UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2008

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

BANCORPSOUTH, INC.

 

(Exact name of registrant as specified in its charter)

Mississippi		64-0659571
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Mississippi Plaza, 201 South Spring Street Tupelo, Mississippi (Address of principal executive offices)		38804 (Zip Code)

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

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

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

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company o

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

As of November 3, 2008, the registrant had outstanding 83,103,519 shares of common stock, par value $2.50 per share.

 

 

BANCORPSOUTH, INC.
TABLE OF CONTENTS

		Page
PART I. Financial Information
ITEM 1. Financial Statements
Consolidated Balance Sheets September 30, 2008 (Unaudited) and December 31, 2007		3
Consolidated Statements of Income (Unaudited) Three Months and Nine Months Ended September 30, 2008 and 2007		4
Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2008 and 2007		5
Notes to Consolidated Financial Statements (Unaudited)		6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		33
ITEM 4. Controls and Procedures		33
PART II. Other Information
ITEM 1A. Risk Factors		33
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		33
ITEM 6. Exhibits		33
EX-31.1
EX-31.2
EX-32.1
EX-32.2

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Report may not be based on historical facts and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may be identified by reference to a future period(s) or by the use of forward-looking terminology, such as “anticipate,” “believe,” “estimate,” “expect,” “foresee,” “may,” “might,” “will,” “intend,” “could,” “would” or “plan,” or future or conditional verb tenses, and variations or negatives of such terms. These forward-looking statements include, without limitation, those relating to the Company’s net interest margin, payment of dividends, prepayment of Junior Subordinated Debt Securities, investment in pooled trust preferred securities, credit losses, credit quality, core deposits, off-balance sheet commitments and arrangements, amortization expense, valuation of mortgage servicing rights, allowance for credit losses, continued weakness in the economic environment, volatility of interest rates, deteriorating credit quality of borrowers, consideration for future acquisitions, key indicators of the Company’s financial performance (such as return on average assets and return on average shareholders’ equity), liquidity needs and strategies, future acquisitions to further the Company’s business strategies, the effect of certain legal claims, the impact of federal and state regulatory requirements for capital, additional share repurchases under the Company’s stock repurchase program, diversification of the Company’s revenue stream and the application and impact of recent accounting pronouncements. We caution you not to place undue reliance on the forward-looking statements contained in this report, in that actual results could differ materially from those indicated in such forward-looking statements as a result of a variety of factors. These factors include, but are not limited to, the ability of the Company to increase noninterest revenue and expand noninterest revenue business, the ability of the Company to fund growth with lower cost liabilities, the ability of the Company to maintain credit quality, the ability of the Company to provide and market competitive services and products, the ability of the Company to diversify revenue, the ability of the Company to attract, train and retain qualified personnel, the ability of the Company to operate and integrate new technology, changes in consumer preferences, changes in the Company’s operating or expansion strategy, changes in economic conditions and government fiscal and monetary policies, legislation and court decisions related to the amount of damages recoverable in legal proceedings, fluctuations in prevailing interest rates and the effectiveness of the Company’s interest rate hedging strategies, the ability of the Company to balance interest rate, credit, liquidity and capital risks, the ability of the Company to collect amounts due under loan agreements and attract deposits, laws and regulations affecting financial institutions in general, the ability of the Company to identify and effectively integrate potential acquisitions, the ability of the Company to manage its growth and effectively serve an expanding customer and market base, geographic concentrations of the Company’s assets and susceptibility to economic downturns in that area, availability of and costs associated with maintaining and/or obtaining adequate and timely sources of liquidity, the ability of the Company to compete with other financial services companies, the ability of the Company to repurchase its common stock on favorable terms, possible adverse rulings, judgments, settlements and other outcomes of pending or threatened litigation, other factors generally understood to affect the financial condition or results of financial services companies and other factors detailed from time to time in the Company’s press releases and filings with the Securities and Exchange Commission. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date of this report.

