BANCORPSOUTH INC - 10-K Annual Report

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Common stock, $2.50 par value
Common stock purchase rights
Guarantee of 8.15% Preferred Securities of BancorpSouth Capital Trust I

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 periods 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 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 amendments to this Form 10-K. [X]

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

The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant on June 30, 2003 was approximately $1,543,000,000, 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, 2003.

As of February 27, 2004, the Registrant had outstanding 77,696,771 shares of Common Stock, par value $2.50 per share.

Portions of the definitive Proxy Statement used in connection with Registrant’s 2004 Annual Meeting of Shareholders, to be held April 28, 2004, are incorporated by reference into Part III of this Report.

BANCORPSOUTH, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2003
CONTENTS

BancorpSouth, Inc. (the “Company”) is a bank holding company incorporated in 1982, with commercial banking and financial services operations in Mississippi, Tennessee, Alabama, Arkansas, Texas and Louisiana. Its principal subsidiary is BancorpSouth Bank (the “Bank”). At December 31, 2003, the Company and its subsidiaries had total assets of approximately $10.31 billion and total deposits of approximately $8.60 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 free of charge through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. The Company’s Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.

The Bank has its principal office in Tupelo, Lee County, Mississippi, and conducts a general commercial banking and trust business through 246 offices in 128 municipalities or communities in Mississippi, Tennessee, Alabama, Arkansas, Texas and Louisiana. The Bank has grown through the acquisition of other banks and insurance companies, the purchase of assets from federal regulators 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, consumer finance, credit insurance and insurance agency subsidiaries which engage in investment brokerage services, consumer lending, credit insurance sales 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.

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 2011, and “Bank of Mississippi” will expire in 2010, unless the Company extends these trademarks for additional 10 year periods. Registrations of 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.

At December 31, 2003, the Company and its subsidiaries had approximately 4,000 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.

Vigorous competition exists in all major areas where the Company 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 a competitive price and maturity, and to offer personal and other services of sufficient quality and at competitive prices. The Company and its subsidiaries believe they can compete effectively in all these areas.

The following is 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.

The Company is a bank holding company and is registered as such under the Bank Holding Company Act of 1956 (the “Bank Holding Company Act”) with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and is subject to regulation and supervision by the Federal Reserve. The Company is required to file annual reports with the Federal Reserve and such other information as it may require. The Federal Reserve may also conduct examinations of the Company. According to Federal Reserve Board policy, bank holding companies are expected to act as a source of financial strength to its subsidiary banks and to commit resources to support each such subsidiary. This support may be required at times when a bank holding company may not be able to provide such support.

The Bank is incorporated under the banking laws of the State of Mississippi and is subject to the applicable provisions of Mississippi banking laws and the laws of various states in which we operate, 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 Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) permits, among other things, the acquisition by bank holding companies of savings associations, irrespective of their financial condition, and increased the deposit insurance premiums for banks and savings associations. FIRREA also provides that commonly controlled federally insured financial institutions must reimburse the FDIC for losses incurred by the FDIC in connection with the default of another commonly controlled financial institution or in connection with the provision of FDIC assistance to such a commonly controlled financial institution in danger of default. Reimbursement liability under FIRREA is superior to any obligations to shareholders of such federally insured institutions (including a bank holding company such as the Company if it were to acquire another federally insured financial institution), arising as a result of their status as shareholders of a reimbursing financial institution.

The Company and the Bank are subject to the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”). This statute provides for increased funding for the FDIC’s deposit insurance fund and expands the regulatory powers of federal banking agencies to permit prompt corrective actions to resolve problems of insured depository institutions through the regulation of banks and their affiliates, including bank holding companies. Its provisions are designed to minimize the potential loss to depositors and to FDIC insurance funds if financial institutions default on their obligations to depositors or become in danger of default. Among other things, FDICIA provides a framework for a system of supervisory actions based primarily on the capital levels of financial institutions. FDICIA also provides for a risk-based deposit insurance premium structure. The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to its deposit insurance fund. While most of the Company’s deposits are in the Bank Insurance Fund, certain other of the Company’s deposits which were acquired from thrifts over the years remain in the Savings Association Insurance Fund.

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 20 to the Company’s Consolidated Financial Statements included in this Report for a discussion of the Company’s capital amounts and ratios.

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 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 is 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 written 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 addition, the Federal Reserve has the authority to prohibit the payment of dividends by bank holding companies if their actions constitute unsafe or unsound practices. In 1985, the Federal Reserve issued a policy statement on the payment of cash dividends by bank holding companies, which outlined 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 indicated that, in some instances, it may be appropriate for a bank holding company to eliminate its dividends.

In September 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“IBBEA”) was signed into law. IBBEA permits adequately capitalized and managed bank holding companies to acquire control of banks in states other than their home states, subject to federal regulatory approval, without regard to whether such a transaction is prohibited by the laws of any state. IBBEA permits states to continue to require that an acquired bank must have been in existence for a certain minimum time period that may not exceed five years. A bank holding company may not, following an interstate acquisition, control more than 10% of the nation’s total amount of bank deposits or 30% of bank deposits in the relevant state (unless the state enacts legislation to raise the 30% limit). States retain the ability to adopt legislation to effectively lower the 30% limit. Federal banking regulators may approve merger transactions involving banks located in different states, without regard to laws of any state prohibiting such transactions; provided, however, that mergers may not be approved with respect to banks located in states that, prior to June 1, 1997, enacted legislation prohibiting mergers by banks located in such state with out-of-state institutions. Federal banking regulators may permit an out-of-state bank to open new branches in another state if such state has enacted legislation permitting interstate branching. Affiliated institutions are authorized to accept deposits for existing accounts, renew time deposits and close and service loans for affiliated institutions without being deemed an impermissible branch of the affiliate.

The Community Reinvestment Act of 1997 (“CRA”) and its implementing regulations are intended to encourage 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 CRA reports in connection with applications for establishment of domestic branches, acquisitions of banks or mergers involving bank holding companies. An unsatisfactory CRA rating 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. At December 31, 2003, the Company had a “satisfactory” CRA rating.

The federal Gramm-Leach-Bliley Act of 1999 (the “GLBA”) was signed into law on November 12, 1999. Under the GLBA, banks are no longer prohibited by the Glass-Steagall Act from associating with a company engaged principally in securities activities. The GLBA also permits bank holding companies to elect to become a

“financial holding company,” which would expand the powers of a bank holding company. 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). The GLBA itself defines certain activities as financial in nature, including lending activities, underwriting and selling insurance, providing financial or investment advice, underwriting, dealing and making markets in securities and merchant banking. In order to qualify as a financial holding company, a bank holding company’s depository subsidiaries must be both well-capitalized and well-managed and must have at least a satisfactory rating under the CRA. The bank holding company must also declare its intention to become a financial holding company to the Federal Reserve and certify that its depository subsidiaries meet the capitalization and management requirements. The GLBA also provides for minimum federal standards of privacy to protect the confidentiality of the personal financial information of customers and to regulate use of such information by financial institutions. A bank holding company that does not elect to become a financial holding company remains subject to the Bank Holding Company Act. Management believes that the Company currently meets the requirements to make an election to become a financial holding company under the GLBA. The Company has not elected to become a financial holding company, but may do so in the future.

On October 26, 2001, President Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”). Among its other provisions, the USA Patriot Act requires each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign banks; and (iii) to avoid establishing, maintaining, administering or managing correspondent accounts in the United States for, or on behalf of, foreign banks that do not have a physical presence in any country. The USA Patriot Act also requires that financial institutions must 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 Equal Credit Opportunity Act requires non-discrimination in the provision of banking services. The applicable federal enforcement agencies have recently cited institutions for red-lining (refusing to extend credit to residents of a specific geographic area known to be comprised predominantly of minorities) or reverse red-lining (extending credit to minority applicants on terms less favorable than those offered to non-minority applicants). Violations can result in the assessment of substantial civil penalties.

The Bank’s insurance subsidiaries are regulated by the insurance regulatory authorities and applicable laws and regulations of the states in which they operate.

The Bank’s investment services subsidiary is a registered adviser under the Investment Advisers Act of 1940, is regulated by the SEC and is a member of the National Association of Securities Dealers.

On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) was signed into law. The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity or debt securities registered under the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit committees, including independence, expertise and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and their directors and executive officers; and (v) new and increased civil and criminal penalties for violation of the securities laws.

In addition, there have been a number of legislative and regulatory proposals that would have an impact on the operation of bank holding companies and their bank and nonbank subsidiaries. It is impossible 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.

The Company’s lending activities include both commercial and consumer loans. Loan originations are derived from a number of sources including real estate broker referrals, mortgage loan companies, direct solicitation by the Company’s loan officers, existing depositors and borrowers, builders, attorneys, walk-in customers and, in some instances, other lenders. The Company 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.

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. At times, the Company 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. Generally, the Bank requires personal guaranties of its commercial loans to offset the risks associated with such loans.

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 else a 90% loan guaranty has been obtained through the Farmers Home Administration on such loans.

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 serviced by originators working from strategically placed offices either within the Bank’s traditional banking facilities or from affordable storefront locations in commercial buildings. 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 solvent and competent contractors on both a pre-sold and a “speculation” basis. Such loans are also 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 maintains the right to service those loans. The sale to the secondary market allows the Bank to manage the interest rate risks related to such lending operations. This brokerage arrangement allows the Bank to accommodate its clients’ demands while eliminating the interest rate risk for the 15 to 30 year period generally associated with such loans. Generally, after the sale of a loan, 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. These loans would be held by the Bank in its mortgage loan portfolio.

In most cases, the Bank requires title, fire, extended casualty insurance and, where required by applicable regulations, flood insurance to be obtained by the borrower. The Bank maintains its own errors and omissions insurance policy to protect against loss in the event of failure of a mortgagor to pay premiums on fire and other hazard insurance policies. Mortgage loans originated by the Bank customarily include a “due on sale” clause giving the Bank the right to declare a loan immediately due and payable in the event, among other matters, that the borrower sells or otherwise disposes of the real property subject to a mortgage. In general, the Bank enforces due on sales clauses. Borrowers are typically permitted to refinance or repay loans at their option without penalty.

Non-residential consumer loans made by the Bank include loans for automobiles, recreation vehicles, boats, personal (secured and unsecured) and deposit account secured loans. In addition, the Bank provides federally insured or guaranteed student loans to students at universities and community colleges in the Bank’s market areas. The Bank also conducts various indirect lending activities through established retail companies in its market areas. Indirect lending activities have been declining as a result of the Company’s decision to reduce its exposure to indirect automobile sales financing by allowing its portfolio of such loans to decline. We expect this decline in indirect lending activities to continue. Non-residential consumer loans are attractive to the Bank because they typically have a shorter term and carry higher interest rates than that charged on other types of loans. Non-residential consumer loans, however, do pose additional risks of collectability when compared to traditional types of loans granted by commercial banks such as residential mortgage 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 believes that its historical credit card losses have been well below industry norms.

Consumer loans are granted based on employment and financial information solicited from prospective borrowers as well as credit records collected from various reporting agencies. Financial stability of the borrower and credit history are the primary factors to be considered. The availability of collateral is also a factor considered in making such a loan. The Bank seeks collateral that can be assigned and has good marketability with a clearly adequate margin of value. The geographic area of the borrower is another consideration, with preference given to borrowers in the Bank’s primary market areas.

The Bank’s consumer finance subsidiary extends consumer loans to individuals and entities that may not satisfy the Bank’s lending standards and operates in 41 offices located in 39 communities in Mississippi and Tennessee.

The Bank’s insurance service subsidiary serves as agents 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 and Louisiana.

The Bank’s investment services subsidiary provides brokerage, investment advisory and asset management services and operates in certain communities in Mississippi, Tennessee, Alabama, Arkansas and Louisiana.

See Note 21 to the Company’s Consolidated Financial Statements included elsewhere in this Report for financial information about each segment of the Company, as defined by generally accepted accounting principles.

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. While there is no assurance that the Company will not suffer losses on its loans, management believes that the Company 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 minimize higher risk types of lending. Undesirable 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 Company’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 Company’s risk of loss. Commercial loans entail certain additional risks since they usually involve large loan balances to single borrowers or a related group of borrowers, resulting in a more concentrated loan portfolio. Further, since 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 Board of Directors of the Bank focuses much of its efforts and resources, and that of the Bank’s management and lending officials, on loan review and underwriting policies. Loan status and monitoring is handled through the Bank’s Loan Administration Department. Weak financial performance is identified and monitored using 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 quickly identifying, evaluating and initiating necessary corrective action for substandard loans. The results of loan reviews are reported to the Audit Committee of both the Company’s and the 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.

On May 15, 2003, certain assets of WMS, L.L.C. (“WMS”), an independent insurance agency headquartered in Baton Rouge, Louisiana, that operated under the name of Wright & Percy Insurance, were acquired by BancorpSouth Insurance Services, Inc., a subsidiary of the Bank (“BancorpSouth Insurance”). Consideration paid to complete this transaction consisted of 426,309 shares of the Company’s common stock in addition to cash paid to WMS in the aggregate amount of approximately $9,711,000. Based on the performance of WMS over the three years following the completion of this transaction, the Company may have to pay an additional aggregate amount of up to $8,584,000 in cash to WMS in three annual installments. The operations of Wright & Percy Insurance became a part of BancorpSouth Insurance. This transaction was accounted for as a purchase and, accordingly, the results of operations have been included since the date of acquisition. This acquisition was not material to the financial position or results of operations of the Company.

On August 1, 2003, Ramsey, Krug, Farrell & Lensing, Inc. (“RKF&L”), an independent insurance agency headquartered in Little Rock, Arkansas, merged with and into the Bank. Subsequent to the merger, the operations of RKF&L became a part of BancorpSouth Insurance. Consideration paid to complete this transaction consisted of 473,918 shares of the Company’s common stock in addition to cash paid to RKF&L shareholders in the aggregate amount of approximately $10,028,000. Based on the performance of RKF&L over the three years following the completion of this transaction, the Company may have to pay an additional aggregate amount of up to $7,633,000 in a combination of cash and shares of the Company’s common stock to RKF&L shareholders in three annual installments. This transaction was accounted for as a purchase and, accordingly, the results of operations have been included since the date of acquisition. This acquisition was not material to the financial position or results of operations of the Company.

Set forth in this section is certain selected statistical information relating to the Company’s business.

Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential

See “Item 7. — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Net Interest Revenue” included herein for information regarding the distribution of assets, liabilities and shareholders’ equity, and interest rates and interest differential.

See “Item 7. — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Net Interest Revenue” included herein for information regarding the analysis of changes in effective interest differential.

The following table shows the amortized cost of held-to-maturity securities at December 31, 2003, 2002 and 2001:

The following table shows the maturities and weighted average yields as of the end of the latest period for the investment categories presented above:

The yield on tax-exempt obligations of states and political subdivisions has been adjusted to a taxable equivalent basis using a 35% tax rate.

The following table shows the book value of available-for-sale securities at December 31, 2003, 2002 and 2001:

The following table shows the maturities and weighted average yields as of the end of the latest period for the investment categories presented above:

The yield on tax-exempt obligations of states and political subdivisions has been adjusted to a taxable equivalent basis using a 35% tax rate. See “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Securities and Other Earning Assets” included herein for more information regarding the Company’s securities portfolio.

The Company’s loans are widely diversified by borrower and industry. The following table shows the composition of loans by collateral type of the Company at December 31 for the years indicated. See “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Loans” included herein for more information regarding the Company’s loan portfolio.

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 portfolio. The following table shows the maturity distribution of loans net of unearned discount of the Company as of December 31, 2003:

The interest rate sensitivity of the Company’s loan portfolio is important in the management of effective interest differential. The Company 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 net of unearned discount as of December 31, 2003:

The total amount of interest earned on non-performing loans was approximately $248,000, $274,000 and $493,000 in 2003, 2002 and 2001, respectively. The gross interest income that would have been recorded under the

original terms of those loans amounted to $1,334,000, $936,000 and $1,402,000 in 2003, 2002 and 2001, respectively.

Loans considered impaired under Statement of Financial Accounting Standards (“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. The Company’s recorded investment in loans considered impaired at December 31, 2003, 2002 and 2001 was $13,979,000, $9,797,000 and $9,315,000, respectively, with a valuation allowance of $6,854,000, $4,827,000 and $4,480,000, respectively. The average recorded investment in impaired loans during 2003, 2002 and 2001 was $15,695,000, $9,408,000 and $10,396,000, respectively.

The Company’s policy provides that loans, other than installment loans, 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 is both well-secured and in the process of collection.

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, but which do not currently meet the criteria for disclosure as non-performing loans. Historically, some of these loans are ultimately restructured or placed in non-accrual status. At December 31, no loans of significance were known to be potential non-performing loans.

At December 31, 2003, the Company did not have any concentration of loans in excess of 10% of total loans outstanding. Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities, which would cause them to be similarly impacted by economic or other conditions. However, the Company does conduct business in a geographically concentrated area. The ability of the Company’s borrowers to repay loans is to some extent dependent upon the economic conditions prevailing in the Company’s market area.

In the normal course of business, the Company assumes risks in extending credit. The Company manages these risks through its lending policies, loan review procedures and the diversification of its loan portfolio. Although it is not possible to predict credit losses with certainty, management continuously reviews the characteristics of the loan portfolio to determine its overall risk profile and quality.

Attention is paid to the quality of the loan portfolio through a formal loan review process. The Board of Directors of the Bank has appointed a Loan Loss Reserve Valuation Committee (the “Loan Loss Committee”) that is responsible for ensuring that the allowance for credit losses provides coverage of both known and inherent losses. The Loan Loss Committee considers estimates of loss for individually analyzed credits as well as factors such as historical experience, changes in economic and business conditions and concentrations of risk in determining the level of the allowance for credit 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, Lending and Finance departments. In each period, the Loan Loss Committee bases the allowance for credit losses on its loan classification system as well as an analysis of general economic and business trends in the Company’s region and nationally.

The allowance for credit losses for commercial loans is based principally upon the Company’s loan classification system. The Company has a disciplined approach for assigning credit ratings and classifications to individual credits. Each credit is assigned a grade by the relevant loan officer, which serves as a basis for the credit analysis of the entire portfolio. The grade assigned considers the borrower’s creditworthiness, collateral values, cash flows and other factors. An independent loan review department is responsible for reviewing the credit rating and classification of individual credits and assessing trends in the portfolio, adherence to internal credit policies and procedures and other factors that may affect the overall adequacy of the allowance. The loan review department is supplemented by regulatory agencies that provide an additional level of review. The loss factors assigned to each classification are based upon the attributes (loan to collateral values, borrower creditworthiness, etc.) of the loans

typically assigned to each grade. Management periodically reviews the loss factors assigned in light of the general economic environment and overall condition of the loan portfolio and modifies the loss factors assigned to each classification as deemed appropriate. The allowance for credit losses for the consumer loan portfolio is based upon delinquencies and historic loss rates. The overall allowance includes a component representing the results of other analyses intended to ensure that the allowance is adequate to cover other probable losses inherent in the portfolio. This component considers analyses of changes in credit risk resulting from the differing underwriting criteria in acquired loan portfolios, industry concentrations, changes in the mix of loans originated, overall credit criteria and other economic indicators.

Any loan or portion thereof which is classified as “loss” by regulatory examiners or which is determined by management to be uncollectible because of such factors 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.

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

The breakdown of the allowance by loan category is based in part on evaluations of specific loans’ past history and on economic conditions within specific industries or geographical areas. Accordingly, since all of these conditions are subject to change, the allocation is not necessarily indicative of the breakdown of any losses.

The following table presents (a) the breakdown of the allowance for credit losses by loan category and (b) the percentage of each category in the loan portfolio to total loans at December 31 for the years presented:

[Continued from above table, first column(s) repeated]


		2000					1999

		ALLOW-		% OF LOANS			ALLOW-		% OF LOANS
		ANCE		IN EACH			ANCE		IN EACH
		FOR		CATEGORY			FOR		CATEGORY
		CREDIT		TO TOTAL			CREDIT		TO TOTAL
		LOSS		LOANS			LOSS		LOANS

		(Dollars in thousands)
Commercial & agricultural		$	12,259		12.30	%	$	11,127		12.67	%
Consumer & installment			23,702		17.29	%		22,231		21.28	%
Real estate mortgage			37,279		65.38	%		32,897		61.22	%
Lease financing			3,290		4.69	%		3,196		4.60	%
Other			5,200		0.34	%		4,781		0.23	%

	TOTAL	$	81,730		100.00	%	$	74,232		100.00	%

The following table sets forth certain information with respect to the Company’s loans (net of unearned discount) and the allowance for credit losses for the five years ended December 31, 2003. See “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results Of Operations –

Provisions for Credit Losses and Allowance for Credit Losses” included herein for more information regarding the Company’s allowance for credit losses.

Deposits represent the principal source of funds for the Company. 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 funds 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 effective interest differential. See “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Deposits” included herein for more information regarding deposits made with the Company.

The following table shows the classification of deposits on an average basis for the three years ended December 31, 2003:

Other time deposits of $100,000 and over, including certificates of deposits of $100,000 and over, at December 31, 2003, had maturities as follows:

Return on average shareholders’ equity, return on average assets and the dividend payout ratios based on net income for each of the years in the three-year period ended December 31, 2003 are presented below:

The Company’s average shareholders’ equity as a percentage of average assets was 8.26%, 8.21% and 8.60% for 2003, 2002 and 2001, respectively. In 2003, the Company’s return on average shareholders’ equity (which is calculated by dividing net income by average shareholders’ equity) and return on average assets (which is calculated by dividing net income by average total assets) increased and its dividend payout ratio (which is calculated by dividing dividends declared per share by net income per share) decreased. See “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview” included herein for more information regarding the Company’s net income and the calculation of return on average shareholders’ equity and return on average assets.

