10-Q 1 msl10-q06302015.htm MIDSOUTH BANCORP, INC 10-Q 6-30-2015 MSL 10-Q 06.30.2015

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____ to _____

COMMISSION FILE NUMBER 1-11826
MIDSOUTH BANCORP, INC.
(Exact name of registrant as specified in its charter)

Louisiana
 
72 –1020809
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

102 Versailles Boulevard, Lafayette, Louisiana 70501
 (Address of principal executive offices, including zip code)
(337) 237-8343
(Registrant’s telephone number, including area code)

Indicate by checkmark 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   ☒   NO   ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES   ☒   NO   ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. 
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Small reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
YES   ☐   NO   ☒

As of August 7, 2015, there were 11,359,501 shares of the registrant’s Common Stock, par value $0.10 per share, outstanding.
 



Part I – Financial Information
3

 
3

 
3

 
4

 
5

 
6

 
7

 
8

 
26

 
26

 
27

 
28

 
31

 
32

 
34

 
36

 
36

Part II – Other Information
37

 
37

 
Item 1A. Risk Factors.
37

 
37

 
37

 
37

 
37

 
Item 6. Exhibits.
37




Part I – Financial Information
 
Item 1. Financial Statements.
MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share data)
 
 
June 30, 2015
(unaudited)
 
December 31, 2014
(audited)
Assets
 
 
 
 
Cash and due from banks, including required reserves of $9,159 and $10,019, respectively
 
$
38,909

 
$
45,142

Interest-bearing deposits in banks
 
41,902

 
39,031

Federal funds sold
 
1,825

 
2,699

Securities available-for-sale, at fair value (cost of $298,453 at June 30, 2015 and $272,588 at December 31, 2014)
 
300,335

 
276,984

Securities held-to-maturity (fair value of $126,849 at June 30, 2015 and $141,593 at December 31, 2014)
 
126,529

 
141,201

Other investments
 
10,598

 
9,990

Loans
 
1,294,392

 
1,284,431

Allowance for loan losses
 
(16,048
)
 
(11,226
)
Loans, net
 
1,278,344

 
1,273,205

Bank premises and equipment, net
 
69,263

 
69,958

Accrued interest receivable
 
6,791

 
6,635

Goodwill
 
42,171

 
42,171

Intangibles
 
6,281

 
6,834

Cash surrender value of life insurance
 
13,473

 
13,659

Other real estate
 
4,542

 
4,234

Other assets
 
7,821

 
4,997

Total assets
 
$
1,948,784

 
$
1,936,740

 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 

 
 

Liabilities:
 
 

 
 

Deposits:
 
 

 
 

Non-interest-bearing
 
$
408,742

 
$
390,863

Interest-bearing
 
1,149,508

 
1,194,371

Total deposits
 
1,558,250

 
1,585,234

Securities sold under agreements to repurchase
 
84,547

 
62,098

Short-term Federal Home Loan Bank advances
 
40,000

 
25,000

Long-term Federal Home Loan Bank advances
 
26,064

 
26,277

Junior subordinated debentures
 
22,167

 
22,167

Other liabilities
 
5,720

 
6,952

Total liabilities
 
1,736,748

 
1,727,728

Commitments and contingencies
 


 


Shareholders’ equity:
 
 

 
 

Series B Preferred stock, no par value; 5,000,000 shares authorized, 32,000 shares issued and outstanding at June 30, 2015 and December 31, 2014
 
32,000

 
32,000

Series C Preferred stock, no par value; 100,000 shares authorized, 91,696 shares issued and outstanding at June 30, 2015 and 93,680 shares issued and outstanding at December 31, 2014
 
9,170

 
9,368

Common stock, $0.10 par value; 30,000,000 shares authorized, 11,510,363 and 11,491,703 issued and 11,359,396 and 11,340,736 outstanding at June 30, 2015 and December 31, 2014, respectively
 
1,151

 
1,149

Additional paid-in capital
 
113,629

 
112,744

Unearned ESOP shares
 
(484
)
 
(250
)
Accumulated other comprehensive income
 
1,224

 
2,857

Treasury stock – 150,967 shares at June 30, 2015 and December 31, 2014, at cost
 
(3,295
)
 
(3,295
)
Retained earnings
 
58,641

 
54,439

Total shareholders’ equity
 
212,036

 
209,012

Total liabilities and shareholders’ equity
 
$
1,948,784

 
$
1,936,740

 
See notes to unaudited consolidated financial statements.