PART I.
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

BANCORPSOUTH, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

		September 30,				December 31,
		2008				2007
		(Unaudited)				(1)
		(Dollars in thousands, except per share amounts)
ASSETS
Cash and due from banks		$	246,687			$	322,926
Interest bearing deposits with other banks			15,730				12,710
Held-to-maturity securities, at amortized cost			1,350,396				1,625,916
Available-for-sale securities, at fair value			919,468				1,001,194
Loans and leases			9,641,497				9,227,495
Less: Unearned income			49,085				47,811
Allowance for credit losses			129,147				115,197
Net loans			9,463,265				9,064,487
Loans held for sale			195,830				128,532
Premises and equipment, net			345,235				317,379
Accrued interest receivable			85,968				96,027
Goodwill			271,017				254,889
Other assets			407,132				365,781
TOTAL ASSETS		$	13,300,728			$	13,189,841
LIABILITIES
Deposits:
Demand: Noninterest bearing		$	1,694,303			$	1,670,198
Interest bearing			3,771,265				3,276,275
Savings			693,034				698,449
Other time			3,526,198				4,419,177
Total deposits			9,684,800				10,064,099
Federal funds purchased and securities sold under agreement to repurchase			1,079,088				809,898
Short-term Federal Home Loan Bank and other short-term borrowings			625,000				706,586
Accrued interest payable			24,846				37,746
Junior subordinated debt securities			160,312				160,312
Long-term Federal Home Loan Bank borrowings			288,861				88,977
Other liabilities			195,102				125,597
TOTAL LIABILITIES			12,058,009				11,993,215
SHAREHOLDERS’ EQUITY
Common stock, $2.50 par value per share
Authorized - 500,000,000 shares, Issued - 83,085,619 and 82,299,297 shares, respectively			207,714				205,748
Capital surplus			216,394				198,620
Accumulated other comprehensive loss			(8,746	)			(7,214	)
Retained earnings			827,357				799,472
TOTAL SHAREHOLDERS’ EQUITY			1,242,719				1,196,626
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	13,300,728			$	13,189,841

See accompanying notes to consolidated financial statements.

BANCORPSOUTH, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

		Three months ended								Nine months ended
		September 30,								September 30,
		2008				2007				2008				2007
		(In thousands, except for per share amounts)
INTEREST REVENUE:
Loans and leases		$	144,393			$	174,787			$	450,866			$	497,745
Deposits with other banks			172				316				573				870
Federal funds sold and securities purchased under agreement to resell			218				232				285				3,376
Held-to-maturity securities:
Taxable			14,063				17,585				45,054				51,252
Tax-exempt			1,959				2,077				6,059				6,136
Available-for-sale securities:
Taxable			9,025				10,554				27,120				30,985
Tax-exempt			874				960				3,338				3,085
Loans held for sale			1,920				1,454				5,550				4,211
Total interest revenue			172,624				207,965				538,845				597,660
INTEREST EXPENSE:
Deposits:
Interest bearing demand			14,214				22,189				44,409				64,068
Savings			1,366				2,503				4,200				7,367
Other time			33,660				55,728				120,298				163,172
Federal funds purchased and securities sold under agreement to repurchase			4,308				9,151				12,824				26,258
FHLB borrowings			6,277				7,130				17,921				13,763
Other			3,197				3,348				9,678				9,790
Total interest expense			63,022				100,049				209,330				284,418
Net interest revenue			109,602				107,916				329,515				313,242
Provision for credit losses			16,306				5,727				38,354				14,925
Net interest revenue, after provision for credit losses			93,296				102,189				291,161				298,317
NONINTEREST REVENUE:
Mortgage lending			3,270				100				14,320				7,363
Credit card, debit card and merchant fees			8,512				7,667				25,334				21,932
Service charges			17,687				17,281				50,619				50,354
Trust income			2,507				2,487				7,002				7,158
Security gains, net			100				7				377				24
Insurance commissions			21,779				17,542				67,909				55,001
Other			9,578				12,810				37,369				34,653
Total noninterest revenue			63,433				57,894				202,930				176,485
NONINTEREST EXPENSE:
Salaries and employee benefits			68,865				63,269				207,161				190,748
Occupancy, net of rental income			10,340				8,959				29,539				26,131
Equipment			6,214				6,057				18,892				18,136
Other			30,640				28,066				86,001				82,874
Total noninterest expense			116,059				106,351				341,593				317,889
Income before income taxes			40,670				53,732				152,498				156,913
Income tax expense			12,325				17,475				48,883				51,198
Net income		$	28,345			$	36,257			$	103,615			$	105,715
Earnings per share:
Basic		$	0.34			$	0.44			$	1.26			$	1.30
Diluted		$	0.34			$	0.44			$	1.25			$	1.30
Dividends declared per common share		$	0.22			$	0.21			$	0.65			$	0.62

See accompanying notes to consolidated financial statements.

