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EX-31.1 - EXHIBIT 31.1 - MIDSOUTH BANCORP INCex31_1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q
 
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
o    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   x   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   x   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 x
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   x

As of November 7, 2014, there were 11,337,891 shares of the registrant’s Common Stock, par value $0.10 per share, outstanding.
 


Part I – Financial Information
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Part II – Other Information
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Part I – Financial Information
Item 1. Financial Statements.
MidSouth Bancorp, Inc. and Subsidiaries
 
Consolidated Balance Sheets
(dollars in thousands, except share data)
 
   
September 30, 2014
(unaudited)
   
December 31, 2013*
(audited)
 
Assets
       
Cash and due from banks, including required reserves of $9,922 and $9,542, respectively
 
$
41,191
   
$
43,488
 
Interest-bearing deposits in banks
   
10,999
     
13,993
 
Federal funds sold
   
2,025
     
2,250
 
Securities available-for-sale, at fair value (cost of $284,572 at September 30, 2014 and $341,828 at December 31, 2013)
   
288,397
     
341,665
 
Securities held-to-maturity (fair value of $144,597 at September 30, 2014 and $151,168 at December 31, 2013)
   
145,030
     
155,523
 
Other investments
   
12,091
     
11,526
 
Loans
   
1,248,373
     
1,137,554
 
Allowance for loan losses
   
(9,425
)
   
(8,779
)
Loans, net
   
1,238,948
     
1,128,775
 
Bank premises and equipment, net
   
71,115
     
72,343
 
Accrued interest receivable
   
6,647
     
6,692
 
Goodwill
   
42,171
     
42,171
 
Intangibles
   
7,111
     
7,941
 
Cash surrender value of life insurance
   
13,565
     
13,450
 
Other real estate
   
4,663
     
6,687
 
Other assets
   
7,807
     
4,656
 
Total assets
 
$
1,891,760
   
$
1,851,160
 
                 
Liabilities and Shareholders’ Equity
               
Liabilities:
               
Deposits:
               
Non-interest-bearing
 
$
396,263
   
$
383,257
 
Interest-bearing
   
1,124,581
     
1,135,546
 
Total deposits
   
1,520,844
     
1,518,803
 
Securities sold under agreements to repurchase
   
70,964
     
53,916
 
Short-term Federal Home Loan Bank advances
   
35,000
     
25,000
 
Notes payable
   
26,384
     
27,703
 
Junior subordinated debentures
   
22,167
     
29,384
 
Other liabilities
   
10,387
     
5,605
 
Total liabilities
   
1,685,746
     
1,660,411
 
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, 2014 and December 31, 2013
   
32,000
     
32,000
 
Series C Preferred stock, no par value; 100,000 shares authorized, 94,046 and 99,971 issued and 93,959 and 99,971 outstanding at September 30, 2014 and December 31, 2013, respectively; 87 shares in treasury at September 30, 2014 and none at December 31, 2013
   
9,405
     
9,997
 
Common stock, $0.10 par value; 30,000,000 shares authorized, 11,487,078 and 11,407,196 issued and 11,336,594 and 11,256,712 outstanding at September 30, 2014 and December 31, 2013, respectively; 150,484 shares in treasury at September 30, 2014 and December 31, 2013
   
1,149
     
1,141
 
Additional paid-in capital
   
112,567
     
111,017
 
Unearned ESOP shares
   
(267
)
   
-
 
Accumulated other comprehensive income (loss)
   
2,486
     
(106
)
Treasury stock, at cost
   
(3,295
)
   
(3,286
)
Retained earnings
   
51,969
     
39,986
 
Total shareholders’ equity
   
206,014
     
190,749
 
Total liabilities and shareholders’ equity
 
$
1,891,760
   
$
1,851,160
 
See notes to unaudited consolidated financial statements.
* Derived from audited financial statements.
 
