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EX-32.2 - EXHIBIT 32.2 - MIDSOUTH BANCORP INCmsl10-q09302016exx322.htm
EX-32.1 - EXHIBIT 32.1 - MIDSOUTH BANCORP INCmsl10-q09302016exx321.htm
EX-31.2 - EXHIBIT 31.2 - MIDSOUTH BANCORP INCmsl10-q09302016exx312.htm
EX-31.1 - EXHIBIT 31.1 - MIDSOUTH BANCORP INCmsl10-q09302016exx311.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 September 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
logoa11.jpg
MIDSOUTH BANCORP, INC.
(Exact name of registrant as specified in its charter)

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

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

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

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

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

As of November 9, 2016, there were 11,362,716 shares of the registrant’s Common Stock, par value $0.10 per share, outstanding.
 



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



Part I – Financial Information
 
Item 1. Financial Statements.
MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share data)
 
 
September 30, 2016
(unaudited)
 
December 31, 2015
(audited)
Assets
 
 
 
 
Cash and due from banks, including required reserves of $5,702 and $8,522, respectively
 
$
31,883

 
$
37,170

Interest-bearing deposits in banks
 
93,850

 
48,331

Federal funds sold
 
934

 
3,700

Securities available-for-sale, at fair value (cost of $311,164 at September 30, 2016 and $317,375 at December 31, 2015)
 
316,145

 
318,159

Securities held-to-maturity (fair value of $106,009 at September 30, 2016 and $117,698 at December 31, 2015)
 
103,412

 
116,792

Other investments
 
11,339

 
11,188

Loans
 
1,272,800

 
1,263,645

Allowance for loan losses
 
(23,268
)
 
(19,011
)
Loans, net
 
1,249,532

 
1,244,634

Bank premises and equipment, net
 
69,778

 
69,105

Accrued interest receivable
 
7,162

 
6,594

Goodwill
 
42,171

 
42,171

Intangibles
 
4,898

 
5,728

Cash surrender value of life insurance
 
14,272

 
13,622

Other real estate
 
2,317

 
4,187

Other assets
 
6,227

 
6,352

Total assets
 
$
1,953,920

 
$
1,927,733

 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 

 
 

Liabilities:
 
 

 
 

Deposits:
 
 

 
 

Non-interest-bearing
 
$
403,301

 
$
374,261

Interest-bearing
 
1,181,906

 
1,176,589

Total deposits
 
1,585,207

 
1,550,850

Securities sold under agreements to repurchase
 
95,210

 
85,957

Short-term Federal Home Loan Bank advances
 

 
25,000

Long-term Federal Home Loan Bank advances
 
25,531

 
25,851

Junior subordinated debentures
 
22,167

 
22,167

Other liabilities
 
7,679

 
4,771

Total liabilities
 
1,735,794

 
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 September 30, 2016 and December 31, 2015
 
32,000

 
32,000

Series C Preferred stock, no par value; 100,000 shares authorized, 91,098 and 91,200 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
 
9,110

 
9,120

Common stock, $0.10 par value; 30,000,000 shares authorized, 11,362,716 and 11,362,150 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
 
1,136

 
1,136

Additional paid-in capital
 
111,116

 
110,771

Unearned ESOP shares
 
(1,342
)
 
(1,093
)
Accumulated other comprehensive income
 
3,273

 
509

Retained earnings
 
62,833

 
60,694

Total shareholders’ equity
 
218,126

 
213,137

Total liabilities and shareholders’ equity
 
$
1,953,920

 
$
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 September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Interest income:
 
 
 
 
 
 
 
 
Loans, including fees
 
$
17,373

 
$
17,992

 
$
51,334

 
$
54,314

Securities and other investments:
 
 

 
 

 
 
 
 
Taxable
 
1,983

 
1,850

 
5,959

 
5,642

Nontaxable
 
416

 
536

 
1,294

 
1,679

Federal funds sold
 
3

 
1

 
11

 
5

Time and interest bearing deposits in other banks
 
83

 
40

 
274

 
112

Other investments
 
95

 
113

 
273

 
259

Total interest income
 
19,953

 
20,532

 
59,145

 
62,011

 
 
