UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

For the transition period from                      to                     

BANCORPSOUTH, INC.

(Exact name of registrant as specified in its charter)

Mississippi		64-0659571
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
One Mississippi Plaza, 201 South Spring Street Tupelo, Mississippi		38804
(Address of principal executive offices)		(Zip Code)

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

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

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

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

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

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

As of May 1, 2008, the registrant had outstanding 82,365,041 shares of common stock, par value $2.50 per share.

 

 

BANCORPSOUTH, INC.
TABLE OF CONTENTS

						Page
PART I.   Financial Information
		ITEM 1.		Financial Statements
				Consolidated Balance Sheets March 31, 2008 (Unaudited) and December 31, 2007			3
				Consolidated Statements of Income (Unaudited) Three Months Ended March 31, 2008 and 2007			4
				Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, 2008 and 2007			5
				Notes to Consolidated Financial Statements (Unaudited)			6
		ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
		ITEM 3.		Quantitative and Qualitative Disclosures About Market Risk			28
		ITEM 4.		Controls and Procedures			28
PART II.   Other Information
		ITEM 1A.		Risk Factors			28
		ITEM 2.		Unregistered Sales of Equity Securities and Use of Proceeds			28
		ITEM 6.		Exhibits			29
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

FORWARD-LOOKING STATEMENTS

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

PART I.
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

BANCORPSOUTH, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

		March 31,				December 31,
		2008				2007
		(Unaudited)				(1)
		(Dollars in thousands, except per share amounts)
ASSETS
Cash and due from banks		$	290,246			$	322,926
Interest bearing deposits with other banks			19,258				12,710
Held-to-maturity securities, at amortized cost			1,523,994				1,625,916
Available-for-sale securities, at fair value			971,613				1,001,194
Loans and leases			9,280,659				9,227,495
Less: Unearned income			47,636				47,811
Allowance for credit losses			119,301				115,197
Net loans			9,113,722				9,064,487
Loans held for sale			161,814				128,532
Premises and equipment, net			328,920				317,379
Accrued interest receivable			92,520				96,027
Goodwill			270,762				254,889
Other assets			382,022				365,781
TOTAL ASSETS		$	13,154,871			$	13,189,841
LIABILITIES
Deposits:
Demand: Noninterest bearing		$	1,722,914			$	1,670,198
Interest bearing			3,484,607				3,276,275
Savings			725,494				698,449
Other time			4,153,186				4,419,177
Total deposits			10,086,201				10,064,099
Federal funds purchased and securities sold under agreement to repurchase			784,532				809,898
Short-term Federal Home Loan Bank borrowings			430,000				706,586
Accrued interest payable			34,203				37,746
Junior subordinated debt securities			160,312				160,312
Long-term Federal Home Loan Bank borrowings			288,939				88,977
Other liabilities			147,031				125,597
TOTAL LIABILITIES			11,931,218				11,993,215
SHAREHOLDERS’ EQUITY
Common stock, $2.50 par value per share Authorized - 500,000,000 shares, Issued - 82,365,041 and 82,299,297 shares, respectively			205,913				205,748
Capital surplus			200,742				198,620
Accumulated other comprehensive income (loss)			1,032				(7,214	)
Retained earnings			815,966				799,472
TOTAL SHAREHOLDERS’ EQUITY			1,223,653				1,196,626
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	13,154,871			$	13,189,841

See accompanying notes to consolidated financial statements.

BANCORPSOUTH, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)

		Three months ended
		March 31,
		2008				2007
		(In thousands, except for per share amounts)
INTEREST REVENUE:
Loans and leases		$	159,184			$	153,241
Deposits with other banks			208				286
Federal funds sold and securities purchased under agreement to resell			67				2,511
Held-to-maturity securities:
Taxable			15,947				16,705
Tax-exempt			2,075				2,015
Available-for-sale securities:
Taxable			9,564				9,592
Tax-exempt			1,204				1,115
Loans held for sale			2,210				1,675
Total interest revenue			190,459				187,140
INTEREST EXPENSE:
Deposits:
Interest bearing demand			17,257				19,887
Savings			1,543				2,383
Other time			46,860				51,985
Federal funds purchased and securities sold under agreement to repurchase			5,195				7,824
FHLB borrowings			6,285				3,302
Other			3,249				3,091
Total interest expense			80,389				88,472
Net interest revenue			110,070				98,668
Provision for credit losses			10,811				1,355
Net interest revenue, after provision for credit losses			99,259				97,313
NONINTEREST REVENUE:
Mortgage lending			1,543				1,779
Credit card, debit card and merchant fees			7,976				6,874
Service charges			15,839				15,396
Trust income			2,234				2,214
Security gains, net			78				7
Insurance commissions			24,668				19,794
Other			13,893				12,295
Total noninterest revenue			66,231				58,359
NONINTEREST EXPENSE:
Salaries and employee benefits			70,175				63,628
Occupancy, net of rental income			9,483				8,463
Equipment			6,433				6,026
Other			27,379				27,493
Total noninterest expense			113,470				105,610
Income before income taxes			52,020				50,062
Income tax expense			16,875				16,485
Net income		$	35,145			$	33,577
Earnings per share: Basic		$	0.43			$	0.42
Diluted		$	0.43			$	0.42
Dividends declared per common share		$	0.21			$	0.20

See accompanying notes to consolidated financial statements.

