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EX-32.2 - EXHIBIT 32.2 - MIDSOUTH BANCORP INCmsl10-q03312016exx3221.htm
EX-32.1 - EXHIBIT 32.1 - MIDSOUTH BANCORP INCmsl10-q03312016exx3211.htm
EX-31.2 - EXHIBIT 31.2 - MIDSOUTH BANCORP INCmsl10-q03312016exx3121.htm
EX-31.1 - EXHIBIT 31.1 - MIDSOUTH BANCORP INCmsl10-q03312016exx3111.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 June 30, 2016
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____ to _____

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

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

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

Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES   ☒   NO   ☐

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

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

As of August 9, 2016, there were 11,362,705 shares of the registrant’s Common Stock, par value $0.10 per share, outstanding.
 



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



Part I – Financial Information
 
Item 1. Financial Statements.
MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share data)
 
 
June 30, 2016
(unaudited)
 
December 31, 2015
(audited)
Assets
 
 
 
 
Cash and due from banks, including required reserves of $6,871 and $8,522, respectively
 
$
31,608

 
$
37,170

Interest-bearing deposits in banks
 
65,144

 
48,331

Federal funds sold
 
1,783

 
3,700

Securities available-for-sale, at fair value (cost of $312,614 at June 30, 2016 and $317,375 at December 31, 2015)
 
318,239

 
318,159

Securities held-to-maturity (fair value of $112,273 at June 30, 2016 and $117,698 at December 31, 2015)
 
109,420

 
116,792

Other investments
 
11,036

 
11,188

Loans
 
1,262,389

 
1,263,645

Allowance for loan losses
 
(21,378
)
 
(19,011
)
Loans, net
 
1,241,011

 
1,244,634

Bank premises and equipment, net
 
68,468

 
69,105

Accrued interest receivable
 
6,485

 
6,594

Goodwill
 
42,171

 
42,171

Intangibles
 
5,175

 
5,728

Cash surrender value of life insurance
 
14,167

 
13,622

Other real estate
 
2,735

 
4,187

Other assets
 
5,082

 
6,352

Total assets
 
$
1,922,524

 
$
1,927,733

 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 

 
 

Liabilities:
 
 

 
 

Deposits:
 
 

 
 

Non-interest-bearing
 
$
383,797

 
$
374,261

Interest-bearing
 
1,176,269

 
1,176,589

Total deposits
 
1,560,066

 
1,550,850

Securities sold under agreements to repurchase
 
85,786

 
85,957

Short-term Federal Home Loan Bank advances
 

 
25,000

Long-term Federal Home Loan Bank advances
 
25,638

 
25,851

Junior subordinated debentures
 
22,167

 
22,167

Other liabilities
 
10,926

 
4,771

Total liabilities
 
1,704,583

 
1,714,596

Commitments and contingencies
 


 


Shareholders’ equity:
 
 

 
 

Series B Preferred stock, no par value; 5,000,000 shares authorized, 32,000 shares issued and outstanding at June 30, 2016 and December 31, 2015
 
32,000

 
32,000

Series C Preferred stock, no par value; 100,000 shares authorized, 91,100 and 91,200 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively
 
9,110

 
9,120

Common stock, $0.10 par value; 30,000,000 shares authorized, 11,362,705 and 11,362,150 shares issued and outstanding at June 30, 2016 and December 31, 2015
 
1,136

 
1,136

Additional paid-in capital
 
110,986

 
110,771

Unearned ESOP shares
 
(1,207
)
 
(1,093
)
Accumulated other comprehensive income
 
3,657

 
509

Retained earnings
 
62,259

 
60,694

Total shareholders’ equity
 
217,941

 
213,137

Total liabilities and shareholders’ equity
 
$
1,922,524

 
$
1,927,733

 
See notes to unaudited consolidated financial statements.

