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EX-32.2 - EXHIBIT 32.2 - MIDSOUTH BANCORP INCmsl10-q03312018exx322.htm
EX-32.1 - EXHIBIT 32.1 - MIDSOUTH BANCORP INCmsl10-q03312018exx321.htm
EX-31.2 - EXHIBIT 31.2 - MIDSOUTH BANCORP INCmsl10-q03312018exx312.htm
EX-31.1 - EXHIBIT 31.1 - MIDSOUTH BANCORP INCmsl10-q03312018exx311.htm
EX-10.3 - EXHIBIT 10.3 - MIDSOUTH BANCORP INCmsl10-q03312018exx103.htm
EX-10.2 - EXHIBIT 10.2 - MIDSOUTH BANCORP INCmsl10-q03312018exx102.htm
EX-10.1 - EXHIBIT 10.1 - MIDSOUTH BANCORP INCmsl10-q03312018exx101.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, 2018
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
logoa28.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 May 10, 2018, there were 16,603,511 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, 2018
(unaudited)
 
December 31, 2017
(audited)
Assets
 
 
 
 
Cash and due from banks, including required reserves of $7,991 and $6,741, respectively
 
$
18,037

 
$
34,775

Interest-bearing deposits in banks
 
192,130

 
114,839

Federal funds sold
 
1,319

 
3,350

Securities available-for-sale, at fair value (cost of $301,411 at March 31, 2018 and $312,584 at December 31, 2017)
 
293,970

 
309,191

Securities held-to-maturity (fair value of $72,307 at March 31, 2018 and $80,920 at December 31, 2017)
 
73,255

 
81,052

Other investments
 
12,896

 
12,214

Loans held for sale
 
1,117

 
15,737

Loans
 
1,137,255

 
1,183,426

Allowance for loan losses
 
(25,371
)
 
(26,888
)
Loans, net
 
1,111,884

 
1,156,538

Bank premises and equipment, net
 
57,848

 
59,057

Accrued interest receivable
 
7,887

 
8,283

Goodwill
 
42,171

 
42,171

Intangibles
 
3,238

 
3,515

Cash surrender value of life insurance
 
14,948

 
14,896

Other real estate
 
1,803

 
2,001

Assets held for sale
 
3,995

 
3,995

Other assets
 
21,257

 
19,538

Total assets
 
$
1,857,755

 
$
1,881,152

 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 

 
 

Liabilities:
 
 

 
 

Deposits:
 
 

 
 

Non-interest-bearing
 
$
427,504

 
$
416,547

Interest-bearing
 
1,076,433

 
1,063,142

Total deposits
 
1,503,937

 
1,479,689

Securities sold under agreements to repurchase
 
33,026

 
67,133

Short-term Federal Home Loan Bank advances
 
27,500

 
40,000

Long-term Federal Home Loan Bank advances
 
10,016

 
10,021

Junior subordinated debentures
 
22,167

 
22,167

Other liabilities
 
10,272

 
8,127

Total liabilities
 
1,606,918

 
1,627,137

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, 2018 and December 31, 2017
 
32,000

 
32,000

Series C Preferred stock, no par value; 100,000 shares authorized, 89,875 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively
 
8,987

 
8,987

Common stock, $0.10 par value; 30,000,000 shares authorized, 16,621,811 and 16,548,829 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively
 
1,662

 
1,655

Additional paid-in capital
 
168,765

 
168,412

Unearned ESOP shares
 
(906
)
 
(937
)
Accumulated other comprehensive loss
 
(4,782
)
 
(1,828
)
Retained earnings
 
45,111

 
45,726

Total shareholders’ equity
 
250,837

 
254,015

Total liabilities and shareholders’ equity
 
$
1,857,755

 
$
1,881,152

 
See notes to unaudited consolidated financial statements.