BANCORPSOUTH, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)

		Three months ended
		March 31,
		2008				2007
		(In thousands)
Operating Activities:
Net income		$	35,145			$	33,577
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for credit losses			10,811				1,355
Depreciation and amortization			7,103				6,796
Deferred taxes			5,794				2,123
Amortization of intangibles			1,529				1,065
Amortization of debt securities premium and discount, net			731				2,220
Share-based compensation expense			756				343
Security gains, net			(78	)			(7	)
Net deferred loan origination expense			(2,252	)			(2,043	)
Excess tax benefit from exercise of stock options			(147	)			(61	)
Decrease (increase) in interest receivable			3,507				(1,670	)
(Decrease) increase in interest payable			(3,543	)			3,570
Realized gain on student loans sold			(17	)			(2,133	)
Proceeds from student loans sold			1,186				79,726
Origination of student loans held for sale			(36,751	)			(36,567	)
Realized gain on mortgages sold			(2,694	)			(2,203	)
Proceeds from mortgages sold			281,109				170,234
Origination of mortgages held for sale			(277,229	)			(173,603	)
Increase in bank-owned life insurance			(1,762	)			(1,652	)
Decrease in prepaid pension asset			334				1,284
Other, net			(8,627	)			5,529
Net cash provided by operating activities			14,905				87,883
Investing activities:
Proceeds from calls and maturities of held-to-maturity securities			106,296				63,029
Proceeds from calls and maturties of available-for-sale securities			109,204				108,436
Purchases of held-to-maturity securities			(4,392	)			(33,271	)
Purchases of available-for-sale securities			(66,330	)			(151,399	)
Net increase in short-term investments			—				(76,289	)
Net increase in loans and leases			(57,542	)			(92,860	)
Purchases of premises and equipment			(18,254	)			(6,434	)
Proceeds from sale of premises and equipment			8				576
(Increase) decrease in other real estate owned			(2,342	)			1,536
Acquisition of businesses, net of cash acquired			(10,106	)			(59,213	)
Other, net			(436	)			(388	)
Net cash provided by (used in) investing activities			56,106				(246,277	)
Financing activities:
Net increase in deposits			22,102				348,778
Net decrease in short-term debt and other liabilities			(302,849	)			(313,925	)
Advances of long-term debt			200,000				—
Repayment of long-term debt			(38	)			(2,521	)
Issuance of common stock			1,127				575
Purchase of common stock			(326	)			(5,850	)
Excess tax benefit from exercise of stock options			147				61
Payment of cash dividends			(17,306	)			(16,384	)
Net cash (used in) provided by financing activities			(97,143	)			10,734
Decrease in cash and cash equivalents			(26,132	)			(147,660	)
Cash and cash equivalents at beginning of period			335,636				451,451
Cash and cash equivalents at end of period		$	309,504			$	303,791

See accompanying notes to consolidated financial statements.

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

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

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

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

NOTE 2 — LOANS AND LEASES

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

		March 31,								December 31,
		2008				2007				2007
		(In thousands)
Commercial and agricultural		$	1,248,622			$	1,185,919			$	1,236,776
Consumer and installment			428,654				618,569				450,882
Real estate mortgage:
One-to-four family			2,513,029				2,355,265				2,529,986
Other			4,595,286				4,292,268				4,490,445
Lease financing			278,590				297,219				285,865
Other			216,478				35,930				233,541
Total		$	9,280,659			$	8,785,170			$	9,227,495

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

		March 31,								December 31,
		2008				2007				2007
		(In thousands)
Non-accrual loans		$	14,709			$	10,128			$	9,789
Loans 90 days or more past due			21,522				12,749				18,671
Restructured loans			2,493				1,312				721
Total non-performing loans		$	38,724			$	24,189			$	29,181

NOTE 3 — ALLOWANCE FOR CREDIT LOSSES

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

		Three months ended								Year ended
		March 31,								December 31,
		2008				2007				2007
		(In thousands)
Balance at beginning of period		$	115,197			$	98,834			$	98,834
Provision charged to expense			10,811				1,355				22,696
Recoveries			1,007				963				4,355
Loans and leases charged off			(7,714	)			(2,610	)			(16,841	)
Acquisitions			—				6,145				6,153
Balance at end of period		$	119,301			$	104,687			$	115,197

NOTE 4 — SECURITIES

The following table summarizes information pertaining to temporarily impaired held-to-maturity and available-for-sale securities with continuous unrealized loss positions at March 31, 2008:

		Continuous Unrealized Loss Position
		Less Than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(In thousands)
Held-to-maturity securities:
U.S. Treasury		$	—			$	—			$	—			$	—			$	—			$	—
U.S. Government agencies			—				—				—				—				—				—
Obligations of states and political subdivisions			34,802				1,049				27,325				430				62,127				1,479
Total		$	34,802			$	1,049			$	27,325			$	430			$	62,127			$	1,479
Available-for-sale securities:
U.S. Government agencies		$	39,294			$	653			$	136,893			$	1,923			$	176,187			$	2,576
Obligations of states and political subdivisions			9,201				200				877				13				10,078				213
Other			9,645				1,355				—				—				9,645				1,355
Total		$	58,140			$	2,208			$	137,770			$	1,936			$	195,910			$	4,144

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

NOTE 5 — PER SHARE DATA

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

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

		Three months ended March 31,
		2008												2007
		Income				Shares				Per Share				Income				Shares				Per Share
		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
		(In thousands, except per share amounts)
Basic EPS
Income available to common shareholders		$	35,145				82,331			$	0.43			$	33,577				79,456			$	0.42
Effect of dilutive share- based awards			—				203								—				436
Diluted EPS
Income available to common shareholders plus assumed exercise of all outstanding share-based awards		$	35,145				82,534			$	0.43			$	33,577				79,892			$	0.42