 
 
 
 
 
 
 
Interest expense:
 
 

 
 

 
 
 
 
Deposits
 
915

 
883

 
2,725

 
2,751

Securities sold under agreements to repurchase
 
236

 
249

 
702

 
721

Other borrowings and payables
 
93

 
109

 
297

 
309

Junior subordinated debentures
 
170

 
150

 
507

 
451

Total interest expense
 
1,414

 
1,391

 
4,231

 
4,232

 
 
 
 
 
 
 
 
 
Net interest income
 
18,539

 
19,141

 
54,914

 
57,779

Provision for loan losses
 
2,900

 
3,800

 
8,000

 
10,900

Net interest income after provision for loan losses
 
15,639

 
15,341

 
46,914

 
46,879

 
 
 
 
 
 
 
 
 
Non-interest income:
 
 

 
 

 
 
 
 
Service charges on deposits
 
2,509

 
2,491

 
7,213

 
7,170

Gain on sale of securities, net
 

 

 
20

 
1,243

ATM and debit card income
 
1,620

 
1,563

 
4,897

 
4,847

Income from death benefit on BOLI
 

 

 

 
160

Other charges and fees
 
737

 
714

 
2,096

 
2,326

Total non-interest income
 
4,866

 
4,768

 
14,226

 
15,746

 
 
 
 
 
 
 
 
 
Non-interest expenses:
 
 

 
 

 
 
 
 
Salaries and employee benefits
 
8,034

 
7,653

 
24,206

 
23,792

Occupancy expense
 
3,635

 
3,815

 
10,899

 
11,365

ATM and debit card expense
 
833

 
770

 
2,410

 
2,126

Data processing
 
527

 
476

 
1,463

 
1,400

FDIC insurance
 
365

 
391

 
1,214

 
1,003

Legal and professional fees
 
516

 
385

 
1,335

 
1,112

Other
 
3,204

 
3,002

 
9,387

 
8,831

Total non-interest expenses
 
17,114

 
16,492

 
50,914

 
49,629

Income before income taxes
 
3,391

 
3,617

 
10,226

 
12,996

Income tax expense
 
993

 
1,028

 
2,986

 
3,817

 
 
 
 
 
 
 
 
 
Net earnings
 
2,398

 
2,589

 
7,240

 
9,179

Dividends on preferred stock
 
811

 
172

 
2,049

 
517

Net earnings available to common shareholders
 
$
1,587

 
$
2,417

 
$
5,191

 
$
8,662

Earnings per share:
 
 

 
 

 
 
 
 
Basic
 
$
0.14

 
$
0.21

 
$
0.46

 
$
0.76

Diluted
 
$
0.14

 
$
0.21

 
$
0.46

 
$
0.75

Weighted average number of shares outstanding:
 
 

 
 

 
 
 
 
Basic
 
11,262

 
11,312

 
11,260

 
11,321

Diluted
 
11,263

 
11,831

 
11,260

 
11,848

Dividends declared per common share
 
$
0.09

 
$
0.09

 
$
0.27

 
$
0.27


See notes to unaudited consolidated financial statements.

4


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Net earnings
 
$
2,398

 
$
2,589

 
$
7,240

 
$
9,179

Other comprehensive (loss) income, net of tax:
 
 

 
 

 
 

 
 

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

 
 

 
 

 
 

Unrealized holding (losses) gains arising during the year
 
(645
)
 
1,717

 
4,217

 
447

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

 

 
(20
)
 
(1,243
)
Unrealized (losses) gains on securities available-for-sale
 
(645
)
 
1,717

 
4,197

 
(796
)
Fair value of derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Change in fair value of derivative instruments designated as cash flow hedges during the period
 
55

 

 
55

 

Total other comprehensive (loss) income, before tax
 
(590
)
 
1,717

 
4,252

 
(796
)
Income tax effect related to items of other comprehensive (loss) income
 
206

 
(601
)
 
(1,488
)
 
279

Total other comprehensive (loss) income, net of tax
 
(384
)
 
1,116

 
2,764

 
(517
)
Total comprehensive income
 
$
2,014

 
$
3,705

 
$
10,004

 
$
8,662

See notes to unaudited consolidated financial statements.