3


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Earnings (unaudited)
(in thousands, except per share data)
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Interest income:
 
 
 
 
 
 
 
 
Loans, including fees
 
$
18,268

 
$
17,769

 
$
36,322

 
$
35,252

Securities and other investments:
 
 

 
 

 
 
 
 
Taxable
 
1,853

 
2,064

 
3,778

 
4,200

Nontaxable
 
559

 
661

 
1,143

 
1,354

Federal funds sold
 
2

 
1

 
4

 
2

Time and interest bearing deposits in other banks
 
35

 
11

 
72

 
27

Other investments
 
81

 
89

 
160

 
159

Total interest income
 
20,798

 
20,595

 
41,479

 
40,994

 
 
 
 
 
 
 
 
 
Interest expense:
 
 

 
 

 
 
 
 
Deposits
 
921

 
858

 
1,868

 
1,729

Securities sold under agreements to repurchase
 
242

 
199

 
472

 
379

Other borrowings and payables
 
103

 
105

 
200

 
211

Junior subordinated debentures
 
151

 
320

 
301

 
667

Total interest expense
 
1,417

 
1,482

 
2,841

 
2,986

 
 
 
 
 
 
 
 
 
Net interest income
 
19,381

 
19,113

 
38,638

 
38,008

Provision for loan losses
 
1,100

 
1,200

 
7,100

 
1,750

Net interest income after provision for loan losses
 
18,281

 
17,913

 
31,538

 
36,258

 
 
 
 
 
 
 
 
 
Non-interest income:
 
 

 
 

 
 
 
 
Service charges on deposits
 
2,137

 
2,448

 
4,257

 
4,828

Gain on sale of securities, net
 
1,128

 
128

 
1,243

 
128

ATM and debit card income
 
1,865

 
1,853

 
3,706

 
3,567

Income from death benefit on BOLI/executive officer life insurance
 
160

 

 
160

 
3,000

Other charges and fees
 
876

 
832

 
1,767

 
1,655

Total non-interest income
 
6,166

 
5,261

 
11,133

 
13,178

 
 
 
 
 
 
 
 
 
Non-interest expenses:
 
 

 
 

 
 
 
 
Salaries and employee benefits
 
8,197

 
8,488

 
16,139

 
17,301

Occupancy expense
 
3,865

 
3,689

 
7,550

 
7,480

FDIC insurance
 
331

 
251

 
612

 
513

Other
 
4,612

 
4,695

 
8,991

 
9,531

Total non-interest expenses
 
17,005

 
17,123

 
33,292

 
34,825

Income before income taxes
 
7,442

 
6,051

 
9,379

 
14,611

Income tax expense
 
2,343

 
1,935

 
2,789

 
3,637

 
 
 
 
 
 
 
 
 
Net earnings
 
5,099

 
4,116

 
6,590

 
10,974

Dividends on preferred stock
 
172

 
170

 
345

 
350

Net earnings available to common shareholders
 
$
4,927

 
$
3,946

 
$
6,245

 
$
10,624

Earnings per share:
 
 

 
 

 
 
 
 
Basic
 
$
0.43

 
$
0.35

 
$
0.55

 
$
0.94

Diluted
 
$
0.42

 
$
0.34

 
$
0.54

 
$
0.91

Weighted average number of shares outstanding:
 
 

 
 

 
 
 
 
Basic
 
11,324

 
11,277

 
11,321

 
11,268

Diluted
 
11,850

 
11,912

 
11,854

 
11,892

Dividends declared per common share
 
$
0.09

 
$
0.09

 
$
0.18

 
$
0.18

See notes to unaudited consolidated financial statements.

