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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

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 8, 2015, there were 11,354,497 shares of the registrant’s Common Stock, par value $0.10 per share, outstanding.
 

 

Part I – Financial Information
3
 
3
 
3
 
4
 
5
 
6
 
7
 
8
 
26
 
26
 
27
 
28
 
31
 
32
 
34
 
36
 
36
Part II – Other Information
37
 
37
 
Item 1A. Risk Factors.
37
 
37
 
37
 
37
 
37
 
Item 6. Exhibits.
37

Part I – Financial Information
 
Item 1. Financial Statements.
MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share data)
   
March 31, 2015
(unaudited)
   
December 31, 2014*
(audited)
 
Assets
       
Cash and due from banks, including required reserves of $9,814 and $10,019, respectively
 
$
40,816
   
$
45,142
 
Interest-bearing deposits in banks
   
60,665
     
39,031
 
Federal funds sold
   
2,921
     
2,699
 
Securities available-for-sale, at fair value (cost of $293,709 at March 31, 2015 and $272,588 at December 31, 2014)
   
299,690
     
276,984
 
Securities held-to-maturity (fair value of $139,462 at March 31, 2015 and $141,593 at December 31, 2014)
   
137,592
     
141,201
 
Other investments
   
9,644
     
9,990
 
Loans
   
1,310,929
     
1,284,431
 
Allowance for loan losses
   
(16,060
)
   
(11,226
)
Loans, net
   
1,294,869
     
1,273,205
 
Bank premises and equipment, net
   
69,762
     
69,958
 
Accrued interest receivable
   
6,741
     
6,635
 
Goodwill
   
42,171
     
42,171
 
Intangibles
   
6,558
     
6,834
 
Cash surrender value of life insurance
   
13,735
     
13,659
 
Other real estate
   
4,589
     
4,234
 
Other assets
   
5,505
     
4,997
 
Total assets
 
$
1,995,258
   
$
1,936,740
 
                 
Liabilities and Shareholders’ Equity
               
Liabilities:
               
Deposits:
               
Non-interest-bearing
 
$
421,897
   
$
390,863
 
Interest-bearing
   
1,194,201
     
1,194,371
 
Total deposits
   
1,616,098
     
1,585,234
 
Securities sold under agreements to repurchase
   
87,346
     
62,098
 
Short-term Federal Home Loan Bank advances
   
25,000
     
25,000
 
Long-term Federal Home Loan Bank advances
   
26,171
     
26,277
 
Junior subordinated debentures
   
22,167
     
22,167
 
Other liabilities
   
7,820
     
6,952
 
Total liabilities
   
1,784,602
     
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 March 31, 2015 and December 31, 2014
   
32,000
     
32,000
 
Series C Preferred stock, no par value; 100,000 shares authorized, 93,248 and 93,680 issued and 93,248 and 93,680 outstanding at March 31, 2015 and December 31, 2014, respectively
   
9,325
     
9,368
 
Common stock, $0.10 par value; 30,000,000 shares authorized, 11,500,252 and 11,491,703 issued and 11,349,285 and 11,340,736 outstanding at March 31, 2015 and December 31, 2014, respectively
   
1,150
     
1,149
 
Additional paid-in capital
   
113,371
     
112,744
 
Unearned ESOP shares
   
(518
)
   
(250
)
Accumulated other comprehensive income
   
3,888
     
2,857
 
Treasury stock – 150,967 shares at March 31, 2015 and December 31, 2014, at cost
   
(3,295
)
   
(3,295
)
Retained earnings
   
54,735
     
54,439
 
Total shareholders’ equity
   
210,656
     
209,012
 
Total liabilities and shareholders’ equity
 
$
1,995,258
   
$
1,936,740
 
 
See notes to unaudited consolidated financial statements.
 
MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Earnings (unaudited)
(in thousands, except per share data)
 
Three Months Ended March 31,
 
   
2015
   
2014
 
Interest income:
       
Loans, including fees
 
$
18,054
   
$
17,483
 
Securities and other investments:
               
Taxable
   
1,925
     
2,136
 
Nontaxable
   
584
     
693
 
Federal funds sold
   
2
     
1
 
Time and interest bearing deposits in other banks
   
37
     
16
 
Other investments
   
79
     
70
 
Total interest income
   
20,681
     
20,399
 
                 
Interest expense:
               
Deposits
   
947
     
871
 
Securities sold under agreements to repurchase
   
230
     
180
 
Other borrowings and payables
   
97
     
106
 
Junior subordinated debentures
   
150
     
347
 
Total interest expense
   
1,424
     
1,504
 
                 
Net interest income
   
19,257
     
18,895
 
Provision for loan losses
   
6,000
     
550
 
Net interest income after provision for loan losses
   
13,257
     
18,345
 
                 
Non-interest income:
               
Service charges on deposits
   
2,120
     
2,380
 
Gain on sale of securities, net
   
115
     
-
 
ATM and debit card income
   
1,841
     
1,714
 
Executive officer life insurance proceeds
   
-
     
3,000
 
Other charges and fees
   
891
     
823
 
Total non-interest income
   
4,967
     
7,917
 
                 
Non-interest expenses:
               
Salaries and employee benefits
   
7,942
     
8,813
 
Occupancy expense
   
3,685
     
3,791
 
FDIC insurance
   
281
     
262
 
Other
   
4,379
     
4,836
 
Total non-interest expenses
   
16,287
     
17,702
 
                 
Income before income taxes
   
1,937
     
8,560
 
Income tax expense
   
446
     
1,702
 
                 
Net earnings
   
1,491
     
6,858
 
Dividends on preferred stock
   
173
     
180
 
Net earnings available to common shareholders
 
$
1,318
   
$
6,678
 
                 
Earnings per share:
               
Basic
 
$
0.12
   
$
0.59
 
Diluted
 
$
0.12
   
$
0.57
 
Weighted average number of shares outstanding:
               
Basic
   
11,318
     
11,258
 
Diluted
   
11,351
     
11,879
 
Dividends declared per common share
 
$
0.09
   
$
0.08
 
See notes to unaudited consolidated financial statements.
 
MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)
   
Three Months Ended March 31,
 
   
2015
   
2014
 
Net earnings
 
$
1,491
   
$
6,858
 
Other comprehensive income, net of tax:
               
Unrealized gains on securities available-for-sale:
               
Unrealized holding gains arising during the year
   
1,701
     
2,946
 
Less: reclassification adjustment for gains on sales of securities available-for-sale
   
(115
)
   
-
 
Total other comprehensive income, before tax
   
1,586
     
2,946
 
Income tax effect related to items of other comprehensive income
   
(555
)
   
(1,031
)
Total other comprehensive income, net of tax
   
1,031
     
1,915
 
Total comprehensive income
 
$
2,522
   
$
8,773
 
See notes to unaudited consolidated financial statements.
 
MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statement of Shareholders’ Equity (unaudited)
For the Three Months Ended March 31, 2015
(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
   
Stock
   
Earnings
   
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
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
1,491
     
1,491
 
Dividends on Series B and Series C preferred stock
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(173
)
   
(173
)
Dividends on common stock, $0.09 per share
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(1,022
)
   
(1,022
)
Conversion of Series C preferred stock to common stock
   
(432
)
   
(43
)
   
2,394
     
-
     
43
     
-
     
-
     
-
     
-
     
-
 
Increase in ESOP obligation, net of repayments
   
-
     
-
     
-
     
-
     
-
     
(268
)
   
-
     
-
     
-
     
(268
)
Exercise of stock options
   
-
     
-
     
6,155
     
1
     
79
     
-
     
-
     
-
     
-
     
80
 
Tax benefit resulting from distribution from Directors Deferred Compensation Plan
   
-
     
-
     
-
     
-
     
420
     
-
     
-
     
-
     
-
     
420
 
Stock option expense
   
-
     
-
     
-
     
-
     
85
     
-
     
-
     
-
     
-
     
85
 
Change in accumulated other comprehensive income
   
-
     
-
     
-
     
-
     
-
     
-
     
1,031
     
-
     
-
     
1,031
 
Balance – March 31, 2015
   
125,248
   
$
41,325
     
11,500,252
   
$
1,150
   
$
113,371
   
$
(518
)
 
$
3,888
   
$
(3,295
)
 
$
54,735
   
$
210,656
 
 
See notes to unaudited consolidated financial statements.
 
MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
   
For the Three Months Ended March 31,
 
   
2015
   
2014
 
Cash flows from operating activities:
       
Net earnings
 
$
1,491
   
$
6,858
 
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Depreciation
   
1,555
     
1,473
 
Accretion of purchase accounting adjustments
   
(189
)
   
(981
)
Provision for loan losses
   
6,000
     
550
 
Provision for deferred tax expense
   
(1,951
)
   
277
 
Amortization of premiums on securities, net
   
633
     
930
 
Amortization of other investments
   
-
     
1
 
Stock option expense
   
85
     
195
 
Net gain on sale of investment securities
   
(115
)
   
-
 
Net (gain) loss on sale of other real estate owned
   
(50
)
   
26
 
Net write down of other real estate owned
   
29
     
31
 
Net gain on sale/disposal of premises and equipment
   
(1
)
   
(28
)
Change in accrued interest receivable
   
(106
)
   
197
 
Change in accrued interest payable
   
(4
)
   
(204
)
Change in other assets & other liabilities, net
   
1,684
     
1,565
 
Net cash provided by operating activities
   
9,061
     
10,890
 
                 
Cash flows from investing activities:
               
Proceeds from maturities and calls of securities available-for-sale
   
17,988
     
12,316
 
Proceeds from maturities and calls of securities held-to-maturity
   
3,326
     
4,191
 
Proceeds from sale of securities available-for-sale
   
34,509
     
-
 
Purchases of securities available-for-sale
   
(73,853
)
   
-
 
Purchases of securities held-to-maturity
   
-
     
(1,104
)
Proceeds from redemptions of other investments
   
-
     
150
 
Proceeds from sale of other investments
   
349
     
-
 
Purchases of other investments
   
(3
)
   
(3
)
Net change in loans
   
(28,461
)
   
(46,021
)
Purchases of premises and equipment
   
(1,362
)
   
(1,634
)
Proceeds from sale of premises and equipment
   
4
     
32
 
Proceeds from sale of other real estate owned
   
532
     
15
 
Net cash used in investing activities
   
(46,971
)
   
(32,058
)
                 
Cash flows from financing activities:
               
Change in deposits
   
30,901
     
29,206
 
Change in securities sold under agreements to repurchase
   
25,248
     
(1,921
)
Borrowings on Federal Home Loan Bank advances
   
25,000
     
25,000
 
Repayments of Federal Home Loan Bank advances
   
(25,000
)
   
(25,015
)
Repayments of notes payable
   
(15
)
   
(250
)
Proceeds and tax benefit from exercise of stock options
   
80
     
-
 
Tax benefit resulting from distribution from Directors Deferred Compensation Plan
   
420
     
-
 
Payment of dividends on preferred stock
   
(174
)
   
(180
)
Payment of dividends on common stock
   
(1,020
)
   
(900
)
Net cash provided by financing activities
   
55,440
     
25,940
 
                 
Net increase in cash and cash equivalents
   
17,530
     
4,772
 
Cash and cash equivalents, beginning of period
   
86,872
     
59,731
 
Cash and cash equivalents, end of period
 
$
104,402
   
$
64,503
 
                 
Supplemental cash flow information:
               
Interest paid
 
$
1,427
   
$
1,708
 
Noncash investing and financing activities:
               
Change in accrued common stock dividends
   
1
     
-
 
Financed sales of other real estate
   
-
     
84
 
Net change in loan to ESOP
   
(268
)
   
-
 
 
See notes to unaudited consolidated financial statements.
 