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,
 
   
2014
   
2013
   
2014
   
2013
 
Interest income:
               
Loans, including fees
 
$
18,273
   
$
17,652
   
$
53,525
   
$
52,966
 
Securities and other investments:
                               
Taxable
   
1,965
     
2,171
     
6,164
     
6,481
 
Nontaxable
   
652
     
785
     
2,007
     
2,436
 
Federal funds sold
   
2
     
1
     
4
     
6
 
Time and interest bearing deposits in other banks
   
15
     
15
     
42
     
70
 
Other investments
   
109
     
80
     
268
     
230
 
Total interest income
   
21,016
     
20,704
     
62,010
     
62,189
 
                                 
Interest expense:
                               
Deposits
   
859
     
976
     
2,588
     
3,044
 
Federal funds purchased
   
-
     
-
     
2
     
3
 
Securities sold under agreements to repurchase
   
210
     
204
     
588
     
565
 
Other borrowings and payables
   
108
     
118
     
318
     
345
 
Junior subordinated debentures
   
327
     
335
     
994
     
1,007
 
Total interest expense
   
1,504
     
1,633
     
4,490
     
4,964
 
                                 
Net interest income
   
19,512
     
19,071
     
57,520
     
57,225
 
Provision for loan losses
   
1,175
     
450
     
2,925
     
2,250
 
Net interest income after provision for loan losses
   
18,337
     
18,621
     
54,595
     
54,975
 
                                 
Non-interest income:
                               
Service charges on deposits
   
2,556
     
2,352
     
7,385
     
6,794
 
Gain on securities, net
   
-
     
25
     
128
     
229
 
ATM and debit card income
   
1,808
     
1,719
     
5,375
     
4,713
 
Executive officer life insurance proceeds
   
-
     
-
     
3,000
     
-
 
Other charges and fees
   
1,830
     
892
     
3,484
     
2,687
 
Total non-interest income
   
6,194
     
4,988
     
19,372
     
14,423
 
                                 
Non-interest expenses:
                               
Salaries and employee benefits
   
8,287
     
8,640
     
25,588
     
25,401
 
Occupancy expense
   
3,834
     
3,874
     
11,314
     
11,196
 
FDIC insurance
   
269
     
265
     
783
     
854
 
Other
   
5,467
     
5,702
     
14,997
     
16,728
 
Total non-interest expenses
   
17,857
     
18,481
     
52,682
     
54,179
 
                                 
Income before income taxes
   
6,674
     
5,128
     
21,285
     
15,219
 
Income tax expense
   
2,202
     
1,588
     
5,839
     
4,588
 
                                 
Net earnings
   
4,472
     
3,540
     
15,446
     
10,631
 
Dividends on preferred stock
   
174
     
468
     
524
     
1,152
 
Net earnings available to common shareholders
 
$
4,298
   
$
3,072
   
$
14,922
   
$
9,479
 
                                 
Earnings per share:
                               
Basic
 
$
0.38
   
$
0.27
   
$
1.32
   
$
0.84
 
Diluted
 
$
0.37
   
$
0.27
   
$
1.28
   
$
0.83
 
Weighted average number of shares outstanding:
                               
Basic
   
11,314
     
11,253
     
11,283
     
11,243
 
Diluted
   
11,955
     
11,869
     
11,904
     
11,853
 
Dividends declared per common share
 
$
0.09
   
$
0.08
   
$
0.26
   
$
0.23
 
 
See notes to unaudited consolidated financial statements.
 
MidSouth Bancorp, Inc. and Subsidiaries
 
Consolidated Statements of Comprehensive Income (unaudited)
 
(in thousands)
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Net earnings
 
$
4,472
   
$
3,540
   
$
15,446
   
$
10,631
 
Other comprehensive income (loss), net of tax:
                               
Unrealized gains (losses) on securities available-for-sale:
                               
Unrealized holding gains (losses) arising during the year
   
(405
)
   
(95
)
   
4,116
     
(10,203
)
Less: reclassification adjustment for gains on sales of securities available-for-sale
   
-
     
(25
)
   
(128
)
   
(229
)
Total other comprehensive income (loss), before tax
   
(405
)
   
(120
)
   
3,988
     
(10,432
)
Income tax effect related to items of other comprehensive income (loss)
   
(142
)
   
(42
)
   
1,396
     
(3,651
)
Total other comprehensive income (loss), net of tax
   
(263
)
   
(78
)
   
2,592
     
(6,781
)
Total comprehensive income
 
$
4,209
   
$
3,462
   
$
18,038
   
$
3,850
 
 
See notes to unaudited consolidated financial statements.
 
