4,701  
Brokered certificates of deposit
     -       4,965       -       4,965  
     Total
   $ 113,902     $ 80,423     $ -     $ 194,325  

There were no transfers between Levels of the fair value hierarchy in 2012 or 2011.


 
111
 



The following investments represented 5% or more of the total plan asset value as of December 31, 2012:

   
2012
  
   
(In thousands)
  
Fidelity Advisor New Insight S Institution
   $ 11,947  
T. Rowe Price Equity Income Fund
     11,151  
Dodge & Cox Income Fund
     11,339  
Pioneer Multi-Asset Ultrashort Inc. Fund
     15,129  
Fidelity Total Bond
     17,120  
Vanguard Total Bond Market Index Institutional Fund
     18,501  


The Company has a defined contribution plan (commonly referred to as a “401(k) Plan”).  Pursuant to the 401(k) Plan, employees may contribute a portion of their compensation, as set forth in the 401(k) Plan, subject to the limitations as established by the Code.  Employee contributions (up to 5% of defined compensation) are matched dollar-for-dollar by the Company.  Employer contributions were $9.2 million, $8.6 million and $8.6 million for the years ended December 31, 2012, 2011 and 2010, respectively.  Until December 31, 2011, the 401(k) Plan provided that the Company make a profit sharing contribution on behalf of each eligible employee in an amount equal to two percent of each such employee’s eligible compensation.  Eligible employees were those hired after December 31, 2005 who worked at least 1,000 hours during the plan year and had attained the age of 21.  As of December 31, 2011, the 401(k) Plan was amended and the profit sharing contribution was discontinued.  Employer profit sharing contributions were $1.3 million for each of the years ended December 31, 2011 and 2010.

(15) FAIR VALUE DISCLOSURES
“Fair value” is defined by 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 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 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
 
 
 
112
 
 
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 ranging from 1.6% to 4.5%.  The Company also considers the associated counterparty credit risk when determining the fair value of these instruments.  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 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 subjected to nonrecurring fair value adjustments.  Estimated fair value is determined on the basis of independent appraisals and other relevant factors less an average of 7%.  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 December 31, 2012 and 2011:
 
 
 
113
 

   
December 31, 2012
  
   
Level 1
    
Level 2
    
Level 3
    
Total
  
Assets:
  
(In thousands)
  
Available-for-sale securities:
                        
   U.S. Government agencies
   $ -     $ 1,401,996     $ -     $ 1,401,996  
   Government agency issued residential
                                
     mortgage-back securities
     -       366,875       -       366,875  
   Government agency issued commercial
                                
     mortgage-back securities
     -       91,445       -       91,445  
   Obligations of states and political
                                
     subdivisions
     -       565,873       -       565,873  
   Collateralized debt obligations
     -       -       -       -  
   Other
     744       7,099       -       7,843  
Mortgage servicing rights
     -       -       37,882       37,882  
Derivative instruments
     -       -       55,684       55,684  
     Total
   $ 744     $ 2,433,288     $ 93,566     $ 2,527,598  
Liabilities:
                                
Derivative instruments
   $ -     $ -     $ 52,773     $ 52,773  


   
December 31, 2011
  
   
Level 1
    
Level 2
    
Level 3
    
Total
  
Assets:
  
(In thousands)
  
Available-for-sale securities:
                        
   U.S. Government agencies
   $ -     $ 1,501,243     $ -     $ 1,501,243  
   Government agency issued residential
                                
     mortgage-back securities
     -       404,610       -       404,610  
   Government agency issued commercial
                                
     mortgage-back securities
     -       34,599       -       34,599  
   Obligations of states and political
                                
     subdivisions
     -       563,520       -       563,520  
   Collateralized debt obligations
     -       -       -       -  
   Other
     561       8,985       -       9,546  
Mortgage servicing rights
     -       -       30,174       30,174  
Derivative instruments
     -       -       55,749       55,749  
     Total
   $ 561     $ 2,512,957     $ 85,923     $ 2,599,441  
Liabilities:
                                
Derivative instruments
   $ -     $ -     $ 55,407     $ 55,407  

The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the years ended December 31, 2012 and 2011:
 
 
 
114
 

   
Mortgage
          
Available-
  
   
Servicing
    
Derivative
    
for-sale
  
   
Rights
    
Instruments
    
Securities
  
   
(In thousands)
  
Balance at December 31, 2011
   $ 30,174     $ 342     $ -  
     Total net gains for the year included in:
                        
        Net income
     7,708       2,569       -  
        Other comprehensive income
     -       -       -  
     Purchases, sales, issuances and settlements, net
     -       -       -  
     Transfers in and/or out of Level 3
     -       -       -  
Balance at December 31, 2012
   $ 37,882     $ 2,911     $ -  
Net unrealized (losses) gains included in net income for the
                        
     year relating to assets and liabilities held at December 31, 2012
   $ (3,163 )   $ 2,569     $ -  


   
Mortgage
          
Available-
  
   
Servicing
    
Derivative
    
for-sale
  
   
Rights
    
Instruments
    
Securities
  
   
(In thousands)
  
Balance at December 31, 2010
   $ 38,642     $ 2,685     $ -  
     Total net losses for the year included in:
                        
        Net loss
     (8,468 )     (2,343 )     -  
        Other comprehensive income
     -       -       -  
     Purchases, sales, issuances and settlements, net
     -       -       -  
     Transfers in and/or out of Level 3
     -       -       -  
Balance at December 31, 2011
   $ 30,174     $ 342     $ -  
Net unrealized losses included in net income for the
                        
     year relating to assets and liabilities held at December 31, 2011
   $ (13,966 )   $ (2,343 )   $ -  


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 December 31, 2012 and 2011:

   
December 31, 2012
  
                           
Total
  
   
Level 1
    
Level 2
    
Level 3
    
Total
    
Gains (Losses)
  
Assets:
  
(In thousands)
  
Loans held for sale
   $ -     $ 129,138     $ -     $ 129,138     $ -  
Impaired loans
     -       -       156,728       156,728       (10,541 )
Other real estate owned
     -       -       103,248       103,248       (31,055 )



   
December 31, 2011
  
                           
Total
  
   
Level 1
    
Level 2
    
Level 3
    
Total
    
Gains (Losses)
  
Assets:
  
(In thousands)
  
Loans held for sale
   $ -     $ 83,458     $ -     $ 83,458     $ -  
Impaired loans
     -       -       234,923       234,923       (39,708 )
Other real estate owned
     -       -       173,805       173,805       (21,641 )


 
115
 


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 that are used by the Company in estimating fair values of financial instruments and that are not disclosed above in this Note 15 are set forth below.
 
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.  All of the Company’s loans and leases are classified as Level 3.

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.  The Company’s noninterest bearing demand deposits, interest bearing demand deposits and savings are classified as Level 1.  Certificates of deposit are classified as Level 2.

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 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.  The Company’s federal funds purchased, repurchase agreements and junior subordinated debt are classified as Level 1.  FHLB advances are classified as Level 2.