3


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations (unaudited)
(in thousands, except share and per share data)
 
 
 
Three Months Ended March 31,
 
 
 
2018
 
2017
 
Interest income:
 
 
 
 
 
Loans, including fees
 
$
16,015

 
$
16,622

 
Securities and other investments:
 
 

 
 

 
Taxable
 
2,047

 
2,327

 
Nontaxable
 
316

 
407

 
Federal funds sold
 
18

 
6

 
Time and interest bearing deposits in other banks
 
514

 
85

 
Other investments
 
87

 
84

 
Total interest income
 
18,997

 
19,531

 
 
 
 
 
 
 
Interest expense:
 
 

 
 

 
Deposits
 
1,238

 
935

 
Securities sold under agreements to repurchase
 
40

 
234

 
Short-term FHLB advances
 
84

 

 
Long-term FHLB advances
 
45

 
88

 
Junior subordinated debentures
 
220

 
208

 
Total interest expense
 
1,627

 
1,465

 
 
 
 
 
 
 
Net interest income
 
17,370

 
18,066

 
Provision for loan losses
 

 
2,800

 
Net interest income after provision for loan losses
 
17,370

 
15,266

 
 
 
 
 
 
 
Non-interest income:
 
 

 
 

 
Service charges on deposits
 
2,206

 
2,480

 
Gain on sale of securities, net
 

 
6

 
ATM and debit card income
 
1,784

 
1,703

 
Other charges and fees
 
839

 
855

 
Total non-interest income
 
4,829

 
5,044

 
 
 
 
 
 
 
Non-interest expenses:
 
 

 
 

 
Salaries and employee benefits
 
7,719

 
8,689

 
Occupancy expense
 
3,190

 
3,624

 
ATM and debit card expense
 
576

 
721

 
Data processing
 
665

 
621

 
FDIC insurance
 
430

 
397

 
Legal and professional fees
 
5,703

 
385

 
Loss on transfer of loans to held for sale
 
875

 

 
Other
 
2,715

 
2,793

 
Total non-interest expenses
 
21,873

 
17,230

 
Income before income tax expense (benefit)
 
326

 
3,080

 
Income tax (benefit) expense
 
(34
)
 
589

 
 
 
 
 
 
 
Net earnings
 
360

 
2,491

 
Dividends on preferred stock
 
810

 
811

 
Net (loss) earnings available to common shareholders
 
$
(450
)
 
$
1,680

 
(Loss) earnings per share:
 
 

 
 

 
Basic
 
$
(0.03
)
 
$
0.15

 
Diluted
 
$
(0.03
)
 
$
0.15

 
Weighted average number of shares outstanding:
 
 

 
 

 
Basic
 
16,495

 
11,264

 
Diluted
 
16,500

 
11,282

 
Dividends declared per common share
 
$
0.01

 
$
0.09

 

See notes to unaudited consolidated financial statements.

4


MidSouth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive (Loss) Income (unaudited)
(in thousands)
 
 
 
Three Months Ended March 31,
 
 
 
2018
 
2017
 
Net earnings
 
$
360

 
$
2,491

 
Other comprehensive (loss) income, net of tax:
 
 

 
 

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

 
 

 
Unrealized holding (losses) gains arising during the year
 
(4,048
)
 
820

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

 
(6
)
 
Net change in unrealized (losses) gains on securities available-for-sale
 
(4,048
)
 
814

 
Unrealized gain on derivative instruments designated as cash flow hedges:
 
 
 
 
 
Unrealized holding gains on derivatives arising during the period
 
349

 
13

 
Less: reclassification adjustment for gains on derivative instruments
 
(40
)
 

 
Net change in unrealized gain on derivative instruments
 
309

 
13

 
Total other comprehensive (loss) income, before tax
 
(3,739
)
 
827

 
Income tax effect related to items of other comprehensive (loss) income
 
785

 
(290
)
 
Total other comprehensive (loss) income, net of tax
 
(2,954
)
 
537

 
Total comprehensive (loss) income
 
$
(2,594
)
 
$
3,028

 
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, 2018
(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, 2017
 
121,875

 
$
40,987

 
16,548,829

 
$
1,655

 
$
168,412

 
$
(937
)
 
$
(1,828
)
 
$
45,726

 
$
254,015

Net earnings
 

 

 

 

 

 

 

 
360

 
360

Dividends on Series B and Series C preferred stock
 

 

 

 

 

 

 

 
(810
)
 
(810
)
Dividends on common stock, $0.01 per share
 

 

 

 

 

 

 

 
(165
)
 
(165
)
Restricted stock grant
 

 