MidSouth Bancorp, Inc. and Subsidiaries
 
Consolidated Statement of Shareholders’ Equity (unaudited)
 
For the Nine Months Ended September 30, 2014
(in thousands, except share and per share data)
 
   
Preferred
Stock
   
Common
Stock
   
Additional Paid-in
   
Unearned ESOP
   
Accumulated Other Comprehensive
   
Treasury
   
Retained
     
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Shares
   
Income (Loss)
   
Stock
   
Earnings
   
Total
 
Balance - December 31, 2013
   
131,971
   
$
41,997
     
11,407,196
   
$
1,141
   
$
111,017
   
$
-
   
$
(106
)
 
$
(3,286
)
 
$
39,986
   
$
190,749
 
Net earnings
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
15,446
     
15,446
 
Dividends on Series B and Series C preferred stock
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(524
)
   
(524
)
Dividends on common stock, $0.26 per share
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(2,939
)
   
(2,939
)
Conversion of Series C preferred stock to common stock
   
(5,925
)
   
(592
)
   
32,917
     
3
     
589
     
-
     
-
     
-
     
-
     
-
 
Repurchase of preferred stock, 87 shares
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(9
)
   
-
     
(9
)
Increase in ESOP obligation
   
-
     
-
     
-
     
-
     
-
     
(267
)
   
-
     
-
     
-
     
(267
)
Exercise of stock options
   
-
     
-
     
46,965
     
5
     
605
     
-
     
-
     
-
     
-
     
610
 
Tax benefit resulting from issuance of stock options, net adjustment
   
-
     
-
     
-
     
-
     
1
     
-
     
-
     
-
     
-
     
1
 
Stock option expense
   
-
     
-
     
-
     
-
     
355
     
-
     
-
     
-
     
-
     
355
 
Change in accumulated other comprehensive income (loss)
   
-
     
-
     
-
     
-
     
-
     
-
     
2,592
     
-
     
-
     
2,592
 
Balance – September 30, 2014
   
126,046
   
$
41,405
     
11,487,078
   
$
1,149
   
$
112,567
   
(267
)
 
$
2,486
   
(3,295
)
 
$
51,969
   
$
206,014
 

See notes to unaudited consolidated financial statements.
 
MidSouth Bancorp, Inc. and Subsidiaries
 
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 
   
For the Nine Months Ended September 30,
 
   
2014
   
2013
 
Cash flows from operating activities:
       
Net earnings
 
$
15,446
   
$
10,631
 
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Depreciation
   
4,518
     
4,106
 
Accretion of purchase accounting adjustments
   
(1,924
)
   
(4,631
)
Provision for loan losses
   
2,925
     
2,250
 
Provision for deferred tax expense
   
2,034
     
2,181
 
Amortization of premiums on securities, net
   
2,432
     
3,432
 
Amortization of other investments
   
4
     
11
 
Stock option expense
   
355
     
212
 
Restricted stock expense
   
-
     
21
 
Net gain on sale of investment securities
   
(128
)
   
(229
)
Net (gain) loss on sale of other real estate owned
   
(1,081
)
   
205
 
Net write down of other real estate owned
   
31
     
380
 
Net (gain) loss on sale/disposal of premises and equipment
   
232
     
118
 
Change in accrued interest receivable
   
45
     
(174
)
Change in accrued interest payable
   
(240
)
   
(348
)
Change in other assets & other liabilities, net
   
(2,006
)
   