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 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 Company’s lending commitments are classified as Level 1.  See Note 24, Commitments and Contingent Liabilities, for additional information regarding lending commitments.
The following table presents carrying and fair value information of financial instruments at December 31, 2012 and 2011:
 

 
116
 
 
   
2012
    
2011
  
   
Carrying
    
Fair
    
Carrying
    
Fair
  
   
Value
    
Value
    
Value
    
Value
  
Assets:
  
(In thousands)
  
Cash and due from banks
   $ 223,814     $ 223,814     $ 195,681     $ 195,681  
Interest bearing deposits with other banks
     979,800       979,800       303,663       303,663  
Available-for-sale and trading securities
     2,434,032       2,434,032       2,513,518       2,513,518  
Net loans and leases
     8,472,523       8,546,810       8,675,193       8,730,819  
Loans held for sale
     129,138       129,230       83,458       83,503  
                                 
Liabilities:
                                
Noninterest bearing deposits
     2,545,169       2,545,169       2,269,799       2,269,799  
Savings and interest bearing deposits
     5,945,281       5,945,281       5,698,527       5,698,527  
Other time deposits
     2,597,696       2,634,099       2,986,863       3,029,147  
Federal funds purchased and securities
                                
   sold under agreement to repurchase
                                
   and other short-term borrowings
     414,611       414,399       375,433       375,285  
Long-term debt and other borrowings
     193,867       205,072       193,880       200,166  
                                 
Derivative instruments:
                                
Forward commitments to sell fixed rate
                                
   mortgage loans
     (536 )     (536 )     (1,057 )     (1,057 )
Commitments to fund fixed rate
                                
   mortgage loans
     4,081       4,081       2,140       2,140  
Interest rate swap position to receive
     51,517       51,517       53,608       53,608  
Interest rate swap position to pay
     (52,154 )     (52,154 )     (54,349 )     (54,349 )

 
(16) STOCK INCENTIVE AND STOCK OPTION PLANS
Key employees and directors of the Company and its subsidiaries have been granted stock options under the Company’s Long-Term Equity Incentive Plan, 1995 Non-Qualified Stock Option Plan for Non-Employees (the “1995 Plan”) and 1998 Stock Option Plan  (collectively, the “Plans”).  Further, restricted stock and restricted stock units may be awarded under the 1995 Plan, and restricted stock, restricted stock units and performance shares may be awarded under the Long-Term Equity Incentive Plan.  All options granted pursuant to these plans have an exercise price equal to the market value on the date of the grant and are exercisable over periods of one to ten years.  Upon the exercise of stock options, new shares are issued by the Company.
The Company’s Directors’ Fee Unfunded Plan provides that a minimum of 50% of the compensation payable to each director is paid in the form of the Company’s common stock.  This plan is registered under the Company’s dividend reinvestment plan and the shares are purchased through the Company’s dividend reinvestment plan which purchases shares in the open market.
FASB ASC 718 requires that compensation expense be measured using estimates of fair value of all stock-based awards.  Compensation expense arising from stock options that has been charged against income for the Plans was $1.9 million, $2.1 million and $2.1 million for 2012, 2011 and 2010, respectively.  As of December 31, 2012, there was $1.4 million of total unrecognized compensation cost related to nonvested stock options.  That cost is expected to be recognized over a three-year period.
In January 2012, the Company granted stock options to purchase 338,681 shares of the Company’s common stock to its employees under the Long-Term Equity Incentive Plan.  These stock options have a contractual life of seven years and vest over a one, two or three-year service period.  No stock options were granted during 2011.  The following tables present the stock option activity under the Plans as of December 31, 2012 and 2011 and changes during the years then ended:
 

 
 
117
 

   
2012
             
Weighted-
  
             
Average
  
         
Weighted-
  
Remaining
Aggregate
         
Average
  
Contractual
Intrinsic
         
Exercise
  
Term
Value
   
Shares
    
Price
  
(years)
(In thousands)
Options
                
Outstanding at January 1, 2012
     2,714,023     $ 21.72      
Granted
     338,681       11.93      
Exercised
     (6,333 )     12.94      
Cancelled or forfeited
     (174,183 )     22.04      
Expired
     (107,334 )     20.03      
Outstanding at December 31, 2012
     2,764,854     $ 20.58  
3.1
 $1,374
                     
Exercisable at December 31, 2012
     2,306,860     $ 22.23  
2.6
 $1,332



   
2011
  
               
Weighted-
        
               
Average
        
         
Weighted-
    
Remaining
    
Aggregate
  
         
Average
    
Contractual
    
Intrinsic
  
         
Exercise
    
Term
    
Value
  
   
Shares
    
Price
    
(years)
    
(In thousands)
  
Options
                        
Outstanding at January 1, 2011
     2,946,307     $ 21.41              
Exercised
     (2,225 )     9.40              
Cancelled or forfeited
     (76,659 )     22.86              
Expired
     (153,400 )     15.39              
Outstanding at December 31, 2011
     2,714,023     $ 21.72       3.6     $ 2  
                                 
Exercisable at December 31, 2011
     2,330,234     $ 22.63       3.3     $ 2  


The following table presents the status of the Company’s nonvested options as of December 31, 2012
 and changes during the year then ended:


         
Weighted-
    
Weighted-
  
         
Average
    
Average
  
         
Exercise
    
Grant Date
  
   
Shares
    
Price
    
Fair Value
  
Nonvested Options
                  
Outstanding at January 1, 2012
     383,789     $ 16.20     $ 4.87  
Granted
     338,681       11.93       4.16  
Vested
     (253,085 )     17.60       5.29  
Forfeited or cancelled
     (11,391 )     14.99       4.72  
Outstanding at December 31, 2012
     457,994     $ 12.30     $ 4.11  

 The Company uses historical data to estimate stock option exercise and employee departure behavior used in the Black-Scholes-Merton option valuation model.  Groups of participants (executive, non-executives and directors) are considered separately for valuation purposes.  The expected term of stock options granted is derived
 
 
 
118
 
 
 from analysis of all historical data on stock option activity and represents the period of time that stock options granted are expected to be outstanding; the range given below results from certain groups of participants exhibiting different post-vesting behaviors.  The risk-free rate for periods within the contractual term of the stock option is based on the U. S. Treasury yield curve in effect at the time of grant.  The expected volatility is estimated based on the Company’s historical experience.  The following table provides the range of assumptions used for stock options granted during the years ended December 31, 2012 and 2010:

   
2012
    
2010
  
             
Expected volatility
     49.9 %     45.2 %
Weighted-average volatility
     49.9 %     45.2 %
Expected dividends
     2.50 %     3.75 %
Expected term (in years)
     4.8-4.9       4.8 - 6.0  
Risk-free rate
     0.81 %     1.64 %


The weighted-average grant-date fair value of stock options granted during the years 2012 and 2010 was $4.16 and $4.00, respectively.  The intrinsic value of stock options exercised during the years ended December 31, 2012, 2011 and 2010 was approximately $9,000, $6,000 and $143,000, respectively.
The following table summarizes information about stock options outstanding at December 31, 2012:


     
Options Outstanding
    
Options exercisable
  
Range of
    
Number
    
Weighted-Avg
    
Weighted-Avg
    
Number
    
Weighted-Avg
  
Exercise Prices
    
Outstanding
    
Remaining Life (years)
    
Exercise Price
    
Exercisable
    
Exercise Price
  
                                 
$ 9.97 to $13.25       719,287       5.4     $ 12.63       261,293     $ 13.21  
$ 17.10 to $22.97       725,517       2.7       22.31       725,517       22.31  
$ 23.19 to $24.03       726,200       1.9       23.52       726,200       23.52  
$ 24.27 to $25.31       593,850       2.2       24.52       593,850       24.52  
$ 9.97 to $25.31       2,764,854       3.1     $ 20.58       2,306,860     $ 22.23  
The Long-Term Equity Incentive plan allows for the issuance of performance shares.  Performance shares entitle the recipient to receive shares of the Company’s common stock upon the achievement of performance goals that are specified in the award over a specified performance period.  The recipient of performance shares is not treated as a shareholder of the Company and is not entitled to vote or receive dividends until the performance conditions stated in the award are satisfied and the shares of stock are actually issued to the recipient.  In January 2009, the Company granted 101,225 performance shares to employees for the two-year performance period from January 1, 2009 through December 31, 2010.  In January 2010, the Company granted 125,395 performance shares to employees for the two-year performance period from January 1, 2010 through December 31, 2011.  In March 2011, the Company granted 125,410 performance shares to employees for the two-year performance period from January 1, 2011 through December 31, 2012.  In January 2012, the Company granted 103,055 performance shares to employees for the two-year performance period from January 1, 2012 through December 31, 2013.  All of these performance shares vest over a three-year period and are valued at the fair value of the Company’s stock at the grant date based upon the estimated number of shares expected to vest.  Compensation expense of approximately $461,000 was recognized in 2009 related to the 2009 grant of performance shares.  This amount was reversed in 2010 and no additional expense was recorded in 2010, as the Company failed to meet the performance threshold for the 2009-2010 performance period.  No expense was recorded in 2010 or 2011 related to the 2010 grant, as the Company failed to meet the performance threshold for the 2010-2011 performance period.  Compensation expense of approximately $659,000 and $147,000 was recognized in 2012 and 2011, respectively, related to the 2011 grant of performance shares.  Compensation expense of approximately $731,000 was recognized in 2012 related to the 2012 grant of performance shares.
In May 2009, the Company awarded 5,000 restricted stock units covering 5,000 shares of Company common stock to its directors with the shares of stock covered by this award issued to the directors in May 2010.  In May 2010, the Company awarded 5,000 restricted stock units covering 5,000 shares of Company common stock to its directors and the shares of stock covered by this award were issued to the directors in May 2011.  No restricted stock units were awarded during 2011.  In May 2012, the Company awarded 7,500 restricted stock units covering
 