BANCORPSOUTH, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

		Nine months ended
		September 30,
		2008				2007
		(In thousands)
Operating Activities:
Net income		$	103,615			$	105,715
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for credit losses			38,354				14,925
Depreciation and amortization			21,700				20,858
Deferred taxes			(2,219	)			6,234
Amortization of intangibles			4,485				3,758
Amortization of debt securities premium and discount, net			1,140				4,636
Share-based compensation expense			1,989				1,102
Security gains, net			(377	)			(20	)
Net deferred loan origination expense			(6,985	)			(6,065	)
Excess tax benefit from exercise of stock options			(2,218	)			(1,155	)
Decrease (increase) in interest receivable			10,059				(7,934	)
(Decrease) increase in interest payable			(12,900	)			3,848
Realized gain on student loans sold			(17	)			(2,221	)
Proceeds from student loans sold			1,483				82,853
Origination of student loans held for sale			(74,953	)			(87,500	)
Realized gain on mortgages sold			(8,394	)			(8,118	)
Proceeds from mortgages sold			759,315				647,014
Origination of mortgages held for sale			(744,795	)			(637,138	)
Increase in bank-owned life insurance			(5,298	)			(5,241	)
Decrease (increase) in prepaid pension asset			941				(37,631	)
Other, net			12,588				(1,598	)
Net cash provided by operating activities			97,513				96,322
Investing activities:
Proceeds from calls and maturities of held-to-maturity securities			287,877				167,075
Proceeds from calls and maturties of available-for-sale securities			632,616				455,247
Proceeds from sales of available-for-sale securities			531				—
Purchases of held-to-maturity securities			(12,731	)			(150,931	)
Purchases of available-for-sale securities			(553,928	)			(408,731	)
Net decrease in short-term investments			—				91,766
Net increase in loans and leases			(437,573	)			(413,246	)
Purchases of premises and equipment			(49,697	)			(26,832	)
Proceeds from sale of premises and equipment			749				1,225
Acquisition of businesses, net of cash acquired			(10,362	)			(60,449	)
Other, net			(611	)			(1,016	)
Net cash used in investing activities			(143,129	)			(345,892	)
Financing activities:
Net decrease in deposits			(379,299	)			(122,176	)
Net increase in short-term debt and other liabilities			188,244				280,360
Advances of long-term debt			200,000				—
Repayment of long-term debt			(116	)			(13,102	)
Issuance of common stock			15,276				8,150
Purchase of common stock			(326	)			(14,545	)
Excess tax benefit from exercise of stock options			2,218				1,155
Payment of cash dividends			(53,600	)			(50,038	)
Net cash (used in) provided by financing activities			(27,603	)			89,804
Decrease in cash and cash equivalents			(73,219	)			(159,766	)
Cash and cash equivalents at beginning of period			335,636				451,451
Cash and cash equivalents at end of period		$	262,417			$	291,685

See accompanying notes to consolidated financial statements.

BANCORPSOUTH, INC. AND SUBSIDIARIES

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

The accompanying unaudited interim consolidated financial statements of BancorpSouth, Inc. (the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which the Company operates. For further information, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial statements have been included and all such adjustments were of a normal, recurring nature. The results of operations for the three-month and nine-month periods ended September 30, 2008 are not necessarily indicative of the results to be expected for the full year. Certain 2007 amounts have been reclassified to conform with the 2008 presentation. Also, beginning March 1, 2007, the financial statements include the accounts of The Signature Bank. See Note 11, Business Combinations, for further information regarding The Signature Bank.

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

NOTE 2 – LOANS AND LEASES

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

		September 30,								December 31,
		2008				2007				2007
		(In thousands)
Commercial and agricultural		$	1,274,007			$	1,241,954			$	1,236,776
Consumer and installment			405,580				423,159				450,882
Real estate mortgage:
One-to-four family			2,609,481				2,561,889				2,529,986
Other			4,887,102				4,330,303				4,490,445
Lease financing			274,734				291,424				285,865
Other			190,593				254,578				233,541
Total		$	9,641,497			$	9,103,307			$	9,227,495

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

		September 30,								December 31,
		2008				2007				2007
		(In thousands)
Non-accrual loans		$	30,642			$	7,301			$	9,789
Loans 90 days or more past due			31,866				23,158				18,671
Restructured loans			2,666				878				721
Total non-performing loans		$	65,174			$	31,337			$	29,181

NOTE 3 – ALLOWANCE FOR CREDIT LOSSES

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

		Nine months ended								Year ended
		September 30,								December 31,
		2008				2007				2007
		(In thousands)
Balance at beginning of period		$	115,197			$	98,834			$	98,834
Provision charged to expense			38,354				14,925				22,696
Recoveries			2,896				3,279				4,355
Loans and leases charged off			(27,300	)			(11,057	)			(16,841	)
Acquisitions			—				6,153				6,153
Balance at end of period		$	129,147			$	112,134			$	115,197

NOTE 4 – SECURITIES

The following table summarizes information pertaining to temporarily impaired held-to-maturity and available-for-sale securities with continuous unrealized loss positions at September 30, 2008:

		Continuous Unrealized Loss Position
		Less Than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(In thousands)
Held-to-maturity securities:
U.S. Treasury		$	—			$	—			$	—			$	—			$	—			$	—
U.S. government agencies			1,499				1				—				—				1,499				1
Obligations of states and political subdivisions			54,121				2,703				23,114				1,001				77,235				3,704
Total		$	55,620			$	2,704			$	23,114			$	1,001			$	78,734			$	3,705
Available-for-sale securities:
U.S. government agencies		$	174,172			$	1,114			$	106,463			$	1,978			$	280,635			$	3,092
Obligations of states and political subdivisions			23,926				1,213				180				35				24,106				1,248
Other			7,645				3,373				—				—				7,645				3,373
Total		$	205,743			$	5,700			$	106,643			$	2,013			$	312,386			$	7,713

Based upon a review of the credit quality of these securities, the ability and intent to hold these securities for a period of time sufficient for recovery of costs and the volatility of their market price, the impairments related to these securities were determined to be temporary.

