Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - MIDSOUTH BANCORP INCmsl10-q09302017exx322.htm
EX-32.1 - EXHIBIT 32.1 - MIDSOUTH BANCORP INCmsl10-q09302017exx321.htm
EX-31.2 - EXHIBIT 31.2 - MIDSOUTH BANCORP INCmsl10-q09302017exx312.htm
EX-31.1 - EXHIBIT 31.1 - MIDSOUTH BANCORP INCmsl10-q09302017exx311.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, 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
logoa21.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 of 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 November 9, 2017, there were 16,548,829 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, 2017
(unaudited)
 
December 31, 2016
(audited)
Assets
 
 
 
 
Cash and due from banks, including required reserves of $6,545 and $6,669, respectively
 
$
32,199

 
$
31,687

Interest-bearing deposits in banks
 
124,591

 
47,091

Federal funds sold
 
6,333

 
3,450

Securities available-for-sale, at fair value (cost of $325,888 at September 30, 2017 and $344,416 at December 31, 2016)
 
326,222

 
341,873

Securities held-to-maturity (fair value of $84,639 at September 30, 2017 and $98,261 at December 31, 2016)
 
83,739

 
98,211

Other investments
 
12,200

 
11,355

Loans
 
1,235,969

 
1,284,082

Allowance for loan losses
 
(25,053
)
 
(24,372
)
Loans, net
 
1,210,916

 
1,259,710

Bank premises and equipment, net
 
64,969

 
68,954

Accrued interest receivable
 
7,697

 
7,576

Goodwill
 
42,171

 
42,171

Intangibles
 
3,792

 
4,621

Cash surrender value of life insurance
 
14,834

 
14,335

Other real estate
 
1,931

 
2,175

Assets held for sale
 
1,100

 

Other assets
 
14,372

 
10,131

Total assets
 
$
1,947,066

 
$
1,943,340

 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 

 
 

Liabilities:
 
 

 
 

Deposits:
 
 

 
 

Non-interest-bearing
 
$
428,183

 
$
414,921

Interest-bearing
 
1,127,752

 
1,164,509

Total deposits
 
1,555,935

 
1,579,430

Securities sold under agreements to repurchase
 
54,875

 
94,461

Short-term Federal Home Loan Bank advances
 
12,500

 

Long-term Federal Home Loan Bank advances
 
25,110

 
25,424

Junior subordinated debentures
 
22,167

 
22,167

Other liabilities
 
8,836

 
7,482

Total liabilities
 
1,679,423

 
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 September 30, 2017 and December 31, 2016
 
32,000

 
32,000

Series C Preferred stock, no par value; 100,000 shares authorized, 89,875 and 91,098 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
 
8,987

 
9,110

Common stock, $0.10 par value; 30,000,000 shares authorized, 16,548,829 and 11,362,716 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
 
1,655

 
1,136

Additional paid-in capital
 
168,322

 
111,166

Unearned ESOP shares
 
(967
)
 
(1,233
)
Accumulated other comprehensive income (loss)
 
773

 
(1,010
)
Retained earnings
 
56,873

 
63,207

Total shareholders’ equity
 
267,643

 
214,376

Total liabilities and shareholders’ equity
 
$
1,947,066

 
$
1,943,340

 
See notes to unaudited consolidated financial statements.

4


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations (unaudited)
(in thousands, except share and per share data)
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Interest income:
 
 
 
 
 
 
 
 
Loans, including fees
 
$
17,329

 
$
17,087

 
$
50,682

 
$
50,525

Securities and other investments:
 
 

 
 

 
 
 
 
Taxable
 
2,276

 
1,983

 
7,019

 
5,959

Nontaxable
 
363

 
416

 
1,144

 
1,294

Federal funds sold
 
13

 
3

 
28

 
11

Time and interest bearing deposits in other banks
 
305

 
83

 
540

 
274

Other investments
 
93

 
95

 
255

 
273

Total interest income
 
20,379

 
19,667

 
59,668

 
58,336

 
 
 
 
 
 
 
 
 
Interest expense:
 
 

 
 

 
 
 
 
Deposits
 
1,094

 
915

 
3,002

 
2,725

Securities sold under agreements to repurchase
 
149

 
236

 
619

 
702

Other borrowings and payables
 
111

 
93

 
290

 
297

Junior subordinated debentures
 
212

 
170

 
632

 
507

Total interest expense
 
1,566

 
1,414

 
4,543

 
4,231

 
 