4


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Net earnings
 
$
5,099

 
$
4,116

 
$
6,590

 
$
10,974

Other comprehensive (loss) income, net of tax:
 
 

 
 

 
 

 
 

Unrealized (losses) gains on securities available-for-sale:
 
 

 
 

 
 

 
 

Unrealized holding (losses) gains arising during the year
 
(2,971
)
 
1,574

 
(1,270
)
 
4,520

Less: reclassification adjustment for gains on sales of securities available-for-sale
 
(1,128
)
 
(128
)
 
(1,243
)
 
(128
)
Total other comprehensive (loss) income, before tax
 
(4,099
)
 
1,446

 
(2,513
)
 
4,392

Income tax effect related to items of other comprehensive income (loss)
 
1,435

 
(506
)
 
880

 
(1,537
)
Total other comprehensive (loss) income, net of tax
 
(2,664
)
 
940

 
(1,633
)
 
2,855

Total comprehensive income
 
$
2,435

 
$
5,056

 
$
4,957

 
$
13,829

See notes to unaudited consolidated financial statements.

5


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statement of Shareholders’ Equity (unaudited)
For the Six Months Ended June 30, 2015
(in thousands, except share and per share data)
 
 
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-in Capital
 
Unearned
ESOP Shares
 
Accumulated
Other Comprehensive Income
 
Treasury Stock
 
Retained Earnings
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
Total
Balance - December 31, 2014
 
125,680

 
$
41,368

 
11,491,703

 
$
1,149

 
$
112,744

 
$
(250
)
 
$
2,857

 
$
(3,295
)
 
$
54,439

 
$
209,012

Net earnings
 

 

 

 

 

 

 

 

 
6,590

 
6,590

Dividends on Series B and Series C preferred stock
 

 

 

 

 

 

 

 

 
(345
)
 
(345
)
Dividends on common stock, $0.18 per share
 

 

 

 

 

 

 

 

 
(2,043
)
 
(2,043
)
Conversion of Series C preferred stock to common stock
 
(1,984
)
 
(198
)
 
11,005

 
1

 
197

 

 

 

 

 

Increase in ESOP obligation, net of repayments
 

 

 

 

 

 
(234
)
 

 

 

 
(234
)
Exercise of stock options
 

 

 
7,655

 
1

 
98

 

 

 

 

 
99

Tax benefit resulting from distribution from Directors Deferred Compensation Plan
 

 

 

 

 
420

 

 

 

 

 
420

Stock option expense
 

 

 

 

 
170

 

 

 

 

 
170

Change in accumulated other comprehensive income
 

 

 

 

 

 

 
(1,633
)
 

 

 
(1,633
)
Balance – June 30, 2015
 
123,696

 
$
41,170

 
11,510,363

 
$
1,151

 
$
113,629

 
$
(484
)
 
$
1,224

 
$
(3,295
)
 
$
58,641

 
$
212,036

 
See notes to unaudited consolidated financial statements.


6


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 
 
For the Six Months Ended June 30,
 
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net earnings
 
$
6,590

 
$
10,974

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 

 
 

Depreciation
 
3,107

 
2,987

Accretion of purchase accounting adjustments
 
(589
)
 
(1,450
)
Provision for loan losses
 
7,100

 
1,750

Deferred tax (benefit) expense
 
(683
)
 
1,246

Amortization of premiums on securities, net
 
1,396

 
1,763

Amortization of other investments
 

 
2

Stock option expense
 
170

 
276

Net gain on sale of investment securities
 
(1,243
)
 
(128
)
Net (gain) loss on sale of other real estate owned
 
(10
)
 
5

Net write down of other real estate owned
 
29

 
31

Net gain on sale/disposal of premises and equipment
 
(2
)
 
(12
)
Income recognized from death benefit on bank owned life insurance
 
(160
)
 

Change in accrued interest receivable
 
(156
)
 
324

Change in accrued interest payable
 
(23
)
 
(43
)
Change in other assets & other liabilities, net
 
(2,621
)
 
(2,023
)
Net cash provided by operating activities
 
12,905

 
15,702

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Proceeds from maturities and calls of securities available-for-sale
 
39,780

 
21,634

Proceeds from maturities and calls of securities held-to-maturity
 
14,083

 
7,156

Proceeds from sale of securities available-for-sale
 
40,277

 
22,153

Purchases of securities available-for-sale
 
(105,486
)
 

Purchases of securities held-to-maturity
 

 
(1,104
)
Proceeds from redemptions of other investments
 

 
150

Proceeds from sale of other investments
 
349

 

Purchases of other investments
 
(957
)
 
(564
)
Net change in loans
 
(12,486
)
 