The Company’s unrealized losses on other securities relate to its investment in bank-only pooled trust preferred securities. The Company is closely monitoring its investments in pooled trust preferred securities in light of recent price volatility in the market place. Due to uncertainty in the credit markets broadly, and the lack of both trading and new issuance in pooled trust preferred securities, market price indications generally reflect the illiquidity in these markets and not the credit quality of the individual securities. Due to this illiquidity, it is unlikely that the Company would be able to recover its investment in these securities if it sold them at this time. The Company has the intent and ability to hold these securities until a recovery of costs, which may be at maturity. Based on an assessment of the credit quality of the underlying issuers, the Company did not consider the investment in these

securities to be other-than-temporarily impaired at September 30, 2008. The Company will continue to monitor the market price of these securities and the default rates of the underlying assets and continue to evaluate these securities for possible other-than-temporary impairment, which could result in a future non-cash charge to earnings. For more information on the valuation techniques used by the Company to value the pooled trust preferred securities, see Note 15, “Fair Value Disclosures.”

NOTE 5 – PER SHARE DATA

The computation of basic earnings per share (“EPS”) is based on the weighted average number of shares of common stock outstanding. The computation of diluted earnings per share is based on the weighted average number of shares of common stock outstanding plus the shares resulting from the assumed exercise of all outstanding share-based awards using the treasury stock method.

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

		Three months ended September 30,
		2008												2007
		Income				Shares				Per Share				Income				Shares				Per Share
		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
		(In thousands, except per share amounts)
Basic EPS
Income available to common shareholders		$	28,345				82,561			$	0.34			$	36,258				82,165			$	0.44
Effect of dilutive share- based awards			—				205								—				302
Diluted EPS
Income available to common shareholders plus assumed exercise of all outstanding share-based awards		$	28,345				82,766			$	0.34			$	36,258				82,467			$	0.44

		Nine months ended September 30,
		2008												2007
		Income				Shares				Per Share				Income				Shares				Per Share
		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
		(In thousands, except per share amounts)
Basic EPS
Income available to common shareholders		$	103,615				82,420			$	1.26			$	105,715				81,264			$	1.30
Effect of dilutive stock options			—				225								—				368
Diluted EPS
Income available to common shareholders plus assumed exercise		$	103,615				82,645			$	1.25			$	105,715				81,632			$	1.30

NOTE 6 – COMPREHENSIVE INCOME

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

		Three months ended September 30,
		2008												2007
		Before				Tax				Net				Before				Tax				Net
		tax				(expense)				of tax				tax				(expense)				of tax
		amount				benefit				amount				amount				benefit				amount
		(In thousands)
Unrealized gains on available-for- sale securities:
Unrealized gains (losses) arising during holding period		$	649			$	(242	)		$	407			$	12,899			$	(4,934	)		$	7,965
Less: Reclassification adjustment for net (gains) losses realized in net income			(100	)			38				(62	)			(7	)			3				(4	)
Recognized employee benefit plan net periodic benefit cost (gain)			229				(88	)			141				494				(189	)			305
Other comprehensive income (loss)		$	778			$	(292	)		$	486			$	13,386			$	(5,120	)		$	8,266
Net income											28,345												36,257
Comprehensive income										$	28,831											$	44,523

		Nine months ended September 30,
		2008												2007
		Before				Tax				Net				Before				Tax				Net
		tax				(expense)				of tax				tax				(expense)				of tax
		amount				benefit				amount				amount				benefit				amount
		(In thousands)
Unrealized gains on available-for-
sale securities:
Unrealized (losses) gains arising during holding period		$	(2,858	)		$	1,239			$	(1,619	)		$	9,447			$	(3,612	)		$	5,835
Less: Reclassification adjustment for net (gains) losses realized in net income			(377	)			144				(233	)			(17	)			7				(10	)
Recognized employee benefit plan net periodic benefit cost (gain)			519				(199	)			320				1,479				(566	)			913
Other comprehensive (loss) income		$	(2,716	)		$	1,184			$	(1,532	)		$	10,909			$	(4,171	)		$	6,738
Net income											103,615												105,715
Comprehensive income										$	102,083											$	112,453