 
 
 
 
 
 
 
Net interest income
 
18,813

 
18,253

 
55,125

 
54,105

Provision for loan losses
 
4,300

 
2,900

 
19,600

 
8,000

Net interest income after provision for loan losses
 
14,513

 
15,353

 
35,525

 
46,105

 
 
 
 
 
 
 
 
 
Non-interest income:
 
 

 
 

 
 
 
 
Service charges on deposits
 
2,463

 
2,584

 
7,339

 
7,404

Gain on sale of securities, net
 
338

 

 
347

 
20

ATM and debit card income
 
1,687

 
1,620

 
5,156

 
4,897

Other charges and fees
 
998

 
948

 
2,911

 
2,714

Total non-interest income
 
5,486

 
5,152

 
15,753

 
15,035

 
 
 
 
 
 
 
 
 
Non-interest expenses:
 
 

 
 

 
 
 
 
Salaries and employee benefits
 
7,849

 
8,034

 
25,989

 
24,206

Occupancy expense
 
3,711

 
3,635

 
11,524

 
10,899

ATM and debit card expense
 
654

 
833

 
2,088

 
2,410

Data processing
 
640

 
527

 
1,928

 
1,463

FDIC insurance
 
448

 
365

 
1,275

 
1,214

Legal and professional fees
 
1,404

 
516

 
2,983

 
1,335

Other
 
3,053

 
3,204

 
8,806

 
9,387

Total non-interest expenses
 
17,759

 
17,114

 
54,593

 
50,914

Income (loss) before income tax expense (benefit)
 
2,240

 
3,391

 
(3,315
)
 
10,226

Income tax expense (benefit)
 
574

 
993

 
(2,058
)
 
2,986

 
 
 
 
 
 
 
 
 
Net earnings (loss)
 
1,666

 
2,398

 
(1,257
)
 
7,240

Dividends on preferred stock
 
810

 
811

 
2,432

 
2,049

Net earnings (loss) available to common shareholders
 
$
856

 
$
1,587

 
$
(3,689
)
 
$
5,191

Earnings (loss) per share:
 
 

 
 

 
 
 
 
Basic
 
$
0.05

 
$
0.14

 
$
(0.28
)
 
$
0.46

Diluted
 
$
0.05

 
$
0.14

 
$
(0.28
)
 
$
0.46

Weighted average number of shares outstanding:
 
 

 
 

 
 
 
 
Basic
 
16,395

 
11,262

 
13,314

 
11,260

Diluted
 
16,396

 
11,263

 
13,318

 
11,260

Dividends declared per common share
 
$
0.01

 
$
0.09

 
$
0.19

 
$
0.27


See notes to unaudited consolidated financial statements.

5


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Net earnings (loss)
 
$
1,666

 
$
2,398

 
$
(1,257
)
 
$
7,240

Other comprehensive (loss) income, net of tax:
 
 

 
 

 
 

 
 

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

 
 

 
 

 
 

Unrealized holding (losses) gains arising during the year
 
(335
)
 
(645
)
 
3,224

 
4,217

Less: reclassification adjustment for gains on sales of securities available-for-sale
 
(338
)
 

 
(347
)
 
(20
)
Net change in unrealized gains (losses) on securities available-for-sale
 
(673
)
 
(645
)
 
2,877

 
4,197

Unrealized gain on derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Unrealized holding (losses) gains on derivatives arising during the period
 
(7
)
 
55

 
(130
)
 
55

Less: reclassification adjustment for gains on derivative instruments
 
(4
)
 

 
(4
)
 

Net change in unrealized gain on derivative instruments
 
(11
)
 
55

 
(134
)
 
55

Total other comprehensive (loss) income, before tax
 
(684
)
 
(590
)
 
2,743

 
4,252

Income tax effect related to items of other comprehensive (loss) income
 
240

 
206

 
(960
)
 
(1,488
)
Total other comprehensive (loss) income, net of tax
 
(444
)
 
(384
)
 
1,783

 
2,764

Total comprehensive income
 
$
1,222

 
$
2,014

 
$
526

 
$
10,004

See notes to unaudited consolidated financial statements.