The Company uses borrowed funds as an additional source of funds for growth in earning assets. Short-term borrowings consist of federal funds purchased, flexible repurchase agreements purchased, securities sold under repurchase agreements and short-term Federal Home Loan Bank advances.

The following table sets forth, for the periods indicated, certain information about short-term borrowings and the components thereof:

Federal funds purchased generally mature the day following the date of purchase while securities sold under agreement to repurchase generally mature within 30 days from the date of the sale. At December 31, 2003, the Bank had established informal federal funds borrowing lines of credit aggregating $275 million.

The Bank has entered into a blanket floating lien security agreement with the Federal Home Loan Bank 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 (unpaid principal balance) of the Bank’s eligible mortgage collateral or 35% of the Bank’s assets.

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 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,” “would,” “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 growth strategies and growth opportunities, financial products and services, mortgage originations and mortgage servicing rights, diversification of revenue stream, noninterest revenue, loan

portfolio, net interest revenue, interest rate sensitivity, credit quality and credit losses, deposits, liquidity, capital resources, dividends, net interest margin, future acquisitions, market risk, critical accounting policies, underwriting and loan administration policies, life insurance premium revenue, indirect automobile sales financing, additional share repurchases under the Company’s April 2003 stock repurchase program, provision and allowance for credit losses, pension and other post retirement benefit amounts, the Wright & Percy Insurance and Ramsey, Krug, Farrell & Lensing, Inc. acquisitions, competitive position, legal and regulatory limitations and compliance, prepayment of the Company’s junior subordinated debt securities, the effect of certain legal claims, amortization expense, off-balance sheet commitments and other arrangements to extend credit and contractual obligations.

We caution you not to place undue reliance on the forward-looking statements contained in this Annual 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, changes in economic conditions and 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; the availability of and costs associated with maintaining and/or obtaining adequate and timely sources of liquidity; laws and regulations affecting financial institutions in general; the ability of the Company to compete with other financial services companies; the ability of the Company to identify, consummate and integrate acquisitions and investment opportunities; 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 repurchase its common stock on favorable terms; the ability of the Company to collect amounts due under loan agreements and attract deposits; legislation and court decisions related to the amount of damages recoverable in legal proceedings, possible adverse rulings, judgments, settlements and other outcomes of pending litigation; other factors generally understood to affect the financial results of financial services companies and the risk factors that are described in greater detail in this section below.

Other relevant risk factors may be detailed from time to time in the Company’s press releases and filings with the Securities and Exchange Commission. The Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date of this Report.

Rising Interest Rates May Result in Higher Interest Rates Being Paid on Interest Bearing Deposits Than Are Charged on Outstanding Loans.

If interest rates rise, we may pay interest on our customers’ interest-bearing deposits and our other liabilities at higher rates than the interest rates paid to us by our customers on outstanding loans that were made when interest rates were at a lower level. This situation would result in a negative interest rate spread with respect to those loans and cause an adverse effect on our earnings. This adverse effect would increase if interest rates continued to rise while we had outstanding loans payable at fixed interest rates that could not be adjusted to a higher interest rate.

BancorpSouth, Inc. is a registered bank holding company under the Bank Holding Company Act of 1956, and BancorpSouth Bank is a Mississippi state banking corporation. Accordingly, both are subject to extensive governmental regulation, legislation and control. These laws 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. We cannot predict whether, or the extent to which, the government and governmental organizations may change any of these laws or controls. We also cannot predict how any of these changes would adversely affect our business and prospects.

We Compete with Other Bank Holding Companies, Banks, Insurance and Financial Services Companies.

The banking business is extremely competitive in our service areas in Mississippi, Tennessee, Alabama, Arkansas, Texas and Louisiana. We compete, and will continue to compete, with well-established banks, credit unions, insurance companies and other financial institutions, several of which have significantly greater resources and lending limits. Some of these competitors provide certain services that we do not provide.

Our Growth Strategy Includes Risks That Could Have an Adverse Effect on Financial Performance.

A significant element of our growth strategy is the acquisition of additional banks, bank holding companies and insurance companies in order to achieve greater economies of scale. We cannot assure you that the current level of growth opportunities will continue to exist, that we will be able to acquire banks, insurance companies and bank holding companies that satisfy our criteria or that any such acquisition will be on terms favorable to us. Further, our growth strategy will require 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.

The stock market has, from time to time, experienced extreme price and volume fluctuations, which often have been unrelated to the operating performance of particular companies. Any announcement with respect to the banking industry, market conditions or any variance in our revenues or earnings from levels generally expected by securities analysts for a given period could have an immediate and significant effect on the trading price of our common stock.

We Are a Party to Pending Litigation, Which Could Adversely Affect Our Business.

During the past several years, a number of cases have been filed against some of our subsidiaries generally alleging that loans were originated or renewed at a time or in a way that improperly increased the charges paid by the borrower and/or that the borrowers were charged fees or sold insurance products without appropriate disclosures or that were unnecessary under the particular circumstances. Plaintiffs in these actions seek large amounts of punitive damages and disproportionate actual damages, even though the claims arise out of transactions that involve relatively small amounts of money. While we intend to vigorously defend these lawsuits and our other pending litigation, we cannot assure you that we will prevail in any of them, or that we will not suffer adverse outcomes, some of which could have a material adverse effect on our business, financial condition or results of operations. Similar claims brought against other companies in our market area have resulted in large awards of actual and punitive damages.

Issuing Additional Shares of Our Common Stock to Acquire Other Banks, Bank Holding Companies and Insurance Agencies May Result in Dilution for Existing Shareholders.

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 and insurance agencies. 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 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.

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 had 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 the new services without adversely affecting our financial performance.

We derive our income solely from dividends received from owning the Bank’s common stock. Federal and state law limits the Bank’s ability to declare and pay dividends. In addition, the Board of Governors of the Federal Reserve System may impose restrictions on our ability to declare and pay dividends on our common stock.

Monetary Policies and Economic Factors May Limit Our Ability to Attract Deposits or Make Loans.

The monetary policies of federal regulatory authorities, particularly the Board of Governors of the Federal Reserve System, 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 and timing of any changes in these monetary policies and economic conditions, including the Federal Reserve Board’s interest rate policies, or their impact on our financial performance. The banking business is subject to various material business risks, which may become more acute in periods of economic slowdown or recession. During such periods, foreclosures generally increase and such conditions could also lead to a potential decline in deposits and demand for loans.

Our governing documents and certain agreements to which we are a party contain several provisions which make a change-in-control difficult to accomplish, and may discourage a potential acquirer. These include a shareholder rights plan, or “poison pill,” a classified or “staggered” Board, 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.

We conduct business in the limited geographic area of Mississippi, Tennessee, Alabama, Arkansas, Texas and Louisiana. An economic downturn in the economies of these states or the southern portion of the United States could adversely affect our financial performance, particularly our ability to attract deposits and extend loans.

In evaluating an investment in shares of our common stock, the factors set forth in this section should be carefully considered, along with other matters discussed in reports and other filings that we have made with the Securities and Exchange Commission. It should not be assumed that we have listed or described the only risks that could affect our future performance or the market price of our common stock.

	a.		BancorpSouth 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 rentable space, with the remainder leased to various unaffiliated tenants.

			The Bank owns 207 of its 234 branch banking facilities. The remaining 27 branch banking facilities are occupied under leases with unexpired terms ranging from one to sixteen years. The Bank also owns other buildings that provide space for computer operations, lease servicing, mortgage lending, warehouse needs and other general purposes.

			The Bank considers all its buildings and leased premises to be in good condition. The Bank also owns several parcels of property acquired under foreclosure. Ownership of and rentals on other real property by the Bank are not material.

	b.		Personal Finance Corporation - This wholly-owned subsidiary of the Bank occupies 39 leased offices, with the unexpired terms varying in length from one to three years. The average size of these leased offices is approximately 1,000 square feet. All of these premises are considered to be in good condition.

	c.		BancorpSouth Insurance Services, Inc. - This wholly-owned subsidiary of the Bank owns three of the eleven offices it occupies. It leases eight offices that have unexpired terms varying in length from one to twelve years.

During the past several years, a number of cases have been filed against some of the Company’s subsidiaries generally alleging that loans were originated or renewed at a time or in a way that improperly increased the charges paid by the borrower and/or that the borrowers were charged fees or sold insurance products without appropriate disclosures or that were unnecessary under the particular circumstances. Plaintiffs in these actions seek large amounts of punitive damages and disproportionate actual damages, even though the claims arise out of transactions that involve relatively small amounts of money. The Company has settled the majority of cases filed, and no new cases of this nature were filed during 2003. The Company accrued a reserve of $3.2 million during the fourth quarter of 2002, which the Company believed was the amount needed to settle the claims covered in settlements then pending. These pending settlements were completed in the second quarter of 2003 for approximately $2.8 million, and the balance of the $3.2 million accrual was reversed. Subsequently in 2003, other cases were settled for approximately $270,000, bringing the total settlement payments in 2003 to approximately $3.1 million. As partial reimbursement for these settlements and related litigation costs and expenses, the Company executed an agreement with its insurance carrier, effective February 12, 2004, under which the Company received $3.15 million in insurance proceeds. This agreement resolves future coverage issues in favor of that carrier. The Company has not recorded a reserve for the lawsuits that are currently pending.

The Company intends to vigorously defend each of the lawsuits that remain pending, and believes that it has meritorious defenses in these cases. Based on the Company’s experience with similar cases, the Company does not believe that the pending lawsuits will have a material adverse effect on the Company’s consolidated financial position or results of operations. Litigation is, however, inherently uncertain, and the Company cannot make assurances that it will prevail in any of these actions, nor can it estimate with reasonable certainty the amount of damages that it might incur. Similar claims brought against other companies in the Company’s market area have resulted in large awards of actual and punitive damages.

Additionally, the Company and its subsidiaries are defendants in various other lawsuits arising out of the normal course of business, including claims against entities to which the Company is a successor as a result of business combinations. In the opinion of management, the ultimate resolutions of this category of claims should not have a material adverse effect on the Company’s consolidated financial position or results of operations.

No matter was submitted to a vote of security holders during the fourth quarter of 2003.

For information regarding executive officers of the Company, see “Item 10. - - Directors and Executive Officers of the Registrant” in this Report.

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.

As of March 9, 2004, there were 8,782 shareholders of record of the Company’s common stock.

The Company declared cash dividends each quarter in an aggregate amount of $0.66 per share during 2003, $0.61 during 2002 and $0.57 during 2001. Future dividends, if any, will vary depending on the Company’s profitability, anticipated capital requirements and applicable federal and state regulations. See “Item 1. – Business – Regulation and Supervision” and “Note 16 – Earnings per Share and Dividend Data” to the Company’s Consolidated Financial Statements included elsewhere in this Report for more information on restrictions and limitations on the Company’s ability to pay dividends.

In the table below is the Company’s selected financial and operating data. When reviewing this selected financial and operating data, it is important that you read along with it the historical financial statements and related notes included elsewhere in this Report, as well as the section of this Report captioned “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations” for, among other things, a discussion of accounting changes and business combinations.

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

The Company is a regional bank holding company with approximately $10.3 billion in assets and is headquartered in Tupelo, Mississippi. The Bank, which is the Company’s banking subsidiary, has commercial banking operations in Mississippi, Tennessee, Alabama, Arkansas, Texas and Louisiana. The Bank and its consumer finance, credit insurance, insurance agency and brokerage subsidiaries provide commercial banking, leasing, mortgage origination and servicing, insurance, brokerage and trust services to corporate customers, local governments, individuals and other financial institutions through an extensive network of branches and offices.

Management’s discussion and analysis provides a narrative discussion of the Company’s financial condition and results of operations for the previous three years. For a complete understanding of the following discussion, you should refer to the Consolidated Financial Statements and Notes thereto presented elsewhere in this Annual 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 additional information is provided to enhance comparability of financial information between years and to provide a better understanding of the Company’s continuing operations.

As a financial services company, the financial condition and operating results of the Company are heavily influenced by economic trends in the nation and its markets specifically. Most of the revenue of the Company is derived from 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 cycles on loan demand and creditworthiness of existing borrowers. The financial services industry itself is highly competitive and heavily regulated. The Company’s success depends on its ability to compete aggressively within its markets while maintaining sufficient asset quality and cost controls to generate net income.

The table below summarizes the Company’s net income, net income per share, return on average assets and return on average shareholders’ equity for the years ended December 31, 2003, 2002 and 2001. These amounts and ratios are key indicators of the Company’s financial performance.

While reporting significant increases in net income for the past three years, the Company continued its strategy to diversify the components of its revenue stream. The primary source of revenue for the Company is the amount of net interest revenue earned by the Bank. Net interest revenue, which is the difference between interest earned on loans and investments and interest paid on deposits and similar obligations, will always be a significant part of the Company’s revenue stream. In recent years, however, the Company has taken steps 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 bank related fees. Management believes this diversification is important to reduce the impact of interest rate fluctuations on the overall operating results of the Company.

Net income for 2003 was $131.1 million, or $1.68 per diluted share, compared with $112.0 million, or $1.39 per diluted share, for 2002 and $98.5 million, or $1.19 per diluted share, for 2001. Net interest revenue for 2003 was $351.1 million, compared to $371.5 million for 2002 and $329.4 million for 2001. Net interest revenue is affected by the general level of interest rates, changes in interest rates and by changes in the amount and composition of interest earning assets and interest bearing liabilities. The Company’s long-term objective is to manage those assets and liabilities to maximize net interest revenue, while balancing interest rate, credit, liquidity and capital risks. The Company continued to reinvest by expanding its branch and ATM networks while systems and operational consolidation efforts continued. Noninterest revenue for 2003 was $190.1 million, an increase of 52.3% when compared to $124.8 million for 2002. Noninterest revenue increased to 54.1% of net interest revenue

for 2003, up from 33.6% for 2002. Leading these increases in noninterest revenue were the Company’s mortgage lending and insurance agencies’ activities. Noninterest expense for 2003 was $322.6 million, an increase of 5.8% over $305.0 million for 2002. The major components of net income are discussed in more detail in the various headings that follow.

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions (see Note 1 to Consolidated Financial Statements). The Company believes that its determination of the allowance for credit losses, 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 (1) market conditions or (2) the actual or perceived financial condition of the Company’s borrowers, subjecting the Company to significant volatility of earnings.

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. 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 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. At the end of 2003, the allowance for credit losses was $92.1 million, representing 1.48% of loans at year-end.

The Company recognizes as assets the rights to service mortgage loans for others, known as mortgage servicing rights (“MSRs”). MSRs are capitalized based on the relative fair value of the servicing right and the mortgage loan on the date the mortgage loan is sold. MSRs are carried at the lower of the capitalized amount, net of accumulated amortization, or fair value. The MSRs are amortized in proportion to, and over the period of, estimated net servicing income. The need for and the amount of valuation allowance to reflect the carrying value of MSRs at the lower of cost or fair value is a significant estimate and, if determined necessary, is reflected as a charge against mortgage lending revenue. In determining the fair value of capitalized mortgage servicing rights, the Company utilizes the expertise of an independent third party. Utilizing assumptions about factors such as mortgage interest rates, discount rates, mortgage loan prepayment speeds, market trends and industry demand, an estimate of the fair value of the Company’s capitalized mortgage servicing rights is performed by the independent third party and reviewed by management. The use of different estimates or assumptions could produce different fair values. The Company does not routinely hedge the value of capitalized mortgage servicing rights and, therefore, the Company is susceptible to significant fluctuations in the fair value of its MSRs in rapidly changing interest rate environments. At December 31, 2003, the Company’s mortgage servicing asset was $32.5 million, net of impairment of $17.2 million.

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 made to determine pension related assets and liabilities include actuarial assumption, expected long-term rate of return on plan assets, rate of compensation increase for participants and discount rate. Estimates made to determine asset and liability amounts for other postretirement benefits include actuarial assumptions and discount rates. Changes in these assumptions could impact earnings. For example, a lower expected long-term rate of return on plan assets could negatively impact earnings, as would a lower estimated discount rate or a higher rate 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. In accordance with Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions,” 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, a variety of factors are considered 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 8% on plan assets for 2003 and used 9% in 2002 and 2001. 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.

It is an assumption that reflects the rates available on long-term high-quality fixed-income debt instruments and is reset annually on the measurement date of each year. The Company lowered its discount rate in 2003 to 6.25% from 6.75% in 2002 and 7.25% in 2001.

The Federal Reserve reduced short-term interest rates once during 2003 by 25 basis points and once during 2002 by 50 basis points, compared to 11 changes during 2001 for a total of 475 basis points. This relatively stable interest rate environment during 2003 resulted in lower net interest revenue for the Company as a larger volume of its interest earning assets were being repriced to lower interest rates faster than its interest bearing liabilities. Net interest revenue decreased 5.5% to $351.1 million in 2003 from $371.5 million in 2002, which represented an increase of 12.8% from $329.4 million in 2001. Net interest revenue is the difference between interest revenue earned from earning assets such as loans, leases and securities, and interest expense paid on liabilities such as deposits and borrowings, and continues to provide the Company with its principal source of revenue. Net interest revenue is affected by the general level of interest rates, changes in interest rates, and by changes in the amount and composition of interest earning assets and interest bearing liabilities. The Company’s long-term objective is to manage those assets and liabilities to maximize net interest revenue, while balancing interest rate, credit, liquidity and capital risks. For purposes of the following discussion, revenue from tax-exempt loans and investment securities has been adjusted to fully taxable equivalent amounts, using an effective tax rate of 35%.

Interest revenue decreased 10.8% to $537.0 million in 2003 from $602.1 million in 2002, which represented a decrease of 10.4% from $672.1 million in 2001. While average interest earning assets increased 3.1% to $9.5 billion in 2003, this increase in the amount of interest earning assets was more than offset by a decrease of 88 basis points in the yield of those assets to 5.64% in 2003, resulting in a decrease in interest revenue. While interest earning assets increased 6.7% to $9.2 billion during 2002, interest revenue in 2002 decreased due to a 125 basis point decline in the yield of those assets to 6.52%. The decrease in interest revenue during 2001 was attributable to the combination of a 5.7% increase in average interest earning assets, to $8.7 billion during 2001, and a decrease of 55 basis points in the yield of those assets to 7.77% in 2001.

Interest expense decreased 19.7% to $175.8 million in 2003 from $218.9 million in 2002, which represented a decrease of 33.9% from $331.1 million in 2001. While average interest bearing liabilities increased 2.5% to $8.1 billion in 2003, this increase in the amount of interest bearing liabilities was more than offset by a decrease of 60 basis points in the average rate paid on those liabilities to 2.17% in 2003. While interest bearing liabilities increased 7.6% to $7.9 billion during 2002, interest expense in 2002 decreased due to a 175 basis point decline in the average rate paid on those liabilities to 2.77%. The decrease in interest expense during 2001 was attributable to the combination of a 6.0% increase in average interest bearing liabilities, to $7.3 billion in 2001, being offset by a decrease of 50 basis points in average rates paid on those liabilities to 4.51%.

The relative performance of the lending and deposit-raising functions is frequently measured by two calculations – net interest margin and net interest rate spread. Net interest margin is determined by dividing fully-taxable equivalent net interest revenue by average earning assets. Net interest rate spread is the difference between the average fully-taxable equivalent yield earned on interest earning assets and the average rate paid on interest bearing liabilities. Net interest margin is generally greater than the net interest rate spread due to the additional income earned on those assets funded by noninterest bearing liabilities, or free funding, such as noninterest bearing demand deposits and shareholders’ equity.

Net interest margin for 2003 was 3.80%, a decrease of 35 basis points from 4.15% for 2002, which represented an increase of 21 basis points from 3.94% for 2001. Net interest rate spread for 2003 was 3.47%, a decrease of 28 basis points from 3.75% for 2002, which represented an increase of 49 basis points from 3.26% for 2001. The decrease in net interest margin and net interest rate spread in 2003 was primarily due to the larger decline in earning asset yield offset relative to the decline in funding cost. In 2003, the earning asset yield decrease was a result of reduced loan activity and a lower yielding investment portfolio. The absence of significant loan demand is attributable to the economic environment in both our regional and national markets. With decreased demand for loans, the Company invested in various securities that traditionally provide lower yields than loans, and due to the lower prevailing interest rates during 2003, proceeds from maturing securities were typically reinvested at lower yields than the maturing securities were earning. The increase in net interest margin and net interest spread in 2002 was primarily due to the Company’s ability to offset the decline in asset yield by a larger decrease in funding cost. Short-term interest rates set by the Federal Reserve were unchanged from December of 2001 until November

of 2002. Because the Company was asset sensitive in the short-term, many of its interest earning assets had repriced to the prevailing interest rates by the end of 2001, while the opportunity to reprice many of its interest bearing liabilities to a lower interest rate occurred during 2002. The decline in net interest margin and net interest rate spread in 2001 was due to the decrease in asset yield that was not fully offset by the smaller decrease in funding cost. Because the Company was asset sensitive in the short-term in 2001, the 475 basis point decline in short-term interest rates during 2001 resulted in interest earning assets being repriced more quickly than interest bearing liabilities, thus reducing net interest margin and net interest rate spread.