NOTE 6 — COMPREHENSIVE INCOME

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

		Three months ended March 31,
		2008												2007
		Before				Tax				Net				Before				Tax				Net
		tax				(expense)				of tax				tax				(expense)				of tax
		amount				benefit				amount				amount				benefit				amount
		(In thousands)
Unrealized gains on available-for- sale securities:
Unrealized gains (losses) arising during holding period		$	13,176			$	(4,971	)		$	8,205			$	2,626			$	(1,004	)		$	1,622
Less: Reclassification adjustment for net (gains) losses realized in net income			(78	)			30				(48	)			—				—				—
Recognized employee benefit plan net periodic benefit cost			145				(56	)			89				—				—				—
Other comprehensive income (loss)		$	13,243			$	(4,997	)		$	8,246			$	2,626			$	(1,004	)		$	1,622
Net income											35,145												33,577
Comprehensive income										$	43,391											$	35,199

NOTE 7 — JUNIOR SUBORDINATED DEBT SECURITIES

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

Pursuant to the merger with Business Holding Corporation on December 31, 2004, the Company assumed the liability for $6,186,000 in Junior Subordinated Debt Securities issued to Business Holding Company Trust I, a statutory trust. Business Holding Company Trust I used the proceeds from the issuance of 6,000 shares of trust preferred securities to acquire the Junior Subordinated Debt Securities. Both the Junior Subordinated Debt

Securities and the trust preferred securities mature on April 7, 2034, and are callable at the option of the Company, in whole or in part, on any January 7, April 7, July 7 or October 7 on or after April 7, 2009. The Junior Subordinated Debt Securities and the trust preferred securities pay a per annum rate of interest, reset quarterly, equal to the three-month London Interbank Offered Rate (“LIBOR”) plus 2.80% from January 30, 2004 to April 7, 2009 and thereafter at LIBOR plus 2.85%.

Pursuant to the merger with American State Bank Corporation on December 1, 2005, the Company assumed the liability for $6,702,000 in Junior Subordinated Debt Securities issued to American State Capital Trust I, a statutory trust. American State Capital Trust I used the proceeds from the issuance of 6,500 shares of trust preferred securities to acquire the Junior Subordinated Debt Securities. Both the Junior Subordinated Debt Securities and the trust preferred securities mature on April 7, 2034, and are callable at the option of the Company, in whole or in part, on any July 7, October 7, January 7 or April 7 on or after April 7, 2009. The Junior Subordinated Debt Securities and the trust preferred securities pay a per annum rate of interest, reset quarterly, equal to the three-month LIBOR plus 2.80%.

Pursuant to the merger with City Bancorp on March 1, 2007, the Company assumed the liability for $8,248,000 in Junior Subordinated Debt Securities issued to Signature Bancshares Preferred Trust I, a statutory trust. Signature Bancshares Preferred Trust I used the proceeds from the issuance of 8,000 shares of trust preferred securities to acquire the Junior Subordinated Debt Securities. Both the Junior Subordinated Debt Securities and the trust preferred securities mature on October 8, 2033, and are callable at the option of the Company, in whole or in part, on any January 8, April 8, July 8 or October 8 on or after October 8, 2008. The Junior Subordinated Debt Securities and the trust preferred securities pay a per annum rate of interest, reset quarterly, equal to the three-month LIBOR plus 3.00%.

Pursuant to the merger with City Bancorp on March 1, 2007, the Company also assumed the liability for $10,310,000 in Junior Subordinated Debt Securities issued to City Bancorp Preferred Trust I, a statutory trust. City Bancorp Preferred Trust I used the proceeds from the issuance of 10,000 shares of trust preferred securities to acquire the Junior Subordinated Debt Securities. Both the Junior Subordinated Debt Securities and the trust preferred securities mature on March 15, 2035, and are callable at the option of the Company, in whole or in part, on any March 15, June 15, September 15 or December 15 on or after March 15, 2010. The Junior Subordinated Debt Securities and the trust preferred securities pay a per annum rate of interest, reset quarterly, equal to the three-month LIBOR plus 2.2%.

NOTE 8 — GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill by operating segment for the three months ended March 31, 2008 were as follows:

		Community				Insurance
		Banking				Agencies				Total
		(In thousands)
Balance as of December 31, 2007		$	214,780			$	40,109			$	254,889
Goodwill acquired during the period			673				10,284				10,957
Purchase accounting adjustments			4,916				—				4,916
Balance as of March 31, 2008		$	220,369			$	50,393			$	270,762

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

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

		As of								As of
		March 31, 2008								December 31, 2007
		Gross Carrying				Accumulated				Gross Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
		(In thousands)
Amortized intangible assets:
Core deposit intangibles		$	27,801			$	15,014			$	27,801			$	14,448
Customer relationship intangibles			31,850				13,439				24,639				12,536
Non-solicitation intangibles			600				260				665				265
Total		$	60,251			$	28,713			$	53,105			$	27,249
Unamortized intangible assets:
Trade names		$	688			$	—			$	688			$	—

		Three months ended
		March 31,
		2008				2007
		(In thousands)
Aggregate amortization expense for:
Core deposit intangibles		$	566			$	513
Customer relationship intangibles			903				550
Non-solicitation intangibles			60				2
Total		$	1,529			$	1,065

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

						Customer				Non-
		Core Deposit				Relationship				Solicitation
		Intangibles				Intangibles				Intangibles				Total
						(In thousands)
Estimated Amortization Expense:
For year ended December 31, 2008		$	2,503			$	3,477			$	240			$	6,220
For year ended December 31, 2009			2,235				2,948				160				5,343
For year ended December 31, 2010			1,834				2,508				—				4,342
For year ended December 31, 2011			1,542				2,139				—				3,681
For year ended December 31, 2012			946				1,828				—				2,774

NOTE 9 — PENSION BENEFITS

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

		Pension Benefits
		Three months ended
		March 31,
		2008				2007
		(In thousands)
Service cost		$	1,667			$	1,738
Interest cost			1,654				1,442
Expected return on assets			(2,646	)			(1,731	)
Amortization of unrecognized transition amount			5				5
Recognized prior service cost			67				60
Recognized net loss			73				350
Net periodic benefit costs		$	820			$	1,864

NOTE 10 — RECENT PRONOUNCEMENTS

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

In September, 2006, the Emerging Issues Task Force (“EITF”) reached a final consensus on Issue No. 06-4, “Accounting for the Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” EITF Issue No. 06-4 requires employers to recognize a liability for future benefits provided through endorsement split-dollar life insurance arrangements that extend into postretirement periods in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” or APB Opinion No. 12, “Omnibus Opinion — 1967.” EITF Issue No. 06-4 is effective for fiscal years beginning after December 15, 2007. Entities should recognize the effects of applying EITF Issue No. 06-04 through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in the statement of financial position as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. The adoption of EITF Issue No. 06-4 resulted in a cumulative-effect adjustment to retained earnings of approximately $1.1 million at January 1, 2008.

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

In November 2007, the SEC issued Staff Accounting Bulletin (“SAB”) No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings”. SAB No. 109 rescinds SAB No. 105’s prohibition on inclusion of expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. SAB No. 109 also applies to any loan commitments for which fair value accounting is elected under SFAS No. 159. SAB No. 109 is effective prospectively for derivative loan commitments issued or modified in

fiscal quarters beginning after December 15, 2007. The adoption of SAB No. 109 has had no material impact on the financial position or results of operations of the Company.

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

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

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

NOTE 11 — BUSINESS COMBINATIONS

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

NOTE 12 — SEGMENT REPORTING

The Company’s principal activity is community banking, which includes providing a full range of deposit products, commercial loans and consumer loans. During the first quarter of 2008, the Company determined that an additional operating segment, insurance agencies, should be created based upon the services offered, the significance of those services to the Company’s financial statements and the regular review of the operating results of the insurance agencies by the chief operating decision makers of the Company. The insurance agencies serve as agents in the sale of title insurance, commercial lines of insurance and full lines of property and casualty, life, health and employee benefits products and services. The general corporate and other operating segment includes leasing, mortgage

lending, trust services, credit card activities, investment services and other activities not allocated to community banking.

Results of operations and selected financial information by operating segment for the three-month periods ended March 31, 2008 and 2007 were as follows:

										General
		Community				Insurance				Corporate
		Banking				Agencies				and Other				Total
		(In thousands)
Three months ended March 31, 2008:
Results of Operations
Net interest revenue		$	100,372			$	428			$	9,270			$	110,070
Provision for credit losses			10,817				—				(6	)			10,811
Net interest revenue after provision for credit losses			89,555				428				9,276				99,259
Noninterest revenue			33,369				24,552				8,310				66,231
Noninterest expense			72,247				18,291				22,932				113,470
Income before income taxes			50,677				6,689				(5,346	)			52,020
Income taxes			16,439				2,632				(2,196	)			16,875
Net income		$	34,238			$	4,057			$	(3,150	)		$	35,145
Selected Financial Information
Total assets (at end of period)		$	10,858,526			$	154,439			$	2,141,906			$	13,154,871
Depreciation and amortization			6,817				1,198				617				8,632
Three months ended March 31, 2007:
Results of Operations
Net interest revenue		$	88,503			$	512			$	9,653			$	98,668
Provision for credit losses			1,343				—				12				1,355
Net interest revenue after provision for credit losses			87,160				512				9,641				97,313
Noninterest revenue			28,657				19,688				10,014				58,359
Noninterest expense			66,996				13,555				25,059				105,610
Income before income taxes			48,821				6,645				(5,404	)			50,062
Income taxes			16,076				2,614				(2,205	)			16,485
Net income		$	32,745			$	4,031			$	(3,199	)		$	33,577
Selected Financial Information
Total assets (at end of period)		$	10,835,755			$	115,419			$	2,009,484			$	12,960,658
Depreciation and amortization			6,431				782				656				7,869

NOTE 13 — MORTGAGE SERVICING RIGHTS

Mortgage servicing rights (“MSRs”) are recognized based on the fair value of the servicing right on the date the corresponding mortgage loan is sold. In determining the fair value of the MSRs, the Company utilizes the expertise of an independent third party. An estimate of the fair value of the Company’s MSRs is determined by the independent third party utilizing assumptions about factors such as mortgage interest rates, discount rates, mortgage loan prepayment speeds, market trends and industry demand. This estimate and the assumptions used are reviewed by management. At March 31, 2008, the valuation of MSRs included an assumed average prepayment speed of 279 PSA and an average discount rate of 9.36%. Because the valuation is determined by using discounted cash flow models, the primary risk inherent in valuing the MSRs is the impact of fluctuating interest rates on the estimated life of the servicing revenue stream. The use of different estimates or assumptions could also produce different fair values. The Company does not hedge the change in fair value of MSRs and, therefore, the Company is susceptible to significant fluctuations in the fair value of its MSRs in changing interest rate environments.

The Company has one class of mortgage servicing asset comprised of closed end loans for one-to-four family residences, secured by first liens. The following table presents the activity in this class for the periods indicated:

		2008				2007
		(In thousands)
Fair value as of January 1		$	32,482			$	35,286
Additions:
Origination of servicing assets			1,818				1,070
Changes in fair value:
Due to change in valuation inputs or assumptions used in the valuation model			(3,387	)			(1,802	)
Other changes in fair value			(4	)			(7	)
Fair value as of March 31		$	30,909			$	34,547

All of the changes to the fair value of the MSRs are recorded as part of mortgage lending noninterest revenue on the income statement. As part of mortgage lending noninterest revenue, the Company recorded contractual servicing fees of approximately $2.08 million and $2.03 million and late and other ancillary fees of approximately $293,000 and $262,000 for the quarters ended March 31, 2008 and 2007, respectively.

NOTE 14 — DERIVATIVE INSTRUMENTS

The derivatives held by the Company include commitments to fund fixed-rate mortgage loans to customers and forward commitments to sell individual fixed-rate mortgage loans. The Company’s objective in obtaining the forward commitments is to mitigate the interest rate risk associated with the commitments to fund the fixed-rate mortgage loans. Both the commitments to fund fixed-rate mortgage loans and the forward commitments to sell individual fixed-rate mortgage loans are reported at fair value, with adjustments being recorded in current period earnings, and are not accounted for as hedges. At March 31, 2008, the notional amount of forward commitments to sell individual fixed-rate mortgage loans was $99.7 million with a carrying value and fair value reflecting a gain of approximately $4,000. At March 31, 2007, the notional amount of forward commitments to sell individual fixed-rate mortgage loans was $69.5 million with a carrying value and fair value reflecting a gain of approximately $54,000. At March 31, 2008, the notional amount of commitments to fund individual fixed-rate mortgage loans was $53.7 million with a carrying value and fair value reflecting a gain of approximately $160,000. At March 31, 2007, the notional amount of commitments to fund individual fixed-rate mortgage loans was $30.1 million with a carrying value and fair value reflecting a loss of approximately $40,000.

The Company also enters into derivative financial instruments in the form of interest rate swaps to meet the financing, interest rate and equity risk management needs of its customers. Upon entering into these interest rate swaps to meet customer needs, the Company enters into offsetting positions to minimize interest rate and equity risk to the Company. These derivative financial instruments are reported at fair value with any resulting gain or loss recorded in current period earnings. These instruments and their offsetting positions are recorded in other assets and other liabilities on the consolidated balance sheets. As of March 31, 2008, the notional amount of customer related derivative financial instruments was $241.8 million with an average maturity of 96 months, an average interest receive rate of 4.47% and an average interest pay rate of 6.24%.

NOTE 15 — FAIR VALUE DISCLOSURES

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

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

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

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

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

Determination of Fair Value

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

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

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

Derivative instruments. The Company’s derivative instruments consist of commitments to fund fixed-rate mortgage loans to customers, forward commitments to sell individual fixed-rate mortgage loans and interest rate swaps. The derivative instruments are traded in over-the-counter markets where quoted market prices are not readily available. Fair value is measured on a recurring basis using internally developed models that use primarily market observable inputs, such as yield curves and option volatilities. The Company’s interest rate swaps are classified as Level 2. The Company’s commitments to fund fixed-rate mortgage loans to customers and forward commitments to sell individual fixed-rate mortgage loans are classified as Level 3.

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

Impaired loans. Loans considered impaired under SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosure,” are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are subject to nonrecurring fair value adjustments to reflect (1) partial write-downs that are based on the observable market price or current appraised value of the collateral, or (2) the full charge-off of the loan carrying value. All of the Company’s impaired loans are classified as Level 3.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of March 31, 2008:

		Level 1				Level 2				Level 3				Total
		(In thousands)
Assets:
Available-for-sale securities		$	1,941			$	969,672			$	—			$	971,613
Mortgage servicing rights			—				—				30,909				30,909
Derivative instruments			—				9,219				565				9,784
Total		$	1,941			$	978,891			$	31,474			$	1,012,306
Liabilities:
Derivative instruments		$	—			$	9,219			$	400			$	9,619

The following table presents the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three-month period ended March 31, 2008:

		Mortgage
		Servicing				Derivative
		Rights				instruments
		(In thousands)
Balance at December 31, 2007		$	32,482			$	(147	)
Total net gains (losses) for the year included in:
Net income			(1,573	)			312
Other comprehensive income
Purchases, sales, issuances and settlements, net			—				—
Transfers in and/or out of Level 3			—				—
Balance at March 31, 2008		$	30,909			$	165
Net unrealized gains (losses) included in net income for the year relating to assets and liabilities held at March 31, 2008		$	(3,391	)		$	312

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The following table presents the balances of assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2008:

																		Total
		Level 1				Level 2				Level 3				Total				Gains (Losses)
		(In thousands)
Assets:
Impaired loans		$	—			$	—			$	7,668			$	7,668			$	(3,372	)

Certain non-financial assets measured at fair value on a nonrecurring basis included non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, as well as intangible assets measured at fair value for impairment assessment. As previously stated, SFAS 157 will be applicable to these fair value measurements beginning January 1, 2009.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OVERVIEW

BancorpSouth, Inc. (the “Company”) is a regional financial holding company headquartered in Tupelo, Mississippi with approximately $13.2 billion in assets. BancorpSouth Bank (the “Bank”), the Company’s wholly-owned banking subsidiary, has commercial banking operations in Mississippi, Tennessee, Alabama, Arkansas, Texas, Louisiana, Florida and Missouri. The Bank and its consumer finance, credit insurance, insurance agency and brokerage subsidiaries provide commercial banking, leasing, mortgage origination and servicing, insurance, brokerage and trust services to corporate customers, local governments, individuals and other financial institutions through an extensive network of branches and offices.

Management’s discussion and analysis provides a narrative discussion of the Company’s financial condition and results of operations. For a complete understanding of the following discussion, you should refer to the unaudited consolidated financial statements for the three-month periods ended March 31, 2008 and 2007 and the notes to such financial statements found under “Part I, Item 1. Financial Statements” of this report. This discussion and analysis is based on reported financial information. The information that follows is provided to enhance comparability of financial information between periods and to provide a better understanding of the Company’s operations.

As a financial holding company, the financial condition and operating results of the Company are heavily influenced by economic trends nationally and in the specific markets in which the Company’s subsidiaries provide financial services. Generally, during the first quarter of 2008, the pressures of the national and regional economic cycle created a difficult operating environment for the financial services industry. The Company is certainly not immune to such pressures and their impact is reflected in the increases in our measures of credit quality, non-performing loans and net charge-offs, compared to the first and fourth quarters of 2007. While these measures have increased, the Company believes that it is well positioned with respect to overall credit quality and strength of its allowance for credit losses to meet the challenges of the current economic cycle.

Most of the revenue of the Company is derived from the operation of its principal operating subsidiary, the Bank. The financial condition and operating results of the Bank are affected by the level and volatility of interest rates on loans, investment securities, deposits and other borrowed funds, and the impact of economic downturns on loan demand and creditworthiness of existing borrowers. The financial services industry is highly competitive and heavily regulated. The Company’s success depends on its ability to compete aggressively within its markets while maintaining sufficient asset quality and cost controls to generate net income.

The tables below summarize the Company’s net income, net income per share, return on average assets and return on average shareholders’ equity for the three months ended March 31, 2008 and 2007. Management believes these amounts and ratios are key indicators of the Company’s financial performance.

		Three months ended
		March 31,
		2008				2007				% Change
(Dollars in thousands, except per share amounts)
Net income		$	35,145			$	33,577				4.67	%
Net income per share: Basic		$	0.43			$	0.42				2.38
Diluted		$	0.43			$	0.42				2.38
Return on average assets (annualized)			1.08	%			1.11	%			(2.70	)
Return on average shareholders’ equity (annualized)			11.78	%			12.90	%			(8.68	)

Net income increased 4.67% for the three months ended March 31, 2008 compared to the three months ended March 31, 2007. The Company’s primary source of revenue is the amount of net interest revenue earned by the Bank. Net interest revenue is the difference between interest earned on loans and investments and interest paid on

deposits and other obligations. While the Company noticed moderate loan growth in a declining interest rate environment, interest revenue increased 1.77% in the first quarter of 2008 compared to the same period in 2007 as a result of partially funding the moderate loan growth primarily with proceeds from maturing lower yielding investment securities. Interest expense decreased 9.14% in the first quarter of 2008 compared to the first quarter of 2007 as the Company experienced a moderate increase in lower rate demand deposits which offset the decrease in higher rate time deposits and allowed the reduction in the use of short-term Federal Home Loan Bank (the “FHLB”) borrowings. These factors combined to increase the Company’s net interest revenue to $110.07 million for the first quarter of 2008, an $11.40 million, or 11.56%, increase from $98.67 million for the first quarter of 2007.

While the increase in net interest revenue during the first quarter of 2008 compared to the first quarter of 2007 positively impacted net income, the provision for credit losses increased in the first quarter of 2008 compared to the same period in 2007, negatively impacting net income. The provision for credit losses was $10.81 million for the first quarter of 2008 compared to $1.36 million for the first quarter of 2007. Consistent with the increase in the provision for credit losses, annualized net charge-offs increased to 0.29% of average loans for the first quarter of 2008 from 0.08% of average loans for the first quarter of 2007. The increase in the provision for credit losses for the first quarter of 2008 was primarily reflective of a slowing economic environment. The unusually low provision for credit losses for the first quarter of 2007 was primarily the result of net charge-offs reaching an unsustainably low level during the quarter.

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 activities that generate fee income. Management believes this diversification is important to reduce the impact of fluctuations in net interest revenue on the overall operating results of the Company. This continued diversification strategy resulted in an overall increase in noninterest revenue of 13.49% for the first quarter 2008, compared to the same period in 2007. One of the primary contributors to the increase in noninterest revenue was insurance commissions, which increased 24.62%. While insurance commission revenue increased, the Company’s mortgage lending revenue decreased during the first quarter of 2008 compared to the same period in 2007. The decrease in mortgage lending revenue primarily resulted from the impact of a $3.39 million decrease in the value of the Company’s mortgage servicing asset during the first quarter of 2008 compared to a $1.80 million decrease in the value of the Company’s mortgage servicing asset during the first quarter of 2007.

