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EX-32.1 - EXHIBIT 32.1 - MIDSOUTH BANCORP INCmsl10-q03312017exx321.htm
EX-31.1 - EXHIBIT 31.1 - MIDSOUTH BANCORP INCmsl10-q03312017exx311.htm
EX-23.1 - EXHIBIT 23.1 - MIDSOUTH BANCORP INCmidsouth-201610xkconsent.htm
EX-10.2 - EXHIBIT 10.2 - MIDSOUTH BANCORP INCmidsouth-formofperformance.htm
EX-10.1 - EXHIBIT 10.1 - MIDSOUTH BANCORP INCa2017annualincentivecompen.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, 2017
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
logoa16.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, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
☐Large accelerated filer
☒Accelerated filer
☐Non-accelerated filer
☐Smaller reporting company
☐Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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, 2017, there were 11,383,914 shares of the registrant’s Common Stock, par value $0.10 per share, outstanding.
 



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



Part I – Financial Information
 
Item 1. Financial Statements.
MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share data)
 
 
March 31, 2017
(unaudited)
 
December 31, 2016
(audited)
Assets
 
 
 
 
Cash and due from banks, including required reserves of $6,561 and $6,669, respectively
 
$
32,188

 
$
31,687

Interest-bearing deposits in banks
 
45,183

 
47,091

Federal funds sold
 
1,100

 
3,450

Securities available-for-sale, at fair value (cost of $359,532 at March 31, 2017 and $344,416 at December 31, 2016)
 
357,803

 
341,873

Securities held-to-maturity (fair value of $91,767 at March 31, 2017 and $98,261 at December 31, 2016)
 
91,242

 
98,211

Other investments
 
11,362

 
11,355

Loans
 
1,272,000

 
1,284,082

Allowance for loan losses
 
(24,578
)
 
(24,372
)
Loans, net
 
1,247,422

 
1,259,710

Bank premises and equipment, net
 
68,216

 
68,954

Accrued interest receivable
 
7,516

 
7,576

Goodwill
 
42,171

 
42,171

Intangibles
 
4,345

 
4,621

Cash surrender value of life insurance
 
14,398

 
14,335

Other real estate
 
1,643

 
2,175

Other assets
 
10,350

 
10,131

Total assets
 
$
1,934,939

 
$
1,943,340

 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 

 
 

Liabilities:
 
 

 
 

Deposits:
 
 

 
 

Non-interest-bearing
 
$
426,998

 
$
414,921

Interest-bearing
 
1,145,946

 
1,164,509

Total deposits
 
1,572,944

 
1,579,430

Securities sold under agreements to repurchase
 
89,807

 
94,461

Long-term Federal Home Loan Bank advances
 
25,318

 
25,424

Junior subordinated debentures
 
22,167

 
22,167

Other liabilities
 
8,641

 
7,482

Total liabilities
 
1,718,877

 
1,728,964

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, 2017 and December 31, 2016
 
32,000

 
32,000

Series C Preferred stock, no par value; 100,000 shares authorized, 91,098 shares issued and outstanding at March 31, 2017 and December 31, 2016
 
9,110

 
9,110

Common stock, $0.10 par value; 30,000,000 shares authorized, 11,383,914 and 11,362,716 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively
 
1,138

 
1,136

Additional paid-in capital
 
111,538

 
111,166

Unearned ESOP shares
 
(1,124
)
 
(1,233
)
Accumulated other comprehensive loss
 
(473
)
 
(1,010
)
Retained earnings
 
63,873

 
63,207

Total shareholders’ equity
 
216,062

 
214,376

Total liabilities and shareholders’ equity
 
$
1,934,939

 
$
1,943,340

 
See notes to unaudited consolidated financial statements.