The Company experienced growth in average interest earning assets and average interest bearing liabilities during the three years ended December 31, 2003. Average interest earning assets increased 3.1% during 2003, 6.7% during 2002 and 5.7% during 2001. This asset growth was paced by increases in the Company’s securities portfolios as economic conditions limited loan demand during 2003 and 2002. Average interest bearing liabilities increased 2.5% during 2003, 7.6% during 2002 and 6.0% during 2001 due to increases in the Company’s deposits and short-term borrowings.

The following table presents average interest earning assets, average interest bearing liabilities, net interest income, net interest margin and net interest rate spread for the three years ended December 31, 2003. Each of the measures is reported on a fully-taxable equivalent basis.


	2003								2002								2001
	Average					Yield/			Average					Yield/			Average					Yield/
(Taxable equivalent basis)	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate
	(Dollars in thousands)
ASSETS
Loans (net of unearned income) (1)(2)	$	6,276,806		$	401,500		6.40	%	$	6,283,798		$	449,610		7.16	%	$	6,010,840		$	510,738		8.50	%
Loans held for sale		65,624			3,234		4.93	%		58,884			3,371		5.72	%		53,559			3,381		6.31	%
Held-to-maturity securities:
Taxable		1,130,833			46,319		4.10	%		998,800			55,091		5.52	%		920,939			56,417		6.13	%
Non-taxable (3)		164,762			12,455		7.56	%		194,089			14,905		7.68	%		214,694			16,411		7.64	%
Available-for-sale securities:
Taxable		1,412,151			54,426		3.85	%		1,160,733			54,066		4.66	%		831,885			50,848		6.11	%
Non-taxable (4)		191,589			12,108		6.32	%		199,218			13,287		6.67	%		180,370			13,073		7.25	%
Federal funds sold, securities purchased under agreement to resell and short-term investments		275,243			6,935		2.52	%		337,093			11,810		3.50	%		439,621			21,200		4.82	%

Total interest earning assets and revenue		9,517,008			536,977		5.64	%		9,232,615			602,140		6.52	%		8,651,908			672,068		7.77	%
Other assets		810,463								735,800								691,608
Less: allowance for credit losses		(90,699	)							(86,247	)							(81,604	)

Total	$	10,236,772							$	9,882,168							$	9,261,912

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand - interest bearing	$	2,478,188		$	24,186		0.98	%	$	2,338,775		$	35,756		1.53	%	$	1,893,075		$	50,727		2.68	%
Savings		799,861			7,074		0.88	%		852,694			12,689		1.49	%		885,025			31,839		3.60	%
Other time		4,074,487			117,761		2.89	%		3,991,757			140,085		3.51	%		3,912,405			218,272		5.58	%
Federal funds purchased, securities sold under agreement to repurchase and other short-term borrowings		475,391			8,290		1.74	%		457,347			12,574		2.75	%		503,024			21,614		4.30	%
Junior subordinated debt securities		125,011			10,188		8.15	%		114,726			9,423		8.21	%		—			—
Long-term debt		139,082			8,306		5.97	%		140,085			8,366		5.97	%		145,097			8,641		5.96	%

Total interest bearing liabilities and expense		8,092,020			175,805		2.17	%		7,895,384			218,893		2.77	%		7,338,626			331,093		4.51	%
Demand deposits - noninterest bearing		1,180,579								1,064,218								1,003,229
Other liabilities		118,274								111,673								123,351

Total liabilities		9,390,873								9,071,275								8,465,206
Shareholders’ equity		845,899								810,893								796,706

Total	$	10,236,772							$	9,882,168							$	9,261,912

Net interest revenue				$	361,172							$	383,247							$	340,975

Net interest margin							3.80	%							4.15	%							3.94	%
Net interest rate spread							3.47	%							3.75	%							3.26	%
Interest bearing liabilities to interest earning assets							85.03	%							85.52	%							84.82	%

(1)		Includes taxable equivalent adjustment to interest of $1,469,000, $1,854,000 and $1,273,000 in 2003, 2002 and 2001, respectively, using an effective tax rate of 35%.

(2)		Non-accrual loans are immaterial for each of the years presented.

(3)		Includes taxable equivalent adjustments to interest of $4,359,000, $5,217,000 and $5,744,000 in 2003, 2002 and 2001, respectively, using an effective tax rate of 35%.

(4)		Includes taxable equivalent adjustment to interest of $4,238,000, $4,651,000 and $4,576,000 in 2003, 2002 and 2001, respectively, using an effective tax rate of 35%.

Net interest revenue may also be analyzed by segregating the rate and volume components of interest revenue and interest expense. The table that follows presents an analysis of rate and volume change in net interest revenue from 2002 to 2003 and from 2001 to 2002. Changes that are not solely due to volume or rate have been allocated to volume.


	2003 over 2002 - Increase (Decrease)									2002 over 2001 - Increase (Decrease)
(Taxable equivalent basis)	Volume			Rate			Total			Volume			Rate			Total
							(In thousands)
INTEREST REVENUE
Loans (net of unearned income)	($	447	)	($	47,663	)	($	48,110	)	$	19,530		($	80,658	)	($	61,128	)
Loans held for sale		332			(469	)		(137	)		305			(315	)		(10	)
Held-to-maturity securities:
Taxable		5,408			(14,180	)		(8,772	)		4,295			(5,621	)		(1,326	)
Non-taxable		(2,217	)		(233	)		(2,450	)		(1,582	)		76			(1,506	)
Available-for-sale securities:
Taxable		9,690			(9,330	)		360			15,317			(12,099	)		3,218
Non-taxable		(482	)		(697	)		(1,179	)		1,257			(1,043	)		214
Federal funds sold, securities purchased under agreement to resell and short-term investments		(1,558	)		(3,317	)		(4,875	)		(3,592	)		(5,798	)		(9,390	)

Total		10,726			(75,889	)		(65,163	)		35,530			(105,458	)		(69,928	)

INTEREST EXPENSE
Demand - interest bearing		1,361			(12,931	)		(11,570	)		6,814			(21,785	)		(14,971	)
Savings		(467	)		(5,148	)		(5,615	)		(481	)		(18,669	)		(19,150	)
Other time		2,391			(24,715	)		(22,324	)		2,785			(80,972	)		(78,187	)
Federal funds purchased, securities sold under agreement to repurchase and other short-term borrowings		315			(4,599	)		(4,284	)		(1,256	)		(7,784	)		(9,040	)
Junior subordinated debt securities		838			(73	)		765			9,423			—			9,423
Long-term debt		(60	)		—			(60	)		(299	)		24			(275	)

Total		4,378			(47,466	)		(43,088	)		16,986			(129,186	)		(112,200	)

Total increase (decrease)	$	6,348		($	28,423	)	($	22,075	)	$	18,544		$	23,728		$	42,272

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, 2003.


	Interest Rate Sensitivity - Maturing or Repricing
				91 Days			Over 1
	0 to 90			to			Year to		Over
	Days			1 Year			5 Years		5 Years
				(In thousands)
Interest earning assets:
Interest bearing deposits with banks	$	9,327		$	—		$	—	$	—
Federal funds sold & securities purchased under agreement to resell		67,293			—			—		—
Held-to-maturity securities		30,711			212,250			670,797		178,233
Available-for-sale securities		129,400			95,133			1,253,562		511,595
Loans, net of unearned discount		3,129,937			1,180,379			1,822,181		100,570
Loans held for sale		74,669			—			—		—

Total interest earning assets		3,441,337			1,487,762			3,746,540		790,398

Interest bearing liabilities:
Interest bearing demand deposits & savings		3,303,457			—			—		—
Other time deposits		936,204			1,538,946			1,526,742		7,172
Federal funds purchased & securities sold under agreement to repurchase		437,014			—			—		—
Long-term debt and junior subordinated debt securities		—			—			61,848		205,516
Other		191			593			942		109

Total interest bearing liabilities		4,676,866			1,539,539			1,589,532		212,797

Interest rate sensitivity gap	($	1,235,529	)	($	51,777	)	$	2,157,008	$	577,601

Cumulative interest sensitivity gap	($	1,235,529	)	($	1,287,306	)	$	869,702	$	1,447,303

In the event interest rates decline after 2003, based on this interest rate sensitivity gap, it is likely that the Company would experience a slightly positive effect on net interest revenue in the following one-year period, as the cost of funds will decrease at a more rapid rate than interest revenue on interest earning assets. Conversely, in periods of increasing interest rates, based on this interest rate sensitivity gap, the Company would likely experience decreased net interest revenue in the following one-year period. It should be noted that the balances shown in the table above are for a specific point in time 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.

Provisions for Credit Losses and Allowance for Credit Losses

The allowance for credit losses for commercial loans is based principally upon the Company’s loan classification system. The Company has a disciplined approach for assigning credit ratings and classifications to individual credits. Each credit is assigned a grade by the relevant loan officer, which serves as a basis for the credit analysis of the entire portfolio. The grade assigned considers the borrower’s creditworthiness, collateral values, cash flows and other factors. An independent loan review department is responsible for reviewing the credit rating and classification of individual credits and assessing trends in the portfolio, adherence to internal credit policies and procedures, and other factors that may affect the overall adequacy of the allowance. The loan review department is

supplemented by regulatory agencies that provide an additional level of review. The loss factors assigned to each classification are based upon the attributes (loan to collateral values, borrower creditworthiness, etc.) of the loans typically assigned to each grade. Management periodically reviews the loss factors assigned in light of the general economic environment and overall condition of the loan portfolio and modifies the loss factors assigned to each classification as deemed appropriate. The allowance for credit losses for the consumer loan portfolio is based upon delinquencies and historic loss rates. The overall allowance includes a component representing the results of other analyses intended to ensure that the allowance is adequate to cover other probable losses inherent in the portfolio. This component considers analyses of changes in credit risk resulting from the differing underwriting criteria in acquired loan portfolios, industry concentrations, changes in the mix of loans originated, overall credit criteria and other economic indicators.

The provision for credit losses, the allowance for credit losses as a percentage of loans outstanding at the end of 2003, 2002 and 2001 and net charge-offs for those years are shown in the following table:


	2003			2002			2001
	(Dollars in thousands)
Provision for credit losses	$	25,130		$	29,411		$	22,259
Allowance for credit losses as a percentage of loans outstanding at year-end		1.48	%		1.38	%		1.37	%
Net charge-offs	$	20,893		$	25,915		$	20,839
Net charge-offs as a percentage of average loans		0.33	%		0.41	%		0.35	%

The provision for credit losses for 2003 decreased 14.6% from the provision for 2002. The decrease in provision for credit losses in 2003 versus 2002 primarily is reflective of the decreased level of charge-offs in 2003 versus 2002, which were $20.9 million in 2003 compared to $25.9 million in 2002, and the impact of economic conditions limiting loan demand during 2003. The provision for credit losses for 2002 increased 32.1% from the provision for 2001. This increase reflects the increased level of charge-offs in 2002 when compared to charge-offs in 2001, which were $25.9 million in 2002 compared to $20.8 million in 2001. Non-performing assets include non-accrual loans, loans more than 90 days past due, restructured loans and foreclosed real estate. These assets serve as one indication of the quality of the Company’s loan portfolio. Non-performing assets totaled $66.4 million at December 31, 2003, compared to $58.6 million at December 31, 2002 and $60.0 million at December 31, 2001. The level of the Company’s non-performing assets in 2003, 2002 and 2001 reflects a general slow down in the overall economy of the region serviced by the Company.

For more information on nonperforming assets, see “Financial Condition – Loans.”

Noninterest Revenue

As previously mentioned, the Company is currently focused on increasing noninterest revenue in order to diversify its revenue stream. Significant progress was made during 2003 as noninterest revenue increased 52.3% over noninterest revenue for 2002. The components of noninterest revenue for the years ended December 31, 2003, 2002 and 2001 and the percentage change from the prior year are shown in the following table:


	2003					2002					2001
	Amount		% Change			Amount		% Change			Amount		% Change
						(Dollars in thousands)
Mortgage lending	$	23,252		824.5	%	$	2,515		(77.5	)%	$	11,191		33.4	%
Service charges		61,899		25.7			49,249		15.2			42,759		5.7
Life insurance premiums		3,255		(25.0	)		4,340		(4.2	)		4,528		5.3
Trust income		7,214		2.7			7,021		1.3			6,929		3.4
Securities gains, net		13,837		152.2			5,486		(48.6	)		10,671	NM
Insurance commissions		39,749		68.4			23,604		15.6			20,422		27.4
Other		40,880		25.4			32,611		3.5			31,498		13.7

Total noninterest revenue	$	190,086		52.3	%	$	124,826		(2.5	)%	$	127,998		45.5	%

NM = not meaningful

The Company’s revenue from mortgage lending increased dramatically in 2003 when compared to 2002. Historically low mortgage loan interest rates during 2003 resulted in record levels of mortgage loan originations for the Company. The Company’s revenue from mortgage lending typically fluctuates as interest rates change and is primarily attributable to two activities, origination of new mortgage loans and servicing mortgage loans. The Company’s normal practice is to generate mortgage loans, sell them in the secondary market and retain the MSRs to the loans sold.

The origination process generates loan origination fees and net gains or losses from the sale of the mortgage loans originated, which is also referred to as secondary marketing. These activities produced revenue of $19.1 million, $16.6 million and $13.1 million for 2003, 2002 and 2001, respectively. Of the revenue from the origination process, the sale of mortgage loans resulted in a net gain of $1.9 million for 2003, a net gain of $1.2 million for 2002 and a net loss of $0.5 million for 2001. Historically, origination volumes have varied as mortgage interest rates have changed. Rising mortgage interest rates have generally resulted in a decrease in the volume of originations, while falling mortgage interest rates have generally resulted in an increased volume of originations. The Company originated mortgage loans totaling $1.2 billion during 2003, $1.0 billion during 2002 and $824 million during 2001.

Revenue from the servicing process includes fees from the actual servicing of loans and the recognition of changes in the valuation of the Company’s MSRs. MSRs are carried as an asset at the lower of the capitalized amount, net of accumulated amortization, or fair value. MSRs are amortized in proportion to, and over the period of, the estimated net servicing income. This amortization is recognized as a reduction of servicing revenue. MSRs are also periodically evaluated for impairment based on the excess of the carrying amount of the mortgage servicing rights over their fair value. If temporary impairment exists, a valuation allowance is established for any excess of amortized cost over the current fair value through a charge to income. If the Company later determines that all or a portion of the temporary impairment no longer exists, a reduction of the valuation allowance may be recorded as an increase to servicing revenue.

The Company does not hedge the value of its MSRs and is susceptible to significant fluctuations in its value in changing interest rate environments. When mortgage interest rates decline, refinancing of home mortgages typically accelerates and the value of the Company’s MSRs typically declines as the expected lives of the underlying mortgages shorten. When mortgage interest rates are rising, refinancing of home mortgages typically decline and the value of the Company’s MSRs typically increases as the expected lives of the underlying mortgages lengthen. The servicing process generated revenues of $4.1 million in 2003, and losses of $14.1 million and $1.8 million for 2002 and 2001, respectively. The fluctuation in servicing revenue is primarily due to changes in the valuation of capitalized MSRs. Changing mortgage interest rates in 2003, 2002 and 2001 resulted in an impairment recovery of $5.7 million in 2003, and impairment expense of $16.0 million and $4.9 million in 2002 and 2001, respectively.

The following is a tabular presentation of the Company’s mortgage lending operation for 2003, 2002 and 2001.


	2003						2002						2001
	Amount			% Change			Amount			% Change			Amount			% Change
							(Dollars in thousands)
Origination revenue	$	19,126			15.2	%	$	16,605			27.6	%	$	13,011			128.3	%

Servicing:
Servicing revenue		(1,545	)	NM				1,931			(36.5	%)		3,039			(18.2	%)
Impairment recovery(expense)		5,671		NM				(16,021	)		229.7	%		(4,859	)		374.5	%

Total		4,126		NM				(14,090	)		674.2	%		(1,820	)		(167.6	%)

Mortgage revenue	$	23,252			824.5	%	$	2,515			(77.5	%)	$	11,191			33.4	%

							(Dollars in millions)
Origination volume	$	1,196			18.2	%	$	1,012			22.8	%	$	824			223.1	%

Mortgage loans serviced at year-end	$	2,836			2.3	%	$	2,771			9.9	%	$	2,522			13.8	%

NM = not meaningful

Service charges on deposit accounts increased in 2003, 2002 and 2001 because of higher volumes of items processed, growth in the number of deposit accounts, rate increases and expansion of overdraft privileges to depositors. Life insurance premium revenue decreased 25.0% in 2003 after having decreased 4.2% in 2002, compared to a 5.3% increase in 2001. The decrease in 2003 is due to a reduced emphasis toward selling credit life insurance products and the Company expects this trend of declining life insurance premium revenue to continue. Trust income increased 2.7% in 2003, 1.3% in 2002 and 3.4% in 2001 as a result of increases in the value of assets under care (either managed or in custody). Net securities gains of $13.8 million, $5.5 million and $10.7 million were recorded in 2003, 2002 and 2001, respectively. These transactions reflect the sales of securities from the available-for-sale portfolio and certain securities that were within three months of maturity or had been downgraded below management’s investment policy thresholds from the held-to-maturity portfolio. The security gains in 2003 were primarily from the sale of approximately $720 million in intermediate term securities pursuant to the Company’s efforts to manage the interest rate sensitivity of the Company’s assets and liabilities. In the second half of 2001, approximately $200 million in intermediate term securities were purchased in anticipation of further reductions in interest rates that could result in the recognition of additional impairment charges related to the Company’s mortgage servicing asset. These securities were sold in the third quarter of 2001 with a gain of $3.9 million. The proceeds were again reinvested in intermediate term securities and these securities were sold in the fourth quarter of 2001 with a gain of $3.6 million.

Revenue from insurance commissions is an area where the Company made significant strides during 2003 in its plan to increase noninterest revenue. The acquisition of two insurance agencies during 2003 added approximately $14.7 million in property and casualty insurance commission revenue. These acquisitions were the primary contributors to the growth in insurance commissions when comparing 2003 versus 2002. The Company plans to continue to expand the products and services offered by its insurance agencies. The increases in other noninterest revenue in 2003, 2002 and 2001 were primarily attributable to fees generated from brokerage activities as well as increased customer account analysis charges and debit card net interchange fees.

Noninterest Expense

The components of noninterest expense for the years ended December 31, 2003, 2002 and 2001 and the percentage change from the prior year are shown in the following table:


	2003					2002					2001
	Amount		% Change			Amount		% Change			Amount		% Change
						(Dollars in thousands)
Salaries and employee benefits	$	181,810		11.1	%	$	163,691		9.4	%	$	149,685		13.9	%
Occupancy, net		22,973		6.1			21,658		5.5			20,529		11.9
Equipment		23,411		(6.2	)		24,962		(6.9	)		26,799		11.0
Telecommunications		7,477		(4.5	)		7,827		(10.0	)		8,693		20.2
Other		86,923		0.1			86,847		3.9			83,612		2.7

Total noninterest expense	$	322,594		5.8	%	$	304,985		5.4	%	$	289,318		10.2	%

Salaries and employee benefits expense for 2003, 2002 and 2001 increased due to increases in incentive payments (especially commission based), salary increases, increases in the cost of employee heath care benefits, increases in pension plan costs, salaries and commissions of employees of the two insurance agencies acquired during 2003, and the hiring of employees to staff the banking locations added during those years. Pension plan costs, a component of salaries and employee benefits expense, increased to $6.7 million in 2003 compared to $4.3 million in 2002 and $2.9 million in 2001. This trend of increasing pension plan costs is primarily reflective of market performance below expectations for the pension plan assets. Occupancy expense increased in 2003, 2002 and 2001 principally as a result of additional branch offices, other bank buildings and the insurance agency acquisitions previously discussed. Equipment expense and telecommunications expense reflected decreases in 2003 and 2002 in response to the Company’s continuing focus on controlling expenses.

Included in other noninterest expense in 2002 was $3.2 million reserved in the fourth quarter of 2002 to settle certain litigation against certain of our subsidiaries, of which $0.4 million of this accrual was reversed in the second quarter of 2003. In addition, in the fourth quarter of 2002, the Company’s net income was reduced by $1.8 million due to charges related to loan system conversion matters. The other components of other noninterest expense reflect normal increases and general inflation in the cost of services and supplies purchased by the Company.

Income Taxes

Income tax expense was $62.3 million in 2003, $49.9 million in 2002 and $47.3 million in 2001. Income tax expense for each year fluctuated based on pretax income. The effective tax rate for 2003 was 32.2% compared to 30.8% in 2002 and 32.5% in 2001. The Company’s effective tax rate increased in 2003 principally as a result of a reduction in tax-exempt revenue on securities in the Company’s investment portfolio. The decrease in the Company’s effective tax rate for 2002 was primarily driven by a revision to the Company’s 401(k) plan that enables the Company to deduct for tax purposes the dividends it pays to the plan for shares of the Company’s common stock held in the plan. Details of the deferred tax assets and liabilities are included in Note 12 to Consolidated Financial Statements.

Financial Condition

Loans

The Company’s loan portfolio represents the largest single component of the Company’s earning asset base, comprising 66.0% of average earning assets during 2003. The following table indicates the average loans, year-end balances of the loan portfolio and the percentage increases for the years presented.


