10-Q 1 msl10-q03312016.htm MIDSOUTH BANCORP, INC 10-Q 3-31-2016 SEC Document

 

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 March 31, 2016
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 May 10, 2016, there were 11,362,150 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)
 
 
March 31, 2016
(unaudited)
 
December 31, 2015
(audited)
Assets
 
 
 
 
Cash and due from banks, including required reserves of $7,155 and $8,522, respectively
 
$
32,942

 
$
37,170

Interest-bearing deposits in banks
 
77,043

 
48,331

Federal funds sold
 
2,425

 
3,700

Securities available-for-sale, at fair value (cost of $298,564 at March 31, 2016 and $317,375 at December 31, 2015)
 
302,151

 
318,159

Securities held-to-maturity (fair value of $115,631 at March 31, 2016 and $117,698 at December 31, 2015)
 
113,623

 
116,792

Other investments
 
11,195

 
11,188

Loans
 
1,250,049

 
1,263,645

Allowance for loan losses
 
(20,347
)
 
(19,011
)
Loans, net
 
1,229,702

 
1,244,634

Bank premises and equipment, net
 
68,482

 
69,105

Accrued interest receivable
 
6,729

 
6,594

Goodwill
 
42,171

 
42,171

Intangibles
 
5,451

 
5,728

Cash surrender value of life insurance
 
13,690

 
13,622

Other real estate
 
3,908

 
4,187

Other assets
 
7,039

 
6,352

Total assets
 
$
1,916,551

 
$
1,927,733

 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 

 
 

Liabilities:
 
 

 
 

Deposits:
 
 

 
 

Non-interest-bearing
 
$
383,684

 
$
374,261

Interest-bearing
 
1,174,519

 
1,176,589

Total deposits
 
1,558,203

 
1,550,850

Securities sold under agreements to repurchase
 
87,879

 
85,957

Short-term Federal Home Loan Bank advances
 

 
25,000

Long-term Federal Home Loan Bank advances
 
25,744

 
25,851

Junior subordinated debentures
 
22,167

 
22,167

Other liabilities
 
6,704

 
4,771

Total liabilities
 
1,700,697

 
1,714,596

Commitments and contingencies
 


 


Shareholders’ equity:
 
 

 
 

Series B Preferred stock, no par value; 5,000,000 shares authorized, 32,000 shares issued and outstanding at March 31, 2016 and December 31, 2015
 
32,000

 
32,000

Series C Preferred stock, no par value; 100,000 shares authorized, 91,200 shares issued and outstanding at March 31, 2016 and December 31, 2015
 
9,120

 
9,120

Common stock, $0.10 par value; 30,000,000 shares authorized, 11,362,150 shares issued and outstanding at March 31, 2016 and December 31, 2015
 
1,136

 
1,136

Additional paid-in capital
 
110,958

 
110,771

Unearned ESOP shares
 
(1,284
)
 
(1,093
)
Accumulated other comprehensive income
 
2,331

 
509

Retained earnings
 
61,593

 
60,694

Total shareholders’ equity
 
215,854

 
213,137

Total liabilities and shareholders’ equity
 
$
1,916,551

 
$
1,927,733

 
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 March 31,
 
 
2016
 
2015
Interest income:
 
 
 
 
Loans, including fees
 
$
17,123

 
$
18,054

Securities and other investments:
 
 

 
 

Taxable
 
2,036

 
1,925

Nontaxable
 
458

 
584

Federal funds sold
 
5

 
2

Time and interest bearing deposits in other banks
 
94

 
37

Other investments
 
88

 
79

Total interest income
 
19,804

 
20,681

 
 
 
 
 
Interest expense:
 
 

 
 

Deposits
 
907

 
947

Securities sold under agreements to repurchase
 
233

 
230

Other borrowings and payables
 
113

 
97

Junior subordinated debentures
 
167

 
150

Total interest expense
 
1,420

 
1,424

 
 
 
 
 
Net interest income
 
18,384

 
19,257

Provision for loan losses
 
2,800

 
6,000

Net interest income after provision for loan losses
 
15,584

 
13,257

 
 
 
 
 
Non-interest income:
 
 

 
 

Service charges on deposits
 
2,313

 
2,332

Gain on sale of securities, net
 

 
115

ATM and debit card income
 
1,609

 
1,629

Other charges and fees
 
565

 
765

Total non-interest income
 
4,487

 
4,841

 
 
 
 
 
Non-interest expenses:
 
 

 
 