3


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Earnings (unaudited)
(in thousands, except per share data)
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Interest income:
 
 
 
 
Loans, including fees
 
$
16,622

 
$
16,866

Securities and other investments:
 
 

 
 

Taxable
 
2,327

 
2,036

Nontaxable
 
407

 
458

Federal funds sold
 
6

 
5

Time and interest bearing deposits in other banks
 
85

 
94

Other investments
 
84

 
88

Total interest income
 
19,531

 
19,547

 
 
 
 
 
Interest expense:
 
 

 
 

Deposits
 
935

 
907

Securities sold under agreements to repurchase
 
234

 
233

Other borrowings and payables
 
88

 
113

Junior subordinated debentures
 
208

 
167

Total interest expense
 
1,465

 
1,420

 
 
 
 
 
Net interest income
 
18,066

 
18,127

Provision for loan losses
 
2,800

 
2,800

Net interest income after provision for loan losses
 
15,266

 
15,327

 
 
 
 
 
Non-interest income:
 
 

 
 

Service charges on deposits
 
2,480

 
2,313

Gain on sale of securities, net
 
6

 

ATM and debit card income
 
1,703

 
1,609

Other charges and fees
 
855

 
822

Total non-interest income
 
5,044

 
4,744

 
 
 
 
 
Non-interest expenses:
 
 

 
 

Salaries and employee benefits
 
8,689

 
7,990

Occupancy expense
 
3,624

 
3,597

ATM and debit card expense
 
721

 
785

Data processing
 
621

 
458

FDIC insurance
 
397

 
429

Legal and professional fees
 
385

 
383

Other
 
2,793

 
3,117

Total non-interest expenses
 
17,230

 
16,759

Income before income taxes
 
3,080

 
3,312

Income tax expense
 
589

 
963

 
 
 
 
 
Net earnings
 
2,491

 
2,349

Dividends on preferred stock
 
811

 
427

Net earnings available to common shareholders
 
$
1,680

 
$
1,922

Earnings per share:
 
 

 
 

Basic
 
$
0.15

 
$
0.17

Diluted
 
$
0.15

 
$
0.17

Weighted average number of shares outstanding:
 
 

 
 

Basic
 
11,264

 
11,262

Diluted
 
11,282

 
11,262

Dividends declared per common share
 
$
0.09

 
$
0.09


See notes to unaudited consolidated financial statements.

4


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Net earnings
 
$
2,491

 
$
2,349

Other comprehensive income, net of tax:
 
 

 
 

Unrealized gains on securities available-for-sale:
 
 

 
 

Unrealized holding gains arising during the year
 
820

 
2,802

Less: reclassification adjustment for gains on sales of securities available-for-sale
 
(6
)
 

Unrealized gains on securities available-for-sale
 
814

 
2,802

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
 
13

 

Total other comprehensive income, before tax
 
827

 
2,802

Income tax effect related to items of other comprehensive income
 
(290
)
 
(980
)
Total other comprehensive income, net of tax
 
537

 
1,822

Total comprehensive income
 
$
3,028

 
$
4,171

See notes to unaudited consolidated financial statements.

5


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statement of Shareholders’ Equity (unaudited)
For the Three Months Ended March 31, 2017
(in thousands, except share and per share data)
 
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-in Capital
 
Unearned
ESOP Shares
 
Accumulated
Other Comprehensive Loss
 
Retained Earnings
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Total
Balance - December 31, 2016
 
123,098

 
$
41,110

 
11,362,716

 
$
1,136

 
$
111,166

 
$
(1,233
)
 
$
(1,010
)
 
$
63,207

 
$
214,376

Net earnings
 

 

 

 

 

 

 

 
2,491

 
2,491

Dividends on Series B and Series C preferred stock
 

 

 

 

 

 

 

 
(811
)
 
(811
)
Dividends on common stock, $0.09 per share
 

 

 

 

 

 

 

 
(1,014
)
 
(1,014
)
ESOP shares released for allocation
 

 

 

 

 
27

 
109

 

 

 
136

Exercise of stock options
 

 

 
20,498

 
2

 
264

 

 

 

 
266

Vested restricted stock
 

 

 
700

 

 

 

 

 

 

Stock option and restricted stock compensation expense
 

 

 

 

 
81

 

 

 

 
81

Change in accumulated other comprehensive income
 

 

 

 

 

 

 
537

 

 
537

Balance – March 31, 2017
 
123,098

 
$
41,110

 
11,383,914

 
$
1,138

 
$
111,538

 
$
(1,124
)
 
$
(473
)
 
$
63,873

 
$
216,062

 
See notes to unaudited consolidated financial statements.