 
52,278

 
5

 
(5
)
 

 

 

 

Restricted stock forfeitures
 

 

 
(12,375
)
 
(1
)
 
1

 

 

 

 

ESOP shares released for allocation
 

 

 

 

 

 
31

 

 

 
31

ESOP compensation expense
 

 

 

 

 
10

 

 

 

 
10

Exercise of stock options
 

 

 
33,079

 
3

 
426

 

 

 

 
429

Stock option and restricted stock compensation expense
 

 

 

 

 
(79
)
 

 

 

 
(79
)
Change in accumulated other comprehensive loss
 

 

 

 

 

 

 
(2,954
)
 

 
(2,954
)
Balance – March 31, 2018
 
121,875

 
$
40,987

 
16,621,811

 
$
1,662

 
$
168,765

 
$
(906
)
 
$
(4,782
)
 
$
45,111

 
$
250,837

 
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,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net earnings
 
$
360

 
$
2,491

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

 
 

Depreciation
 
1,205

 
1,493

Accretion of purchase accounting adjustments
 
162

 
2

Provision for loan losses
 

 
2,800

Deferred tax expense (benefit)
 
1,614

 
(222
)
Amortization of premiums on securities, net
 
705

 
686

Stock-based compensation expense
 
(79
)
 
81

Net excess tax benefit from stock-based compensation
 
18

 
333

ESOP compensation expense
 
10

 
27

Net gain on sale of investment securities
 

 
(6
)
Proceeds from sale of loans held for sale
 
14,514

 

Net gain on sale of other real estate owned
 
(1
)
 
(8
)
Net write down of other real estate owned
 
48

 
23

Loss on transfer of loans to held for sale
 
875

 

Net loss (gain) on sale/disposal of premises and equipment
 
55

 
(12
)
Change in accrued interest receivable
 
396

 
60

Change in accrued interest payable
 
(28
)
 
(11
)
Change in other assets & other liabilities, net
 
(136
)
 
510

Net cash provided by operating activities
 
19,718

 
8,247

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Proceeds from maturities and calls of securities available-for-sale
 
12,272

 
14,631

Proceeds from maturities and calls of securities held-to-maturity
 
7,583

 
5,865

Proceeds from sale of securities available-for-sale
 
410

 
6,462

Proceeds from sale of security held-to-maturity
 

 
887

Purchases of securities available-for-sale
 
(2,000
)
 
(36,672
)
Purchases of other investments
 
(682
)
 
(7
)
Net change in loans
 
44,026

 
9,687

Purchases of premises and equipment
 
(275
)
 
(887
)
Proceeds from sale of premises and equipment
 
224

 
144

Proceeds from sale of other real estate owned
 
151

 
612

Net cash provided by investing activities
 
61,709

 
722

 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Change in deposits
 
24,248

 
(6,486
)
Change in securities sold under agreements to repurchase
 
(34,107
)
 
(4,654
)
Borrowings on Federal Home Loan Bank advances
 
82,500

 

Repayments of Federal Home Loan Bank advances
 
(95,000
)
 
(17
)
Proceeds from exercise of stock options
 
429

 
266

Payment of dividends on preferred stock
 
(810
)
 
(811
)
Payment of dividends on common stock
 
(165
)
 
(1,024
)
Net cash used by financing activities
 
(22,905
)
 
(12,726
)
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
58,522

 
(3,757
)
Cash and cash equivalents, beginning of period
 
152,964

 
82,228

Cash and cash equivalents, end of period
 
$
211,486

 
$
78,471

 
 
 
 
 
Supplemental cash flow information:
 
 

 
 

Interest paid
 
$
1,654

 
$
1,476

Income taxes paid
 

 

Noncash investing and financing activities:
 
 

 
 

Transfer of loans to other real estate
 

 
95

Transfer of loans to held for sale
 
221

 

Change in accrued common stock dividends
 
1

 
1

Change in unrealized gains/losses on securities available-for-sale, net of tax
 
(3,198
)
 
529

Change in unrealized gains on derivative instruments, net of tax
 
244

 
8

Net change in loan to ESOP
 
31

 
109

 
See notes to unaudited consolidated financial statements.