	2003					2002					2001
	Amount		% Change			Amount		% Change			Amount		% Change
	(Dollars in millions)
Loans, net of unearned - average	$	6,277		(0.1	)%	$	6,284		4.6	%	$	6,010		3.8	%
Loans, net of unearned - year-end		6,233		(2.4	)		6,389		5.2			6,073		(0.4	)

Average loans decreased 0.1% in 2003 when compared to 2002, and loans outstanding at December 31, 2003 decreased 2.4% when compared to December 31, 2002. Loan growth has been slowed by the general weakness in the economy of many of the markets served by the Company. In addition, loan growth in 2003, 2002

and 2001 has been impacted by the Company’s decision to reduce its exposure to indirect automobile sales financing by allowing its portfolio of such loans to decline. The Company’s portfolio of indirect automobile loans totaled $146.4 million at December 31, 2001, $65.5 million at December 31, 2002 and was down to $22.4 million at December 31, 2003.

Quality is stressed in the Company’s lending policy as opposed to growth. The Company’s non-performing assets, which are carried either in the loan account or other assets on the consolidated balance sheets depending on foreclosure status, were as follows at the end of each year presented.


	2003			2002			2001
	(Dollars in thousands)
Foreclosed properties	$	14,952		$	18,978		$	16,140
Non-accrual loans		18,139			10,514			10,825
Loans 90 days or more past due, still accruing		30,634			29,104			33,012
Restructured loans		2,659			20			40

Total non-performing assets	$	66,384		$	58,616		$	60,017

Total non-performing assets as a percentage of net loans		1.07	%		0.92	%		0.99	%

The level of the Company’s non-performing assets in 2003, 2002 and 2001 reflects a general slow down in the overall economy of the region serviced by the Company. Because the Company is primarily a secured lender, we do not anticipate a significant rise in charge-offs despite the increase in non-performing loans at year-end 2003. The Company has not, as a matter of policy, made or participated in any loans or investments relating to extraordinary corporate transactions such as leveraged buyouts or leveraged recapitalizations. At December 31, 2003, 2002 and 2001, the Company did not have any concentration of loans in excess of 10% of loans outstanding. 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. However, the Company does conduct business in a geographically concentrated area. The ability of the Company’s borrowers to repay loans may be dependent upon the economic conditions prevailing in the Company’s market area.

Included in non-performing assets above were loans the Company considered impaired totaling $14.0 million, $9.8 million and $9.3 million at December 31, 2003, 2002 and 2001, respectively.

Securities and Other Earning Assets

The securities portfolio is used to make various term investments, to provide a source of liquidity and to serve as collateral to secure certain types of deposits and borrowings. A portion of the Company’s securities portfolio continues to be tax-exempt. Investments in tax-exempt securities totaled $308.4 million at December 31, 2003, compared to $358.0 million at the end of 2002. 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, 2003, the Company’s available-for-sale securities totaled $2.0 billion. These securities, which are subject to possible sale, are recorded at fair value. At December 31, 2003, the Company held no securities whose decline in fair value was considered other than temporary.

Net unrealized gains on investment securities as of December 31, 2003 totaled $57.1 million. Net unrealized gains on held-to-maturity securities comprised $33.4 million of that total, while net unrealized gains on available-for-sale securities were $23.7 million. Net unrealized gains on investment securities as of December 31, 2002 totaled $111.2 million. Of that total, $49.9 million was attributable to held-to-maturity securities and $61.3 million to available-for-sale securities.

Deposits

Deposits are the Company’s primary source of funds to support its earning assets. The Company has been able to effectively compete for deposits in its primary market areas, which has resulted in the increases in deposits for the years presented.

The following table presents the Company’s average deposit mix and percentage change for the years indicated.


	2003					2002					2001
	Average		%			Average		%			Average		%
	Balance		Change			Balance		Change			Balance		Change
	(Dollars in millions)
Interest bearing deposits	$	7,353		2.4	%	$	7,183		7.4	%	$	6,690		6.1	%
Noninterest bearing deposits		1,181		10.9			1,064		6.1			1,003		3.7

Total average deposits	$	8,533		3.5	%	$	8,247		7.2	%	$	7,693		5.8	%

Liquidity and Capital Resources

One of the Company’s goals is to provide adequate funds to meet changes in loan demand or any potential increase in the normal level of deposit withdrawals. This goal is accomplished primarily by generating cash from operating activities and maintaining sufficient short-term liquid assets. These sources, coupled with a stable deposit base and a strong reputation in the capital markets, allows the Company to fund earning assets and maintain the availability of funds. Management believes that the Company’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.

To provide additional liquidity, the Company utilizes short-term financing through the purchase of federal funds and securities lending arrangements. Further, the Company maintains a borrowing relationship with the Federal Home Loan Bank (“FHLB”) which provides liquidity to fund term loans with borrowings of matched or longer maturities. At December 31, 2003, the Company had long-term advances from the FHLB totaling approximately $138 million, bearing interest rates from 5.86% to 7.19%. The Company has pledged eligible mortgage loans to secure the FHLB borrowings and had approximately $1.3 billion in additional borrowing capacity under the existing FHLB borrowing agreement at December 31, 2003.

Further, the Company had informal federal funds borrowing arrangements aggregating approximately $275 million at December 31, 2003. 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 U.S. government and government agencies securities portfolio.

If the Company’s traditional sources of liquidity were constrained, the Company would be forced to pursue avenues of funding not typically used and the Company’s net interest margin could be impacted negatively. The Company does utilize, 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. The Company’s approach to providing adequate liquidity has been successful in the past and management does not anticipate any near- or long-term changes to its liquidity strategies.

Off-Balance Sheet Arrangements

In the ordinary course of business, the Company enters into various off-balance sheet commitments and other arrangements to extend credit, that are not reflected in the consolidated balance sheets of the Company. The business purpose of these off-balance sheet commitments is the routine extension of credit. As of December 31, 2003, commitments to extend credit included approximately $73 million for letters of credit and approximately $1.3 billion for interim mortgage financing, construction credit, credit card and other revolving line of credit arrangements. While most of the commitments to extend credit are made at variable rates, included in these commitments are forward commitments to fund individual fixed-rate mortgage loans of approximately $28.5 million at December 31, 2003, with a carrying value and fair value reflecting a loss of approximately $100,000, which has been recognized in the Company’s results of operations. Fixed-rate lending commitments expose the Company to risks associated with movements 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, 2003, the Company had $41.5 million in such commitments to sell, with a carrying value and fair value reflecting a loss of approximately $100,000. 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 which vary according to the level of risk associated with the assets. Capital is measured in two “Tiers”: Tier I consists of common shareholders’ equity and qualifying noncumulative perpetual preferred stock, less goodwill and certain other intangible assets, and Tier II consists of general allowance for losses on loans and leases, “hybrid” debt capital instruments, and all or a portion of other subordinated capital debt, depending upon remaining term to maturity. Total capital is the sum of Tier I and Tier II capital. The Company’s Tier I capital and total capital, as a percentage of total risk-adjusted assets, was 13.24% and 14.51%, respectively, at December 31, 2003, compared to 11.92% and 13.16%, respectively, at December 31, 2002. Both ratios exceeded the required minimum levels for these ratios of 4% and 8%, respectively, for each period. In addition, the Company’s Tier 1 leverage capital ratio (Tier I capital divided by total assets, less goodwill) was 8.79% at December 31, 2003 and 8.41% at December 31, 2002, compared to the required minimum leverage capital ratio of 4%.

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 classify as “well capitalized,” the Tier I risk-based capital, total risk-based 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, 2003.

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

Uses of Capital

The Company may pursue acquisition transactions of depository institutions and businesses closely related to banking which further the Company’s business strategies. The Company anticipates that a portion of the consideration for substantially all of these transactions, if any, would be shares of the Company’s common stock; however, transactions involving only cash consideration or other forms of consideration may also be considered.

On March 5, 2001, the Company announced a stock repurchase program whereby the Company could acquire up to 4.2 million shares of its common stock, or approximately 5% of the shares of common stock then outstanding. The shares were to be repurchased from time to time in the open market at prevailing market prices or in privately negotiated transactions. During 2001, 2,965,115 shares of the Company’s common stock were repurchased under this repurchase program with the remaining authorization of 1,234,885 shares repurchased in the first half of 2002. Repurchased shares are held as authorized but unissued stock and are available for use in connection with the Company’s stock option plans and other compensation programs, or for other corporate purposes as determined by the Company’s Board of Directors.

On February 15, 2002, the Company announced another stock repurchase program whereby the Company could acquire up to 4.1 million shares of its common stock. The shares were to be repurchased from time to time in the open market at prevailing market prices or in privately negotiated transactions. During 2002, 3,472,608 shares of the Company’s common stock were repurchased under this repurchase program with the remaining authorization of 627,392 shares repurchased in 2003. Repurchased shares are held as authorized but unissued shares and are available for use in connection with the Company’s stock option plans and other compensation programs, or for other corporate purposes as determined by the Company’s Board of Directors.

On April 23, 2003, the Company announced a new stock repurchase program whereby the Company may acquire up to 3.9 million shares of its common stock. The shares may be purchased from time to time in the open market at prevailing market prices or in privately negotiated transactions during the period between May 1, 2003 and April 30, 2005. The extent and time of any repurchase will depend on market conditions and other corporate considerations. Repurchased shares will be held as authorized but unissued shares. These authorized but unissued shares will be available for use in connection with the Company’s stock option plans, other compensation programs, other transactions or for other corporate purposes as determined by the Company’s Board of Directors. At December 31, 2003, 443,508 shares had been repurchased under this plan. The Company will continue to evaluate additional share repurchases under the April 2003 plan.

As of December 31, 2003, the Company had repurchased approximately 8.7 million shares of its common stock, or 10.4% of its outstanding shares at March 5, 2001. The Company conducts its stock repurchase program by using funds received in the ordinary course of business. The Company has not experienced, and does not expect to experience, a material effect on its capital resources or liquidity in connection with its stock repurchase program during the terms of the program.

On January 28, 2002, the Company issued $128,866,000 in 8.15% in Junior Subordinated Debt Securities to BancorpSouth Capital Trust I (the “Trust”), a business trust. The Trust used the proceeds from the issuance of 5.0 million shares of 8.15% trust preferred securities, $25 face value per share, to acquire the 8.15% Junior Subordinated Debt Securities. Both the Junior Subordinated Debt Securities and the trust preferred securities mature on January 28, 2032, and are callable at the option of the Company after January 28, 2007. The net proceeds to the Company from the issuance of its Junior Subordinated Debt Securities to the Trust were used for general corporate purposes, including the repurchase of shares of its outstanding common stock. Prior to December 31, 2003, the accounts of the Trust were included in the consolidated financial statements of the Company. Pursuant to the Company’s adoption of the transition guidance of FIN 46R, “Consolidation of Variable Interest Entities,” for investment in special-purpose entities, the Company deconsolidated the Trust from its financial statements as of December 31, 2003. The $125 million in trust preferred securities issued by the Trust qualify as Tier I capital under Federal Reserve Board guidelines. As a result of the issuance of FIN 46, the Federal Reserve Board is currently evaluating whether deconsolidation of entities such as the Trust will affect the qualification of the trust preferred securities as Tier I capital. The Company may prepay the Junior Subordinated Debt Securities, and in turn the trust preferred securities, at a prepayment price of 100% of the principal amount of these securities within 90 days of a determination by the Federal Reserve Board that trust preferred securities will no longer qualify as Tier I Capital.

Contractual Obligations

The Company has contractual obligations to make future payments on debt and lease agreements. See Notes 9, 10, 11 and 22 to Consolidated Financial Statements for further disclosures regarding contractual obligations. The following table summarizes the Company’s contractual obligations at December 31, 2003.


	Payments Due by Period
			Less than						After
	Total		1 year		1-3 years		3-5 years		5 years
	(Dollars in thousands)
Contractual Obligations:
Deposit maturities	$	8,599,128	$	7,065,214	$	1,020,526	$	506,216	$	7,172
Junior subordinated debt		128,866		—		—		—		128,866
Long-term debt		138,498		—		5,000		56,989		76,509
Other borrowings		2,112		607		812		541		152
Operating lease obligations		18,471		4,632		6,083		3,805		3,951
Purchase obligations		23,873		14,177		9,696

Total Contractual Obligations	$	8,910,948	$	7,084,630	$	1,042,117	$	567,551	$	216,650

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 specifies 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 for information technology.

Certain Litigation Contingencies

The Company and its subsidiaries are engaged in lines of business that are heavily regulated and involve a large volume of financial transactions with numerous customers through offices in six states. Although the Company and its subsidiaries have developed policies and procedures to minimize the impact of legal noncompliance and other disputes, litigation presents an ongoing risk.

the charges paid by the borrower and/or that the borrowers were charged fees or sold insurance products without appropriate disclosures or that were unnecessary under the particular circumstances. Plaintiffs in these actions seek large amounts of punitive damages and disproportionate actual damages, even though the claims arise out of transactions that involve relatively small amounts of money. The Company has settled the majority of cases filed, and no new cases of this nature were filed during 2003. The Company accrued a reserve of $3.2 million during the fourth quarter of 2002, which the Company believed was the amount needed to settle the claims covered in settlements then pending. These pending settlements were completed in the second quarter of 2003 for approximately $2.8 million, and the balance of the $3.2 million accrual was reversed. Subsequently in 2003, other cases were settled for approximately $270,000, bringing the total settlement payments in 2003 to approximately $3.1 million. As partial reimbursement for these settlements and related litigation costs and expenses, the Company executed an agreement with its insurance carrier, effective February 12, 2004, under which the Company received $3.15 million in insurance proceeds. This agreement resolves future coverage issues in favor of that carrier. The Company has not recorded a reserve for the lawsuits that are currently pending.

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 its assets and owes on its liabilities are established contractually for a period of time. Since 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 gap, 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 gap 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.

The following table provides information about the Company’s financial instruments that are sensitive to changes in interest rates as of December 31, 2003. The expected maturity categories take into account repricing opportunities as well as contractual maturities. For core deposits without contractual maturities (interest bearing

checking, savings and money market accounts), the table presents cash flows based on management’s judgement concerning their most likely runoff or repricing behaviors. The fair value of loans, deposits and other borrowings are based on the discounted value of expected cash flows using a discount rate which is commensurate with the maturity. The fair value of securities is based on market prices or dealer quotes.


	Principal Amount Maturing/Repricing in:																					Fair value
																						December 31,
	2004			2005			2006			2007			2008			Thereafter			Total			2003
				(Dollars in thousands)
Rate-sensitive assets:
Fixed interest rate loans	$	2,240,604		$	851,567		$	561,598		$	269,859		$	139,157		$	100,569		$	4,163,354		$	4,275,275
Average interest rate		6.55	%		6.68	%		6.36	%		6.35	%		6.35	%		6.88	%		6.54	%
Variable interest rate loans	$	2,144,381			—			—			—			—			—		$	2,144,381		$	2,158,153
Average interest rate		4.65	%		—			—			—			—			—			4.65	%
Fixed interest rate securities	$	485,566		$	456,254		$	542,586		$	484,610		$	429,425		$	683,241		$	3,081,682		$	3,115,085
Average interest rate		4.22	%		4.58	%		4.05	%		4.97	%		4.48	%		5.54	%		4.69	%
Other interest bearing assets	$	59,327			—			—			—			—			—		$	59,327		$	59,327
Average interest rate		1.11	%		—			—			—			—			—			1.11	%
Mortgage servicing rights (1)		—			—			—			—			—			—		$	32,466		$	32,466
Rate-sensitive liabilities:
Savings & interest bearing checking	$	3,303,457			—			—			—			—			—		$	3,303,457		$	3,303,457
Average interest rate		0.80	%		—			—			—			—			—			0.80	%
Fixed interest rate time deposits	$	2,475,150		$	761,298		$	259,228		$	262,139		$	244,077		$	7,172		$	4,009,064		$	4,078,188
Average interest rate		2.18	%		2.99	%		3.49	%		4.65	%		3.79	%		4.39	%		2.68	%
Fixed interest rate borrowings	$	783		$	5,842		$	81		$	9		$	56,858		$	201,760		$	265,333		$	287,802
Average interest rate		7.20	%		6.45	%		7.28	%		8.00	%		5.93	%		7.32	%		7.00	%
Variable interest rate borrowings	$	437,014			—			—			—			—			—		$	437,014		$	437,014
Average interest rate		1.11	%		—			—			—			—			—			1.11	%
Rate-sensitive off balance sheet items:
Commitments to extend credit for single family mortgage loans	$	28,520			—			—			—			—			—		$	28,520		$	28,520
Average interest rate		5.56	%		—			—			—			—			—			5.56	%
Forward contracts	$	29,500			—			—			—			—			—		$	29,500		$	29,500
Average interest rate		5.15	%		—			—			—			—			—			5.15	%

(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 1. – Business – Investment Portfolio” and “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Interest Rate Sensitivity” and “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Securities and Other Earning Assets.”

ITEM 8. – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
BancorpSouth, Inc.:

We have audited the consolidated balance sheets of BancorpSouth, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, shareholders’ equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2003. 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 auditing standards generally accepted in the United States of America. 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 at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

Memphis, Tennessee
January 30, 2004

Consolidated Balance Sheets
BancorpSouth, Inc. and Subsidiaries


	December 31
	2003		2002
	(In thousands)
Assets
Cash and due from banks	$	369,699	$	356,976
Interest bearing deposits with other banks		9,327		5,007
Held-to-maturity securities (fair value of $1,125,395 and $1,243,234)		1,091,991		1,193,375
Available-for-sale securities (amortized cost of $1,965,985 and $1,580,867)		1,989,690		1,642,172
Federal funds sold and securities purchased under agreement to resell		67,293		139,508
Loans		6,267,257		6,435,268
Less: Unearned discount		34,190		45,883
Allowance for credit losses		92,112		87,875

Net loans		6,140,955		6,301,510
Loans held for sale		74,669		57,804
Premises and equipment, net		212,216		210,183
Accrued interest receivable		75,914		83,614
Goodwill		59,671		32,462
Other assets		213,610		166,636

Total Assets	$	10,305,035	$	10,189,247

Liabilities and Shareholders’ Equity
Deposits:
Demand:
Noninterest bearing	$	1,286,607	$	1,183,127
Interest bearing		2,524,159		2,455,821
Savings		779,298		824,902
Other time		4,009,064		4,085,068

Total deposits		8,599,128		8,548,918
Federal funds purchased and securities sold under agreement to repurchase		437,014		457,389
Accrued interest payable		17,140		23,306
Junior subordinated debt securities		128,866		125,000
Long-term debt		138,498		139,757
Other liabilities		115,483		87,054

Total Liabilities		9,436,129		9,381,424

Shareholders’ Equity
Common stock, $2.50 par value Authorized - 500,000,000 shares; Issued - 77,926,645 and 77,680,664 shares, respectively		194,817		194,202
Capital surplus		43,344		20,773
Accumulated other comprehensive income		14,298		37,744
Retained earnings		616,447		555,104

Total Shareholders’ Equity		868,906		807,823

Commitments and contingent liabilities		—		—
Total Liabilities and Shareholders’ Equity	$	10,305,035	$	10,189,247

See accompanying notes to consolidated financial statements.

Consolidated Statements of Income
BancorpSouth, Inc. and Subsidiaries


	Year Ended December 31
	2003		2002		2001
	(In thousands, except per share amounts)
Interest Revenue
Loans	$	400,029	$	447,756	$	509,464
Deposits with other banks		347		279		521
Federal funds sold and securities purchased under agreement to resell		6,588		11,531		20,677
Held-to-maturity securities:
Taxable		46,320		55,091		56,417
Tax-exempt		8,096		9,688		10,667
Available-for-sale securities:
Taxable		54,426		54,066		50,848
Tax-exempt		7,871		8,636		8,500
Loans held for sale		3,234		3,371		3,381

Total interest revenue		526,911		590,418		660,475

Interest Expense
Deposits		149,022		188,530		300,838
Federal funds purchased and securities sold under agreement to repurchase		8,114		12,461		21,535
Other		18,669		17,901		8,720

Total interest expense		175,805		218,892		331,093

Net interest revenue		351,106		371,526		329,382
Provision for credit losses		25,130		29,411		22,259

Net interest revenue, after provision for credit losses		325,976		342,115		307,123

Noninterest Revenue
Mortgage lending		23,252		2,515		11,191
Service charges		61,899		49,249		42,759
Life insurance premiums		3,255		4,340		4,528
Trust income		7,214		7,021		6,929
Securities gains, net		13,837		5,486		10,671
Insurance commissions		39,749		23,604		20,422
Other		40,880		32,611		31,498

Total noninterest revenue		190,086		124,826		127,998

Noninterest Expense
Salaries and employee benefits		181,810		163,691		149,685
Occupancy, net of rental income		22,973		21,658		20,529
Equipment		23,411		24,962		26,799
Telecommunications		7,477		7,827		8,693
Other		86,923		86,847		83,612

Total noninterest expense		322,594		304,985		289,318

Income before income taxes		193,468		161,956		145,803
Income tax expense		62,334		49,938		47,340

Net Income	$	131,134	$	112,018	$	98,463

Net Income Per Share: Basic	$	1.69	$	1.40	$	1.19

Diluted	$	1.68	$	1.39	$	1.19

See accompanying notes to consolidated financial statements.