6


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 
 
For the Three Months Ended March 31,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Net earnings
 
$
2,491

 
$
2,349

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

 
 

Depreciation
 
1,493

 
1,512

Amortization (accretion) of purchase accounting adjustments
 
2

 
(288
)
Provision for loan losses
 
2,800

 
2,800

Deferred tax benefit
 
(222
)
 
(503
)
Amortization of premiums on securities, net
 
686

 
681

Stock-based compensation expense
 
81

 
97

Tax benefit from exercise of stock options and vesting of restricted common stock
 
10

 

Tax benefit resulting from distribution from Directors Deferred Compensation Plan
 
300

 
39

Tax benefit resulting from dividends paid to the ESOP
 
23

 
87

Excess of market value over book value of ESOP shares released
 
27

 
(36
)
Net gain on sale of investment securities
 
(6
)
 

Net (gain) loss on sale of other real estate owned
 
(8
)
 
24

Net write down of other real estate owned
 
23

 
120

Net gain on sale/disposal of premises and equipment
 
(12
)
 
(14
)
Change in accrued interest receivable
 
60

 
(135
)
Change in accrued interest payable
 
(11
)
 
(9
)
Change in other assets & other liabilities, net
 
510

 
454

Net cash provided by operating activities
 
8,247

 
7,178

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Proceeds from maturities and calls of securities available-for-sale
 
14,631

 
18,379

Proceeds from maturities and calls of securities held-to-maturity
 
5,865

 
2,919

Proceeds from sale of securities available-for-sale
 
6,462

 

Proceeds from sale of security held-to-maturity
 
887

 

Purchases of securities available-for-sale
 
(36,672
)
 

Purchases of other investments
 
(7
)
 
(7
)
Net change in loans
 
9,687

 
12,293

Purchases of premises and equipment
 
(887
)
 
(915
)
Proceeds from sale of premises and equipment
 
144

 
40

Proceeds from sale of other real estate owned
 
612

 
245

Net cash provided by investing activities
 
722

 
32,954

 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Change in deposits
 
(6,486
)
 
7,366

Change in securities sold under agreements to repurchase
 
(4,654
)
 
1,922

Borrowings on Federal Home Loan Bank advances
 

 
25,000

Repayments of Federal Home Loan Bank advances
 
(17
)
 
(50,017
)
Proceeds from exercise of stock options
 
266

 

Payment of dividends on preferred stock
 
(811
)
 
(171
)
Payment of dividends on common stock
 
(1,024
)
 
(1,023
)
Net cash used by financing activities
 
(12,726
)
 
(16,923
)
 
 
 
 
 
Net (decrease) increase in cash and cash equivalents
 
(3,757
)
 
23,209

Cash and cash equivalents, beginning of period
 
82,228

 
89,201

Cash and cash equivalents, end of period
 
$
78,471

 
$
112,410

 
 
 
 
 
Supplemental cash flow information:
 
 

 
 

Interest paid
 
$
1,476

 
$
1,429

Noncash investing and financing activities:
 
 

 
 

Transfer of loans to other real estate
 
95

 
110

Change in accrued common stock dividends
 
1

 

Change in accrued preferred stock dividends
 

 
256

Net change in loan to ESOP
 
109

 
(191
)
 
See notes to unaudited consolidated financial statements.


7


MidSouth Bancorp, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
March 31, 2017
(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, 2017 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 2016 Annual Report on Form 10-K.
 
The results of operations for the three-month period ended March 31, 2017 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 2016 Annual Report on Form 10-K.

Recent Accounting Pronouncements ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. ASU 2017-03 addresses and codifies the practical considerations and application of the required disclosures under SAB Topic 11.M for the implementation of ASU 2014-09, Revenue from Contracts with Customers (Topic 606); ASU 2016-02, Leases (Topic 842); and ASU 2016-13, Financial Instruments-Credit Losses (Topic 326); Measurement of Credit Losses on Financial Instruments. The SEC Staff has emphasized on a number of occasions, including the December 2016 AICPA National Conference on Current SEC and PCAOB Developments, the requirements to disclose the potential material effects of newly issued standards and the importance of providing investors with this information. Such disclosures should explain the impact the new standard is expected to have on the financial statements and how the adoption of the new standard will affect comparability. Entities should discuss both quantitative and qualitative information as available when assessing implementation of a new standard. This ASU was effective immediately for public business entities.

ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment was issued in order to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments in this ASU, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will then recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The effective date of this Update is for fiscal years beginning on or after December 15, 2020. The Company does not expect ASU 2017-04 to have an impact on its goodwill impairment tests.

ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities was issued in response to diversity in practice in the amortization period for premiums of callable debt securities and in how the potential for exercise of a call is factored into current impairment assessments. As such, these amendments reduce the amortization period for certain callable debt securities carried at a premium and require the premium to be amortized over the period not to exceed the earliest call date. These amendments do not apply to securities carried at a discount. The effective date of this Update is for fiscal years beginning on or after December 15, 2018. The Company is currently amortizing premiums of callable debt securities over a period through the earliest call date. As a result, it does not expect ASU 2017-08 to have an impact on its financial position, results of operations or its financial statement disclosures.

Accounting Changes, Reclassifications and Restatements Certain items in prior financial statements have been reclassified to conform to the current presentation. 

On January 1, 2017, the Company adopted the provisions of ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,”. ASU 2016-09 requires that all income tax effects associated with share-

8


based payment awards be reported in earnings as an adjustment to income tax expense. Previously, excess tax benefits associated with share-based payments awards were recorded in additional paid-in-capital when the excess tax benefits were realized. The requirement to report those income tax effects in earnings has been applied to settlements occurring on or after January 1, 2017. ASU 2016-09 also requires that all income tax-related cash flows resulting from share-based payments be reported as operating activities in the statement of cash flows. Previously, income tax benefits at settlement of an award were reported as a reduction to operating cash flows and an increase to financing cash flows to the extent that those benefits exceeded the income tax benefits reported in earnings during the award's vesting period. The Company has elected to apply that change in cash flow classification on a retrospective basis, which resulted in a $126,000 increase to net cash from operating activities and a corresponding decrease to net cash from financing activities in the accompanying consolidated statements of cash flows for 2016, as compared to the amounts previously reported.

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

 
 
March 31, 2017
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Available-for-sale:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
26,465

 
$
114

 
$
968

 
$
25,611

GSE mortgage-backed securities
 
78,554

 
1,618

 
146

 
80,026

Collateralized mortgage obligations: residential
 
230,413

 
282

 
3,181

 
227,514

Collateralized mortgage obligations: commercial
 
3,027

 

 
36

 
2,991

Mutual funds
 
2,100

 

 
41

 
2,059

Corporate debt securities
 
18,973

 
629

 

 
19,602

 
 
$
359,532

 
$
2,643

 
$
4,372

 
$
357,803

 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Available-for-sale:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
29,935

 
$
226

 
$
1,020

 
$
29,141

GSE mortgage-backed securities
 
72,144

 
1,736

 
302

 
73,578

Collateralized mortgage obligations: residential
 
223,602

 
206

 
3,606

 
220,202

Collateralized mortgage obligations: commercial
 
3,135

 

 
53

 
3,082

Mutual funds
 
2,100

 

 
41

 
2,059

  Corporate debt securities
 
13,500

 
311

 

 
13,811

 
 
$
344,416

 
$
2,479

 
$
5,022

 
$
341,873



9


 
 
March 31, 2017
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Held-to-maturity:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
37,338

 
$
523

 
$
6

 
$
37,855

GSE mortgage-backed securities
 
42,004

 
433

 
140

 
42,297

Collateralized mortgage obligations: residential
 
8,605

 

 
273

 
8,332

Collateralized mortgage obligations: commercial
 
3,295

 

 
12

 
3,283

 
 
$
91,242

 
$
956

 
$
431

 
$
91,767

 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Held-to-maturity:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
40,515