5


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statement of Shareholders’ Equity (unaudited)
For the Nine Months Ended September 30, 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
 

 

 

 

 

 

 

 
7,240

 
7,240

Dividends on Series B and Series C preferred stock
 

 

 

 

 

 

 

 
(2,049
)
 
(2,049
)
Dividends on common stock, $0.27 per share
 

 

 

 

 

 

 

 
(3,052
)
 
(3,052
)
Conversion of Series C preferred stock to common stock
 
(102
)
 
(10
)
 
566

 

 
10

 

 

 

 

Increase in ESOP obligation, net of repayments
 

 

 

 

 

 
(249
)
 

 

 
(249
)
Tax benefit resulting from distribution from Directors Deferred Compensation Plan
 

 

 

 

 
127

 

 

 

 
127

Stock option and restricted stock compensation expense
 

 

 

 

 
165

 

 

 

 
165

ESOP compensation expense
 

 

 

 

 
(88
)
 

 

 

 
(88
)
Tax benefit for dividends paid to the ESOP
 

 

 

 

 
131

 

 

 

 
131

Change in accumulated other comprehensive income
 

 

 

 

 

 

 
2,764

 

 
2,764

Balance – September 30, 2016
 
123,098

 
$
41,110

 
11,362,716

 
$
1,136

 
$
111,116

 
$
(1,342
)
 
$
3,273

 
$
62,833

 
$
218,126

 
See notes to unaudited consolidated financial statements.




6


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 
 
For the Nine Months Ended September 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net earnings
 
$
7,240

 
$
9,179

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

 
 

Depreciation
 
4,431

 
4,652

Accretion of purchase accounting adjustments
 
(569
)
 
(1,003
)
Provision for loan losses
 
8,000

 
10,900

Deferred tax benefit
 
(781
)
 
(1,633
)
Amortization of premiums on securities, net
 
2,170

 
2,141

Accretion of other investments
 

 
(1
)
Stock option expense
 
126

 
253

Restricted stock expense
 
39

 
6

Excess of book value over market value of ESOP shares released
 
(88
)
 

Net gain on sale of investment securities
 
(20
)
 
(1,243
)
Net loss (gain) on sale of other real estate owned
 
56

 
(13
)
Net write down of other real estate owned
 
130

 
111

Net gain on sale/disposal of premises and equipment
 
(6
)
 
(8
)
Income recognized from death benefit on bank owned life insurance
 

 
(160
)
Change in accrued interest receivable
 
(568
)
 
(20
)
Change in accrued interest payable
 
(42
)
 
(48
)
Change in other assets & other liabilities, net
 
1,152

 
481

Net cash provided by operating activities
 
21,270

 
23,594

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Proceeds from maturities and calls of securities available-for-sale
 
47,547

 
55,874

Proceeds from maturities and calls of securities held-to-maturity
 
12,629

 
19,299

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

 
40,277

Purchases of securities available-for-sale
 
(49,538
)
 
(105,486
)
Proceeds from sale of other investments
 
600

 
898

Purchases of other investments
 
(751
)
 
(2,970
)
Net change in loans
 
(12,736
)
 
(20,669
)
Proceeds from bank owned life insurance death benefit
 

 
498

Purchases of premises and equipment
 
(5,152
)
 
(3,439
)
Proceeds from sale of premises and equipment
 
54

 
35

Proceeds from sale of other real estate owned
 
2,374

 
857

Purchase of other real estate owned
 

 
(351
)
Net cash provided by (used in) investing activities
 
1,830

 
(15,177
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Change in deposits
 
34,385

 
(41,728
)
Change in securities sold under agreements to repurchase
 
9,253

 
29,987

Borrowings on Federal Home Loan Bank advances
 
25,000

 
150,000

Repayments of Federal Home Loan Bank advances
 
(50,050
)
 