3


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Earnings (unaudited)
(in thousands, except per share data)
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Interest income:
 
 
 
 
 
 
 
 
Loans, including fees
 
$
16,838

 
$
18,268

 
$
33,961

 
$
36,322

Securities and other investments:
 
 

 
 

 
 
 
 
Taxable
 
1,940

 
1,853

 
3,976

 
3,778

Nontaxable
 
420

 
559

 
878

 
1,143

Federal funds sold
 
3

 
2

 
8

 
4

Time and interest bearing deposits in other banks
 
97

 
35

 
191

 
72

Other investments
 
90

 
81

 
178

 
160

Total interest income
 
19,388

 
20,798

 
39,192

 
41,479

 
 
 
 
 
 
 
 
 
Interest expense:
 
 

 
 

 
 
 
 
Deposits
 
903

 
921

 
1,810

 
1,868

Securities sold under agreements to repurchase
 
233

 
242

 
466

 
472

Other borrowings and payables
 
91

 
103

 
204

 
200

Junior subordinated debentures
 
170

 
151

 
337

 
301

Total interest expense
 
1,397

 
1,417

 
2,817

 
2,841

 
 
 
 
 
 
 
 
 
Net interest income
 
17,991

 
19,381

 
36,375

 
38,638

Provision for loan losses
 
2,300

 
1,100

 
5,100

 
7,100

Net interest income after provision for loan losses
 
15,691

 
18,281

 
31,275

 
31,538

 
 
 
 
 
 
 
 
 
Non-interest income:
 
 

 
 

 
 
 
 
Service charges on deposits
 
2,391

 
2,347

 
4,704

 
4,679

Gain on sale of securities, net
 
20

 
1,128

 
20

 
1,243

ATM and debit card income
 
1,668

 
1,655

 
3,277

 
3,284

Income from death benefit on BOLI
 

 
160

 

 
160

Other charges and fees
 
794

 
847

 
1,359

 
1,612

Total non-interest income
 
4,873

 
6,137

 
9,360

 
10,978

 
 
 
 
 
 
 
 
 
Non-interest expenses:
 
 

 
 

 
 
 
 
Salaries and employee benefits
 
8,182

 
8,197

 
16,172

 
16,139

Occupancy expense
 
3,667

 
3,865

 
7,264

 
7,550

ATM and debit card expense
 
792

 
693

 
1,577

 
1,356

Data processing
 
478

 
467

 
936

 
924

FDIC insurance
 
420

 
331

 
849

 
612

Legal and professional fees
 
436

 
382

 
819

 
727

Other
 
3,066

 
3,041

 
6,183

 
5,829

Total non-interest expenses
 
17,041

 
16,976

 
33,800

 
33,137

Income before income taxes
 
3,523

 
7,442

 
6,835

 
9,379

Income tax expense
 
1,030

 
2,343

 
1,993

 
2,789

 
 
 
 
 
 
 
 
 
Net earnings
 
2,493

 
5,099

 
4,842

 
6,590

Dividends on preferred stock
 
811

 
172

 
1,238

 
345

Net earnings available to common shareholders
 
$
1,682

 
$
4,927

 
$
3,604

 
$
6,245

Earnings per share:
 
 

 
 

 
 
 
 
Basic
 
$
0.15

 
$
0.43

 
$
0.32

 
$
0.55

Diluted
 
$
0.15

 
$
0.42

 
$
0.32

 
$
0.54

Weighted average number of shares outstanding:
 
 

 
 

 
 
 
 
Basic
 
11,255

 
11,324

 
11,258

 
11,321

Diluted
 
11,255

 
11,850

 
11,258

 
11,854

Dividends declared per common share
 
$
0.09

 
$
0.09

 
$
0.18

 
$
0.18


See notes to unaudited consolidated financial statements.

4


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Net earnings
 
$
2,493

 
$
5,099

 
$
4,842

 
$
6,590

Other comprehensive income (loss), net of tax:
 
 

 
 

 
 

 
 

Unrealized gains on securities available-for-sale:
 
 

 
 

 
 

 
 

Unrealized holding gains (losses) arising during the year
 
2,060

 
(2,971
)
 
4,862

 
(1,270
)
Less: reclassification adjustment for gains on sales of securities available-for-sale
 
(20
)
 
(1,128
)
 
(20
)
 
(1,243
)
Total other comprehensive income (loss), before tax
 
2,040

 
(4,099
)
 
4,842

 
(2,513
)
Income tax effect related to items of other comprehensive income (loss)
 
(714
)
 
1,435

 
(1,694
)
 
880

Total other comprehensive income (loss), net of tax
 
1,326

 
(2,664
)
 
3,148

 
(1,633
)
Total comprehensive income
 
$
3,819

 
$
2,435

 
$
7,990

 
$
4,957

See notes to unaudited consolidated financial statements.