 
$
309

 
$
39

 
$
40,785

GSE mortgage-backed securities
 
44,375

 
426

 
311

 
44,490

Collateralized mortgage obligations: residential
 
8,969

 

 
323

 
8,646

Collateralized mortgage obligations: commercial
 
4,352

 

 
12

 
4,340

 
 
$
98,211

 
$
735

 
$
685

 
$
98,261


With the exception of two private-label collateralized mortgage obligations (“CMOs”) with a combined balance remaining of $15,000 at March 31, 2017, 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 March 31, 2017 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
 
$
2,682

 
$
2,688

Due after one year through five years
 
6,265

 
6,430

Due after five years through ten years
 
51,206

 
52,768

Due after ten years
 
297,279

 
293,858

 
 
$
357,432

 
$
355,744

 
 
 
 
 
 
 
Amortized
Cost
 
Fair
Value
Held-to-maturity:
 
 
 
 
Due in one year or less
 
$
354

 
$
354

Due after one year through five years
 
6,535

 
6,579

Due after five years through ten years
 
31,540

 
32,064

Due after ten years
 
52,813

 
52,770

 
 
$
91,242

 
$
91,767



10


Details concerning investment securities with unrealized losses are as follows (in thousands):
 
 
 
March 31, 2017
 
 
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
 
$
12,827

 
$
968

 
$

 
$

 
$
12,827

 
$
968

GSE mortgage-backed  securities
 
26,478

 
146

 

 

 
26,478

 
146

Collateralized mortgage  obligations: residential
 
162,695

 
2,806

 
11,051

 
375

 
173,746

 
3,181

Collateralized mortgage  obligations: commercial
 

 

 
2,991

 
36

 
2,991

 
36

Mutual funds
 
2,059

 
41

 

 

 
2,059

 
41

 
 
$
204,059

 
$
3,961

 
$
14,042

 
$
411

 
$
218,101

 
$
4,372

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
Securities with losses
under 12 months
 
Securities with losses
over 12 months
 
Total
 
 
Fair
Value
 
Gross
Unrealized
Loss
 
Fair
Value
 
Gross
Unrealized
Loss
 
Fair
Value
 
Gross
Unrealized
Loss
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
13,402

 
$
1,020

 
$

 
$

 
$
13,402

 
$
1,020

GSE mortgage-backed  securities
 
29,119

 
302

 

 

 
29,119

 
302

Collateralized mortgage  obligations: residential
 
187,235

 
3,099

 
14,194

 
507

 
201,429

 
3,606

Collateralized mortgage  obligations: commercial
 
961

 
4

 
2,121

 
49

 
3,082

 
53

Mutual funds
 
2,059

 
41

 

 

 
2,059

 
41

 
 
$
232,776

 
$
4,466

 
$
16,315

 
$
556

 
$
249,091

 
$
5,022



11


 
 
March 31, 2017
 
 
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
 
$
4,249

 
$
6

 
$

 
$

 
$
4,249

 
$
6

GSE mortgage-backed securities
 
5,694

 
140

 

 

 
5,694

 
140

Collateralized mortgage obligations: residential
 

 

 
8,332

 
273

 
8,332

 
273

Collateralized mortgage obligations: commercial
 
3,283

 
12

 

 

 
3,283

 
12

 
 
$
13,226

 
$
158

 
$
8,332

 
$
273

 
$
21,558

 
$
431

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
Securities with losses
under 12 months
 
Securities with losses
over 12 months
 
Total
 
 
Fair
Value
 
Gross
Unrealized
Loss
 
Fair
Value
 
Gross
Unrealized
Loss
 
Fair
Value
 
Gross
Unrealized
Loss
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
8,054

 
$
39

 
$

 
$

 
$
8,054

 
$
39

GSE mortgage-backed securities
 
19,408

 
311

 

 

 
19,408

 
311

Collateralized mortgage obligations: residential
 

 

 
8,645

 
323

 
8,645

 
323

Collateralized mortgage obligations: commercial
 
4,340

 
12

 

 

 
4,340

 
12

 
 
