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BancorpSouth hosts annual meeting

‘Broad geographic diversification’ helps BXS weather storm

Tupelo — Themes such as balance and consistency underscored BancorpSouth’s (NYSE: BXS) recent annual meeting, which provided an overview of 2005 performance and major accomplishments.

While Katrina had a significant effect on many of the company’s customers and employees, BancorpSouth chairman and CEO Aubrey Patterson said that the Tupelo-based financial services company responded well to the challenges of 2005.

“Because of BancorpSouth’s broad geographic diversification, we were able to more than offset the effect of the storm on our financial results for 2005 through growth in other markets, and we expect to now participate in unprecedented rebuilding efforts gathering momentum along the Mississippi Gulf Coast,” Patterson said. “We have a strong market position, a proven business model and an outstanding team of dedicated professionals.”

BancorpSouth’s net income for 2005 rose to $115.2 million, or $1.47 per diluted share, from $110.6 million, or $1.43 per diluted share for 2004. Patterson said the stronger environment for the company’s traditional banking business was reflected in four key factors.

“First, we produced 7.7% growth in loans and leases net of unearned discount for 2005,” Patterson noted. “We attribute this increase primarily to organic growth produced in a geographically broad array of urban markets within our six-state franchise.”

Second, Patterson said that the company worked to optimize its asset/liability management, maximizing net interest revenue and reducing the earnings impact of interest rate volatility. Third, Patterson said that the combination of loan growth and effective asset/liability management enabled BancorpSouth to produce an increase in net interest margin for 2005 to 3.64% — the first increase achieved since 2002. Fourth, BancorpSouth continued to build on a decade’s long record of credit quality as it reduced its nonperforming loans for eight consecutive comparable-quarter periods from a high of $51.4 million at the end of 2003 to $28.8 million at end of 2005. Additionally, Patterson observed that net charge-offs for 2005 declined for the third consecutive year to 0.23% of average loans and leases for the year, compared with 0.41% for 2002.

The year was not without its challenges, however. Patterson stated that non-interest revenue streams faced pressure from rising interest rates and the impact of Katrina during 2005. “As anticipated, mortgage originations slowed as a result of increasing interest rates, totaling $588 million for 2005 compared with $576 million for 2004,” Patterson said. “In addition, with one of our three major insurance agencies headquartered in Gulfport, our insurance commission revenue fell substantially in the immediate aftermath of the hurricane.” Patterson noted that insurance commission revenues had increased through organic growth at a rate in excess of 9% for the three quarters prior to the third quarter of 2005. Due to Katrina, the rate of growth was 3.2% for the third quarter and 0.9% for the fourth quarter, Patterson added.

Despite these factors, Patterson said that BancorpSouth’s operating and financial results and its potential for future growth strengthened in 2005. The company is also engaged in a number of activities designed to leverage a range of growth opportunities, among which is the huge redevelopment effort along the Mississippi Gulf Coast.

Patterson said that the company expects to participate in a meaningful way in the rebuilding of the Gulf Coast region.

“We intend to strengthen our presence in existing markets such as Biloxi, Gulfport and Ocean Springs and in early 2006, we received approval to open a new full-service office in Bay St. Louis,” Patterson said.

“We expect the revitalization of the region to provide substantial long-term opportunities for our traditional banking, insurance and mortgage origination businesses,” Patterson observed.

Additionally, Patterson said that the company expects to continue implementing its existing long-term growth strategies “focused on increasing our share of existing markets and expanding into new markets with attractive growth dynamics, either within our existing six-state franchise or in contiguous states.”

In 2005, BancorpSouth grew through its acquisitions of banks in Brentwood, Tenn. and Baton Rouge, La., both completed on December 31, 2004. The company also expanded into what Patterson called demographically attractive markets in northeastern Arkansas through its acquisition of American State Bank Corp. in Jonesboro. Additionally in 2005, the company opened loan production offices in Gulf Shores, Ala. and in Fayetteville, Ark.

“We are evaluating other de novo and acquisition opportunities to expand our existing footprint in East Texas where we have already opened full-service offices in Longview and Lufkin and a loan production office in Tyler, Texas. During the first quarter of this year, we expanded our North Alabama franchise with the opening of a loan production office in Huntsville, one of the most attractive markets among Alabama’s 11 medium-to-large metropolitan areas. We are also considering attractive markets in new states, including Florida and Georgia,” Patterson stated.

Beyond geography, BancorpSouth’s growth strategy also continues to focus on building noninterest revenue streams to mitigate traditional bank dependence on volatile interest margins. Patterson added that noninterest revenue products and services can also significantly strengthen relationships with existing bank customers, as well as providing an entry to new relationships.

Patterson moved on to the company’s recently-announced results for the first quarter of 2006, highlights of which included:

• growth in net income of 18.9% to $37.7 million

• growth of 17.5% in earnings per diluted share to $0.47 for the first quarter of 2006, up from $ 0.40 for the first quarter of 2005

• a 21.2% increase in net interest revenue, after provision for credit losses, to $99.8 million for the first quarter of 2006

• the expansion of the company’s net interest margin for the first quarter to 3.73% from 3.64% for both the first and fourth quarters of 2005

In closing, Patterson stated that BancorpSouth has assembled what he deems as key ingredients necessary to drive long-term growth and shareholder value.

“We have differentiated products and services and have substantial opportunity to expand market share within existing and contiguous markets,” Patterson said. “We have the financial strength and the expertise to achieve our long-term goals without overexposure to the risks of the interest rate cycle.”

Contact MBJ contributing writer Karen Kahler Holliday at mbj@msbusiness.com.

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