5


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statement of Shareholders’ Equity (unaudited)
For the Six Months Ended June 30, 2016
(in thousands, except share and per share data)
 
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-in Capital
 
Unearned
ESOP Shares
 
Accumulated
Other Comprehensive Income
 
Retained Earnings
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Total
Balance - December 31, 2015
 
123,200

 
$
41,120

 
11,362,150

 
$
1,136

 
$
110,771

 
$
(1,093
)
 
$
509

 
$
60,694

 
$
213,137

Net earnings
 

 

 

 

 

 

 

 
4,842

 
4,842

Dividends on Series B and Series C preferred stock
 

 

 

 

 

 

 

 
(1,238
)
 
(1,238
)
Dividends on common stock, $0.18 per share
 

 

 

 

 

 

 

 
(2,039
)
 
(2,039
)
Conversion of Series C preferred stock to common stock
 
(100
)
 
(10
)
 
555

 

 
10

 

 

 

 

Increase in ESOP obligation, net of repayments
 

 

 

 

 

 
(114
)
 

 

 
(114
)
Tax benefit resulting from distribution from Directors Deferred Compensation Plan
 

 

 

 

 
39

 

 

 

 
39

Stock option and restricted stock compensation expense
 

 

 

 

 
123

 

 

 

 
123

ESOP compensation expense
 

 

 

 

 
(66
)
 

 

 

 
(66
)
Tax benefit for dividends paid to the ESOP
 

 

 

 

 
109

 

 

 

 
109

Change in accumulated other comprehensive income
 

 

 

 

 

 

 
3,148

 

 
3,148

Balance – June 30, 2016
 
123,100

 
$
41,110

 
11,362,705

 
$
1,136

 
$
110,986

 
$
(1,207
)
 
$
3,657

 
$
62,259

 
$
217,941

 
See notes to unaudited consolidated financial statements.




6


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 
 
For the Six Months Ended June 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net earnings
 
$
4,842

 
$
6,590

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

 
 

Depreciation
 
2,964

 
3,107

Accretion of purchase accounting adjustments
 
(353
)
 
(589
)
Provision for loan losses
 
5,100

 
7,100

Deferred tax benefit
 
(330
)
 
(683
)
Amortization of premiums on securities, net
 
1,407

 
1,396

Stock option expense
 
97

 
170

Restricted stock expense
 
26

 

Excess of book value over market value of ESOP shares released
 
(66
)
 

Net gain on sale of investment securities
 
(20
)
 
(1,243
)
Net loss (gain) on sale of other real estate owned
 
37

 
(10
)
Net write down of other real estate owned
 
130

 
29

Net gain on sale/disposal of premises and equipment
 
(7
)
 
(2
)
Income recognized from death benefit on bank owned life insurance
 

 
(160
)
Change in accrued interest receivable
 
109

 
(156
)
Change in accrued interest payable
 
(13
)
 
(23
)
Change in other assets & other liabilities, net
 
4,898

 
(2,621
)
Net cash provided by operating activities
 
18,821

 
12,905

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Proceeds from maturities and calls of securities available-for-sale
 
32,205

 
39,780

Proceeds from maturities and calls of securities held-to-maturity
 
6,861

 
14,083

Proceeds from sale of securities available-for-sale
 
6,803

 
40,277

Purchases of securities available-for-sale
 
(35,123
)
 
(105,486
)
Proceeds from sale of other investments
 
600

 
349

Purchases of other investments
 
(448
)
 
(957
)
Net change in loans
 
(1,062
)
 
(12,486
)
Proceeds from bank owned life insurance death benefit
 

 
498

Purchases of premises and equipment
 
(2,360
)
 
(2,438
)
Proceeds from sale of premises and equipment
 
40

 
28

Proceeds from sale of other real estate owned
 
1,458

 
582

Net cash provided by (used in) investing activities
 
8,974

 
(25,770
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Change in deposits
 
9,240

 
(26,919
)
Change in securities sold under agreements to repurchase
 
(171
)
 
22,449

Borrowings on Federal Home Loan Bank advances
 
25,000

 
80,000

Repayments of Federal Home Loan Bank advances
 
(50,033
)
 
(65,032
)
Proceeds and tax benefit from exercise of stock options
 

 
99

Tax benefit resulting from distribution from Directors Deferred Compensation Plan
 
39

 
420

Tax benefit for dividends paid to ESOP
 
109

 

Payment of dividends on preferred stock
 
(598
)
 
(347
)
Payment of dividends on common stock
 
(2,047
)
 
(2,041
)
Net cash (used in) provided by financing activities
 
(18,461
)
 