Consolidated Statements of Shareholders’ Equity and Comprehensive Income
BancorpSouth, Inc. and Subsidiaries
Years Ended December 31, 2003, 2002 and 2001


										Accumulated
	Common Stock						Capital			Other Comprehensive			Retained
	Shares			Amount			Surplus			Income			Earnings			Total
	(Dollars in thousands, except per share amounts)
Balance, December 31, 2000		84,043,340		$	210,108		$	48,667		$	15,202		$	515,599		$	789,576
Net income		—			—			—			—			98,463			98,463
Change in fair value of available-for-sale securities, net of tax effect of $5,765		—			—			—			9,041			—			9,041

Comprehensive income		—			—			—			—			—			107,504
Shares issued		127,305			318			866			—			—			1,184
Recognition of stock compensation		56,000			140			935			—			(115	)		960
Purchase of stock		(3,000,855	)		(7,502	)		(39,011	)		—			—			(46,513	)
Cash dividends declared, $0.57 per share		—			—			—			—			(47,308	)		(47,308	)

Balance, December 31, 2001		81,225,790			203,064			11,457			24,243			566,639			805,403
Net income		—			—			—			—			112,018			112,018
Change in fair value of available-for-sale securities, net of tax effect of $8,379		—			—			—			13,501			—			13,501

Comprehensive income		—			—			—			—			—			125,519
Business combinations		599,626			1,500			9,230			—			—			10,730
Other shares issued		566,531			1,416			4,281			—			—			5,697
Recognition of stock compensation		28,000			70			2,343			—			459			2,872
Purchase of stock		(4,739,283	)		(11,848	)		(6,538	)		—			(75,379	)		(93,765	)
Cash dividends declared, $0.61 per share		—			—			—			—			(48,633	)		(48,633	)

Balance, December 31, 2002		77,680,664			194,202			20,773			37,744			555,104			807,823
Net income		—			—			—			—			131,134			131,134
Change in fair value of available-for-sale securities, net of tax effect of ($14,457)		—			—			—			(23,142	)		—			(23,142	)
Minimum pension liability, net of tax effect of $188		—			—			—			(304	)		—			(304	)

Comprehensive income		—			—			—			—			—			107,688
Business combinations		900,227			2,251			16,747			—			—			18,998
Other shares issued		432,469			1,081			5,824			—			—			6,905
Recognition of stock compensation		—			—			—			—			771			771
Purchase of stock		(1,086,715	)		(2,717	)		—			—			(19,734	)		(22,451	)
Cash dividends declared, $0.66 per share		—			—			—			—			(50,828	)		(50,828	)

Balance, December 31, 2003		77,926,645		$	194,817		$	43,344		$	14,298		$	616,447		$	868,906

See accompanying notes to consolidated financial statements.

Consolidated Statements of Cash Flows
BancorpSouth, Inc. and Subsidiaries


	Year Ended December 31
	2003			2002			2001
				(In thousands)
Operating Activities:
Net income	$	131,134		$	112,018		$	98,463
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for credit losses		25,130			29,411			22,259
Depreciation and amortization		25,507			26,528			27,328
Deferred taxes		8,210			16			3,452
Amortization of intangibles		15,257			10,334			10,431
Amortization of debt securities premium and discount, net		11,692			2,087			(1,190	)
Security gains, net		(13,837	)		(5,486	)		(10,671	)
Net deferred loan origination expense		(7,703	)		(8,088	)		(8,456	)
Decrease in interest receivable		7,700			2,597			4,246
Decrease in interest payable		(6,166	)		(7,953	)		(9,487	)
Realized gain on student loans sold		(2,880	)		(2,651	)		(2,403	)
Proceeds from student loans sold		107,595			92,351			93,688
Origination of student loans held for sale		(80,909	)		(111,219	)		(88,825	)
Realized gain on mortgages sold		(18,232	)		(11,602	)		(2,946	)
Proceeds from mortgages sold		1,190,114			1,053,902			873,027
Origination of mortgages held for sale		(1,149,447	)		(1,041,980	)		(913,860	)
Other, net		(798	)		(11,966	)		(11,393	)

Net cash provided by operating activities		242,367			128,299			83,663

Investing Activities:
Proceeds from calls and maturities of held-to-maturity securities		1,670,024			699,713			509,300
Proceeds from calls and maturities of available-for-sale securities		477,913			1,332,836			348,464
Proceeds from sales of held-to-maturity securities		10,112			5,278			51,212
Proceeds from sales of available-for-sale securities		738,167			661,246			766,110
Purchases of held-to-maturity securities		(1,578,784	)		(786,621	)		(649,328	)
Purchases of available-for-sale securities		(1,594,140	)		(2,519,011	)		(1,142,904	)
Net (increase) decrease in short-term investments		72,215			204,003			(130,586	)
Net (increase) decrease in loans		80,021			(186,121	)		13,334
Purchases of premises and equipment		(27,489	)		(27,934	)		(44,912	)
Proceeds from sale of premises and equipment		2,734			5,773			6,437
Net cash paid for acquisitions		(14,539	)		(5,719	)		—
Other, net		(31,684	)		(45,509	)		(24,479	)

Net cash used in investing activities		(195,450	)		(662,066	)		(297,352	)

Financing Activities:
Net increase in deposits		50,210			593,031			375,920
Net decrease in short-term debt and other liabilities		(14,233	)		(22,837	)		(26,225	)
Repayment of long-term debt		(1,259	)		(18,682	)		(11,110	)
Issuance of junior subordinated debt		—			121,063			—
Issuance of common stock		7,677			5,697			1,184
Purchase of common stock		(22,451	)		(93,765	)		(46,513	)
Payment of cash dividends		(49,818	)		(48,300	)		(46,599	)

Net cash provided by (used in) financing activities		(29,874	)		536,207			246,657

Increase in Cash and Cash Equivalents		17,043			2,440			32,968
Cash and Cash Equivalents at Beginning of Year		361,983			359,543			326,575

Cash and Cash Equivalents at End of Year	$	379,026		$	361,983		$	359,543

See accompanying notes to consolidated financial statements.

Notes to Consolidated Financial Statements
BancorpSouth, Inc. and Subsidiaries
December 31, 2003, 2002 and 2001

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The 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 prevailing practices within the banking industry. 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 and its subsidiaries are engaged in the business of banking and activities closely related to banking. The Company and its subsidiaries are subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory agencies. The following is a summary of the more significant accounting and reporting policies.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, BancorpSouth Bank and its wholly owned subsidiaries (the “Bank”). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain 2002 and 2001 amounts have been reclassified to conform with the 2003 presentation.

Cash Flow Statements

Cash equivalents include cash and amounts due from banks, including interest bearing deposits with other banks. The Company paid interest of approximately $181,971,000, $226,710,000 and $340,580,000 and income taxes of approximately $41,851,000, $54,930,000 and $48,081,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Fair value of assets acquired during 2003 as a result of business combinations totaled $50,590,000, while liabilities assumed totaled $17,053,000. Fair value of assets acquired during 2002 as a result of business combinations totaled $138,096,000, while liabilities assumed totaled $121,647,000.

Securities

Securities are classified as either held-to-maturity, trading, or available-for-sale. Held-to-maturity securities are debt securities that the Company has the ability and management has the positive 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. Changes in the valuation of securities which are considered other than temporary are recorded as losses in the period recognized.

Securities Purchased and Sold Under Agreement to Resell or Repurchase

The Bank has entered into a secured borrowing arrangement with the State of Mississippi whereby the Bank is required to provide collateral amounts of 102%, in U.S. Treasury or Government National Mortgage Association (“GNMA”) securities, of the fair value and accrued income of the securities sold under repurchase agreement. The Bank has entered into third party lending arrangements, structured as securities purchased under agreement to resell, that mirror the collateral provisions of the agreement with the State of Mississippi, and provide for a fixed spread between the interest rate paid and earned by the Bank. The Bank remains responsible for repayment of the monies borrowed from the State of Mississippi.

Loans

Loans are recorded at the face amount of the notes reduced by collections of principal. Loans include net unamortized deferred origination costs. Unearned discount on discount-basis consumer loans and net deferred origination costs are recognized as income using a method which approximates the interest method. Interest is

recorded monthly as earned on all other loans. Where doubt exists as to the collectibility of the loans, interest income is recorded as payment is received.

Provision and Allowance for Credit Losses

The provision for credit losses charged to expense is an amount that, in the judgment of management, is necessary to maintain the allowance for credit losses at a level that is adequate based on estimated probable losses on the Company’s current portfolio of loans. Management’s judgment is based on a variety of factors which include the Company’s experience related to loan balances, charge-offs and recoveries, scrutiny of individual loans and risk factors, results of regulatory agency reviews of loans, and present economic conditions in the Company’s market area. Material estimates that are particularly susceptible to significant change in the near term are a necessary part of this process. Future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for credit losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.

Loans Held for Sale

Loans held for sale are recorded at the lower of aggregate cost or fair value.

Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation and amortization. Provisions for depreciation and amortization, computed using straight-line and accelerated 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 in settlement 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. At the time of acquisition, any excess of cost over fair value is charged to the allowance for credit losses. Gains and losses realized on sales are included in other revenue.

Mortgage Servicing Rights

Mortgage servicing rights are capitalized as assets by allocating the total cost incurred between the loan and the servicing rights based on their relative fair values. Fair values are determined using a valuation model that calculates the present value of future cash flows using prepayment assumptions based upon dealer consensus and discount rates based upon market indices at the date of determination. Capitalized mortgage servicing rights are being amortized in proportion to, and over the period of, the estimated net servicing income of the underlying asset. On a quarterly basis, capitalized mortgage servicing rights are evaluated for impairment based on the excess of the carrying amount of the mortgage servicing rights over their fair value. Impairment and recovery are recognized through a valuation allowance.

Pension and Postretirement Benefits Accounting

The Company accounts for its defined benefit pension plans using an actuarial model as required by Statement of Financial Accounting Standards (“SFAS”) No. 87, “Employers’ Accounting for Pensions.” This model uses an approach that allocates pension costs over the service period of employees in the plan. The Company accounts for its other postretirement benefits using the requirements of SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” SFAS No. 106 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 SFAS No. 87 and SFAS No. 106 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 pattern.

Stock-Based Compensation

At December 31, 2003, the Company had three stock-based employee compensation plans, which are described more fully in Note 15, Stock Incentive and Stock Option Plans. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25,

“Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” for the years ended December 31, 2003, 2002 and 2001.


	2003			2002			2001
	(In thousands, except per share amounts)
Net income, as reported	$	131,134		$	112,018		$	98,463
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(734	)		(977	)		(919	)

Pro forma net income	$	130,400		$	111,041		$	97,544

Basic earnings per share: As reported	$	1.69		$	1.40		$	1.19
Pro forma		1.68			1.39			1.18
Diluted earnings per share: As reported	$	1.68		$	1.39		$	1.19
Pro forma		1.67			1.38			1.18

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2003, 2002 and 2001: expected options lives of 7 years for all three years; expected dividend yield of 3.10%, 3.10% and 3.70%; expected volatility of 21%, 22% and 23% and risk-free interest rates of 3.0%, 5.0% and 5.5%.

Certain of the Company’s stock option plans contain provisions for stock appreciation rights (“SARs”). Accounting rules for SARs require the recognition of expense for appreciation in the market value of the Company’s common stock or a reduction of expense in the event of a decline in the market value of the Company’s common stock. See Note 15, Stock Incentive and Stock Option Plans, for further disclosures regarding SARs.

Derivative Instruments and Hedging Activities

The derivatives held by the Company are 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.

Recent Pronouncements

In July 2002, SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” was issued. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recorded when it is incurred and can be measured at fair value. The statement was adopted by the Company effective January 1, 2003 and has had no material impact on the financial position or results of operations of the Company.

In November 2002, FASB Interpretation No. (“FIN”) 45, “Guarantors Accounting and Disclosure Requirement for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” was issued. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements regarding its obligations under certain guarantees that it has issued. FIN 45 also clarifies the requirement of the guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this interpretation were adopted by the Company effective January 1, 2003. The disclosure requirements of this interpretation were adopted by the Company effective December 16, 2002. The adoption of FIN 45 has had no material impact on the financial position or results of operations of the Company.

In January 2003, FIN 46, “Consolidation of Variable Interest Entities,” was issued. FIN 46 sets forth the criteria used to determine whether an entity’s investment in a variable interest entity (“VIE”) should be consolidated with the entity. FIN 46 is based on the general premise that a company that controls another entity through an interest other than a voting interest should consolidate the controlled entity. In December 2003, the FASB issued

FIN 46 (revised December 2003)(“FIN 46R”), “Consolidation of Variable Interest Entities,” which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FIN 46. The Company adopted the transition guidance of FIN 46R for special purpose entities in 2003. As a result of the adoption of FIN 46R, BancorpSouth Capital Trust I was prospectively deconsolidated from the Company’s consolidated financial statements at December 31, 2003 as described in Note 11, Junior Subordinated Debt Securities.

In April 2003, SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” was issued. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is effective for contracts and hedging relationships entered into, modified or designated after June 30, 2003. The provisions of SFAS No. 149 that relate to SFAS No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003 should continue to be applied in accordance with their respective effective dates. SFAS No. 149 was adopted by the Company effective June 30, 2003. The adoption of SFAS No. 149 has had no material impact on the financial position or results of operations of the Company.

In May 2003, SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” was issued. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and for the first interim period beginning after June 15, 2003. SFAS No. 150 was adopted by the Company effective May 31, 2003. The adoption of SFAS No. 150 has had no material impact on the financial position or results of operations of the Company.

In December 2003, SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” was revised (“SFAS No. 132R”). SFAS No. 132R does not change the measurement or recognition provisions of the original standard. However, SFAS No. 132R requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The disclosure provisions of this revision are effective for financial statements with fiscal years ending after December 15, 2003. SFAS No. 132R was adopted by the Company effective December 31, 2003. The adoption of SFAS No. 132R has had no material impact on the financial position or results of operations of the Company.

In November 2003, a consensus was reached on Emerging Issues Task Force (“EITF”) No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF No. 03-1 addresses the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The disclosure requirements adopted by the EITF include aggregated data related to impaired investments in tabular form and narrative material. EITF No. 03-1 was adopted by the Company effective December 31, 2003. The adoption of EITF No. 03-1 has had no material impact on the financial position or results of operations of the Company.

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. The Company, with the exception of the Bank’s credit life insurance subsidiary, files a consolidated federal income tax return.

Other

Trust income is recorded on the cash basis as received, which results in an amount that does not differ materially from the amount that would be recorded under the accrual basis.

(2) BUSINESS COMBINATIONS

On February 28, 2002, Pinnacle Bancshares, Inc., a $130 million bank holding company headquartered in Little Rock, Arkansas, merged with and into the Company. Pursuant to the merger, Pinnacle Bancshare’s

subsidiary, Pinnacle Bank, merged into the Bank. Consideration paid to complete this transaction consisted of 554,602 shares of common stock in addition to cash paid to the Pinnacle shareholders in the aggregate amount of $9,524,000. This transaction was accounted for as a purchase and, accordingly, the results of operations have been included since the date of acquisition. This acquisition was not material to the results of operations of the Company.

On May 3, 2002, certain assets of First Land and Investment Company were purchased by the Company. Consideration paid to complete this transaction consisted of 45,024 shares of the Company’s common stock. This transaction was accounted for as a purchase and, accordingly, the results of operations have been included since the date of acquisition. This acquisition was not material to the results of operations of the Company.

(3) HELD-TO-MATURITY SECURITIES

A comparison of amortized cost and estimated fair values of held-to-maturity securities as of December 31, 2003 and 2002 follows:


	2003
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(In thousands)
U.S. Treasury	$	7,315	$	415	$	—	$	7,730
U.S. Government agencies and corporations		869,732		21,024		99		890,657
Obligations of states and political subdivisions		166,077		9,713		296		175,494
Other		48,867		2,647		—		51,514

Total	$	1,091,991	$	33,799	$	395	$	1,125,395


	2002
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(In thousands)
U.S. Treasury	$	28,406	$	1,008	$	—	$	29,414
U.S. Government agencies and corporations		895,681		38,009		15		933,675
Obligations of states and political subdivisions		199,975		7,996		273		207,698
Other		69,313		3,482		348		72,447

Total	$	1,193,375	$	50,495	$	636	$	1,243,234

Gross gains of $768,000 and gross losses of $420,000 were recognized in 2003, gross gains of $310,000 and gross losses of $129,000 were recognized in 2002 and gross gains of $767,000 and gross losses of $29,000 were recognized in 2001 on held-to-maturity securities. Except for the following, these gains and losses were the result of held-to-maturity securities being called prior to maturity. Included in the 2003 amounts are a gross gain of $389,000 and a gross loss of $407,000 related to the sale of held-to-maturity securities with a combined amortized cost of $10,130,000. These securities were sold because of deterioration in the issuers’ creditworthiness. Included in the 2002 amounts is a gross loss of $44,000 related to the sale of a held-to-maturity security with an amortized cost of $5,322,000. This security was sold because of deterioration in the issuer’s creditworthiness. Included in the 2001 amounts is a gross gain of $218,000 related to the sale of held-to-maturity securities with amortized cost of $45,682,000 whose actual maturity date was within 90 days of the sale date.

Held-to-maturity securities with a carrying value of approximately $752.0 million at December 31, 2003 were pledged to secure public and trust funds on deposit and for other purposes. Included in held-to-maturity securities at December 31, 2003 were securities with a carrying value of $127.0 million issued by the State of Mississippi and securities with a carrying value of $16.6 million issued by the State of Arkansas.

The amortized cost and estimated fair value of held-to-maturity securities at December 31, 2003 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.


	2003
			Estimated
	Amortized		Fair
	Cost		Value
	(In thousands)
Due in one year or less	$	244,112	$	247,318
Due after one year through five years		671,416		689,814
Due after five years through ten years		124,271		132,503
Due after ten years		52,192		55,760

Total	$	1,091,991	$	1,125,395

A summary of temporarily impaired held-to-maturity investments with continuous unrealized loss positions at December 31, 2003 follows:


	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 and corporations	$	96,218	$	96	$	5,000	$	3	$	101,218	$	99
Obligations of states and political subdivisions		11,572		160		61		136		11,633		296

Total	$	107,790	$	256	$	5,061	$	139	$	112,851	$	395

Based upon review of the sector credit ratings of these securities and the positive intent to hold the securities to maturity at which point the fair value will mirror amortized cost, the impairments related to the securities were determined to be temporary.

(4) AVAILABLE-FOR-SALE SECURITIES

A comparison of amortized cost and estimated fair values of available-for-sale securities as of December 31, 2003 and 2002 follows:


	2003
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(In thousands)
U.S. Treasury	$	224,633	$	22	$	7,259	$	217,396
U.S. Government agencies and corporations		1,495,835		32,501		12,830		1,515,506
Obligations of states and political subdivisions		158,013		8,182		75		166,120
Preferred stock		42,343		225		278		42,290
Other		45,161		3,250		33		48,378

Total	$	1,965,985	$	44,180	$	20,475	$	1,989,690


	2002
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(In thousands)
U.S. Treasury	$	299	$	33	$	—	$	332
U.S. Government agencies and corporations		1,325,432		52,179		103		1,377,508
Obligations of states and political subdivisions		178,036		6,461		244		184,253
Preferred stock		47,343		217		291		47,269
Other		29,757		3,126		73		32,810

Total	$	1,580,867	$	62,016	$	711	$	1,642,172

Gross gains of $13,492,000 and gross losses of $3,000 were recognized in 2003, gross gains of $5,448,000 and gross losses of $143,000 were recognized in 2002 and gross gains of $10,856,000 and gross losses of $923,000 were recognized in 2001 on available-for-sale securities.

Available-for-sale securities with a carrying value of approximately $1.1 billion at December 31, 2003 were pledged to secure public and trust funds on deposit and for other purposes. Included in available-for-sale securities at December 31, 2003, were securities with a carrying value of $76.7 million issued by the State of Mississippi and securities with a carrying value of $65.8 million issued by the State of Arkansas.

The amortized cost and estimated fair value of available-for-sale securities at December 31, 2003 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 10 years.


	2003
			Estimated
	Amortized		Fair
	Cost		Value
	(In thousands)
Due in one year or less	$	157,865	$	160,339
Due after one year through five years		1,275,116		1,293,647
Due after five years through ten years		384,559		382,653
Due after ten years		148,445		153,051

Total	$	1,965,985	$	1,989,690

A summary of temporarily impaired available-for-sale investments with continuous unrealized loss positions at December 31, 2003 follows:


	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. Treasury	$	217,074	$	7,259	$	—	$	—	$	217,074	$	7,259
U.S. Government agencies and corporations		522,045		12,830		—		—		522,045		12,830
Obligations of states and political subdivisions		4,871		22		1,284		53		6,155		75
Preferred stock		1,272		228		4,950		50		6,222		278
Other		186		33		—		—		186		33

Total	$	745,448	$	20,372	$	6,234	$	103	$	751,682	$	20,475

Based upon review of the sector credit ratings of these securities and the volatility of the security’s market price, the impairments related to the securities were determined to be temporary.

(5) LOANS

A summary of loans classified by collateral type at December 31, 2003 and 2002 follows:


	2003		2002
	(In thousands)
Commercial and agricultural	$	743,286	$	716,891
Consumer and installment		533,755		727,083
Real estate mortgage:
1-4 Family		1,992,252		2,122,202
Other		2,746,463		2,528,253
Lease financing		227,918		311,769
Other		23,583		29,070

Total	$	6,267,257	$	6,435,268

Non-performing loans consist of both non-accrual loans and loans which have been restructured (primarily in the form of reduced interest rates) because of the borrower’s weakened financial condition. The aggregate principal balance of non-accrual loans was $18,139,000 and $10,514,000 at December 31, 2003 and 2002, respectively. Restructured loans totaled $2,659,000 and $20,000 at December 31, 2003 and 2002, respectively.

