10-Q 1 msl10-q09302015.htm MIDSOUTH BANCORP, INC 10-Q 9-30-2015 10-Q

 

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 September 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 November 6, 2015, there were 11,362,149 shares of the registrant’s Common Stock, par value $0.10 per share, outstanding.
 



Part I – Financial Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II – Other Information
 
 
Item 1A. Risk Factors.
 
 
 
 
 
Item 6. Exhibits.



Part I – Financial Information
 
Item 1. Financial Statements.
MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share data)
 
 
September 30, 2015
(unaudited)
 
December 31, 2014
(audited)
Assets
 
 
 
 
Cash and due from banks, including required reserves of $8,782 and $10,019, respectively
 
$
38,386

 
$
45,142

Interest-bearing deposits in banks
 
82,538

 
39,031

Federal funds sold
 
4,513

 
2,699

Securities available-for-sale, at fair value (cost of $281,885 at September 30, 2015 and $272,588 at December 31, 2014)
 
285,485

 
276,984

Securities held-to-maturity (fair value of $122,488 at September 30, 2015 and $141,593 at December 31, 2014)
 
121,043

 
141,201

Other investments
 
12,063

 
9,990

Loans
 
1,301,452

 
1,284,431

Allowance for loan losses
 
(18,939
)
 
(11,226
)
Loans, net
 
1,282,513

 
1,273,205

Bank premises and equipment, net
 
68,718

 
69,958

Accrued interest receivable
 
6,655

 
6,635

Goodwill
 
42,171

 
42,171

Intangibles
 
6,004

 
6,834

Cash surrender value of life insurance
 
13,548

 
13,659

Other real estate
 
4,661

 
4,234

Other assets
 
6,010

 
4,997

Total assets
 
$
1,974,308

 
$
1,936,740

 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 

 
 

Liabilities:
 
 

 
 

Deposits:
 
 

 
 

Non-interest-bearing
 
$
406,118

 
$
390,863

Interest-bearing
 
1,137,303

 
1,194,371

Total deposits
 
1,543,421

 
1,585,234

Securities sold under agreements to repurchase
 
92,085

 
62,098

Short-term Federal Home Loan Bank advances
 
70,000

 
25,000

Long-term Federal Home Loan Bank advances
 
25,958

 
26,277

Junior subordinated debentures
 
22,167

 
22,167

Other liabilities
 
6,713

 
6,952

Total liabilities
 
1,760,344

 
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 September 30, 2015 and December 31, 2014
 
32,000

 
32,000

Series C Preferred stock, no par value; 100,000 shares authorized, 91,256 shares issued and outstanding at September 30, 2015 and 93,680 shares issued and outstanding at December 31, 2014
 
9,126

 
9,368

Common stock, $0.10 par value; 30,000,000 shares authorized, 11,361,839 and 11,340,736 shares issued and outstanding, respectively
 
1,136

 
1,149

Additional paid-in capital
 
110,482

 
112,744

Unearned ESOP shares
 
(1,155
)
 
(250
)
Accumulated other comprehensive income
 
2,340

 
2,857

Treasury stock – 0 and 150,967 shares at September 30, 2015 and December 31, 2014, respectively
 

 
(3,295
)
Retained earnings
 
60,035

 
54,439

Total shareholders’ equity
 
213,964

 
209,012

Total liabilities and shareholders’ equity
 
$
1,974,308

 
$
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 September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Interest income:
 
 
 
 
 
 
 
 
Loans, including fees
 
$
17,992

 
$
18,273

 
$
54,314

 
$
53,525

Securities and other investments:
 
 

 
 

 
 
 
 
Taxable
 
1,850

 
1,965

 
5,628

 
6,164

Nontaxable
 
536

 
652

 
1,679

 
2,007

Federal funds sold
 
1

 
2

 
5

 
4

Time and interest bearing deposits in other banks
 
40

 
15

 
112

 
42

Other investments
 
113

 
109

 
273

 
268

Total interest income
 
20,532

 
21,016

 
62,011

 
62,010

 
 