MidSouth Bancorp, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
March 31, 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 March 31, 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 three-month period ended March 31, 2015 are not necessarily indicative of the results to be expected for the entire year.
 
Use of Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
 
Summary of Significant Accounting Policies — The accounting and reporting policies of the Company conform with GAAP and general practices within the banking industry.  There have been no material changes or developments in the application of accounting principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies and Estimates as disclosed in our 2014 Annual Report on Form 10-K.
 
2.
Investment Securities
 
The portfolio of investment securities consisted of the following (in thousands):
 
   
March 31, 2015
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
Available-for-sale:
               
Obligations of state and political subdivisions
 
$
41,336
   
$
1,476
   
$
35
   
$
42,777
 
GSE mortgage-backed securities
   
101,185
     
3,669
     
66
     
104,788
 
Collateralized mortgage obligations: residential
   
131,373
     
614
     
820
     
131,167
 
Collateralized mortgage obligations: commercial
   
17,459
     
93
     
69
     
17,483
 
Collateralized debt obligation
   
256
     
1,096
     
-
     
1,352
 
Mutual funds
   
2,100
     
23
     
-
     
2,123
 
   
$
293,709
   
$
6,971
   
$
990
   
$
299,690
 

   
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
 

   
March 31, 2015
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
Held-to-maturity:
               
Obligations of state and political subdivisions
 
$
45,343
   
$
621
   
$
56
   
$
45,908
 
GSE mortgage-backed securities
   
64,710
     
1,552
     
85
     
66,177
 
Collateralized mortgage obligations: residential
   
12,339
     
-
     
270
     
12,069
 
Collateralized mortgage obligations: commercial
   
15,200
     
108
     
-
     
15,308
 
   
$
137,592
   
$
2,281
   
$
411
   
$
139,462
 

   
December 31, 2014
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
Held-to-maturity:
               
Obligations of state and political subdivisions
 
$
45,914
   
$
267
   
$
192
   
$
45,989
 
GSE mortgage-backed securities
   
67,268
     
1,080
     
164
     
68,184
 
Collateralized mortgage obligations: residential
   
12,709
     
-
     
479
     
12,230
 
Collateralized mortgage obligations: commercial
   
15,310
     
53
     
173
     
15,190
 
   
$
141,201
   
$
1,400
   
$
1,008
   
$
141,593
 
 
With the exception of three private-label collateralized mortgage obligations (“CMOs”) with a combined balance remaining of $41,000 at March 31, 2015, all of the Company’s CMOs are government-sponsored enterprise (“GSE”) securities.
 
The amortized cost and fair value of debt securities at March 31, 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
 
$
6,916
   
$
6,998
 
Due after one year through five years
   
18,900
     
19,694
 
Due after five years through ten years
   
12,422
     
12,972
 
Due after ten years
   
3,098
     
3,113
 
Mortgage-backed securities and collateralized mortgage obligations:
               
Residential
   
232,558
     
235,955
 
Commercial
   
17,459
     
17,483
 
Collateralized debt obligation
   
256
     
1,352
 
Mutual funds
   
2,100
     
2,123
 
   
$
293,709
   
$
299,690
 

   
Amortized
Cost
   
Fair
Value
 
Held-to-maturity:
       
Due in one year or less
 
$
595
   
$
600
 
Due after one year through five years
   
2,819
     
2,857
 
Due after five years through ten years
   
12,205
     
12,346
 
Due after ten years
   
29,724
     
30,105
 
Mortgage-backed securities and collateralized mortgage obligations:
               
Residential
   
77,049
     
78,246
 
Commercial
   
15,200
     
15,308
 
   
$
137,592
   
$
139,462
 
 
Details concerning investment securities with unrealized losses are as follows (in thousands):
 
   
March 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
 
$
3,241
   
$
35
   
$
-
   
$
-
   
$
3,241
   
$
35
 
GSE mortgage-backed  securities
   
12,876
     
33
     
8,249
     
33
     
21,125
     
66
 
Collateralized mortgage  obligations: residential
   
24,659
     
103
     
35,097
     
717
     
59,756
     
820
 
Collateralized mortgage  obligations: commercial
   
-
     
-
     
3,617
     
69
     
3,617
     
69
 
   
$
40,776
   
$
171
   
$
46,963
   
$
819
   
$
87,739
   
$
990
 
 
   
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
 

   
March 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
 
$
4,271
   
$
19
   
$
2,740
   
$
37
   
$
7,011
   
$
56
 
GSE mortgage-backed securities
   
-
     
-
     
7,957
     
85
     
7,957
     
85
 
Collateralized mortgage obligations: residential
   
-
     
-
     
12,068
     
270
     
12,068
     
270
 
   
$
4,271
   
$
19
   
$
22,765
   
$
392
   
$
27,036
   
$
411
 

   
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 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 March 31, 2015, 37 securities had unrealized losses totaling 1.21% of the individual securities’ amortized cost basis and 0.33% of the Company’s total amortized cost basis.  Of the 37 securities, 20 had been in an unrealized loss position for over twelve months at March 31, 2015.  These 20 securities had an amortized cost basis and unrealized loss of $70.9 million and $1.2 million, respectively.  The unrealized losses on debt securities at March 31, 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 March 31, 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 March 31, 2015.
 
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.  During the three months ended March 31, 2014, the Company did not sell any securities.
 
Securities with an aggregate carrying value of approximately $294.4 million and $279.8 million at March 31, 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):
 
   
March 31, 2015
   
December 31, 2014
 
Commercial, financial and agricultural
 
$
484,508
   
$
467,147
 
Real estate - construction
   
76,964
     
68,577
 
Real estate – commercial
   
471,737
     
467,172
 
Real estate – residential
   
153,647
     
154,602
 
Installment loans to individuals
   
115,284
     
119,328
 
Lease financing receivable
   
6,350
     
4,857
 
Other
   
2,439
     
2,748
 
     
1,310,929
     
1,284,431
 
Less allowance for loan losses
   
(16,060
)
   
(11,226
)
   
$
1,294,869
   
$
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 March 31, 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 $287.6 million, or 21.9% of total loans.  Additionally, the Company’s exposure to loans secured by commercial real estate is monitored.  At March 31, 2015, loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately $521.9 million.  Of the $521.9 million, $471.7 million represent CRE loans, 55% of which are secured by owner-occupied commercial properties.  Of the $521.9 million in loans secured by commercial real estate, $8.1 million, or 1.6%, were on nonaccrual status at March 31, 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 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 three months ended March 31, 2015 and 2014 is as follows (in thousands):
 
   
March 31, 2015
 
       
Real Estate
                 
   
Coml, Fin,
and Agric
   
Construction
   
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
 
 
   
March 31, 2014
 
       
Real Estate
                 
   
Coml, Fin,
and Agric
   
Construction
   
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
   
(431
)
   
(1
)
   
(13
)
   
(84
)
   
(159
)
   
-
     
-
     
(688
)
Recoveries
   
14
     
-
     
37
     
8
     
65
     
-
     
-
     
124
 
Provision
   
749
     
36
     
8
     
(172
)
   
(69
)
   
(2
)
   
-
     
550
 
Ending balance
 
$
4,238
   
$
1,081
   
$
1,421
   
$
893
   
$
1,110
   
$
19
   
$
3
   
$
8,765
 
Ending balance: individually evaluated for impairment
 
$
86
   
$
3
   
$
57
   
$
71
   
$
131
   
$
-
   
$
-
   
$
348
 
Ending balance: collectively evaluated for impairment
 
$
4,152
   
$
1,078
   
$
1,364
   
$
822
   
$
979
   
$
19
   
$
3
   
$
8,417
 
                                                                 
Loans:
                                                               
Ending balance
 
$
435,523
   
$
78,988
   
$
408,546
   
$
150,551
   
$
101,869
   
$
5,102
   
$
3,610
   
$
1,184,189
 
Ending balance: individually evaluated for impairment
 
$
2,273
   
$
154
   
$
3,195
   
$
951
   
$
292
   
$
-
   
$
-
   
$
6,865
 
Ending balance: collectively evaluated for impairment
 
$
433,250
   
$
78,834
   
$
404,652
   
$
149,442
   
$
101,577
   
$
5,102
   
$
3,610
   
$
1,176,467
 
Ending balance: loans acquired with deteriorated credit quality
 
$
-
   
$
-
   
$
699
   
$
158
   
$
-
   
$
-
   
$
-
   
$
857
 
 
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):
 
   
March 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
 
$
2,767
   
$
761
   
$
2,306
   
$
5,834
   
$
478,674
   
$
484,508
   
$
3
 
Commercial real estate - construction
   
17
     
-
     
13
     
30
     
50,164
     
50,194
     
-
 
Commercial real estate - other
   
12,643
     
639
     
4,372
     
17,654
     
454,083
     
471,737
     
-
 
Residential - construction
   
-
     
-
     
433
     
433
     
26,337
     
26,770
     
-
 
Residential - prime
   
2,226
     
225
     
1,010
     
3,461
     
150,186
     
153,647
     
-
 
Consumer - credit card
   
9
     
13
     
-
     
22
     
5,664
     
5,686
     
-
 
Consumer - other
   
603
     
106
     
321
     
1,030
     
108,568
     
109,598
     
37
 
Lease financing receivable
   
-
     
-
     
-
     
-
     
6,350
     
6,350
     
-
 
Other loans
   
62
     
-
     
-
     
62
     
2,377
     
2,439
     
-
 
   
$
18,327
   
$
1,744
   
$
8,455
   
$
28,526
   
$
1,282,403
   
$
1,310,929
   
$
40
 
                                                         
   