Salaries and employee benefits
 
7,990

 
7,942

Occupancy expense
 
3,597

 
3,685

ATM and debit card expense
 
785

 
663

Data processing
 
458

 
457

FDIC insurance
 
429

 
281

Legal and professional fees
 
383

 
345

Other
 
3,117

 
2,788

Total non-interest expenses
 
16,759

 
16,161

Income before income taxes
 
3,312

 
1,937

Income tax expense
 
963

 
446

 
 
 
 
 
Net earnings
 
2,349

 
1,491

Dividends on preferred stock
 
427

 
173

Net earnings available to common shareholders
 
$
1,922

 
$
1,318

Earnings per share:
 
 

 
 

Basic
 
$
0.17

 
$
0.12

Diluted
 
$
0.17

 
$
0.12

Weighted average number of shares outstanding:
 
 

 
 

Basic
 
11,262

 
11,318

Diluted
 
11,262

 
11,351

Dividends declared per common share
 
$
0.09

 
$
0.09


See notes to unaudited consolidated financial statements.

4


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)
 
 
Three Months Ended March 31,
 
 
2016
 
2015
Net earnings
 
$
2,349

 
$
1,491

Other comprehensive income, net of tax:
 
 

 
 

Unrealized gains on securities available-for-sale:
 
 

 
 

Unrealized holding gains arising during the year
 
2,802

 
1,701

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

 
(115
)
Total other comprehensive income, before tax
 
2,802

 
1,586

Income tax effect related to items of other comprehensive income
 
(980
)
 
(555
)
Total other comprehensive income, net of tax
 
1,822

 
1,031

Total comprehensive income
 
$
4,171

 
$
2,522

See notes to unaudited consolidated financial statements.

5


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statement of Shareholders’ Equity (unaudited)
For the Three Months Ended March 31, 2016
(in thousands, except share and per share data)
 
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-in Capital
 
Unearned
ESOP Shares
 
Accumulated
Other Comprehensive Income
 
Retained Earnings
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Total
Balance - December 31, 2015
 
123,200

 
$
41,120

 
11,362,150

 
$
1,136

 
$
110,771

 
$
(1,093
)
 
$
509

 
$
60,694

 
$
213,137

Net earnings
 

 

 

 

 

 

 

 
2,349

 
2,349

Dividends on Series B and Series C preferred stock
 

 

 

 

 

 

 

 
(427
)
 
(427
)
Dividends on common stock, $0.09 per share
 

 

 

 

 

 

 

 
(1,023
)
 
(1,023
)
Increase in ESOP obligation, net of repayments
 

 

 

 

 

 
(191
)
 

 

 
(191
)
Tax benefit resulting from distribution from Directors Deferred Compensation Plan
 

 

 

 

 
39

 

 

 

 
39

Stock option and restricted stock compensation expense
 

 

 

 

 
97

 

 

 

 
97

ESOP compensation expense
 
 
 
 
 
 
 
 
 
(36
)
 
 
 
 
 
 
 
(36
)
Tax benefit for dividends paid to the ESOP
 
 
 
 
 
 
 
 
 
87

 
 
 
 
 
 
 
87

Change in accumulated other comprehensive income
 

 

 

 

 

 

 
1,822

 

 
1,822

Balance – March 31, 2016
 
123,200

 
$
41,120

 
11,362,150

 
$
1,136

 
$
110,958

 
$
(1,284
)
 
$
2,331

 
$
61,593

 
$
215,854

 
See notes to unaudited consolidated financial statements.




6


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 
 
For the Three Months Ended March 31,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net earnings
 
$
2,349

 
$
1,491

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

 
 

Depreciation
 
1,512

 
1,555

Accretion of purchase accounting adjustments
 
(288
)
 
(189
)
Provision for loan losses
 
2,800

 
6,000

Deferred tax benefit
 
(503
)
 
(1,951
)
Amortization of premiums on securities, net
 
681

 
633

Stock option expense
 
84

 
85

Restricted stock expense
 
13

 

Excess of book value over market value of ESOP shares released
 
(36
)
 

Net gain on sale of investment securities
 

 
(115
)
Net loss (gain) on sale of other real estate owned
 
24

 
(50
)
Net write down of other real estate owned
 
120

 
29

Net gain on sale/disposal of premises and equipment
 
(14
)
 
(1
)
Change in accrued interest receivable
 
(135
)
 
(106
)
Change in accrued interest payable
 
(9
)
 