 
 
 
 
 
 
 
Interest expense:
 
 

 
 

 
 
 
 
Deposits
 
883

 
859

 
2,751

 
2,588

Securities sold under agreements to repurchase
 
249

 
210

 
721

 
588

Other borrowings and payables
 
109

 
108

 
309

 
320

Junior subordinated debentures
 
150

 
327

 
451

 
994

Total interest expense
 
1,391

 
1,504

 
4,232

 
4,490

 
 
 
 
 
 
 
 
 
Net interest income
 
19,141

 
19,512

 
57,779

 
57,520

Provision for loan losses
 
3,800

 
1,175

 
10,900

 
2,925

Net interest income after provision for loan losses
 
15,341

 
18,337

 
46,879

 
54,595

 
 
 
 
 
 
 
 
 
Non-interest income:
 
 

 
 

 
 
 
 
Service charges on deposits
 
2,231

 
2,556

 
6,488

 
7,385

Gain on sale of securities, net
 

 

 
1,243

 
128

ATM and debit card income
 
1,823

 
1,808

 
5,529

 
5,375

Income from death benefit on BOLI/executive officer life insurance
 

 

 
160

 
3,000

Other charges and fees
 
786

 
1,830

 
2,553

 
3,484

Total non-interest income
 
4,840

 
6,194

 
15,973

 
19,372

 
 
 
 
 
 
 
 
 
Non-interest expenses:
 
 

 
 

 
 
 
 
Salaries and employee benefits
 
7,653

 
8,287

 
23,792

 
25,588

Occupancy expense
 
3,815

 
3,834

 
11,365

 
11,314

FDIC insurance
 
391

 
269

 
1,003

 
783

Other
 
4,705

 
5,467

 
13,696

 
14,997

Total non-interest expenses
 
16,564

 
17,857

 
49,856

 
52,682

Income before income taxes
 
3,617

 
6,674

 
12,996

 
21,285

Income tax expense
 
1,028

 
2,202

 
3,817

 
5,839

 
 
 
 
 
 
 
 
 
Net earnings
 
2,589

 
4,472

 
9,179

 
15,446

Dividends on preferred stock
 
172

 
174

 
517

 
524

Net earnings available to common shareholders
 
$
2,417

 
$
4,298

 
$
8,662

 
$
14,922

Earnings per share:
 
 

 
 

 
 
 
 
Basic
 
$
0.22

 
$
0.38

 
$
0.77

 
$
1.32

Diluted
 
$
0.21

 
$
0.37

 
$
0.75

 
$
1.28

Weighted average number of shares outstanding:
 
 

 
 

 
 
 
 
Basic
 
11,312

 
11,314

 
11,321

 
11,283

Diluted
 
11,831

 
11,955

 
11,848

 
11,904

Dividends declared per common share
 
$
0.09

 
$
0.09

 
$
0.27

 
$
0.26

See notes to unaudited consolidated financial statements.

4


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Net earnings
 
$
2,589

 
$
4,472

 
$
9,179

 
$
15,446

Other comprehensive income (loss), net of tax:
 
 

 
 

 
 

 
 

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

 
 

 
 

 
 

Unrealized holding gains (losses) arising during the year
 
1,717

 
(405
)
 
447

 
4,116

Less: reclassification adjustment for gains on sales of securities available-for-sale
 

 

 
(1,243
)
 
(128
)
Total other comprehensive income (loss), before tax
 
1,717

 
(405
)
 
(796
)
 
3,988

Income tax effect related to items of other comprehensive income (loss)
 
(601
)
 
142

 
279

 
(1,396
)
Total other comprehensive income (loss), net of tax
 
1,116

 
(263
)
 
(517
)
 
2,592

Total comprehensive income
 
$
3,705

 
$
4,209

 
$
8,662

 
$
18,038

See notes to unaudited consolidated financial statements.