 
 
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7,500 shares of Company common stock to its directors with the shares of stock covered by this award to be issued to the directors in May 2013.  Compensation expense of approximately $67,000, $37,000 and $112,000 was recognized in 2012, 2011 and 2010, respectively, related to the restricted stock units issued to the Company’s directors.
    In June 2012, pursuant to the Long-Term Equity Incentive Plan, the Company awarded 60,000 restricted stock units covering 60,000 shares of Company common stock to senior executives with the shares of stock covered by this award to be issued to the senior executives equally beginning in June 2013 over a five-year period.  Compensation expense of approximately $199,000 was recognized in 2012 related to the restricted stock units issued to the Company’s senior executives.

(17) EARNINGS PER SHARE AND DIVIDEND DATA
The computation of basic earnings per share is based on the weighted average number of common shares outstanding.  The computation of diluted earnings per share is based on the weighted average number of shares of common stock outstanding plus the shares resulting from the assumed exercise or vesting of all outstanding share-based awards using the treasury stock method.  Weighted-average antidilutive stock options to purchase 2.9 million, 2.8 million and 2.2 million shares of Company common stock with a weighted average exercise price of $20.64, $21.75 and $23.46 per share for 2012, 2011 and 2010, respectively, were excluded from diluted shares.  Antidilutive other equity awards covering approximately 36,000 shares of Company common stock for 2011 were also excluded from diluted shares.  There were no antidilutive other equity awards for 2012 and 2010.  The following tables provide a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the years ended December 31, 2012, 2011 and 2010:


                   
   
2012
  
   
Income
    
Shares
    
Per Share
  
   
(Numerator)
    
(Denominator)
    
Amount
  
Basic EPS:
  
(In thousands, except per share amounts)
  
Income available to common shareholders
   $ 84,295       93,774     $ 0.90  
Effect of dilutive stock options
     -       90          
                         
Diluted EPS:
                        
Income available to common shareholders
                        
   plus assumed exercise
   $ 84,295       93,864     $ 0.90  



   
2011
  
   
Income
    
Shares
    
Per Share
  
   
(Numerator)
    
(Denominator)
    
Amount
  
Basic EPS:
  
(In thousands, except per share amounts)
  
Income available to common shareholders
   $ 37,569       83,486     $ 0.45  
Effect of dilutive stock options
     -       23          
                         
Diluted EPS:
                        
Income available to common shareholders
                        
   plus assumed exercise
   $ 37,569       83,509     $ 0.45  

 

 
 
120
 

   
2010
  
   
Income
    
Shares
    
Per Share
  
   
(Numerator)
    
(Denominator)
    
Amount
  
Basic EPS:
  
(In thousands, except per share amounts)
  
Income available to common shareholders
   $ 22,942       83,425     $ 0.28  
Effect of dilutive stock options
     -       90          
                         
Diluted EPS:
                        
Income available to common shareholders
                        
   plus assumed exercise
   $ 22,942       83,515     $ 0.27  


Dividends to shareholders are paid from dividends paid to the Company by the Bank which are subject to approval by the applicable state regulatory authority.

(18) OTHER COMPREHENSIVE INCOME
The following tables present the components of other comprehensive income and the related tax effects allocated to each component for the years ended December 31, 2012, 2011 and 2010:


                   
   
2012
  
   
   Before        
  
Tax
    
Net
  
   
Tax
    
(Expense)
    
of Tax
  
   
Amount
    
Benefit
    
Amount
  
   
(In thousands)
  
Unrealized gains on available-for-sale securities:
                  
Unrealized gains (losses) arising during
                  
   holding period
   $ 3,043     $ (1,171 )   $ 1,872  
Reclassification adjustment for net (gains) losses
                        
   realized in net income
     (442 )     169       (273 )
Change in pension funding status
     (12,930 )     4,946       (7,984 )
Other comprehensive loss
   $ (10,329 )   $ 3,944     $ (6,385 )



   
2011
  
   
Before     
 
Tax
    
Net
  
   
Tax
    
(Expense)
    
of Tax
  
   
Amount
    
Benefit
    
Amount
  
   
(In thousands)
  
Unrealized gains on available-for-sale securities:
                  
Unrealized gains (losses) arising during
                  
   holding period
   $ 55,882     $ (21,405 )   $ 34,477  
Reclassification adjustment for net (gains) losses
                        
   realized in net income
     (12,127 )     4,639       (7,488 )
Change in pension funding status
     (23,963 )     9,166       (14,797 )
Other comprehensive income
   $ 19,792     $ (7,600 )   $ 12,192  

 

 
 
121
 

   
2010
  
   
    Before        
    
Tax
    
Net
  
   
Tax
    
(Expense)
    
of Tax
  
   
Amount
    
Benefit
    
Amount
  
   
(In thousands)
  
Unrealized gains on available-for-sale securities:
                  
Unrealized (losses) gains arising during
                  
   holding period
   $ (8,854     $ 3,399     $ (5,455 )
Reclassification adjustment for net losses (gains)
                        
   realized in net income
     470       (180 )     290  
Change in pension funding status
     (1,423       544       (879 )
Other comprehensive loss
   $ (9,807     $ 3,763     $ (6,044 )


(19) RELATED PARTY TRANSACTIONS
The Bank has made, and expects in the future to continue to make in the ordinary course of business, loans to directors and executive officers of the Company and their affiliates.  In management’s opinion, these transactions with directors and executive officers were made on substantially the same terms as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectibility or present any other unfavorable features.  A summary of such outstanding loans is as follows:


       
   
Amount
  
   
(In thousands)
  
Loans outstanding at December 31, 2011
   $ 19,181  
New loans
     24,373  
Repayments
     (34,158 )
Changes in directors and executive officers
     18,286  
Loans outstanding at December 31, 2012
   $ 27,682  


(20) 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 for the years ended December 31, 2012, 2011 and 2010 were as follows:

 
 
   
2012
    
2011
    
2010
  
   
(Dollars in thousands)
  
Unpaid principal balance
   $ 5,058,912     $ 4,293,552     $ 3,870,872  
Weighted-average prepayment speed (CPR)
     17.1       22.7       15.6  
Discount rate (annual percentage)
     10.8       10.3       10.3  
Weighted-average coupon interest rate (percentage)
     4.4       4.9       5.2  
Weighted-average remaining maturity (months)
     307.0       311.0       315.0  
Weighted-average servicing fee (basis points)
     27.1       28.0       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 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.
 
 
 
122
 
 
    The Company has 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 years indicated:

   
2012
    
2011
  
   
(In thousands)
  
Fair value at beginning of year
   $ 30,174     $ 38,642  
Additions:
                
   Origination of servicing assets
     18,531       11,692  
Changes in fair value:
                
   Due to payoffs/paydowns
     (7,649 )     (6,180 )
   Due to change in valuation inputs or assumptions
                
     used in the valuation model
     (3,163 )     (13,966 )
   Other changes in fair value
     (11 )     (14 )
Fair value at end of year
   $ 37,882     $ 30,174  

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 $13.0 million, $11.6 million and $10.5 million and late and other ancillary fees of $1.4 million, $1.3 million and $1.4 million in 2012, 2011, and 2010, respectively.