6


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statement of Shareholders’ Equity (unaudited)
For the Nine Months Ended September 30, 2017
(in thousands, except share and per share data)
 
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-in Capital
 
Unearned
ESOP Shares
 
Accumulated
Other Comprehensive Income (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 loss
 

 

 

 

 

 

 

 
(1,257
)
 
(1,257
)
Dividends on Series B and Series C preferred stock
 

 

 

 

 

 

 

 
(2,432
)
 
(2,432
)
Dividends on common stock, $0.19 per share
 

 

 

 

 

 

 

 
(2,645
)
 
(2,645
)
Issuance of common stock, net of offering expenses of $683
 

 

 
5,100,034

 
510

 
56,641

 

 

 

 
57,151

Restricted stock grant
 

 

 
58,090

 
6

 
(6
)
 

 

 

 

Conversion of Series C preferred stock to common stock
 
(1,223
)
 
(123
)
 
6,791

 
1

 
122

 

 

 

 

ESOP shares released for allocation
 

 

 

 

 
50

 
266

 

 

 
316

Exercise of stock options
 

 

 
20,498

 
2

 
264

 

 

 

 
266

Vested restricted stock
 

 

 
700

 

 

 

 

 

 

Stock option and restricted stock compensation expense
 

 

 

 

 
85

 

 

 

 
85

Change in accumulated other comprehensive income (loss)
 

 

 

 

 

 

 
1,783

 

 
1,783

Balance – September 30, 2017
 
121,875

 
$
40,987

 
16,548,829

 
$
1,655

 
$
168,322

 
$
(967
)
 
$
773

 
$
56,873

 
$
267,643

 
See notes to unaudited consolidated financial statements.




7


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 
 
For the Nine Months Ended September 30,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Net (loss) earnings
 
$
(1,257
)
 
$
7,240

Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
 
 

 
 

Depreciation
 
4,345

 
4,431

Accretion of purchase accounting adjustments
 
(180
)
 
(569
)
Provision for loan losses
 
19,600

 
8,000

Deferred tax benefit
 
(704
)
 
(781
)
Amortization of premiums on securities, net
 
2,128

 
2,170

Stock-based compensation expense
 
85

 
165

Net excess tax benefit from stock-based compensation
 
379

 
258

ESOP compensation expense
 
50

 
(88
)
Net gain on sale of investment securities
 
(347
)
 
(20
)
Net (gain) loss on sale of other real estate owned
 
(15
)
 
56

Net write down of other real estate owned
 
83

 
130

Write down of assets held for sale
 
570

 

Net loss (gain) on sale/disposal of premises and equipment
 
648

 
(6
)
Change in accrued interest receivable
 
(121
)
 
(568
)
Change in accrued interest payable
 
(12
)
 
(42
)
Change in other assets & other liabilities, net
 
(3,236
)
 
1,152

Net cash provided by operating activities
 
22,016

 
21,528

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Proceeds from maturities and calls of securities available-for-sale
 
42,585

 
47,547

Proceeds from maturities and calls of securities held-to-maturity
 
12,940

 
12,629

Proceeds from sale of securities available-for-sale
 
16,979

 
6,803

Proceeds from sale of security held-to-maturity
 
887

 

Purchases of securities available-for-sale
 
(42,172
)
 
(49,538
)
Proceeds from sale of other investments
 
57

 
600

Purchases of other investments
 
(902
)
 
(751
)
Net change in loans
 
28,649

 
(12,736
)
Purchases of premises and equipment
 
(2,940
)
 
(5,152
)
Proceeds from sale of premises and equipment
 
249

 
54

Proceeds from sale of other real estate owned
 
1,728

 
2,374

Net cash provided by investing activities
 
58,060

 
1,830

 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Change in deposits
 
(23,495
)
 
34,385

Change in securities sold under agreements to repurchase
 
(39,586
)
 
9,253

Borrowings on Federal Home Loan Bank advances
 
25,000

 
25,000

Repayments of Federal Home Loan Bank advances
 
(12,546
)
 
(50,050
)
Proceeds from exercise of stock options
 
266

 

Proceeds from issuance of common stock
 
57,834

 

Stock offering expenses
 
(683
)
 

Payment of dividends on preferred stock
 
(2,433
)
 
(1,409
)
Payment of dividends on common stock
 
(3,538
)
 
(3,071
)
Net cash provided by financing activities
 
819

 
14,108

 
 
 
 
 
Net increase in cash and cash equivalents
 
80,895

 
37,466

Cash and cash equivalents, beginning of period
 
82,228

 
89,201

Cash and cash equivalents, end of period
 
$
163,123

 
$
126,667

 
 
 
 
 
Supplemental cash flow information:
 
 

 
 

Interest paid
 
$
4,555

 
$
4,274

Income taxes paid
 
2,500

 
2,853

Noncash investing and financing activities:
 
 

 
 

Transfer of loans to other real estate
 
1,552

 
690

Change in accrued common stock dividends
 
(859
)
 

Change in accrued preferred stock dividends
 
(1
)
 
640

Net change in loan to ESOP
 
266

 
(249
)
 
See notes to unaudited consolidated financial statements.