189
 
Net cash provided by operating activities
   
22,643
     
18,354
 
                 
Cash flows from investing activities:
               
Net decrease in time deposits in other banks
   
-
     
881
 
Proceeds from maturities and calls of securities available-for-sale
   
33,466
     
59,430
 
Proceeds from maturities and calls of securities held-to-maturity
   
10,778
     
19,617
 
Proceeds from sale of securities available-for-sale
   
22,153
     
55,808
 
Purchases of securities available-for-sale
   
-
     
(68,043
)
Purchases of securities held-to-maturity
   
(1,104
)
   
(26,382
)
Proceeds from redemptions of other investments
   
150
     
1,000
 
Redemption of Capital Securities related to MidSouth Statutory Trust I
   
217
     
-
 
Purchases of other investments
   
(567
)
   
(2,653
)
Net change in loans
   
(111,329
)
   
(90,091
)
Purchases of premises and equipment
   
(4,265
)
   
(10,955
)
Proceeds from sale of premises and equipment
   
743
     
45
 
Proceeds from sale of other real estate owned
   
3,315
     
940
 
Net cash used in investing activities
   
(46,443
)
   
(60,403
)
                 
Cash flows from financing activities:
               
Change in deposits
   
2,244
     
(45,232
)
Change in securities sold under agreements to repurchase
   
17,048
     
32,462
 
Change in federal funds purchased
   
-
     
3,900
 
Borrowings on Federal Home Loan Bank advances
   
10,000
     
25,000
 
Repayments of FHLB advance
   
(45
)
   
(43
)
Redemption of  MidSouth Statutory Trust I
   
(7,217
)
   
-
 
Repayments of notes payable
   
(1,000
)
   
(750
)
Purchase of treasury stock
   
(9
)
   
-
 
Proceeds and tax benefit from exercise of stock options
   
611
     
30
 
Tax benefit from issuance of restricted stock
   
-
     
14
 
Payment of dividends on preferred stock
   
(530
)
   
(1,052
)
Payment of dividends on common stock
   
(2,818
)
   
(2,419
)
Net cash provided by financing activities
   
18,284
     
11,910
 
                 
Net increase (decrease) in cash and cash equivalents
   
(5,516
)
   
(30,139
)
Cash and cash equivalents, beginning of period
   
59,731
     
73,573
 
Cash and cash equivalents, end of period
 
$
54,215
   
$
43,434
 
                 
Supplemental cash flow information:
               
Interest paid
 
$
4,730
   
$
5,106
 
Income taxes paid
   
5,815
     
3,500
 
Noncash investing and financing activities:
               
Transfer of loans to other real estate
   
317
     
701
 
Change in accrued common stock dividends
   
121
     
167
 
Change in accrued preferred stock dividends
   
(6
)
   
100
 
Financed sales of other real estate
   
84
     
-
 
Net change in loan to ESOP
   
(267
)
   
-
 
 
See notes to unaudited consolidated financial statements.
 
MidSouth Bancorp, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
September 30, 2014

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, 2014 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 2013 Annual Report on Form 10-K.
 
The results of operations for the nine-month period ended September 30, 2014 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 2013 Annual Report on Form 10-K.
 
Recently Adopted Accounting Pronouncements — ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force) provides guidance on when an in-substance repossession or foreclosure occurs, which requires the mortgage loan to be derecognized and the related real estate be recognized.  Creditors must disclose the amount of foreclosed residential real estate held as well as the amount of collateralized loans for which foreclosure is in process.  The effective date of this Update is for fiscal years beginning on or after December 15, 2014 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.
 