(21)  REGULATORY MATTERS
The Company is subject to various regulatory capital requirements administered by the federal and state banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.  The Company’s capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings and other factors.  Quantitative measures established by the Board of Governors of the Federal Reserve to ensure capital adequacy require the Company to maintain minimum capital amounts and ratios (risk-based capital ratios).  All banking companies are required to have core capital (“Tier 1”) of at least 4% of risk-weighted assets, total capital of at least 8% of risk-weighted assets and a minimum Tier 1 leverage ratio of 4% of adjusted average assets.  The regulations also define well capitalized levels of Tier 1, total capital and Tier 1 leverage as 6%, 10% and 5%, respectively.  The Company and the Bank had Tier 1, total capital and Tier 1 leverage above the well capitalized levels at December 31, 2012 and 2011, respectively, as set forth in the following table:


   
2012
    
2011
  
   
Amount
    
Ratio
    
Amount
    
Ratio
  
   
(Dollars in thousands)
  
Tier 1 capital (to risk-weighted assets)
                        
     BancorpSouth, Inc.
   $ 1,316,905       13.77 %   $ 1,129,746       11.77 %
     BancorpSouth Bank
     1,191,567       12.48       1,099,369       11.46  
Total capital (to risk-weighted assets)
                                
     BancorpSouth, Inc.
     1,437,320       15.03       1,250,801       13.03  
     BancorpSouth Bank
     1,311,840       13.74       1,220,424       12.73  
Tier 1 leverage capital (to average assets)
                                
     BancorpSouth, Inc.
     1,316,905       10.25       1,129,746       8.85  
     BancorpSouth Bank
     1,191,567       9.34       1,099,369       8.67  


(22)  SEGMENTS
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
 
 
 
123
 
 
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 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 mortgage lending, trust services, credit card activities, investment services and other activities not allocated to  the Community Banking or Insurance Agencies operating segments.  The increased net income of the Community Banking operating segment in 2012 compared to 2011 and in 2011 compared to 2010 was primarily related to the corresponding decrease in the provision for credit losses.
Results of operations and selected financial information by operating segment for the years ended December 31, 2012, 2011 and 2010 were as follows:


   
Community
 Banking
    
Insurance
 Agencies
    
General Corporate
and Other
    
Total
  
2012
  
(In thousands)
  
Results of Operations
                        
Net interest revenue
   $ 389,466     $ 270     $ 24,855     $ 414,591  
Provision for credit losses
     25,482       -       2,518       28,000  
Net interest income after provision
                                
   for credit losses
     363,984       270       22,337       386,591  
Noninterest revenue
     113,613       90,045       76,491       280,149  
Noninterest expense
     351,378       78,799       119,016       549,193  
Income (loss) before income taxes
     126,219       11,516       (20,188 )     117,547  
Income tax expense (benefit)
     39,777       4,682       (11,207 )     33,252  
Net income (loss)
   $ 86,442     $ 6,834     $ (8,981 )   $ 84,295  
Selected Financial Information
                                
Total assets
   $ 10,232,036     $ 173,832     $ 2,991,330     $ 13,397,198  
Depreciation and amortization
     23,773       3,616       3,553       30,942  



   
Community
Banking
    
Insurance
 Agencies
    
General Corporate
and Other
    
Total
  
2011
  
(In thousands)
  
Results of Operations
                        
Net interest revenue
   $ 407,648     $ 329     $ 26,936     $ 434,913  
Provision for credit losses
     127,794       -       2,287       130,081  
Net interest income after provision
                                
   for credit losses
     279,854       329       24,649       304,832  
Noninterest revenue
     126,807       86,955       57,083       270,845  
Noninterest expense
     338,125       73,793       121,715       533,633  
Income (loss) before income taxes
     68,536       13,491       (39,983 )     42,044  
Income tax expense (benefit)
     40,454       5,423       (41,402 )     4,475  
Net income
   $ 28,082     $ 8,068     $ 1,419     $ 37,569  
Selected Financial Information
                                
Total assets
   $ 10,169,986     $ 163,995     $ 2,661,870     $ 12,995,851  
Depreciation and amortization
     24,167       3,826       4,221       32,214  

 

 
 
124
 

   
Community Banking
    
Insurance
 Agencies
    
General Corporate and Other
    
Total
  
2010
  
(In thousands)
  
Results of Operations
                        
Net interest revenue
   $ 411,936     $ 561     $ 28,645     $ 441,142  
Provision for credit losses
     197,539       -       6,477       204,016  
Net interest income after provision
                                
   for credit losses
     214,397       561       22,168       237,126  
Noninterest revenue
     114,736       82,327       67,081       264,144  
Noninterest expense
     308,299       70,830       107,904       487,033  
Income (loss) before income taxes
     20,834       12,058       (18,655 )     14,237  
Income tax expense (benefit)
     2,914       4,786       (16,405 )     (8,705 )
Net income (loss)
   $ 17,920     $ 7,272     $ (2,250 )   $ 22,942  
Selected Financial Information
                                
Total assets
   $ 10,854,511     $ 158,919     $ 2,601,580     $ 13,615,010  
Depreciation and amortization
     24,910       4,230       4,532       33,672  
 
 

 (23)  DERIVATIVE INSTRUMENTS
The derivative instruments 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 December 31, 2012, the notional amount of forward commitments to sell individual fixed-rate mortgage loans was $231.2 million, with a carrying value and fair value reflecting a loss of approximately $536,000.  At December 31, 2011, the notional amount of forward commitments to sell individual fixed-rate mortgage loans was $107.0 million, with a carrying value and fair value reflecting a loss of $1.1 million.  At December 31, 2012, the notional amount of commitments to fund individual fixed-rate mortgage loans was $198.3 million, with a carrying value and fair value reflecting a gain of $4.1 million.  At December 31, 2011, the notional amount of commitments to fund individual fixed-rate mortgage loans was $104.2 million, with a carrying value and fair value reflecting a gain of $2.1 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 December 31, 2012, the notional amount of customer related derivative financial instruments was $496.2 million, with an average maturity of 59.9 months, an average interest receive rate of 2.5% and an average interest pay rate of 5.7%.  As of December 31, 2011, the notional amount of customer related derivative financial instruments was $493.3 million, with an average maturity of 62.3 months, an average interest receive rate of 2.6% and an average interest pay rate of 5.9%.

(24)  COMMITMENTS AND CONTINGENT LIABILITIES
Leases
Rent expense was $7.2 million for 2012, $7.1 million for 2011 and $6.9 million for 2010. Future minimum lease payments for the following five years for all non-cancelable operating leases with initial or remaining terms of one year or more consisted of the following at December 31, 2012:

 
 
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Amount
  
   
(In thousands)
  
2013
   $ 5,072  
2014
     2,918  
2015
     2,184  
2016
     1,597  
2017
     1,215  
Thereafter
     4,377  
Total future minimum lease payments
   $ 17,363  


Mortgage Loans Serviced for Others
The Company services mortgage loans for others that are not included as assets in the Company’s accompanying consolidated financial statements. Included in the $5.1 billion of loans serviced for investors at December 31, 2012 was $2.5 million of primary recourse servicing pursuant to which the Company is responsible for any losses incurred in the event of nonperformance by the mortgagor. The Company's exposure to credit loss in the event of such nonperformance is the unpaid principal balance at the time of default. This exposure is limited by the underlying collateral, which consists of single family residences and either federal or private mortgage insurance.

Lending Commitments
In the normal course of business, there are outstanding various commitments and other arrangements for credit which are not reflected in the consolidated balance sheets.  As of December 31, 2012, these included $130.9 million for letters of credit and $2.0 billion for interim mortgage financing, construction credit, credit card and revolving line of credit arrangements.  The Company did not realize significant credit losses from these commitments and arrangements during the years ended December 31, 2012, 2011 and 2010.