8,629

 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
9,334

 
(4,236
)
Cash and cash equivalents, beginning of period
 
89,201

 
86,872

Cash and cash equivalents, end of period
 
$
98,535

 
$
82,636

 
 
 
 
 
Supplemental cash flow information:
 
 

 
 

Interest paid
 
$
2,831

 
$
2,864

Income taxes paid
 
1,963

 
5,180

Noncash investing and financing activities:
 
 

 
 

Transfer of loans to other real estate
 
173

 
909

Change in accrued common stock dividends
 

 
2

Change in accrued preferred stock dividends
 
640

 
(2
)
Net change in loan to ESOP
 
(114
)
 
(234
)
 
See notes to unaudited consolidated financial statements.


7


MidSouth Bancorp, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
June 30, 2016
(Unaudited)

1. Basis of Presentation
 
The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the financial position of MidSouth Bancorp, Inc. (the “Company”) and its subsidiaries as of June 30, 2016 and the results of their operations and their cash flows for the periods presented. The interim financial information should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s 2015 Annual Report on Form 10-K.
 
The results of operations for the six-month period ended June 30, 2016 are not necessarily indicative of the results to be expected for the entire year.
 
Use of Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
 
Summary of Significant Accounting Policies — The accounting and reporting policies of the Company conform with GAAP and general practices within the banking industry.  There have been no material changes or developments in the application of accounting principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies and Estimates as disclosed in our 2015 Annual Report on Form 10-K.

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

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

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

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments was issued with the intention of improving financial reporting by requiring timely recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets

8


not recorded at fair value based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU will be required to be implemented through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the amendments are effective. The effective date of this Update is for fiscal years beginning on or after December 15, 2019. The Company is evaluating the impact that ASU 2016-13 will have on its financial position, results of operations, and its financial statement disclosures. 

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

 
 
June 30, 2016
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Available-for-sale:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
24,226

 
$
577

 
$
1

 
$
24,802

GSE mortgage-backed securities
 
70,115

 
3,228

 

 
73,343

Collateralized mortgage obligations: residential
 
205,815

 
2,035

 
220

 
207,630

Collateralized mortgage obligations: commercial
 
3,858

 

 
29

 
3,829

Mutual funds
 
2,100

 
35

 

 
2,135

Corporate securities
 
6,500

 

 

 
6,500

 
 
$
312,614

 
$
5,875

 
$
250

 
$
318,239

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

 
$
770

 
$
27

 
$
31,493

GSE mortgage-backed securities
 
84,946

 
2,321

 
229

 
87,038

Collateralized mortgage obligations: residential
 
194,067

 
297

 
2,276

 
192,088

Collateralized mortgage obligations: commercial
 
5,512

 
1

 
65

 
5,448

Mutual funds
 
2,100

 

 
8

 
2,092

 
 
$
317,375

 
$
3,389

 
$
2,605

 
$
318,159



9


 
 
June 30, 2016
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Held-to-maturity:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
43,232

 
$
1,424

 
$
1

 
$
44,655

GSE mortgage-backed securities
 
50,301

 
1,444

 

 
51,745

Collateralized mortgage obligations: residential
 
9,942

 

 
65

 
9,877

Collateralized mortgage obligations: commercial
 
5,945

 
51

 

 
5,996

 
 
$
109,420

 
$
2,919

 
$
66

 
$
112,273

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

 
$
697

 
$
6

 
$
44,428

GSE mortgage-backed securities
 
55,696

 
705

 
131

 
56,270

Collateralized mortgage obligations: residential
 
10,803

 

 
361

 
10,442

Collateralized mortgage obligations: commercial
 
6,556

 
2

 

 
6,558

 
 
$
116,792

 
$
1,404

 
$
498

 
$
117,698


With the exception of two private-label collateralized mortgage obligations (“CMOs”) with a combined balance remaining of $22,000 at June 30, 2016, all of the Company’s CMOs are government-sponsored enterprise (“GSE”) securities.
 