7


MidSouth Bancorp, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
March 31, 2018
(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, 2018 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 2017 Annual Report on Form 10-K.
 
The results of operations for the three-month period ended March 31, 2018 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 2017 Annual Report on Form 10-K.

Recent Accounting Pronouncements ASU 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities was issued to clarify certain aspects of the guidance on recognizing and measuring financial assets and liabilities in ASU 2016-01:
Clarification regarding the ability to discontinue application of the measurement alternative for equity securities without a readily determinable fair value
Clarification of the measurement date for fair value adjustments to the carrying amount of equity securities without a readily determinable fair value for which the measurement alternative is elected
Clarification of the unit of account for fair value adjustments to forward contracts and purchased options on equity securities without a readily determinable fair value for which the measurement alternative is expected to be elected
Presentation requirements for certain hybrid financial liabilities for which the fair value option is elected
Measurement of financial liabilities denominated in a foreign currency for which the fair value option is elected
Transition guidance for equity securities without a readily determinable fair value
The effective date of this Update is for fiscal years beginning on or after December 15, 2017 and for interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017 and June 15, 2018 are not required to adopt the amendments until interim periods beginning after June 15, 2018. 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.

Adoption of New Accounting Standards — In May 2014, the FASB issued ASU 2014-09 - Revenue from Contracts with Customers, which created a new principle-based framework to determine when and how an entity recognizes revenue from its customer contracts. FASB has established a core principle for recognizing revenue within the new rules, which states that revenue should only be recorded when services are provided or goods are transferred to customers at the agreed price. The majority of our revenue-generating transactions are not subject to ASC Topic 606, including revenue generated from financial instruments, such as our loans, letters of credit and investment securities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Description of our revenue-generating activities that are within the scope of ASC Topic 606, which are presented in our income statements as components of non-interest income are as follows:

Service charges on deposits - We collect service charges on most of our non-maturity deposits accounts on a monthly basis. Our fee earned is collected monthly when a particular cycle for a non-maturity deposit account closes. Each cycle is monthly and the fee earned is for our service for the month just closed. Our performance obligations are to process transactions, pay interest (on interest-bearing accounts), collect deposits, and allow access to on-line banking applications and other services ancillary to a banking relationship. Each month when our fee is charged, our obligation is complete. The contract-relationship is a month to month obligation - i.e. our obligation to perform these services would end if the customer closes their deposit account with MidSouth.

8


ATM and debit card income - ATM fees primarily consist of surcharges assessed to our customers for using a non-Bank ATM or a non-Bank customer using our ATM. Debit card income represents revenues earned from interchange fees, which are earned on debit card transactions conducted with payment networks. Such fees are generally recognized concurrently with the delivery of services on a daily basis.

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

 
 
March 31, 2018
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Available-for-sale:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
20,943

 
$
75

 
$
825

 
$
20,193

GSE mortgage-backed securities
 
55,926

 
561

 
976

 
55,511

Collateralized mortgage obligations: residential
 
194,647

 
103

 
6,743

 
188,007

Collateralized mortgage obligations: commercial
 
2,230

 

 
47

 
2,183

Mutual funds
 
2,100

 

 
74

 
2,026

Corporate debt securities
 
25,565

 
579

 
94

 
26,050

 
 
$
301,411

 
$
1,318

 
$
8,759

 
$
293,970

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Available-for-sale:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
23,042

 
$
209

 
$
442

 
$
22,809

GSE mortgage-backed securities
 
58,620

 
825

 
321

 
59,124

Collateralized mortgage obligations: residential
 
202,573

 
90

 
4,508

 
198,155

Collateralized mortgage obligations: commercial
 
2,274

 

 
34

 
2,240

Mutual funds
 
2,100

 

 
39

 
2,061

  Corporate debt securities
 
23,975

 
837

 
10

 
24,802

 
 
$
312,584

 
$
1,961

 
$
5,354

 
$
309,191



9


 
 
March 31, 2018
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Held-to-maturity:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
30,550

 
$
162

 
$
113

 
$
30,599

GSE mortgage-backed securities
 
33,930

 

 
598

 
33,332

Collateralized mortgage obligations: residential
 
7,120

 