5


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statement of Shareholders’ Equity (unaudited)
For the Nine Months Ended September 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
 

 

 

 

 

 

 

 

 
9,179

 
9,179

Dividends on Series B and Series C preferred stock
 

 

 

 

 

 

 

 

 
(517
)
 
(517
)
Dividends on common stock, $0.27 per share
 

 

 

 

 

 

 

 

 
(3,066
)
 
(3,066
)
Conversion of Series C preferred stock to common stock
 
(2,424
)
 
(242
)
 
13,448

 
1

 
241

 

 

 

 

 

Reclassification of treasury stock per the LBCA (1)
 

 

 
(150,967
)
 
(15
)
 
(3,280
)
 
 
 
 
 
3,295

 
 
 

Increase in ESOP obligation, net of repayments
 

 

 

 

 

 
(905
)
 

 

 

 
(905
)
Exercise of stock options
 

 

 
7,655

 
1

 
98

 

 

 

 

 
99

Tax benefit resulting from distribution from Directors Deferred Compensation Plan
 

 

 

 

 
420

 

 

 

 

 
420

Stock option and restricted stock compensation expense
 

 

 

 

 
259

 

 

 

 

 
259

Change in accumulated other comprehensive income
 

 

 

 

 

 

 
(517
)
 

 

 
(517
)
Balance – September 30, 2015
 
123,256

 
$
41,126

 
11,361,839

 
$
1,136

 
$
110,482

 
$
(1,155
)
 
$
2,340

 
$

 
$
60,035

 
$
213,964

 
See notes to unaudited consolidated financial statements.

(1) See Note 1 for an explanation of the elimination of treasury stock under the Louisiana Business Corporation Act.


6


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 
 
For the Nine Months Ended September 30,
 
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net earnings
 
$
9,179

 
$
15,446

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

 
 

Depreciation
 
4,652

 
4,518

Accretion of purchase accounting adjustments
 
(1,003
)
 
(1,924
)
Provision for loan losses
 
10,900

 
2,925

Deferred tax (benefit) expense
 
(1,633
)
 
2,034

Amortization of premiums on securities, net
 
2,141

 
2,432

(Accretion) amortization of other investments
 
(1
)
 
4

Stock option expense
 
253

 
355

Restricted stock expense
 
6

 

Net gain on sale of investment securities
 
(1,243
)
 
(128
)
Net gain on sale of other real estate owned
 
(13
)
 
(1,081
)
Net write down of other real estate owned
 
111

 
31

Net (gain) loss on sale/disposal of premises and equipment
 
(8
)
 
232

Income recognized from death benefit on bank owned life insurance
 
(160
)
 

Change in accrued interest receivable
 
(20
)
 
45

Change in accrued interest payable
 
(48
)
 
(240
)
Change in other assets & other liabilities, net
 
481

 
(2,006
)
Net cash provided by operating activities
 
23,594

 
22,643

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Proceeds from maturities and calls of securities available-for-sale
 
55,874

 
33,466

Proceeds from maturities and calls of securities held-to-maturity
 
19,299

 
10,778

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

Redemption of Capital Securities related to MidSouth Statutory Trust I
 

 
217

Proceeds from sale of other investments
 
898

 

Purchases of other investments
 
(2,970
)
 
(567
)
Net change in loans
 
(20,669
)
 
(111,329
)
Proceeds from bank owned life insurance death benefit
 
498

 

Purchases of premises and equipment
 
(3,439
)
 
(4,265
)
Proceeds from sale of premises and equipment
 
35

 
743

Proceeds from sale of other real estate owned
 
857

 
3,315

Purchase of other real estate owned
 
(351
)
 

Net cash used in investing activities
 
(15,177
)
 
(46,443
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Change in deposits
 
(41,728
)
 