December 31, 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
 
$
2,179
   
$
654
   
$
2,556
   
$
5,389
   
$
461,758
   
$
467,147
   
$
26
 
Commercial real estate - construction
   
15
     
-
     
105
     
120
     
43,390
     
43,510
     
97
 
Commercial real estate - other
   
4,989
     
270
     
2,464
     
7,723
     
459,449
     
467,172
     
-
 
Residential - construction
   
431
     
-
     
-
     
431
     
24,636
     
25,067
     
-
 
Residential - prime
   
1,843
     
523
     
704
     
3,070
     
151,532
     
154,602
     
-
 
Consumer - credit card
   
5
     
19
     
18
     
42
     
5,970
     
6,012
     
18
 
Consumer - other
   
671
     
392
     
107
     
1,170
     
112,146
     
113,316
     
46
 
Lease financing receivable
   
-
     
-
     
-
     
-
     
4,857
     
4,857
     
-
 
Other loans
   
134
     
-
     
-
     
134
     
2,614
     
2,748
     
-
 
   
$
10,267
   
$
1,858
   
$
5,954
   
$
18,079
   
$
1,266,352
   
$
1,284,431
   
$
187
 
 
Non-accrual loans are as follows (in thousands):
 
   
March 31, 2015
   
December 31, 2014
 
Commercial, financial, and agricultural
 
$
2,413
   
$
2,642
 
Commercial real estate – construction
   
43
     
54
 
Commercial real estate - other
   
8,012
     
6,429
 
Residential - construction
   
433
     
-
 
Residential - prime
   
1,585
     
1,194
 
Consumer - credit card
   
-
     
-
 
Consumer - other
   
408
     
382
 
Lease financing receivable
   
-
     
-
 
Other
   
-
     
-
 
   
$
12,894
   
$
10,701
 
 
The amount of interest that would have been recorded on non-accrual loans, had the loans not been classified as non-accrual, totaled approximately $342,000 and $118,000 for the three months ended March 31, 2015 and 2014, respectively.  Interest actually received on non-accrual loans at March 31, 2015 and 2014 was $11,000 and $88,000, 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, are reviewed to determine whether impairment testing is appropriate.  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):
 
   
March 31, 2015
 
   
Recorded
Investment
   
Unpaid
Principal
 Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
 Income
Recognized
 
With no related allowance recorded:
                   
Commercial, financial, and agricultural
 
$
407
   
$
490
   
$
-
   
$
422
   
$
-
 
Commercial real estate – construction
   
43
     
43
     
-
     
49
     
-
 
Commercial real estate – other
   
3,852
     
3,852
     
-
     
2,886
     
12
 
Residential – prime
   
1,057
     
1,057
     
-
     
800
     
5
 
Residential – construction
   
434
     
434
     
-
     
217
     
-
 
Consumer – other
   
56
     
56
     
-
     
67
     
-
 
Subtotal:
   
5,849
     
5,932
     
-
     
4,441
     
17
 
With an allowance recorded:
                                       
Commercial, financial, and agricultural
   
2,020
     
2,134
     
737
     
2,119
     
-
 
Commercial real estate – other
   
4,125
     
4,125
     
645
     
4,296
     
-
 
Residential – prime
   
414
     
434
     
57
     
471
     
-
 
Consumer – other
   
349
     
363
     
206
     
324
     
1
 
Subtotal:
   
6,908
     
7,056
     
1,645
     
7,210
     
1
 
Totals:
                                       
Commercial
   
10,447
     
10,644
     
1,382
     
9,772
     
12
 
Residential
   
1,905
     
1,925
     
57
     
1,488
     
5
 
Consumer
   
405
     
419
     
206
     
391
     
1
 
Grand total:
 
$
12,757
   
$
12,988
   
$
1,645
   
$
11,651
   
$
18
 
   
December 31, 2014
 
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
With no related allowance recorded:
                   
Commercial, financial, and agricultural
 
$
438
   
$
521
   
$
-
   
$
554
   
$
-
 
Commercial real estate – construction
   
54
     
54
     
-
     
58
     
-
 
Commercial real estate – other
   
1,921
     
1,921
     
-
     
1,885
     
17
 
Residential – prime
   
543
     
543
     
-
     
534
     
15
 
Consumer – other
   
78
     
78
     
-
     
72
     
-
 
Subtotal:
   
3,034
     
3,117
     
-
     
3,103
     
32
 
With an allowance recorded:
                                       
Commercial, financial, and agricultural
   
2,218
     
2,333
     
1,010
     
1,394
     
35
 
Commercial real estate – construction
   
-
     
-
     
-
     
19
     
-
 
Commercial real estate – other
   
4,467
     
4,467
     
1,484
     
2,416
     
220
 
Residential – prime
   
529
     
548
     
68
     
452
     
3
 
Consumer – other
   
299
     
313
     
179
     
252
     
4
 
Subtotal:
   
7,513
     
7,661
     
2,741
     
4,533
     
262
 
Totals:
                                       
Commercial
   
9,098
     
9,296
     
2,494
     
6,326
     
272
 
Residential
   
1,072
     
1,091
     
68
     
986
     
18
 
Consumer
   
377
     
391
     
179
     
324
     
4
 
Grand total:
 
$
10,547
   
$
10,778
   
$
2,741
   
$
7,636
   
$
294
 
 
Credit Quality
 
The Company manages credit risk by observing written underwriting standards and lending policy established by the Board of Directors and management to govern all lending activities.  The risk management program requires that each individual loan officer review his or her portfolio on a quarterly basis and assign recommended credit ratings on each loan.  These efforts are supplemented by independent reviews performed by a loan review officer and other validations performed by the internal audit department.  The results of the reviews are reported directly to the Audit Committee of the Board of Directors.
 
Loans can be classified into the following three risk rating grades: pass, special mention, and substandard/doubtful.  Factors considered in determining a risk rating grade include debt service capacity, capital structure/liquidity, management, collateral quality, industry risk, company trends/operating performance, repayment source, revenue diversification/customer concentration, quality of financial information, and financing alternatives.  Pass grade signifies the highest quality of loans to loans with reasonable credit risk, which may include borrowers with marginally adequate financial performance, but have the ability to repay the debt.  Special mention loans have potential weaknesses that warrant extra attention from the loan officer and other management personnel, but still have the ability to repay the debt.  Substandard classification includes loans with well-defined weaknesses with risk of potential loss.  Loans classified as doubtful are considered to have little recovery value and are charged off.
 
The following tables present the classes of loans by risk rating (in thousands):
 
      
March 31, 2015
 
Commercial Credit Exposure
                     
Credit Risk Profile by
Creditworthiness Category
                     
   
Commercial,
financial, and
agricultural
   
Commercial
real estate -
construction
   
Commercial
real estate -
other
   
Total
   
% of Total
 
Pass
   
$
442,711
   
$
50,022
   
$
435,848
   
$
928,581
     
92.26
%
Special mention
     
5,749
     
129
     
5,865
     
11,743
     
1.17
%
Substandard
     
35,638
     
43
     
30,024
     
65,705
     
6.53
%
Doubtful
     
410
     
-
     
-
     
410
     
0.04
%
   
$
484,508
   
$
50,194
   
$
471,737
   
$
1,006,439
     
100.00
%
                                         
Residential Credit Exposure
                                         
Credit Risk Profile by
Creditworthiness Category
                                         
             
Residential -
construction
   
Residential
- prime
   
Total
   
% of Total
 
Pass
           
$
26,337
   
$
149,498
   
$
175,835
     
97.46
%
Special mention
             
-
     
1,180
     
1,180
     
0.65
%
Substandard
             
433
     
2,969
     
3,402
     
1.89
%
           
$
26,770
   
$
153,647
   
$
180,417
     
100.00
%
                                         
Consumer and Commercial Credit
Exposure
                                         
Credit Risk Profile Based on
Payment Activity
                                         
Consumer -
credit card
 
Consumer -
other
   
Lease
financing
receivable
   
Other
   
Total
   
% of Total
 
Performing
$
5,684
 
$
109,157
   
$
6,350
   
$
2,439
   
$
123,630
     
99.64
%
Nonperforming
  
2
   
441
     
-
     
-
     
443
     
0.36
%
  $
5,686
 
$
109,598
   
$
6,350
   
$
2,439
   
$
124,073
     
100.00
%

 
December 31, 2014
 
Commercial Credit Exposure
                     
Credit Risk Profile by
Creditworthiness Category
                     
   
Commercial,
financial, and
agricultural
   
Commercial
real estate -
construction
   
Commercial
real estate -
other
   
Total
   
Percentage
of Total
 
Pass
   
$
456,221
   
$
43,320
   
$
440,281
   
$
939,822
     
96.11
%
Special mention
     
4,861
     
132
     
7,120
     
12,113
     
1.24
%
Substandard
     
5,541
     
58
     
19,771
     
25,370
     
2.60
%
Doubtful
     
524
     
-
     
-
     
524
     
0.05
%
   
$
467,147
   
$
43,510
   
$
467,172
   
$
977,829
     
100.00
%
                                         
Residential Credit Exposure
                                         
Credit Risk Profile by
Creditworthiness Category
                                         
           
Residential -
construction
   
Residential
- prime
   
Total
   
Percentage
of Total
 
Pass
           
$
25,067
   
$
150,664
   
$
175,731
     
97.81
%
Special mention
             
-
     
1,184
     
1,184
     
0.66
%
Substandard
             
-
     
2,754
     
2,754
     
1.53
%
           
$
25,067
   
$
154,602
   
$
179,669
     
100.00
%
                                         
Consumer and Commercial Credit
Exposure
                                         
Credit Risk Profile Based on
Payment Activity
                                         
Consumer -
credit card
 
Consumer -
other
   
Lease
financing
receivable
   
Other
   
Total
   
Percentage
of Total
 
Performing
$
 5,995
 
$
112,893
   
$
4,857
   
$
2,748
   
$
126,493
     
99.65
%
Nonperforming
  
17
   
423
     
-
     
-
     
440
     
0.35
%
$
6,012
 
$
113,316
   
$
4,857
   
$
2,748
   
$
126,933
     
100.00
%
                                                                 
Troubled Debt Restructurings
 
A troubled debt restructuring (“TDR”) is a restructuring of a debt made by the Company to a debtor for economic or legal reasons related to the debtor’s financial difficulties that it would not otherwise consider.  The Company grants the concession in an attempt to protect as much of its investment as possible.
 