Litigation
The nature of the Company’s business ordinarily results in a certain amount of claims, litigation, investigations and legal and administrative investigations and proceedings. Although the Company and its subsidiaries have developed policies and procedures to minimize the impact of legal noncompliance and other disputes, and endeavored to provide reasonable insurance coverage, litigation and regulatory actions present an ongoing risk.
The Company and its subsidiaries are engaged in lines of business that are heavily regulated and involve a large volume of financial transactions and potential transactions with numerous customers or applicants. From time to time, borrowers, customers, former employees and other third parties have brought actions against the Company or its subsidiaries, in some cases claiming substantial damages. Financial services companies are subject to the risk of class action litigation and, from time to time, the Company and its subsidiaries are subject to such actions brought against it. Additionally, the Bank is, and management expects it to be, engaged in a number of foreclosure proceedings and other collection actions as part of its lending and leasing collections activities, which, from time to time, have resulted in counterclaims against the Bank. Various legal proceedings have arisen and may arise in the future out of claims against entities to which the Company is a successor as a result of business combinations. The Company’s insurance has deductibles, and will likely not cover all such litigation or other proceedings or the costs of defense. The Company and its subsidiaries may also be subject to enforcement actions by federal or state regulators, including the Securities and Exchange Commission, the Federal Reserve, the FDIC, the Consumer Financial Protection Bureau, the Department of Justice, state attorneys general and the Mississippi Department of Banking and Consumer Finance.
When and as the Company determines it has meritorious defenses to the claims asserted, it vigorously defends against such claims. The Company will consider settlement of claims when, in management’s judgment and in consultation with counsel, it is in the best interests of the Company to do so.
The Company cannot predict with certainty the cost of defense, the cost of prosecution or the ultimate outcome of litigation and other proceedings filed by or against it, its directors, management or employees, including remedies or damage awards. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with outstanding legal proceedings as well as certain threatened claims (which are not considered
 
 
 
126
 
 
 incidental to the ordinary conduct of the Company’s business) utilizing the latest and most reliable information available. For matters where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established. For matters where it is probable the Company will incur a loss and the amount can be reasonably estimated, the Company establishes an accrual for the loss. Once established, the accrual is adjusted periodically to reflect any relevant developments. The actual cost of any outstanding legal proceedings or threatened claims, however, may turn out to be substantially higher than the amount accrued. Further, the Company’s insurance will not cover all such litigation, other proceedings or claims, or the costs of defense.
While the final outcome of any legal proceedings is inherently uncertain, based on the information available, advice of counsel and available insurance coverage, management believes that the litigation-related expense accrued as of December 31, 2012 is adequate and that any incremental liability arising from the Company’s legal proceedings and threatened claims, including the matters described herein and those otherwise arising in the ordinary course of business, will not have a material adverse effect on the Company's business or consolidated financial condition. It is possible, however, that future developments could result in an unfavorable outcome for or resolution of any one or more of the lawsuits in which the Company or its subsidiaries are defendants, which may be material to the Company’s results of operations for a given fiscal period.
On August 16, 2011, a shareholder filed a putative derivative action purportedly on behalf of the Company in the Circuit Court of Lee County, Mississippi, against certain current and past executive officers and the members of the Board of Directors of the Company. The plaintiff in this shareholder derivative lawsuit asserts that the individual defendants violated their fiduciary duties based upon substantially the same facts as alleged in the now settled securities class action lawsuit described in Item 3 Legal Proceedings above. The plaintiff is seeking to recover damages in an unspecified amount and equitable and/or injunctive relief. Although it is not possible to predict the ultimate resolution or financial liability with respect to this litigation, management is currently of the opinion that the outcome of this lawsuit will not have a material adverse effect on the Company’s business, consolidated financial position or results of operations.
In November 2010, the Company was informed that the Atlanta Regional Office of the SEC had issued an Order of Investigation concerning the Company.  This investigation is ongoing and is primarily focused on the Company’s recording and reporting of its unaudited financial statements, including the allowance and provision for credit losses, its internal control over financial reporting and its communications with the independent auditors prior to the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.  In connection with its investigation, the SEC issued subpoenas for documents and testimony, with which the Company has fully complied.  The Company is cooperating fully with the SEC. No claims have been made by the SEC against the Company or against any individuals affiliated with the Company. At this time, it is not possible to predict when or how the investigation will be resolved or the cost or potential liabilities associated with this matter.
On May 18, 2010, the Bank was named as a defendant in a purported class action lawsuit filed by an Arkansas customer of the Bank in the U.S. District Court for the Northern District of Florida. The suit challenges the manner in which overdraft fees were charged and the policies related to posting order of debit card and ATM transactions. The suit also makes a claim under Arkansas’ consumer protection statute. The plaintiff is seeking to recover damages in an unspecified amount and equitable relief. The case was transferred to pending multi-district litigation in the U.S. District Court for the Southern District of Florida. On May 4, 2012, the judge presiding over the multi-district litigation entered an order certifying a class in this case.  The Bank has filed a petition for leave to appeal the class certification order, which, if granted, would provide the Bank with an immediate right to appeal the class certification order.  At this stage of the lawsuit, management of the Company cannot determine the probability of an unfavorable outcome to the Company. There are significant uncertainties involved in any purported class action litigation.  Although it is not possible to predict the ultimate resolution or financial liability with respect to this litigation, management is currently of the opinion that the outcome of this lawsuit will not have a material adverse effect on the Company’s business, consolidated financial position or results of operations. However, there can be no assurance that an adverse outcome or settlement would not have a material adverse effect on the Company’s consolidated results of operations for a given fiscal period.

(25) CONDENSED PARENT COMPANY INFORMATION
The following condensed financial information reflects the accounts and transactions of the Company (excluding its subsidiaries) at the dates and for the years indicated:
 

 
 
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Condensed Balance Sheets
  
December 31,
  
   
2012
    
2011
  
Assets:
  
(In thousands)
  
Cash on deposit with subsidiary bank
   $ 114,394     $ 17,100  
Investment in subsidiaries
     1,484,097       1,392,966  
Other assets
     13,398       15,173  
  Total assets
   $ 1,611,889     $ 1,425,239  
                 
Liabilities and shareholders' equity:
                
Total liabilities
   $ 162,837     $ 162,327  
Shareholders' equity
     1,449,052       1,262,912  
  Total liabilities and shareholders' equity
   $ 1,611,889     $ 1,425,239  

   
Year Ended December 31,
  
Condensed Statements of Income
  
2012
    
2011
    
2010
  
   
(In thousands)
  
Dividends from subsidiaries
   $ -     $ 23,000     $ 89,500  
Other operating income
     1,253       268       837  
  Total income
     1,253       23,268       90,337  
                         
Operating expenses
     16,931       17,358       16,807  
Income (loss) before tax benefit and equity in undistributed earnings
     (15,678 )     5,910       73,530  
Income tax benefit
     5,732       6,050       6,102  
Income (loss) before equity in undistributed earnings
                        
  of subsidiaries
     (9,946 )     11,960       79,632  
Equity in undistributed (distributed) earnings of subsidiaries
     94,241       25,609       (56,690 )
  Net income
   $ 84,295     $ 37,569     $ 22,942  


   
Year Ended December 31,
  
Condensed Statements of Cash Flows
  
2012
    
2011
    
2010
  
   
(In thousands)
  
Operating activities:
                  
  Net income
   $ 84,295     $ 37,569     $ 22,942  
  Adjustments to reconcile net income
                        
    to net cash provided by operating activities
     (95,231 )     (30,348 )     58,486  
Net cash (used in) provided by operating activities
     (10,936 )     7,221       81,428  
Investing activities:
                        
  Net cash paid for acquisitions
     -       -       -  
Net cash used in investing activities
     -       -       -  
Financing activities:
                        
  Cash dividends
     (3,778 )     (11,689 )     (73,458 )
  Common stock transactions, net
     112,008       2,596       464  
Net cash provided by (used in) financing activities
     108,230       (9,093 )     (72,994 )
Increase (decrease) in cash and cash equivalents
     97,294       (1,872 )     8,434  
Cash and cash equivalents at beginning of year
     17,100       18,972       10,538  
Cash and cash equivalents at end of year
   $ 114,394     $ 17,100     $ 18,972  

(26) OTHER NONINTEREST INCOME AND EXPENSE
The following table details other noninterest income for the three years ended December 31, 2012, 2011 and 2010:
 
 
 
128
 

                   
   
2012
    
2011
    
2010
  
   
(In thousands)
  
Annuity fees
   $ 2,243     $ 3,323     $ 2,474  
Brokerage commissions and fees
     6,714       5,918       5,512  
Bank-owned life insurance
     8,074       7,662       7,737  
Other miscellaneous income
     15,124       16,599       14,433  
   Total other noninterest income
   $ 32,155     $ 33,502     $ 30,156  

The following table details other noninterest expense for the three years ended December 31, 2012, 2011 and 2010:

 
   
2012
    
2011
    
2010
  
   
(In thousands)
  
Advertising
   $ 4,869     $ 5,098     $ 5,354  
Foreclosed property expense
     39,406       27,796       18,355  
Telecommunications
     8,515       8,386       9,466  
Public relations
     5,434       5,727       6,088  
Data processing
     10,234       9,677       6,068  
Computer software
     7,476       7,502       7,334  
Amortization of intangibles
     3,222       3,324       3,909  
Legal fees
     9,334       9,170       6,102  
Postage and shipping
     4,465       4,812       5,044  
Other miscellaneous expense
     72,147       74,098       62,760  
   Total other noninterest expense
   $ 165,102     $ 155,590     $ 130,480  

 
(27) SUBSEQUENT EVENTS
The Company has evaluated all subsequent events through the date of this filing.  Management does not believe there are any material subsequent events which would require further disclosure.