(4
)
Change in other assets & other liabilities, net
 
454

 
1,684

Net cash provided by operating activities
 
7,052

 
9,061

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Proceeds from maturities and calls of securities available-for-sale
 
18,379

 
17,988

Proceeds from maturities and calls of securities held-to-maturity
 
2,919

 
3,326

Proceeds from sale of securities available-for-sale
 

 
34,509

Purchases of securities available-for-sale
 

 
(73,853
)
Proceeds from sale of other investments
 

 
349

Purchases of other investments
 
(7
)
 
(3
)
Net change in loans
 
12,293

 
(28,461
)
Purchases of premises and equipment
 
(915
)
 
(1,362
)
Proceeds from sale of premises and equipment
 
40

 
4

Proceeds from sale of other real estate owned
 
245

 
532

Net cash provided by (used in) investing activities
 
32,954

 
(46,971
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Change in deposits
 
7,366

 
30,901

Change in securities sold under agreements to repurchase
 
1,922

 
25,248

Borrowings on Federal Home Loan Bank advances
 
25,000

 
25,000

Repayments of Federal Home Loan Bank advances
 
(50,017
)
 
(25,015
)
Proceeds and tax benefit from exercise of stock options
 

 
80

Tax benefit resulting from distribution from Directors Deferred Compensation Plan
 
39

 
420

Tax benefit for dividends paid to ESOP
 
87

 

Payment of dividends on preferred stock
 
(171
)
 
(174
)
Payment of dividends on common stock
 
(1,023
)
 
(1,020
)
Net cash (used in) provided by financing activities
 
(16,797
)
 
55,440

 
 
 
 
 
Net increase in cash and cash equivalents
 
23,209

 
17,530

Cash and cash equivalents, beginning of period
 
89,201

 
86,872

Cash and cash equivalents, end of period
 
$
112,410

 
$
104,402

 
 
 
 
 
Supplemental cash flow information:
 
 

 
 

Interest paid
 
$
1,429

 
$
1,427

Noncash investing and financing activities:
 
 

 
 

Transfer of loans to other real estate
 
110

 
866

Change in accrued common stock dividends
 

 
1

Change in accrued preferred stock dividends
 
256

 

Net change in loan to ESOP
 
(191
)
 
(268
)
 
See notes to unaudited consolidated financial statements.


7


MidSouth Bancorp, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
March 31, 2016
(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 March 31, 2016 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 2015 Annual Report on Form 10-K.
 
The results of operations for the three-month period ended March 31, 2016 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 2015 Annual Report on Form 10-K.

Recent Accounting Pronouncements ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities is the first ASU issued under the FASB's financial instruments project. ASU 2016-01 primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The guidance in this ASU requires all equity securities with readily determinable fair values to be measured at fair value on the balance sheet, with changes in fair value recorded through earnings. For financial liabilities that are measured at fair value in accordance with the fair value option, the guidance requires changes in the fair value of a financial liabilities attributable to a change in instrument-specific credit risk to be recorded separately in other comprehensive income. This ASU eliminates the requirement to disclose the methods and significant assumptions used to estimate fair value. It does require public entities to use the exit price when measuring the fair value of financial instruments measured at amortized cost for disclosure purposes In addition, the new guidance requires financial assets and financial liabilities to be presented separately in the notes to the financial statements, grouped by measurement category and form of financial asset. The effective date of this Update is for fiscal years beginning on or after December 15, 2017. The Company is evaluating the impact, if any, that ASU 2016-01 will have on its financial position, results of operations, and its financial statement disclosures.

ASU 2016-02, Leases (Topic 842) was issued with the intention of improving financial reporting about leasing transactions. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP - which requires only capital leases to be recognized on the balance sheet - the guidance in the ASU will require both types of leases to be recognized on the balance sheet. The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The effective date of this Update is for fiscal years beginning on or after December 15, 2018. The Company is evaluating the impact that ASU 2016-02 will have on its financial position, results of operations, and its financial statement disclosures. 

ASU 2016-09, Compensation - Stock Compensation (Topic 718) was issued as part of the FASB's simplification initiative. Under the new guidance, several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The effective date of this Update is for fiscal years beginning on or after December 15, 2016. The Company is evaluating the impact that ASU 2016-09 will have on its financial position, results of operations, and its financial statement disclosures. 