$
31,802

 
$
362

 
$
8,645

 
$
323

 
$
40,447

 
$
685


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.  For equity securities, management reviews the near term prospects of the issuer, the nature and cause of the unrealized loss, the severity and duration of the impairments and other factors when determining if an unrealized loss is other than temporary. 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, 2017, 64 securities had unrealized losses totaling 1.96% of the individual securities’ amortized cost basis and 1.07% of the Company’s total amortized cost basis.  Of the 64 securities, 10 had been in an unrealized loss position for over twelve months at March 31, 2017.  These 10 securities had an amortized cost basis and unrealized loss of $23.1 million and $684,000, respectively.  The unrealized losses on debt securities at March 31, 2017 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, 2017, 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, 2017.
 
During the three months ended March 31, 2017, the Company sold 10 securities classified as available-for-sale and 1 security classified as held-to-maturity. Of the available-for-sale securities, 7 securities were sold with gains totaling $108,000 and 3 securities were sold at a loss of $109,000 for a net loss of $1,000.  The decision to sell the 1 held-to-maturity security, which was sold at a gain of $7,000, was

12


based on the pre-refunding of the bond which would accelerate the maturity of the bond by 15 years with an anticipated call date within six months. During the three months ended March 31, 2016, the Company did not sell any securities.
 
Securities with an aggregate carrying value of approximately $295.6 million and $293.4 million at March 31, 2017 and December 31, 2016, 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, 2017
 
December 31, 2016
Commercial, financial and agricultural
 
$
469,815

 
$
459,574

Real estate – construction
 
100,248

 
100,959

Real estate – commercial
 
464,859

 
481,155

Real estate – residential
 
159,426

 
157,872

Installment loans to individuals
 
75,258

 
82,660

Lease financing receivable
 
969

 
1,095

Other
 
1,425

 
767

 
 
1,272,000

 
1,284,082

Less allowance for loan losses
 
(24,578
)
 
(24,372
)
 
 
$
1,247,422

 
$
1,259,710

 
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, 2017, 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 $231.8 million, or 18.2% of total loans.  Additionally, the Company’s exposure to loans secured by commercial real estate is monitored.  At March 31, 2017, loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately $539.9 million, 48% of which are secured by owner-occupied commercial properties.  Of the $539.9 million in loans secured by commercial real estate, $20.6 million, or 3.8%, were on nonaccrual status at March 31, 2017.
 
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, 2017 and 2016 is as follows (in thousands):

13


 
 
 
March 31, 2017
 
 
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
Coml, Fin,
and Agric
 
Construction
 
Commercial
 
Residential
 
Installment
loans to
individuals
 
Lease
financing
receivable
 
Other
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
16,057

 
$
585

 
$
5,384

 
$
940

 
$
1,395

 
$
5

 
$
6

 
$
24,372

Charge-offs
 
(1,705
)
 

 
(823
)
 
(117
)
 
(261
)
 

 

 
(2,906
)
Recoveries
 
154

 

 
10

 
90

 
58

 

 

 
312

Provision
 
3,832

 
(321
)
 
(238
)
 
(249
)
 
(222
)
 
(2
)
 

 
2,800

Ending balance
 
$
18,338

 
$
264

 
$
4,333

 
$
664

 
$
970

 
$
3

 
$
6

 
$
24,578

Ending balance: individually evaluated for impairment
 
$
4,173

 
$
9

 
$
1,656

 
$
217

 
$
160

 
$

 
$

 
$
6,215

Ending balance: collectively evaluated for impairment
 
$
14,165

 
$
255

 
$
2,677

 
$
447

 
$
810

 
$
3

 
$
6

 
$
18,363

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
 
$
469,815

 
$
100,248

 
$
464,859

 
$
159,426

 
$
75,258

 
$
969

 
$
1,425

 
$
1,272,000

Ending balance: individually evaluated for impairment
 
$
35,346

 
$
26

 
$
20,623

 
$
1,956

 
$
487

 
$

 
$

 
$
58,438

Ending balance: collectively evaluated for impairment
 
$
434,469

 
$
100,222

 
$
443,802

 
$
157,401

 
$
74,771

 
$
969

 
$
1,425

 
$
1,213,059

Ending balance: loans acquired with deteriorated credit quality
 
$

 
$

 
$
434

 
$
69

 
$

 
$

 
$

 
$
503


14


 
 