The amortized cost and fair value of debt securities at June 30, 2016 by contractual maturity are shown in the following table (in thousands) with the exception of other asset-backed securities, mortgage-backed securities, CMOs, and the collateralized debt obligation.   Expected maturities may differ from contractual maturities for mortgage-backed securities and CMOs because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


10


 
 
Amortized
Cost
 
Fair
Value
Available-for-sale:
 
 
 
 
Due in one year or less
 
$
3,333

 
$
3,384

Due after one year through five years
 
14,755

 
15,115

Due after five years through ten years
 
2,865

 
3,016

Due after ten years
 
3,273

 
3,287

Mortgage-backed securities and collateralized mortgage obligations:
 
 

 
 

Residential
 
275,930

 
280,973

Commercial
 
3,858

 
3,829

Mutual funds
 
2,100

 
2,135

Corporate securities
 
6,500

 
6,500

 
 
$
312,614

 
$
318,239

 
 
 
 
 
 
 
Amortized
Cost
 
Fair
Value
Held-to-maturity:
 
 
 
 
Due in one year or less
 
$
2,475

 
$
2,477

Due after one year through five years
 
5,374

 
5,507

Due after five years through ten years
 
9,419

 
9,770

Due after ten years
 
25,964

 
26,901

Mortgage-backed securities and collateralized mortgage obligations:
 
 

 
 

Residential
 
60,243

 
61,622

Commercial
 
5,945

 
5,996

 
 
$
109,420

 
$
112,273


Details concerning investment securities with unrealized losses are as follows (in thousands):
 
 
 
June 30, 2016
 
 
Securities with losses
under 12 months
 
Securities with losses
over 12 months
 
Total
 
 
Fair
Value
 
Gross
Unrealized
 Loss
 
Fair
Value
 
Gross
Unrealized
Loss
 
Fair
Value
 
Gross
Unrealized
Loss
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of state and  political subdivisions
 
$
762

 
$
1

 
$

 
$

 
$
762

 
$
1

Collateralized mortgage  obligations: residential
 
22,419

 
65

 
12,815

 
155

 
35,234

 
220

Collateralized mortgage  obligations: commercial
 
1,205

 
4

 
2,624

 
25

 
3,829

 
29

 
 
$
24,386

 
$
70

 
$
15,439

 
$
180

 
$
39,825

 
$
250

 
 
 
 
 
 
 
 
 
 
 
 
 

11


 
 
December 31, 2015
 
 
Securities with losses
under 12 months
 
Securities with losses
over 12 months
 
Total
 
 
Fair
Value
 
Gross
Unrealized
Loss
 
Fair
Value
 
Gross
Unrealized
Loss
 
Fair
Value
 
Gross
Unrealized
Loss
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
1,192

 
$
27

 
$

 
$

 
$
1,192

 
$
27

GSE mortgage-backed  securities
 
21,607

 
229

 

 

 
21,607

 
229

Collateralized mortgage  obligations: residential
 
140,999

 
1,207

 
30,029

 
1,069

 
171,028

 
2,276

Collateralized mortgage  obligations: commercial
 

 

 
2,946

 
65

 
2,946

 
65

Other asset-backed securities
 
2,092

 
8

 

 

 
2,092

 
8

 
 
$
165,890

 
$
1,471

 
$
32,975

 
$
1,134

 
$
198,865

 
$
2,605


 
 
June 30, 2016
 
 
Securities with losses
under 12 months
 
Securities with losses
over 12 months
 
Total
 
 
Fair
Value
 
Gross
Unrealized
Loss
 
Fair
Value
 
Gross
Unrealized Loss
 
Fair
Value
 
Gross
Unrealized
Loss
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$

 
$

 
$
505

 
$
1

 
$
505

 
$
1

Collateralized mortgage obligations: residential
 

 

 
9,876

 
65

 
9,876

 
65

 
 
$

 
$

 
$
10,381

 
$
66

 
$
10,381

 
$
66

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
Securities with losses
under 12 months
 
Securities with losses
over 12 months
 
Total
 
 
Fair
Value
 
Gross
Unrealized
Loss
 
Fair
Value
 
Gross
Unrealized
Loss
 
Fair
Value
 
Gross
Unrealized
Loss
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
541

 
$
1

 
$
505

 
$
5

 
$
1,046

 
$
6

GSE mortgage-backed securities
 

 

 
7,021

 
131

 
7,021

 
131

Collateralized mortgage obligations: residential
 

 

 
10,442

 
361

 
10,442

 
361

 
 
$
541

 
$
1

 
$
17,968

 
$
497

 
$
18,509

 
$
498


Management evaluates each quarter whether unrealized losses on securities represent impairment that is other than temporary. For debt securities, the Company considers its intent to sell the securities or if it is more likely than not the Company will be required to sell the securities.  If such impairment is identified, based upon the intent to sell or the more likely than not threshold, the carrying amount of the security is reduced to fair value with a charge to earnings. Upon the result of the aforementioned review, management then reviews for potential other than temporary impairment based upon other qualitative factors.  In making this evaluation, management considers changes in market rates relative to those available when the security was acquired, changes in market expectations about the timing of cash flows from securities that can be prepaid, performance of the debt security, and changes in the market’s perception of the issuer’s financial health and the security’s credit quality.  If determined that a debt security has incurred other than temporary impairment, then the amount of the credit related impairment is determined.  If a credit loss is evident, the amount of the credit loss is charged to earnings and the non-credit related impairment is recognized through other comprehensive income.
 