2.  Investment Securities
 
The portfolio of investment securities consisted of the following (in thousands):

   
September 30, 2014
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
Available-for-sale:
               
U.S. Government sponsored enterprises
 
$
10,418
   
$
-
   
$
126
   
$
10,292
 
Obligations of state and political subdivisions
   
48,053
     
1,820
     
26
     
49,847
 
GSE mortgage-backed securities
   
110,482
     
2,787
     
623
     
112,646
 
Collateralized mortgage obligations: residential
   
64,946
     
299
     
1,872
     
63,373
 
Collateralized mortgage obligations: commercial
   
25,803
     
308
     
117
     
25,994
 
Other asset-backed securities
   
24,406
     
411
     
-
     
24,817
 
Collateralized debt obligation
   
464
     
964
     
-
     
1,428
 
   
$
284,572
   
$
6,589
   
$
2,764
   
$
288,397
 
 
   
December 31, 2013
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
Available-for-sale:
               
U.S. Government sponsored enterprises
 
$
11,455
   
$
1
   
$
191
   
$
11,265
 
Obligations of state and political subdivisions
   
57,925
     
2,296
     
243
     
59,978
 
GSE mortgage-backed securities
   
146,129
     
2,029
     
2,193
     
145,965
 
Collateralized mortgage obligations: residential
   
73,569
     
212
     
2,894
     
70,887
 
Collateralized mortgage obligations: commercial
   
27,082
     
416
     
152
     
27,346
 
Other asset-backed securities
   
25,204
     
351
     
66
     
25,489
 
Collateralized debt obligation
   
464
     
271
     
-
     
735
 
   
$
341,828
   
$
5,576
   
$
5,739
   
$
341,665
 
 
   
September 30, 2014
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
Held-to-maturity:
               
Obligations of state and political subdivisions
 
$
46,608
   
$
203
   
$
324
   
$
46,487
 
GSE mortgage-backed securities
   
69,886
     
715
     
412
     
70,189
 
Collateralized mortgage obligations: residential
   
13,106
     
-
     
547
     
12,559
 
Collateralized mortgage obligations: commercial
   
15,430
     
49
     
117
     
15,362
 
   
$
145,030
   
$
967
   
$
1,400
   
$
144,597
 
 
   
December 31, 2013
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
Held-to-maturity:
               
Obligations of state and political subdivisions
 
$
47,377
   
$
38
   
$
2,586
   
$
44,829
 
GSE mortgage-backed securities
   
78,272
     
148
     
1,079
     
77,341
 
Collateralized mortgage obligations: residential
   
14,189
     
-
     
979
     
13,210
 
Collateralized mortgage obligations: commercial
   
15,685
     
103
     
-
     
15,788
 
   
$
155,523
   
$
289
   
$
4,644
   
$
151,168
 

With the exception of three private-label collateralized mortgage obligations (“CMOs”) with a combined balance remaining of $47,000 at September 30, 2014, all of the Company’s CMOs are government-sponsored enterprise (“GSE”) securities.
 
The amortized cost and fair value of debt securities at September 30, 2014 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
 
$
8,533
   
$
8,625
 
Due after one year through five years
   
32,867
     
33,763
 
Due after five years through ten years
   
13,969
     
14,631
 
Due after ten years
   
3,102
     
3,120
 
Other asset-backed securities
   
24,406
     
24,817
 
Mortgage-backed securities and collateralized mortgage obligations:
               
Residential
   
175,428
     
176,019
 
Commercial
   
25,803
     
25,994
 
Collateralized debt obligation
   
464
     
1,428
 
   
$
284,572
   
$
288,397
 

   
Amortized
Cost
   
Fair
Value
 
Held-to-maturity:
       
Due in one year or less
 
$
106
   
$
105
 
Due after one year through five years
   
3,105
     
3,130
 
Due after five years through ten years
   
7,829
     
7,787
 
Due after ten years
   
35,568
     
35,465
 
Mortgage-backed securities and collateralized mortgage obligations:
               
Residential
   
82,992
     
82,748
 
Commercial
   
15,430
     
15,362
 
   
$
145,030
   
$
144,597
 
Details concerning investment securities with unrealized losses are as follows (in thousands):