(86,692
)
Proceeds from bank owned life insurance death benefit
 
498

 

Purchases of premises and equipment
 
(2,438
)
 
(2,909
)
Proceeds from sale of premises and equipment
 
28

 
490

Proceeds from sale of other real estate owned
 
582

 
338

Net cash used in investing activities
 
(25,770
)
 
(39,348
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Change in deposits
 
(26,919
)
 
6,765

Change in securities sold under agreements to repurchase
 
22,449

 
13,658

Borrowings on Federal Home Loan Bank advances
 
80,000

 
10,000

Repayments of Federal Home Loan Bank advances
 
(65,032
)
 
(30
)
Repayments of notes payable
 

 
(500
)
Purchase of treasury stock
 

 
(9
)
Proceeds and tax benefit from exercise of stock options
 
99

 
122

Tax benefit resulting from distribution from Directors Deferred Compensation Plan
 
420

 

Payment of dividends on preferred stock
 
(347
)
 
(355
)
Payment of dividends on common stock
 
(2,041
)
 
(1,801
)
Net cash provided by financing activities
 
8,629

 
27,850

 
 
 
 
 
Net (decrease) increase in cash and cash equivalents
 
(4,236
)
 
4,204

Cash and cash equivalents, beginning of period
 
86,872

 
59,731

Cash and cash equivalents, end of period
 
$
82,636

 
$
63,935

 
 
 
 
 
Supplemental cash flow information:
 
 

 
 

Interest paid
 
$
2,864

 
$
3,030

Income taxes paid
 
5,180

 
3,560

Noncash investing and financing activities:
 
 

 
 

Transfer of loans to other real estate
 
909

 
77

Change in accrued common stock dividends
 
2

 
117

Change in accrued preferred stock dividends
 
(2
)
 
(5
)
Financed sales of other real estate
 

 
84

Net change in loan to ESOP
 
(234
)
 
(283
)
 
See notes to unaudited consolidated financial statements.


7


MidSouth Bancorp, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
June 30, 2015
(Unaudited)

1. Basis of Presentation
 
The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the financial position of MidSouth Bancorp, Inc. (the “Company”) and its subsidiaries as of June 30, 2015 and the results of their operations and their cash flows for the periods presented. The interim financial information should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s 2014 Annual Report on Form 10-K.
 
The results of operations for the six-month period ended June 30, 2015 are not necessarily indicative of the results to be expected for the entire year.
 
Use of Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
 
Summary of Significant Accounting Policies — The accounting and reporting policies of the Company conform with GAAP and general practices within the banking industry.  There have been no material changes or developments in the application of accounting principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies and Estimates as disclosed in our 2014 Annual Report on Form 10-K.
 
2. Investment Securities
 
The portfolio of investment securities consisted of the following (in thousands):

 
 
June 30, 2015
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Available-for-sale:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
38,192

 
$
1,148

 
$
95

 
$
39,245

GSE mortgage-backed securities
 
93,368

 
2,783

 
407

 
95,744

Collateralized mortgage obligations: residential
 
155,241

 
392

 
1,892

 
153,741

Collateralized mortgage obligations: commercial
 
9,552

 
22

 
65

 
9,509

Mutual funds
 
2,100

 

 
4

 
2,096

 
 
$
298,453

 
$
4,345

 
$
2,463

 
$
300,335

 
 
 
 
 
 
 
 
 

8


 
 
December 31, 2014
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Available-for-sale:
 
 
 
 
 
 
 
 
U.S. Government sponsored enterprises
 
$
10,339

 
$

 
$
112

 
$
10,227

Obligations of state and political subdivisions
 
43,079

 
1,555

 
29

 
44,605

GSE mortgage-backed securities
 
106,208

 
3,183

 
288

 
109,103

Collateralized mortgage obligations: residential
 
62,093

 
266

 
1,520

 
60,839

Collateralized mortgage obligations: commercial
 
24,462

 
190

 
107

 
24,545

Other asset-backed securities
 
24,041

 
321

 
19

 
24,343

Collateralized debt obligation
 
266

 
952

 

 
1,218

Mutual funds
 
2,100

 
4

 

 
2,104

 
 
$
272,588

 
$
6,471

 
$
2,075

 
$
276,984


 
 