NOTE 7 – JUNIOR SUBORDINATED DEBT SECURITIES

In 2002, the Company issued $128,866,000 in 8.15% Junior Subordinated Debt Securities to BancorpSouth Capital Trust I (the “Trust”), a business trust. The Trust used the proceeds from the issuance of five million shares of 8.15% trust preferred securities, $25 face value per share, to acquire the 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 $6,186,000 in Junior Subordinated Debt Securities issued to Business Holding Company Trust I, a statutory trust. Business Holding Company Trust I used the proceeds from the issuance of 6,000 shares of trust preferred securities to acquire the Junior Subordinated Debt Securities. Both the Junior Subordinated Debt Securities and the trust preferred securities mature on April 7, 2034, and are callable at the option of the Company, in whole or in part, on any January 7, April 7, July 7 or October 7 on or after April 7, 2009. The Junior Subordinated Debt Securities and the trust preferred securities pay a per annum rate of interest, reset quarterly, equal to the three-month London Interbank Offered Rate (“LIBOR”) plus 2.80% from January 30, 2004 to April 7, 2009 and thereafter at LIBOR plus 2.85%.

Pursuant to the merger with American State Bank Corporation on December 1, 2005, the Company assumed the liability for $6,702,000 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 any July 7, October 7, January 7 or April 7 on or after April 7, 2009. The Junior Subordinated Debt Securities and the trust preferred securities pay a per annum rate of interest, reset quarterly, equal to the three-month LIBOR plus 2.80%.

Pursuant to the merger with City Bancorp on March 1, 2007, the Company assumed the liability for $8,248,000 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 on or after October 8, 2008. 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 $10,310,000 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, on any March 15, June 15, September 15 or December 15 on or after March 15, 2010. 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%.

NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill by operating segment for the nine months ended September 30, 2008 were as follows:

		Community				Insurance
		Banking				Agencies				Total
		(In thousands)
Balance as of December 31, 2007		$	214,780			$	40,109			$	254,889
Goodwill acquired during the period			673				10,539				11,212
Purchase accounting adjustments			4,916				—				4,916
Balance as of September 30, 2008		$	220,369			$	50,648			$	271,017

As reflected in the table above, the community banking goodwill acquired during the period is related to the additional purchase price paid in connection with the acquisition of City Bancorp as a result of the settlement of a contingency during the first quarter of 2008. Also, an adjustment was made in the first quarter of 2008 to the allocation of the purchase price in conjunction with the acquisition of City Bancorp that related to a loan acquired which was subsequently determined to be unsubstantiated. See Note 11, Business Combinations, for more information regarding that transaction.

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

		As of								As of
		September 30, 2008								December 31, 2007
		Gross Carrying				Accumulated				Gross Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
		(In thousands)
Amortized intangible assets:
Core deposit intangibles		$	27,801			$	16,076			$	27,801			$	14,448
Customer relationship intangibles			32,186				15,213				24,639				12,536
Non-solicitation intangibles			600				380				665				265
Total		$	60,587			$	31,669			$	53,105			$	27,249
Unamortized intangible assets:
Trade names		$	688			$	—			$	688			$	—

		Three months ended								Nine months ended
		September 30,								September 30,
		2008				2007				2008				2007
		(In thousands)
Aggregate amortization expense for:
Core deposit intangibles		$	531			$	699			$	1,628			$	2,024
Customer relationship intangibles			891				511				2,677				1,588
Non-solicitation intangibles			60				142				180				146
Total		$	1,482			$	1,352			$	4,485			$	3,758

The following table presents information regarding estimated amortization expense on the Company’s amortizable identifiable intangible assets for the year ended December 31, 2008 and the succeeding four years:

						Customer				Non-
		Core Deposit				Relationship				Solicitation
		Intangibles				Intangibles				Intangibles				Total
		(In thousands)
Estimated Amortization Expense:
For year ended December 31, 2008		$	1,977			$	3,529			$	240			$	5,746
For year ended December 31, 2009			1,709				2,996				160				4,865
For year ended December 31, 2010			1,308				2,551				—				3,859
For year ended December 31, 2011			1,016				2,178				—				3,194
For year ended December 31, 2012			946				1,863				—				2,809

NOTE 9 – PENSION BENEFITS

The following table presents the components of net periodic benefit costs for the periods indicated:

		Pension Benefits
		Three months ended								Nine months ended
		September 30,								September 30,
		2008				2007				2008				2007
						(In thousands)
Service cost		$	1,935			$	1,959			$	5,269			$	5,876
Interest cost			1,677				1,532				4,985				4,598
Expected return on assets			(2,744	)			(2,281	)			(8,036	)			(6,841	)
Amortization of unrecognized transition amount			3				5				13				13
Recognized prior service cost			65				64				199				192
Recognized net loss			161				425				307				1,274
Net periodic benefit costs		$	1,097			$	1,704			$	2,737			$	5,112