   
September 30, 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
 
$
-
   
$
-
   
$
10,292
   
$
126
   
$
10,292
   
$
126
 
Obligations of state and  political subdivisions
   
-
     
-
     
3,739
     
26
     
3,739
     
26
 
GSE mortgage-backed  securities
   
10,873
     
68
     
32,344
     
555
     
43,217
     
623
 
Collateralized mortgage  obligations: residential
   
4,483
     
16
     
43,689
     
1,856
     
48,172
     
1,872
 
Collateralized mortgage  obligations: commercial
   
-
     
-
     
3,952
     
117
     
3,952
     
117
 
   
$
15,356
   
$
84
   
$
94,016
   
$
2,680
   
$
109,372
   
$
2,764
 
 
   
December 31, 2013
 
   
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
 
$
10,463
   
$
191
   
$
-
   
$
-
   
$
10,463
   
$
191
 
Obligations of state and  political subdivisions
   
4,256
     
243
     
-
     
-
     
4,256
     
243
 
GSE mortgage-backed  securities
   
68,028
     
2,193
     
-
     
-
     
68,028
     
2,193
 
Collateralized mortgage  obligations: residential
   
56,975
     
2,563
     
4,371
     
331
     
61,346
     
2,894
 
Collateralized mortgage  obligations: commercial
   
4,282
     
152
     
-
     
-
     
4,282
     
152
 
Other asset-backed securities
   
13,099
     
66
     
-
     
-
     
13,099
     
66
 
   
$
157,103
   
$
5,408
   
$
4,371
   
$
331
   
$
161,474
   
$
5,739
 

   
September 30, 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
 
$
7,808
   
$
43
   
$
21,085
   
$
281
   
$
28,893
   
$
324
 
GSE mortgage-backed securities
   
-
     
-
     
28,591
     
412
     
28,591
     
412
 
Collateralized mortgage obligations: residential
   
-
     
-
     
12,559
     
547
     
12,559
     
547
 
Collateralized mortgage obligations: commercial
   
7,772
     
117
     
-
     
-
     
7,772
     
117
 
   
$
15,580
   
$
160
   
$
62,235
   
$
1,240
   
$
77,815
   
$
1,400
 

   
December 31, 2013
 
   
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
 
$
42,246
   
$
2,569
   
$
685
   
$
17
   
$
42,931
   
$
2,586
 
GSE mortgage-backed securities
   
31,042
     
1,079
     
-
     
-
     
31,042
     
1,079
 
Collateralized mortgage obligations: residential
   
13,210
     
979
     
-
     
-
     
13,210
     
979
 
   
$
86,498
   
$
4,627
   
$
685
   
$
17
   
$
87,183
   
$
4,644
 
 
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.
 
As of September 30, 2014, 74 securities had unrealized losses totaling 2.18% of the individual securities’ amortized cost basis and 0.97% of the Company’s total amortized cost basis.  Of the 74 securities, 62 had been in an unrealized loss position for over twelve months at September 30, 2014.  These 62 securities had an amortized cost basis and unrealized loss of $160.1 million and $3.9 million, respectively.  The unrealized losses on debt securities at September 30, 2014 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, 2014, 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 nine months ended September 30, 2014.
 
During the nine months ended September 30, 2014, the Company sold four securities classified as available-for-sale at a net gain of $128,000.  All of the securities were sold at a gain.  During the nine months ended September 30, 2013, the Company sold 33 securities classified as available-for-sale at a net gain of $229,000.  Of the 33 securities sold, 29 securities were sold with gains totaling $242,000 and four securities were sold at a loss of $13,000.
 