June 30, 2015
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Held-to-maturity:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
44,128

 
$
260

 
$
247

 
$
44,141

GSE mortgage-backed securities
 
61,609

 
868

 
214

 
62,263

Collateralized mortgage obligations: residential
 
11,778

 

 
370

 
11,408

Collateralized mortgage obligations: commercial
 
9,014

 
24

 
1

 
9,037

 
 
$
126,529

 
$
1,152

 
$
832

 
$
126,849

 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Held-to-maturity:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
45,914

 
$
267

 
$
192

 
$
45,989

GSE mortgage-backed securities
 
67,268

 
1,080

 
164

 
68,184

Collateralized mortgage obligations: residential
 
12,709

 

 
479

 
12,230

Collateralized mortgage obligations: commercial
 
15,310

 
53

 
173

 
15,190

 
 
$
141,201

 
$
1,400

 
$
1,008

 
$
141,593


With the exception of three private-label collateralized mortgage obligations (“CMOs”) with a combined balance remaining of $41,000 at June 30, 2015, all of the Company’s CMOs are government-sponsored enterprise (“GSE”) securities.
 
The amortized cost and fair value of debt securities at June 30, 2015 by contractual maturity are shown in the following table (in thousands) with the exception of other asset-backed securities, mortgage-backed securities, CMOs, and the collateralized debt obligation.   Expected maturities may differ from contractual maturities for mortgage-backed securities and CMOs because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


9


 
 
Amortized
Cost
 
Fair
Value
Available-for-sale:
 
 
 
 
Due in one year or less
 
$
5,108

 
$
5,174

Due after one year through five years
 
19,960

 
20,666

Due after five years through ten years
 
10,733

 
11,062

Due after ten years
 
2,391

 
2,343

Mortgage-backed securities and collateralized mortgage obligations:
 
 

 
 

Residential
 
248,609

 
249,485

Commercial
 
9,552

 
9,509

Mutual funds
 
2,100

 
2,096

 
 
$
298,453

 
$
300,335

 
 
 
 
 
 
 
Amortized
Cost
 
Fair
Value
Held-to-maturity:
 
 
 
 
Due in one year or less
 
$
111

 
$
111

Due after one year through five years
 
3,294

 
3,322

Due after five years through ten years
 
11,145

 
11,158

Due after ten years
 
29,578

 
29,550

Mortgage-backed securities and collateralized mortgage obligations:
 
 

 
 

Residential
 
73,387

 
73,671

Commercial
 
9,014

 
9,037

 
 
$
126,529

 
$
126,849


Details concerning investment securities with unrealized losses are as follows (in thousands):
 
 
 
June 30, 2015
 
 
Securities with losses
under 12 months
 
Securities with losses
over 12 months
 
Total
 
 
Fair
Value
 
Gross
Unrealized
 Loss
 
Fair
Value
 
Gross
Unrealized
Loss
 
Fair
Value
 
Gross
Unrealized
Loss
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of state and  political subdivisions
 
$
4,365

 
$
95

 
$

 
$

 
$
4,365

 
$
95

GSE mortgage-backed  securities
 
32,229

 
344

 
3,877

 
63

 
36,106

 
407

Collateralized mortgage  obligations: residential
 
96,995

 
663

 
33,105

 
1,229

 
130,100

 
1,892

Collateralized mortgage  obligations: commercial
 
1,141

 
1

 
3,158

 
64

 
4,299

 
65

Mututal funds
 
2,100

 
4

 

 

 
2,100

 
4

 
 
$
136,830

 
$
1,107

 
$
40,140

 
$
1,356

 
$
176,970

 
$
2,463

 
 
 
 
 
 
 
 
 
 
 
 
 

10


 
 
December 31, 2014
 
 
Securities with losses
under 12 months
 
Securities with losses
over 12 months
 
Total
 
 
Fair
Value
 
Gross
Unrealized
Loss
 
Fair
Value
 
Gross
Unrealized
Loss
 
Fair
Value
 
Gross
Unrealized
Loss
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored enterprises
 
$
4,973

 
$
32

 
$
5,254

 
$
80

 
$
10,227

 
$
112

Obligations of state and  political subdivisions
 
2,029

 
29

 

 