 
387

 
6,733

Collateralized mortgage obligations: commercial
 
1,655

 

 
12

 
1,643

 
 
$
73,255

 
$
162

 
$
1,110

 
$
72,307

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Held-to-maturity:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
 
$
35,908

 
$
265

 
$
22

 
$
36,151

GSE mortgage-backed securities
 
35,751

 
171

 
219

 
35,703

Collateralized mortgage obligations: residential
 
7,450

 

 
321

 
7,129

Collateralized mortgage obligations: commercial
 
1,943

 

 
6

 
1,937

 
 
$
81,052

 
$
436

 
$
568

 
$
80,920


With the exception of one private-label collateralized mortgage obligations (“CMOs”) with a balance remaining of $7,000 at March 31, 2018, 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, 2018 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
 
$

 
$

Due after one year through five years
 
7,124

 
7,116

Due after five years through ten years
 
43,042

 
43,443

Due after ten years
 
249,145

 
241,385

 
 
$
299,311

 
$
291,944

 
 
 
 
 
 
 
Amortized
Cost
 
Fair
Value
Held-to-maturity:
 
 
 
 
Due in one year or less
 
$
1,392

 
$
1,389

Due after one year through five years
 
5,061

 
5,023

Due after five years through ten years
 
45,316

 
44,731

Due after ten years
 
21,486

 
21,164

 
 
$
73,255

 
$
72,307



10


Details concerning investment securities with unrealized losses are as follows (in thousands):
 
 
 
March 31, 2018
 
 
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
 
$
1,622

 
$
28

 
$
12,343

 
$
797

 
$
13,965

 
$
825

GSE mortgage-backed  securities
 
35,985

 
791

 
5,568

 
185

 
41,553

 
976

Collateralized mortgage  obligations: residential
 
54,829

 
1,208

 
130,399

 
5,535

 
185,228

 
6,743

Collateralized mortgage  obligations: commercial
 

 

 
2,183

 
47

 
2,183

 
47

Mutual funds
 
2,026

 
74

 

 

 
2,026

 
74

Corporate debt securities
 
4,496

 
94

 

 

 
4,496

 
94

 
 
$
98,958

 
$
2,195

 
$
150,493

 
$
6,564

 
$
249,451

 
$
8,759

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 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
 
$
596

 
$
5

 
$
12,716

 
$
437

 
$
13,312

 
$
442

GSE mortgage-backed  securities
 
29,725

 
224

 
5,858

 
97

 
35,583

 
321

Collateralized mortgage  obligations: residential
 
57,665

 
548

 
137,598

 
3,960

 
195,263

 
4,508

Collateralized mortgage  obligations: commercial
 

 

 
2,240

 
34

 
2,240

 
34

Mutual funds
 
2,061

 
39

 

 

 
2,061

 
39

Corporate debt securities
 
2,990

 
10

 

 

 
2,990

 
10

 
 
$
93,037

 
$
826

 
$
158,412

 
$
4,528

 
$
251,449

 
$
5,354



11


 
 
March 31, 2018
 
 
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
 
$
9,893

 
$
113

 
$

 
$

 
$
9,893

 
$
113

GSE mortgage-backed securities
 
$
28,673

 
$
380

 
$
4,658

 
$
218

 
$
33,331

 
$
598

Collateralized mortgage obligations: residential
 
$

 
$

 
$
6,734

 
$
387

 
$
6,734

 
$
387

Collateralized mortgage obligations: commercial
 
1,643

 
12

 

 

 
1,643

 
12

 
 
$
40,209

 
$
505

 
$
11,392

 
$
605

 
$
51,601

 
$
1,110

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 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
 
$
6,340

 
$
22

 
$

 
$

 
$
6,340

 
$
22

GSE mortgage-backed securities
 
11,201

 
89

 
4,961

 
130

 
16,162

 
219

Collateralized mortgage obligations: residential
 

 

 
7,129

 
321

 
7,129

 
321

Collateralized mortgage obligations: commercial
 
1,937

 
6

 

 

 
1,937

 
6

 
 
$
19,478

 
$
117

 
$
12,090

 
$
451

 
$
31,568

 
$
568


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, 2018, 106 securities had unrealized losses totaling 3.17% of the individual securities’ amortized cost basis and 2.63% of the Company’s total amortized cost basis.  Of the 106 securities, 45 had been in an unrealized loss position for over twelve months at March 31, 2018.  These 45 securities had an amortized cost basis and unrealized loss of $169.1 million and $7.2 million, respectively.  The unrealized losses on debt securities at March 31, 2018 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, 2018, 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, 2018.
 