(105,047
)
Proceeds and tax benefit from exercise of stock options
 

 
99

Tax benefit resulting from distribution from Directors Deferred Compensation Plan
 
127

 
420

Tax benefit for dividends paid to ESOP
 
131

 

Payment of dividends on preferred stock
 
(1,409
)
 
(519
)
Payment of dividends on common stock
 
(3,071
)
 
(3,064
)
Net cash provided by financing activities
 
14,366

 
30,148

 
 
 
 
 
Net increase in cash and cash equivalents
 
37,466

 
38,565

Cash and cash equivalents, beginning of period
 
89,201

 
86,872

Cash and cash equivalents, end of period
 
$
126,667

 
$
125,437

 
 
 
 
 
Supplemental cash flow information:
 
 

 
 

Interest paid
 
$
4,274

 
$
4,280

Income taxes paid
 
2,853

 
5,180

Noncash investing and financing activities:
 
 

 
 

Transfer of loans to other real estate
 
690

 
1,031

Change in accrued common stock dividends
 

 
3

Change in accrued preferred stock dividends
 
640

 
(2
)
Net change in loan to ESOP
 
(249
)
 
(905
)
 
See notes to unaudited consolidated financial statements.


7


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

8


held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets 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. We expect the new accounting guidance to increase the allowance for loan losses with a resulting negative adjustment to retained earnings, and we are planning on implementing a new software program during 2017 to enable us to determine the extent of the impact, which could be material.

ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments was issued to address diversity in practice of how certain cash receipts and cash payments are currently presented and classified in the statement of cash flows. The amendments in the ASU provide guidance on the following issues: debit prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees and beneficial interests in securitization transactions. Further, the ASU addresses the topic of separately identifiable cash flows and application of the predominance principle. The effective date of this Update is for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company is evaluating the impact that ASU 2016-15 will have, if any, on its financial statement disclosures. 

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

 
 
September 30, 2016
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Available-for-sale:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
31,104

 
$
446

 
$
29

 
$
31,521

GSE mortgage-backed securities
 
65,916

 
3,229

 

 
69,145

Collateralized mortgage obligations: residential
 
195,047

 
1,289

 
331

 
196,005

Collateralized mortgage obligations: commercial
 
3,497

 

 
32

 
3,465

Mutual funds
 
2,100

 
25

 

 
2,125

Corporate debt securities
 
13,500

 
384

 

 
13,884

 
 
$
311,164

 
$
5,373

 
$
392

 
$
316,145

 
 
 
 
 
 
 
 
 
 
 
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


 
 
September 30, 2016
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Held-to-maturity:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
40,695

 
$
1,151

 
$

 
$
41,846

GSE mortgage-backed securities
 
47,451

 
1,496

 

 
48,947

Collateralized mortgage obligations: residential
 
9,414

 

 
76

 
9,338

Collateralized mortgage obligations: commercial
 
5,852

 
26

 

 
5,878

 
 
$
103,412

 
$
2,673

 
$
76

 
$
106,009

 
 
 
 
 
 
 
 
 
 
 
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 $19,000 at September 30, 2016, all of the Company’s CMOs are government-sponsored enterprise (“GSE”) securities.
 
The following table presents the amortized cost and fair value of debt securities at September 30, 2016 by contractual maturity (in thousands).   Actual maturities will differ from contractual maturities because of rights to call or repay obligations with or without penalties and scheduled and unscheduled principal payments on mortgage-backed securities and collateralized mortgage obligations.