8


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

 
 
March 31, 2016
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Available-for-sale:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
23,624

 
$
625

 
$
10

 
$
24,239

GSE mortgage-backed securities
 
81,030

 
2,890

 
24

 
83,896

Collateralized mortgage obligations: residential
 
187,859

 
871

 
744

 
187,986

Collateralized mortgage obligations: commercial
 
3,951

 

 
43

 
3,908

Mutual funds
 
2,100

 
22

 

 
2,122

 
 
$
298,564

 
$
4,408

 
$
821

 
$
302,151

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Available-for-sale:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
30,750

 
$
770

 
$
27

 
$
31,493

GSE mortgage-backed securities
 
84,946

 
2,321

 
229

 
87,038

Collateralized mortgage obligations: residential
 
194,067

 
297

 
2,276

 
192,088

Collateralized mortgage obligations: commercial
 
5,512

 
1

 
65

 
5,448

Mutual funds
 
2,100

 

 
8

 
2,092

 
 
$
317,375

 
$
3,389

 
$
2,605

 
$
318,159


 
 
March 31, 2016
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Held-to-maturity:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
43,430

 
$
935

 
$
4

 
$
44,361

GSE mortgage-backed securities
 
53,423

 
1,256

 
12

 
54,667

Collateralized mortgage obligations: residential
 
10,429

 

 
193

 
10,236

Collateralized mortgage obligations: commercial
 
6,341

 
26

 

 
6,367

 
 
$
113,623

 
$
2,217

 
$
209

 
$
115,631

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Held-to-maturity:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
43,737

 
$
697

 
$
6

 
$
44,428

GSE mortgage-backed securities
 
55,696

 
705

 
131

 
56,270

Collateralized mortgage obligations: residential
 
10,803

 

 
361

 
10,442

Collateralized mortgage obligations: commercial
 
6,556

 
2

 

 
6,558

 
 
$
116,792

 
$
1,404

 
$
498

 
$
117,698


With the exception of two private-label collateralized mortgage obligations (“CMOs”) with a combined balance remaining of $23,000 at March 31, 2016, all of the Company’s CMOs are government-sponsored enterprise (“GSE”) securities.
 

9


The amortized cost and fair value of debt securities at March 31, 2016 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
 
$
2,249

 
$
2,276

Due after one year through five years
 
17,887

 
18,379

Due after five years through ten years
 
2,871

 
2,973

Due after ten years
 
617

 
611

Mortgage-backed securities and collateralized mortgage obligations:
 
 

 
 

Residential
 
268,889

 
271,882

Commercial
 
3,951

 
3,908

Mutual funds
 
2,100

 
2,122

 
 
$
298,564

 
$
302,151

 
 
 
 
 
 
 
Amortized
Cost
 
Fair
Value
Held-to-maturity:
 
 
 
 
Due in one year or less
 
$
479

 
$
479

Due after one year through five years
 
3,454

 
3,501

Due after five years through ten years
 
11,390

 
11,691

Due after ten years
 
28,107

 
28,690

Mortgage-backed securities and collateralized mortgage obligations:
 
 

 
 

Residential
 
63,852

 
64,903

Commercial
 
6,341

 
6,367

 
 
$
113,623

 
$
115,631


Details concerning investment securities with unrealized losses are as follows (in thousands):
 
 
 
March 31, 2016
 
 
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
 
$
597

 
$
4

 
$
610

 
$
6

 
$
1,207

 
$
10

GSE mortgage-backed  securities
 
11,054

 
24

 

 

 
11,054

 
24

Collateralized mortgage  obligations: residential
 
56,918

 
269

 
26,003

 
475

 
82,921

 
744

Collateralized mortgage  obligations: commercial
 
1,236

 
2

 
2,673

 
41

 
3,909

 
43

 
 
$
69,805

 
$
299

 
$
29,286

 
$
522

 
$
99,091

 
$
821

 
 
 
 
 
 
 
 
 
 
 
 
 

10


 
 
December 31, 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
 
$
1,192

 
$
27

 
$

 
$

 
$
1,192

 
$
27

GSE mortgage-backed  securities
 
21,607

 
229

 

 

 
21,607

 
229

Collateralized mortgage  obligations: residential
 
140,999

 
1,207

 
30,029

 
1,069

 
171,028

 
2,276

Collateralized mortgage  obligations: commercial
 

 

 
2,946

 
65

 
2,946

 
65

Other asset-backed securities
 
2,092

 
8

 

 

 
2,092

 
8

 
 
$
165,890

 
$
1,471

 
$
32,975

 
$
1,134

 
$
198,865

 
$
2,605


 
 
March 31, 2016
 
 
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
 
$

 
$

 
$
505

 
$
4

 
$
505

 
$
4

GSE mortgage-backed securities
 
6,915

 
12

 