 
2,029

 
29

GSE mortgage-backed  securities
 
6,668

 
25

 
21,538

 
263

 
28,206

 
288

Collateralized mortgage  obligations: residential
 
9,366

 
53

 
37,997

 
1,467

 
47,363

 
1,520

Collateralized mortgage  obligations: commercial
 

 

 
3,747

 
107

 
3,747

 
107

Other asset-backed securities
 
6,401

 
19

 

 

 
6,401

 
19

 
 
$
29,437

 
$
158

 
$
68,536

 
$
1,917

 
$
97,973

 
$
2,075


 
 
June 30, 2015
 
 
Securities with losses
under 12 months
 
Securities with losses
over 12 months
 
Total
 
 
Fair
Value
 
Gross
Unrealized
Loss
 
Fair
Value
 
Gross
Unrealized Loss
 
Fair
Value
 
Gross
Unrealized
Loss
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
18,319

 
$
220

 
$
1,295

 
$
27

 
$
19,614

 
$
247

GSE mortgage-backed securities
 
12,552

 
13

 
7,553

 
201

 
20,105

 
214

Collateralized mortgage obligations: residential
 

 

 
11,408

 
370

 
11,408

 
370

Collateralized mortgage obligations: commercial
 
1,402

 
1

 

 

 
1,402

 
1

 
 
$
32,273

 
$
234

 
$
20,256

 
$
598

 
$
52,529

 
$
832

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
Securities with losses
under 12 months
 
Securities with losses
over 12 months
 
Total
 
 
Fair
Value
 
Gross
Unrealized
Loss
 
Fair
Value
 
Gross
Unrealized
Loss
 
Fair
Value
 
Gross
Unrealized
Loss
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
11,761

 
$
35

 
$
13,263

 
$
157

 
$
25,024

 
$
192

GSE mortgage-backed securities
 

 

 
8,142

 
164

 
8,142

 
164

Collateralized mortgage obligations: residential
 

 

 
12,230

 
479

 
12,230

 
479

Collateralized mortgage obligations: commercial
 
7,599

 
173

 

 

 
7,599

 
173

 
 
$
19,360

 
$
208

 
$
33,635

 
$
800

 
$
52,995

 
$
1,008


Management evaluates each quarter whether unrealized losses on securities represent impairment that is other than temporary. For debt securities, the Company considers its intent to sell the securities or if it is more likely than not the Company will be required

11


to sell the securities.  If such impairment is identified, based upon the intent to sell or the more likely than not threshold, the carrying amount of the security is reduced to fair value with a charge to earnings. Upon the result of the aforementioned review, management then reviews for potential other than temporary impairment based upon other qualitative factors.  In making this evaluation, management considers changes in market rates relative to those available when the security was acquired, changes in market expectations about the timing of cash flows from securities that can be prepaid, performance of the debt security, and changes in the market’s perception of the issuer’s financial health and the security’s credit quality.  If determined that a debt security has incurred other than temporary impairment, then the amount of the credit related impairment is determined.  If a credit loss is evident, the amount of the credit loss is charged to earnings and the non-credit related impairment is recognized through other comprehensive income.
 
As of June 30, 2015, 77 securities had unrealized losses totaling 1.42% of the individual securities’ amortized cost basis and 0.78% of the Company’s total amortized cost basis.  Of the 77 securities, 20 had been in an unrealized loss position for over twelve months at June 30, 2015.  These 20 securities had an amortized cost basis and unrealized loss of $62.3 million and $2.0 million, respectively.  The unrealized losses on debt securities at June 30, 2015 resulted from changing market interest rates over the yields available at the time the underlying securities were purchased.  Management identified no impairment related to credit quality.  At June 30, 2015, management had the intent and ability to hold impaired securities and no impairment was evaluated as other than temporary.  As a result, no other than temporary impairment losses were recognized during the three months ended June 30, 2015.
 
During the six months ended June 30, 2015, the Company sold 21 securities classified as available-for-sale at a net gain of $1.2 million.  Of the 21 securities sold, 11 were sold with gains totaling $1.4 million and 10 securities were sold at a loss of $135,000.  During the six months ended June 30, 2014, the Company sold 4 securities classified as available-for-sale at a net gain of $128,000. All of the securities were sold at a gain.
 