 
 
Amortized
Cost
 
Fair
Value
Available-for-sale:
 
 
 
 
Due in one year or less
 
$
2,812

 
$
2,843

Due after one year through five years
 
15,374

 
15,608

Due after five years through ten years
 
41,740

 
43,819

Due after ten years
 
249,138

 
251,750

 
 
$
309,064

 
$
314,020

 
 
 
 
 
 
 
Amortized
Cost
 
Fair
Value
Held-to-maturity:
 
 
 
 
Due in one year or less
 
$
348

 
$
349

Due after one year through five years
 
4,909

 
5,005

Due after five years through ten years
 
20,222

 
20,948

Due after ten years
 
77,933

 
79,707

 
 
$
103,412

 
$
106,009



10


Details concerning investment securities with unrealized losses are as follows (in thousands):
 
 
 
September 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
 
$
5,517

 
$
29

 
$

 
$

 
$
5,517

 
$
29

Collateralized mortgage  obligations: residential
 
49,802

 
182

 
12,111

 
149

 
61,913

 
331

Collateralized mortgage  obligations: commercial
 
989

 
3

 
2,475

 
29

 
3,464

 
32

 
 
$
56,308

 
$
214

 
$
14,586

 
$
178

 
$
70,894

 
$
392

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

Mutual funds
 
2,092

 
8

 

 

 
2,092

 
8

 
 
$
165,890

 
$
1,471

 
$
32,975

 
$
1,134

 
$
198,865

 
$
2,605



11


 
 
September 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:
 
 
 
 
 
 
 
 
 
 
 
 
Collateralized mortgage obligations: residential
 
$

 
$

 
$
9,338

 
$
76

 
$
9,338

 
$
76

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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.
 
As of September 30, 2016, 23 securities had unrealized losses totaling 0.58% of the individual securities’ amortized cost basis and 0.11% of the Company’s total amortized cost basis.  Of the 23 securities, 9 had been in an unrealized loss position for over twelve months at September 30, 2016.  These 9 securities had an amortized cost basis and unrealized loss of $24.2 million and $254,000, respectively.  The unrealized losses on debt securities at September 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 September 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 September 30, 2016.
 
During the nine months ended September 30, 2016, the Company sold 2 securities classified as available-for-sale at a gross gain of $20,000. During the nine months ended September 30, 2015, the Company sold 21 securities classified as available-for-sale at a net gain of $1.2 million. Of the 21 securities sold, 11 were sold with gains totaling $1.4 million and 10 securities were sold at a loss of $135,000.
 
Securities with an aggregate carrying value of approximately $309.9 million and $285.4 million at September 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):

12


 
 
September 30, 2016
 
December 31, 2015
Commercial, financial and agricultural
 
$
463,031

 
$
454,028

Real estate – construction
 
96,365

 
74,952

Real estate – commercial
 
464,853

 
471,141

Real estate – residential
 
155,653

 
149,064

Installment loans to individuals
 
88,537

 
111,009

Lease financing receivable
 
1,449

 
1,968

Other
 
2,912

 
1,483

 
 
1,272,800

 
1,263,645

Less allowance for loan losses
 
(23,268
)
 
(19,011
)
 
 
$
1,249,532

 
$
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 September 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 $243.3 million, or 19.1% of total loans.  Additionally, the Company’s exposure to loans secured by commercial real estate is monitored.  At September 30, 2016, loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately $542.2 million.  Of the $542.2 million, $464.9 million represent CRE loans, 54% of which are secured by owner-occupied commercial properties.  Of the $542.2 million in loans secured by commercial real estate, $28.3 million, or 5.2%, were on nonaccrual status at September 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-impaired at acquisition are similar to originated loans; however, the estimate of loss is based on the unpaid principal balance and then compared to any remaining unaccreted purchase discount. To the extent that the calculated loss is greater than the remaining unaccreted purchase discount, an allowance is recorded for such difference.
 
The Company has an internal loan review department that is independent of the lending function to challenge and corroborate the loan grade assigned by the lender and to provide additional analysis in determining the adequacy of the allowance for loan losses.
 