12


As of June 30, 2016, 17 securities had unrealized losses totaling 0.63% of the individual securities’ amortized cost basis and 0.07% of the Company’s total amortized cost basis.  Of the 17 securities, 10 had been in an unrealized loss position for over twelve months at June 30, 2016.  These 10 securities had an amortized cost basis and unrealized loss of $26.1 million and $246,000, respectively.  The unrealized losses on debt securities at June 30, 2016 resulted from changing market interest rates over the yields available at the time the underlying securities were purchased.  Management identified no impairment related to credit quality.  At June 30, 2016, management had the intent and ability to hold impaired securities and no impairment was evaluated as other than temporary.  As a result, no other than temporary impairment losses were recognized during the three months ended June 30, 2016.
 
During the six months ended June 30, 2016, the Company sold 2 securities classified as available-for-sale at a gross gain of $20,000. During the six months ended June 30, 2015, the Company sold 21 securities classified as available-for-sale at a net gain of $1.2 million. Of the 21 securities sold, 11 were sold with gains totaling $1.4 million and 10 securities were sold at a loss of $135,000.
 
Securities with an aggregate carrying value of approximately $307.2 million and $285.4 million at June 30, 2016 and December 31, 2015, respectively, were pledged to secure public funds on deposit and for other purposes required or permitted by law.
 
3. Credit Quality of Loans and Allowance for Loan Losses
 
The loan portfolio consisted of the following (in thousands):
 
 
June 30, 2016
 
December 31, 2015
Commercial, financial and agricultural
 
$
456,264

 
$
454,028

Real estate – construction
 
96,331

 
74,952

Real estate – commercial
 
463,142

 
471,141

Real estate – residential
 
148,379

 
149,064

Installment loans to individuals
 
94,522

 
111,009

Lease financing receivable
 
1,641

 
1,968

Other
 
2,110

 
1,483

 
 
1,262,389

 
1,263,645

Less allowance for loan losses
 
(21,378
)
 
(19,011
)
 
 
$
1,241,011

 
$
1,244,634

 
The Company monitors loan concentrations and evaluates individual customer and aggregate industry leverage, profitability, risk rating distributions, and liquidity for each major standard industry classification segment.  At June 30, 2016, one industry segment concentration, the oil and gas industry, constituted more than 10% of the loan portfolio.  The Company’s exposure in the oil and gas industry, including related service and manufacturing industries, totaled approximately $249.8 million, or 19.8% of total loans.  Additionally, the Company’s exposure to loans secured by commercial real estate is monitored.  At June 30, 2016, loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately $540.0 million.  Of the $540.0 million, $463.1 million represent CRE loans, 55% of which are secured by owner-occupied commercial properties.  Of the $540.0 million in loans secured by commercial real estate, $27.3 million, or 5.1%, were on nonaccrual status at June 30, 2016.
 
Allowance for Loan Losses
 
The allowance for loan losses is a valuation account available to absorb probable losses on loans. All losses are charged to the allowance for loan losses when the loss actually occurs or when a determination is made that a loss is likely to occur. Recoveries are credited to the allowance for loan losses at the time of recovery.  Quarterly, the probable level of losses in the existing portfolio is estimated through consideration of various factors.  Based on these estimates, the allowance for loan losses is increased by charges to earnings and decreased by charge‑offs (net of recoveries).

The allowance is composed of general reserves and specific reserves.  General reserves are determined by applying loss percentages to segments of the portfolio.  The loss percentages are based on each segment’s historical loss experience, generally over the past twelve to eighteen months, and adjustment factors derived from conditions in the Company’s internal and external environment.  All loans considered to be impaired are evaluated on an individual basis to determine specific reserve allocations in accordance with GAAP.  Loans for which specific reserves are provided are excluded from the calculation of general reserves.
 