The total amount of interest earned on non-performing loans was approximately $248,000, $274,000 and $493,000 in 2003, 2002 and 2001, respectively. The gross interest income which would have been recorded under

the original terms of those loans amounted to $1,334,000, $936,000 and $1,402,000 in 2003, 2002 and 2001, respectively.

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 Disclosures,” are loans 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, 2003 and 2002 was $13,979,000 and $9,797,000, respectively, with a valuation allowance of $6,854,000 and $4,827,000, respectively. The average recorded investment in impaired loans during 2003 and 2002 was $15,695,000 and $9,408,000, respectively.

(6) ALLOWANCE FOR CREDIT LOSSES

The following summarizes the changes in the allowance for credit losses for the years ended December 31, 2003, 2002 and 2001:


	2003			2002			2001
	(In thousands)
Balance at beginning of year	$	87,875		$	83,150		$	81,730
Provision charged to expense		25,130			29,411			22,259
Recoveries		3,848			3,461			4,050
Loans charged off		(24,741	)		(29,376	)		(24,889	)
Acquisitions		—			1,229			—

Balance at end of year	$	92,112		$	87,875		$	83,150

(7) PREMISES AND EQUIPMENT

A summary by asset classification at December 31, 2003 and 2002 follows:


	Estimated
	Useful Life
	Years	2003		2002
		(In thousands)
Land	N/A	$	36,779	$	35,274
Buildings and improvements	20-50		166,756		164,210
Leasehold improvements	10-20		6,742		5,811
Equipment, furniture and fixtures	3-12		187,734		176,428
Construction in progress	N/A		16,291		11,328

Subtotal			414,302		393,051
Accumulated depreciation and amortization			202,086		182,868

Premises and equipment, net		$	212,216	$	210,183

(8) GOODWILL AND OTHER INTANGIBLE ASSETS

The following table presents the changes in the carrying amount of goodwill by operating segment for the years ended December 31, 2003 and 2002:


	2003
			General
	Community		Corporate
	Banking		and Other		Total
	(In thousands)
Balance as of January 1, 2003	$	32,423	$	39	$	32,462
Goodwill acquired during the year		861		26,348		27,209

Balance as of December 31, 2003	$	33,284	$	26,387	$	59,671


	2002
				General
	Community			Corporate
	Banking			and Other		Total
	(In thousands)
Balance as of January 1, 2002	$	27,495		$	39	$	27,534
Goodwill reclassified as other identifiable intangible		(3,177	)		—		(3,177	)
Goodwill acquired during the year		8,105			—		8,105

Balance as of December 31, 2002	$	32,423		$	39	$	32,462

The Company’s annual goodwill impairment evaluation for 2003 and 2002 indicated no impairment of goodwill for its reporting units. The Company will continue to test reporting unit goodwill for potential impairment on an annual basis in the Company’s fourth quarter, or sooner if a goodwill impairment indicator is identified.

The following table presents information regarding the components of the Company’s identifiable intangible assets for the years ended December 31, 2003 and 2002:


	Year ended				Year ended
	December 31, 2003				December 31, 2002
	Gross Carrying		Accumulated		Gross Carrying		Accumulated
	Amount		Amortization		Amount		Amortization
	(In thousands)
Amortized intangible assets:
Core deposit intangibles	$	11,549	$	5,661	$	11,549	$	4,192
Customer relationship intangibles		21,702		2,438		4,877		601
Mortgage servicing rights		90,790		41,115		77,615		29,164

Total	$	124,041	$	49,214	$	94,041	$	33,957

Unamortized intangible assets:
Trade names	$	688	$	—	$	—	$	—


	Year ended
	December 31,
	2003		2002
	(In thousands)
Aggregate amortization expense for:
Core deposit intangibles	$	1,469	$	1,503
Customer relationship intangibles		1,837		280
Mortgage servicing rights		11,951		8,632

Total	$	15,257	$	10,415

At December 31, 2003 and December 31, 2002, aggregate impairment for mortgage servicing rights was approximately $17,209,000 and approximately $23,197,000, respectively.

The following table presents information regarding estimated amortization expense on the Company’s amortizable identifiable intangible assets for the year ended December 31, 2004, and the succeeding four years.


			Customer
	Core Deposit		Relationship		Mortgage
	Intangibles		Intangibles		Servicing Rights		Total
	(In thousands)
Estimated amortization expense:
For the year ended December 31, 2004	$	1,372	$	2,655	$	9,900	$	13,927
For the year ended December 31, 2005		1,280		2,238		7,800		11,318
For the year ended December 31, 2006		1,197		1,888		6,400		9,485
For the year ended December 31, 2007		1,113		1,594		5,100		7,807
For the year ended December 31, 2008		851		1,376		4,095		6,322

The following table provides the transitional disclosures required under SFAS No. 142 for the Company’s goodwill and other intangible assets:


	For the year ended December 31
	2003		2002		2001
	(In thousands, except per share amounts)
Reported net income	$	131,134	$	112,018	$	98,463
Add back: Goodwill amortization		—		—		3,013

Adjusted net income	$	131,134	$	112,018	$	101,476

Basic earnings per share:
Reported net income	$	1.69	$	1.40	$	1.19
Goodwill amortization		—		—		0.04

Adjusted net income	$	1.69	$	1.40	$	1.23

Diluted earnings per share:
Reported net income	$	1.68	$	1.39	$	1.19
Goodwill amortization		—		—		0.04

Adjusted net income	$	1.68	$	1.39	$	1.23

(9) TIME DEPOSITS AND SHORT-TERM DEBT

Certificates of deposit and other time deposits of $100,000 or more amounting to approximately $1,772,453,000 and $1,818,159,000 were outstanding at December 31, 2003 and 2002, respectively. Total interest expense relating to certificate and other time deposits of $100,000 or more totaled approximately $50,511,000, $50,191,000 and $75,015,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

For time deposits with a remaining maturity of more than one year at December 31, 2003, the aggregate amount of maturities for each of the following five years is presented in the following table:


Maturing in	Amount
	(In thousands)
2005	$	761,298
2006		259,228
2007		262,139
2008		244,077
2009		6,008
Thereafter		1,164

Total	$	1,533,914

Presented below is information relating to short-term debt for the years ended December 31, 2003, 2002 and 2001:


	End of Period					Daily Average					Maximum
											Outstanding
			Interest					Interest			At Any
	Balance		Rate			Balance		Rate			Month End
			(Dollars in thousands)
2003:
Federal funds purchased	$	1,500		0.7	%	$	7,768		1.2	%	$	102,000
Flex-repos purchased		17,293		2.1	%		89,167		4.7	%		128,553
Securities sold under agreement to repurchase		418,221		1.0	%		369,087		1.1	%		436,548
Short-term Federal Home Loan Bank advances		—		—			7,534		1.1	%		50,000

Total	$	437,014				$	473,556				$	717,101

2002:
Federal funds purchased	$	1,300		0.9	%	$	3,412		1.6	%	$	15,900
Flex-repos purchased		134,508		4.7	%		141,882		5.6	%		163,898
Securities sold under agreement to repurchase		321,581		1.1	%		309,012		1.5	%		356,198
Short-term Federal Home Loan Bank advances		—		—			1,337		4.3	%		4,000

Total	$	457,389				$	455,643				$	539,996

2001:
Federal funds purchased	$	—		—		$	621		5.7	%	$	400
Flex-repos purchased		168,511		5.6	%		186,841		5.7	%		198,085
Securities sold under agreement to repurchase		305,401		1.4	%		313,299		3.5	%		339,462

Total	$	473,912				$	500,761				$	537,947

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. At December 31, 2003, the Bank had established informal federal funds borrowing lines of credit aggregating $275,000,000.

(10) LONG-TERM DEBT

The Bank has entered into a blanket floating lien security agreement with the Federal Home Loan Bank (“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 (unpaid principal balance) of the Bank’s eligible mortgage loans pledged as collateral or 35% of the Bank’s assets.

At December 31, 2003, the following FHLB fixed term advances were repayable as follows:


Final due date	Interest rate			Amount
				(In thousands)
2005		6.32%		$	5,000
2008 and beyond		5.86% - 7.19	%		133,498

Total				$	138,498

(11) JUNIOR SUBORDINATED DEBT SECURITIES

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

general corporate purposes, including repurchase of shares of the Company’s outstanding common stock. Prior to December 31, 2003, the accounts of the Trust were included in the consolidated financial statements of the Company. Pursuant to the Company’s adoption of the transition guidance of FIN 46R for investments in special-purpose entities, the Company deconsolidated the Trust from its financial statements as of December 31, 2003.

(12) INCOME TAXES

Total income taxes for the years ended December 31, 2003, 2002 and 2001 are allocated as follows:


	2003			2002			2001
	(In thousands)
Income from continuing operations	$	62,334		$	49,938		$	47,340
Shareholders’ equity for other comprehensive income		(14,645	)		8,379			5,765
Shareholders’ equity for stock option plans		(1,415	)		(1,895	)		(314	)

Total	$	46,274		$	56,422		$	52,791

The components of income tax expense attributable to continuing operations are as follows for the years ended December 31, 2003, 2002 and 2001:


	2003		2002		2001
	(In thousands)
Current:
Federal	$	48,693	$	46,916	$	37,004
State		5,431		3,006		6,884
Deferred:
Federal		7,048		14		2,911
State		1,162		2		541

Total	$	62,334	$	49,938	$	47,340

Income tax expense differs from the amount computed by applying the U.S. federal income tax rate of 35% to income before income taxes due to the following:


	2003			2002			2001
	(In thousands)
Tax expense at statutory rates	$	67,714		$	56,684		$	51,031
Increase (decrease) in taxes resulting from:
State income taxes, net of federal tax benefit		4,286			1,955			4,826
Tax-exempt interest revenue		(6,334	)		(7,625	)		(6,606	)
Tax-exempt earnings on life insurance		(2,095	)		(635	)		(235	)
Other, net		(1,237	)		(441	)		(1,676	)

Total	$	62,334		$	49,938		$	47,340

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2003 and 2002 are as follows:


	2003			2002
	(In thousands)
Deferred tax assets:
Loans, principally due to allowance for credit losses	$	39,178		$	38,515
Accrued liabilities, principally due to compensation arrangements and vacation accruals		6,957			8,291
Net operating loss carryforwards		621			489
Unrealized pension expense		188			—

Total gross deferred tax assets		46,944			47,295
Less: valuation allowance		—			—

Deferred tax assets	$	46,944		$	47,295

Deferred tax liabilities:
Premises and equipment, principally due to differences in depreciation and lease transactions	$	33,690		$	34,559
Other assets, principally due to expense recognition		7,614			3,783
Investments, principally due to interest income recognition		6,482			5,302
Capitalization of mortgage servicing rights		8,826			5,296
Unrealized gains on available-for-sale securities		8,940			23,397

Total gross deferred tax liabilities		65,552			72,337

Net deferred tax liabilities	$	(18,608	)	$	(25,042	)

Based upon the level of historical taxable income and projections for future taxable income over the periods 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, 2003.

At December 31, 2003, the Company has net operating loss carryforwards related to business combinations for federal income tax purposes of approximately $1,461,000 that are available to offset future federal taxable income, subject to various limitations, through 2016.

(13) PENSION, OTHER POSTRETIREMENT BENEFIT AND PROFIT SHARING PLANS

The BancorpSouth, Inc. Retirement Plan (the “Basic Plan”) is a noncontributory 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. Benefits are based on years of service and the employee’s compensation. 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 pension cost included in current income and the funded amount is included in other assets or other liabilities, as appropriate. Actuarial assumptions are evaluated periodically.

The BancorpSouth, Inc. Restoration Plan (the “Restoration Plan”) provides for the payment of retirement benefits to certain participants in the Basic Plan. The Restoration Plan covers any employee whose benefit under the Basic Plan is limited by the provisions of the Internal Revenue Code of 1986, as amended, and any employee who elects to participate in the BancorpSouth, Inc. Deferred Compensation Plan, thereby reducing their benefit under the Basic Plan. The Company has a nonqualified defined benefit supplemental retirement plan (“the Supplemental Plan”) for certain key employees. Benefits commence when the employee retires and are payable over a period of 10 years.

During 2003, the Company established a retiree medical plan whereby the Company subsidizes the cost of retiree health care coverage for current retirees and employees who retire over the next five years. Under the plan, the Company will subsidize retiree health care coverage on a decreasing basis through 2008. Beginning in 2009, the Company will only provide access to coverage for its retirees and subsequent years’ retired employees.

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) became law in the United States. The Act introduces a prescription drug benefit under Medicare as well as a

federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. In accordance with FASB Staff Position FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” the Company has elected to defer recognition of the effects of the Act in any measures of the benefit obligation or costs. Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require the Company to change previously reported information. Currently, the Company does not believe it will need to amend its plan to benefit from the Act.

The Company uses a December 31 measurement date for its pension and other benefit plans.

A summary of the defined benefit retirement plans and the retiree medical plan at and for the years ended December 31, 2003, 2002 and 2001 follows:


	Pension Benefits									Other Benefits
	2003			2002			2001			2003
	(In thousands)
Change in benefit obligation:
Projected benefit obligation at beginning of year	$	63,132		$	55,100		$	49,371		$	3,962
Service cost		4,658			3,865			3,220			—
Interest cost		4,160			3,977			3,516			233
Amendments		921			—			1,420			55
Actuarial loss		3,184			5,356			825			—
Benefits paid		(3,929	)		(5,124	)		(3,195	)		(1,530	)
Administrative expenses paid		—			(42	)		(57	)		—
Adjustment to projected benefit obligation		136			—			—			—

Projected benefit obligation at end of year	$	72,262		$	63,132		$	55,100		$	2,720

Change in plan assets:
Fair value of plan assets at beginning of year	$	42,177		$	42,651		$	45,609		$	—
Actual return on assets		6,563			(2,453	)		294			—
Employer contributions		12,247			7,145			—			1,530
Benefits paid		(3,929	)		(5,124	)		(3,195	)		(1,530	)
Administrative expenses paid		—			(42	)		(57	)		—

Fair value of plan assets at end of year	$	57,058		$	42,177		$	42,651		$	—

Funded status:
Projected benefit obligation	($	72,262	)	($	63,132	)	($	55,100	)	($	2,720	)
Fair value of plan assets		57,058			42,177			42,651			—
Unrecognized transition amount		202			220			238			—
Unrecognized prior service cost		3,727			3,120			3,319			3,170
Unrecognized actuarial loss		15,309			16,216			4,624			55

Net amount recognized	$	4,034		($	1,399	)	($	4,268	)	$	505

Amounts recognized in the consolidated balance sheets consist of:


	Pension Benefits									Other Benefits
	2003			2002			2001			2003
	(In thousands)
Prepaid benefit cost	$	9,001		$	2,076		$	—		$	505
Accrued benefit liability		(7,016	)		(3,475	)		(4,268	)		—
Intangible asset		1,557			—			—			—
Accumulated other comprehensive income adjustment		492			—			—			—

Net amount recognized	$	4,034		$	(1,399	)	$	(4,268	)	$	505

The components of net periodic benefit cost at December 31, 2003 and 2002 are as follows:


	Pension Benefits									Other Benefits
	2003			2002			2001			2003
	(In thousands)
Components of net periodic benefit cost:
Service cost	$	4,658		$	3,865		$	3,220		$	—
Interest cost		4,160			3,977			3,516			233
Expected return on assets		(3,372	)		(3,882	)		(4,045	)		—
Amortization of unrecognized transition amount		18			17			17			—
Recognized prior service cost		314			199			117			792
Recognized net (gain) loss		900			100			40			—

Net periodic benefit cost	$	6,678		$	4,276		$	2,865		$	1,025

The weighted-average assumptions used to determine benefit obligations at December 31, 2003 and 2002 are as follows:


	Pension Benefits						Other Benefits
	2003			2002			2003
Discount rate		6.25	%		6.75	%		6.25	%
Rate of compensation increase		4.00	%		4.00	%		N/A

The weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31, 2003, 2002 and 2001 are as follows:


	Pension Benefits									Other Benefits
	2003			2002			2001			2003
Discount rate		6.75	%		7.25	%		7.75	%		7.00	%
Rate of compensation increase		4.00	%		4.00	%		4.00	%		N/A
Expected rate of return on plan assets		8.00	%		9.00	%		9.00	%		N/A

The following table presents information related to the Company’s Restoration Plan and Supplemental Plan that had accumulated benefit obligations in excess of plan assets at December 31, 2003 and 2002:


	2003		2002
	(In thousands)
Projected benefit obligation	$	9,290	$	6,631
Accumulated benefit obligation		6,880		4,776
Fair value of assets		—		—

The following table presents information related to the Company’s defined benefit pension plans:


	2003		2002
	(In thousands)
Accumulated benefit obligation	$	58,836	$	46,004
Minimum liability included in other comprehensive income		492		—

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 this 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.

Accounting for postretirement health care plans uses a health care cost trend rate to recognize the effect of expected changes in future health care costs due to medical inflation, utilization changes, technological changes, regulatory requirements and Medicare cost shifting. For measurement purposes, a 9.00% health care cost trend rate was assumed for 2004. The rate was assumed to decrease gradually to 5.00% through 2011 and remain at that level thereafter. Assumed health care cost trend rates can have a significant effect on the amounts reported for health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:


	1-Percentage-		1-Percentage-
	Point Increase		Point Decrease
	(In thousands)
Effect on total of service and interest cost	$	6	$	(1	)
Effect on postretirement benefit obligation		70		(41	)

The Company’s pension plan weighted-average asset allocations at December 31, 2003 and 2002, by asset category are as follows:


	Plan assets at December 31						Target for
	2003			2002			2004
Asset category:
Equity securities		50.11	%		40.76	%		40-60	%
Debt securities		40.36	%		41.83	%		40-60	%
Other		9.53	%		17.41	%		0	%

Total		100.00	%		100.00	%

Equity securities held in the Basic Plan include shares of the Company’s common stock with a fair value of $2.0 million (3.4% of total plan assets) and $1.6 million (3.8% of total plan assets) at December 31, 2003 and 2002, respectively. The Company expects to contribute approximately $8.8 million to the Basic Plan in 2004.

The Company has a deferred compensation plan (commonly referred to as a “401(k) Plan”), whereby employees may contribute a portion of their compensation, as defined in the 401(k) Plan, subject to the limitations as established by the Internal Revenue Code. Employee contributions (up to 5% of defined compensation) are matched dollar-for-dollar by the Company. Under the terms of the plan, contributions matched by the Company are used to purchase shares of Company common stock at prevailing market prices. During 2002, the 401(k) Plan was amended to permit employees to diversify their holdings of shares of Company common stock by selling some or all of their shares of Company common stock and reinvesting the proceeds in other investments. Plan expense for the years ended December 31, 2003, 2002 and 2001 was $5,019,000, $4,733,000 and $4,191,000, respectively.

(14) FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods and assumptions are set forth below for the Company’s financial instruments.

Securities

The carrying amounts for short-term securities approximate fair value because of their short-term maturity (90 days or less) and present no unexpected credit risk. The fair value of most longer-term securities is estimated based on market prices or dealer quotes. See Note 3, Held-to-Maturity Securities, and Note 4, Available-for-Sale Securities, for fair values.

Loans

Fair values are estimated for portfolios of loans with similar financial characteristics. The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity using rates currently available that reflect the credit and interest rate risk inherent in the loan. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information.

Average maturity represents the expected average cash flow period, which in some instances is different than the stated maturity. Management has made estimates of fair value discount rates that are believed to be reasonable. However, because there is no market for many of these financial instruments, management has no basis

to determine whether the fair value presented would be indicative of the value negotiated in an actual sale. New loan rates were used as the discount rate on existing loans of similar type, credit quality and maturity.

Deposit Liabilities

Under SFAS No. 107, 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 December 31, 2003 and 2002. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar maturities.

Debt

The carrying amounts for federal funds purchased and repurchase agreements approximate fair value because of their short-term maturity. The fair value of the Company’s fixed-term FHLB advances and junior subordinated debt securities are based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently available for advances of similar maturities.

Derivative Instruments

The Company has commitments to fund fixed-rate mortgage loans and forward commitments to sell individual fixed-rate mortgage loans. The fair value of these derivative instruments is based on observable market price. See Note 22, Commitments and Contingent Liabilities, for additional fair value information regarding these instruments.

Lending Commitments

The Company’s lending commitments are negotiated at current 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. See Note 22, Commitments and Contingent Liabilities, for additional information regarding lending commitments.

The following table presents carrying and fair value information at December 31, 2003 and 2002:


	2003						2002
	Carrying			Fair			Carrying			Fair
	Value			Value			Value			Value
	(In thousands)
Assets:
Cash and due from banks	$	369,699		$	369,699		$	356,976		$	356,976
Interest bearing deposits with other banks		9,327			9,327			5,007			5,007
Held-to-maturity securities		1,091,991			1,125,395			1,193,375			1,243,234
Available-for-sale securities		1,989,690			1,989,690			1,642,172			1,642,172
Federal funds sold and securities purchased under agreement to resell		67,293			67,293			139,508			139,508
Loans, net of unearned discount		6,233,067			6,358,759			6,389,385			6,511,829
Loans held for sale		74,669			74,878			57,804			58,782
Liabilities:
Noninterest bearing deposits		1,286,607			1,286,607			1,183,127			1,183,127
Savings and interest bearing deposits		3,303,457			3,303,457			3,280,723			3,280,723
Other time deposits		4,009,064			4,078,188			4,085,068			4,154,200
Federal funds purchased and securities sold under agreement to repurchase		437,014			437,014			457,389			457,389
Long-term debt and other borrowings		269,199			287,802			265,849			288,204
Derivative instruments:
Forward commitments		(100	)		(100	)		(1,400	)		(1,400	)
Commitments to fund		(100	)		(100	)		1,100			1,100

(15) STOCK INCENTIVE AND STOCK OPTION PLANS

In 1995, the Company issued 60,000 shares of common stock to a key employee. The shares vested over a 10-year period subject to the Company meeting certain performance goals. This employee terminated his employment with the Company during 2002. The Company retired the 18,000 unearned shares in 2002 and there was no compensation expense associated with this award in 2002. The compensation expense associated with this award was $51,600 for 2001.

In 1998, the Company issued 70,000 shares of common stock to a key employee and, in 2002, an additional 56,000 shares were issued. The remaining shares vest over a four-year period subject to the Company meeting certain performance goals. The unearned shares are held in escrow and totaled 56,000 at December 31, 2003. The compensation expense associated with this award was $305,800 for each of the years in the three-year period ended December 31, 2003.

In 2000, the Company issued 100,000 shares of common stock to a key employee. The remaining shares vest over a two-year period subject to the Company meeting certain performance goals. The unearned shares are held in escrow and totaled 40,000 at December 31, 2003. The compensation expense associated with this award was $292,500 for each of the years in the three-year period ended December 31, 2003.

In 2002, the Company issued 28,000 shares of common stock to key employees. The remaining shares vest over a two-year period subject to attainment of certain performance goals by the employees. The unearned shares are held in escrow and totaled 18,666 at December 31, 2003. The compensation expense associated with this award was $172,700 for 2003 and 2002.

Key employees and directors of the Company and its subsidiaries have been granted stock options and SARs under the Company’s 1990, 1994 and 1995 stock incentive plans. The 1994 and 1995 stock incentive plans were amended in 1998 to eliminate SARs and to allow a limited number of restricted stock awards. All options and SARs 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. At December 31, 2003, the Company had outstanding 172,960 SARs exercisable in conjunction with certain of the options outstanding. The Company recorded compensation expense of $835,000, $1,329,000 and $1,903,000 in 2003, 2002 and 2001, respectively, related to the SARs because of changes in the market value of the Company’s common stock.

In 1998, the Company adopted a stock plan through which a minimum of 50% of the compensation payable to each director is paid in the form of the Company’s common stock effective January 1, 1999. Directors may elect under the plan to receive up to 100% of their compensation in the form of common stock.

A summary of the status of the Company’s stock options outstanding as of December 31, 2003, 2002 and 2001, and changes during the years ended on those dates is presented below:


	2003					2002					2001
				Weighted-					Weighted-					Weighted-
				Average					Average					Average
				Exercise					Exercise					Exercise
Options	Shares			Price		Shares			Price		Shares			Price
Outstanding at beginning of year		2,663,437		$	15.88		2,758,534		$	14.51		2,509,102		$	14.08
Granted		444,000			23.20		534,221			16.85		400,000			15.48
Exercised		(431,135	)		12.73		(567,900	)		10.06		(127,606	)		9.31
Expired or cancelled		(26,668	)		17.38		(61,418	)		16.67		(22,962	)		14.67

Outstanding at end of year		2,649,634		$	17.60		2,663,437		$	15.88		2,758,534		$	14.51

Exercisable at end of year		1,825,517					1,905,713					2,043,197

For options granted in 2003, 2002 and 2001, the weighted-average fair values as of the grant date were $4.03, $4.40 and $3.44, respectively.

The following table summarizes information about stock options at December 31, 2003:


		Options Outstanding							Options Exercisable
Range of		Number		Weighted-Avg			Weighted-Avg		Number		Weighted-Avg
Exercise Prices		Outstanding		Remaining Life			Exercise Price		Exercisable		Exercise Price
$6.30 to $9.46			45,688		2.90	years	$	8.05		45,688	$	8.05
$	11.06 to $14.98		695,893		4.50			12.81		695,893		12.81
$	15.06 to $18.00		649,517		6.60			16.33		545,192		16.49
$	19.18 to $23.51		1,258,536		7.80			21.26		538,744		20.58

$6.30 to $23.51			2,649,634		6.60		$	17.60		1,825,517	$	16.08

(16) 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 common shares outstanding plus the shares resulting from the assumed exercise of all outstanding stock options using the treasury stock method. The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the years ended December 31, 2003, 2002 and 2001:


	2003						2002						2001
	Income		Shares		Per Share		Income		Shares		Per Share		Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount		(Numerator)		(Denominator)		Amount		(Numerator)		(Denominator)		Amount
	(In thousands, except per share amounts)
Basic EPS:
Income available to common shareholders	$	131,134		77,696	$	1.69	$	112,018		79,926	$	1.40	$	98,463		82,539	$	1.19

Effect of dilutive stock options		—		468				—		555				—		440

Diluted EPS:
Income available to common shareholders plus assumed exercise	$	131,134		78,164	$	1.68	$	112,018		80,481	$	1.39	$	98,463		82,979	$	1.19

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. At December 31, 2003, the Bank could have paid dividends to the Company of $320 million under current regulatory guidelines.

(17) OTHER COMPREHENSIVE INCOME

The following table presents the components of other comprehensive income and the related tax effects allocated to each component for the years ended December 31, 2003, 2002 and 2001:


	2003								2002									2001
	Before			Tax		Net			Before			Tax			Net			Before			Tax			Net
	tax			(expense)		of tax			tax			(expense)			of tax			tax			(expense)			of tax
	amount			benefit		amount			amount			benefit			amount			amount			benefit			amount
	(In thousands)
Unrealized gains on securities:
Unrealized gains (losses) arising during holding period	$	(24,110	)	$	9,297	$	(14,813	)	$	27,184		$	(10,409	)	$	16,775		$	24,739		$	(9,564	)	$	15,175
Reclassification adjustment for net losses (gains) realized in net income		(13,489	)		5,160		(8,329	)		(5,304	)		2,030			(3,274	)		(9,933	)		3,799			(6,134	)
Minimum pension liability		(492	)		188		(304	)		—			—			—			—			—			—

Other comprehensive income (loss)	$	(38,091	)	$	14,645	$	(23,446	)	$	21,880		$	(8,379	)	$	13,501		$	14,806		$	(5,765	)	$	9,041

(18) 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 normal risk of collectibility or present any other unfavorable features. An analysis of such outstanding loans is as follows:


(In thousands)	Amount
Loans outstanding at December 31, 2002	$	27,877
New loans		31,529
Repayments		(24,830	)
Changes in directors and executive officers		(22	)

Loans outstanding at December 31, 2003	$	34,554

(19) CAPITALIZED MORTGAGE SERVICING RIGHTS

Mortgage servicing rights (“MSRs”) are capitalized as assets by allocating the total cost incurred between the loan and the servicing rights based on their relative fair values. To determine the fair value of the servicing rights created, the Company uses a valuation model that calculates the present value of future cash flows. The significant assumptions utilized by the valuation model are prepayment assumptions based upon dealer consensus and discount rates based upon market indices at the date of determination. MSRs are being amortized in proportion to, and over the period of, the estimated net servicing income. Capitalized mortgage servicing rights are evaluated for impairment based on the excess of the carrying amount of the mortgage servicing rights over their fair value. A quarterly impairment analysis is performed using a discounted methodology that is disaggregated by predominant risk characteristics. The Company has determined those risk characteristics to include: note rate, note term and loan type based on 1) loan guarantee (i.e., conventional or government), and 2) interest characteristic (i.e., fixed-rate or adjustable-rate). In measuring impairment, the carrying amount is based on one or more predominant risk characteristics of the underlying loans. Impairment is recognized through a valuation allowance for each individual stratum.

The following is a summary of capitalized mortgage servicing rights, net of accumulated amortization, and a valuation allowance for impairment:


	2003			2002			2001
	(In thousands)
Balance at beginning of year	$	48,451		$	44,320		$	37,175
Mortgage servicing rights capitalized		13,904			13,316			13,772
Mortgage servicing rights sold		(729	)		(553	)		—
Amortization expense		(11,951	)		(8,632	)		(6,627	)

Balance at end of year		49,675			48,451			44,320
Valuation allowance		(17,209	)		(23,197	)		(7,095	)

Fair value at end of year	$	32,466		$	25,254		$	37,225

(20) 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 (“FRB”) 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 I”) of at least 4% of risk-weighted assets, total capital of at least 8% of risk-weighted assets and a minimum Tier I leverage ratio of 4% of adjusted average assets. The regulations also define well capitalized levels of Tier I, total capital and Tier I leverage as 6%, 10% and 5%, respectively. The Company had Tier I, total capital and Tier I leverage above the well capitalized levels at December 31, 2003 and 2002, respectively, as set forth in the following table:


	2003					2002
	Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Tier I Capital (to Risk-Weighted Assets)	$	890,851		13.24	%	$	848,246		11.92	%
Total Capital (to Risk-Weighted Assets)		976,024		14.51			936,975		13.16
Tier I Leverage Capital (to Average Assets)		890,851		8.79			848,246		8.41

(21) SEGMENTS

The Company’s principal activity is community banking which includes providing a full range of deposit products, commercial loans and consumer loans. General corporate and other includes leasing, mortgage lending,


			General
	Community		Corporate
	Banking		and Other		Total
	(In thousands)
2003
Results of Operations
Net interest revenue	$	311,872	$	39,234	$	351,106
Provision for credit losses		22,468		2,662		25,130

Net interest income after provision for credit losses		289,404		36,572		325,976
Noninterest revenue		108,192		81,894		190,086
Noninterest expense		213,536		109,058		322,594

Income before income taxes		184,060		9,408		193,468
Income taxes		59,303		3,031		62,334

Net income	$	124,757	$	6,377	$	131,134

Selected Financial Information
Total assets	$	8,704,462	$	1,600,573	$	10,305,035
Depreciation & amortization		22,825		2,682		25,507

2002
Results of Operations
Net interest revenue	$	313,543	$	57,983	$	371,526
Provision for credit losses		25,500		3,911		29,411

Net interest income after provision for credit losses		288,043		54,072		342,115
Noninterest revenue		80,398		44,428		124,826
Noninterest expense		246,334		58,651		304,985

Income before income taxes		122,107		39,849		161,956
Income taxes		37,651		12,287		49,938

Net income	$	84,456	$	27,562	$	112,018

Selected Financial Information
Total assets	$	9,277,374	$	911,873	$	10,189,247
Depreciation & amortization		24,765		1,763		26,528

2001
Results of Operations
Net interest revenue	$	278,196	$	51,186	$	329,382
Provision for credit losses		18,998		3,261		22,259

Net interest income after provision for credit losses		259,198		47,925		307,123
Noninterest revenue		74,373		53,625		127,998
Noninterest expense		234,839		54,479		289,318

Income before income taxes		98,732		47,071		145,803
Income taxes		32,057		15,283		47,340

Net income	$	66,675	$	31,788	$	98,463

Selected Financial Information
Total assets	$	8,551,441	$	843,988	$	9,395,429
Depreciation & amortization		25,506		1,822		27,328

(22) COMMITMENTS AND CONTINGENT LIABILITIES

Leases

Rent expense was approximately $4,665,000 for 2003, $4,592,000 for 2002 and $4,599,000 for 2001. Future minimum lease payments for all non-cancelable operating leases with initial or remaining terms of one year or more consisted of the following at December 31, 2003:


(In thousands)	Amount
2004	$	4,632
2005		3,475
2006		2,608
2007		2,048
2008		1,757
Thereafter		3,951

Total future minimum lease payments	$	18,471

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 $2.8 billion of loans serviced for investors at December 31, 2003 is approximately $1.7 million of primary recourse servicing whereby 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.

Forward Contracts

Forward contracts are agreements to purchase or sell securities at a specified future date at a specific price or yield. Risks arise from the possibility that counterparties may be unable to meet the term of their contracts and from movements in securities values and interest rates. At December 31, 2003 and 2002, the Company had forward commitments to sell individual fixed-rate mortgage loans and commitments to fund individual fixed-rate mortgage loans. At December 31, 2003 the notional amount of forward commitments to sell individual fixed-rate mortgage loans was $41.5 million with a carrying value and fair value reflecting a loss of $100 thousand. At December 31, 2002, the notional amount of forward commitments to sell individual fixed-rate mortgage loans was $122.0 million with a carrying value and fair value reflecting a loss of $1.4 million. At December 31, 2003, the notional amount of commitments to fund individual fixed-rate mortgage loans was $28.5 million with a carrying value and fair value reflecting a loss of $100 thousand. At December 31, 2002, the notional amount of commitments to fund individual fixed-rate mortgage loans was $75.9 million with a carrying value and fair value reflecting a gain of $1.1 million. The forward commitments to sell fixed-rate mortgage loans and the commitments to fund fixed-rate mortgage loans are reported at fair value in the Company’s financial statements, with adjustments being recorded in current period earnings, and are not accounted for as hedges.

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, 2003, these included approximately $73 million for letters of credit and approximately $1.3 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 year ended December 31, 2003.

Litigation

In states in which the Company operates, financial services companies have been sued in connection with lending, insurance and other financial transactions. While the allegations vary from case to case and from company to company, in general these cases allege that loans were originated or renewed at a time or in a way that improperly increased the charges paid by the borrower and/or that the borrowers were charged fees or sold insurance products without appropriate disclosures or were unnecessary under the particular circumstances.

Cases of this type have been filed against some of the Company’s subsidiaries. The Company has settled the majority of cases filed. During 2003, the Company paid a total of approximately $3.1 million to settle these cases. The Company accrued $3.2 million during the fourth quarter of 2002, which the Company believed was the amount necessary to settle the claims covered in settlements then pending. These pending settlements were completed in the second quarter of 2003 for approximately $2.8 million, and the balance of the $3.2 million accrual was reversed. Subsequently in 2003, other cases were settled for approximately $270,000.

The Company intends to vigorously defend each of the pending lawsuits, and believes that it has meritorious defenses in these cases. Litigation is, however, inherently uncertain, and the Company cannot make assurances that it will prevail in any of these actions, nor can it estimate with reasonable certainty the amount of damages that it might incur. The Company has not recorded a reserve for these pending lawsuits.

Restricted Cash Balance

Aggregate reserves (in the form of deposits with the Federal Reserve Bank) of $79,175,000 were maintained to satisfy Federal regulatory requirements at December 31, 2003.

(23) CONDENSED PARENT COMPANY INFORMATION

The following condensed financial information reflects the accounts and transactions of BancorpSouth, Inc. (parent company only) for the dates indicated:


	December 31
	2003		2002
Condensed Balance Sheets	(In thousands)
Assets:
Cash on deposit with subsidiary bank	$	49,715	$	26,266
Investment in subsidiaries		941,193		905,787
Other assets		24,403		21,558

Total assets	$	1,015,311	$	953,611

Liabilities and shareholders’ equity:
Total liabilities	$	146,405	$	145,788
Shareholders’ equity		868,906		807,823

Total liabilities and shareholders’ equity	$	1,015,311	$	953,611


	Year Ended December 31
	2003		2002			2001
Condensed Statements of Income	(In thousands)
Dividends from subsidiaries	$	102,315	$	141,291		$	97,500
Other operating income		53		56			334

Total income		102,368		141,347			97,834
Operating expenses		14,375		13,937			4,661

Income before tax benefit and equity in undistributed earnings		87,993		127,410			93,173
Income tax benefit		5,473		7,007			1,510

Income before equity in undistributed earnings of subsidiaries		93,466		134,417			94,683
Equity in undistributed earnings of subsidiaries		37,668		(22,399	)		3,780

Net income	$	131,134	$	112,018		$	98,463


	Year Ended December 31
	2003			2002			2001
Condensed Statements of Cash Flows	(In thousands)
Operating activities:
Net income	$	131,134		$	112,018		$	98,463
Adjustments to reconcile net income to net cash provided by operating activities		(40,949	)		(98,783	)		(1,973	)

Net cash provided by operating activities		90,185			13,235			96,490
Net cash used in financing activities		(66,736	)		(15,153	)		(91,832	)

Increase (decrease) in cash and cash equivalents		23,449			(1,918	)		4,658
Cash and cash equivalents at beginning of year		26,266			28,184			23,526

Cash and cash equivalents at end of year	$	49,715		$	26,266		$	28,184

ITEM 9. – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

There have been no disagreements with the Company’s independent accountants and auditors on any matter of accounting principles or practices or financial statement disclosure.

ITEM 9A. – CONTROLS AND PROCEDURES.

The Company, with the participation of its management, including its 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 Securities Exchange Act of 1934) 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 are effective in timely alerting them to information required to be disclosed in its reports that the Company files or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934. There have been no changes in the Company’s internal control over financial reporting that occurred during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART III

ITEM 10. – DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

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 2004 annual meeting of shareholders, and is incorporated herein by reference.

EXECUTIVE OFFICERS OF REGISTRANT

Information follows concerning the executive officers of the Company who are subject to the reporting requirements of Section 16 of the Securities Exchange Act of 1934.


Name	Offices Held	Age
Aubrey B. Patterson	Chairman of the Board of Directors and Chief Executive Officer of the Company and BancorpSouth Bank; Director of the Company		61

James V. Kelley	President and Chief Operating Officer of the Company and BancorpSouth Bank; Director of the Company		54

L. Nash Allen, Jr.	Treasurer and Chief Financial Officer of the Company; Executive Vice President, Chief Financial Officer and Cashier, BancorpSouth Bank		59

Larry Bateman	Executive Vice President of the Company and Vice Chairman of BancorpSouth Bank		55

Gary R. Harder	Executive Vice President of the Company and Executive Vice President, Audit and Loan Review of BancorpSouth Bank		59

W. James Threadgill, Jr.	Executive Vice President of the Company and Vice Chairman of BancorpSouth Bank		49

Michael L. Sappington	Executive Vice President of the Company and Vice Chairman of BancorpSouth Bank		54

Gregg Cowsert	Executive Vice President of the		56


Name	Offices Held	Age
	Company and Vice Chairman and Chief Lending Officer of BancorpSouth Bank

Cathy M. Robertson	Executive Vice President of the Company and BancorpSouth Bank		49

Cathy S. Freeman	Senior Vice President and Corporate Secretary of the Company and BancorpSouth Bank		38

None of the executive officers of the Company are related by blood, marriage or adoption. There are no arrangements or understandings between any of the executive officers and any other person pursuant to which the individual named above was or is to be selected as an officer. The executive officers of the Company are elected 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 elected and qualified.

Mr. Patterson has served as Chairman of the Board and Chief Executive Officer of the Bank and the Company for at least the past five years.

Mr. Kelley has served as President and Chief Operating Officer of the Bank and the Company since the August 31, 2000 merger of First United Bancshares, Inc. with the Company. Prior to the merger, he served as Chairman of the Board, President and Chief Executive Officer of First United Bancshares, Inc. for at least two years prior to the merger. First United Bancshares, Inc. was a $2.7 billion bank holding company headquartered in El Dorado, Arkansas at the time of its merger with the Company.

Mr. Allen has served as Executive Vice President of the Bank for at least the past five years. He has served as Treasurer and Chief Financial Officer of the Company during this same period.

Mr. Bateman has served as Executive Vice President of the Company since October 2000. He served as Tennessee Region President of BancorpSouth Bank for at least 2 years prior to October 2000. He was also named Vice Chairman of the Bank in November 2003.

Mr. Harder has served as Executive Vice President, Audit and Loan Review of the Bank for at least the past five years. He has also served as Executive Vice President of the Company during this same period.

Mr. Threadgill had served as Southern Mississippi Region President of BancorpSouth Bank for at least three years prior to April 2002 when he was named Vice Chairman of BancorpSouth Bank and Executive Vice President of the Company.

Mr. Sappington has served as Executive Vice President of the Company and Vice Chairman of the Bank for at least the past five years.

Mr. Cowsert has served as Executive Vice President of the Company and Vice Chairman and Chief Lending Officer of the Bank for at least the past five years.

Mrs. Robertson has served as Executive Vice President of the Bank for at least the past five years. She has also served as Executive Vice President of the Company during this same period.

Mrs. Freeman has served as First Vice President and Corporate Secretary of the Company and the Bank for at least five years prior to November 2003 when she was named Senior Vice President and Corporate Secretary of the Company and the Bank.

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 “Audit Committee Financial Expert” in the Company’s definitive Proxy Statement for its 2004 annual meeting of shareholders to be held during 2004, 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 “Meetings of the Board of Directors and Committees” in the Company’s definitive Proxy Statement for its 2004 annual meeting of shareholders to be held during 2004, and is incorporated herein by reference.

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 2003 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 “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive Proxy Statement for its 2004 annual meeting of shareholders to be held during 2004, 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 Guidelines for its Board of Directors. These documents, as well as the charters of the Audit Committee, Executive Compensation and Stock Incentive Committee, Nominating Committee and Executive Committee of the Board of Directors, are available on the Company’s website at www.bancorpsouth.com, 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

ITEM 11. – EXECUTIVE COMPENSATION.

Information regarding the remuneration of executive officers of the Company appears under the caption “Executive Compensation” in the Company’s definitive Proxy Statement for its 2004 annual meeting of shareholders, and is incorporated herein by reference. Information concerning the remuneration of directors of the Company appears under the caption “Compensation of Directors” in the Company’s definitive Proxy Statement for its 2004 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 2004 annual meeting of shareholders, and is incorporated herein by reference.

Information regarding the Company’s equity compensation plans appears under the caption “Equity Compensation Plan Information” in the Company’s definitive Proxy Statement for its 2004 annual meeting of shareholders, and is incorporated herein by reference.