A rollforward of the activity within the allowance for loan losses by loan type and recorded investment in loans for the nine months ended September 30, 2016 and 2015 is as follows (in thousands):
 

13


 
 
September 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
 
(2,957
)
 

 
(208
)
 
(24
)
 
(991
)
 

 

 
(4,180
)
Recoveries
 
193

 

 
115

 
4

 
125

 

 

 
437

Provision
 
6,747

 
(478
)
 
1,042

 
(97
)
 
781

 
(5
)
 
10

 
8,000

Ending balance
 
$
15,251

 
$
341

 
$
5,563

 
$
699

 
$
1,383

 
$
9

 
$
22

 
$
23,268

Ending balance: individually evaluated for impairment
 
$
1,105

 
$

 
$
2,270

 
$
194

 
$
268

 
$

 
$

 
$
3,837

Ending balance: collectively evaluated for impairment
 
$
14,146

 
$
341

 
$
3,293

 
$
505

 
$
1,115

 
$
9

 
$
22

 
$
19,431

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
 
$
463,031

 
$
96,365

 
$
464,853

 
$
155,653

 
$
88,537

 
$
1,449

 
$
2,912

 
$
1,272,800

Ending balance: individually evaluated for impairment
 
$
29,887

 
$
10

 
$
28,285

 
$
1,831

 
$
464

 
$

 
$

 
$
60,477

Ending balance: collectively evaluated for impairment
 
$
433,144

 
$
96,355

 
$
435,985

 
$
153,747

 
$
88,073

 
$
1,449

 
$
2,912

 
$
1,211,665

Ending balance: loans acquired with deteriorated credit quality
 
$

 
$

 
$
583

 
$
75

 
$

 
$

 
$

 
$
658


14


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

 

 
(3,483
)
Recoveries
 
185

 
1

 
20

 
10

 
80

 

 

 
296

Provision
 
8,016

 
(62
)
 
2,107

 
(104
)
 
923

 
13

 
7

 
10,900

Ending balance
 
$
11,620

 
$
817

 
$
4,360

 
$
671

 
$
1,431

 
$
29

 
$
11

 
$
18,939

Ending balance: individually evaluated for impairment
 
$
2,569

 
$
26

 
$
1,739

 
$
147

 
$
216

 
$

 
$

 
$
4,697

Ending balance: collectively evaluated for impairment
 
$
9,051

 
$
791

 
$
2,621

 
$
524

 
$
1,215

 
$
29

 
$
11

 
$
14,242

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
 
$
482,452

 
$
74,279

 
$
473,319

 
$
151,667

 
$
113,199

 
$
4,790

 
$
1,746

 
$
1,301,452

Ending balance: individually evaluated for impairment
 
$
29,185

 
$
212

 
$
19,928

 
$
1,796

 
$
386

 
$

 
$

 
$
51,507

Ending balance: collectively evaluated for impairment
 
$
453,267

 
$
74,067

 
$
452,758

 
$
149,788

 
$
112,813

 
$
4,790

 
$
1,746

 
$
1,249,229

Ending balance: loans acquired with deteriorated credit quality
 
$

 
$

 
$
633

 
$
83

 
$

 
$

 
$

 
$
716

 
Non-Accrual and Past Due Loans
 
Loans are considered past due if the required principal and interest payment have not been received as of the date such payments were due.  Loans are placed on non-accrual status when, in management’s opinion, the probability of collection of interest is deemed insufficient to warrant further accrual.  For loans placed on non-accrual status, the accrual of interest is discontinued and subsequent payments received are applied to the principal balance.  Interest income is recorded after principal has been satisfied and as payments are received.  Non-accrual loans may be returned to accrual status if all principal and interest amounts contractually owed are reasonably assured of repayment within a reasonable period and there is a period of at least six months to one year of repayment performance by the borrower depending on the contractual payment terms.


15


An age analysis of past due loans (including both accruing and non-accruing loans) is as follows (in thousands):
 
 
September 30, 2016
 
 
30-59
Days
Past Due
 
60-89
Days
Past
Due
 
Greater
than 90
Days
Past Due
 
Total
Past
Due
 
Current
 
Total Loans
 
Recorded
Investment
> 90 days
 and
Accruing
Commercial, financial, and agricultural
 
$
3,213