 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
There have been no changes in the Company's independent accountants and auditors for the two most recent fiscal years.


ITEM 9A. CONTROLS AND PROCEDURES.

CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
 
               The Company, with the participation of its management, including the Company’s Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under the Exchange Act) as of the end of the period covered by this Report.
                Based upon that evaluation and as of the end of the period covered by this Report, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective in ensuring that information required to be disclosed in its reports that the Company files or submits to the SEC under the Exchange Act is recorded, processed, summarized and reported on a timely basis.
Pursuant to Section 404 of the Sarbanes-Oxley Act, the Company has included a report of management’s assessment of the design and operating effectiveness of its internal controls as part of this Report.  The Company’s
 
 
 
129
 
 
independent registered public accounting firm reported on the effectiveness of internal control over financial reporting.  Management’s report and the independent registered public accounting firm’s report are included with the Company’s 2012 consolidated financial statements in Item 8 of this Report under the captions entitled “Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm.”

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 last fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


ITEM 9B. OTHER INFORMATION.

None.


PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Information concerning the directors and nominees of the Company appears under the caption “Proposal 1:  Election of Directors” in the Company's definitive Proxy Statement for its 2013 annual meeting of shareholders, and is incorporated herein by reference.


EXECUTIVE OFFICERS OF THE REGISTRANT

Certain information regarding executive officers is included under the section captioned “Executive Officers of the Registrant” in Part I, Item 1, elsewhere in the Report.

AUDIT COMMITTEE FINANCIAL EXPERT

Information regarding audit committee financial experts serving on the Audit Committee of the Company’s Board of Directors appears under the caption “Corporate Governance - Committees of the Board of Directors” in the Company’s definitive Proxy Statement for its 2013 annual meeting of shareholders, and is incorporated herein by reference.


IDENTIFICATION OF THE AUDIT COMMITTEE

Information regarding the Audit Committee and the identification of its members appears under the caption “Corporate Governance - Committees of the Board of Directors” in the Company’s definitive Proxy Statement for its 2013 annual meeting of shareholders, and is incorporated herein by reference.  In establishing the Audit Committee’s compliance with Rule 10A-3 under the Exchange Act, each member of the Company’s Audit Committee is relying upon the exemption provided by Rule 10A-3(b)(1)(iv)(B) of the Exchange Act because each member of the Audit Committee is also a member of the Bank’s Board of Directors.



 
 
130
 
 
MATERIAL CHANGES TO PROCEDURES BY WHICH SECURITY HOLDERS MAY RECOMMEND NOMINEES

The Company has not made any material changes to the procedures by which its shareholders may recommend nominees to the Company’s Board of Directors since the date of the Company’s definitive Proxy Statement for its 2012 annual meeting of shareholders.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Information regarding the Section 16(a) beneficial ownership compliance of each of the Company’s directors and executive officers or each person who owns more than 10% of the outstanding shares of the Company’s common stock appears under the caption “General Information - Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive Proxy Statement for its 2013 annual meeting of shareholders, and is incorporated herein by reference.

CERTAIN CORPORATE GOVERNANCE DOCUMENTS

The Company has adopted a code of business conduct and ethics that applies to its directors, chief executive officer, chief financial officer, other officers, other financial reporting persons and employees.  The Company has also adopted Corporate Governance Principles for its Board of Directors.  These documents, as well as the charters of the Audit Committee, Executive Compensation and Stock Incentive Committee and Nominating Committee of the Board of Directors, are available on the Company’s website at www.bancorpsouth.com on the Investors Relations webpage under the captions “Corporate Information-Governance Documents” and “-Committee Charting,” or shareholders may request a free copy of these documents from:

BancorpSouth, Inc.
Corporate Secretary
One Mississippi Plaza
201 South Spring Street
Tupelo, Mississippi 38804
(662) 680-2000

The Company intends to disclose any amendments to its code of business conduct and ethics and any waiver from a provision of the code, as required by the SEC, on the Company’s website within four business days following such amendment or waiver.

ITEM 11. EXECUTIVE COMPENSATION.

This information appears under the captions “Executive Compensation,”  “Compensation Discussion and Analysis,” “Director Compensation” and “Executive Compensation and Stock Incentive Committee Report” in the Company's definitive Proxy Statement for its 2013 annual meeting of shareholders, and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Information regarding the security ownership of certain beneficial owners and directors, nominees and executive officers of the Company appears under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Company’s definitive Proxy Statement for its 2013 annual meeting of shareholders, and is incorporated herein by reference.
The following table provides information as of December 31, 2012 with respect to compensation plans (including individual compensation arrangements) under which shares of Company common stock are authorized for issuance:
 

 
 
131
 
 
       
Number of Securities
          
Number of Securities
  
       
to be Issued upon
    
Weighted-Average
    
Remaining Available for
  
       
Exercise of
    
Exercise Price of
    
Future Issuance under
  
       
Outstanding Options,
    
Outstanding Options,
    
Equity Compensation
  
Plan Category
  
Warrants and Rights
    
Warrants and Rights
    
Plans(1)
  
Equity compensation plans
                  
approved by shareholders (2)
     2,761,107     $ 20.59       4,083,787  
Equity compensation plans not
                        
approved by shareholders
     3,747       12.85       413,589  
Total
     2,764,854     $ 20.58       4,497,376  
                             
  (1 )
Excludes shares to be issued upon exercise of outstanding options.
          
  (2 )
Excludes 112,315 restricted shares that were unvested,  67,500 restricted stock units that were unvested and 261,482 performance shares that were unearned as
  
     
of December 31, 2012. Equity compensation plans approved by shareholders include the BancorpSouth, Inc.
  
     
Director Stock Plan, the BancorpSouth, Inc. Executive Performance Incentive Plan, as amended, the BancorpSouth,
  
     
Inc. Long-Term Equity Incentive Plan, as amended, and the BancorpSouth, Inc. 1995 Non-Qualified Stock Option
  
     
Plan for Non-Employee Directors, as amended.
                  
  (3 )
Equity compensation plans not approved by shareholders include the BancorpSouth, Inc. 1998 Stock Option Plan,
  
     
as amended, and the plan assumed in connection with the merger of BusinessHolding Corporation, which was
  
     
effective December 31, 2004.
                        


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Information regarding certain relationships and related transactions with management and others appears under the caption “Certain Relationships and Related Transactions” in the Company's definitive Proxy State­ment for its 2013 annual meeting of shareholders, and is incorporated herein by reference.  Information regarding director independence appears under the caption “Corporate Governance – Director Independence” in the Company’s definitive Proxy Statement for its 2012 annual meeting of shareholders, and is incorporated herein by reference.


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Information regarding accountant fees and services appears under the caption “Proposal 2:  Ratification of Appointment of Independent Registered Public Accounting Firm” in the Company’s definitive Proxy Statement for its 2013 annual meeting of shareholders, and is incorporated herein by reference.


PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Index to Consolidated Financial Statements, Financial Statement Schedules and Exhibits:
     1.           Consolidated Financial Statements:  See “Item 8. Financial Statements and Supplementary Data.”

     2.           Consolidated Financial Statement Schedules:
               All schedules are omitted as the required information is inapplica­ble or the information is presented in
               the financial statements or related notes.