Information about the Company’s TDRs is as follows (in thousands):
 
   
March 31, 2015
 
   
Current
   
Past Due
Greater
Than 30
Days
   
Nonaccrual
TDRs
   
Total
TDRs
 
Commercial, financial and agricultural
 
$
20
   
$
-
   
$
234
   
$
254
 
Real estate - commercial
   
153
     
-
     
-
     
153
 
   
$
173
   
$
-
   
$
234
   
$
407
 
 
   
December 31, 2014
 
   
Current
   
Past Due
Greater
Than 30
Days
   
Nonaccrual
TDRs
   
Total
TDRs
 
Commercial, financial and agricultural
 
$
21
   
$
-
   
$
234
   
$
255
 
Real estate - commercial
   
155
     
-
     
-
     
155
 
   
$
176
   
$
-
   
$
234
   
$
410
 
 
During the three months ended March 31, 2015, there were no loans identified as a TDR, and there were no defaults on any loans that were modified as TDRs during the preceding twelve months.  During the three months ended March 31, 2014, there was one loan relationship with a pre-modification balance of $1.2 million identified as a TDR through a modification of the original loan terms, and there were no defaults on any loans that were modified as TDRs during the preceding twelve months.  For purposes of the determination of an allowance for loan losses on these TDRs, as an identified TDR, the Company considers a loss probable on the loan and, as a result is reviewed for specific impairment in accordance with the Company’s allowance for loan loss methodology.  If it is determined losses are probable on such TDRs, either because of delinquency or other credit quality indicator, the Company establishes specific reserves for these loans.  As of March 31, 2015, there were no commitments to lend additional funds to debtors owing sums to the Company whose terms have been modified in TDRs.

4.
Intangibles
 
A summary of core deposit intangible assets as of March 31, 2015 and December 31, 2014 is as follows (in thousands):
 
 
   
March 31, 2015
   
December 31, 2014
 
Gross carrying amount
 
$
11,674
   
$
11,674
 
Less accumulated amortization
   
(5,116
)
   
(4,840
)
Net carrying amount
 
$
6,558
   
$
6,834
 
 
5.
Other Comprehensive Income
 
The following is a summary of the tax effects allocated to each component of other comprehensive income (in thousands):
 
   
Three Months Ended March 31,
 
   
2015
   
2014
 
   
Before Tax
Amount
   
Tax Effect
   
Net of Tax
Amount
   
Before Tax
Amount
   
Tax Effect
   
Net of Tax
Amount
 
Other comprehensive income:
                       
Securities available-for-sale:
                       
Change in unrealized gain during period
 
$
1,701
   
$
(595
)
 
$
1,106
   
$
2,946
   
$
(1,031
)
 
$
1,915
 
Reclassification adjustment for gains included in net income
   
(115
)
   
40
     
(75
)
   
-
     
-
     
-
 
Total other comprehensive income
 
$
1,586
   
$
(555
)
 
$
1,031
   
$
2,946
   
$
(1,031
)
 
$
1,915
 
 
The reclassifications out of accumulated other comprehensive income into net income are presented below (in thousands):
 
   
Three Months Ended March 31,
   
2015
 
2014
Details about
Accumulated Other
Comprehensive Income
Components
 
Reclassifications Out of
Accumulated Other
Comprehensive Income
     
Income Statement
Line Item
 
Reclassifications Out of
Accumulated Other
Comprehensive Income
    
Income Statement
 Line Item
Unrealized gains and losses on securities available-for-sale:
              
   
$
(115
)
Gain on sale of securities, net
 
$
-
 
Gain on sale of securities, net
     
40
 
Tax expense
   
-
 
Tax expense
   
$
(75
)
Net of tax
 
$
-
 
Net of tax
 
6. Declaration of Dividends
 
A first quarter dividend of $0.09 per share for holders of common stock of record on March 13, 2015 was declared on January 21, 2015, and was paid on April 1, 2015.  On January 21, 2015, the Company also declared a 1.00% dividend for holders of its Series C preferred stock of record on April 1, 2015, which was paid on April 15, 2015.
 
7.
Earnings Per Common Share
 
Following is a summary of the information used in the computation of earnings per common share (in thousands):
 
   
Three Months Ended March 31,
 
   
2015
   
2014
 
Net earnings available to common shareholders
 
$
1,318
   
$
6,678
 
Dividends on Series C preferred stock
   
-
     
100
 
Adjusted net earnings available to common shareholders
 
$
1,318
   
$
6,778
 
Weighted average number of common shares outstanding used in computation of basic earnings per common share
   
11,318
     
11,258
 
Effect of dilutive securities:
               
Stock options
   
29
     
74
 
Convertible preferred stock and warrants
   
4
     
547
 
Weighted average number of common shares outstanding plus effect of dilutive securities – used in computation of diluted earnings per share
   
11,351
     
11,879
 
 
Options to acquire 134,822 and 18,003 shares of common stock were not included in computing diluted earnings per share for the quarters ended March 31, 2015 and 2014, respectively, because the effects of these shares were anti-dilutive as a result of the exercise price of such options.  518,086 shares issuable upon the conversion of outstanding convertible preferred stock were anti-dilutive and not included in the computation of diluted earnings per shares for the three months ended March 31, 2015.
 
8. Fair Value Measurement
 
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  These levels are:
 
Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.
 
Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
 
Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market.  These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
 
Following is a description of valuation methodologies used for assets and liabilities which are either recorded or disclosed at fair value.
 
Cash and Due From Banks, Interest-Bearing Deposits in Banks and Federal Funds Sold—The carrying value of these short-term instruments is a reasonable estimate of fair value.
 
Securities Available-for-Sale—Securities available-for-sale are recorded at fair value on a recurring basis.  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.  Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter market funds.  Securities are classified as Level 2 within the valuation hierarchy when the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things. Level 2 inputs are used to value U.S. Agency securities, mortgage-backed securities, asset-backed securities, municipal securities, single issue trust preferred securities, certain pooled trust preferred securities, collateralized debt obligations and certain equity securities that are not actively traded.
 
Securities Held-to-Maturity—The fair value of securities held-to-maturity is estimated using the same measurement techniques as securities available-for-sale.
 
Other Investments—The carrying value of other investments is a reasonable estimate of fair value.
 
Loans—For disclosure purposes, the fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings.  For variable rate loans, the carrying amount is a reasonable estimate of fair value.  The Company does not record loans at fair value on a recurring basis.  No adjustment to fair value is taken related to illiquidity discounts.  However, from time to time, a loan is considered impaired and an allowance for loan losses is established.  Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.  Once a loan is identified as individually impaired, management uses one of three methods to measure impairment, which, include collateral value, market value of similar debt, and discounted cash flows.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.  Impaired loans where an allowance is established based on the fair value of collateral or where the loan balance has been charged down to fair value require classification in the fair value hierarchy.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2.  When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and adjusts the appraisal value by taking an additional discount for market conditions and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
 
For non-performing loans, collateral valuations currently in file are reviewed for acceptability in terms of timeliness and applicability.  Although each determination is made based on the facts and circumstances of each credit, generally valuations are no longer considered acceptable when there has been physical deterioration of the property from when it was last appraised, or there has been a significant change in the underlying assumptions of the appraisal.  If the valuation is deemed to be unacceptable, a new appraisal is ordered.  New appraisals are typically received within 4-6 weeks.  While awaiting new appraisals, the valuation in the file is utilized, net of discounts.  Discounts are derived from available relevant market data, selling costs, taxes, and insurance.  Any perceived collateral deficiency utilizing the discounted value is specifically reserved (as required by ASC Topic 310) until the new appraisal is received or charged off.  Thus, provisions or charge-offs are recognized in the period the credit is identified as non-performing.
 
The following sources are utilized to set appropriate discounts: in-market real estate agents, current local sales data, bank history for devaluation of similar property, Sheriff’s valuations and buy/sell contracts.  If a real estate agent is used to market and sell the property, values are discounted 10% for selling costs.  Additional discounts may be applied if research from the above sources indicates a discount is appropriate given devaluation of similar property from the time of the initial valuation.
 
Other Real Estate—Other real estate (“ORE”) properties are adjusted to fair value upon transfer of the loans to other real estate, and annually thereafter to insure other real estate assets are carried at the lower of carrying value or fair value.  Exceptions to obtaining initial appraisals are properties where a buy/sell agreement exists for the loan value or greater, or where a Sheriff’s valuation has been received for properties liquidated through a Sheriff sale.  Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the ORE as nonrecurring Level 2.  When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and adjusts the appraisal value by taking an additional discount for market conditions and there is no observable market prices, the Company records the ORE asset as nonrecurring Level 3.
 
Cash Surrender Value of Life Insurance Policies—Fair value for life insurance cash surrender value is based on cash surrender values indicated by the insurance companies.
 
Deposits—The fair value of demand deposits, savings accounts, NOW accounts, and money market deposits is the amount payable on demand at the reporting date.  The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.  The estimated fair value does not include customer related intangibles.
 
Securities Sold Under Agreements to Repurchase—The fair value approximates the carrying value of securities sold under agreements to repurchase due to their short-term nature.
 
Short-term Federal Home Loan Bank Advances—The fair value approximates the carrying value of short-term FHLB advances due to their short-term nature.
 
Long-term Federal Home Loan Bank Advances—The fair value of long-term FHLB advances is estimated using a discounted cash flow analysis that applies interest rates currently being offered on similar types of borrowings with similar terms.
 
Junior Subordinated Debentures—For junior subordinated debentures that bear interest on a floating basis, the carrying amount approximates fair value.  For junior subordinated debentures that bear interest on a fixed rate basis, the fair value is estimated using a discounted cash flow analysis that applies interest rates currently being offered on similar types of borrowings.
 
Commitments to Extend Credit, Standby Letters of Credit and Credit Card Guarantees—Because commitments to extend credit and standby letters of credit are generally short-term and made using variable rates, the carrying value and estimated fair value associated with these instruments are immaterial.

Assets Recorded at Fair Value
 
The table below presents information about certain assets and liabilities measured at fair value on a recurring basis (in thousands):
 
 
Assets / Liabilities
Measured at Fair Value
   
Fair Value Measurements
at March 31, 2015
 
Description
 
at March 31, 2015
   
Level 1
   
Level 2
   
Level 3
 
Available-for-sale securities:
               
Obligations of state and political subdivisions
 
$
42,777
   
$
-
   
$
42,777
   
$
-
 
GSE mortgage-backed securities
   
104,788
     
-
     
104,788
     
-
 
Collateralized mortgage obligations: residential
   
131,167
     
-
     
131,167
     
-
 
Collateralized mortgage obligations: commercial
   
17,483
     
-
     
17,483
     
-
 
Collateralized debt obligation
   
1,352
     
-
     
1,352
     
-
 
Mutual funds
   
2,123
     
2,123
     
-
     
-
 

 
Assets / Liabilities
Measured at Fair Value
   
Fair Value Measurements
at December 31, 2014
 
Description
 
at December 31, 2014
   
Level 1
   
Level 2
   
Level 3
 
Available-for-sale securities:
               
U.S. Government sponsored enterprises
 
$
10,227
   
$
-
   
$
10,227
   
$
-
 
Obligations of state and political subdivisions
   
44,605
     
-
     
44,605
     
-
 
GSE mortgage-backed securities
   
109,103
     
-
     
109,103
     
-
 
Collateralized mortgage obligations: residential
   
60,839
     
-
     
60,839
     
-
 
Collateralized mortgage obligations: commercial
   
24,545
     
-
     
24,545
     
-
 
Other asset-backed securities
   
24,343
     
-
     
24,343
     
-
 
Collateralized debt obligation
   
1,218
     
-
     
1,218
     
-
 
Mutual funds
   
2,104
     
2,104
     
-
     
-
 
 
Certain assets and liabilities are measured at fair value on a nonrecurring basis and are included in the table below (in thousands).  Impaired loans are Level 2 assets measured using appraisals from external parties of the collateral less any prior liens.  Other real estate properties are also Level 2 assets measured using appraisals from external parties.
 
 
Assets / Liabilities
Measured at Fair Value
   
Fair Value Measurements
at March 31, 2015
 
Description
 
at March 31, 2015
   
Level 1
   
Level 2
   
Level 3
 
Impaired loans
 
$
5,540
   
$
-
   
$
5,540
   
$
-
 
Other real estate
   
4,589
     
-
     
4,589
     
-
 

 
Assets / Liabilities
Measured at Fair Value
   
Fair Value Measurements
at December 31, 2014
 
Description
 
at December 31, 2014
   
Level 1
   
Level 2
   
Level 3
 
Impaired loans
 
$
5,051
   
$
-
   
$
5,051
   
$
-
 
Other real estate
   
4,234
     
-
     
4,234
     
-
 
 
Limitations
 
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s holdings of a particular financial instrument.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.
 
Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment.  In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
 
The carrying amounts and estimated fair values of the Company’s financial instruments are as follows at March 31, 2015 and December 31, 2014 (in thousands):
 
       
Fair Value Measurements at
March 31, 2015 Using:
 
   
Carrying
Value
   
Level 1
   
Level 2
   
Level 3
 
Financial assets:
               
Cash and due from banks, interest-bearing deposits in banks and federal funds sold
 
$
104,402
   
$
104,402
   
$
-
   
$
-
 
Securities available-for-sale
299,690
2,123
297,567
-
Securities held-to-maturity
   
137,592
     
-
     
139,462
     
-
 
Other investments
   
9,644
     
9,644
     
-
     
-
 
Loans, net
   
1,294,869
     
-
     
5,540
     
1,298,787
 
Cash surrender value of life insurance policies
   
13,735
     
-
     
13,735
     
-
 
Financial liabilities:
                             
Non-interest-bearing deposits
   
421,897
     
-
     
421,897
     
-
 
Interest-bearing deposits
   
1,194,201
     
-
     
944,876
     
249,445
 
Securities sold under agreements to repurchase
87,346
     
87,346
     
-
   
-
 
Short-term Federal Home Loan Bank advances
25,000
     
-
     
25,000
     
-
Long-term Federal Home Loan Bank advances
26,171
     
-
     
-
27,261
Junior subordinated debentures
22,167
 
-
     
22,167
 
-
 

       
Fair Value Measurements at
December 31, 2014 Using:
 
   
Carrying
Value
   
Level 1
   
Level 2
   
Level 3
 
Financial assets:
               
Cash and due from banks, interest-bearing deposits in banks and federal funds sold
 
$
86,872
   
$
86,872
   
$
-
   
$
-
 
Securities available-for-sale
276,984
     
2,104
     
274,880
     
-
 
Securities held-to-maturity
141,201
     
-
     
141,593
     
-
 
Other investments
9,990
9,990
-
     
-
 
Loans, net
1,273,205
     
-
     
5,051
     
1,277,882
Cash surrender value of life insurance policies
   
13,659
     
-
     
13,659
     
-
 
Financial liabilities:
                               
Non-interest-bearing deposits
   
390,863
     
-
     
390,863
     
-
 
Interest-bearing deposits
   
1,194,371
     
-
     
943,255
     
251,291
 
Securities sold under agreements to repurchase
   
62,098
     
62,098
     
-
     
-
 
Short-term Federal Home Loan Bank advances
   
25,000
     
-
     
25,000
     
-
 
Long-term Federal Home Loan Bank advances
   
26,277
     
-
     
-
     
27,193
 
Junior subordinated debentures
   
22,167
     
-
     
22,167
     
-
 

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operation.

MidSouth Bancorp, Inc. (the “Company”) is a financial holding company headquartered in Lafayette, Louisiana that conducts substantially all of its business through its wholly owned subsidiary bank, MidSouth Bank, N.A. (the “Bank”).  We offer complete banking services to commercial and retail customers in Louisiana and south and central Texas with 58 locations and are connected to a worldwide ATM network that provides customers with access to more than 55,000 surcharge-free ATMs.  We are community oriented and focus primarily on offering commercial and consumer loan and deposit services to individuals, small businesses, and middle market businesses.
 
The following discussion and analysis identifies significant factors that have affected our financial position and operating results during the periods included in the financial statements accompanying this report.  We encourage you to read this discussion in conjunction with our consolidated financial statements and the notes thereto presented herein and with the financial statements, the notes thereto, and related Management’s Discussion and Analysis of Financial Condition and Results of Operation in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
 
Forward-Looking Statements
 
Certain statements included in this Report, other than statements of historical fact, are forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the regulations thereunder), which are intended to be covered by the safe harbors created thereby. Forward-looking statements include, but are not limited to certain statements under the captions “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
 The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” “would,” “could,” “should,” “guidance,” “potential,” “continue,” “project,” “forecast,” “confident,” and similar expressions are typically used to identify forward-looking statements.  These statements are based on assumptions and assessments made by management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.  Any forward-looking statements are not guarantees of our future performance and are subject to risks and uncertainties and may be affected by various factors that may cause actual results, developments and business decisions to differ materially from those in the forward-looking statements.  Some of the factors that may cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements include the factors discussed under the caption “Risk Factors” in our 2014 Annual Report on form 10-K and under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report and the following:
 
· changes in interest rates and market prices that could affect the net interest margin, asset valuation, and expense levels;
· changes in local economic and business conditions, including, without limitation, changes related to the oil and gas industries, that could adversely affect customers and their ability to repay borrowings under agreed upon terms, adversely affect the value of the underlying collateral related to their borrowings, and reduce demand for loans;
· increased competition for deposits and loans which could affect compositions, rates and terms;
· changes in the levels of prepayments received on loans and investment securities that adversely affect the yield and value of the earning assets;
· a deviation in actual experience from the underlying assumptions used to determine and establish our allowance for loan losses (“ALL”), which could result in greater than expected loan losses;
· changes in the availability of funds resulting from reduced liquidity or increased costs;
· the timing, ability to complete and the impact of proposed and/or future acquisitions, the success or failure of integrating acquired operations, and the ability to capitalize on growth opportunities upon entering new markets;
·
the timing, ability to complete and the impact of proposed and/or future efficiency initiatives;
· the ability to acquire, operate, and maintain effective and efficient operating systems;
· increased asset levels and changes in the composition of assets that would impact capital levels and regulatory capital ratios;
· loss of critical personnel and the challenge of hiring qualified personnel at reasonable compensation levels;
 
· legislative and regulatory changes, including the changes in the regulatory capital framework under the Federal Reserve Board’s Basel III regulatory capital reforms, the impact of regulations under the Dodd-Frank  Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), including the implementation of the Consumer Financial Protection Bureau, and other changes in banking, securities and tax laws and regulations and their application by our regulators, changes in the scope and cost of Federal Deposit Insurance Corporation (“FDIC”) insurance and other coverage;
· regulations and restrictions resulting from our participation in government sponsored programs such as the U.S. Treasury’s Small Business Lending Fund, including potential retroactive changes in such programs;
· changes in accounting principles, policies, and guidelines applicable to financial holding companies and banking;
· acts of war, terrorism, cyber intrusion, weather, or other catastrophic events beyond our control; and
· the ability to manage the risks involved in the foregoing.
 
We can give no assurance that any of the events anticipated by the forward-looking statements will occur or, if any of them does, what impact they will have on our results of operations and financial condition.  We disclaim any intent or obligation to publicly update or revise any forward-looking statements, regardless of whether new information becomes available, future developments occur or otherwise.
 
Critical Accounting Policies
 
Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements.  Our significant accounting policies are described in the notes to the consolidated financial statements included in this report. The accounting principles we follow and the methods of applying these principles conform to accounting principles generally accepted in the United States of America (“GAAP”) and general banking practices.  Our most critical accounting policy relates to the determination of the allowance for loan losses, which reflects the estimated losses resulting from the inability of its borrowers to make loan payments.  The determination of the adequacy of the allowance involves significant judgment and complexity and is based on many factors.  If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, the estimates would be updated and additional provisions for loan losses may be required.  See Asset Quality – Nonperforming Assets and Allowance for Loan Losses and Note 1 and Note 3 of the footnotes to the consolidated financial statements.
 
Another of our critical accounting policies relates to the valuation of goodwill, intangible assets and other purchase accounting adjustments.  We account for acquisitions in accordance with ASC Topic No. 805, which requires the use of the purchase method of accounting.  Under this method, we are required to record assets acquired and liabilities assumed at their fair value, including intangible assets.  Determination of fair value involves estimates based on internal valuations of discounted cash flow analyses performed, third party valuations, or other valuation techniques that involve subjective assumptions.  Additionally, the term of the useful lives and appropriate amortization periods of intangible assets is subjective.  Resulting goodwill from an acquisition under the purchase method of accounting represents the excess of the purchase price over the fair value of net assets acquired.  Goodwill is not amortized, but is evaluated for impairment annually or more frequently if deemed necessary.  If the fair value of an asset exceeds the carrying amount of the asset, no charge to goodwill is made.  If the carrying amount exceeds the fair value of the asset, goodwill will be adjusted through a charge to earnings.  Given the instability of the economic environment, it is reasonably possible that the methodology of the assessment of potential loan losses and goodwill impairment could change in the near-term or could result in impairment going forward.
 
A third critical accounting policy relates to deferred tax assets and liabilities.  We record deferred tax assets and deferred tax liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.  Future tax benefits, such as net operating loss carry forwards, are recognized to the extent that realization of such benefits is more likely than not.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.  In the event the future tax consequences of differences between the financial reporting bases and the tax bases of our assets and liabilities results in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such assets is required.  A valuation allowance is provided when it is more likely than not that a portion or the full amount of the deferred tax asset will not be realized.  In assessing the ability to realize the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies.  A deferred tax liability is not recognized for portions of the allowance for loan losses for income tax purposes in excess of the financial statement balance.  Such a deferred tax liability will only be recognized when it becomes apparent that those temporary differences will reverse in the foreseeable future.  A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than 50% more likely of being realized on examination.  For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
 
Results of Operations
 
Earnings Analysis
 
We reported net earnings available to common shareholders of $1.3 million for the first quarter of 2015, compared to net earnings available to common shareholders of $6.7 million reported for the first quarter of 2014.  Diluted earnings for the first quarter of 2015 were $0.12 per common share, compared to $0.57 per common share reported for the first quarter of 2014.  The first quarter of 2014 included $3.0 million of executive officer life insurance proceeds recorded in noninterest income and after-tax related expenses of $160,000.  Excluding these non-operating income and expenses, operating earnings per share for the first quarter of 2014 was $0.33.
 
First quarter 2015 net earnings were impacted by a loan loss provision of $6.0 million of which approximately $4.0 million is the result of energy related credit downgrades on five relationships plus an increase of $500,000 to the reserve for potential yet unidentified losses in our energy related portfolio.  Based on our 30 years of experience lending to the oilfield service industry and the current uncertainty regarding the length of the downturn in energy markets, we were proactive with downgrading credits and increasing reserve levels in the first quarter of 2015, although we have not yet confirmed any material energy related losses.  We continue to be engaged in frequent dialogue with our energy related borrowers impacted by the downturn to attempt to mitigate or eliminate possible losses to the Bank.  Although we are very focused on resolving energy related credits, we continue to make good progress in improving our core profitability.
 
Excluding $3.0 million of executive officer life insurance proceeds recorded in noninterest income in the first quarter of 2014, revenues from consolidated operations increased $412,000 in quarterly comparison.  Net interest income increased $362,000, from $18.9 million for the first quarter of 2014 to $19.3 million for the first quarter of 2015.  Decreases of $751,000 in loan valuation income and $320,000 in interest income on investment securities were offset primarily by a $1.3 million increase in interest income earned on a higher volume of loans and a $197,000 decrease in interest expense on junior subordinated debentures.  Excluding the $3.0 million of life insurance income, noninterest income increased $50,000 in quarterly comparison, from $4.9 million for the three months ended March 31, 2014 to $5.0 million for the three months ended March 31, 2015.  The increase in noninterest income consisted primarily of $127,000 in ATM/debit card income, $115,000 in gain on sales of securities and $104,000 in mortgage lending fees. The increases were partially offset primarily by a $260,000 decrease in service charges on deposit accounts.
 
Excluding non-operating expenses of $242,000 in the first quarter of 2014, first quarter 2015 noninterest expenses decreased $1.2 million compared to first quarter 2014 and primarily consisted of decreases of $732,000 in salaries and benefits costs, $106,000 in occupancy expenses and $75,000 in expenses on ORE and other repossessed assets, combined with smaller decreases in several other noninterest expense categories. The provision for loan losses increased $5.5 million in quarterly comparison, primarily due to energy related credit downgrades and an increase of $500,000 in a special reserve for potential yet unidentified losses in the energy related portfolio.  Income tax expense decreased $1.3 million in quarterly comparison.
 
Dividends paid on the Series B Preferred Stock issued to the Treasury as a result of our participation in the Small Business Lending Fund (“SBLF”) totaled $80,000 for the first quarter of 2015 based on a dividend rate of 1.00%.  The dividend rate is set at 1.00% through February 25, 2016.  The Series C Preferred Stock issued with the December 28, 2012 acquisition of PSB Financial Corporation (“PSB”) paid dividends totaling $93,000 for the three months ended March 31, 2015.
 
Net Interest Income
 
Our primary source of earnings is net interest income, which is the difference between interest earned on loans and investments and interest paid on deposits and other interest-bearing liabilities.  Changes in the volume and mix of earning assets and interest-bearing liabilities combined with changes in market rates of interest greatly affect net interest income.  Our net interest margin on a taxable equivalent basis, which is net interest income as a percentage of average earning assets, was 4.44% and 4.66% for the three months ended March 31, 2015 and 2014, respectively.   Tables 1 and 2 below analyze the changes in net interest income in the three months ended March 31, 2015 and 2014.
 
Fully taxable-equivalent (“FTE”) net interest income totaled $19.6 million and $19.3 million for the quarters ended March 31, 2015 and 2014, respectively.  The FTE net interest income increased $304,000 in prior year quarterly comparison primarily due to a $571,000 increase in interest income on loans despite a $751,000 reduction in purchase accounting adjustments on acquired loans.  The increased interest income on loans resulted from a $151.3 million increase in the average volume of loans in quarterly comparison. The average yield on loans decreased 54 basis points, from 6.18% to 5.64%.  The purchase accounting adjustments added 13 basis points to the average yield on loans for the first quarter of 2015 and 42 basis points to the average yield on loans for the first quarter of 2014.  Net of the impact of the purchase accounting adjustments, average loan yields declined 25 basis points in prior year quarterly comparison, from 5.76% to 5.51%.  Loan yields have declined primarily as the result of a sustained low interest rate environment.
 
Investment securities totaled $437.3 million, or 21.9% of total assets at March 31, 2015, versus $483.7 million, or 25.6% of total assets at March 31, 2014.  The investment portfolio had an effective duration of 3.5 years and a net unrealized gain of $6.0 million at March 31, 2015.  The average volume of investment securities decreased $74.1 million in prior year quarterly comparison.  The average tax equivalent yield on investment securities increased 10 basis points, from 2.61% to 2.71%.  The $74.1 million decrease in the average volume of investment securities was used to fund loan growth during the same period.
 
The average yield on all earning assets decreased 25 basis points in prior year quarterly comparison, from 5.02% for the first quarter of 2014 to 4.77% for the first quarter of 2015.  Net of the impact of purchase accounting adjustments, the average yield on total earning assets decreased 7 basis points, from 4.74% to 4.67% for the three month periods ended March 31, 2014 and 2015, respectively, due to a decline in the average rate earned on loans.
 
The impact to interest expense of a $59.5 million increase in the average volume of interest- bearing liabilities was offset by a 4 basis point decrease in the average rate paid on interest- bearing liabilities, from 0.47% at March 31, 2014 to 0.43% at March 31, 2015.  Net of purchase accounting adjustments on acquired certificates of deposit and FHLB borrowings, the average rate paid on interest-bearing liabilities was 0.53% for the first quarter of 2014 and declined to 0.47% for the first quarter of 2015.
 
The average volume of notes payable for the three months ended March 31, 2015 of $26.2 million consisted of long-term FHLB advances.  The average volume of notes payable of $27.6 million for the three months ended March 31, 2014 consisted of long-term FHLB advances and a note payable with First National Bankers Bank.  The FHLB advances are fixed rate advances with rates ranging from 1.99% to 5.06% and have a range of maturities from April 2015 to January 2019.  The FHLB advances are collateralized by a blanket lien on first mortgages and other qualifying loans.  The remaining balance on the note payable with First National Bankers Bank in the amount of $500,000 was paid off in the third quarter of 2014.  The interest rate on the note was equal to New York Prime.  A short-term FHLB advance totaled $25.0 million at March 31, 2015.  The advance matures in June 2015 and bears an interest rate of 0.17%.
 
As a result of these changes in volume and yield on earning assets and interest-bearing liabilities, the FTE net interest margin decreased 22 basis points, from 4.66% for the first quarter of 2014 to 4.44% for the first quarter of 2015.  Net of purchase accounting adjustments on loans, deposits and FHLB borrowings, the FTE margin decreased 1 basis point, from 4.33% for the first quarter of 2014 to 4.32% for the first quarter of 2015.
 
Table 1
Consolidated Average Balances, Interest and Rates
(in thousands)
   
Three Months Ended March 31,
 
   
2015
   
2014
 
   
Average
Volume
   
Interest
   
Average
Yield/Rate
   
Average
Volume
   
Interest
   
Average
Yield/Rate
 
Assets
                       
Investment securities1
                       
Taxable
 
$
336,337
   
$
1,925
     
2.29
%
 
$
397,642
   
$
2,136
     
2.15
%
Tax exempt2
   
78,948
     
892
     
4.52
%
   
91,792
     
1,059
     
4.61
%
Total investment securities
   
415,285
     
2,817
     
2.71
%
   
489,434
     
3,195
     
2.61
%
Federal funds sold
   
3,816
     
2
     
0.21
%
   
2,921
     
1
     
0.14
%
Time and interest bearing deposits in other banks
   
59,225
     
37
     
0.25
%
   
25,891
     
16
     
0.25
%
Other investments
   
9,754
     
79
     
3.24
%
   
11,527
     
70
     
2.43
%
Total loans3
   
1,298,317
     
18,054
     
5.64
%
   
1,147,010
     
17,483
     
6.18
%
Total earning assets
   
1,786,397
     
20,989
     
4.77
%
   
1,676,783
     
20,765
     
5.02
%
Allowance for loan losses
   
(10,942
)
                   
(8,688
)
               
Nonearning assets
   
191,297
                     
191,117
                 
Total assets
 
$
1,966,752
                   
$
1,859,212
                 
                                                 
Liabilities and shareholders’ equity
                                               
Total interest bearing deposits
 
$
1,192,086
   
$
947
     
0.32
%
 
$
1,155,011
   
$
871
     
0.31
%
Securities sold under repurchase agreements
   
79,630
     
230
     
1.17
%
   
48,413
     
180
     
1.51
%
Federal funds purchased
   
-
     
-
     
-
     
168
     
-
     
-
 
Short-term FHLB advances
   
25,000
     
8
     
0.13
%
   
25,000
     
10
     
0.16
%
Notes payable
   
26,219
     
89
     
1.36
%
   
27,577
     
96
     
1.39
%
Junior subordinated debentures
   
22,167
     
150
     
2.71
%
   
29,384
     
347
     
4.72
%
Total interest bearing liabilities
   
1,345,102
     
1,424
     
0.43
%
   
1,285,553
     
1,504
     
0.47
%
                                                 
Demand deposits
   
400,067
                     
372,342
                 
Other liabilities
   
9,598
                     
6,337
                 
Shareholders’ equity
   
211,985
                     
194,980
                 
Total liabilities and shareholders’ equity
 
$
1,966,752
                   
$
1,859,212
                 
                                                 
Net interest income and net interest spread
         
$
19,565
     
4.34
%
         
$
19,261
     
4.55
%
Net yield on interest earning assets
                   
4.44
%
                   
4.66
%
                                                 
 

1
Securities classified as available-for-sale are included in average balances.  Interest income figures reflect interest earned on such securities.
 
2
Interest income of $308,000 for 2015 and $366,000 for 2014 is added to interest earned on tax-exempt obligations to reflect tax equivalent yields using a tax rate of 35%.
 
3
Interest income includes loan fees of $1,362,000 for 2015 and $1,345,000 for 2014.  Nonaccrual loans are included in average balances and income on such loans is recognized on a cash basis.
 
Table 2
Changes in Taxable-Equivalent Net Interest Income
(in thousands)
   
Three Months Ended
March 31, 2015 compared to March 31, 2014
 
   
Total
Increase
   
Change
Attributable To
 
   
(Decrease)
   
Volume
   
Rates
 
Taxable-equivalent earned on:
           
Investment securities
           
Taxable
 
$
(211
)
 
$
(344
)
 
$
133
 
Tax exempt
   
(167
)
   
(145
)
   
(22
)
Federal funds sold
   
1
     
-
     
1
 
Time and interest bearing deposits in other banks
   
21
     
21
     
-
 
Other investments
   
9
     
(12
)
   
21
 
Loans, including fees
   
571
     
2,185
     
(1,614
)
Total
   
224
     
1,705
     
(1,481
)
                         
Interest paid on:
                       
Interest bearing deposits
   
76
     
28
     
48
 
Securities sold under repurchase agreements
   
50
     
97
     
(47
)
Short-term FHLB advances
   
(2
)
   
-
     
(2
)
Notes payable
   
(7
)
   
(5
)
   
(2
)
Junior subordinated debentures
   
(197
)
   
(71
)
   
(126
)
Total
   
(80
)
   
49
     
(129
)
                         
Taxable-equivalent net interest income
 
$
304
   
$
1,656
   
$
(1,352
)
 
Note: In Table 2, changes due to volume and rate have generally been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts to the changes in each.

Non-interest Income
 
Non-interest income decreased $3.0 million in quarterly comparison, from $7.9 million for the three months ended March 31, 2014 to $5.0 million for the three months ended March 31, 2015.  Excluding the $3.0 million of life insurance income, noninterest income increased $50,000 in quarterly comparison.  The increase in noninterest income consisted primarily of $127,000 in ATM/debit card income, $115,000 in gain on sales of securities and $104,000 in mortgage lending fees. The increases were partially offset primarily by a $260,000 decrease in service charges on deposit accounts.
 
Non-interest Expense
 
First quarter 2015 noninterest expenses decreased $1.4 million compared to first quarter 2014 and primarily consisted of decreases of $871,000 in salaries and benefits costs, $106,000 in occupancy expenses and $75,000 in expenses on ORE and other repossessed assets, combined with smaller decreases in several other noninterest expense categories.
 
A reduction in the number of full-time equivalent (“FTE”) employees from 581 FTE employees at March 31, 2014 to 549 FTE employees at March 31, 2015 reduced salaries expense by $366,000 year-over-year.  The 34 FTE employee decrease was achieved primarily through attrition and process improvement initiatives over the twelve month period.  The $871,000 decrease in salaries and benefits costs also included a $150,000 decrease in annual incentive accruals and a $280,000 decrease in group health costs.
 
Analysis of Balance Sheet
 
Consolidated assets totaled $2.0 billion at March 31, 2015, compared to $1.9 billion at December 31, 2014.  Deposits totaled $1.6 billion at March 31, 2015 and December 31, 2014.  Our stable core deposit base, which excludes time deposits, grew $32.2 million and accounted for 84.5% of deposits at March 31, 2015 compared to 84.1% of deposits at year end 2014.
 
Securities available-for-sale totaled $299.7 million at March 31, 2015, an increase of $22.7 million from $277.0 million at December 31, 2014.  The securities available-for-sale portfolio increased primarily due to $73.9 million in purchases of securities, which were offset by $18.0 million in calls, maturities and pay-downs and $34.5 million in sales of securities.  During the quarter ended March 31, 2015, we sold lower yielding asset backed securities and US Government sponsored enterprises securities and reinvested those funds primarily in higher yielding CMOs.  Securities held-to-maturity decreased $3.6 million, from $141.2 million at December 31, 2014 to $137.6 million at March 31, 2015.  The investment securities portfolio had an effective duration of 3.5 years and a net unrealized gain of $6.0 million at March 31, 2015.
 
Total loans grew $26.5 million, or 2.1% for the quarter ended March 31, 2015.  Excluding a CD secured loan of $20.0 million, loans grew $6.5 million, or 0.5% for the quarter ended March 31, 2015.  The first quarter 2015 also included $3.9 million of pay-downs on the indirect auto loan program, which the Bank exited at the end of 2014.
 
Table 3
Composition of Loans
(in thousands)
   
March 31, 2015
   
December 31, 2014
 
Commercial, financial, and agricultural (C&I)
 
$
484,508
   
$
467,147
 
Real estate – construction
   
76,964
     
68,577
 
Real estate – commercial (CRE)
   
471,737
     
467,172
 
Real estate – residential
   
153,647
     
154,602
 
Installment loans to individuals
   
115,284
     
119,328
 
Lease financing receivable
   
6,350
     
4,857
 
Other
   
2,439
     
2,748
 
   
$
1,310,929
   
$
1,284,431
 
Less allowance for loan losses
   
(16,060
)
   
(11,226
)
Net loans
 
$
1,294,869
   
$
1,273,205
 
 
At March 31, 2015, MidSouth’s energy related loan portfolio totaled $288 million, including a $20 million CD secured loan.  The majority of our energy lending is focused on oil field service companies and the portfolio consists of 488 total credit relationships.  As a result of an ongoing review of our energy portfolio in the continued low oil price environment, an additional $4 million of loan loss provision related to credit downgrades was recorded during the first quarter 2015, as well as a $500,000 addition to the reserve for potential yet unidentified losses in our energy loan portfolio.  Combined with an initial provision of $650,000 established in the fourth quarter of 2014, a total of $1.15 million is reserved for potential yet unidentified losses in our energy related portfolio.
 
Within the $471.7 million commercial real estate portfolio, $436.6 million is secured by commercial property, $16.3 million is secured by multi-family property, and $18.9 million is secured by farmland.  Of the $436.6 million secured by commercial property, $259.2 million, or 59.4%, is owner-occupied.  Of the $153.6 million residential real estate portfolio, 87.8% represented loans secured by first liens.
 
Off-Balance Sheet Arrangements
 
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements.  These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk.  Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, letters of credit and lines of credit.  For the period ended March 31, 2015, we did not engage in any off-balance sheet transactions reasonably likely to have a material impact on our financial condition, results of operations, or cash flows.
 
Liquidity and Capital
 
Bank Liquidity
 
Liquidity is the availability of funds to meet maturing contractual obligations and to fund operations.  The Bank’s primary liquidity needs involve its ability to accommodate customers’ demands for deposit withdrawals as well as customers’ requests for credit.  Liquidity is deemed adequate when sufficient cash to meet these needs can be promptly raised at a reasonable cost to the Bank.
 
Liquidity is provided primarily by three sources: a stable base of funding sources, an adequate level of assets that can be readily converted into cash, and borrowing lines with correspondent banks.  Although the Bank historically has not utilized brokered deposits, this is a fourth potential source of liquidity, albeit one that is more costly and volatile.  Our core deposits are our most stable and important source of funding.  Cash deposits at other banks, federal funds sold, and principal payments received on loans and mortgage-backed securities provide additional primary sources of liquidity.  Approximately $53.4 million in projected cash flows from securities repayments for the remainder of 2015 provides an additional source of liquidity.
 
The Bank also has significant borrowing capacity with the FRB-Atlanta and with the FHLB–Dallas.  As of March 31, 2015, we had no borrowings with the FRB-Atlanta.  Long-term FHLB-Dallas advances totaled $26.2 million at March 31, 2015 and are fixed rate advances with rates ranging from 1.99% to 5.06% and have a range of maturities from April 2015 to January 2019.  A short-term FHLB-Dallas advance totaled $25.0 million at March 31, 2015.  The advance matures in June 2015 and bears an interest rate of 0.17%.   Under existing agreements with the FHLB-Dallas, our borrowing capacity totaled $322.6 million at March 31, 2015.  The Bank has the ability to post additional collateral of approximately $139.4 million if necessary to meet liquidity needs.  Additionally, $267.1 million in loan collateral is pledged under a Borrower-in-Custody line with the FRB-Atlanta. Unsecured borrowing lines totaling $33.5 million are available through correspondent banks.  We utilize these contingency funding alternatives to meet deposit volatility, which is more likely in the current environment, given unusual competitive offerings within our markets.
 
Company Liquidity
 
At the Company level, cash is needed primarily to meet interest payments on the junior subordinated debentures, dividends on our common stock and dividend payments on the Series B and Series C Preferred Stocks.  The dividend rate on the Series B Preferred Stock issued to the U.S. Treasury for participation in the Small Business Lending Fund (“SBLF”) was 1.00% for the three month periods ended March 31, 2015 and December 31, 2014.  The dividend rate was set at 1.00% for the fourth quarter of 2013 due to attaining the target 10% growth rate in qualified small business loans during the second quarter of 2013.  Beginning February 2016, the dividend rate will increase to 9% per annum.
 
On December 28, 2012, the Company issued 756,511 shares of common stock and 99,971 shares of Series C Preferred Stock in connection with the PSB acquisition.  During the first three months of 2015, 432 shares of Series C Preferred Stock were converted into 2,394 shares of the Company’s common stock.  As of March 31, 2015, there were 93,248 shares of Series C Preferred Stock issued and outstanding.  The Series C Preferred Stock is entitled to the payment of noncumulative dividends, if and when declared by the Company’s Board of Directors, at the rate of 4.00% per annum, payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year.  The Series C Preferred Stock paid dividends totaling $93,000 for the three months ended March 31, 2015.
 
Dividends from the Bank totaling $4.0 million provided additional liquidity for the Company during the three months ended March 31, 2015.  As of March 31, 2015, the Bank had the ability to pay dividends to the Company of approximately $7.3 million without prior approval from its primary regulator.  As a publicly traded company, the Company also has the ability, subject to market conditions, to issue additional shares of common stock and other securities to provide funds as needed for operations and future growth of the Company.
 
Capital
 
The Company and the Bank are required to maintain certain minimum capital levels.  Risk-based capital requirements are intended to make regulatory capital more sensitive to the risk profile of an institution's assets.  Effective January 1, 2015, The Company and the Bank adopted the Basel III rules which included new minimum risk-based and leverage ratios, and modified capital and asset definitions for purposes of calculating these ratios.  These rules also created a new regulatory capital standard based on Tier 1 common equity and increased the minimum leverage and risk-based capital ratios applicable to all banking organizations.
 
In addition, the Basel III rules subject banking organizations to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer of 2.5% above the new regulatory minimum capital ratios.  The effect of the capital conservation buffer will be to increase the minimum common equity Tier 1 capital ratio to 7.0%, the minimum Tier 1 risk-based capital ratio to 8.5% and the minimum total risk-based capital ratio to 10.5%, for banking organizations seeking to avoid the limitations on capital distributions and discretionary bonus payments to executive officers.  The new minimum capital requirements were effective on January 1, 2015 for community banking organizations, such as MidSouth, whereas other requirements of the Basel III rules phase in over time.
 
At March 31, 2015, the Company and the Bank were in compliance with statutory minimum capital requirements and were classified as “well capitalized.”  Minimum capital requirements include a total risk-based capital ratio of 8.0%, with Tier 1 capital not less than 6.0%, a Tier 1 leverage ratio (Tier 1 to total average adjusted assets) of 4.0% based upon the regulators latest composite rating of the institution, and a common equity Tier 1 capital to total risk-weighted assets of 4.5%.  As of March 31, 2015, the Company’s Tier 1 leverage ratio was 9.63%, Tier 1 capital to risk-weighted assets was 12.30%, total capital to risk-weighted assets was 13.38% and common equity Tier 1 capital to risk-weighted assets was 8.12%.  The Bank had a Tier 1 leverage capital ratio of 8.95% at March 31, 2015.
 
Asset Quality
 
Credit Risk Management
 
We manage credit risk primarily by observing written, board approved policies that govern all credit underwriting and approval activities.  Our Chief Credit Officer (“CCO”) is responsible for credit underwriting and loan operations for the Bank.  The role of the CCO includes on-going review and development of lending policies, commercial credit analysis, centralized consumer underwriting, loan operations documentation and funding, and overall credit risk management procedures.  The current risk management process requires that each individual loan officer review his or her portfolio on a quarterly basis and assign recommended credit ratings on each loan.  These efforts are supplemented by independent reviews performed by the loan review officer and other validations performed by the internal audit department.  The results of the reviews are reported directly to the Audit Committee of the Board of Directors.  We believe the conservative nature of our underwriting practices has resulted in strong credit quality in our loan portfolio.  Completed loan applications, credit bureau reports, financial statements, and a committee approval process remain a part of credit decisions.  Documentation of the loan decision process is required on each credit application, whether approved or denied, to ensure thorough and consistent procedures.  Additionally, we have historically recognized and disclosed significant problem loans quickly and taken prompt action to address material weaknesses in those credits.
 
Credit concentrations are monitored and reported quarterly whereby individual customer and aggregate industry leverage, profitability, risk rating distributions, and liquidity are evaluated for each major standard industry classification segment.  At March 31, 2015, one industry segment concentration, the oil and gas industry, aggregated more than 10% of our loan portfolio.  Our exposure in the oil and gas (energy related) industry, including related service and manufacturing industries, totaled approximately $287.6 million, or 21.9% of total loans.  Of the 488 credit relationships in the energy related loan portfolio, 14 relationships totaling $37.0 million were classified with $0.7 million on nonaccrual status at March 31, 2015.
 
Additionally, we monitor our exposure to loans secured by commercial real estate.  At March 31, 2015, loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately $521.9 million.  Of the $521.9 million, $471.7 million represent CRE loans, 55% of which are secured by owner-occupied commercial properties.  Of the $521.9 million in loans secured by commercial real estate, $8.1 million, or 1.6%, were on nonaccrual status at March 31, 2015Additional information regarding credit quality by loan classification is provided in Note 3 – Credit Quality of Loans and Allowance for Loan Losses and Note 8 – Fair Value Measurement in the notes to the interim consolidated financial statements.
 
Nonperforming Assets and Allowance for Loan Loss
 
Table 4 summarizes the Company's nonperforming assets for the quarters ending March 31, 2015 and 2014, and December 31, 2014.
 
Table 4
Nonperforming Assets and Loans Past Due 90 Days or More and Still Accruing
(in thousands)
   
March 31,
2015
   
December 31,
2014
   
March 31,
2014
 
Nonaccrual loans
 
$
12,894
   
$
10,701
   
$
6,025
 
Loans past due 90 days and over and still accruing
   
40
     
187
     
251
 
Total nonperforming loans
   
12,934
     
10,888
     
6,276
 
Other real estate
   
4,589
     
4,234
     
6,525
 
Other foreclosed assets
   
43
     
-
     
56
 
Total nonperforming assets
 
$
17,566
   
$
15,122
   
$
12,857
 
                         
Troubled debt restructurings
 
$
407
   
$
410
   
$
1,579
 
                         
Nonperforming assets to total assets
   
0.88
%
   
0.78
%
   
0.68
%
Nonperforming assets to total loans + ORE + other assets repossessed
   
1.34
%
   
1.17
%
   
1.08
%
ALL to nonperforming loans
   
124.17
%
   
103.10
%
   
139.66
%
ALL to total loans
   
1.23
%
   
0.87
%
   
0.74
%
                         
QTD charge-offs
 
$
1,332
   
$
985
   
$
688
 
QTD recoveries
   
166
     
86
     
124
 
QTD net charge-offs
 
$
1,166
   
$
899
   
$
564
 
Annualized net charge-offs to total loans
   
0.36
%
   
0.28
%
   
0.19
%
 
Nonperforming assets totaled $17.6 million at March 31, 2015, an increase of $2.5 million from the $15.1 million reported at year-end 2014 and an increase of $4.7 million from the $12.9 million reported at March 31, 2014.  The increase in the first three months of 2015 resulted primarily from the addition of a commercial real estate (CRE) loan that was placed on nonaccrual status during the quarter.  The CRE loan is not included in our energy portfolio.
 
Allowance coverage for nonperforming loans was 124.17% at March 31, 2015 compared to 103.10% at December 31, 2014 and 139.66% at March 31, 2014.  The ALL/total loans ratio increased to 1.23% at March 31, 2015, compared to 0.87% at year-end 2014 and 0.74% at March 31, 2014.  The increase in the ALL/total loans ratio resulted from a $6.0 million loan loss provision recorded during the first quarter of 2015.  Including valuation accounting adjustments on acquired loans, the total adjustments and ALL was 1.23% of loans at March 31, 2015.  The ratio of annualized net charge-offs to total loans was 0.36% for the three months ended March 31, 2015, compared to 0.28% for the three months ended December 31, 2014, and 0.19% for the three months ended March 31, 2014.
 
Total nonperforming assets to total loans plus ORE and other assets repossessed increased to 1.34% at March 31, 2015 from 1.17% at December 31, 2014 and 1.08% at March 31, 2014.  Loans classified as troubled debt restructurings (“TDRs”) totaled $407,000 at March 31, 2015 compared to $410,000 at December 31, 2014 and $1.6 million at March 31, 2014.  Classified assets, including ORE, increased $41.1 million, or 122.3%, to $74.7 million at March 31, 2015 compared to $33.6 million at December 31, 2014. The increase in classified assets from the prior quarter is primarily due to the downgrade of five performing energy related credit relationships.  Additional information regarding impaired loans is included in Note 3 – Credit Quality of Loans and Allowance for Loan Losses and Note 8 – Fair Value Measurement in the notes to the interim consolidated financial statements.
 
Quarterly evaluations of the allowance for loan losses are performed in accordance with GAAP and regulatory guidelines.  The ALL is comprised of specific reserves assigned to each impaired loan for which a probable loss has been identified as well as general reserves to maintain the allowance at an acceptable level for other loans in the portfolio where historical loss experience is available that indicates certain probable losses may exist.  Factors considered in determining provisions include estimated losses in significant credits; known deterioration in concentrations of credit; historical loss experience; trends in nonperforming assets; volume, maturity and composition of the loan portfolio; off-balance sheet credit risk; lending policies and control systems; national and local economic conditions; the experience, ability and depth of lending management; and the results of examinations of the loan portfolio by regulatory agencies and others.  The processes by which we determine the appropriate level of the ALL, and the corresponding provision for probable credit losses, involves considerable judgment; therefore, no assurance can be given that future losses will not vary from current estimates. We believe the $16.1 million in the ALL as of March 31, 2015 is sufficient to cover probable losses in the loan portfolio.
 
Impact of Inflation and Changing Prices
 
The consolidated financial statements and notes thereto, presented herein, have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations.  Unlike most industrial companies, nearly all the assets and liabilities of the Company are financial.  As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation.  Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
 
There have been no significant changes from the information regarding market risk disclosed under the heading “Funding Sources - Interest Rate Sensitivity” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
 
Item 4.  
Controls and Procedures.
 
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  As of the end of the period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
 
During the first quarter of 2015, there was no change in the Company’s internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Part II – Other Information
 
Item 1.
Legal Proceedings.
 
The Bank has been named as a defendant in various legal actions arising from normal business activities in which damages of various amounts are claimed.  While the amount, if any, of ultimate liability with respect to such matters cannot be currently determined, management believes, after consulting with legal counsel, that any such liability will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.  However, in the event of unexpected future developments in these matters, if the ultimate resolution of any such matter is unfavorable, the result may be material to the Company’s consolidated financial position, consolidated results of operations or consolidated cash flows.
 
Item 1A.
Risk Factors.
 
There have been no material changes from the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2014.
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
 
The Company did not sell any unregistered equity securities or repurchase any equity securities during the quarter ended March 31, 2015.
 
Item 3.
Defaults Upon Senior Securities.
 
None.
 
Item 4.
Mine Safety Disclosures.
 
None.
 
Item 5.
Other Information.
 
None.
 
Item 6.
Exhibits.
 
 Exhibit Number     Document Description
 
3.1
Amended and Restated Articles of Incorporation of MidSouth Bancorp, Inc. (restated solely for purposes of Item 601(b)(3) of Regulation S-K) (filed as Exhibit 3.1 to MidSouth's Annual Report on Form 10-K filed on March 18, 2013 and incorporated herein by reference).
   
3.2
Amended and Restated By-laws of MidSouth Bancorp, Inc. effective as of September 26, 2012 (restated solely for purposes of Item 601(b)(3) of Regulation S-K (filed as Exhibit 3.3 to MidSouth’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 and incorporated herein by reference).
   
Certification pursuant to Exchange Act Rules 13(a) – 14(a)
   
Certification pursuant to Exchange Act Rules 13(a) – 14(a)
   
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101
The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015, formatted in Extensible Business Reporting Language (“XBRL”): (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows and (iv) Notes to Consolidated Financial Statements.*

*
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not to be “filed” or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Act of 1934, as amended, and otherwise are not subject to liability under these sections.

Signatures

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
MidSouth Bancorp, Inc.
(Registrant)
   
Date: May 8, 2014
 
 
/s/ C. R. Cloutier
 
C. R. Cloutier, President and CEO
 
(Principal Executive Officer)
 
 
/s/ James R. McLemore
 
James R. McLemore, CFO
 
(Principal Financial Officer)
 
 
/s/ Teri S. Stelly
 
Teri S. Stelly, Controller
(Principal Accounting Officer)
 
 
38