NOTE 10 – RECENT PRONOUNCEMENTS

In September 2006, Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” was issued. SFAS No. 157 establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157,” which delays the effective date of SFAS 157 for non-financial assets and non-financial liabilities that are recognized or disclosed in the financial statements on a nonrecurring basis. The FSP partially defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. The adoption of SFAS No. 157 and FSP FAS 157-2 has had no material impact on the financial position or results of operations of the Company. The Company has not applied the provisions of SFAS 157 to its non-financial assets and non-financial liabilities in accordance with FSP FAS 157-2. The Company will apply the provisions of SFAS 157 to these assets and liabilities beginning January 1, 2009 as required by FSP FAS 157-2.

In September, 2006, the Emerging Issues Task Force (“EITF”) reached a final consensus on Issue No. 06-4, “Accounting for the Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” EITF Issue No. 06-4 requires employers to recognize a liability for future benefits provided through endorsement split-dollar life insurance arrangements that extend into postretirement periods in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” or APB Opinion No. 12, “Omnibus Opinion – 1967.” EITF Issue No. 06-4 is effective for fiscal years beginning after December 15, 2007. Entities should recognize the effects of applying EITF Issue No. 06-04 through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in the statement of financial position as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. The initial adoption of EITF Issue No. 06-4 resulted in a cumulative-effect adjustment to retained earnings of approximately $1.1 million at January 1, 2008. During the second quarter of 2008, management identified certain endorsement split-dollar life insurance arrangements that were not included in the original adoption of EITF Issue No. 06-4. The correction of this immaterial error resulted in an additional cumulative-effect adjustment to retained earnings of approximately $2.5 million for a total cumulative-effect adjustment to retained earnings at January 1, 2008 of approximately $3.6 million. Retained earnings was originally reported at March 31, 2008 as $816.0 million. Subsequent to the adjustment of $2.5 million, retained earnings was $813.5 million. Other liabilities was originally reported at March 31, 2008 as $147.0 million. Subsequent to the adjustment of $2.5 million, other liabilities was $149.5 million.

In February, 2007, SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” was issued. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company did not elect the fair value option in regards to items not previously recorded at fair value. Therefore, the adoption of SFAS No. 159 has had no material impact on the financial position or results of operations of the Company.

In November 2007, the SEC issued Staff Accounting Bulletin (“SAB”) No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings.” SAB No. 109 rescinds SAB No. 105’s prohibition on inclusion of expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. SAB No. 109 also applies to any loan commitments for which fair value accounting is elected under SFAS No. 159. SAB No. 109 is effective prospectively for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The adoption of SAB No. 109 has had no material impact on the financial position or results of operations of the Company.

In December 2007, SFAS No. 141(R), “Business Combinations,” was issued. SFAS No. 141(R) expands the definition of transactions and events that qualify as business combinations; requires that the acquired assets and liabilities, including contingencies, be recorded at fair value determined on the acquisition date; changes the recognition timing for restructuring costs; and requires the expensing of acquisition costs as incurred. SFAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. The Company believes that the

adoption of SFAS No. 141(R) will have no material impact on the financial position or results of operations of the Company.

In December 2007, SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements – an Amendment of ARB No. 51,” was issued. SFAS No. 160 requires that acquired assets and liabilities be measured at full fair value without consideration to ownership percentage. Under SFAS No. 160, any non-controlling interests in an acquiree should be presented as a separate component of equity rather than on a mezzanine level. Additionally, SFAS No. 160 provides that net income or loss should be reported in the consolidated income statement at its consolidated amount, with disclosure on the face of the consolidated income statement of the amount of consolidated net income which is attributable to the parent and noncontrolling interest, respectively. SFAS No. 160 is effective prospectively for periods beginning on or after December 15, 2008, with the exception of the presentation and disclosure requirements which should be retrospectively applied to all periods presented. The Company believes that the adoption of SFAS No. 160 will have no impact on the financial position or results of operations of the Company.

In March 2008, SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133,” was issued. SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities by requiring entities to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. SFAS No. 161 will impact disclosures only and will not have an impact on the financial position or results of operations of the Company.