During the three months ended March 31, 2018, the Company sold 1 security classified as available-for-sale. The security was sold at book value; therefore, no gain or loss was recorded on the transaction. 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

12


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.

Securities with an aggregate carrying value of approximately $187.0 million and $177.9 million at March 31, 2018 and December 31, 2017, 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, 2018
 
December 31, 2017
Commercial, financial and agricultural
 
$
401,048

 
$
435,207

Real estate – construction
 
94,679

 
90,287

Real estate – commercial
 
438,779

 
448,406

Real estate – residential
 
145,671

 
146,751

Installment loans to individuals
 
50,888

 
56,398

Lease financing receivable
 
692

 
732

Other
 
5,498

 
5,645

 
 
1,137,255

 
1,183,426

Less allowance for loan losses
 
(25,371
)
 
(26,888
)
 
 
$
1,111,884

 
$
1,156,538

 
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, 2018, 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 $172.8 million, or 15.2% of total loans.  Additionally, the Company’s exposure to loans secured by commercial real estate is monitored.  At March 31, 2018, loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately $502.5 million, 54% of which are secured by owner-occupied commercial properties.  Of the $502.5 million in loans secured by commercial real estate, $26.2 million, or 5.2%, were on nonaccrual status at March 31, 2018.
 
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.
 

13


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, 2018 and 2017 is as follows (in thousands):
 
 
 
March 31, 2018
 
 
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
Coml, Fin,
and Agric
 
Construction
 
Commercial
 
Residential
 
Installment
loans to
individuals
 
Lease
financing
receivable
 
Other
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
20,577

 
$
596

 
$
3,893

 
$
837

 
$
957

 
$
3

 
$
25

 
$
26,888

Charge-offs
 
(1,524
)
 
(2
)
 
(86
)
 
(3
)
 
(221
)
 

 

 
(1,836
)
Recoveries
 
276

 

 
6

 
1

 
36

 

 

 
319

Provision
 
(264
)
 
159

 
(106
)
 
64

 
146

 

 
1

 

Ending balance
 
$
19,065

 
$
753

 
$
3,707

 
$
899

 
$
918

 
$
3

 
$
26

 
$
25,371

Ending balance: individually evaluated for impairment
 
$
5,968

 
$
94

 
$
76

 
$
20

 
$
6

 
$

 
$

 
$
6,164

Ending balance: collectively evaluated for impairment
 
$
13,097

 
$
659

 
$
3,631

 
$
879

 
$
912

 
$
3

 
$
26

 
$
19,207

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
 
$
401,048

 
$
94,679

 
$
438,779

 
$
145,671

 
$
50,888

 
$
692

 
$
5,498

 
$
1,137,255

Ending balance: individually evaluated for impairment
 
$
55,092

 
$
192

 
$
26,005

 
$
2,088

 
$
50

 
$

 
$

 
$
83,427

Ending balance: collectively evaluated for impairment
 
$
345,956

 
$
94,487

 
$
412,774

 
$
143,583

 
$
50,838

 
$
692

 
$
5,498

 
$
1,053,828


14


 
 
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

 
Non-Accrual and Past Due Loans
 
Loans are considered past due if the required principal and interest payments 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, 2018
 
 
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
 
$
2,235

 
$
3,156

 
$
12,816

 
$
18,207

 
$
382,841

 
$
401,048

 
$
1

Real estate - construction
 
927

 
1,179

 
192

 
2,298

 
92,381

 
94,679

 

Real estate - commercial
 
5,681

 
6,079

 
11,330

 
23,090

 
415,689

 
438,779

 

Real estate - residential
 
657

 
1,137

 
1,187

 
2,981

 
142,690

 
145,671

 

Installment loans to individuals
 
202

 
125

 
50

 
377

 
50,511

 
50,888

 

Lease financing receivable