Securities with an aggregate carrying value of approximately $276.4 million and $279.8 million at June 30, 2015 and December 31, 2014, respectively, were pledged to secure public funds on deposit and for other purposes required or permitted by law.
 
3. Credit Quality of Loans and Allowance for Loan Losses
 
The loan portfolio consisted of the following (in thousands):
 
 
June 30, 2015
 
December 31, 2014
Commercial, financial and agricultural
 
$
471,397

 
$
467,147

Real estate - construction
 
79,176

 
68,577

Real estate – commercial
 
469,022

 
467,172

Real estate – residential
 
153,820

 
154,602

Installment loans to individuals
 
113,626

 
119,328

Lease financing receivable
 
5,561

 
4,857

Other
 
1,790

 
2,748

 
 
1,294,392

 
1,284,431

Less allowance for loan losses
 
(16,048
)
 
(11,226
)
 
 
$
1,278,344

 
$
1,273,205

 
The Company monitors loan concentrations and evaluates individual customer and aggregate industry leverage, profitability, risk rating distributions, and liquidity for each major standard industry classification segment.  At June 30, 2015, one industry segment concentration, the oil and gas industry, constituted more than 10% of the loan portfolio.  The Company’s exposure in the oil and gas industry, including related service and manufacturing industries, totaled approximately $266.4 million, or 20.6% of total loans.  Additionally, the Company’s exposure to loans secured by commercial real estate is monitored.  At June 30, 2015, loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately $526.6 million.  Of the $526.6 million, $469.0 million represent CRE loans, 53% of which are secured by owner-occupied commercial properties.  Of the $526.6 million in loans secured by commercial real estate, $18.5 million, or 3.5%, were on nonaccrual status at June 30, 2015.
 
Allowance for Loan Losses
 
The allowance for loan losses is a valuation account available to absorb probable losses on loans. All losses are charged to the allowance for loan losses when the loss actually occurs or when a determination is made that a loss is likely to occur. Recoveries

12


are credited to the allowance for loan losses at the time of recovery.  Quarterly, the probable level of losses in the existing portfolio is estimated through consideration of various factors.  Based on these estimates, the allowance for loan losses is increased by charges to earnings and decreased by charge‑offs (net of recoveries).

The allowance is composed of general reserves and specific reserves.  General reserves are determined by applying loss percentages to segments of the portfolio.  The loss percentages are based on each segment’s historical loss experience, generally over the past twelve to eighteen months, and adjustment factors derived from conditions in the Company’s internal and external environment.  All loans considered to be impaired are evaluated on an individual basis to determine specific reserve allocations in accordance with GAAP.  Loans for which specific reserves are provided are excluded from the calculation of general reserves.
 
Loans acquired in business combinations are initially recorded at fair value, which includes an estimate of credit losses expected to be realized over the remaining lives of the loans, and therefore no corresponding allowance for loan losses is recorded for these loans at acquisition. Methods utilized to estimate any subsequently required allowance for loan losses for acquired loans not deemed credit-impaired at acquisition are similar to originated loans; however, the estimate of loss is based on the unpaid principal balance and then compared to any remaining unaccreted purchase discount. To the extent that the calculated loss is greater than the remaining unaccreted purchase discount, an allowance is recorded for such difference.
 
The Company has an internal loan review department that is independent of the lending function to challenge and corroborate the loan grade assigned by the lender and to provide additional analysis in determining the adequacy of the allowance for loan losses.
 
A rollforward of the activity within the allowance for loan losses by loan type and recorded investment in loans for the six months ended June 30, 2015 and 2014 is as follows (in thousands):
 

13


 
 
June 30, 2015
 
 
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
Coml, Fin,
and Agric
 
Constru-ction
 
Commercial
 
Residential
 
Installment
loans to
individuals
 
Lease
financing
receivable
 
Other
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
5,729

 
$
954

 
$
2,402

 
$
810

 
$
1,311

 
$
16

 
$
4

 
$
11,226

Charge-offs
 
(1,855
)
 
(6
)
 
(48
)
 
(37
)
 
(537
)
 

 

 
(2,483
)
Recoveries
 
144

 

 
14

 
5

 
42

 

 

 
205

Provision
 
5,074

 
20

 
1,560

 
608

 
(173
)
 