8


MidSouth Bancorp, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
September 30, 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 September 30, 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 nine-month period ended September 30, 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.

ASU 2017-09, Compensation - Stock Compensation (Topic 350): Scope of Modification Accounting was issued in response to diversity in practice when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The update provides guidance about which changes to the terms or conditions of a share-based payment

9


award require an entity to apply modification accounting under Topic 718. The amendments require an entity to account for the effects of a modification unless all of the following conditions are met:
The fair value (or intrinsic or calculated value if elected) of the modified award is the same as the value of the original award immediately before the original award was modified.
The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified.
The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.

The effective date of this Update is for fiscal years beginning on or after December 15, 2017. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. Adoption of this Update is not expected to have a material effect on the Company's financial position, results of operations or its financial statement disclosures.

ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities was issued to better align a company's financial reporting for hedging activities with the economic objectives of those activities. The effective date of this Update is for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company plans to adopt ASU 2017-12 on January 1, 2019. ASU 2017-12 requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the consolidated balance sheet as of the date of adoption. While the Company continues to assess all potential impacts of the standard, adoption of this Update is not expected to have a material impact on the Company's consolidated financial statements.

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-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 $258,000 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):

 
 
September 30, 2017
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Available-for-sale:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
23,929

 
$
233

 
$
352

 
$
23,810

GSE mortgage-backed securities
 
61,578

 
1,304

 
22

 
62,860

Collateralized mortgage obligations: residential
 
211,808

 
359

 
1,958

 
210,209

Collateralized mortgage obligations: commercial
 
2,499

 

 
27

 
2,472

Mutual funds
 
2,100

 

 
21

 
2,079

Corporate debt securities
 
23,974

 
822

 
4

 
24,792

 
 
$
325,888

 
$
2,718

 
$
2,384

 
$
326,222

 
 
 
 
 
 
 
 
 

10


 
 
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


 
 
September 30, 2017
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Held-to-maturity:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
36,080

 
$
658

 
$

 
$
36,738

GSE mortgage-backed securities
 
37,729

 
524

 
59

 
38,194

Collateralized mortgage obligations: residential
 
7,819

 

 
223

 
7,596

Collateralized mortgage obligations: commercial
 
2,111

 

 

 
2,111

 
 
$
83,739

 
$
1,182

 
$
282

 
$
84,639

 
 
 
 
 
 
 
 
 
 
 
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 one private-label collateralized mortgage obligations (“CMOs”) with a balance remaining of $8,000 at September 30, 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 September 30, 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.


11


 
 
Amortized
Cost
 
Fair
Value
Available-for-sale:
 
 
 
 
Due in one year or less
 
$
1,136

 
$
1,139

Due after one year through five years
 
10,315

 
10,513

Due after five years through ten years
 
43,777

 
45,080

Due after ten years
 
268,560

 
267,411

 
 
$
323,788

 
$
324,143

 
 
 
 
 
 
 
Amortized
Cost
 
Fair
Value
Held-to-maturity:
 
 
 
 
Due in one year or less
 
$
1,204

 
$
1,206

Due after one year through five years
 
5,413

 
5,465

Due after five years through ten years
 
43,555

 
44,335

Due after ten years
 
33,567

 
33,633

 
 
$
83,739

 
$
84,639



12


Details concerning investment securities with unrealized losses are as follows (in thousands):
 
 
 
September 30, 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
 
$
8,092

 
$
141

 
$
5,324

 
$
211

 
$
13,416

 
$
352

GSE mortgage-backed  securities
 
6,168

 
22

 

 

 
6,168

 
22

Collateralized mortgage  obligations: residential
 
118,195

 
1,153

 
45,344

 
805

 
163,539

 
1,958

Collateralized mortgage  obligations: commercial
 

 

 
2,472

 
27

 
2,472

 
27

Mutual funds
 
2,079

 
21

 

 

 
2,079

 
21

Corporate debt securities
 
2,995

 
4

 