Noninterest expense totaled $113.47 million for the first quarter of 2008 compared to $105.61 million for the first quarter of 2007, an increase of $7.86 million, or 7.44%. The increase in noninterest expense for the first quarter of 2008 resulted primarily from increased costs related to additional locations and facilities added since March 31, 2007, as well as costs related to the integration and operation of The Signature Bank, acquired by the Company on March 1, 2007. The major components of net income are discussed in more detail in the various sections that follow.

RESULTS OF OPERATIONS

Net Interest Revenue

Net interest revenue is the difference between interest revenue earned on assets, such as loans, leases and securities, and interest expense paid on liabilities, such as deposits and borrowings, and continues to provide the Company with its principal source of revenue. Net interest revenue is affected by the general level of interest rates, changes in interest rates and changes in the amount and composition of interest earning assets and interest bearing liabilities. The Company’s long-term objective is to manage interest earning assets and interest bearing liabilities to maximize net interest revenue, while balancing interest rate, credit, liquidity and capital risks. For purposes of the following discussion, revenue from tax-exempt loans and investment securities has been adjusted to a fully taxable equivalent basis, using an effective tax rate of 35%.

Net interest revenue was $112.71 million for the three months ended March 31, 2008, compared to $101.18 million for the same period in 2007, representing an increase of $11.53 million, or 11.40%. The increase in net interest revenue is related to the slight growth in loans experienced by the Company when comparing March 31, 2008 to

March 31, 2007 as well as the Company’s continued focus on funding this growth with maturing securities and lower-cost liabilities.

Interest revenue increased $3.45 million, or 1.82%, to $193.10 million for the three months ended March 31, 2008 from $189.65 million for the three months ended March 31, 2007. The increase in interest revenue is a result of an increase in average interest earning assets of $721.57 million, or 6.43%, to $11.95 billion for the first quarter of 2008 from $11.23 billion for the first quarter of 2007, with the increase in average interest earning assets somewhat offset by a decrease of 35 basis points in the yield on those assets to 6.50% for the first quarter of 2008 from 6.85% for the first quarter of 2007.

Interest expense decreased $8.08 million, or 9.14%, to $80.39 million for the three months ended March 31, 2008 from $88.47 million for the three months ended March 31, 2007. While average interest bearing liabilities increased $712.92 million, or 7.56%, to $10.14 billion for the first quarter of 2008 from $9.43 billion for the first quarter of 2007, this increase in average interest bearing liabilities was more than offset by a decrease of 61 basis points in the average rate paid on those liabilities to 3.19% from 3.80%.

The relative performance of the Company’s 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 (earning asset yield) and the average rate paid on interest bearing liabilities. Net interest margin is generally greater than the net interest rate spread because of the additional income earned on assets funded by noninterest bearing liabilities, or interest free funding, such as noninterest bearing demand deposits and shareholders’ equity.

Net interest margin for the first quarters of 2008 and 2007 was 3.79% and 3.66%, respectively, representing an increase of 13 basis points. Net interest rate spread for the first quarter of 2008 was 3.31%, an increase of 26 basis points from 3.05% for the first quarter of 2007. The increase in net interest margin and net interest rate spread was primarily a result of the smaller decrease in the average rate earned on interest earning assets, from 6.85% for the first quarter of 2007 to 6.50% for the first quarter of 2008, than the decrease in the average rate paid on interest bearing liabilities from 3.80% for the first quarter of 2007 to 3.19% for the first quarter of 2008. The earning asset yield decrease for the three months ended March 31, 2008 when compared to the three months ended March 31, 2007 was a result of a decrease in the Company’s investment portfolio. The Company has also chosen to fund its loan growth with lower rate short-term FHLB borrowings rather than higher rate time deposits.

Interest Rate Sensitivity

The interest rate sensitivity gap is the difference between the maturity or repricing opportunities of interest sensitive assets and interest sensitive liabilities for a given period of time. A prime objective of the Company’s asset/liability management is to maximize net interest margin while maintaining a reasonable mix of interest sensitive assets and liabilities. The following table presents the Company’s interest rate sensitivity at March 31, 2008:

		Interest Rate Sensitivity — Maturing or Repricing Opportunities
						91 Days				Over One
		0 to 90				to				Year to				Over
		Days				One Year				Five Years				Five Years
		(In thousands)
Interest earning assets:
Interest bearing deposits with banks		$	19,258			$	—			$	—			$	—
Held-to-maturity securities			112,068				315,235				830,208				266,483
Available-for-sale and trading securities			130,599				59,845				381,117				400,052
Loans and leases, net of unearned income			4,886,687				1,648,675				2,496,573				201,388
Loans held for sale			143,301				223				1,375				16,915
Total interest earning assets			5,291,913				2,023,978				3,709,273				884,838
Interest bearing liabilities:
Interest bearing demand deposits and savings			4,210,101				—				—				—
Other time deposits			1,228,971				2,221,013				701,425				1,777
Federal funds purchased and securities sold under agreement to repurchase and other short-term FHLB borrowings			1,191,756				2,895				19,881				—
Long-term FHLB borrowings and junior subordinated debt securities			—				2,598				257,841				188,812
Other			20				—				35				108
Total interest bearing liabilities			6,630,848				2,226,506				979,182				190,697
Interest rate sensitivity gap		$	(1,338,935	)		$	(202,528	)		$	2,730,091			$	694,141
Cumulative interest sensitivity gap		$	(1,338,935	)		$	(1,541,463	)		$	1,188,628			$	1,882,769

Provision for Credit Losses and Allowance for Credit Losses

The provision for credit losses is the periodic cost of providing an allowance or reserve for losses inherent within the loan and lease portfolio. The Bank employs a systematic methodology for determining the 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 Bank include loan and lease growth, changes in nonperforming and past due loans and leases, historical loan and lease loss experience, delinquencies, management’s assessment of loan and lease portfolio quality, the value of collateral and concentrations of loans and leases to specific borrowers or industries. Some of the qualitative factors that the Bank considers include existing general economic conditions and the inherent risks of individual loans and leases.