9

 
2

 
7,100

Ending balance
 
$
9,092

 
$
968

 
$
3,928

 
$
1,386

 
$
643

 
$
25

 
$
6

 
$
16,048

Ending balance: individually evaluated for impairment
 
$
889

 
$

 
$
1,123

 
$
107

 
$
156

 
$

 
$

 
$
2,275

Ending balance: collectively evaluated for impairment
 
$
8,203

 
$
968

 
$
2,805

 
$
1,279

 
$
487

 
$
25

 
$
6

 
$
13,773

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
 
$
471,397

 
$
79,176

 
$
469,022

 
$
153,820

 
$
113,626

 
$
5,561

 
$
1,790

 
$
1,294,392

Ending balance: individually evaluated for impairment
 
$
23,750

 
$
531

 
$
18,423

 
$
1,823

 
$
324

 
$

 
$

 
$
44,851

Ending balance: collectively evaluated for impairment
 
$
447,647

 
$
78,645

 
$
449,957

 
$
151,912

 
$
113,302

 
$
5,561

 
$
1,790

 
$
1,248,814

Ending balance: loans acquired with deteriorated credit quality
 
$

 
$

 
$
642

 
$
85

 
$

 
$

 
$

 
$
727


14


 
 
June 30, 2014
 
 
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
Coml, Fin,
and Agric
 
Constr-uction
 
Commercial
 
Residential
 
Installment
loans to
individuals
 
Lease
financing
receivable
 
Other
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
3,906

 
$
1,046

 
$
1,389

 
$
1,141

 
$
1,273

 
$
21

 
$
3

 
$
8,779

Charge-offs
 
(1,135
)
 

 
(17
)
 
(176
)
 
(350
)
 

 

 
(1,678
)
Recoveries
 
42

 

 
42

 
39

 
101

 

 

 
224

Provision
 
1,970

 
(53
)
 
(23
)
 
(325
)
 
184

 
(4
)
 
1

 
1,750

Ending balance
 
$
4,783

 
$
993

 
$
1,391

 
$
679

 
$
1,208

 
$
17

 
$
4

 
$
9,075

Ending balance: individually evaluated for impairment
 
$
208

 
$
3

 
$
55

 
$
152

 
$
145

 
$

 
$

 
$
563

Ending balance: collectively evaluated for impairment
 
$
4,575

 
$
990

 
$
1,336

 
$
527

 
$
1,063

 
$
17

 
$
4

 
$
8,512

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
 
$
454,310

 
$
86,238

 
$
413,565

 
$
153,082

 
$
108,581

 
$
4,750

 
$
3,656

 
$
1,224,182

Ending balance: individually evaluated for impairment
 
$
1,793

 
$
152

 
$
3,234

 
$
1,214

 
$
340

 
$

 
$

 
$
6,733

Ending balance: collectively evaluated for impairment
 
$
452,517

 
$
86,086

 
$
409,631

 
$
151,763

 
$
108,241

 
$
4,750

 
$
3,656

 
$
1,216,644

Ending balance: loans acquired with deteriorated credit quality
 
$

 
$

 
$
700

 
$
105

 
$

 
$

 
$

 
$
805

 
Non-Accrual and Past Due Loans
 
Loans are considered past due if the required principal and interest payment have not been received as of the date such payments were due.  Loans are placed on non-accrual status when, in management’s opinion, the probability of collection of interest is deemed insufficient to warrant further accrual.  For loans placed on non-accrual status, the accrual of interest is discontinued and subsequent payments received are applied to the principal balance.  Interest income is recorded after principal has been satisfied and as payments are received.  Non-accrual loans may be returned to accrual status if all principal and interest amounts contractually owed are reasonably assured of repayment within a reasonable period and there is a period of at least six months to one year of repayment performance by the borrower depending on the contractual payment terms.


15


An age analysis of past due loans (including both accruing and non-accruing loans) is as follows (in thousands):
 
 
June 30, 2015
 
 
30-59
Days
Past Due
 
60-89
Days
Past
Due
 
Greater
than 90
Days
Past Due
 
Total
Past
Due
 
Current
 
Total Loans
 
Recorded
Investment
> 90 days
 and
Accruing
Commercial, financial, and agricultural
 
$