     3.           Exhibits:
 
(3)
(a)
Restated Articles of Incorporation, as amended. (1)
(b)           Bylaws, as amended and restated. (2)
 
 
 
132
 
 
(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)
(a)
BancorpSouth, Inc. Supplemental Executive Retirement Plan, as amended and restated.                   (8)(29)
(b)           Amendment to BancorpSouth, Inc. Supplemental Executive Retirement Plan. (9)(29)
(c)           BancorpSouth, Inc. Long-Term Equity Incentive Plan.* (29)
(d)           Amendment to BancorpSouth, Inc. Long-Term Equity Incentive Plan. (10)(29)
(e)           BancorpSouth, Inc. Executive Performance Incentive Plan. (11)(29)
(f)           Amendment to BancorpSouth, Inc. Executive Performance Incentive Plan. (12)(29)
 
(g)
Second Amendment to BancorpSouth, Inc. Executive Performance Incentive Plan. (13)(29)
(h)           Form of Performance Share Award Agreement. (14)(29)
(i)           BancorpSouth, Inc. Director Stock Plan, as amended and restated.* (29)
 
(j)
BancorpSouth, Inc. 1995 Non-Qualified Stock Option Plan for Non-Employee Directors. (12)(29)
 
(k)
Amendment to the BancorpSouth, Inc. 1995 Non-Qualified Stock Option Plan for Non-Employee Directors (15)(29)
(l)           BancorpSouth, Inc. 1998 Stock Option Plan (16)(29)
(m)           Amendment to the BancorpSouth, Inc. 1998 Stock Option Plan (17)(29)
(n)           BancorpSouth, Inc. Restoration Plan, as amended and restated. (8)(29)
(o)           BancorpSouth, Inc. Amended and Restated Deferred Compensation Plan. (8)(29)
(p)           BancorpSouth, Inc. Home Office Incentive Plan. (18)(29)
(q)           Description of Dividend Reinvestment Plan. (19)(29)
 
(r)
BancorpSouth, Inc., Amended and Restated Salary Deferral-Profit Sharing Employee Stock Ownership Plan. (20)(29)
(s)           Executive Employment Agreement with James D. Rollins III.* (29)
 
(t)
BancorpSouth, Inc. Long-Term Equity Incentive Plan Restricted Stock Award Agreement with James D. Rollins.* (29)
(u)           Form of BancorpSouth, Inc. Change in Control Agreement. (21)(29)
(v)           Form of Amendment to BancorpSouth, Inc. Change in Control Agreement. (8)(29)
(w)           BancorpSouth, Inc. Change in Control Agreement for Aubrey B. Patterson. (22)(29)
(x)            BancorpSouth, Inc. Change in Control Agreement for James V. Kelley. (23)(29)
(y)           BancorpSouth, Inc. Change in Control Agreement for Gregg Cowsert. (22)(29)
(z)            BancorpSouth, Inc. Change in Control Agreement for Michael Sappington. (22)(29)
(aa)          BancorpSouth, Inc. Change in Control Agreement for Larry Bateman. (24)(29)
(bb)         BancorpSouth, Inc. Change in Control Agreement for William L. Prater. (25)(29)
(cc)          BancorpSouth, Inc. Change in Control Agreement for Gordon Lewis. (26)(29)
 
     (dd)
   BancorpSouth, Inc. Change in Control Agreement for James D. Rollins III.* (29)
(ee)          BancorpSouth, Inc. 1994 Stock Incentive Plan, as amended and restated. (12)(29)
(ff)           BancorpSouth, Inc. Deferred Directors’ Fee Unfunded Plan. (8)(29)
 
 
 
133
 
 
(gg)           Premier Bancorp, Inc. 1998 Stock Option Plan. (27)(29)
(hh)           Premier Bancorp, Inc. 1998 Outside Director Stock Option Plan. (27)(29)
(ii)             Form of Stock Option Agreement for converted Business Holding Corporation Options (Vesting). (27)(29)
(jj)             Form of Stock Option Agreement for converted Business Holding Corporation Options (Non-Vesting). (27)(29)
(kk)           Salary Continuation Agreement with Gordon R. Lewis. (28)(29)
(11)
Statement re computation of per share earnings.*
(21)
Subsidiaries of the Registrant.*
(23)
Consent of Independent Accountants.*
 (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 Annual Report on Form 10-K for the year ended December 31, 2012, is formatted in XBRL (Extensible Business Reporting Language) interactive data files: (i) the Consolidated Balance Sheets as of December 31, 2012 and 2011, (ii) the Consolidated Statements of Income for each of the years ended December 31, 2012, 2011 and 2010, (iii) the Consolidated Statements of Shareholders’ Equity and Comprehensive Income for each of the years ended December 31, 2012, 2011 and 2010, (iv) the Consolidated Statements of Cash Flows for each of the years ended December 31, 2012, 2011 and 2010, and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text.*(30)
 
__________________
(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 an exhibit 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 an exhibit 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 Annual Report on Form 10-K for the year ended December 31, 2008 (file number 1-12991) and incorporated by reference thereto.
(9)
Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the three months ended September 30, 2012 (file number 1-12991) and incorporated by reference thereto.
(10)
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.
(11)
Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2003 (file number 1-12991) and incorporated by reference thereto.
(12)
Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the three months ended June 30, 2005 (file number 1-12991) and incorporated by reference thereto.
 
 
 
134
 

(13)
Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the three months ended June 30, 2006 (file number 1-12991) and incorporated by reference thereto.
(14)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on March 7, 2007 (file number 1-12991) and incorporated by reference thereto.
(15)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on April 29, 2008 (file number 1-12991) and incorporated by reference thereto.
(16)
Filed as an exhibit to the Company’s Post-Effective Amendment No. 5 on Form S-3 to Form S-4 filed on February 23, 1999 (Registration No. 333-280181) and incorporated by reference thereto.
(17)
Filed as an exhibit to the Company’s registration statement on Form S-3 filed on March 13, 2007 (Registration No. 333-141250) and incorporated by reference thereto.
(18)
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 (file number 1-12991) and incorporated by reference thereto.
(19)
Filed as the Company’s prospectus pursuant to Rule 424(b)(2) filed on January 5, 2004 (Registration No. 033-03009) and incorporated by reference thereto.
(20)
Filed as an exhibit to the Company’s registration statement on Form S-8 filed on April 19, 2006 (Registration No. 333-133390) and incorporated by reference thereto.
(21)
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (file number 1-12991) and incorporated by reference thereto.
(22)
Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 1999 (file number 1-12991) and incorporated by reference thereto.
(23)
Filed as an exhibit to the Company’s registration statement on Form S-4 filed on June 14, 2000 (Registration No. 333-39326) and incorporated by reference thereto.
(24)
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (file number 1-12991) and incorporated by reference thereto.
(25)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on June 25, 2009 (file number 1-12991) and incorporated by reference thereto.
(26)
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 (file number 1-12991) and incorporated by reference thereto.
(27)
Filed as an exhibit to the Company’s registration statement on Form S-8 filed on December 30, 2004 (Registration No. 333-121785) and incorporated by reference thereto.
(28)
Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2012 (file number 1-12991) and incorporated by reference thereto.
(29)
Compensatory plans or arrangements.
(30)
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.
*
Filed herewith.

 
135 
 


 
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

DATE:  February 25, 2013                                                  By:    /s/James D. Rollins III
                                                                                                James D. Rollins III
                                                                                                Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

                                                                                                Chairman of the Board and
/s/ Aubrey B. Patterson                                                                      Director            February 25, 2013
Aubrey B. Patterson

Chief Executive Officer (Principal
/s/James D. Rollins III                                                          Executive Officer) and Director       February 25, 2013
James D. Rollins III

                                                                                Treasurer and Chief Financial
 Officer (Principal Financial   
/s/William L. Prater                                                               Officer)                                      February 25, 2013
William L. Prater


/s/Gus J. Blass III                                                   Director                                                       February 25, 2013
Gus J. Blass III


/s/James E. Campbell III                                    Director                                                   February 25, 2013
James E. Campbell II


/s/Albert C. Clark                                                   Director                                                   February 25, 2013
Albert C. Clark


/s/Grace Clark                                                     Director                February 25, 2013
Grace Clark


/s/Hassell H. Franklin                                           Director                                                       February 25, 2013
Hassell H. Franklin
 

/s/W. G. Holliman, Jr.                                           Director                  February 25, 2013
W. G. Holliman, Jr.