2,244

Change in securities sold under agreements to repurchase
 
29,987

 
17,048

Borrowings on Federal Home Loan Bank advances
 
150,000

 
10,000

Repayments of Federal Home Loan Bank advances
 
(105,047
)
 
(45
)
Redemption of MidSouth Statutory Trust I
 

 
(7,217
)
Repayments of notes payable
 

 
(1,000
)
Purchase of treasury stock
 

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

 
611

Tax benefit resulting from distribution from Directors Deferred Compensation Plan
 
420

 

Payment of dividends on preferred stock
 
(519
)
 
(530
)
Payment of dividends on common stock
 
(3,064
)
 
(2,818
)
Net cash provided by financing activities
 
30,148

 
18,284

 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
38,565

 
(5,516
)
Cash and cash equivalents, beginning of period
 
86,872

 
59,731

Cash and cash equivalents, end of period
 
$
125,437

 
$
54,215

 
 
 
 
 
Supplemental cash flow information:
 
 

 
 

Interest paid
 
$
4,280

 
$
4,730

Income taxes paid
 
5,180

 
5,815

Noncash investing and financing activities:
 
 

 
 

Transfer of loans to other real estate
 
1,031

 
317

Change in accrued common stock dividends
 
3

 
121

Change in accrued preferred stock dividends
 
(2
)
 
(6
)
Financed sales of other real estate
 

 
84

Net change in loan to ESOP
 
(905
)
 
(267
)
 
See notes to unaudited consolidated financial statements.


7


MidSouth Bancorp, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
September 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 September 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 nine-month period ended September 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.

Recent Accounting Pronouncements ASU 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items was issued as part of the FASB's simplification initiative. ASU 2015-01 eliminates the concept of extraordinary items. The effective date of this Update is for fiscal years beginning on or after December 15, 2015 and interim periods within those annual periods. Adoption of this Update is not expected to have a material effect on the Company’s consolidated financial statements or the interim notes to the consolidated financial statements.

ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs was also issued as part of the FASB's simplification initiative. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Currently, debt issuance costs are presented as an asset on the balance sheet. The FASB notes within the ASU, capitalized debt issuance costs do not meet the definition of an asset and are more akin to a debt discount, thereby reducing the carrying amount of the proceeds received. The effective date of this Update is for fiscal years beginning on or after December 15, 2015 and interim periods within those annual periods. Adoption of this Update is not expected to have a material effect on the Company’s consolidated financial statements or the interim notes to the consolidated financial statements.

Louisiana Business Corporation Act — Effective January 1, 2015, companies incorporated under Louisiana law became subject to the Louisiana Business Corporation Act. Provisions of the Louisiana Business Corporation Act eliminate the concept of treasury stock. Rather, shares purchased by the Company constitute authorized but unissued shares. Accounting principles generally accepted in the United States of America state that accounting for treasury stock shall conform to state law. The Company's consolidated financial statements as of September 30, 2015 reflect this change. The cost of shares purchased by the Company has been allocated to common stock and additional paid-in capital balances.
 







8


2. Investment Securities
 
The portfolio of investment securities consisted of the following (in thousands):

 
 
September 30, 2015
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Available-for-sale:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
36,500

 
$
979

 
$
48

 
$
37,431

GSE mortgage-backed securities
 
88,813

 
2,981

 
55

 
91,739

Collateralized mortgage obligations: residential
 
148,819

 
690

 
927

 
148,582

Collateralized mortgage obligations: commercial
 
5,653

 
9

 
45

 
5,617

Mutual funds
 
2,100

 
16

 

 
2,116

 
 
$
281,885

 
$
4,675

 
$
1,075

 
$
285,485

 
 
 
 
 
 
 
 
 
 
 
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


 
 
September 30, 2015
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Held-to-maturity:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
43,933

 
$
552

 
$
38

 
$
44,447

GSE mortgage-backed securities
 
58,420

 
1,212

 
82

 
59,550

Collateralized mortgage obligations: residential
 
11,284

 

 
250

 
11,034

Collateralized mortgage obligations: commercial
 
7,406

 
51

 

 
7,457

 
 
$
121,043

 
$
1,815

 
$
370

 
$
122,488

 
 
 
 
 
 
 
 
 
 
 
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


9



With the exception of two private-label collateralized mortgage obligations (“CMOs”) with a combined balance remaining of $34,000 at September 30, 2015, all of the Company’s CMOs are government-sponsored enterprise (“GSE”) securities.
 