The allowance for credit losses is based principally upon the Bank’s loan and lease classification system, delinquencies and historic loss rates. The Bank has a disciplined approach for assigning credit ratings and classifications to individual credits. Each credit is assigned a grade by the appropriate loan officer, which serves as a basis for the credit analysis of the entire portfolio. The assigned grade reflects the borrower’s creditworthiness, collateral values, cash flows and other factors. An independent loan review department of the Bank is responsible for reviewing the credit rating and classification of individual credits and assessing trends in the portfolio, adherence to internal credit policies and procedures and other factors that may affect the overall adequacy of the allowance. The work of the loan review department is supplemented by governmental regulatory agencies in connection with their periodic examinations of the Bank, which provides an additional independent level of review. The loss factors assigned to each classification are based upon the attributes of the loans and leases typically assigned to each grade (such as loan-to-collateral values and borrower creditworthiness). Further, the Bank requires that a relatively narrow group of loans that have adverse internal ratings or that are significantly past due be subject to testing for impairment as required by SFAS No. 114. Management periodically reviews the loss factors assigned in light of the general economic environment and overall condition of the loan and lease portfolio and modifies the loss factors assigned to each classification as it deems appropriate. The overall allowance generally 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 and lease portfolios, industry concentrations, changes in the mix of loans and leases originated, overall credit criteria and other economic indicators.

The Company’s provision for credit losses, allowance for credit losses and net charge-offs are shown in the following table:

		Three months ended
		March 31,
		2008				2007				% Change
		(Dollars in thousands)
Provision for credit losses		$	10,811			$	1,355				697.86	%
Allowance for credit losses as a percentage of loans and leases outstanding at period-end			1.29	%			1.20	%			7.50
Net charge-offs		$	6,707			$	1,647				307.23
Net charge-offs as a percentage of average loans and leases (annualized)			0.29	%			0.08	%			262.50

The increase in the provision for credit losses for the first three months of 2008 compared to the same period of 2007 was a result of the increased credit risk from the loan growth experienced by the Company, an increase in net charge-offs, the slowing economic environment and some downward migration of loans within the Bank’s loan and lease credit ratings and classifications. The unusually low provision for credit losses for the first quarter of 2007 was primarily the result of net charge-offs reaching an unsustainable low level during the quarter. Because our mortgage lending decisions are based on conservative lending policies, we continue to have only nominal exposure, approximately $186,000, to the credit issues affecting the subprime residential mortgage market.

The breakdown of the allowance by loan and lease category is based, in part, on evaluations of specific loan and lease histories and on economic conditions within specific industries or geographical areas. Accordingly, because all of these conditions are subject to change, the allocation is not necessarily indicative of the breakdown of any future allowance or losses. The following table presents (a) the breakdown of the allowance for credit losses by loan and lease category and (b) the percentage of each category in the loan and lease portfolio to total loans and leases at the dates indicated:

		March 31,																December 31,
		2008								2007								2007
		Allowance				% of				Allowance				% of				Allowance				% of
		for				Total				for				Total				for				Total
		Credit				Loans				Credit				Loans				Credit				Loans
		Losses				and Leases				Losses				and Leases				Losses				and Leases
		(Dollars in thousands)
Commercial and agricultural		$	15,852				13.46	%		$	13,406				13.50	%		$	15,109				13.40	%
Consumer and installment			7,520				4.62	%			6,419				7.04	%			9,013				4.89	%
Real estate mortgage			92,681				76.59	%			81,827				75.67	%			88,061				76.08	%
Lease financing			2,823				3.00	%			2,740				3.38	%			2,656				3.10	%
Other			425				2.33	%			295				0.41	%			358				2.53	%
Total		$	119,301				100.00	%		$	104,687				100.00	%		$	115,197				100.00	%

The following table provides an analysis of the allowance for credit losses for the periods indicated:

		Three months ended								Year ended
		March 31,								December 31,
		2008				2007				2007
		(Dollars in thousands)
Balance, beginning of period		$	115,197			$	98,834			$	98,834
Loans and leases charged off:
Commercial and agricultural			(4,069	)			(632	)			(2,533	)
Consumer and installment			(1,454	)			(1,453	)			(6,393	)
Real estate mortgage			(2,085	)			(525	)			(7,792	)
Lease financing			(106	)			—				(123	)
Total loans charged off			(7,714	)			(2,610	)			(16,841	)
Recoveries:
Commercial and agricultural			184				135				913
Consumer and installment			660				397				1,962
Real estate mortgage			159				258				1,396
Lease financing			4				173				84
Total recoveries			1,007				963				4,355
Net charge-offs			(6,707	)			(1,647	)			(12,486	)
Provision charged to operating expense			10,811				1,355				22,696
Acquisitions			—				6,145				6,153
Balance, end of period		$	119,301			$	104,687			$	115,197
Average loans for period		$	9,213,294			$	8,150,205			$	8,784,940
Ratios:
Net charge-offs to average loans (annualized)			0.29	%			0.08	%			0.14	%