/s/Warren A. Hood, Jr.                                    Director                 February 25, 2013
Warren A. Hood, Jr.
 
 

 
 
136
 
 
 
/s/Keith J. Jackson                                             Director                                   February 25, 2013
Keith J. Jackson


/s/James V. Kelley                                              Director                                  February 25, 2013
James V. Kelley


/s/Larry G. Kirk                                                   Director                          February 25, 2013
Larry G. Kirk


/s/Turner O. Lashlee                                         Director                           February 25, 2013
Turner O. Lashlee                                                                           


/s/Guy W. Mitchell                                           Director              February 25, 2013
Guy W. Mitchell, III   


/s/ Robert C. Nolan                                          Director                February 25, 2013
Robert C. Nolan


/s/W. Cal Partee, Jr.                                         Director                February 25, 2013
W. Cal Partee, Jr.


/s/Alan W. Perry                          Director                        February 25, 2013
Alan W. Perry





 
137
 
 

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)
(a)
BancorpSouth, Inc. Supplemental Executive Retirement Plan, as amended and restated. (8)(29)
(b)           Amendment to BancorpSouth, Inc. Supplemental Executive Retirement Plan. (9)(29)
(c)           BancorpSouth, Inc. Long-Term Equity Incentive Plan.* (29)
(d)           Amendment to BancorpSouth, Inc. Long-Term Equity Incentive Plan. (10)(29)
(e)           BancorpSouth, Inc. Executive Performance Incentive Plan. (11)(29)
(f)           Amendment to BancorpSouth, Inc. Executive Performance Incentive Plan. (12)(29)
(g)           Second Amendment to BancorpSouth, Inc. Executive Performance Incentive Plan. (13)(29)
(h)           Form of Performance Share Award Agreement. (14)(29)
(i)            BancorpSouth, Inc. Director Stock Plan, as amended and restated.* (29)
(j)            BancorpSouth, Inc. 1995 Non-Qualified Stock Option Plan for Non-Employee Directors. (12)(29)
 
(k)
Amendment to the BancorpSouth, Inc. 1995 Non-Qualified Stock Option Plan for Non-Employee Directors (15)(29)
(l)            BancorpSouth, Inc. 1998 Stock Option Plan (16)(29)
(m)          Amendment to the BancorpSouth, Inc. 1998 Stock Option Plan (17)(29)
(n)           BancorpSouth, Inc. Restoration Plan, as amended and restated. (8)(29)
(o)           BancorpSouth, Inc. Amended and Restated Deferred Compensation Plan. (8)(29)
(p)           BancorpSouth, Inc. Home Office Incentive Plan. (18)(29)
(q)           Description of Dividend Reinvestment Plan. (19)(29)
 
(r)
BancorpSouth, Inc., Amended and Restated Salary Deferral-Profit Sharing Employee Stock Ownership Plan. (20)(29)
(s)           Executive Employment Agreement with James D. Rollins III.* (29)
 
(t)
BancorpSouth, Inc. Long-Term Equity Incentive Plan Restricted Stock Award Agreement with James D. Rollins.* (29)
(u)           Form of BancorpSouth, Inc. Change in Control Agreement. (21)(29)
(v)           Form of Amendment to BancorpSouth, Inc. Change in Control Agreement. (8)(29)
(w)          BancorpSouth, Inc. Change in Control Agreement for Aubrey B. Patterson. (22)(29)
(x)           BancorpSouth, Inc. Change in Control Agreement for James V. Kelley. (23)(29)
(y)           BancorpSouth, Inc. Change in Control Agreement for Gregg Cowsert. (22)(29)
(z)           BancorpSouth, Inc. Change in Control Agreement for Michael Sappington. (22)(29)
(aa)         BancorpSouth, Inc. Change in Control Agreement for Larry Bateman. (24)(29)
(bb)        BancorpSouth, Inc. Change in Control Agreement for William L. Prater. (25)(29)
(cc)         BancorpSouth, Inc. Change in Control Agreement for Gordon Lewis. (26)(29)
 
 
 
138
 
 
(dd)         BancorpSouth, Inc. Change in Control Agreement for James D. Rollins III.* (29)
 
(ee)
BancorpSouth, Inc. 1994 Stock Incentive Plan, as amended and restated. (12)(29)
(ff)           BancorpSouth, Inc. Deferred Directors’ Fee Unfunded Plan. (8)(29)
(gg)         Premier Bancorp, Inc. 1998 Stock Option Plan. (27)(29)
(hh)         Premier Bancorp, Inc. 1998 Outside Director Stock Option Plan. (27)(29)
 
(ii)
Form of Stock Option Agreement for converted Business Holding Corporation Options (Vesting). (27)(29)
 
(jj)
Form of Stock Option Agreement for converted Business Holding Corporation Options (Non-Vesting). (27)(29)
 
(kk)
Salary Continuation Agreement with Gordon R. Lewis. (28)(29)
(11)                         Statement re computation of per share earnings.*
(21)                         Subsidiaries of the Registrant.*
(23)                         Consent of Independent Accountants.*
(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 Annual Report on Form 10-K for the year ended December 31, 2012, is formatted in XBRL (Extensible Business Reporting Language) interactive data files: (i) the Consolidated Balance Sheets as of December 31, 2012 and 2011, (ii) the Consolidated Statements of Income for each of the years ended December 31, 2012, 2011 and 2010, (iii) the Consolidated Statements of Shareholders’ Equity and Comprehensive Income for each of the years ended December 31, 2012, 2011 and 2010, (iv) the Consolidated Statements of Cash Flows for each of the years ended December 31, 2012, 2011 and 2010, and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text.*(30)
 
__________________
(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 an exhibit 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 an exhibit 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 Annual Report on Form 10-K for the year ended December 31, 2008 (file number 1-12991) and incorporated by reference thereto.
(9)
Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the three months ended September 30, 2012 (file number 1-12991) and incorporated by reference thereto.
(10)
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.
(11)
Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2003 (file number 1-12991) and incorporated by reference thereto.
 
 
 
139
 
 
(12)
Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the three months ended June 30, 2005 (file number 1-12991) and incorporated by reference thereto.
(13)
Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the three months ended June 30, 2006 (file number 1-12991) and incorporated by reference thereto.
(14)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on March 7, 2007 (file number 1-12991) and incorporated by reference thereto.
(15)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on April 29, 2008 (file number 1-12991) and incorporated by reference thereto.
(16)
Filed as an exhibit to the Company’s Post-Effective Amendment No. 5 on Form S-3 to Form S-4 filed on February 23, 1999 (Registration No. 333-280181) and incorporated by reference thereto.
(17)
Filed as an exhibit to the Company’s registration statement on Form S-3 filed on March 13, 2007 (Registration No. 333-141250) and incorporated by reference thereto.
(18)
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 (file number 1-12991) and incorporated by reference thereto.
(19)
Filed as the Company’s prospectus pursuant to Rule 424(b)(2) filed on January 5, 2004 (Registration No. 033-03009) and incorporated by reference thereto.
(20)
Filed as an exhibit to the Company’s registration statement on Form S-8 filed on April 19, 2006 (Registration No. 333-133390) and incorporated by reference thereto.
(21)
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (file number 1-12991) and incorporated by reference thereto.
(22)
Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 1999 (file number 1-12991) and incorporated by reference thereto.
(23)
Filed as an exhibit to the Company’s registration statement on Form S-4 filed on June 14, 2000 (Registration No. 333-39326) and incorporated by reference thereto.
(24)
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (file number 1-12991) and incorporated by reference thereto.
(25)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on June 25, 2009 (file number 1-12991) and incorporated by reference thereto.
(26)
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 (file number 1-12991) and incorporated by reference thereto.
(27)
Filed as an exhibit to the Company’s registration statement on Form S-8 filed on December 30, 2004 (Registration No. 333-121785) and incorporated by reference thereto.
(28)
Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2012 (file number 1-12991) and incorporated by reference thereto.
(29)
Compensatory plans or arrangements.
(30)
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.
*
Filed herewith.



 
140