The amortized cost and fair value of debt securities at September 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.

 
 
Amortized
Cost
 
Fair
Value
Available-for-sale:
 
 
 
 
Due in one year or less
 
$
5,074

 
$
5,114

Due after one year through five years
 
19,498

 
20,120

Due after five years through ten years
 
9,540

 
9,832

Due after ten years
 
2,388

 
2,365

Mortgage-backed securities and collateralized mortgage obligations:
 
 

 
 

Residential
 
237,632

 
240,321

Commercial
 
5,653

 
5,617

Mutual funds
 
2,100

 
2,116

 
 
$
281,885

 
$
285,485

 
 
 
 
 
 
 
Amortized
Cost
 
Fair
Value
Held-to-maturity:
 
 
 
 
Due in one year or less
 
$
473

 
$
475

Due after one year through five years
 
2,923

 
2,960

Due after five years through ten years
 
11,105

 
11,273

Due after ten years
 
29,432

 
29,739

Mortgage-backed securities and collateralized mortgage obligations:
 
 

 
 

Residential
 
69,704

 
70,584

Commercial
 
7,406

 
7,457

 
 
$
121,043

 
$
122,488


Details concerning investment securities with unrealized losses are as follows (in thousands):
 
 
 
September 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
 
$
3,190

 
$
48

 
$

 
$

 
$
3,190

 
$
48

GSE mortgage-backed  securities
 
15,860

 
45

 
3,754

 
10

 
19,614

 
55

Collateralized mortgage  obligations: residential
 
33,689

 
128

 
31,772

 
799

 
65,461

 
927

Collateralized mortgage  obligations: commercial
 

 

 
3,073

 
45

 
3,073

 
45

 
 
$
52,739

 
$
221

 
$
38,599

 
$
854

 
$
91,338

 
$
1,075

 
 
 
 
 
 
 
 
 
 
 
 
 

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


 
 
September 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
 
$
6,544

 
$
19

 
$
1,302

 
$
19

 
$
7,846

 
$
38

GSE mortgage-backed securities
 

 

 
7,309

 
82

 
7,309

 
82

Collateralized mortgage obligations: residential
 

 

 
11,034

 
250

 
11,034

 
250

 
 
$
6,544

 
$
19

 
$
19,645

 
$
351

 
$
26,189

 
$
370

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 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

11


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 September 30, 2015, 42 securities had unrealized losses totaling 1.21% of the individual securities’ amortized cost basis and 0.36% of the Company’s total amortized cost basis.  Of the 42 securities, 20 had been in an unrealized loss position for over twelve months at September 30, 2015.  These 20 securities had an amortized cost basis and unrealized loss of $59.4 million and $1.2 million, respectively.  The unrealized losses on debt securities at September 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 September 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 September 30, 2015.
 