 

 
6,915

 
12

Collateralized mortgage obligations: residential
 

 

 
10,235

 
193

 
10,235

 
193

 
 
$
6,915

 
$
12

 
$
10,740

 
$
197

 
$
17,655

 
$
209

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 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
 
$
541

 
$
1

 
$
505

 
$
5

 
$
1,046

 
$
6

GSE mortgage-backed securities
 

 

 
7,021

 
131

 
7,021

 
131

Collateralized mortgage obligations: residential
 

 

 
10,442

 
361

 
10,442

 
361

 
 
$
541

 
$
1

 
$
17,968

 
$
497

 
$
18,509

 
$
498


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 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.

11


 
As of March 31, 2016, 32 securities had unrealized losses totaling 0.87% of the individual securities’ amortized cost basis and 0.25% of the Company’s total amortized cost basis.  Of the 32 securities, 15 had been in an unrealized loss position for over twelve months at March 31, 2016.  These 15 securities had an amortized cost basis and unrealized loss of $40.7 million and $719,000, respectively.  The unrealized losses on debt securities at March 31, 2016 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 March 31, 2016, 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 March 31, 2016.
 
During the three months ended March 31, 2016, the Company did not sell any securities.  During the three months ended March 31, 2015, the Company sold 18 securities classified as available-for-sale at a net gain of $115,000. Of the 18 securities sold, 8 were sold with gains totaling $250,000 and 10 securities were sold at a loss of $135,000.
 
Securities with an aggregate carrying value of approximately $321.1 million and $285.4 million at March 31, 2016 and December 31, 2015, 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):
 
 
March 31, 2016
 
December 31, 2015
Commercial, financial and agricultural
 
$
441,160

 
$
454,028

Real estate - construction
 
84,790

 
74,952

Real estate – commercial
 
467,648

 
471,141

Real estate – residential
 
149,961

 
149,064

Installment loans to individuals
 
103,181

 
111,009

Lease financing receivable
 
1,590

 
1,968

Other
 
1,719

 
1,483

 
 
1,250,049

 
1,263,645

Less allowance for loan losses
 
(20,347
)
 
(19,011
)
 
 
$
1,229,702

 
$
1,244,634

 
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 March 31, 2016, 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 $252.5 million, or 20.2% of total loans.  Additionally, the Company’s exposure to loans secured by commercial real estate is monitored.  At March 31, 2016, loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately $532.5 million.  Of the $532.5 million, $467.6 million represent CRE loans, 54% of which are secured by owner-occupied commercial properties.  Of the $532.5 million in loans secured by commercial real estate, $26.0 million, or 4.9%, were on nonaccrual status at March 31, 2016.
 
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 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

12


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 three months ended March 31, 2016 and 2015 is as follows (in thousands):
 
 
 
March 31, 2016
 
 
 
 
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
 
$
11,268

 
$
819

 
$
4,614

 
$
816

 
$
1,468

 
$
14

 
$
12

 
$
19,011

Charge-offs
 
(1,307
)
 

 

 
(4
)
 
(283
)
 

 

 
(1,594
)
Recoveries
 
26

 

 
76

 
3

 
25

 

 

 
130

Provision
 
2,194

 
(420
)
 
861

 
(170
)
 
336

 
(3
)
 
2

 
2,800

Ending balance
 
$
12,181

 
$
399

 
$
5,551

 
$
645

 
$
1,546

 
$
11

 
$
14

 
$
20,347

Ending balance: individually evaluated for impairment
 
$
1,021

 
$

 
$
2,586

 
$
267

 
$
278

 
$

 
$

 
$
4,152

Ending balance: collectively evaluated for impairment
 
$
11,160

 
$
399

 
$
2,965

 
$
378

 
$
1,268

 
$
11

 
$
14

 
$
16,195

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
 
$
441,160

 
$
84,790

 
$
467,648

 
$
149,961

 
$
103,181

 
$
1,590

 
$
1,719

 
$
1,250,049

Ending balance: individually evaluated for impairment
 
$
29,097

 
$
35

 
$
27,511

 
$
2,230

 
$
506

 
$

 
$

 
$
59,379

Ending balance: collectively evaluated for impairment
 
$
412,063

 
$
84,755

 
$
439,530

 
$
147,653

 
$
102,675

 
$
1,590

 
$
1,719

 
$
1,189,985

Ending balance: loans acquired with deteriorated credit quality
 
$

 
$

 
$
607

 
$
78

 
$

 
$

 
$

 
$
685


13


 
 