NOTE 11 – BUSINESS COMBINATIONS

On March 1, 2007, City Bancorp, a bank holding company with approximately $850 million in assets headquartered in Springfield, Missouri, merged with and into the Company. As a result of the merger, City Bancorp’s subsidiary, The Signature Bank, became a subsidiary of the Company. Effective July 1, 2007, The Signature Bank merged with and into the Bank. Consideration paid to complete this transaction consisted of 3,327,564 shares of the Company’s common stock in addition to cash paid to City Bancorp’s shareholders in the aggregate amount of approximately $83.8 million. The consideration paid to complete the transaction was adjusted to reflect the additional amount paid as a result of the settlement of a contingency during the first quarter of 2008. In addition, all outstanding City Bancorp stock options were converted into stock options to purchase 272,834 shares of the Company’s common stock. This transaction was accounted for as a purchase. This acquisition was not material to the financial position or results of operations of the Company.

NOTE 12 — SEGMENT REPORTING

The Company’s principal activity is community banking, which includes providing a full range of deposit products, commercial loans and consumer loans. During the first quarter of 2008, the Company determined that an additional operating segment, insurance agencies, should be created based upon the services offered, the significance of those services to the Company’s financial statements and the regular review of the operating results of the insurance agencies by the chief operating decision makers of the Company. The insurance agencies serve as agents in the sale of title insurance, commercial lines of insurance and full lines of property and casualty, life, health and employee benefits products and services. The general corporate and other operating segment includes leasing, mortgage lending, trust services, credit card activities, investment services and other activities not allocated to community banking. The increase in profitability of the general corporate and other operating segment is primarily related to mortgage lending.

Results of operations and selected financial information by operating segment for the three-month and nine-month periods ended September 30, 2008 and 2007 were as follows:

										General
		Community				Insurance				Corporate
		Banking				Agencies				and Other				Total
						(In thousands)
Three months ended September 30, 2008:
Results of Operations
Net interest revenue		$	100,169			$	268			$	9,165			$	109,602
Provision for credit losses			16,309				—				(3	)			16,306
Net interest revenue after provision for credit losses			83,860				268				9,168				93,296
Noninterest revenue			31,618				21,701				10,114				63,433
Noninterest expense			76,583				17,661				21,815				116,059
Income before income taxes			38,895				4,308				(2,533	)			40,670
Income taxes			11,787				1,704				(1,166	)			12,325
Net income		$	27,108			$	2,604			$	(1,367	)		$	28,345
Selected Financial Information
Total assets (at end of period)		$	10,933,724			$	154,891			$	2,212,113			$	13,300,728
Depreciation and amortization			6,996				1,232				598				8,826
Three months ended September 30, 2007:
Results of Operations
Net interest revenue		$	97,722			$	717			$	9,477			$	107,916
Provision for credit losses			5,680				—				47				5,727
Net interest revenue after provision for credit losses			92,042				717				9,430				102,189
Noninterest revenue			33,388				17,370				7,136				57,894
Noninterest expense			71,333				13,804				21,214				106,351
Income before income taxes			54,097				4,283				(4,648	)			53,732
Income taxes			17,594				1,690				(1,809	)			17,475
Net income		$	36,503			$	2,593			$	(2,839	)		$	36,257
Selected Financial Information
Total assets (at end of period)		$	10,982,478			$	117,996			$	2,033,843			$	13,134,317
Depreciation and amortization			7,083				749				638				8,470

										General
		Community				Insurance				Corporate
		Banking				Agencies				and Other				Total
						(In thousands)
Nine months ended September 30, 2008:
Results of Operations
Net interest revenue		$	301,574			$	1,034			$	26,907			$	329,515
Provision for credit losses			38,367				—				(13	)			38,354
Net interest revenue after provision for credit losses			263,207				1,034				26,920				291,161
Noninterest revenue			100,492				67,739				34,699				202,930
Noninterest expense			220,552				53,529				67,512				341,593
Income before income taxes			143,147				15,244				(5,893	)			152,498
Income taxes			45,886				5,997				(3,000	)			48,883
Net income		$	97,261			$	9,247			$	(2,893	)		$	103,615
Selected Financial Information
Total assets (at end of period)		$	10,933,724			$	154,891			$	2,212,113			$	13,300,728
Depreciation and amortization			20,747				3,621				1,817				26,185
Nine months ended September 30, 2007:
Results of Operations
Net interest revenue		$	283,556			$	1,856			$	27,830			$	313,242
Provision for credit losses			14,873				—				52				14,925
Net interest revenue after provision for credit losses			268,683				1,856				27,778				298,317
Noninterest revenue			93,390				54,555				28,540				176,485
Noninterest expense			210,206				41,020				66,663				317,889
Income before income taxes			151,867				15,391				(10,345	)			156,913
Income taxes			49,552				6,067				(4,421	)			51,198
Net income		$	102,315			$	9,324			$	(5,924	)		$	105,715
Selected Financial Information
Total assets (at end of period)		$	10,982,478			$	117,996			$	2,033,843			$	13,134,317
Depreciation and amortization			20,435				2,292				1,907				24,634

NOTE 13 – MORTGAGE SERVICING RIGHTS

Mortgage servicing rights (“MSRs”) are recognized based on the fair value of the servicing right on the date the corresponding mortgage loan is sold. 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. At September 30, 2008, the valuation of MSRs included an assumed average prepayment speed of 190 and an average discount rate of 9.79%. 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.