Securities with an aggregate carrying value of approximately $276.7 million and $259.9 million at September 30, 2014 and December 31, 2013, 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, 2014
   
December 31, 2013
 
Commercial, financial and agricultural
 
$
452,065
   
$
403,976
 
Real estate - construction
   
86,315
     
82,691
 
Real estate – commercial
   
430,930
     
397,135
 
Real estate – residential
   
153,915
     
146,841
 
Installment loans to individuals
   
116,340
     
97,459
 
Lease financing receivable
   
5,285
     
5,542
 
Other
   
3,523
     
3,910
 
     
1,248,373
     
1,137,554
 
Less allowance for loan losses
   
(9,425
)
   
(8,779
)
   
$
1,238,948
   
$
1,128,775
 
 
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, 2014, 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 $255.6 million, or 20.5% of total loans.  Additionally, the Company’s exposure to loans secured by commercial real estate is monitored.  At September 30, 2014, loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately $491.3 million.  Of the $491.3 million, $395.1 million represent CRE loans, 63.2% of which are secured by owner-occupied commercial properties.  Of the $395.1 million in loans secured by commercial real estate, $3.4 million, or 0.9%, were on nonaccrual status at September 30, 2014.
 
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 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, 2014 and 2013 is as follows (in thousands):

   
September 30, 2014
 
       
Real Estate
                 
   
Coml, Fin, and Agric
   
Construction
   
Commercial
   
Residential
   
Consumer
   
Finance Leases Coml
   
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
 
 
   
September 30, 2013
 
       
Real Estate
                 
   
Coml, Fin, and Agric
   
Construction
   
Commercial
   
Residential
   
Consumer
   
Finance Leases Coml
   
Other
   
Total
 
Allowance for loan losses:
                               
Beginning balance
 
$
1,535
   
$
2,147
   
$
2,166
   
$
936
   
$
543
   
$
41
   
$
2
   
$
7,370
 
Charge-offs
   
(461
)
   
-
     
(18
)
   
(129
)
   
(558
)
   
-
     
-
     
(1,166
)
Recoveries
   
61
     
5
     
21
     
34
     
92
     
-
     
-
     
213
 
Provision
   
3,090
     
(1,081
)
   
(661
)
   
(46
)
   
962
     
(16
)
   
2
     
2,250
 
Ending balance
 
$
4,225
   
$
1,071
   
$
1,508
   
$
795
   
$
1,039
   
$
25
   
$
4
   
$
8,667
 
Ending balance: individually evaluated for impairment
 
$
419
   
$
36
   
$
54
   
$
55
   
$
134
   
$
-
   
$
-
   
$
698
 
Ending balance: collectively evaluated for impairment
 
$
3,806
   
$
1,035
   
$
1,454
   
$
740
   
$
905
   
$
25
   
$
4
   
$
7,969
 
                                                                 
Loans:
                                                               
Ending balance
 
$
423,073
   
$
76,213
   
$
401,080
   
$
142,431
   
$
94,722
   
$
5,340
   
$
2,164
   
$
1,145,023
 
Ending balance: individually evaluated for impairment
 
$
1,450
   
$
164
   
$
2,285
   
$
994
   
$
322
   
$
-
   
$
-
   
$
5,215
 
Ending balance: collectively evaluated for impairment
 
$
421,623
   
$
76,049
   
$
398,080
   
$
141,136
   
$
94,400
   
$
5,340
   
$
2,164
   
$
1,138,792
 
Ending balance: loans acquired with deteriorated credit quality
 
$
-
   
$
-
   
$
715
   
$
301
   
$
-
   
$
-
   
$
-
   
$
1,016
 

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.
 
An age analysis of past due loans (including both accruing and non-accruing loans) is as follows (in thousands):
 
   
September 30, 2014
 
                             
   