During the nine months ended September 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 nine months ended September 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 $287.2 million and $279.8 million at September 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):
 
 
September 30, 2015
 
December 31, 2014
Commercial, financial and agricultural
 
$
482,452

 
$
467,147

Real estate - construction
 
74,279

 
68,577

Real estate – commercial
 
473,319

 
467,172

Real estate – residential
 
151,667

 
154,602

Installment loans to individuals
 
113,199

 
119,328

Lease financing receivable
 
4,790

 
4,857

Other
 
1,746

 
2,748

 
 
1,301,452

 
1,284,431

Less allowance for loan losses
 
(18,939
)
 
(11,226
)
 
 
$
1,282,513

 
$
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 September 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 $295.6 million, or 22.7% of total loans.  Additionally, the Company’s exposure to loans secured by commercial real estate is monitored.  At September 30, 2015, loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately $529.0 million.  Of the $529.0 million, $473.3 million represent CRE loans, 53% of which are secured by owner-occupied commercial properties.  Of the $529.0 million in loans secured by commercial real estate, $20.0 million, or 3.8%, were on nonaccrual status at September 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 nine months ended September 30, 2015 and 2014 is as follows (in thousands):
 

13


 
 
September 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
 
(2,310
)
 
(76
)
 
(169
)
 
(45
)
 
(883
)
 

 

 
(3,483
)
Recoveries
 
185

 
1

 
20

 
10

 
80

 

 

 
296

Provision
 
8,016

 
(62
)
 
2,107

 
(104
)
 
923

 
13

 
7

 
10,900

Ending balance
 
$
11,620

 
$
817

 
$
4,360

 
$
671

 
$
1,431

 
$
29

 
$
11

 
$
18,939

Ending balance: individually evaluated for impairment
 
$
2,569

 
$
26

 
$
1,739

 
$
147

 
$
216

 
$

 
$

 
$
4,697

Ending balance: collectively evaluated for impairment
 
$
9,051

 
$
791

 
$
2,621

 
$
524

 
$
1,215

 
$
29

 
$
11

 
$
14,242

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
 
$
482,452

 
$
74,279

 
$
473,319

 
$
151,667

 
$
113,199

 
$
4,790

 
$
1,746

 
$
1,301,452

Ending balance: individually evaluated for impairment
 
$
29,185

 
$
212

 
$
19,928

 
$
1,796

 
$
386

 
$

 
$

 
$
51,507

Ending balance: collectively evaluated for impairment
 
$
453,267

 
$
74,067

 
$
452,758

 
$
149,788

 
$
112,813

 
$
4,790

 
$
1,746

 
$
1,249,229

Ending balance: loans acquired with deteriorated credit quality
 
$

 
$

 
$
633

 
$
83

 
$

 
$

 
$

 
$
716


14


 
 
September 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
 
(2,084
)
 
(1
)
 
(93
)
 
(188
)
 
(566
)
 

 

 
(2,932
)
Recoveries
 
101

 

 
398

 
44

 
110

 

 

 
653

Provision
 
2,731

 
103

 
(345
)
 
(8
)
 
450

 
(6
)
 

 
2,925

Ending balance
 
$
4,654

 
$
1,148

 
$
1,349

 
$
989

 
$
1,267

 
$
15

 
$
3

 
$
9,425

Ending balance: individually evaluated for impairment
 
$
853

 
$
3

 
$
55

 
$
87

 
$
140

 
$

 
$

 
$
1,138

Ending balance: collectively evaluated for impairment
 
$
3,801

 
$
1,145

 
$
1,294

 
$
902

 
$
1,127

 
$
15

 
$
3

 
$
8,287

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
 
$
452,065

 
$
86,315

 
$
430,930

 
$
153,915

 
$
116,340

 
$
5,285

 
$
3,523

 
$
1,248,373

Ending balance: individually evaluated for impairment
 
$
2,662

 
$
106

 
$
3,312

 
$
1,073

 
$
426

 
$

 
$

 
$
7,579

Ending balance: collectively evaluated for impairment
 
$
449,403

 
$
86,209

 
$
426,942

 
$
152,742

 
$
115,914

 
$
5,285

 
$
3,523

 
$
1,240,018

Ending balance: loans acquired with deteriorated credit quality
 
$

 
$

 
$
676

 
$
100

 
$

 
$

 
$

 
$
776

 
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):
 
 
September 30, 2015
 
 
30-59
Days
Past Due
 
60-89