March 31, 2015
 
 
 
 
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
 
$
5,729

 
$
954

 
$
2,402

 
$
810

 
$
1,311

 
$
16

 
$
4

 
$
11,226

Charge-offs
 
(1,001
)
 
(6
)
 

 
(2
)
 
(323
)
 

 

 
(1,332
)
Recoveries
 
132

 

 
6

 
2

 
26

 

 

 
166

Provision
 
5,523

 
3

 
202

 
7

 
260

 
4

 
1

 
6,000

Ending balance
 
$
10,383

 
$
951

 
$
2,610

 
$
817

 
$
1,274

 
$
20

 
$
5

 
$
16,060

Ending balance: individually evaluated for impairment
 
$
737

 
$

 
$
645

 
$
57

 
$
206

 
$

 
$

 
$
1,645

Ending balance: collectively evaluated for impairment
 
$
9,646

 
$
951

 
$
1,965

 
$
760

 
$
1,068

 
$
20

 
$
5

 
$
14,415

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
 
$
484,508

 
$
76,964

 
$
471,737

 
$
153,647

 
$
115,284

 
$
6,350

 
$
2,439

 
$
1,310,929

Ending balance: individually evaluated for impairment
 
$
2,427

 
$
477

 
$
7,977

 
$
1,471

 
$
405

 
$

 
$

 
$
12,757

Ending balance: collectively evaluated for impairment
 
$
482,081

 
$
76,487

 
$
463,106

 
$
152,087

 
$
114,879

 
$
6,350

 
$
2,439

 
$
1,297,429

Ending balance: loans acquired with deteriorated credit quality
 
$

 
$

 
$
654

 
$
89

 
$

 
$

 
$

 
$
743

 
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.


14


An age analysis of past due loans (including both accruing and non-accruing loans) is as follows (in thousands):
 
 
March 31, 2016
 
 
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
 
$
6,021

 
$
1,922

 
$
24,116

 
$
32,059

 
$
409,101

 
$
441,160

 
$
204

Commercial real estate - construction
 
260

 

 
11

 
271

 
64,549

 
64,820

 

Commercial real estate - other
 
10,754

 

 
16,275

 
27,029

 
440,619

 
467,648

 

Residential - construction
 
1,468

 

 

 
1,468

 
18,502

 
19,970

 

Residential - prime
 
1,046

 
97

 
1,625

 
2,768

 
147,193

 
149,961

 

Consumer - credit card
 
37

 
17

 
16

 
70

 
5,648

 
5,718

 
16

Consumer - other
 
625

 
306

 
478

 
1,409

 
96,054

 
97,463

 
38

Lease financing receivable
 

 

 

 

 
1,590

 
1,590

 

Other loans
 
66

 
3

 

 
69

 
1,650

 
1,719

 

 
 
$
20,277

 
$
2,345

 
$
42,521

 
$
65,143

 
$
1,184,906

 
$
1,250,049

 
$
258

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 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
 
$
1,362

 
$
2,317

 
$
25,696

 
$
29,375

 
$
424,653

 
$
454,028

 
$
59

Commercial real estate - construction
 
1,047

 

 
12

 
1,059

 
55,839

 
56,898

 

Commercial real estate - other
 
1,164

 
514

 
19,512

 
21,190

 
449,951

 
471,141

 

Residential - construction
 

 

 

 

 
18,054

 
18,054

 

Residential - prime
 
1,703

 
367

 
1,563

 
3,633

 
145,431

 
149,064

 
19

Consumer - credit card
 
38

 
25

 
22

 
85

 
5,970

 
6,055

 
22

Consumer - other
 
984

 
219

 
387

 
1,590

 
103,364

 
104,954

 
47

Lease financing receivable
 

 

 

 

 
1,968

 
1,968

 

Other loans
 
101

 
4

 

 
105

 
1,378

 
1,483

 

 
 
$
6,399

 
$
3,446

 
$
47,192

 
$
57,037

 
$
1,206,608

 
$
1,263,645

 
$
147

 

15


Non-accrual loans are as follows (in thousands):
 
 
 
March 31, 2016
 
December 31, 2015
Commercial, financial, and agricultural
 
$
24,900

 
$
27,705

Commercial real estate – construction
 
35

 
37

Commercial real estate - other
 
25,951

 
19,907

Residential - construction
 

 

Residential - prime
 
2,322

 
1,998