ITEM 13. – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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 2004 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 3: Selection of Auditors” in the Company’s definitive Proxy Statement for its 2004 annual meeting of shareholders, and is incorporated herein by reference.

PART IV

ITEM 15. – EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(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) Articles of Incorporation, as amended and restated. (1)

(b) Bylaws, as amended and restated. (2)

(c) Amendment No. 1 to Amended and Restated Bylaws. (3)

(4) (a) Specimen Common Stock Certificate. (4)

(b) Rights Agreement, dated as of April 24, 1991, including as Exhibit A the forms of Rights Certificate and of Election to Purchase and as Exhibit B the summary of Rights to Purchase Common Shares. (5)

(c) First Amendment to Rights Agreement, dated as of March 28, 2001. (6)

(d) Amended and Restated Certificate of Trust of BancorpSouth Capital Trust I. (7)

(e) 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. (8)

(f) Junior Subordinated Indenture, dated as of January 28, 2002, between BancorpSouth, Inc. and The Bank of New York. (8)

(g) Guarantee Agreement, dated as of January 28, 2002, between BancorpSouth, Inc. and The Bank of New York. (8)

(h) Junior Subordinated Debt Security Specimen. (8)

(i) Trust Preferred Security Certificate for BancorpSouth Capital Trust I. (8)

(10) (a) 1998 Director Stock Plan. (2)(24)

(b) Form of deferred compensation agreement between Bancorp of Mississippi, Inc. and certain key executives. (9)(24)

(c) 1990 Stock Incentive Plan. (10)(24)

(d) 1994 Stock Incentive Plan. (11)(24)

(e) 1998 Stock Option Plan. (12)(24)

(f) 1995 Non-Qualified Stock Option Plan for Non-Employee Directors. (11)(24)

(g) BancorpSouth, Inc. Restoration Plan. (19)(24)

(h) BancorpSouth, Inc. Deferred Compensation Plan. (19)(24)

(i) Home Office Incentive Plan. (19)(24)

(j) Dividend Reinvestment Plan. (13)

(k) Stock Bonus Agreement between BancorpSouth, Inc. and Aubrey B. Patterson, dated January 20, 1998 and Escrow Agreement between BancorpSouth Bank and Aubrey B. Patterson, dated March 20, 1998. (14)(24)

(l) First Amendment, dated January 30, 2000, to Stock Bonus Agreement, dated January 20, 1998, between BancorpSouth, Inc. and Aubrey B. Patterson. (15)(24)

(m) Second Amendment, dated January 31, 2001, to Stock Bonus Agreement, dated January 20, 1998, between BancorpSouth, Inc. and Aubrey B. Patterson. (3)(24)

(n) Stock Bonus Agreement between BancorpSouth, Inc. and James V. Kelley, dated April 16, 2000 and Escrow Agreement between BancorpSouth Bank and James V. Kelley, dated April 16, 2000. (16)(24)

(o) Amendment, dated July 24, 2000, to Stock Bonus Agreement, dated April 16, 2000, between BancorpSouth, Inc. and James V. Kelley. (17)(24)

(p) Information regarding Bancorp of Mississippi, Inc., amended and restated Salary Deferral-Profit Sharing Employee Stock Ownership Plan. (18)(24)

(q) Form of BancorpSouth, Inc. Change in Control Agreement.* (24)

(r) BancorpSouth, Inc. Change in Control Agreement for Aubrey B. Patterson. (20)(24)

(s) BancorpSouth, Inc. Change in Control Agreement for James V. Kelley. (21)(24)

(t) BancorpSouth, Inc. Change in Control Agreement for Gregg Cowsert. (20)(24)

(u) BancorpSouth, Inc. Change in Control Agreement for Michael Sappington. (20)(24)

(v) BancorpSouth, Inc. Change in Control Agreement for Harry Baxter. (20)(24)

(w) Mutual Termination of to be Assumed Prior Employment Agreement, Retention Incentive, Non-Competition/Non-Solicitation/Anti-Piracy and Employment Agreement for Robert M. Althoff. (22)(24)

(x) Mutual Termination of to be Assumed Prior Employment Agreement, Retention Incentive, Non-Competition/Non-Solicitation/Anti-Piracy and Employment Agreement for Dabbs Cavin. (22)(24)

(y) BancorpSouth, Inc. Executive Performance Incentive Plan. (23)(24)

(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.*

(1)

Filed as exhibits 3.1 and 3.2 to the Company’s registration statement on Form S-4 filed on January 6, 1995 (Registration No. 33-88274) 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 Annual Report on Form 10-K for the year ended December 31, 1994 (file number 0-10826) and incorporated by reference thereto.

(5)		Filed as exhibit 1 to the Company’s registration statement on Form 8-A filed on April 24, 1991 (file number 0-10826) and incorporated by reference thereto.

(6)		Filed as exhibit 2 to the Company’s amended registration statement on Form 8-A/A filed on March 28, 2001 (file number 1-12991) and incorporated by reference thereto.

(7)		Filed as exhibits 4.12 and 4.13 to the Company’s registration statement on Form S-3 filed on November 2, 2001 (Registration No. 33-72712) and incorporated by reference thereto.

(8)		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.

(9)		Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1988 (file number 0-10826) and incorporated by reference thereto.

(10)		Filed as exhibit 28(a) to the Company’s registration statement on Form S-8 filed on November 1, 1991 (file number 33-43796) 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, 1998 (file number 1-12991) and incorporated by reference thereto.

(12)		Filed as exhibit 99.1 to the Company’s Post-Effective Amendment No. 5 on Form S-3 to the registration statement on Form S-4 filed on February 23, 1999 (file number 333-28081) and incorporated by reference thereto.

(13)		Filed in the Company’s Post-Effective Amendment No. 4 to the registration statement on Form S-3 filed on December 30, 1997 (file number 33-03009) and the Company’s filing pursuant to Rule 424(b)(2) filed on January 5, 2004 and incorporated by reference thereto.

(14)		Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997 (file number 1-12991), and incorporated by reference thereto.

(15)		Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2000 (file number 1-12991) and incorporated by reference thereto.

(16)		Filed as exhibits 10.3 and 10.4 to the Company’s registration statement on Form S-4 filed June 14, 2000 (Registration No. 333-39326) and incorporated by reference thereto.

(17)		Filed as an exhibit to the Company’s Current Report on Form 8-K filed on July 24, 2000 (file number 1-12991) 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, 1990 (file number 0-10826) and incorporated by reference thereto.

(19)		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.

(20)		Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 1999 (file number 001-12991) and incorporated by reference thereto.

(21)		Filed as an exhibit to the Company’s registration statement on Form S-4 filed June 14, 2000 (Registration No. 333-39326) and incorporated by reference thereto.

(22)		Filed as an exhibit to the Company’s Post-Effective Amendment No. 6 on Form S-4 filed on January 18, 2002 (file number 333-28081) and incorporated by reference thereto.

(23)		Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2003 (file number 001-12991) and incorporated by reference thereto.

(24)		Compensatory plans or arrangements.

*		Filed herewith

(b) Reports on Form 8-K:

During the three months ended December 31, 2003, no current reports on Form 8-K were filed (excluding a current report on Form 8-K furnished on October 17, 2003 reporting information under Item 7. “Financial Statements and Exhibits,” and Item 12. “Disclosure of Results of Operations and Financial Condition”).

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: March 11, 2004	By:	/s/Aubrey B. Patterson

		Aubrey B. Patterson
		Chairman of the Board
		and 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.


/s/ Aubrey B. Patterson Aubrey B. Patterson	Chairman of the Board, Chief Executive Officer (Principal Executive Officer) and Director	March 11, 2004

/s/L. Nash Allen, Jr. L. Nash Allen, Jr.	Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer)	March 11, 2004

/s/Hassell H. Franklin Hassell H. Franklin	Director	March 11, 2004

/s/W. G. Holliman, Jr. W. G. Holliman, Jr.	Director	March 11, 2004

/s/James V. Kelley James V. Kelley	President, Chief Operating Officer and Director	March 11, 2004

/s/Larry G. Kirk Larry G. Kirk	Director	March 11, 2004

/s/Turner O. Lashlee Turner O. Lashlee	Director	March 11, 2004

/s/Guy W. Mitchell, III Guy W. Mitchell, III	Director	March 11, 2004

/s/R. Madison Murphy R. Madison Murphy	Director	March 11, 2004

INDEX TO EXHIBITS


Exhibit No.		Description
(3)	(a)	Articles of Incorporation, as amended and restated. (1)

	(b)	Bylaws, as amended and restated. (2)

	(c)	Amendment No. 1 to Amended and Restated Bylaws. (3)

(4)	(a)	Specimen Common Stock Certificate. (4)

	(b)	Rights Agreement, dated as of April 24, 1991, including as Exhibit A the forms of Rights Certificate and of Election to Purchase and as Exhibit B the summary of Rights to Purchase Common Shares. (5)

	(c)	First Amendment to Rights Agreement, dated as of March 28, 2001. (6)

	(d)	Amended and Restated Certificate of Trust of BancorpSouth Capital Trust I. (7)

	(e)	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. (8)

	(f)	Junior Subordinated Indenture, dated as of January 28, 2002, between BancorpSouth, Inc. and The Bank of New York. (8)

	(g)	Guarantee Agreement, dated as of January 28, 2002, between BancorpSouth, Inc. and The Bank of New York. (8)

	(h)	Junior Subordinated Debt Security Specimen. (8)

	(i)	Trust Preferred Security Certificate for BancorpSouth Capital Trust I. (8)

(10)	(a)	1998 Director Stock Plan. (2)(24)

	(b)	Form of deferred compensation agreement between Bancorp of Mississippi, Inc. and certain key executives. (9)(24)

	(c)	1990 Stock Incentive Plan. (10)(24)

	(d)	1994 Stock Incentive Plan. (11)(24)

	(e)	1998 Stock Option Plan. (12)(24)

	(f)	1995 Non-Qualified Stock Option Plan for Non-Employee Directors. (11)(24)

	(g)	BancorpSouth, Inc. Restoration Plan. (19)(24)

	(h)	BancorpSouth, Inc. Deferred Compensation Plan. (19)(24)

	(i)	Home Office Incentive Plan. (19)(24)

	(j)	Dividend Reinvestment Plan. (13)

	(k)	Stock Bonus Agreement between BancorpSouth, Inc. and Aubrey B. Patterson, dated January 20, 1998 and Escrow Agreement between BancorpSouth Bank and Aubrey B. Patterson, dated March 20, 1998. (14)(24)

	(l)	First Amendment, dated January 30, 2000, to Stock Bonus Agreement, dated January 20, 1998, between BancorpSouth, Inc. and Aubrey B. Patterson. (15)(24)

	(m)	Second Amendment, dated January 31, 2001, to Stock Bonus Agreement, dated January 20, 1998, between BancorpSouth, Inc. and Aubrey B. Patterson. (3)(24)

	(n)	Stock Bonus Agreement between BancorpSouth, Inc. and James V. Kelley, dated April 16, 2000 and Escrow Agreement between BancorpSouth Bank and James V. Kelley, dated April 16, 2000. (16)(24)

	(o)	Amendment, dated July 24, 2000, to Stock Bonus Agreement, dated April 16, 2000, between BancorpSouth, Inc. and James V. Kelley. (17)(24)

	(p)	Information regarding Bancorp of Mississippi, Inc., amended and restated Salary Deferral-Profit Sharing Employee Stock Ownership Plan. (18)(24)

	(q)	Form of BancorpSouth, Inc. Change in Control Agreement.* (24)

	(r)	BancorpSouth, Inc. Change in Control Agreement for Aubrey B. Patterson. (20)(24)

	(s)	BancorpSouth, Inc. Change in Control Agreement for James V. Kelley. (21)(24)

	(t)	BancorpSouth, Inc. Change in Control Agreement for Gregg Cowsert. (20)(24)

	(u)	BancorpSouth, Inc. Change in Control Agreement for Michael Sappington. (20)(24)

	(v)	BancorpSouth, Inc. Change in Control Agreement for Harry Baxter. (20)(24)


Exhibit No.		Description
	(w)	Mutual Termination of to be Assumed Prior Employment Agreement, Retention Incentive, Non-Competition/Non-Solicitation/Anti-Piracy and Employment Agreement for Robert M. Althoff. (22)(24)

	(x)	Mutual Termination of to be Assumed Prior Employment Agreement, Retention Incentive, Non-Competition/Non-Solicitation/Anti-Piracy and Employment Agreement for Dabbs Cavin. (22)(24)

	(y)	BancorpSouth, Inc. Executive Performance Incentive Plan. (23)(24)

(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.*



(1)		Filed as exhibits 3.1 and 3.2 to the Company’s registration statement on Form S-4 filed on January 6, 1995 (Registration No. 33-88274) 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 Annual Report on Form 10-K for the year ended December 31, 1994 (file number 0-10826) and incorporated by reference thereto.

(5)		Filed as exhibit 1 to the Company’s registration statement on Form 8-A filed on April 24, 1991 (file number 0-10826) and incorporated by reference thereto.

(6)		Filed as exhibit 2 to the Company’s amended registration statement on Form 8-A/A filed on March 28, 2001 (file number 1-12991) and incorporated by reference thereto.

(7)		Filed as exhibits 4.12 and 4.13 to the Company’s registration statement on Form S-3 filed on November 2, 2001 (Registration No. 33-72712) and incorporated by reference thereto.

(8)		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.

(9)		Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1988 (file number 0-10826) and incorporated by reference thereto.

(10)		Filed as exhibit 28(a) to the Company’s registration statement on Form S-8 filed on November 1, 1991 (file number 33-43796) 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, 1998 (file number 1-12991) and incorporated by reference thereto.

(12)		Filed as exhibit 99.1 to the Company’s Post-Effective Amendment No. 5 on Form S-3 to the registration statement on Form S-4 filed on February 23, 1999 (file number 333-28081) and incorporated by reference thereto.

(13)		Filed in the Company’s Post-Effective Amendment No. 4 to the registration statement on Form S-3 filed on December 30, 1997 (file number 33-03009) and the Company’s filing pursuant to Rule 424(b)(2) filed on January 5, 2004 and incorporated by reference thereto.

(14)		Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997 (file number 1-12991), and incorporated by reference thereto.

(15)		Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2000 (file number 1-12991) and incorporated by reference thereto.

(16)		Filed as exhibits 10.3 and 10.4 to the Company’s registration statement on Form S-4 filed June 14, 2000 (Registration No. 333-39326) and incorporated by reference thereto.

(17)		Filed as an exhibit to the Company’s Current Report on Form 8-K filed on July 24, 2000 (file number 1-12991) 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, 1990 (file number 0-10826) and incorporated by reference thereto.

(19)		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.

(20)		Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 1999 (file number 001-12991) and incorporated by reference thereto.

(21)		Filed as an exhibit to the Company’s registration statement on Form S-4 filed June 14, 2000 (Registration No. 333-39326) and incorporated by reference thereto.

(22)		Filed as an exhibit to the Company’s Post-Effective Amendment No. 6 on Form S-4 filed on January 18, 2002 (file number 333-28081) and incorporated by reference thereto.

(23)		Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2003 (file number 001-12991) and incorporated by reference thereto.

(24)		Compensatory plans or arrangements.

*		Filed herewith


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)


		Name of Each Exchange on
Title of Each Class		Which Registered

Common stock, $2.50 par value Common stock purchase rights Guarantee of 8.15% Preferred Securities of BancorpSouth Capital Trust I		New York Stock Exchange New York Stock Exchange


		December 31

		2003		2002		2001

				(In thousands)
U. S. Treasury securities		$	7,315	$	28,406	$	23,034
U. S. Government agency securities			869,732		895,681		798,887
Taxable obligations of states and political subdivisions			14,383		15,749		12,154
Tax exempt obligations of states and political subdivisions			151,694		184,226		201,343
Other securities			48,867		69,313		75,045

	TOTAL	$	1,091,991	$	1,193,375	$	1,110,463


	December 31, 2003

			U.S.
	U.S.		Government		States &				Weighted
	Treasury		Agency		Political		Other		Average
	Securities		Securities		Subdivisions		Securities		Yield

			(Dollars in thousands)
Period to Maturity:
Maturing within one year	$	1,998	$	201,617	$	20,427	$	20,071		3.78	%
Maturing after one year but within five years		5,317		583,204		54,098		28,796		4.20	%
Maturing after five years but within ten years		—		84,911		39,360		—		7.01	%
Maturing after ten years		—		—		52,192		—		7.16	%

TOTAL	$	7,315	$	869,732	$	166,077	$	48,867


		December 31

		2003		2002		2001

				(In thousands)
U. S. Treasury securities		$	217,396	$	332	$	7,383
U. S. Government agency securities			1,515,506		1,377,508		821,607
Taxable obligations of states and political subdivisions			9,367		10,481		13,007
Tax exempt obligations of states and political subdivisions			156,753		173,772		164,800
Other securities			90,668		80,079		76,394

	TOTAL	$	1,989,690	$	1,642,172	$	1,083,191


PART I
	ITEM 1. – BUSINESS
	ITEM 2. – PROPERTIES
	ITEM 3. – LEGAL PROCEEDINGS
	ITEM 4. – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
	ITEM 5. – MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
	ITEM 6. – SELECTED FINANCIAL DATA
	ITEM 7. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 7A. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 8. – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	ITEM 9. – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
	ITEM 9A. – CONTROLS AND PROCEDURES
PART III
	ITEM 10. – DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
	ITEM 11. – EXECUTIVE COMPENSATION
	ITEM 12. – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
	ITEM 13. – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
	ITEM 14. – PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
	ITEM 15. – EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES
INDEX TO EXHIBITS
EX-10.Q CHANGE IN CONTROL AGREEMENT
EX-11 COMPUTATION OF PER SHARE EARNINGS
EX-21 SUBSIDIARIES OF THE REGISTRANT
EX-23 CONSENT OF KPMG LLP
EX-31.1 RULE 13A-14 CERTIFICATION OF THE CEO
EX-31.2 RULE 13A-14 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO


PART I
Item 1.	Business	4
Item 2.	Properties	22
Item 3.	Legal Proceedings	23
Item 4.	Submission of Matters to a Vote of Security Holders	23
PART II
Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters	23
Item 6.	Selected Financial Data	25
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 8.	Financial Statements and Supplementary Data	44
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	75
Item 9A.	Controls and Procedures	75
PART III
Item 10.	Directors and Executive Officers of the Registrant	76
Item 11.	Executive Compensation	78
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	79
Item 13.	Certain Relationships and Related Transactions	79
Item 14.	Principal Accountant Fees and Services	79
PART IV
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	79


	One Year		One to		After
	or Less		Five Years		Five Years

			(In thousands)
Commercial & agricultural	$	511,196	$	216,108	$	11,928
Consumer & installment		367,091		155,187		8,565
Real estate mortgages		3,259,059		1,377,763		76,042
Lease financing		156,751		66,266		3,657
Other		16,219		6,857		378

Total Loans, net of unearned discount	$	4,310,316	$	1,822,181	$	100,570


	December 31, 2003

	Fixed		Variable
	Rate		Rate

	(In thousands)
Loan Portfolio Due after one year	$	1,279,399	$	643,352


		December 31, 2003

		(In thousands)
Three months or less		$	457,673
Over three months through six months			335,567
Over six months through twelve months			330,463
Over twelve months			648,759

	TOTAL	$	1,772,453


		High		Low

2003	Fourth	$	24.50	$	21.92
	Third		22.23		20.29
	Second		22.76		18.31
	First		20.30		17.50

2002	Fourth	$	20.19	$	17.43
	Third		21.10		16.61
	Second		22.21		19.37
	First		20.00		15.90


	Quarter Ended

	Mar 31		Jun 30		Sept 30		Dec 31

	(In thousands, except per share amounts)
2003
Interest revenue	$	137,682	$	133,194	$	129,812	$	126,223
Net interest revenue		90,144		87,069		87,808		86,085
Provision for credit losses		6,522		6,472		4,664		7,472
Income before income taxes		59,015		42,179		50,413		41,861
Net income		39,148		29,241		33,874		28,870
Earnings per share: Basic		0.51		0.38		0.43		0.37
Diluted		0.50		0.37		0.43		0.37
Dividends per share		0.16		0.16		0.16		0.18
2002
Interest revenue	$	149,547	$	148,825	$	147,508	$	144,538
Net interest revenue		92,429		94,083		92,622		92,392
Provision for credit losses		6,760		7,215		8,208		7,228
Income before income taxes		43,427		45,112		37,948		35,469
Net income		29,398		30,927		26,072		25,621
Earnings per share: Basic		0.36		0.38		0.33		0.33
Diluted		0.36		0.38		0.33		0.33
Dividends per share		0.15		0.15		0.15		0.16
2001
Interest revenue	$	172,940	$	168,280	$	163,584	$	155,671
Net interest revenue		80,398		79,527		83,039		86,418
Provision for credit losses		4,097		4,769		6,852		6,541
Income before income taxes		32,620		34,900		31,033		47,250
Net income		22,319		23,246		21,583		31,315
Earnings per share: Basic		0.27		0.28		0.26		0.39
Diluted		0.27		0.28		0.26		0.38
Dividends per share		0.14		0.14		0.14		0.15

	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:


/s/ Robert C. Nolan Robert C. Nolan	Director	March 11, 2004

/s/W. Cal Partee, Jr. W. Cal Partee, Jr.	Director	March 11, 2004

/s/Alan W. Perry Alan W. Perry	Director	March 11, 2004

/s/ Travis E. Staub Travis E. Staub	Director	March 11, 2004