Loans acquired in business combinations are initially recorded at fair value, which includes an estimate of credit losses expected to be realized over the remaining lives of the loans, and therefore no corresponding allowance for loan losses is recorded for these loans at acquisition. Methods utilized to estimate any subsequently required allowance for loan losses for acquired loans not deemed credit-

13


impaired at acquisition are similar to originated loans; however, the estimate of loss is based on the unpaid principal balance and then compared to any remaining unaccreted purchase discount. To the extent that the calculated loss is greater than the remaining unaccreted purchase discount, an allowance is recorded for such difference.
 
The Company has an internal loan review department that is independent of the lending function to challenge and corroborate the loan grade assigned by the lender and to provide additional analysis in determining the adequacy of the allowance for loan losses.
 
A rollforward of the activity within the allowance for loan losses by loan type and recorded investment in loans for the six months ended June 30, 2016 and 2015 is as follows (in thousands):
 
 
 
June 30, 2016
 
 
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
Coml, Fin,
and Agric
 
Constru-ction
 
Commercial
 
Residential
 
Installment
loans to
individuals
 
Lease
financing
receivable
 
Other
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
11,268

 
$
819

 
$
4,614

 
$
816

 
$
1,468

 
$
14

 
$
12

 
$
19,011

Charge-offs
 
(2,373
)
 

 
(12
)
 
(23
)
 
(611
)
 

 

 
(3,019
)
Recoveries
 
120

 

 
84

 
4

 
78

 

 

 
286

Provision
 
5,013

 
(405
)
 
162

 
(134
)
 
464

 
(3
)
 
3

 
5,100

Ending balance
 
$
14,028

 
$
414

 
$
4,848

 
$
663

 
$
1,399

 
$
11

 
$
15

 
$
21,378

Ending balance: individually evaluated for impairment
 
$
1,027

 
$

 
$
2,260

 
$
251

 
$
265

 
$

 
$

 
$
3,803

Ending balance: collectively evaluated for impairment
 
$
13,001

 
$
414

 
$
2,588

 
$
412

 
$
1,134

 
$
11

 
$
15

 
$
17,575

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
 
$
456,264

 
$
96,331

 
$
463,142

 
$
148,379

 
$
94,522

 
$
1,641

 
$
2,110

 
$
1,262,389

Ending balance: individually evaluated for impairment
 
$
29,688

 
$
34

 
$
27,292

 
$
2,322

 
$
471

 
$

 
$

 
$
59,807

Ending balance: collectively evaluated for impairment
 
$
426,576

 
$
96,297

 
$
435,255

 
$
145,981

 
$
94,051

 
$
1,641

 
$
2,110

 
$
1,201,911

Ending balance: loans acquired with deteriorated credit quality
 
$

 
$

 
$
595

 
$
76

 
$

 
$

 
$

 
$
671


14


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

 
$
954

 
$
2,402

 
$
810

 
$
1,311

 
$
16

 
$
4

 
$
11,226

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

 

 
(2,483
)
Recoveries
 
144

 

 
14

 
5

 
42

 

 

 
205

Provision
 
5,074

 
20

 
1,560

 
608

 
(173
)
 
9

 
2

 
7,100

Ending balance
 
$
9,092

 
$
968

 
$
3,928

 
$
1,386

 
$
643

 
$
25

 
$
6

 
$
16,048

Ending balance: individually evaluated for impairment
 
$
889

 
$

 
$
1,123

 
$
107

 
$
156

 
$

 
$

 
$
2,275

Ending balance: collectively evaluated for impairment
 
$
8,203

 
$
968

 
$
2,805

 
$
1,279

 
$
487

 
$
25

 
$
6

 
$
13,773

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
 
$
471,397

 
$
79,176

 
$
469,022

 
$
153,820

 
$
113,626

 
$
5,561

 
$
1,790

 
$
1,294,392

Ending balance: individually evaluated for impairment
 
$
23,750

 
$
531

 
$
18,423

 
$
1,823

 
$
324

 
$

 
$

 
$
44,851

Ending balance: collectively evaluated for impairment
 
$
447,647

 
$
78,645

 
$
449,957

 
$
151,912

 
$
113,302

 
$
5,561

 
$
1,790

 
$
1,248,814

Ending balance: loans acquired with deteriorated credit quality
 
$

 
$

 
$
642

 
$
85

 
$

 
$

 
$

 
$
727

 
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.