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
 
$
1,692
   
$
1,435
   
$
2,443
   
$
5,570
   
$
446,495
   
$
452,065
   
$
11
 
Commercial real estate - construction
   
548
     
651
     
73
     
1,272
     
59,078
     
60,350
     
-
 
Commercial real estate - other
   
913
     
200
     
2,513
     
3,626
     
427,304
     
430,930
     
-
 
Residential - construction
   
-
     
-
     
-
     
-
     
25,965
     
25,965
     
-
 
Residential - prime
   
973
     
1,030
     
712
     
2,715
     
151,200
     
153,915
     
-
 
Consumer - credit card
   
34
     
9
     
12
     
55
     
5,763
     
5,818
     
12
 
Consumer - other
   
644
     
101
     
413
     
1,158
     
109,364
     
110,522
     
-
 
Lease financing receivable
   
-
     
-
     
-
     
-
     
5,285
     
5,285
     
-
 
Other loans
   
106
     
-
     
-
     
106
     
3,417
     
3,523
     
-
 
   
$
4,910
   
$
3,426
   
$
6,166
   
$
14,502
   
$
1,233,871
   
$
1,248,373
   
$
23
 

   
December 31, 2013
 
   
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
 
$
4,350
   
$
208
   
$
1,256
   
$
5,814
   
$
398,162
   
$
403,976
   
$
26
 
Commercial real estate - construction
   
36
     
-
     
63
     
99
     
64,794
     
64,893
     
-
 
Commercial real estate - other
   
1,230
     
1,447
     
2,395
     
5,072
     
392,063
     
397,135
     
141
 
Residential - construction
   
149
     
-
     
-
     
149
     
17,649
     
17,798
     
-
 
Residential - prime
   
2,984
     
870
     
307
     
4,161
     
142,680
     
146,841
     
-
 
Consumer - credit card
   
36
     
-
     
7
     
43
     
6,163
     
6,206
     
7
 
Consumer - other
   
767
     
102
     
269
     
1,138
     
90,115
     
91,253
     
4
 
Lease financing receivable
   
-
     
-
     
-
     
-
     
5,542
     
5,542
     
-
 
Other loans
   
125
     
-
     
-
     
125
     
3,785
     
3,910
     
-
 
   
$
9,677
   
$
2,627
   
$
4,297
   
$
16,601
   
$
1,120,953
   
$
1,137,554
   
$
178
 
  
Non-accrual loans are as follows (in thousands):
   
September 30, 2014
   
December 31, 2013
 
Commercial, financial, and agricultural
 
$
2,649
   
$
1,272
 
Commercial real estate – construction
   
106
     
100
 
Commercial real estate - other
   
3,358
     
2,290
 
Residential - construction
   
-
     
-
 
Residential - prime
   
1,206
     
1,153
 
Consumer - credit card
   
-
     
-
 
Consumer - other
   
431
     
284
 
Lease financing receivable
   
-
     
-
 
Other
   
-
     
-
 
   
$
7,750
   
$
5,099
 
 
The amount of interest that would have been recorded on non-accrual loans, had the loans not been classified as non-accrual, totaled approximately $392,000 and $431,000 for the nine months ended September 30, 2014 and 2013, respectively.  Interest actually received on non-accrual loans at September 30, 2014 and 2013 was $93,000 and $246,000, respectively.
 
Impaired Loans
 
Loans are considered impaired when, based upon current information, it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  All loans classified as special mention, substandard, or doubtful, based on credit risk rating factors, and are reviewed for impairment.  An allowance for each impaired loan is calculated based on the present value of expected future cash flows discounted at the loan’s effective interest rate or at the loan’s observable market price or the fair value of the collateral if the loan is collaterally dependent.  All impaired loans are reviewed, at a minimum, on a quarterly basis.  Existing valuations are reviewed to determine if additional discounts or new appraisals are required.  After this review, when comparing the resulting collateral valuation to the outstanding loan balance, if the discounted collateral value exceeds the loan balance no specific allocation is reserved.  Acquired impaired loans are generally not subject to individual evaluation for impairment and are not reported with impaired loans or troubled debt restructurings, even if they would otherwise qualify for such treatment.
Loans that are individually evaluated for impairment are as follows (in thousands):
 
   
September 30, 2014
 
   
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
With no related allowance recorded:
                   
Commercial, financial, and agricultural
 
$
441
   
$
524
   
$
-
   
$
474
   
$
-
 
Commercial real estate – construction
   
67
     
67
     
-
     
69
     
-
 
Commercial real estate – other
   
2,947
     
2,947