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 periods indicated:

		2008				2007
		(In thousands)
Fair value as of January 1		$	32,482			$	35,286
Additions:
Origination of servicing assets			6,191				4,025
Changes in fair value:
Due to change in valuation inputs or assumptions used in the valuation model			518				(3,774	)
Other changes in fair value			(14	)			(19	)
Fair value as of September 30		$	39,177			$	35,518

All of the changes to the fair value of the MSRs are recorded as part of mortgage lending noninterest revenue on the income statement. As part of mortgage lending noninterest revenue, the Company recorded contractual servicing fees of $2.14 million and $2.01 million and late and other ancillary fees of approximately $289,000 and approximately $239,000 for the quarters ended September 30, 2008 and 2007, respectively. The Company recorded contractual servicing fees of $6.32 million and $6.06 million and late and other ancillary fees of approximately $875,000 and approximately $731,000 for the nine months ended September 30, 2008 and 2007, respectively.

NOTE 14 – DERIVATIVE INSTRUMENTS

The derivatives held by the Company include commitments to fund fixed-rate mortgage loans to customers and forward commitments to sell individual fixed-rate mortgage loans. The Company’s objective in obtaining the forward commitments is to mitigate the interest rate risk associated with the commitments to fund the fixed-rate mortgage loans. Both the commitments to fund fixed-rate mortgage loans and the forward commitments to sell individual fixed-rate mortgage loans are reported at fair value, with adjustments being recorded in current period earnings, and are not accounted for as hedges. At September 30, 2008, the notional amount of forward commitments to sell individual fixed-rate mortgage loans was $86.90 million with a carrying value and fair value reflecting a loss of approximately $45,000. At September 30, 2007, the notional amount of forward commitments to sell individual fixed-rate mortgage loans was $64.35 million with a carrying value and fair value reflecting a loss of approximately $141,000. At September 30, 2008, the notional amount of commitments to fund individual fixed-rate mortgage loans was $35.44 million with a carrying value and fair value reflecting a gain of approximately $115,000. At September 30, 2007, the notional amount of commitments to fund individual fixed-rate mortgage loans was $24.35 million with a carrying value and fair value reflecting a loss of approximately $1,000.

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 September 30, 2008, the notional amount of customer related derivative financial instruments was $566.59 million with an average maturity of 86 months, an average interest receive rate of 4.37% and an average interest pay rate of 6.46%.

NOTE 15 – FAIR VALUE DISCLOSURES

Fair value is defined 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. SFAS No. 157 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 the most 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 Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions 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 three levels based on the reliability of inputs as follows:

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.

The Company adopted the provisions of SFAS 157 and FSP FAS 157-2 on January 1, 2008. The adoption of these pronouncements did not have a material effect on the Company’s financial position or results of operations.

Determination of Fair Value

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

Available-for-sale securities. Available-for-sale securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. The Company’s available-for-sale securities that are traded on an active exchange, such as the New York Stock Exchange, are classified as Level 1. Available-for-sale securities valued using matrix pricing are classified as Level 2. As of September 30, 2008, the Company transferred pooled trust preferred securities in the available-for-sale portfolio from Level 2 to Level 3. Market prices of comparable instruments have become harder to identify due to inactive markets, which has made it necessary for the Company to make adjustments to the matrix prices to compensate for the present value of expected cash flows, market liquidity, credit quality and volatility. As a result, the Company utilized Level 3 inputs of greater significance, which has required the Company to move the valuation of these securities from Level 2 to 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. In determining fair value, the Company utilizes the expertise of an independent third party. An estimate of the fair value of the Company’s MSRs is determined by the independent third party 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, forward commitments to sell individual fixed-rate mortgage loans and interest rate swaps. The derivative instruments are traded in over-the-counter markets where quoted market prices are not readily available. Fair value is measured on a recurring basis using internally developed models that use primarily market observable inputs, such as yield curves and option volatilities. The Company’s interest rate swaps are classified as Level 2. The Company’s 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 subjected 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 SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan – Income Recognition and Disclosure,” 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.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of September 30, 2008:

		Level 1				Level 2				Level 3				Total
		(In thousands)
Assets:
Available-for-sale securities		$	485			$	911,349			$	7,634			$	919,468
Mortgage servicing rights			—				—				39,177				39,177
Derivative instruments			—				8,893				514				9,407
Total		$	485			$	920,242			$	47,325			$	968,052
Liabilities:
Derivative instruments		$	—			$	8,893			$	444			$	9,337