March 31, 2016
 
 
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
Coml, Fin,
and Agric
 
Construction
 
Commercial
 
Residential
 
Installment
loans to
individuals
 
Lease
financing
receivable
 
Other
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
11,268

 
$
819

 
$
4,614

 
$
816

 
$
1,468

 
$
14

 
$
12

 
$
19,011

Charge-offs
 
(1,307
)
 

 

 
(4
)
 
(283
)
 

 

 
(1,594
)
Recoveries
 
26

 

 
76

 
3

 
25

 

 

 
130

Provision
 
2,194

 
(420
)
 
861

 
(170
)
 
336

 
(3
)
 
2

 
2,800

Ending balance
 
$
12,181

 
$
399

 
$
5,551

 
$
645

 
$
1,546

 
$
11

 
$
14

 
$
20,347

Ending balance: individually evaluated for impairment
 
$
1,021

 
$

 
$
2,586

 
$
267

 
$
278

 
$

 
$

 
$
4,152

Ending balance: collectively evaluated for impairment
 
$
11,160

 
$
399

 
$
2,965

 
$
378

 
$
1,268

 
$
11

 
$
14

 
$
16,195

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
 
$
441,160

 
$
84,790

 
$
467,648

 
$
149,961

 
$
103,181

 
$
1,590

 
$
1,719

 
$
1,250,049

Ending balance: individually evaluated for impairment
 
$
29,097

 
$
35

 
$
27,511

 
$
2,230

 
$
506

 
$

 
$

 
$
59,379

Ending balance: collectively evaluated for impairment
 
$
412,063

 
$
84,755

 
$
439,530

 
$
147,653

 
$
102,675

 
$
1,590

 
$
1,719

 
$
1,189,985

Ending balance: loans acquired with deteriorated credit quality
 
$

 
$

 
$
607

 
$
78

 
$

 
$

 
$

 
$
685

 
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):
 
 
March 31, 2017
 
 
30-59
Days
Past Due
 
60-89
Days
Past
Due
 
Greater
than 90
Days
Past Due
 
Total
Past
Due
 
Current
 
Total Loans
 
Recorded
Investment
> 90 days
 and
Accruing
Commercial, financial, and agricultural
 
$
1,849

 
$
1,022

 
$
28,154

 
$
31,025

 
$
438,790

 
$
469,815

 
$
546

Real estate - construction
 
709

 

 
125

 
834

 
99,414

 
100,248

 
99

Real estate - commercial
 
9,326

 
1,389

 
18,542

 
29,257

 
435,602

 
464,859

 

Real estate - residential
 
2,237

 
136

 
1,620

 
3,993

 
155,433

 
159,426

 
130

Installment loans to individuals
 
302

 
190

 
487

 
979

 
74,279

 
75,258

 

Lease financing receivable
 

 

 

 

 
969

 
969

 

Other loans
 
41

 
6

 

 
47

 
1,378

 
1,425

 

 
 
$
14,464

 
$
2,743

 
$
48,928

 
$
66,135

 
$
1,205,865

 
$
1,272,000

 
$
775

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
30-59
Days
Past Due
 
60-89
Days
Past
Due
 
Greater
than 90
Days
Past Due
 
Total
Past
Due
 
Current
 
Total Loans
 
Recorded
Investment
> 90 days
and
Accruing
Commercial, financial, and agricultural
 
$
2,297

 
$
902

 
$
31,425

 
$
34,624

 
$
424,950

 
$
459,574

 
$
96

Real estate - construction
 
2,613

 
399

 
9

 
3,021

 
97,938

 
100,959

 

Real estate - commercial
 
5,159

 
1,931

 
25,408

 
32,498

 
448,657

 
481,155

 
140

Real estate - residential
 
1,956

 
207

 
1,553

 
3,716

 
154,156

 
157,872

 
16

Installment loans to individuals
 
756

 
36

 
538

 
1,330

 
81,330

 
82,660

 
16

Lease financing receivable