 

 
2,995

 
4

 
 
$
137,529

 
$
1,341

 
$
53,140

 
$
1,043

 
$
190,669

 
$
2,384

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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



13


 
 
September 30, 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:
 
 
 
 
 
 
 
 
 
 
 
 
GSE mortgage-backed securities
 
$
5,287

 
$
59

 
$

 
$

 
$
5,287

 
$
59

Collateralized mortgage obligations: residential
 

 

 
7,596


223

 
7,596

 
223

 
 
$
5,287

 
$
59

 
$
7,596

 
$
223

 
$
12,883

 
$
282

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 September 30, 2017, 51 securities had unrealized losses totaling 1.29% of the individual securities’ amortized cost basis and 0.65% of the Company’s total amortized cost basis.  Of the 51 securities, 18 had been in an unrealized loss position for over twelve months at September 30, 2017.  These 18 securities had an amortized cost basis and unrealized loss of $59.0 million and $1.2 million, respectively.  The unrealized losses on debt securities at September 30, 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 September 30, 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 September 30, 2017.
 
During the nine months ended September 30, 2017, the Company sold 16 securities classified as available-for-sale and 1 security classified as held-to-maturity. Of the available-for-sale securities, 13 securities were sold with gains totaling $449,000 and 3 securities were sold at a loss of $109,000 for a net gain of $340,000.  The decision to sell the 1 held-to-maturity security, which was sold at a gain of $7,000, was 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 nine months ended September 30, 2016, the Company sold 2 securities classified as available-for-sale at a gross gain of $20,000.  


14


Securities with an aggregate carrying value of approximately $236.3 million and $293.4 million at September 30, 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):
 
 
September 30, 2017
 
December 31, 2016
Commercial, financial and agricultural
 
$
447,482

 
$
459,574

Real estate – construction
 
90,088

 
100,959

Real estate – commercial
 
473,046

 
481,155

Real estate – residential
 
155,676

 
157,872

Installment loans to individuals
 
63,148

 
82,660

Lease financing receivable
 
760

 
1,095

Other
 
5,769

 
767

 
 
1,235,969

 
1,284,082

Less allowance for loan losses
 
(25,053
)
 
(24,372
)
 
 
$
1,210,916

 
$
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 September 30, 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 $197.8 million, or 16.0% of total loans.  Additionally, the Company’s exposure to loans secured by commercial real estate is monitored.  At September 30, 2017, loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately $537.9 million, 56% of which are secured by owner-occupied commercial properties.  Of the $537.9 million in loans secured by commercial real estate, $20.5 million, or 3.8%, were on nonaccrual status at September 30, 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 three to five years, 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. Additionally, the Company utilizes the services of a third party to supplement its loan review efforts.
 
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, 2017 and 2016 is as follows (in thousands):
 

15


 
 
September 30, 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
 
(15,106
)
 
(70
)
 
(3,618
)
 
(293
)
 
(860
)
 

 

 
(19,947
)
Recoveries
 
537

 

 
158

 
97

 
235

 

 

 
1,027

Provision
 
17,413

 
28

 
2,024

 
(40
)
 
159

 
(1
)
 
18

 
19,601

Ending balance
 
$
18,901

 
$
543

 
$
3,948

 
$
704

 
$
929

 
$
4

 
$
24

 
$
25,053

Ending balance: individually evaluated for impairment
 
$
3,254

 
$
17

 
$
904

 
$
7

 
$
69

 
$
1

 
$

 
$
4,252

Ending balance: collectively evaluated for impairment
 
$
15,647

 
$
526

 
$
3,044

 
$
697

 
$
860

 
$
3

 
$
24

 
$
20,801

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
 
$
447,482

 
$
90,088

 
$
473,046

 
$
155,676

 
$
63,148

 
$
760

 
$
5,769

 
$
1,235,969

Ending balance: individually evaluated for impairment
 
$
30,892

 
$
2,416

 
$
18,132

 
$
1,031

 
$
338

 
$
34

 
$

 
$
52,843

Ending balance: collectively evaluated for impairment
 
$
416,590

 
$
87,672

 
$
454,488

 
$
154,582

 
$
62,810

 
$
726

 
$
5,769

 
$
1,182,637

Ending balance: loans acquired with deteriorated credit quality
 
$

 
$

 
$
426

 
$
63

 
$

 
$

 
$

 
$
489


16


 
 
September 30, 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
 
(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: